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Friday, Feb 23, 2024

Honest Co. Files for IPO

Honest Co. Inc.’s recent initial public offering filing provides a glimpse into the Playa
Vista-based company’s operations to date, as well as where it’s headed once it commences trading on the Nasdaq.

The maker of nontoxic and eco-friendly personal and household products could reportedly seek a valuation of about $2 billion. Its revenue grew 27.6% to $300.5 million in 2020, up from $235.6 million in 2019. It also narrowed losses to $14.5 million from $31.1 million in the same period.

Honest Co. has not turned a profit since it was co-founded in 2011 by actress Jessica Alba, but that’s not necessarily a deterrent for potential investors who may likely be more focused on the company’s growth potential.

Some 80% of 165 companies that filed for an IPO in the United States last year posted negative earnings during the l2 months prior to going public, according to data collected by Jay Ritter, finance professor at the University of Florida’s Warrington College of Business.

Not having profit is “not a big deal, but it’s not irrelevant,” Ritter said. “It partly depends upon the industry. For biotech companies that have no revenue and are unlikely to have any drug sales in the next five years, the market is not expecting them to be profitable. … If you’re in the restaurant business, which is a competitive business, the market asks, ‘If you’re not making money now, when are you going to?’ The beauty industry is not quite the restaurant industry, but it’s definitely not the tech industry either. (Honest) Company is growing rapidly, and revenue was growing more rapidly than costs, so that is a very positive sign.”

Honest Co. offers three product categories — diapers and wipes, skin and personal care, and household and wellness. Diapers and wipes generated $188.4 million last year, or 63% of the company’s total revenue.

The category, which grew 16.4% year over year, serves as a “strategic consumer acquisition tool that acts as an entry point for our portfolio as new parents often go on to purchase products from our other categories for their everyday family needs,” the company said in its S-1 statement filed with the Securities and Exchange Commission.

“According to a third-party study that we commissioned in 2020, nearly 90% of our diaper buyers surveyed expanded their purchases beyond diapers, and nearly half have purchased two or more of our non-diaper products,” the company added.

Honest Co.’s competitors in the diaper and wipes category include Kimberly-Clark Corp., which makes Huggies, and Procter & Gamble Co., which sells Pampers, Pampers Pure and Luvs diapers.

Skin and personal care items accounted for $79.5 million of Honest Co. revenue in 2020, a 35.5% jump from 2019. The category will likely expand as the company intends to prioritize its growth “given its attractive margin characteristics.”

Honest Co. also competes with Johnson & Johnson Consumer Inc., the maker of Johnson’s Baby and Aveeno; Clorox Co., whose subsidiary is Burt’s Bees Inc.; and Unilever, maker of Shea Moisture.

In the household and wellness category, Honest Co. has doubled revenue since 2019 to $32.5 million last year. The pandemic fueled consumer demand for sanitization products, prompting the company to accelerate its development timeline for disinfecting spray and alcohol wipes, which are a part of its Stay Safe cleaning collection that debuted last year.

Other Honest Co. products in the category include hypoallergenic baby laundry detergent and prenatal vitamins. On this front, the company competes with Reckitt Benckiser Group, maker of Lysol, and Unilever’s Seventh Generation products.

Honest Co., a digitally national brand, generated 55% of its annual revenue — 166.7 million — from ecommerce last year, including 33% via its website.

Sales at brick-and-mortar retailers Costco Wholesale Corp., Target Corp., Walgreen Co. and others added up to $133.7 million and accounted for 45% of Honest Co.’s total revenue.

The company’s products can be found at some 32,000 retail locations in the United States, Canada and Europe. Honest Co. also connects with consumers via social media where it has some 43 million followers between the company’s accounts and Alba’s accounts. It also uses social media influencers for product promotion and marketing.

Honest Co. has 191 employees, most of whom work out of company’s 46,518-square-foot headquarters in Playa Vista. It also leases warehouse and distribution facilities in Fontana; Las Vegas; Breinigsville, Pa.; and the Netherlands. Together those locations account for more than 1 million square feet of space that the company uses to fulfill direct-to-consumer and retail orders.

The company said it plans to use funds from the IPO for “operating expenses, working capital and capital expenditures for future growth, including marketing and direct-to-consumer advertising investments, innovation and adjacent product category expansion, international growth investment and organizational capabilities investments.”

Alba, Honest Co.’s chief creative officer, co-founded the company with Christopher Gavigan and Brian Lee. She owns a 6.7% stake, according to the SEC filing.

Connecticut-based private equity firm L Catterton Partners holds a 37.5% stake in Honest Co. Other investors include Menlo Park-based PE firm Institutional Venture Partners and venture capital firm Lightspeed Venture Partners, as well as Massachusetts-based Fidelity Securities Fund. Those companies hold stakes of 13.9%, 12.3% and 9.3%, respectively.

Honest Co. will trade under the symbol HNST. This will be company’s third attempt at IPO — it signaled plans to public in 2014 and 2016 but did not officially file until now.

Mediha DiMartino
Mediha DiMartino
Mediha DiMartino covers retail, manufacturing and the ports. She can be emailed here.

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