The Honest Company, Inc.

Good day and thank you for standing by. Welcome to the Honest Company first quarter 2021 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, to Sung Kim, Vice President, Finance and Strategy. Thank you, please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal year 2021 conference call. Joining me today are Nick Flores, Chief Executive Officer, and Kelly Kennedy, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer that we will make certain statements today that are forward-looking within the meaning of the federal securities law, including statements about the outlook of our business and other matters referenced in our earnings release issue today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our SEC filings as well as our earnings release issued today 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. Also, During this call, we may 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 today's financial results 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 Nick.

Thanks, An. Good afternoon, everyone. We're excited to speak with you on our first call as a public company. Honest is dedicated to providing safe, clean, and effective products to consumers around the world, and becoming a public company represented a significant milestone as it further empowered our team to drive our mission of inspiring everyone to love living consciously. I want to thank the entire Honest organization for their dedication and passion to our business and mission. Their contributions led to our successful offering and position as well to execute our strategy going forward. As you saw in our earnings release, we're off to a strong start with double digit top line growth and solid progress against our strategic initiatives. These initiatives focus on broadening awareness, introducing breakthrough product innovation, increasing our digital and retail presence, and continuing our commitment to ESG. Before I share the highlights of the quarter, for those new to The Honest Story, I'll take a moment and outline what makes our company uniquely positioned to drive good growth in the near and long term. First and foremost, we're a digitally native mission-driven brand, We're a leading lifestyle brand in clean baby, beauty, and personal care with top rankings across three key loyalty drivers in our product categories, better for you credibility, expressive brand personality, and functional excellence. Our products have garnered strong ratings and reviews across categories with industry-leading NPS scores while formulating according to our honest standard and no list. avoiding over 2,500 chemicals and materials we choose not to use. Our brand promises to always strive to provide clean, sustainable, effective, and thoughtfully designed products for our consumers. Second, we're focused on disrupting large consumer categories. The total addressable market for our categories of diapers and wipes, skin and personal care, and household and wellness is estimated to be $130 billion, with $17 billion representing the clean and natural market in those categories. Importantly, the clean and natural market is projected to grow in the high single digits through 2025, six times the rate of the conventional market, giving us a unique advantage. As we create products in our attractive consumer categories, we're focused on three key differentiators to give us a competitive advantage. Number one, we're focused on driving marketing innovation to increase consumer awareness of our products. Since inception, we've grown our brand and deepened our consumer relationships through our content, community, and commerce strategy as we educate and entertain and build long-lasting consumer connections with over 43 million followers on social media. These relationships with our consumers inform our product development and and allow us to move faster to bring new and improved products to market. Number two, we have built a high-performance in-house product development team with a proven track record of bringing breakthrough, award-winning products to market. This capability has allowed us to diversify our revenue across product categories and to drive a creative innovation through our cost-divation process. And number three, our integrated omnichannel approach drives discovery and accessibility and allows us to efficiently scale our business while making us agnostic to the channel our consumer chooses to shop. In fact, our sales are balanced with 55% transacted digitally and 45% at retail in 2020. Now let's pivot to our Q1 2021 results. Our Q1 accomplishments reflect the continued execution of our strategy against these key priorities. Number one, starting with marketing innovation, we continue to expand brand awareness and consumer touch points through the use of key marketing campaigns that leverage our content, community, and commerce strategy. By inspiring authentic dialogue and creating lasting connections, we were able to draw 42% growth in our skin and personal care business. This is a strategic focus for us as more than one-third of new honest.com consumers enter through our skin and personal care products. Let me highlight one key campaign that we launched in Q1. Our morning routine campaign featured Jessica Alba showcasing a variety of morning routines for the whole family. emphasizing the versatility of our personal care offering through multiple life stages. The content underscored the breadth of personal care product line by utilizing a solution set of four hero personal care items, our shampoo and body wash, conditioner, face and body lotion, and conditioning detangler. We engaged our honest community by launching a compelling and comprehensive campaign that utilized paid media and was supported by strategic influencer gifting and press features in premium publications. The campaign had a total reach of over 90 million impressions across social media, influencer, press, and paid media. According to our consumer engagement strategy, we created unique solution-oriented content drove advocacy for our honest community, and ultimately generated commerce through unique honest.com solution sets around the morning routine campaign. This is just one example of how we leaned into marketing innovation to drive strategic growth in the quarter through incremental marketing investment. Second, we introduced product innovation with strong consumer response. During the quarter, we introduced breakthrough innovation in diapers and wipes. We launched our Clean Conscious Diaper that delivers improvements in performance, sustainability, and margin. With regards to performance, our new diaper features advanced leak protection, a new wetness indicator, and product features designed for every stage of a child's development. In addition to the improved performance features, the Clean Conscious diapers also are most sustainable diaper yet. Our diapers continue to feature sustainably harvested, totally chlorine-free fluff pulp, and a 100% plant-based back sheet. We were able to further improve the sustainability and environmental impact of this offering by moving to a more efficient diaper design that uses less material in the diaper and 100% post-consumer recycled cardboard in our diaper boxes. Finally, in addition to improved performance and sustainability, we were very proud to achieve improved margins on our diaper due to our more efficient diaper design. Early consumer and marketplace response has been strong. Over the course of the year, we expect to release a consistent cadence of new product innovation. Third, we're pleased to deliver growth across both our digital and retail channels as our integrated omni-channel strategy continues to accelerate digital and retail share of shelf. This quarter, we delivered double-digit revenue growth on top of 36% growth in Q1 2020, Our two-year stock is 48% growth. Overall, we have seen increased consumer willingness to get back into stores as consumer behavior in response to the COVID-19 pandemic changes and have seen a channel shift and an acceleration in revenue growth within our retail channel. We're well-positioned with our omnichannel strategy to capture this growth as evidenced by our retail growth in Q1 2021. Significant white space opportunities still exist to expand our on-shelf presence and the depths of our product offering with new and existing retail partners. For example, in Q1 2021, we increased both our door penetration and our assortment on beauty at Target, increasing from roughly 900 stores to over 1,200 stores, with skincare and color now sitting in an integrated shelf set in the beauty aisle. In total, we added approximately 10 additional items to our core target beauty set. Before I turn it over to Kelly, I wanted to take a moment to reiterate our commitment to ESG, which has been part of our DNA since our founding. We have a deep sense of purpose and infuse the ethical values of transparency, sustainability, diversity, and inclusion in all that we do. From developing products designed to be safe to working hand-in-hand with our charity partners to serve those in need to embracing diversity and inclusion, we're on a mission to create real and meaningful impact. In the first quarter, we launched several breakthrough initiatives that have deepened our commitment to offering environmentally friendly products. In addition to the launch of our Clean Conscious Diaper, we were also proud to launch our Conscious Cleaning Essentials. a sustainable solution that seeks to reduce waste without compromising on effectiveness. According to our estimates, approximately 600 million household plastic bottles may end up in a landfill each year. As part of our effort to reduce the amount of single-use plastic thrown away each year, the essentials collection features reusable spray top bottles along with cleaning concentrates for bathroom, glass, and multi-surface cleaning. In addition to reducing plastic waste, the lightweight concentrate pods cut down on the amount of water shipped around the country, providing us with an opportunity to lower our carbon footprint. Consumer response has been strong, and we're inspired by the impact that simple, sustainable changes can make. Regarding social impact, we're very proud of our partnership with our charitable partner, Baby to Baby. Since inception, we've now donated over 25 million products, making an impact with individuals and families in need. As it relates to our governance efforts, in May, we're pleased to welcome James White and Susan Gentile to our Board of Directors. Mr. White brings nearly 30 years of professional experience in the CPG and retail industries, and Ms. Gentile brings more than 25 years of experience in the finance sector across industries. The background they bring to Honest will help ensure we continue to reflect the needs and wants of our consumers and the communities we serve in all that we do. With these two new additions, we are very proud of a board that is 56% people of color and 33% women. In summary, we believe we have built the foundation for Honest to continue to grow as a leading clean and natural wellness brand. We continue to capitalize on our strong content, community, and commerce platform to drive good growth across product categories and all consumer touch points. We are pleased with our strong start to the year and believe we are well positioned to continue to advance our strategic growth plan. I'd like to turn the call over to Kelly Kennedy, our Chief Financial Officer, to review our first quarter results in more detail.

Thank you, Nick. And welcome, everyone. I'm delighted to speak to you today and share our strong start to the fiscal year, achieving the single highest revenue quarter in the company's history, reflecting double-digit revenue growth versus the first quarter of 2020. This performance reflects the positive momentum for our honest brand and the successful implementation of our strategic priorities by our team. I'll walk you through our financial results and key drivers for the quarter. My remarks will include adjusted non-GAAP results. You can find reconciliation tables to GAAP financials in our earnings release. First quarter revenue totaled $81 million, a 12% increase over Q1 2020. As Nick highlighted, this was on top of 36% growth, which represents two-year stacked 48% top-line growth. Now diving to the key drivers by product category. Starting with diapers and wipes, the category decreased 2% as we transitioned to our clean conscious diaper. And lastly, acceleration in diapers and wipes related to COVID-19 pantry loading in the first quarter of 2020. Of note, diaper growth was positive in Q1 behind our new diaper launch, but was offset by a decrease in wipes as we lapped consumer stock up behavior from Q1 2020. Based on consumption data for the last 12 weeks ending May 16th, our diaper business was up 13% while the overall market declined 1%. Skin and personal care grew 42% driven by sales volume from our incremental investment in digital marketing and expanded distribution with our retail partners. We invested meaningfully in marketing innovation behind our skin and personal care products through some of the innovative campaigns that Nick highlighted earlier. And we were also able to expand distribution points with our key retail partners, such as Target. During the first quarter, we were able to reduce our legacy beauty inventory, which puts us in a great position for the beauty relaunch, launching in Q3 of 2021. Our beauty restage features tree-free packaging across the line while achieving significant margin improvement. Skin and personal care saw strong growth even as compared to the first quarter of 2020 when revenue grew 63% versus the first quarter of 2019. Householder wellness grew 53%, fueled by our standardization and disinfecting products that we introduced in the second half of 2020. While we were still able to see significant growth in household and wellness, we are starting to see households and retailers destock sanitization and disinfecting products as more consumers become vaccinated and return to their pre-COVID routine. Now turning to results by channel. Digital channel revenue increased 2% to 42.5 million. On a two-year stack basis, growth was 25%. Retail channel revenue increased 25% to $38.6 million. Retail two-year staff growth was 83%. Outside retail growth was aided by a strong rebound in store traffic as vaccinated consumers increasingly returned to in-store shopping. We also benefited from expanded distribution, the sale of our existing beauty inventory, as well as promotional and merchandising events with partners like Target, Whole Foods, and regional groceries. Gross profit increased $2.6 million to $28.4 million, primarily due to increased revenue. As a percentage of revenue, gross margin achieved 35% for the quarter. This compares to 36% in Q1 of 2020, which benefited from the lower levels of trade spend as retailers pulled back on events during the pandemic. Overall input costs were higher in Q1 of 2021 versus Q1 of 2020, including higher transportation and freight costs. Given record levels of cost inflation, this is a focus area for us in 2021. We have a number of conservation initiatives launching in 2021, including the Clean Conscious Diaper, which launched in Q1, and our upcoming Beauty Resage that launches in Q3. We will continue to evaluate the input cost environment to ensure that our productivity plans are sufficient to offset current inflation levels. Total operating expenses increased $7.5 million versus Q1 of 2020, primarily driven by increased investment to support growth, as well as increased costs of operating as a public company. We invested an incremental $5.5 million in marketing and R&D versus Q1 2020, as we supported the accelerated growth of our skin and personal care business the launch of our new Clean Conscious Cypher, and invested in our upcoming innovation pipeline. Adjusted EBITDA for the first quarter of 2021 was roughly breakeven. A couple of items to note on the balance sheet. We ended the quarter in a healthy position with $58 million in cash, restricted cash, and short-term investments with no debt on our balance sheet. I just wanted to note that this is before the impact of the IPO proceeds, which will be reflected in the second quarter. As evidenced by our double-digit growth in Q1 of 2021 and our 2020 results, we continue to feel good about our strategy and growth prospects. Our consumption remains strong, and we continue to be extremely proud of our deep connection with consumers, our award-winning products, and our omnichannel approach. We believe these differentiators continue to position on us for success, both now and into the future. We want to reinforce our long-term targets First, consistent double-digit top-line growth over the next few years. Second, ongoing gross margin expansion with a path to 45% long-term. And third, improved EBITDA profitability with a long-term target of 20%. With that, I'll turn the call over to the operator to begin the Q&A portion of the call.

Thank you. As a reminder, to ask a question, you would need to press star 1 on your telephone. To withdraw your question, please press the pound key. Due to the essence of time, we ask that you please limit yourselves to one question and one follow-up, and we queue for further questions. Please stand by while we compile the Q&A roster. I show our first question comes from the line of Steph Wissink from Jefferies. Please go ahead.

Thank you. Good afternoon, everyone. Our question is just on the business momentum. If Kelly or Nick, you could talk a little bit about what you're seeing in Q2. And then I think it would be helpful just to rationalize the lap to COVID last year in the Q2 quarter. Is there anything we should be aware of in the base from a comparability perspective?

Yeah, sure. I'll take that. Thank you for the question, Steph. You know, obviously, in Q1, you can see lots of momentum in the business. You know, we're seeing strength, you know, based on our visibility to the tract consumption data. We look at IRI. But really underlying this shift in something, you know, you'll be hearing a lot about is this shift from digital to retail and kind of as the economy starts to open and strengthen. And so this shift for us is kind of creating this volatility. You know, as an example, you saw in Q1, our retail business represented 48%. of our total business in Q1 in 2021, while a year ago it was 43%. And while we're typically going to be volatility in our business from quarter to quarter, there's quarters we've seen benefits, but what we're currently seeing in our business right now really is consumption outpacing shipments. So we do want to highlight kind of if you think about business right now that this could have a potentially material impact on the quarter, but it's happening real time. We're in the middle of our quarter and it's something that we're monitoring. We have a significant digital event that takes place at the end of the quarter. And so, you know, kind of a lot of eyes and kind of visibility to coming out of this event and our trends here. You know, obviously, we always manage for the long term. Underlying consumption remains really strong. You know, we're not getting specific quarterly guidance, but certainly a trend that we want to give some visibility to. And we'll be getting back together here in August. We'll be able to share kind of a lot more about the business and kind of the results kind of of this kind of mega event that's happening at the end of our quarter.

Okay, that's great. Nick, if I could just add a follow-up question on beauty and skin care. You talked a lot about Target as an illustration of the white space opportunity, but that category seems to be a real important power driver of the model. So talk a little bit about where you think you are in terms of SKU, assortment breadth, opportunity to build out those full brand experiences like you talked about at Target. Where are you with some of your other retail partners in really harvesting that opportunity to grow that sleeve of the business?

Yeah, thanks, Steph, for the question. I think, number one, you know, the way we look at it is, first and foremost, you know, we're really pleased with the strength that we're seeing within Target with this expansion put into place. Number two, we're also, from a digital perspective, as you look at kind of skin, the personal care results, you know, 42% growth. When we drill down in beauty, we're seeing acceleration within that part of the business. So we're seeing it and we're seeing a nice mix between both cosmetic and the color side as well as the skin start to move. And now as things start to open up, here in California, you know, I walked into a store today and I was able to wear my mask and we're starting to, you know, wear masks more and more. So we're starting to see the consumer start to gravitate more and more to our mix being both on the cosmetic as well as on the skin side. What we're seeing is from a distribution, from an assortment standpoint, is in different retail. So, for example, Target, Ulta.com is another example, as well as our results internationally. When you look at Douglas over the last quarter, we saw actually at Douglas about 23% growth this past quarter. We're seeing definitely the depth that we're driving around distribution on the digital as well as the physical shelf. And we're starting to see, obviously, the repeat. And that's why when you see the results in Q1, that's 42%, you know, 63% a year ago. And that's, you know, over 100 plus percent on a stack basis. So, again, a lot of opportunity still, but a lot of good momentum as you look at the results coming out of Q1. And that's going to position us well. when you think about the beauty restage, which is going to hit in Q3, because just a reminder, that's going to be not only from a packaging perspective, this 100% free, free packaging that we're thrilled about when you look at the improvements around the business, it's already doing extremely well, but also importantly, new products. We have a new daily defense collection that we're going to be introducing as well as a new lash tinted serum initiative around that from the innovation perspective. So A lot there, and then coupled with that is roughly about 800 basis points of gross margin expansion that's going to take place against that initiative when you look at the... Great.

Thank you.

Thank you. I show our next question. It comes from the line of Wendy Nicholson from Citi. Please go ahead.

Thanks. And actually, Kelly, I wanted to circle back and just hear a little bit more about what you were just saying in that line of questioning about how consumption is outpacing shipments and you've got the big digital promotion coming up at the end of the month. So I'm just trying to understand, are you worried about having out-of-stocks? Is there a chance that you would move that promotion? Like how is everything working from a supply chain? I just wanted to really understand if there was a risk that either at the time of that promotion or at the retail level there was a chance you couldn't fulfill demand. Great question. I'm glad you asked the follow-up, Wendy. It is not. We're in a good inventory position. What we're seeing really is around this shift, and we're seeing a retail partner where their shipments are not reflective of the underlying consumption. You know, we mentioned volatility from time to time, you know, from quarter to quarter. We can see shifts. Sometimes it goes in our favor. Sometimes it goes the other direction. And right now what we're seeing in the business is specific to kind of this shift between digital to retail. And one of our partners essentially, you know, kind of managing their working capital. Got it. Yes. Okay, and that is not a worry that, gosh, maybe they're going to cease to carry honest diapers or something like that. There's nothing untoward or anything we should be worried about in terms of that relationship. No, I would say this is an extremely strategic relationship, and we'll be getting some great prominence, and we've been working with them as well just behind this event, an event that we've done kind of in past years, but again, we're leaning into it, and we're really excited. It's just that it's not representative overall in the underlying. Typically, we've seen replenishment follow this event, and the timing is at the end of our quarter, so it's kind of different than it's been in the past. Understood. Okay, I really appreciate that clarification. That's very helpful. And then, you know, maybe for you, Nick, I had a question just about the competitive environment. You know, some of your competitors have announced price increases on the baby care side, and, you know, as we start to see those higher prices maybe show up on shelf over the next couple of months, Do you think it impacts your pricing at all? I mean, obviously, you're more premium priced generally, but do you intend to keep the same price gap, i.e., raise your prices as well, or do you think that's a more compelling proposition because the price gap won't be as large if you don't raise prices? Just how do you think about sort of the elasticity of demand for honest diapers depending on what the competitive pricing environment is like? Thank you.

Yeah, thank you, Wendy. A couple things on that. Number one, I would think about it this way. So the conscious diaper that we just introduced in Q1 really started to hit the market kind of the second half of Q1. And you look at our marketing investment, we put in about an incremental $5 million of marketing this quarter and really driven against the conscious diaper initiative as well as our skin personal care businesses. from that standpoint. So by introducing that in the market with the features that we reference, this is the most sustainable Viper as we look at the comparison versus kind of where we've been as we look to continue to improve from an innovation perspective. What we're starting to see in the market behind that investment and that new product, again, still early, but hitting the markets, We're starting to see our share start to pick up from a track perspective. So at the start of the quarter, our share stood, and this is looking at all outlet IRI MULO data over the last 12 weeks. Our share sits now at about a 1.4 on the diaper. Starting the quarter, it was sitting at about a 1.2. So we like the fact that we're starting to see share start to pick up. And then importantly, what we're seeing now is from a category perspective, and Kelly referenced this, We've seen over the last 12 weeks about 13% growth versus the category declining at 1%. So we like the position that we're in because coupled with that is the second part of the question around input costs. Remember, this initiative was also a cost evasion. So not only a product improvement for us from an innovation perspective, but we also picked up additional gross margin on this product. So it was a margin win for us also. That second component that you're referencing that we're looking at, we understand that there are some of these manufacturers that have taken price. We're closely monitoring the input cost and kind of that volatility that sits in the market right now. Right now, when you look at our plans, we have sufficiency around productivity and this cost evasion that we're driving both in our diaper business in the second half. It'll be our beauty restage that I referenced earlier. But it's one that we're taking a very close look at. Right now we like the fact it's a conscious diaper. We've introduced it. You know, we're starting to take a little bit of share. We've got a lot of momentum from that standpoint. What's going to be important is to really understand and see where the cost structure is going to sit moving forward around, you know, some of the inflation that everyone is seeing. And we're monitoring that right now. And, again, today we have sufficiency within our plans as it pertains to mitigation. but that's something that we're closely looking at.

Terrific. That's very helpful. Thank you. Thank you. Thank you, Wendy.

Thank you. Our next question comes from the line of Lawrence Grandet from Guggenheim. Please go ahead.

Hey, good morning. Good morning, everyone, and thanks for this first call, Nick and Kenny. Very good job. So I do have really a career question about the comments you made in your pro-mark or in your press releases. regarding the $3.4 million of personal care you sold in the quarter. I just want to understand, basically, is it on top of what you planned originally, or is it something that was already planned? And really, when you say in exchange for future marketing and transportation credits, I'd really like to understand this a bit more, if you can. Thanks.

Sure. I'll take that one. I'll give you a context. Always part of the plan is So when you see the level of innovation and the cadence that you see from Honest that we continue to introduce in a very rapid pace, we have, in this example, legacy inventory, approximately $3.4 million that we've partnered with Active International on to be able to, prior to this Q4 restage, to be able to sell through that inventory. The good news there is that inventory is is being sold at an accretive gross margin to where the company landed Q1 at. So that's a positive. Two, we're also putting outside of our warehouses, getting this product moved through the system to position the new product that we're going to be bringing in and be able to start staging our inventory. So it is a benefit. The second part of that question is around really the credit component. And the way this works is we have marketing credits as well as transportation. And how we use those is really against current digital media partners that are already part of the honest go-to-market. as well as in-store visual merchandising vendors that we use. So as we start to transition this product in the marketplace, we have both the marketing component as well as the in-store component with current vendors that we can utilize those individual credits against. So it's a strategic play for us. It's part of our transition plan and puts us in a good position as we talk about this new beauty restage that's coming as it pertains to Q3 to be able to really start to accelerate not only great innovation with the 100% tree-free packaging as well as the new items, but also start to capture the additional incremental gross margin that we're driving at about 800 basis points against that initiative.

Thanks. I appreciate that. Thank you very much. Thanks.

Thank you. I show our next question comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead.

Good afternoon, everyone. As you think about diapers and obviously the share that you've gained and the growth in the first quarter and how you've outpaced the market is very impressive. How do you see this Clean Conscious Diaper Initiative going forward? Is that a margin enhancer too? And how are you planning wipes go forward? And then just on another note, on the beauty restage, What type of marketing investment do you make there, and does that continue through the balance of the year? Thank you.

Yeah, I'll take the first one. Dan, thank you for the question. And I would say on the conscious diaper, as we've kind of built out that innovation, we do this type of work when it comes to the performance and being able to address these key consumer dissatisfiers. And we've done this in a way now where we're also increasing the margin structure against that business. So it's got the right proposition for us because we talk about good growth always, which is this consistency around not just driving top line, but also the margin expansion components that we want on the business. So that's rooted in the current proposition. The key for us will be, as I referenced earlier, the earlier question, we'll be maintaining the sufficiency within our consistent annual productivity plans. And we have three-year productivity plans that we drive against the business to really mitigate kind of the cost environment. And that, again, is something that we're closely looking at. And then I'll let Kelly pick up on the second part of the question.

Yeah, I think, you know, as we think about marketing spend, we think the right level for us is kind of in this 14% to 17% revenue range. We did have some great kind of marketing and leaned into marketing spend because of the great innovation that we had. We will support the beauty restage that's coming in Q3. We continue to see skin and personal care be just a great driver for us of growth, and you would expect that over the back half as well. So we think it's the right place for marketing. You know, we will continue to lean in as we see the return and see it drive top-line growth. But you could expect for us to kind of stay within that guided range of 14% to 17%. Got it.

Thank you. Just on the digital and retail channel growth, did you see the digital piece of your retail partners accelerate as much as you saw the store improvement come back? Or what did you see as stores reopened on the digital performance of the retail channel?

Yeah, I think there was a mention of this earlier. As we think about kind of looking at digital versus retail, it's helpful to look at two-year stacks as well because we want to remind everyone the COVID kind of, you know, the COVID trend that happened, you know, in Q1 was all around kind of a shift on the consumer stock up behavior. And there was kind of a growth both in retail and digital last year. In Q1 of 2020, retail grew 58% and digital grew 23%. So when you think about digital on a two-year stack, we are seeing a significant shift versus what was happening a year ago. So the key trend that we spoke about earlier is really the shift from digital back to retail. But again, we also saw digital acceleration as well.

Yeah, the other thing that I would add on that is with some of our key retail partners on the digital side, you know, in 2020, you know, we saw really this migration from kind of in the 20% ranges to, you know, moving more closely to 30% plus when you look at the amount of business that they're doing. But coupled with that is a lot of also click and collect pickup that's taking place within retail. So it's not just the digital component, but also the visitation as it pertains to the stores. And that's where we're seeing more and more, both within our own data sets and with some of our strategic partners, kind of those people are more and more gravitating towards the retail side. Now, the good news is, and that's why we're always strategy-led, is that we have an omni-channel strategy that we built and that we're agnostic when it comes to consumers that want to shop at, you know, honest.com. Great. You want to shop amazon.com. You want to shop at target. You want to shop at HEB. You have that opportunity with us. And that's why I think we're well positioned as we look at, you know, based on where that consumer shops, you know, consumers at the end of the day, they don't shop channels. They shop brands at the end of the day. So we're well positioned.

Thank you.

Thank you. I show our next question comes from the line of Brian Spillane from Bank of America. Please go ahead.

Hey, good afternoon, everyone. Just, I guess, two quick ones related to the channels. One is just, I guess, following up on an earlier question with regards to the, I guess, the shipments being behind consumption issues. Is that specific to retail, or is it spread across retail and digital? And then the second question I had is, when we're thinking about channel agnostic by channel going forward on margins, assuming that's true today, as we think about the margin expansion that you're expecting over the next few years, Would that relationship hold, meaning I guess is the margin opportunity bigger in one channel versus the other, or would you expect that even as margins are expanding, you're still sort of agnostic, whether it's digital or retail?

Yeah, thank you, Brian, for the follow-up question. The trend that we were mentioning earlier is specific to the digital channel, this As it relates to thinking about the margins between right now, they're relatively in line, and we expect that to continue over the next few years to be not materially different. In the longer term, we do think there is an opportunity as we leverage the business and leverage the fixed costs within our digital channel. that we would be able to expand the margins in the longer term better in the digital channel. But we do feel right now we're pretty well balanced between the two, and we would expect that to continue over the next few years. So you would have to look farther out than just kind of one to two years to see a material difference between the margin structure, digital versus retail.

Okay, great. Thank you.

Thank you, Brian. Thank you. I show our next question comes from the line of Laura Champagne from Loop Capital. Please go ahead.

Hi. Thanks for taking my question. I wanted to talk a little bit about your international opportunity, which I think management has acknowledged is very significant, but that it's longer term. How would you get started there, and what's on deck for you to do in the next couple of years in terms of international growth?

Thank you for the question. A couple things on this one. When it comes to international, you know, we've already, you know, it represents about 2% of our business in 2020. What we have done in international, we haven't been, I've built a lot of businesses over the years, we haven't been planting flags. We've been very strategic and methodical. So when you take a look at one of our core partners where we introduced the brand with, was Douglas in Europe. And I referenced earlier, you know, the consumption trends as it pertains to Q1 at Douglas of about 23%. That's an example of, you know, we're going to build this business in a methodical way when it comes to, you know, driving both the digital side of the business with a partner like Douglas as well as, you know, the retail side. An example also is, you know, Cult Beauty in the UK is another strategic partner of ours. the skin personal care space so number one you'll see us be you know methodical in going deeper and wider in the geographies that we've already built out because we've got awareness behind our marketing investments we started to see the repeat again we're in our early innings as it pertains to international and then we're going to continue to drive strategically what we do here which is this kind of omni-channel component that you're going to see through the retailer partnerships that we've established. And as we look at, you know, the rest of this year and you start looking, you know, further out, you're going to see us continue to build off kind of that core, you know, and those principles that we established in 2020, you know, moving forward. So I hope that gives you some context.

So, Nick, if I can try to summarize that. It sounds like you expect to move partner by partner rather than geography by geography. So even though, you know, some of the markets in Asia look very exciting to us, you'd rather find the right partner and then take it from there. Is that a reasonable assessment? Correct.

And I've seen a lot over the years where businesses, you know, get challenged is, you know, when they don't have the right kind of beachhead from a partnership perspective because that localization is so important, especially when our you're a young brand like ours. So being very strategic, have the right alignments from a partnership perspective and a principle around really building something together because there's added value for both parties. And the examples that we've leveraged in Europe, both partners like our digital capabilities, our content community and commerce strategies. So those are enablers for them. as well as the initiatives around innovation and the cadence we have around clean beauty that actually works. So when you put those things together, that's how we're going to continue to approach it as we look at Europe, number one. And then, you know, as we start talking strategically and we share broader strategy in the future, we'll go into greater detail with other geographies. Great.

Thank you.

Thank you, Laura.

Thank you. I show our next question. It comes from the line of Andrea Teixeira from J.P. Morgan. Please go ahead.

Thank you. So I have a question on distribution and then a follow-up on gross margin. On the distribution side, if you can break down the 12% growth you had in the quarter, how much was distribution velocity within the same doors or shelf and price mix? And then a clarification on the gross margin commentary. I think, Nick, you mentioned the Conscious Diaper being accretive to margins and not contributing until, I think, half of the quarter. And also the 100 basis points benefit from restaging in Q3. So I was just wondering if we should be prepared for more impact in gross margin in Q2 against the Q1, so sequentially. the channel mix that you're seeing from online to wholesale also being a negative. And specifically to that, if you can clarify one commentary, Kelly, you were saying that the shipments trading consumption, in particular in digital, is that something specific to this customer which may be putting a lot more emphasis on you on the retail side, so basically increasing And I'm thinking of that one that you are online and you're not in store. Is that something that has happened? So you're gaining more distribution in the physical stores and then that's going to be shifting because of that, because they're staging you new in store. Yeah. I know we have a lot there. Yeah.

No, that's okay. I'll speak to all three. And the first and the last are actually related because as we think about kind of Q1 growth and the sources of that growth, it was actually balanced between velocity, innovation, and distribution, which is, of course, some of the power between our growth strategies as they complement and work together. You are right as we're seeing some of the consumer behavior shift between digital and retail. You know, I do think that just creates some volatility as, you know, kind of as people ramp up their inventory pace and weeks of inventory to reflect the change in demand. So I think the two are related. As we go into Q2, we're seeing again a lot of demand come through velocity in the retail channel. So that can be kind of the – as you think about current trends in the business, velocity is a little more heavily weighted to what we're seeing today predominantly in the retail channel. As it relates to the gross margin impact, we have, as Nick highlighted, we have a really robust cost evasion. You know, kind of cadence with the introduction of the Clean Conscious Diaper in Q1. Beauty Restage is a materially different overall margin structure, although a growing, a small but growing piece of our overall business. You know, we are, as we kind of think about gross margin, we're looking at the input cost versus the cost deviation that we have lined up. And right now they are in line, and we're feeling, you know, kind of, good about our ability to deliver our gross margin structure. I think what Nick was alluding to earlier is we have a level of inflation kind of anticipated. We do have some contracts that protect us against some inflation in certain parts of our business, but we're seeing some strong inflation in transportation and freight, and that is an area that we're offsetting with that cost evasion. So I think as we go through the year, we'll be coming back to let you know if we see anything different in August. You know, right now, you know, we chose, you know, the one thing that we didn't talk about as a driver of growth is pricing because it was really all volume. We didn't take any big material pricing at this point. We haven't announced any pricing. We are really excited about some of the opportunity, you know, to kind of grow our share as other people, you know, take their pricing up. And we're going to continue to evaluate as we go through the year and keep an eye on input cost inflation. And, again, at this moment, no additional action we feel is needed, but we want to keep that as an open option for us for the future.

That's great. Thank you. Thank you.

Thank you. Our last question comes from the line of John Anderson from William Blair. Please go ahead.

Yeah, hi. Thanks for taking my question, and congrats on the start, Nick and Kelly. I have just a broad-based question on customer acquisition. You mentioned earlier, I think nearly a third of honest users are coming in through the skin and personal care, the beauty franchise. What is the right mix of customer acquisition by product category as you move the business forward over the next two to three to four years? And how does that influence your marketing kind of tactics and innovation tactics as you move forward. Thanks.

Thanks for the question. So a couple things on how to think about this. And, you know, I'll kind of give you some insight as it pertains to, you know, honest.com and maybe zero in on kind of the skin and personal care component. you know, to that. You know, what we're seeing in, from an acquisition perspective versus 2020, and we referenced this, you know, when we were together last, we had about in 2020, 34% of new consumers that came to honest.com entered through skin and personal care. What we saw in Q1 is about 44% that entered through skin and personal care. Now, what's important there is we're balancing, obviously, the investment profile accordingly. And what we're doing is, and this is why we leverage kind of our honest omni-analytics and being able to have really this idea around, as we're acquiring, are we, number one, sourcing them specifically through honest.com? And then where are we turning around and tracking that second and third purchase from a data set standpoint? And what I mean by that is we look at then how do we appropriate the additional dollars to be able to continue to kind of fuel that element from a strategy perspective, whether it's new acquisition or how do we monetize that consumer on that second or third item within the marketplace. And now what we're seeing, again, through that skin and personal care side of the business, we're seeing stickiness now as we're starting to over this past quarter, and you're seeing it in the results with the growth rates in skin and personal care based on that strategy from an omnichannel perspective. I'll let Kelly add some additional color.

Yeah, you know, as we think about really broadening the appeal of the Honest brand, I mean, we're looking at multiple levers. Clearly, we want there to be balance in terms of customer acquisition across, you know, our different products, but we're particularly focused, as Nick mentioned, on skin and personal care. The other thing we wanted to highlight is we continue to keep our eye on on kind of the overall metrics as it relates to Gen Z acquisition, this balance between male-female. We saw some good progress in Q1 of 2021 on both of those metrics. Gen Z in particular was 9% of our customers in 2020, up to 14% in 2021. So that's really exciting because it means we have more appeal across a broader audience. As well, we've predominantly been a female-focused brand, but as we highlighted some of these great campaigns, we really are trying to make them appeal beyond and appeal to the male consumer as well. As we think about marketing, as we think about campaigns, we try to keep that appeal much broader. And the overall percentage of kind of our male customer base went from 18% to 20% in Q1 2021 versus prior years. So I'm really excited just about momentum we're seeing there as well, and we'll continue to track that and keep an eye and make sure that that appeal is well-balanced and we're growing the appeal kind of across our customer base.

That's super helpful. Thank you very much.

Thanks, John.

Thank you. That concludes our Q&A session. At this time, I'd like to turn the call back over to Mr. Nick Flaoz for closing comments.

Very good. Well, thanks, everybody, for all the questions. You know, on behalf of the team, I want to thank you for participating today. You know, we look forward to sharing our progress with you on our quarterly earnings calls going forward and speaking with hopefully many of you at the Jeffries Conference later this month. So take care, everybody. Thank you. Thank you.

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