Ladies and gentlemen, thank you for standing by. Welcome to the Honest Company’s Third Quarter 2022 Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Mr. Steve Austenfeld, Vice President, Investor Relations at Honest Company. Please go ahead, sir.

Good morning, everyone. Thank you for joining our third quarter 2022 conference call. Joining me today are Nick Vlahos, Chief Executive Officer; and Kelly Kennedy, our Chief Financial Officer. Before we start, I’d like to remind you that we will be making 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. These forward-looking statements 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 in the Investor Relations section of our website at investors.honest.com. With that, I’ll turn the call over to Nick.

Thanks, Steve. Good morning, everyone, and thanks for joining us today. As noted in today’s earnings release, we delivered revenue of $85 million, the largest single quarter in our 10-year history. This strong performance reflected our focus on 3 strategic growth priorities: marketing, innovation and distribution expansion. Highlights in the quarter included our performance in retail where honest growth in tracked channels continues to outpace the category, significant distribution expansion that will continue into the fourth quarter and the broadening of the Honest lifestyle brand through the integration of our rapidly growing baby clothing business. That said, we recognize the headwinds in the marketplace, inflationary pressures across the supply chain remain an issue. Customer acquisition costs remain elevated. The digital channel remains challenged and retailers are increasingly focused on managing their working capital by reducing weeks of supply. Despite these challenges and an uncertain macroeconomic environment, we continue to see a resilient consumer in our categories. Consumers are as value-conscious as ever, so we’re meeting their needs through tailored product offerings, pack sizes and promotions. Because Honest is a lifestyle brand that spans categories, consumers will be able to create value-oriented bundled solutions across diapers, wipes, personal care, beauty, household products, and now our curated collection of baby clothing. Based on consumption trends in the quarter, it’s clear that the Honest brand continues to resonate with a clean conscious consumer. Looking at 12-week track channel data ending October 2, Honest is gaining market share as our growth to equal or outpace the category where we compete. Our unit velocities remain healthy following first half pricing actions as both volume and pricing are fueling our top line growth. This indicates the brand has pricing power even in this challenging economic environment. The overall category growth in tracked channels for diapers and…

Thank you, Nick, and welcome, everyone. I’ll start by highlighting our top line performance in the quarter, where revenue was up 2% versus a year ago on top of our highest single revenue quarter last year, slightly ahead of our expectations. Revenue was up 10%, excluding the impact of a prior year rotational club channel program that didn’t repeat this year. While we remain cautious as inflation continues to weigh on costs and impact our margins, we are taking action to mitigate higher input costs, including pricing actions, cost savings initiatives and a focus on margin-enhancing innovation. Starting with the key driver by product category. First, Diapers & Wipes. Our diapers and life business represented 65% of revenue this quarter and was up 3%, following 9% growth in the second quarter. Growth was balanced with positive trends in both volume and pricing and positive year-over-year trends across all of our key retail customers. This quarter, we also shipped initial orders to support the rollout into Walmart retail stores. In the Diapers & Wipes, we are seeing acceleration, particularly in larger sized offerings, which provide the best value to a consumer on a per unit cost basis. I also wanted to highlight the momentum in our baby wipe, which grew at more than double the rate of the overall category, driven by alternate uses of wipes beyond diapers. In Q3, we relaunched our training camp, which completes our clean conscious cipher portfolio. During the quarter, we leveraged a multi-tier strategy of marketing, packaging improvement, expanded shelf placement and stronger price positioning as we increased our assortment from 450 to 1,5 00 Target stores. Skin and Personal Care represented [Technical Difficulty] Our Health & Wellness business saw a big step-up in revenue versus recent trends, increasing 115% and representing nearly 10% of…

[Operator Instructions] Our first question will come from the line of Laura Champine from Loop Capital.

It’s Laura from Loop. My question is on the consolidation of the baby clothing line. What’s the strategic rationale? And could you be more specific on the contribution to revenues this quarter, next quarter and first half of next year since you’ve provided an initial revenue outlook? Also, I’d love to hear the impact to adjusted EBITDA?

Yes. I’ll start off, Laura and give you some context around the strategic kind of rationale. When you think of this business, we’ve kind of been involved with it through a licensing arrangement for about a couple of years. So we’ve been monitoring it closely. What we like about the business is kind of 2 things. Number one, the digital component to this around acquisition and how we drive our AOB and kind of monetize that honest consumer kind of in that early life stage is really attractive because what we’re talking about here is opportunities to really drive gifting, which obviously not only in baby clothing, but our personal care business, our diaper business will start to offer more holistic solutions. And then the second thing that also is attractive is kind of the overlap in the consumer, about 8 0% of the consumers that are out there, there’s an overlap between the Target as it pertains to the Honest consumer from a personal care perspective as well as diaper perspective. And we think the bundling solutions around this initiative are really attractive. So this is something that, again, has been in the works for a little bit. It also gives us the opportunity as we think of household and wellness as we think of the size of that category and what we were anticipating when we did the to be able to kind of solidify that part of our business moving forward. So from a volume dollar perspective, it’s also attractive. And then we talk about kind of the incrementality of this. The way I would think about it is this initiative as well as Walmart as we look at next year will drive about 5% to 7% incremental growth on an annualized basis. So when you take a look at both the new business from a Walmart standpoint as well as now the baby clothing, we think the incrementality of this is attractive, and I’ll let Kelly give some more details around the financials about it.

Laura, so for the quarter, the Honest baby clothing was just under $4 million. It is -- tends to be a little more seasonal in nature. So Q3, we anticipate being the largest quarter as it relates to revenue as we ship on maybe closing out to retailers in advance of the holiday. While we only entered into the agreement about half way through the year it was anticipated and planned within our numbers and they are run rating roughly to be about a $15 million business this year with significant growth projected for this year, and going forward, big opportunities as Nick mentioned, not only to leverage our kind of distribution in the future. Starting with the current arrangements kind of the overall margin structure and EBITDA structure is kind of at par with the potential to be favorable as we consolidate within -- in 2023 within our warehouse facility. One moment for next question come from the line of Brian Spillane from Bank of America.

This is John Keeper on for Bryan. So looking at the release, you guys mentioned the 8 points of drag as you lapped last year’s rotation program in Skin and Personal Care. Adjusting for that, it implies -- I mean, correct me if my math is wrong, but it implies 16% to 17% growth otherwise. Is that a better gauge of the underlying momentum in that business?

Yes. I think if you look at the underlying, we would suggest you look to kind of the recent consumption data. We did highlight in the release that we had a 12-week tracked data was up 6%. If you look at the most recent IRI data that just came out through 10:30, our 4 week, we’ve had some acceleration in the business with growth closer to 17% versus the category at 3%. So we’ve seen good underlying consumption trends within the tracked and retail channels. There were lots of puts and takes for Q3. We were up against, as we mentioned, the rotational program. We also had a drag as well with the destocking with 1 of our key digital partners that was also a slight drag as well on Q3. But of course, we shipped a lot of pipeline with Walmart, which in essence, offset the loss of the rotational program. And then again, we did have a little bit more strength overall in our Honest Baby closing that we had planned on coming into the quarter. So all of those puts and takes, as you think about 2%, we did highlight that excluding kind of that onetime program, the growth in Q3 would have been closer to 10%. So I think that’s relatively in line with the consumption trends that you’re seeing and reporting within the IRI data.

And if I could have a follow-up on. So Walmart is -- was basically offsetting the rotation program left, so that’s about 6-ish million. Is there any public pipeline fill in the quarter as well?

No, we did expect that some of that Walmart Q3 shipment was pipeline. There was no other material pipeline still for the quarter.

[Operator Instructions] Our next question will come from the line of Andrea Teixeira from JP Morgan.

This is Shabana Choudhary [ph] on behalf of Andrea. I just wanted to quickly ask about now that retail channel makes up a bigger portion of your sales at 60% versus digital before. Can you please go over like your margin dynamics and like for retail versus digital? I mean you did elaborate on the marketing being lower for retail versus digital and you’re shifting away into retail more. But can you please go over like the other margin profile? Is it better? Or how do you see it going forward?

Thanks for the question. I would first kind of give context as it pertains to kind of that 60-40 split. So as an omnichannel business and what we’re driving here that’s unique is driving that accessibility in multiple places within the market. We’ve seen kind of digital soften over the last year because now consumers have gravitated kind of post this COVID period more into store. So as we’re starting to drive a broader distribution and driving accessibility with partners like a Walmart, partners like Publics. We’re going to be able to now make that product accessible broader, and it’s also going to help us from a volatility perspective because now we have broader distribution of digital softer, you got places to be able to offshoot kind of the overall revenue piece around other different markers from that standpoint. On a margin basis, it’s almost equivalized. So when you look at digital, versus retail, we have equivalized margin structures between both retail as well as digital. And I know Kelly got some additional context as certain kind of fulfillment as well as the overall footprint. So I don’t know, Kelly, if you want to add.

Yes. If you think about it in terms of the retailer margin, pretty much equivalent to the fulfillment costs associated. That’s where we kind of come relatively in line between our 2 channels. I will mention that kind of certainly as we expand and retail growth we have, as we’ve highlighted we are getting better marketing efficiency and seeing better returns such that as you can see, marketing spend at about 14% for the quarter, historically, it’s at slightly higher levels than that. But we feel that we can pull back on marketing set because we’re getting the return. And a lot of that is around the shopper marketing that we’re doing in partnership and the ability to amplify that marketing to our retail partners. . In addition, there is some slight trade efficiency as we think about just kind of dilution spend as it relates to retailers. And so over time, we’ve always highlighted as the business grows, we do think there’s a potential for digital to have better margins. But again, at the scale we’re at right now, they’re relatively in line with our retail margins.

And now I’ll turn it back to our CEO, Nick for any closing remarks.

I appreciate the participation today. I would just say from our standpoint, kind of 3 things: number one, as you look at the underlying consumption of the business, it continues to be strong as perspective. So as you kind of eliminate some of the noise that’s transpired here this year, kind of the second big takeaway as we enter next year, there’s been a lot of historical moving parts, but we see stabilization as it pertains to 2023 around the supply chain volatility, kind of these rotational club programs the retailer inventory destocking as well as kind of the COVID impact. So we feel like that’s behind us. And really the key takeaway as we look at kind of the third point is as we enter 2023, this continues to be, for us, a growth story. We talk about 7% to 10% growth really in the front half. But as all kind of the back half, this kind of incremental business that we’re talking about from a Walmart perspective, a baby perspective with the baby clothing line, we see that contributing between 5 to 7 points of incremental growth moving forward, and that’s coupled with the innovation pipeline that we have, the hit back half of the year, the benefits of pricing on an annualized basis as well as kind of expected new distribution, gives us reason to believe that 2023 is going to be a very good year for the Honest company. And we’re going to come back in our next earnings call once we close out Q4 to give a full forecast, both from a top line gross margin and profitability standpoint. So with that, I wish everybody has a great holiday season, and we look forward to our next call.

And this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.