Ladies and gentlemen, thank you for standing by. Welcome to the Honest Company Third Quarter 2024 Earnings Call. At this time, all participants are in a 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 like now to turn the conference over to Allison Malkin of ICR. Please go ahead.

Good afternoon everyone. Thank you for joining our third quarter 2024 conference call. Joining me today from the Honest Company, our Chief Executive Officer Carla Vernon, and Chief Financial Officer, Dave Loretta. 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. 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 on the Investor Relations section of our website at investors.honest.com. With that, I'll turn the call over to Carla.

Thanks, Allison. Hello everyone, and thank you for joining us today. I'm pleased to share the details of our strong performance, for the third quarter of 2024. The continued financial improvement of Honest, is due in large part to the dedication of our teams, and their commitment to delivering a collection of cleanly designed, and consumer loved personal care products. Our transformation pillars of brand maximization, margin enhancement and operating discipline, provide our teams with a framework that puts our product mission in balance, with our financial mission For the third quarter of fiscal 2024, our results include three notable financial achievements. First, we delivered our highest quarterly revenue in the history of the Honest Company with $99 million in sales, which was and 15% year-over-year. Second, we achieved a gross margin of 39%, representing an expansion of 710 basis points over the same period last year. And lastly, we generated adjusted EBITDA of $7 million, representing our fourth consecutive quarter of positive adjusted EBITDA. With this momentum and strong performance in the third quarter, we are raising our full year 2024 guidance for both revenue and adjusted EBITDA. In addition to these strong financial measures, we're pleased that the consumption of Honest products, was stronger than the competitive set of personal care categories. In this quarter, according to Circana tracked channel data, Honest's portfolio grew 9% year-over-year, compared to a 2% decline in the consumption from the comparable personal care sector. This serves as further evidence of the strength of the Honest brand, and how we uniquely meet the needs of today's families. Despite challenging macroeconomic factors and consumer spending pressures, we continue to see increasing interest in clean product solutions. According to Mintel, over 70% of consumers are concerned about the effects of certain chemicals in personal care…

Thank you, Carla. As noted, our third quarter results surpassed our expectations across key financial metrics and we saw significant accomplishments toward our transformation pillars. On the top line, our 15% revenue increase was balanced across distribution and velocity gains and included shipments in support of retail and digital events. We generated gross margin expansion, which reached a new high of 38.7% driven by benefits across the cost structure through supply chain efficiencies and product cost savings. The execution of our transformation pillars continues to deliver efficiencies as we grow, demonstrated by our strong revenue growth, expansion in gross margin and disciplined SG&A spend leading to profitability in the quarter. And as provided in our press release issued today, we are raising our annual guidance for the second time this year reflecting our year to-date performance and our positive view of the business. Let me turn to our third quarter results. As Carla noted previously, net revenue was $99 million, up 15% from the prior year third quarter driven by strong performance across our baby products and wipes portfolios. Also noted, retail tracked channel consumption grew 9% compared to the comparative categories which were down 2% in the same period. And at Amazon, our largest digital customer consumption in the period was up 19%. We advanced our brand maximization pillar with balanced revenue growth seeing increases in distribution and velocity. We continue to realize increased consumer demand across our core business offerings, which is allowing Honest to play a bigger role in consumers daily lives. In fact, our community is purchasing our brand across multiple categories which drove increased household penetration and spend per household in the quarter. As I mentioned, revenue also benefited from shipments to support retail events in the quarter including our target 10th anniversary collection and…

[Operator Instructions] And please stand by for our first question. And the first question does come from Aaron Grey with AGP. Your line is now open. Good evening.

Good evening. Thank you for the questions and a nice quarter there. So, first question for me. You mentioned strong consumption trends, but also talked about some shipment benefits. So curious if you could quantify how much of the shipment benefits impacted the quarter. I believe that also led to the implied softer growth for 4Q, so that would be helpful there? Thank you.

Yes. Hi Aaron, this is Dave. The consumption trend that we saw in the quarter we're really excited about at retail level, 9% up with Amazon 19%. And when you blend the two together, they do kind of resemble our revenue growth rate of 15% for that period of time. So pleased with that performance and how the team delivered it in terms of the incremental shipments that we did realize, and those were in line with the retail events that we had. We talked about in our second quarter, both an event at Target and an event at Walmart and then Amazon Prime Day both to supply the July Prime Day and the October prime Day, since that was really just the first week into that next week after our third quarter ended. So to put some context around the percentage growth rate, you could think of it as roughly 3 to 4 percentage points of our revenue growth to be attributed to supplying that inventory for those events. And the balance is really ongoing and kind of momentum business from a consumption standpoint and order flow.

Okay, great. Thank you for that. I appreciate it. Second question for me. So just as we think bigger picture, last call, you guys talked about investments to drive more growth that continues to kind of bear fruit for you guys, building a nice cash balance. So just as we look going forward and into 2025 in the holiday season, how much more confidence do you guys have to kind of keep digging deeper and pushing the lever on different marketing or investing even on the gross margin side in trade to kind of drive continued growth versus letting more of that drop down to the bottom line? Thanks.

Yes, sure. Aaron, as we talked about in the second half of the year where we did intend to increase both the marketing spend and the trade promotion investments, we're pleased with how that played out for us. As you saw in the third quarter, marketing was up in dollars relative to last year and sales a little over 13%. And trade promotion as well was deeper in what we applied for that period of time. So we're comfortable with that flexibility we've got to dial up our marketing, to drive the right kind of awareness and brand trial. Some of that evidence is playing out in the stats that we shared around household penetration were at 6.7%, which increased 2023 basis points in the quarter. I think that's a year to-date rate. So we're seeing the results of that brand awareness and the consumer acceptance. And so we're comfortable that we've got both the flexibility to drive velocities with some of the trade promotion dollars, but also continue to expand the brand awareness through a lot of the marketing initiatives that we employed in the third quarter. And we'll continue to do that in the remaining quarter of the year. And as we move into 2025, we'll give you some color on that period of time when we give our guidance for that period.

Okay, great. Pleased with the detail and I'll jump back in the queue.

And the next question comes from Owen Rickert with Northland Capital Markets. Your line is open.

Hi, Carla, hi, Dave. Congrats on another great print. I guess quickly, how are you viewing the Dollar Store end segment and what's your thoughts on the opportunity there? How penetrated are you in that space? And I guess just any more of your thoughts there would be really helpful?

Hi Owen. Nice to talk to you. Thank you for joining us. This is Carla and thank you for asking. If you take a look at our investor presentation that's online, you will see that we have a very intentional distribution based growth strategy underlying our overall long range plan and our long range growth model. And on some of those slides we love to provide you with an update of how we're making progress against that strategy where we currently have strength and where we see opportunity. In this quarter, what we've communicated is our distribution growth of 4% in the quarter overall following our stores, doors, aisles, shelves, facing distribution growth strategy. We're very pleased with the fact that as our distribution is growing, our velocities are growing at the same time. And so velocities are up 5% at the same time we've been driving distribution growth, which is just such an indicator of the excitement for the brand. To date, we are represented in about 50,000 retail doors overall. That's a little less than half of all the retail doors available across the various retail brick and mortar channels that we might think of. So we do think that there is enormous runway for us to grow with regard to the opportunity and the places where this brand really makes sense to be. Currently we don't have any distribution in the dollar channel. Very compelling. We know that young families shop in the channel and have the same sensitive skin needs that fit in the 70% of households that we know are very focused on the ingredient content of their products. And we look forward to not only being available in more channels than we are today, but making sure that we step our way into all the right channels that will help us continue to drive the awareness and the growth.

Great. Thanks Carla. That was very helpful. And secondly, could you provide some more color on some of those new marketing initiatives that were discussed on the previous earnings call? What worked well in the quarter and maybe what should we be keeping our eyes on for 4Q?

Yes. Well, I think overall we've got just the a world-class marketing team on the brand here that it has been improving the effectiveness of not only what the marketing does, but exactly where we spend it and our balance of upper, middle and lower funnel activities, so some of our marketing is used in partnership directly with our retailers. We had great strength as Dave reported in both prime days and target circle week in the quarter with very strong double digit growth rates across all of those. And you may remember that on the call we also addressed the fact that in the most recent Amazon Prime Day, one of our boxes of wipes, our 720 count wipes box, was among the top 100 items across all of Prime Day. Whether that's Dyson vacuum cleaners or Nike ankle socks or whatever it is, you might buy our wipes boxes in the top hundred performing deals. That's because we've got really strong sense of how to use our marketing dollars to plug into our retailers specific tent pole items. In addition to that, the team had several campaigns that they executed across the various forms of consumer media. We have some campaigns that are strongly aligned with our Sensitive Skin benefit. So we ran a campaign this quarter called the Skin to Skin campaign. We're seeing very strong results. That campaign was actually able to feature a variety of products across our portfolio, all with one common thread that they are good and trustworthy for Sensitive Skin. What you will see from us will continue to be a balance of doing both events that are really focused on amplifying our execution with our retailers, along with a complementary set of marketing activities that are really bigger, larger consumer focused initiatives to share with people the benefits and the portfolio variety within Honest.

Great, great. Thanks so much. Thanks for all the color. Congrats on the amazing quarter.

Thank you, Owen.

And the next question comes from Dara Mohsenian with Morgan Stanley. Your line is open.

Hi, good afternoon guys.

Hi, Dara.

So Carla, I was just hoping you could take a step back now in other words, three quarters through the year. The strong consumption trends we've seen in both direct channels and digital. How sustainable is that as we look out to 2025 and beyond? You just touched on some of the marketing success and just how you think about sustainability going forward from here? And then just a similar question on gross margins, the 37% to 38% range for the full year, is that a sustainable level going forward? Are there any key puts and takes as you look beyond this year longer term? Thanks.

Sure. Dara, it's really great to hear you today. So thank you for joining the call. To talk about consumption, I would remind everyone that the overall consumption in the MULO track channel data was up 9% in the quarter and that consumption was complemented by our consumption for the quarter on Amazon of 19% up year-over-year. Together that blend is really a very such strong indication of the way in which the velocities are working as well as the increased scale of household penetration. Dave just recapped that. We've grown household penetration year to-date. We're now at 6.7% household penetration, which is an increase of 23 basis points of our household penetration. Those are great measures that really point us towards the fact that consumption has a strong underlying basis. What I also like to look at, Dara, when I try to think about the sustainability of consumption is what are some of the elements that are driving that consumption? Are we seeing it on price? Are we seeing it on units? This consumption that we've experienced, and over all of the recent quarters that I've been talking to you has been really balanced and very strong. So our consumption is driven 5% unit growth consumption increase and 4% price increase. That is not during a period where we've done price advance, so to speak, because we've actually lapped almost all of our price advances in market. That's a demonstration that people are actually buying larger basket sizes of Honest per transaction, or larger items from us when they are buying transactions with Honest. Additionally that I look for, is our repeat rates and our overall drivers of consumption and loyalty and our repeat has also grown in the quarter. So all of those indicators tell me that we have consumer fundamentals that are highly aligned with the products we offer and the benefits they serve. Of course, I can't speak specifically about what consumption will do on any future basis. But I would say when I look at the indicators and the fundamental drivers of consumption, I feel very great about what that tells me about the alignment we have with our retail partners and our consumers.

Dara, I'd be happy to kind of touch on the gross margin sustainability question that you had there, too. As we see the improvement that we've made year-to-date, a little over 1,000 basis points, pretty significant with the combination of both product cost savings and supply chain fulfillment savings. Those are sustainable and they're structural. And when we think about what's going to support kind of the level that we're at now and even longer term continuing to expand it. What we know is that we've got the right opportunity to continue to see some cost structural improvements in our product set. Our teams are continuously aggressively going after that across our sourcing network. And as we leverage with sales growth, some of the supply chain opportunity improvements will be there that sees benefit from revenue growth. And then lastly, I'd say, as you can see where some of the highlights of our portfolio, is seeing the most traction. It's in margin categories that are beneficial to the overall picture. And so over time, a mix of portfolio based on higher-margin profitability is what's also going to be part of the equation. And that's a core tenet of how we know the long-term margin expansion will play out for us. But hopefully, that supports your question.

Okay. Thank you.

And our next question comes from Anna Glaessgen with B. Riley Securities. Your line is open.

Hi, good afternoon. Thanks for taking my questions. I'd love to start on the Amazon Prime Day and historically, its efficacy as a tool to reach new consumers. Or do you generally see that as existing customers who are just buying in bulk and taking advantage of the discounts and the ability to convert those new customers to DTC customers? Thank you.

Anna, this is Carla. Nice to talk to you. We know from our Amazon purchase behavior that we actually track each quarter to what degree are we getting new-to-brand shoppers. And I don't know the number in this quarter specifically. But I think when we were with you all last quarter, we reported that we quadrupled new-to-brand first-time shoppers on Amazon in the quarter. So in general, what we find with Prime Day is that Prime Day is definitely a balance of replenishment shoppers, who are already very loyal and love the brand. But as our algorithm and our set of products work so powerfully in the Amazon ecosystem, we are also able to really gain new households who are doing search word, searches for maybe a product category, and haven't yet decided which brands they want. And as we perform strongly, we rate higher up in those searches. And so that brings greater brand awareness and greater trial on the Amazon ecosystem. I know some of the analysts on the call today are aware that I used to run these categories at Amazon. So I was the Vice President of Consumables categories for two years at Amazon. Our team not only maintains strong relationships with many of the leaders, of those categories over Amazon. But as we do our business planning, we love to be highly integrated with them on making sure, we deploy the right investments that unlock the ability to grow together, and we're very pleased with how that growth has gone.

Great, thanks for that color, Carla. And I'd like to shift to a topic that's very popular right now, assessing potential exposure to China sourcing. I believe you are limited to sourcing wipes from China, which would be roughly less than 20% of sales, but any update there would be great?

Yes. Sure, Anna. That is a topical issue these days, and we've been actually monitoring it for quite a while ourselves. You're right, our wipes portfolio is sourced in China. And so our team has been actively working with our supplier for quite a while on the topic of tariffs and really cost efficiencies. And so as we think about how - not knowing what the level or the timing of new tariffs may come down within China. We've already been working on plans to consider diversification, working on plans around cost reductions within that product set. And so we're prepared for what the uncertainty might bring us, but we're not clear as to the timing and the level that it's going to play out along with anyone else. Thankfully, we do have a nimble sourcing organization, and we are not heavily concentrated in that part of the world. So I think, we've got a portfolio that balances across our sourcing domestically, and internationally and will allow us to continue to maintain the gross margin levels that we expect, and continue to build on that. So we're prepared.

Great, thanks.

And our next question comes from Laura Champine with Loop. Your line is open.

Thanks for taking my question. So the gross margin gains have been obviously substantial. How much of a lift are you getting there from the price mix benefits that you're seeing? And if you can quantify that as a percentage lift to sales in Q3, on that 15%, that would be great? Thanks.

Yes. Sure, Laura. Within the quarter, and you're right, the lift was quite notable as we see our 38.7% gross margin is really an all-time high for us and tracks over last year, over 700 basis points. We don't see that, that's really letting up in terms of pricing being the driving factor there. In fact, we know that it's almost entirely made up of both the cost savings on product and fulfillment and supply chain savings that are in place for us ongoing. The pricing that we did take in 2023, we've largely lapped all of that price increase. And so by the third quarter of this year, it was a very small amount that you could attribute to pricing, or mix of higher-priced product in terms of our booked gross margin. But I think what we did call out, and Carla noted this, too, once the product is in the retailer hands and the consumers are buying it. They're buying at a higher price point, and we're seeing growth on units and the average. So it's a mix factor that's out there. But in terms of our gross margin rate, it was, for the most part, all cost savings and structural improvements.

Got it. And then a quick follow-up on the tariff question. I hear you that you're preparing for it. But given that you're sourcing one of your highest growth categories out of China, we're just a little worried about the wipe side. How quickly could you shift production? And how comfortable would you be raising prices to offset any increase in cost that's tariff related?

Well, we know that there will take some time for any implemented tariffs to put into place and how that would materialize in our cost structure, just given the lead times on our inventory flow and I don't really expect it's going to be a material impact in 2025. But what we do see is that the flexibility we have on sourcing is something that we're already well underway of working on with our supplier. Looking at other countries of origin, other supply locations and also actively looking at cost reductions in the wipes product itself. So that's - I'd say, more to come, but we're actively on this topic.

Should we expect inventory to build a bit through year-end as you build safety stock there?

Well, we'll make a call on that as we get closer to the lead times necessary, and if we've got any guidance on the state of implementing tariffs in certain parts of the world, but not at the risk of over-inventorying our position. I mean we'll be very prudent, but we'll also take the appropriate action to build if necessary, to avoid some known costs. But today, those aren't known.

Understood. Thank you.

I would now like to turn the call back to Carla Vernon for closing remarks.

Thanks, everyone, for joining us today. It was a pleasure speaking with you and sharing our third quarter results. We look forward to speaking with many of you at some of our upcoming investor events. And the rest of you will see you next quarter.

This does conclude today's conference call. Thank you for participating. You may now disconnect.