Q4 2022 Honest Company Inc Earnings Call

Speaker 1: Oh you.

Speaker 2: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.

Speaker 1: The.

Speaker 3: Ladies and gentlemen, thank you for standing by. Welcome to the Honest Company full quarter 2022 earnings call.

Speaker 3: At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

Speaker 3: Please be advised that today's conference is being recorded.

Speaker 3: I would now like to hand the conference over to Mr. Steve Austin felt vice president investor at the honest company. Please go ahead, sir.

Speaker 4: Good morning, everyone. Thank you for joining our fourth quarter and full year 2022 conference call. Joining me today are Karla Vernon, Chief Executive Officer, and Kelly Kennedy, our Chief Financial Officer.

Speaker 4: Before we start, I would like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws.

Speaker 4: including statements about the outlook of our business and other matters referenced in our earnings release issued today.

Speaker 4: These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.

Speaker 4: Please refer to our earnings release issued today.

Speaker 4: as well as our SEC filings for a more detailed description of the risk factors that may affect our results.

Speaker 4: Please also note that these forward-looking statements reflect our opinions only as of the date of this call.

Speaker 4: and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events except as required by law.

Speaker 4: Also, during this call, we will discuss non-GAAP financial measures.

Speaker 4: which adjusts our GAF results to eliminate the impact of certain items.

Speaker 4: You will find additional information regarding these non-GAAP financial measures.

Speaker 4: and a reconciliation of these non-gap-to- GAAP measures in the financial results section of today's earnings release.

Speaker 4: A live broadcast of this call is also available.

Speaker 4: on the investor relations section of our website at investors.onus.com.

Speaker 4: With that, I'll turn it over to Carlin.

Speaker 5: Thanks, Steve. Good morning, everyone, and thanks for joining us today.

Speaker 5: I'm glad to be speaking with you as the new CEO of the Honest Company, and I look forward to meeting many of you in the months ahead.

Speaker 5: Before starting at Honest a little over two months ago, I was the Vice President of consumables categories at the leading e-commerce retailer in the United States, which gave me the opportunity to get to know the categories that Honest participates in.

Speaker 5: I also oversaw the supply chain and digital storefront innovation for those categories.

Speaker 5: In that role, I got a first-hand view of how strongly the honest brand performs with the consumers we serve, and the key operational elements of running a high-performing e-commerce business.

Speaker 5: In that retailer-vendor partnership, I also had the opportunity to get to know several of our key leaders, including our founder Jessica Alba.

Speaker 5: Since that early beginning as partners, I've been impressed with the quality of honest products, the strength of the brand, and the honest mission to make purpose-driven consumer products designed for all people.

Speaker 5: My work, Leading Categories in E-Commerce, builds nicely on another set of experiences that have helped me hit the ground running here at Honest.

Speaker 5: As a division president at a leading CPG company, I have more than two decades of experience building and growing some of America's most classic brands.

Speaker 5: In that role, I also ran a portfolio of sustainability-driven, founder-built businesses.

Speaker 5: giving me a deep understanding for the important financial, operational, and consumer drivers required to have a strong brand portfolio.

Speaker 5: My degree in Ecology and career in Sustainability allowed me to build the triple bottom line ESG business principles of sustainability, strong culture, and profitability into mission-driven brand business models much like honest.

Speaker 5: When honest was launched 11 years ago, it disrupted and modernized many categories by bringing a new standard of product design to categories ranging from baby, beauty, and personal care to household and wellness.

Speaker 5: Our standards for clean and highly efficacious products have allowed Honest to lead innovation in our categories and drive growth for our partners.

Speaker 5: And, our origin as a company built in the Gen Z era has poised us to be relevant, relatable, and available to a broad cross-section of consumers through a truly omni-channel business model.

Speaker 5: Since joining honest, I've had the opportunity to meet with some of our key retail and manufacturing partners. I've spent time in stores with my team, seeing the many ways that the honest brand comes to life. And most importantly, I've had the opportunity to talk with honest consumers and employees.

Speaker 5: about what attracts them to Honest.

Speaker 5: And time and time again, the answer is grounded in the values embedded in the brand and the company.

Speaker 5: These early touch points, along with the strength of our mission and our products, give me the confidence that we have a great future ahead.

Speaker 5: I firmly believe that Honest is a powerful brand that resonates with an ever-diversifying consumer base.

Speaker 5: However, as I noted in the earnings release, we are not satisfied with the revenue and margin results.

Speaker 5: We do not believe they reflect the strength and potential of the honest brand.

Speaker 5: In 2023, we will be relentlessly focused on taking actions and defining a strategy to set us up to be a stronger, more profitable company in 2024 and beyond.

I'm thrilled to support our team, our consumers, and our many partners in the next stage of our honest journey.

Kelly, I'll turn it over to you to review the financials.

Thank you, Carla, and welcome everyone.

We were pleased with revenue in the quarter, which came in slightly ahead of expectations, but faced continuing cost pressures which impacted margins.

Starting with the top line.

Fourth quarter revenue was up 2% versus a year ago, driven by strong performance in retail, reflecting healthy consumption and distribution increases, as well as pricing actions taken in 2022, partially offset by continuing softness in the digital channel. When we get good sales, we'll see you on Star Margaret.

Honest consumption in the fourth quarter was up 15%.

Based on these results, it is clear the honest brand continues to resonate with consumers.

Honest is gaining market share and track channels as our growth continues to outpace the categories where we compete.

Our unit velocities remain healthy following 2022 price increases, as both volume and pricing are supporting our top-line growth.

Turning to Key Drivers by Product Category. First, Cypress and White.

Her diapers and wipes business represented approximately 60% of revenue this quarter and was up 1%.

Wipes consumption was up 24% and diapers consumption was up 23%, outpacing category growth by over 15 percentage points.

Growth reflected the benefit of price increases, retail distribution expansion, and increased assortment.

WIPE also benefited from expanded usage around the home beyond diapering.

We continue to innovate in this category and now can announce that 94% of our baby wipes portfolio are home compostable. Home consumption gains in diapers and wipes were offset by declining traffic and subscriptions

Tippmann's with a key digital customer also liked consumption as they reduced fourth quarter purchases.

Skin and personal care, which represented nearly 30% of total revenue this quarter, declined 13% year over year.

Revenue was impacted by the reduced shipments we mentioned by our key digital customer.

We continue to innovate our beauty and skincare portfolio with the Q1 launch of our new daily green juice antioxidant super serum.

This theorem was developed with Gen Z and the Latino consumer in mind.

with easy to understand ingredients such as kale, lemon, carrot, goji, green tea, and apple.

It is inspired by the feeling of a fresh, moisturized face.

and it speaks to the minimalist trends in skin care. Our household and wellness business represented just over 10% of revenue this quarter and doubled year over year, driven by honest baby clothing.

We continue to anticipate solid growth on this business in 2023, as our bedding, towels, blankets, and seasonal pajamas nicely complement our current baby care offerings. In Q4, Honest Family Pajamas was on Oprah's Favorite Things list in 2022 for a second year in a row. We continue to anticipate solid growth on this business in 2023, as our bedding, towels, blankets, and seasonal pajamas nicely complement our current baby care offerings.

Now turning to results by channel.

Revenue in Q4 was split, 57% retail and 43% digital, reflecting recent retail distribution wins as well as softness in the digital channel.

Digital channel revenues declined 14% as shipments lagged consumption at our largest digital customer. In light of increased costs of digital marketing, we shifted marketing spend to higher return opportunities to support retail expansion.

Despite these near-term headwinds, we are continuing to improve our digital platforms, including faster checkout and site speed, as well as expanding the Build Your Own Bundle program to include a broad section of products which drive larger basket sizes.

Now turning to retail, where revenue increased 18%, reflecting strong traffic and consumption at our largest customer.

distribution expansion, assortment gains, and strong in-store execution. In 2022, we increased placements from 43,000 retail locations to over 50,000.

As a result, ACV increased from 49% to 72%.

Key distribution wins during the year included the launch into over 2,500 Walmart stores and the addition of Publix, Ulta, and additional assortment at Kroger.

At Target, our largest customer, we achieved 20 consecutive quarters of year-over-year consumption growth.

We are very pleased that Honest has become the number one baby personal care brand at Target.

Honest has become the number one baby personal care brand at Target. Now turning to gross margin.

Gross margin was 27.5% in the fourth quarter of 2022 compared to 30% in the fourth quarter of 2021.

This reflects approximately 800 basis points of higher supply chain costs.

offset by 550 basis points of positive impact from pricing, cost savings, and favorable mix.

We've continued to experience a post-COVID slowdown in our standardization business, which resulted in an approximate $2 million non-cash inventory reserve in the quarter, online with Q4 2021.

Turning to Operating Costs and Profitability.

Operating expenses increased $3 million this quarter, but were lower than a year ago if we exclude a $6 million CEO transition expense.

and one million in security litigation expense.

Marketing spent was 12% of sales in line with plans.

We shifted our marketing investment from lower funnel digital tactics to higher return retail marketing levers, where we believe we can cost-effectively reach our consumers and support new distribution. Adjusted EBITDA for the fourth quarter of 2022 was negative $1.6 million, a nearly $4 million improvement from Q3.

and $2 million favorable to Q4 of 2021.

We fell short of our goal of being positive for the quarter.

due to the margin pressure we experienced related to the standardization product inventory reserve as well as escalated transportation and warehousing costs.

Turning to the balance sheet, we ended the fourth quarter with $15 million in cash, cash equivalents, and short-term investments with no debt.

This reflected $15 million in inventory purchases in advance of increased supplier prices in early 2023.

Over 2023, we expect the sell-down inventory to more normalized levels, generating approximately $20 million in cash.

In January , we entered into a new $35 million asset-based credit facility that provides us with more financial flexibility.

We have the ability to request up to $70 million to support future growth investments.

Now turning to 2023, as Carla highlighted.

We stand on the foundation of a strong brand, but we have significant work to do.

and we've already gotten started. For example, we recently communicated new pricing actions in 2023 to reflect our premium positioning, and we've initiated robust cost savings programs as well.

Prior to introducing our Improved Margin Improvement Roadmap, our full year 2023 revenue and adjusted EBITDA would be in line with our fiscal year 2022 results.

With that, let me turn it back to Carla before we open it up for questions.

Thanks, Kelly. I want to reinforce that we are not satisfied.

So now our focus is on marrying the quality of our product and our premium positioning to our pricing strategy, along with advancing cost savings initiatives and improving our margin structure.

We plan to address our business challenges head-on in 2023 and put honest back on a path to profitability with meaningful benefits expected in 2024.

Despite the current challenges, we are confident. Our distribution is healthy, our market shares are growing, and the honest brand is strong.

With that, I will turn the call over to the operator and we look forward to answering your questions.

Thank you. Ladies and gentlemen, to ask a question, please press star 11 on your telephone.

You will then hear an automated message advising your hand is raised, and then wait for your name to be announced.

To withdraw your questions, please press star 11 again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Laura Campine with Loop Capital. Your line is open. Your line is open.

Thanks for taking my question. It's for Carla and it's sort of a longer term question. So since the IPO, the digital business has not had the kind of growth trajectory that we had been hoping for. Can you talk a little bit about, given your background in this particular channel, what

what the action steps are for honest to turn that business around.

Hi, Laura, it's lovely to meet you. Thank you for that question. Yes, absolutely. You know, one of the things that I am excited to be bringing to honest is the experience I had at Amazon. At Amazon as the Vice President of consumables categories.

I had responsibility for the digital storefronts for all of the categories that you might consider center store categories. And so many of those were categories that HONUS participates in. In addition to being responsible for the storefronts,

My team and I were also responsible for innovation about how to bring brands to life better on those storefronts. That experience is going to pull directly into what we do here at Honest and how the digital team and I collaborate. We're going to focus on what we need to do in order to make sure that our honest.com

consumer transactions are clear, efficient, and fast, and so that we can really customize what we show to customers on the storefront so that when they are shopping it's an experience that's highly relevant for them.

In addition to that, our digital business is also brought to life through some of our strongest retail partnerships, right? So as we continue to grow with our retail partners, we want to make sure that honest is effectively being brought to life in the digital medium that they are continuing to grow and invest in.

Great. Thank you. Thank you.

Great, thank you. Please stand by for our next question.

Our next question comes from the line of Dana Telsey with Telsey Group. Your line is open.

Good morning, good afternoon everyone, whichever it is. Nice to meet you, Carla. As you think about the margin improvement roadmap, how do you think about it given in the vein of the guidance of this upcoming fiscal year and what it could look like going forward? And if you think of the expanded retail portfolio that you have now of distribution,

How are you thinking about pricing? How are you thinking about margins and revenue as we move forward? Thank you

Thank you, Dana. Good to meet you as well.

The first and most important thing for me to make sure I emphasize and get across is we are not satisfied with what we have delivered thus far on margin and on profit. And so our team is squarely focused on making sure we have discipline and rigor with what are the most important things to continue to fix and optimize.

roadmap. Margin is important for us to address on a pricing level as you said. So I think what I'm going to do is allow Tali to get in more detail with you about our plans for pricing. But it is also imperative that we work on cost out and cost savings projects. We have many of those projects.

already underway, but in my time since I've arrived, we have accelerated the conversation and really make sure that we are applying discipline and being very exploratory and understanding where else there are opportunities to partner on all the drivers of cost in our P&L.

I look forward to being back with you to tell you more specifics about the areas we are going to address, but that is one of the important pieces for us in improving the margin outlook. Then, of course, the margin outlook is also driven by the portfolio mix. So, I want you to know that we will make choices as we assess which items in our portfolio

driving growth which items in our portfolio we think have margins that are at or accretive to our overall margin roadmap and our margin trajectory and we will make the choices that we need to make whether that means that we will start you know what ourselves start retracting from some of the categories that we

and pricing that fits a brand that always delivers premium input and a premium position.

I'm happy to talk a little on pricing and what we plan to do in 2023 because we did highlight it today. I wanted to put in perspective first and remind everyone that we faced in 2022 roughly 800 basis points of basically input cost pressure.

it's left us in a position where we kind of lost our ideal price premium to the conventional product into the competition. So we have announced pricing that will go into effect mid year and over the course of the back half of 2023. And that pricing is going to be mid to high single digit price increases on roughly 50% of our revenue base.

And it will impact all product categories. And it's going to return us to our pre-COVID premiums. For example, in areas like diapers, where pre-COVID we were at 50% premiums, kind of the leading player. We're now down to about half of that. It will return our premium, where we know that that is for the honest brand.

aligned with our premium positioning.

In addition, that impact of pricing overall will be about 400 digital basis points, but it's going to be back half-weighted. So we are facing additional cost pressures in 2023. That's reflective in how we're thinking about the impact of pricing both on the top line.

as well as margin pressure we'll see in the first half, that as we move in and get to the end of 2023 and 2024, we will have offset our input cost pressures fully with the pricing we've taken.

Thank you. And just one follow-up on inventory levels. How do you see the pace of inventory as we move forward given the 53% increase at the end of this quarter? Thank you.

Yeah, on inventory levels, we know that we're ahead of where we should be. We have already started taking actions. You'll see that over the course of 2023, we'll reduce inventory by roughly $20 million, and that will be paced across the quarter. So you will see us, you know, it was a use of cash as we built inventory in 2022. We've now seen lead times normalize.

Our next question comes from the line of Andrea Tashiro with JP Morgan. Your line is open. O-Z is open.

Thank you. Hi everyone and welcome. Great to have you leading the Honest Company. So I discussed earlier with the IR team, Steve and Elizabeth, regarding what initially was your overview before Kala joined in terms of the first half.

of 23 being potentially a 7% to 8% growth given the carryover pricing. It clearly seems that you removed that and I was just wondering what happened both on that front and also on the gross margin front. I don't believe that you expected margins to be so bad.

in the quarter. Obviously, Kelly, you called out on the SNA side some pressures there that are probably not recurring. So if you can comment a little bit on the top line why things have been so negative, given that to your point, your price ladder is actually relatively more attractive to your competitors, which have taken pricing and you haven't taken

The possibility of right sizing your portfolio. So I was wondering some of the dream of course of extending the onus company, the right to win in some of this category, including VMS. It was kind of like, it was kind of like, it was kind of like,

would make sense. It seems that those investments did not bear fruit.

How should we be thinking of looking at your kind of first 100 years or so at some point in the next few weeks, coming to us and explaining what the plan is in terms of getting...

Number one, the top line moving in the right direction, and number two, getting the margins where they should be. Thank you.

Thanks Andrea, I'll start and then I'll let, I'll turn it over to Carla. I thought I would start by just talking a little bit about 2023 as we think about revenue and margin. We do anticipate growth in the 1st half, but we expect that to moderate as we move into the back half. We do expect revenue to be in line with 2022. Clearly let me talk 1st about what is on track. We are continuing to see healthy consumption or attract.

You know, we've been very pleased, particularly in Walmart, with the penetration we've seen in the South Beach. And also that that business has deemed to be an incremental consumer to us, which is exciting and on the right path. However, we continue to see headwind, particularly in digital. In declines in traffic, we've also shifted our spending to where we see a higher return.

So we've intentionally reduced our lower funnel digital spend, and we feel that that has really allowed us to leverage our marketing and have more efficiency within our marketing spend. So overall, if you think about 2023, there's still trends going against us. We don't anticipate to have

We think the Amazon levels of inventory are healthy. We've seen some good consumption trends in Amazon. It was positive 8% in Q4, but we know that they have been very closely managing their inventory. So again, 2023 revenue really reflects continued positive trends on the retail side, headwinds on digital, and really a thoughtful approach around what the pricing and velocity impact may be in the short term, so we know over time that can.

cover those input costs, but we didn't take it in 2022. And so there is a timing delay. We'll continue to see margin pressure in 2023, although as we get into the back half and see the impact of that pricing on margin.

that will over the course of 2023 improve, and we anticipate 2024 hovering the input cost pressure with the pricing actions we've taken. So very positive. Andrea, this is Carla. So I think what I wanna make sure is that I'm clear on your question. I'm interpreting your question as,

trying to understand if we still believe that honest has the right to play in multiple categories and if we see category opportunities expanding as we look out to the future. So if that's the right understanding your question, what I wanted to tell you is is thank you. First of all, the reason I came to honest is because I was able to understand the importance of honest.

is that in my experience of running both startup founder built companies like startup and founder built brands like Lara Bar like Annie's as well as running classic brands that have shown their ability to weather through the test of time like Cheerios or Nature Valley.

One of my fundamental beliefs is that for consumer brands born in this era, right? And I always say that that Honest was born in a Gen Z era. One of the important things is whether that brand has the ability to have broad shoulders to have more than just a single point of relevance or a single category of relevance.

And that was already demonstrated to be true with the honest brand. I think the choices to expand that brand early in its history to multiple categories was important and continues to be so.

One of the things that we are going to do and what I want to make clear from my message is that we know that honest is relevant across life stages, right? We already have consumer groups across every demographic age group, across every demographic cultural group. And so as we choose our categories going forward, we will be able to see that we are going to

We want to be thoughtful that those categories are categories where honest can lead, innovate, and win because that's what we exist to do. We exist to push our categories farther with our purpose-driven ethos, but we also want to choose categories thoughtfully that fit.

the overall margin portfolio strategy we will go forward with that will allow us to operate with the premium inputs we put into our products and the premium positioning and the ways we communicate with our consumers today. That's how we'll make the choices of where we play, but I can assure you there are lots of those opportunities.

categories. It's just as it is and on an ongoing basis.

We are of course still refining and working on the strategy, right? In the 10 weeks that I've been here, I've had an opportunity to do a lot of assessments on our current portfolio and understand, is everything we're in today going to be part of our program going forward? And the truth of the matter is, Andrea, there are some things that we are in today.

that we will deprioritize going forward and may even get out of. But those things will make sense and they will be things that actually really give us the ability to have more momentum over the places where we want to invest, we want to grow. We believe innovation is going to be something that's going to be embraced by both the consumer and the consumer.

to emphasizing and investing in some of our hero products, that we actually have the opportunity to really grow and build. That's something I learned on brands like Nature Valley, a business that has many, many SKU offerings, but some of them are very core to driving the fundamental growth and business model of the brand.

and then new places to play where they will really fit our business model as we go forward. That's the only other thing, sorry, that I, if I can, I did mention SGA and Kelly, you quoted some of the known the extraordinary items that we should be removing or should we not, you know, should we, because I understand and appreciate that you don't have an adjusted.

number, but it would be nice to see how much overhead we should be banking and how much marketing spending we should be thinking as we go embedded in your guide. I can give you a quick highlight. As you think about marketing, one of the things that we've been talking a lot about is how the shift in spending has allowed us to be more efficient.

And so, you know, we were at 12% for the fourth quarter as we go forward. You know, I think you can think about that as our baseline and then we lean in to innovation. And as Carla highlighted, over time as we figure out what that future innovation will look like in the longer term.

we will absolutely adjust the marketing spend to be appropriate to the categories we move in. But right now we found more efficiency and you can anticipate that going into 2023. As it relates to SGA, I know we have been throughout 2022 managing that very carefully. For example, our headcount is actually down 5% from where we were.

Okay, great. Thank you. I'll pass it on.

Thank you. Please stand by for our next question.

Our next question comes from the line of John Anderson with Will Blair. The line is open.

Hi, good morning everybody and Karla, it's nice to meet you and look forward to meet you in person in the future.

Thank you, John . Quick question, one kind of a housekeeping and then a little bit more detailed question. With respect to the margin improvement roadmap that you're working through right now, could you talk a little bit about...

you know, perhaps your anticipated timeline for kind of laying that out in more detail and perhaps when that will affect.

kind of the outlook? Is this something that could happen in 2023 and modify the initial kind of guidance that you've provided? And then a second question is wondering if you could talk a little bit about some of the initial results that you're seeing in market.

For example, with the diapers and wipes roll out at Walmart, the incremental stores, and some of the other kind of assortment enhancements you've experienced, say with Target, etc. Thank you.

Thanks, John . I'll start out talking real quickly about the margin improvement roadmap. There's a couple of components to that, some of which will benefit us in 2023, but predominantly the impact of the margin improvement roadmap is going to be a benefit to 2024. On the actions that we've already started, for example, the pricing actions are already embedded.

In the color that we've given provided on 2023, the items that will take more time to really roll in our projects around the cost savings, which will include looking at. Transportation fulfillment as well as ingredients and packaging, so those, because of inventory levels and the timing it takes to implement those projects with third party manufacturers.

Those will come in late in 2023, so those would be beneficial in 2024. We're also working with our suppliers on some productivity improvements that we can pass lower costs through. And as I think we spoke a little bit about, Carla spoke about just enhancing and leaning in between our higher margin. Hero items, that's also something that we're going to begin working on in 2023. We'll come back.

So I would say high level margin improvement roadmap predominantly benefits to 2024. The second question around Walmart, we mentioned that as we moved in, it represented around 4% of our revenue in 2023. But really, we're just early in our days with Walmart. We're seeing some really great.

results in momentum in areas such as WIPES, where we're doing a special program with Walmart. We also participated in, started mid-February, goes to the end of March, the Walmart Baby Days, and honestly selected as a product to be featured in some of their store events. So far, we feel that's going well.

more to come as we kind of see what the momentum is going into 2023 and having more time within the consumption data to talk more about those trends. The last question on target, John , I'm not sure I caught what your question on target was. I know that we highlighted that that has certainly been one of the strength areas for us as we had 20 consecutive quarters.

of travel as you kind of referred to earlier, Carla, can the brand succeed in multiple categories?

What gives you confidence that that is the case? And as you think about the portfolio longer term, and I know it's early days for you still, do you see more addition or more subtraction in terms of the reach of the brand across categories?

At least to the best that you can kind of speak to that today. Thank you. Thanks, John . I am so happy to talk about this subject because my time at Annie was a really great experience for me to understand when you build a brand where the consumer has adopted and internalized the purpose.

of the brand, the benefits and the values of the brand, then the brand has a lot of license to take those benefits and those values across categories where that is relevant. And you know so far, Honest is a brand built on a number of values, obviously clean.

formulations, high quality ingredients and inputs, products where you can believe the quality is worth the value that you are paying for them, as well as something that was always important to our founder Jessica and remains true for our company today. Honest is a brand that needs to...

speak to all consumers, all demographics, all cultural groups, all life stages. And that's that's really a sort of part of our unique DNA because we were we were built in modern times by a like thoroughly modern set of founders.

And those truths are the thing we bring with us as we expand honest into more categories. So I'm extremely confident that the shoulders of honest are broad, that the shoulders of honest are strong to bear the weight of many categories, and that there are categories in which we all belong.

This is a brand that is still on the upswing and our conversations with our retail partners Let us know that this is a brand that they love to partner with to drive more growth

Thanks so much. That's really helpful. Thank you. Thank you. I'm sure no further questions in the queue. I would now like to turn the call back to Carl for closing remarks.

Everyone, I can't thank you enough. I do want to extend my thanks to my team as well. It's a real honor and privilege to join the Honest family. I thank you for your interest and support in the Honest Company, and we look forward to talking to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

We'll begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.

I have you I.

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Ladies and gentlemen, thank you for standing by. Welcome to the Honest Company's fourth quarter 2022 earnings call.

At this time, all participants are in listen-only mode.

After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Mr. Steve Austin-Felt, Vice President and Vice President of the Good morning, everyone. Thank you for joining our fourth quarter and full year 2022 conference call. Joining me today are Carlo Vernon, Chief Executive Officer, and Kelly Kennedy, our Chief Financial Officer.

Before we start, I would like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our earnings release issued today. In forward-looking statements, we will make certain statements that are forward-looking

involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release issued today, as well as our SEC filings for a more detailed description of the risk factors that may affect our results.

Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events except as required by law.

Also, during this call, we will discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the financial results section of today's earnings release. A live broadcast of this call is also available.

on the investor relations section of our website at investors.honest.com. With that, I'll turn it over to Carla. Thanks, Steve. Good morning, everyone. And thanks for joining us today. I'm glad to be speaking with you as the new CEO of The Honest Company. And I look forward to meeting many of you in the months ahead.

Before starting at Honest a little over two months ago, I was the Vice President of Consumables categories at the leading e-commerce retailer in the United States, which gave me the opportunity to get to know the categories that Honest participates in.

I also oversaw the supply chain and digital storefront innovation for those categories. In that role, I got a first-hand view of how strongly the honest brand performs with the consumers we serve and the key operational elements of running a high-performing e-commerce business.

In that retailer-vendor partnership, I also had the opportunity to get to know several of our key leaders, including our founder Jessica Alba. Since that early beginning as partners, I've been impressed with the quality of Honest products, the strength of the brand, and the Honest mission of the company.

to make purpose-driven consumer products designed for all people. My work, Leading Categories in E-commerce, builds nicely on another set of experiences that have helped me hit the ground running here at Honest.

As a division president at a leading CPG company, I have more than two decades of experience building and growing some of America's most classic brands.

In that role, I also ran a portfolio of sustainability-driven, founder-built businesses, giving me a deep understanding for the important financial, operational, and consumer drivers required to have a strong brand portfolio.

My degree in Ecology and career in Sustainability allowed me to build the triple bottom line ESG business principles of sustainability, strong culture, and profitability into mission-driven brand business models much like Honest. And Honest was launched 11 years ago.

It disrupted and modernized many categories by bringing a new standard of product design to categories ranging from baby, beauty, and personal care to household and wellness. Our standards for clean and highly efficacious products.

have allowed Honest to lead innovation in our categories and drive growth for our partners. And our origin as a company built in the Gen Z era has poised us to be relevant, relatable, and available to a broad cross-section of consumers through a truly omni-channel business model.

Since joining Honest, I've had the opportunity to meet with some of our key retail and manufacturing partners. I've spent time in stores with my team, seeing the many ways that the Honest brand comes to life. And most importantly, I've had the opportunity to talk with Honest consumers and employees Career dodgy organizations and all the voices that educate and move reachable markets.

about what attracts them to Honest. And time and time again, the answer is grounded in the values embedded in the brand and the company.

These early touch points, along with the strength of our mission and our products, give me the confidence that we have a great future ahead.

I firmly believe that Honest is a powerful brand that resonates with an ever-diversifying consumer base. However, as I noted in the earnings release, we are not satisfied with the revenue and margin results. We do not believe they reflect the strength and potential of the Honest brand.

In 2023, we will be relentlessly focused on taking actions and defining a strategy to set us up to be a stronger, more profitable company in 2024 and beyond. I'm thrilled to support our team, our consumers, and our many partners in the next stage of Honest's journey. Kelly, I'll turn it over to you to review the financials.

Thank you, Carla, and welcome everyone. We were pleased with revenue in the quarter, which came in slightly ahead of expectations, but faced continuing cost pressures, which impacted margins. And with the top line.

Fourth quarter revenue was up 2% versus a year ago, given by strong performance in retail, reflecting healthy consumption and distribution increases, as well as pricing actions taken in 2022, partially offset by continuing softness in the digital channel. Honest consumption in the fourth quarter was up 15%.

Based on these results, it is clear the honest brand continues to resonate with consumers. Honest is gaining market share and track channels as our growth continues to outpace the categories where we compete.

Our unit velocities remain healthy following 2022 price increases, as both volume and pricing are supporting our top line growth.

Turning to Key Drivers by Product Category. First, diapers and wipes. Our diapers and wipes business represented approximately 60% of revenue this quarter and was up 1%. Wipes consumption was up 24% and diapers consumption was up 23%, outpacing category growth by over 15 percentage points.

Growth reflected the benefit of price increases, retail distribution expansion, and increased assortment. Wipes also benefited from expanded usage around the home beyond diapering. We continue to innovate in this category.

and now can announce that 94% of our baby wipes portfolio are home compostable. Drawn consumption gains in diapers and wipes were offset by declining traffic and subscriptions in our digital channel.

Tippmann's with a key digital customer also lagged consumption as they reduced fourth quarter purchases. Skin and personal care, which represented nearly 30% of total revenue this quarter, declined 13% year over year.

Revenue was impacted by the reduced shipments we mentioned by our key digital customer. We continue to innovate our beauty and skincare portfolio with the Q1 launch of our new daily Green Juice antioxidant super serum.

This serum was developed with Gen Z and the Latino consumer in mind. With easy to understand ingredients such as kale, lemon, carrot, goji, green tea, and apple, it is inspired by the feeling of a fresh, moisturized face.

and it speaks to the minimalist trends in skin care. Our household and wellness business represented just over 10% of revenue this quarter and doubled year over year, driven by honest baby clothing.

We continue to anticipate solid growth on this business in 2023, as our bedding, towels, blankets, and seasonal pajamas nicely complement our current baby care offerings.

In Q4, Honest Family Pajamas was on Oprah's Favorite Things list in 2022 for a second year in a row.

In Q4, Honest Family Pajamas was on Oprah's Favorite Things list in 2022 for a second year in a row. Now turning to results by channel.

Revenue in Q4 was split, 57% retail and 43% digital, reflecting recent retail distribution wins as well as softness in the digital channel. Digital channel revenue declined 14% as shipments lagged consumption at our largest digital customer. And in light of increased cost of digital marketing, we shifted marketing spend.

Half of that input cost pressure to around 400 basis points.

What that has done for us as much as we're in a position where we kind of lost our ideal price premium to the professional product into the competition. So we have announced pricing that will go into effect mid year.

Over the course of the back half of 2023 and that pricing is going to be mid to high single digit price increases on roughly 50% of our revenue base.

And it will impact all product categories.

And it's going to return us to our pre Covid premiums for example in areas like diapers.

Pre COVID-19, we were at 15% premiums.

Kind of a leading player.

We are now down to about half of that it will return our premiums where we know that that is pretty honest brand it aligned with our premium positioning.

In addition.