Honest : Q4 2025 Earnings Transcript

About this update from The Honest Company, Inc.

Q4 & FY 2025 Earnings Script Ladies and gentlemen, thank you for standing by - welcome to The Honest Company's fourth quarter and full year 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' 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 call over to Chris Mandeville, Interim Head of Investor Relations at the Honest Company. Please go ahead. Chris Mandeville Good afternoon and thank you for joining our fourth quarter and full year 2025 conference call. With me today are Carla Vernón, our Chief Executive Officer and Curtiss Bruce, our Chief Financial Officer. Before we begin, I will remind you that our remarks today include forward-looking statements subject to risks and uncertainties. We do not undertake any obligation to update these statements, and actual results may differ materially. For a detailed discussion of these factors, please refer to our safe harbor statements in today's earnings materials and our recent SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and accompanying presentation, which are available at investors.honest.com. Finally, please note that all consumption data included in our discussion today, unless otherwise noted, will reflect Circana MULO+ measured channel data for the 52 weeks ended January 4, 2026, as compared to the prior year. With that, I'll turn the call over to Carla. Carla Vernón Thank you, Chris, and hello to everyone joining the call. Honest enters 2026 as a more focused and agile organization. Over the last several months, we have moved assertively to execute the Powering Honest Growth transformation we laid out last November. By exiting Honest.com as a direct fulfillment website, the apparel category and our Canadian business, we have successfully narrowed our focus to our 'right to win' core of Wipes, Personal Care, and Diapers. With these exits, we have also right sized SG&A in line with this more focused revenue base. Later in the year we expect additional financial efficiency as we consolidate our warehouse footprint. As a result of these actions, we begin 2026 with a leaner, higher-margin operating model poised for growth. Today my discussion will be focused on the organic view of the product and channel mix that defines the resulting business after the strategic exits from Powering Honest Growth. As a reminder "organic" excludes the impact of the exits of apparel, Canada and Honest.com fulfillment. Our execution in Q4 enabled Honest to deliver on our revised guidance for the year. In 2025, Honest delivered organic revenue of $294 million, up 5.3% versus last year and squarely in line with our long-term algorithm. Consumption growth of 5%, driven by double-digit growth in unit sales, was in line with organic revenue growth and materially outpaced our comparative category growth of 2%. In 2025 our wipes and personal care portfolios delivered strong performance with consumption growth of over 30% and 12% respectively, which drove market share gains for both. This strength in momentum offset the softness in diaper performance. In 2026 we expect the growth on Wipes and personal care to continue offsetting weakness in diapers. I will share more on our diaper performance in a few moments. Despite the volatile tariff environment, adjusted gross margins were 38.7%, an improvement of 50 basis points year-over-year, largely due to favorable product mix. Our 2025 adjusted EBITDA of $21.8 million was in line with our most recent guidance. We also closed out 2025 with a strengthened balance sheet, ending with $90 million cash on hand and no debt. I am confident in the strength of our business, the discipline of our asset-light model, and our anticipated future cash generation. Based on that foundation, our Board of Directors has authorized a $25 million share repurchase program. This authorization reflects deep confidence in our strategy and our commitment to delivering long-term value to our shareholders. Looking back on 2025 performance in more detail, we are particularly encouraged that momentum improved across the second half of the year with Q4 organic revenue improving by six percentage points over the Q3 decline and returning the business to topline growth of 1% in Q4. This inflection in revenue quarter-over-quarter was largely because we lapped two retailer specific activations in 2024 that were mostly contained to Q3. Additionally, our total consumption improved by nearly 200 basis points quarter-over-quarter, driven by our higher margin wipes and personal care portfolios. Taken together, these drivers allowed our underlying strength to resurface in the fourth quarter. We are proud that this momentum is also reflected in our all-time highest household penetration of 7.6% at year end. This penetration growth represents an increase of 1.7 million households versus the prior year, proving that the Honest brand continues to resonate with a widening audience. And now, turning to 2026. For the full year 2026, we expect to deliver organic revenue growth in the range of 4 to 6%, while also driving margin expansion due to our more efficient operating model. This dual focus on top line leadership and bottom-line health is central to our value creation thesis. As a reminder, we continue to drive our strategy through the three strategic pillars that guide every piece of our work: Brand Maximization, Margin Enhancement, and Operating Discipline. This will be evident in our three growth drivers for 2026. Our first two drivers support our goal of Brand Maximization, which is how we scale the Honest brand. • Driver number one is our continued growth and leadership in the baby category. • Driver number two is our plan to accelerate our growth in households beyond those with babies. In addition to being a top baby brand, Honest also performs quite well in households beyond baby. And, in the US, 89% of households do not have any children under the age of six. This includes the 75% of US households that have no children at all. • To complement our strategy of broadening the Honest brand, our Third driver of 2026, is grounded in our Margin Enhancement and Operating Discipline pillars which allow us to make continued progress on strengthening our financial profile and operational excellence. Let me begin with our Brand Maximization drivers. The Honest Brand is unique in its ability to travel seamlessly across categories, aisles, and demographics. This was evident in our household penetration growth in 2025, which was balanced across households with no kids and households with kids. Even as we embrace this expanded approach to growth, our story always begins with babies. We believe there is no higher bar than the standard of care a parent gives to their precious babies. According to the National Institutes of Health, 42% of all parents and 49% of all first-time parents are concerned that their children have sensitive skin. This is why our Honest Standard, our rigorous set of guiding principles that helps shape every step of product development, including our commitment to formulating without the use of more than 3,500 ingredients of concern, resonates so strongly with our community. Honest is trusted by parents who demand a high standard of clean and refuse to compromise on safety or performance. Let me spend a moment addressing our diaper performance in 2025. The double-digit consumption declines on our diaper business had a dampening effect on the otherwise strong growth of our wipes and personal care collections. And while diapers are no longer our largest category, they are an important way to introduce the brand to the 11% of US Households with kids ages 6 or under. Our diaper declines were largely driven by retail assortment shifts at select brick-and- mortar retailers, the lapping of two large promotional events which I discussed earlier, and macroeconomic pressures driving consumers toward lower-priced items. Because today's parents expect a value equation that balances price with performance and safety, we are strengthening that equation for our diaper business through thoughtful investment in pricing and improvements to price-pack architecture, while continuing to deliver the quality materials, fit and style that we are known for. Now, turning to baby wipes and baby personal care. We are confident that our 2026 baby growth plan will drive the ongoing strong momentum of our core products along with a robust lineup of baby-focused innovation, much of which is rolling out this quarter. In 2025, our total Honest wipes portfolio delivered remarkable growth with consumption up more than 30%, which was six times faster than the comparative categories. A standout performer was our all-purpose baby wipes collection, which grew consumption by 25%, materially outpaced the category, and delivered the largest dollar share growth of any all-purpose baby wipes brand. One of the key drivers in this growth was trade up to larger sizes. In response to the demand for value and convenience, we are launching our largest baby wipes configuration to date: with 16 of our full-size packages for what we call our Mega Pack. Our baby personal care success is driven by the same demand for clean, safe, ingredients we see across the Honest portfolio. With 12% consumption growth in 2025, we are building on this momentum with a strong innovation lineup in 2026. On the heels of the successful launch of our first partnership with Disney, we are expanding our Mickey and Friends bath time and bedtime items into additional retailers this year. Our baby personal care portfolio also focuses on bringing the sustainability and value that today's parents are seeking. This quarter, we are adding a new item to our collection of milk-carton style 32oz refills with the addition of our fragrance-free shampoo and body wash. This gable top package, which is our largest-size offering, uses 89% less plastic than our standard 10-ounce bottle. And earlier this month, we launched our Fragrance-Free Sensitive Rich Cream moisturizer, with a beautifully light and creamy texture that is clinically proven to deliver 48-hour moisturization for babies' delicate skin. As I shared earlier, in addition to growing with baby households in 2026, we will also bring intention and focus to our growth of Honest in households with bigger kids and no kids at all. This leverages momentum that has been quietly building. According to Numerator data, 54% of current Honest buyers are in no-kid households and we have a history of appealing to these households in several ways. Many families who trusted Honest for their babies stick with us even after the kids grow up. Some of our most popular items from the baby aisle, like our shampoo and body wash, body lotion, or our conditioners and detanglers are favorites among households that don't have babies anymore. There are also households that discover Honest through products like our sanitizing wipes or our adult flushable wipes. Regardless of the reason, we have big plans to unlock more growth in households where the kids are older or where there may be no kids at all. The next natural step in this journey is our expansion into the section of the store dedicated to products for big kids. We know that as kids grow, they want things that show that they are growing up, but that doesn't mean they lose the need for the gentle and clean formulations we bring. So, we are practically cartwheeling with glee at our first launch into the big kid aisle in partnership with Disney Pixar's Toy Story. We are now taking bath time "to infinity and beyond" with a lineup of six-items that add Woody, Buzz, Jessie, and more Toy Story friends to the Honest family. The collection launched this month online and in stores at Walmart and the rollout will continue to additional retailers ahead of the Toy Story 5 release this summer. In 2026, we are also poised to continue our growth in the 75% of US households that don't have any babies or little kids. We have a two-prong approach for growing with these no-kid households. In many instances, we have seen that our existing items are already a great solution for these households. So, in 2025, we began evolving our marketing messages to introduce these older households to our personal care items and wipes. We are also designing new items specifically with this broader set of households in mind. A great example of this success is our beautiful counter-top friendly adult flushable wipes collection which grew consumption by 175% in 2025 and has ascended to the top 5 in Amazon's personal cleansing wipes set. Following our 2025 launch into brick-and- mortar retailers including HEB and Target, we are striking while the iron is hot as we rolled out our flushable wipes into Walmart stores earlier this month. Also, in addition to our successful fragrance-free offering, we expanded the range of our sanitizing wipes by adding full-sized packs in two new scents, grapefruit and lavender, alongside convenient pocket packs for on-the-go occasions. These are rolling into market as we speak. This strategy to grow across demographics is not a pivot; it is an advancement of what is working. Our community has spoken. The Honest brand and The Honest Standard are for everyone from babies and kids to kids at heart. And finally, we are also driving value creation through our focus on Margin Enhancement and Operating Discipline. Now that we have exited our lower-margin and less strategically aligned categories and channels, we will be able to deliver end-to-end efficiencies in our supply chain, along with improvements to inventory management, and reductions in SG&A. And with these Powering Honest Growth actions in place, we expect to deliver gross margins in the low 40s in 2026 . We have strengthened our balance sheet, lowered our cost structure, and have clear momentum in our 'right to win' categories. And today, we believe Honest is better positioned than ever to deliver long-term value to our shareholders while building a stronger, bigger Honest. With that, I'll now turn things over to Curtiss to provide more detail on our Q4 and full year 2025 performance as well as our 2026 outlook. Curtiss Bruce Thank you, Carla, and good afternoon everyone. The financial results we are sharing today represent the conclusion of a necessary and decisive chapter for The Honest Company. While our headline numbers for 2025 reflect the deliberate streamlining of our portfolio, the underlying metrics reveal a business that is fundamentally stronger than it was a year ago. Through Powering Honest Growth, we have built a stronger financial foundation, specifically designed to power our future expansion. This program is expected to deliver between $10 to $15 million in annualized savings, serving as a direct catalyst for margin expansion, while at the same time providing us with the fuel to reinvest and drive growth in our highest margin portfolios. To that end, our execution is moving at pace. Since our announcement in November, we have seamlessly exited non-strategic channels and categories, taken actions to right size our SG&A, and initiated plans to consolidate our footprint that will deliver structural improvements and efficiencies in 2026 that will endure well beyond this year. The performance and guidance I will detail today provide evidence of this continued scale for Honest. Beginning with our fourth quarter results, revenue was $88 million, down 11.8% year- over-year, this decline primarily reflects the deliberate impact of our strategic exits. These headwinds were partially offset by the continued momentum Carla detailed in our total wipes and baby personal care collections. On an organic basis, revenue grew 0.7% to $71.3 million, reflecting continued momentum in our total wipes and personal care categories, largely offset by ongoing diaper sales declines. Importantly, this was a significant inflection from our third quarter performance as we lapped select merchandising headwinds, observed continued strength in our wipes and personal care portfolios, and executed on targeted investments. Gross margin was 15.7%, compared to 38.8% in the prior year period. This was primarily related to a discrete inventory write-down on apparel as we finalized our exit of this lower margin portfolio. Additionally, an increase in tariff costs was also a slight headwind compared to the prior year period. These pressures were partially mitigated by favorable product mix as we shift toward our higher margin wipes and personal care portfolios and a decrease in fulfillment costs. On an adjusted basis, our gross margin was 38.3% and generally in line with the prior year period. Operating expenses increased $2 million dollars year-over-year. This reflected $4.2 million of the total restructuring costs we expect to realize from Powering Honest Growth. This was partially mitigated by lower year-over-year SG&A, primarily reflecting a reduction in legal expenses. Q4 marketing expenses were consistent with the prior year period. In the quarter, the Company reported a net loss of $23.6 million, primarily related to the one-time costs associated with Powering Honest Growth. Adjusted EBITDA for the fourth quarter was $3.8 million, down $4.8 million vs. last year largely due to lower revenue. Adjusted EBITDA margin was 4.3%. Turning to our full-year 2025 results, revenue was $371.3 million, representing a 1.9% decrease compared to the prior year. This top-line performance primarily reflects the intentional impact of our strategic exits under Powering Honest Growth. On an organic basis, full year revenue increased 5.3%, landing squarely within our long- term algorithm and highlighting the underlying strength in our core wipes and personal care portfolios. Our GAAP gross margin for the year was 33.3%, compared to 38.2% in 2024. This contraction was driven largely by a discrete inventory write-down on apparel and a headwind from increased tariff costs. These factors were partially offset by a more favorable product mix. On an adjusted basis, gross margin was 38.7%, an increase of 50 basis points over the prior year, highlighting the underlying health of our core business. Total operating expenses decreased by $9 million, or 5.8%, primarily driven by a reduction in SG&A related to lower legal and stock-based compensation expense compared to the prior year. This was partially offset by the aforementioned, discrete restructuring costs and a strategic increase in marketing to support our growth. For the full year, we reported a net loss of $15.7 million, compared to a loss of $6.1 million in 2024, with the variance almost entirely attributable to the discrete costs associated with our transformation. On an adjusted basis, net income was $8.3 million. Finally, Adjusted EBITDA was $22 million, which landed within our updated outlook range, and compared to $25.9 million in 2024. Now turning to our cash flow and balance sheet for the year, we generated free cash flow of $13.6 million, a substantial improvement compared to $1.0 million in the prior year. This strength was driven by significant working capital improvements stemming from our focus on operating discipline. Our balance sheet ended the year in an exceptionally strong position, with $89.6 million in cash and cash equivalents and zero debt. This capital position, coupled with our asset- light operating model, provides us with significant financial flexibility. As Carla shared earlier, with this strength as the backdrop, our Board of Directors has authorized our inaugural share repurchase program of up to $25 million, effective immediately. This decision is a direct reflection of our confidence in Powering Honest Growth and the substantial near and long-term benefits we expect this transformation to deliver. We believe our current valuation does not fully reflect the structural improvements we are making to our operating model, and this program underscores our commitment to a disciplined capital allocation strategy-one that balances reinvestment in our growth initiatives with a clear focus on returning value to our shareholders. As we look ahead, the decisive actions we've taken to optimize our portfolio have created a much stronger foundation for profitable growth. We have effectively shifted our resources toward the categories where Honest has the clearest competitive advantage, and our 2026 framework reflects the early returns of that discipline. For 2026, we expect the following: • Reported Revenue declines of 18% to 16% due to our strategic exits • Organic revenue growth of 4% to 6%, in line with our long-term algorithm; • Adjusted gross margins in the low 40s; • And adjusted EBITDA of $20 million to $23 million. To provide greater color on these figures, we anticipate sequential improvement in our organic growth throughout the year. While we face difficult comparisons in the first half of 2026-particularly in Q1 due to last year's retailer inventory buildup ahead of tariffs- our momentum will be driven by a robust pipeline of innovation and significant distribution gains established early in the year that will build throughout the remainder of 2026. For modeling purposes, it is also important to account for a high-teens percentage headwind to reported sales resulting from the strategic business exits we finalized in 2025. While this impacts the reported top line, it effectively concentrates our resources on our most profitable categories. Our adjusted gross margin expectations reflect the continued success and ongoing shift in our revenue base toward our higher-growth, higher-margin wipes and personal care portfolios. As these categories represent an increasing share of our total business, we expect a consistent mix benefit to our consolidated margin profile. However, tariffs will remain a year-over-year headwind until they enter the base period beginning in Q2. Regarding supply chain efficiencies realization under Powering Honest Growth, we expect these savings to materialize in the second half of the year as we move past the implementation phase of our footprint optimization. Specifically, we are consolidating from two fulfillment centers into our state-of-the-art facility in Las Vegas with a focus on automated large scale retail fulfillment. We are executing against a comprehensive project plan designed to ensure the continuity and stability of our operations. By applying our core principle of operating discipline to this move, we are focused on maintaining strong service levels for our retail partners and consumers throughout the process. Finally, our Adjusted EBITDA expectations reflect the operational leverage inherent in our leaner business model. To fully appreciate the significance of our profitability outlook, it is important to look beyond the absolute dollars. While we expect our adjusted EBITDA performance to be consistent with the prior year, it is being generated off a materially lower reported sales base. The fact that we are maintaining our profit levels while intentionally shedding nearly a fifth of our top line is a testament to the fundamental improvement in our business model. In terms of shape of the year for adjusted EBITDA, we expect performance to strengthen as the year progresses, mirroring the cadence of our organic growth and gross margin profile. When we look at the long-term earnings power of The Honest Company, we see a business that has moved past the era of structural complexity and into a phase of structural leverage. Regarding our top-line potential, our 4 to 6% organic growth algorithm remains the appropriate yardstick for our long-term framework anchored in our focus on driving sustained market share gains. Just as Brand Maximization is a catalyst for revenue growth, we see a similarly long runway for continued margin enhancement. As our higher-margin, higher-velocity products continue to outpace the broader portfolio, we are establishing a new, elevated baseline for gross margin. Additionally, the supply chain efficiencies and SG&A rightsizing we expect to realize are not one-time wins-we believe they are structural enhancements to our earnings power. As I close, I want to express my confidence about 2026 and the great future ahead for Honest. We are moving forward with a more productive portfolio, a stronger financial foundation, and a clear line of sight toward sustainable, profitable growth. We are committed to ensuring that The Honest brand thrives in the modern household for years to come. With that, I turn it over to Carla for final remarks. Carla Vernón Thank you, Curtiss. Powering Honest Growth was never just about restructuring; it was about unlocking the full potential of the Honest business model and brand. In 2025, we did the heavy lifting to streamline our portfolio and establish a stronger financial foundation. And now, in 2026 we will build on the great momentum of our core products, our strong brand building, and a great innovation lineup. This year, as always, our progress is due to incredible execution by our team. Curtiss and I offer our sincere thanks to our employees, proudly known as our 'Honest Butterflies'- across our LA, Las Vegas, and Minneapolis locations. Their resilience and commitment as a community continues to power our success. We enter 2026 with a high degree of confidence in our ability to deliver sustainable, profitable growth. Thank you for your support as we build a stronger, more focused, and enduring Honest. And now I turn it over to the Operator to open the line for questions.

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