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spk00: Ladies and gentlemen, thank you for standing by and welcome to The Honest Company's second quarter fiscal 2021 earnings conference call. At this time, all participants are on a list and all in 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 now like to hand the conference over to Mr. Sung Kim, VP Finance and Strategy at The Honest Company. Please go ahead, sir.
spk06: Thank you. Good morning, everyone. Thank you for joining us for our second quarter fiscal year 2021 conference call. Joining me today are Nick Vlahos, 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 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 SEC filing, 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 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 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.
spk09: Thanks, Sean. Good morning, everyone. We're excited to speak with you on our second earnings call as a public company. Honest is dedicated to providing safe, clean, and effective products to consumers around the world. We continue to tirelessly work to drive our mission of inspiring everyone to love living consciously. As you saw in our earnings release, we had a solid quarter with top-line growth, sequential gross margin expansion, and continued progress against our strategic initiatives despite facing a challenging environment. We saw our seventh consecutive quarter of year-over-year revenue and volume growth, even in light of the significant COVID-19 demand in the second quarter of 2020. Revenue grew 3% in the second quarter of 2021 on top of the 16% growth that we saw in the second quarter of 2020 versus 2019. Additionally, we achieved solid gross margins of 36% in the second quarter as our cost evasion initiatives and improved product mix offset inflation headwinds and normalized levels of trade spend. As we mentioned in our Q1 earnings call, we were impacted by a reduction of inventory at a key digital partner. Even in the face of the $6 million headwind, our first half revenue and volume grew 8% compared to the first half of 2020. That's on top of the 25% growth rate in the first half of 2020 versus 2019. Our focus continues to be executing against what we can control. Our strategic initiatives have remained constant. We continue to focus on broadening awareness of our brand, introducing breakthrough product innovation, increasing our digital and retail presence, and continuing our commitment to ESG. Now, I will provide an update on our progress across these initiatives in Q2 2021. Starting with marketing innovation, we continue to expand brand awareness and consumer touchpoints through the use of marketing campaigns leveraging our content, community, and commerce strategy. By inspiring authentic dialogue and creating lasting connections, we drove 16% growth in our skin and personal care business this quarter and 28% growth for the first half of 2021. This continues to remain a strategic focus for us as more than 40% of new Honest.com consumers are acquired through our skin and personal care products. Throughout the second quarter of 2021, we continued to invest in integrated marketing campaigns supporting our skin and personal care business, which combined earned media coverage, sponsored influencer content, earned user-generated content, and paid media. Two campaigns that exemplify These full funnel tactics were our Honest Beauty Radiance Campaign that featured our Vitamin C Serum and Gloss C Lip Gloss in our See Your Beauty Campaign around our eye portfolio, including our Hero Mascara product. In total, these campaigns generated roughly 900 million total impressions across over 70 earned media placements. 100 pieces of sponsored content and paid media including white listing and brand handle amplification. Jessica Alba created original content to support each campaign and amplified influencer content to help expand their reach. These campaigns led to a strong consumer engagement. increased traffic to Honest.com, and featured our award-winning products, including our most recent award win, an Allure Reader's Choice Award for our Extreme Life Mascara and Lash Primer. We believe these campaigns positioned our beauty business extremely well as we launched our sustainable packaging initiatives for beauty in the third quarter of 2021. Given the continued success of these programs, we expect to lean into marketing in the back half to continue to support the restage and pursue growth in skin and personal care. Second, we continue to support our breakthrough product innovation. In the first quarter of 2021, we introduced our Clean Conscious Diaper that delivered improvements in performance, sustainability, and margin. This innovative product fully phased into the market in the second quarter of 2021, driving a lift on diaper consumption trends in the marketplace. Our new diaper is our best performing and most sustainable diaper yet. Behind these improvements in performance and sustainability we saw mid-single-digit growth for the quarter on our diaper business despite COVID-19 stock-up impact in the year-ago period. Our diaper market share increased this quarter as our diaper retail consumption growth outpaced the market. Honest grew 33% compared to the total diaper market up 20%. Beyond the breakthrough diaper innovation, We also introduced new innovation in our wipes, household and wellness, and beauty categories in the second quarter with items such as our benefit wipes, which hydrate and nourish skin as they clean, our scented sanitizing wipes, which introduce natural fragrances to our sanitizing wipes line, and our honestly healthy serum-infused lash tint and plant-based brow gel. which helped to build our eye portfolio around our hero beauty product, our Extreme Length Mascara. Third, we were pleased to deliver strong growth in our retail channel as our integrated omnichannel strategy led to a more balanced mix of revenue across our channels. Our retail channel accounted for 53% of our total revenue in the second quarter, as opposed to only 36% in the second quarter of 2020 when consumers sheltered in place and shifted to online shopping. In line with this macro trend, we have seen increased consumer willingness to get back into stores as more people have become vaccinated. As a result, we have seen a channel shift from digital to retail, causing an acceleration in revenue growth within our retail channel. Our retail channel grew 51% in the second quarter of 2021 compared to 2020. We believe we're well positioned with our omni-channel strategy to capture growth wherever our consumer chooses to shop. Significant white space opportunities exist to expand our on-shelf presence and the depth of our product offering with new and existing retail partners. For example, we've secured new physical and digital distribution for the back half of 2021 in line with our expectations with over 30,000 new distribution points with approximately half coming in the skin and personal care product category. Highlights of this distribution expansion include the launch of our diapers with Walmart Canada, a launch of diapers and wipes on BJs.com, launch of a digital strategic partnership with GoPuff, and the expansion of our total brand assortment with key grocery partners including Kroger, Aho, Hannaford, and Wakeford. 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. This quarter, we're excited to highlight our renewed partnership with our official charitable partner, Baby to Baby. Since inception, Honest has donated over 26 million products, making an impact with individuals and families in need. To celebrate Baby to Baby's 10-year anniversary, we have committed to donating 10 million products over the course of 2021 and 2022 to further support our community and help Baby to Baby distribute essential items to underserved communities. 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 touchpoints. We're pleased with our solid start to the year and believe we're well positioned to continue to advance our strategic growth plan. Now, I would like to turn the call over to Kelly Kennedy, our Chief Financial Officer, to review our second quarter results.
spk04: Thank you, Nick, and welcome, everyone. This quarter reflects our seventh consecutive quarter of year-over-year top-line growth with solid gross margin and profitability performance. despite a challenging comparison to the COVID-19 stock up behavior in 2020 and the headwinds of significant inventory destocking by a key digital partner. This quarter's performance reflects the positive momentum of the Honest brand, as well as our team's strong execution against our strategic priorities, starting with our financial results and key drivers. Second quarter revenue totaled 75M dollars, a 3% increase over Q2 2020. As Nick highlighted, this was on top of the 16% growth we delivered in Q2 of 2020. After adjusting for the estimated 3.7M of diapers and wipe revenue driven by COVID-19 stock up in the second quarter of 2020, revenue growth in Q2 of 2021 was 9%. diving into key drivers by product category. Starting with diapers and wipes, the category decreased 2% as we lapped COVID-19 stock-up behavior in diapers and wipes in the second quarter of 2020. Of note, we saw mid-single-digit diaper growth behind our new diaper innovation as we had our first full quarter with the innovation in market. Based on retail consumption from syndicated data for the last 13 weeks, Ending June 27, our diaper business was up 33%, and we grew diaper market share during that time period. On a two-year basis, diapers and wipes grew 17% in Q2 2021 versus the second quarter of 2019. Skin and personal care grew 16%, driven by higher sales volume within the retail channel. Omnichannel demand for our skin and personal care products was driven by our continued investment in our content community commerce strategy and incremental merchandising programs with our retail partners. Based on retail consumption from syndicated data for the last 13 weeks, ending June 27, we grew our personal care business 18%, further increasing our market share during the second quarter. Skin and personal care grew 39% in Q2 2021 as compared to the second quarter of 2019. Household and wellness declined 6% as consumer and customer demand for standardization products decreased as people became vaccinated and customers managed heavy levels of inventory. Now turning to results by channel. For the quarter, The digital channel revenue declined 24% to 34.8M up 11% on a 2 year stack basis. Retail channel revenue increased 51% to 39.8M up 45% on a 2 year stack basis. Like many other brands, we saw a stronger than expected rebound in the retail channel in the first half of 2021. outside retail growth was aided by a strong rebound in store traffic as vaccinated consumers increasingly returned to in-person shopping as compared to the second quarter of 2020 when consumers sheltered in place and shifted their behavior heavily to online shopping. In the second quarter of 2020, our retail business only represented 36% of total revenue, but we saw a significant shift to a more balanced mix of revenue in the second quarter of 2021 as consumers came back into stores and retail accounted for 53% of total revenue. We also benefited this quarter from expanded distribution and incremental merchandising events with partners like Target and Costco in both our diapers and wipes and skin and personal care categories. The decrease in the digital channel revenue was largely impacted by the reduction in inventory on hand by our key digital partner, who cut inventory and consumables in the second quarter to free up space for other products ahead of a major promotional event. While this inventory reduction was not specific to Honest, due to our higher digital penetration, it was more impactful for us. During the second quarter of 2021, revenue for this key customer declined by 6.4 million, while consumption by this partner's end consumers increased by 3%. Each is compared to the second quarter of 2020. Turning now to gross margin. Gross margin achieved 36% for the quarter, a sequential improvement of 110 basis points versus Q1. Gross margins for the second quarter was down approximately 50 basis points versus the second quarter of 2020, which benefited from lower levels of trade spend as retailers pulled back on events during the pandemic. Q2 gross margin was up over 700 basis points versus the second quarter of 2019, reflecting progress on diversifying our portfolio to higher margin products and delivering against our cost evasion projects. Overall input costs were higher in Q2 of 2021 versus Q2 of 2020, including higher transportation and freight costs. Those margin headwinds were offset in part by our continued focus on cost evasion, operating leverage, and improved mix across the business. In Q2, we captured a full quarter of our clean conscious diaper innovation, which has improved our diaper margins by over 100 basis points. We also have a number of other conservation initiatives launching throughout 2021, headlined by our beauty sustainability restage that launched in Q3 and is projected to improve beauty gross margin by approximately 800 basis points. Given record levels of cost inflation, conservation will continue to be a focus area for us in 2021. We recognize that there is uncertainty around the input cost environment. We plan to closely monitor our productivity plan in relation to current inflation levels. Total operating expenses increased $19.8 million versus Q2 of 2020, primarily driven by three items. First, we had $11.1 million in one-time IPO and transaction-related expenses. Second, operating expenses included a $4.3 million increase in stock-based compensation, including the expense recognizing connection with performance-based equity that vested upon our IPO offering. Finally, we invested an incremental $3.4 million in marketing versus Q2 2020, as we supported the accelerated growth of our skin and personal care business and the launch of our new Clean Conscious Diapers. Adjusted EBITDA for the second quarter of 2021 was a loss of $0.8 million. We ended the quarter in a healthy position with $95 million in cash and short-term investments with no debt on our balance sheet. We believe we are well-positioned to execute against our 2023 strategy and retain financial flexibility as we invest in marketing innovation, product innovation, and domestic and international expansion over the next few years. looking toward the remainder of the year. Trends for the back half of the year remain volatile as we navigate an environment that is dynamic with significant input cost pressure and continuing uncertainty around the COVID-19 pandemic and its impact on consumer behavior. With that in mind, I will now share some thoughts on our outlook for the remainder of 2021. As it relates to revenue, We continue to expect our diapers and wipes and skin and personal care product categories to perform in line with our expectations for the year, which reflects continued market share penetration and double digit top line growth in total. We believe our clean conscious diaper resonates with consumers and will drive diaper market share expansion. In the back half of the year, our baby wipes will return to a more normalized comparison period. and our skin and personal care business is primed for growth behind our content community commerce strategy and our beauty restage. Based on macro household and wellness trends, consumer demand for sanitizing and disinfecting products has decelerated at a more rapid pace than we expected as people have become vaccinated and returned to their pre-COVID routines. For example, Total market consumption data at retail for hand sanitizer products declined by 74%, and consumption for household cleaners and disinfecting products declined by 12% during the 13 weeks ending June 27th, as compared to the same time period in 2020. We had planned household and wellness in 2021 to be roughly flat to the prior year, but we now expect 2021 household and wellness revenue to be roughly half of last year's revenue. As we look forward to the future of our household and wellness product category, we are developing plans to reinvigorate this category, including product innovation that will allow us to continue to diversify our portfolio and drive growth. As it relates to margin, we are pleased with the gross margin we've been able to achieve in the front half of the year, driven by our conservation initiative and improved product mix. While we have ongoing conservation initiatives coming in the back half of the year, including our beauty sustainability restage, we do see continuing headwinds from input cost pressures, such as transportation, freight, and labor. As such, we expect our back half 2021 gross margin structure to be in line with year-to-date results. As we reflect on 2021 performance to date, for the first six months of the year, We were proud to deliver against our top line revenue target in diapers and wipes and skin and personal care in total. We also exceeded our gross margin and adjusted EBITDA expectations for the overall business despite the headwinds of a significant destocking event at a key digital partner. As we continue to execute our strategy 2023, we have strong conviction in our growth algorithm. The clean and natural market is outpacing growth versus conventional brands in our product categories. We are growing our market share in our core product categories as we invest behind our product and marketing innovation. We are expanding our points of distribution and driving our omni-channel strategy with retail and digital partners. Our focus is on executing on our growth plan and driving higher shareholder value over the long term, while solidifying honest position as the next generation modern CPG company. With that, I'll turn the call over to the operator to begin the Q&A portion of the call.
spk00: Thank you. Ladies and gentlemen, as needed to ask a question, you will need to press the start and the one key on your touch-tone cell phone. To withdraw your question, please press the pound key. Please limit yourself to one question and one follow-up. You may requeue for any additional questions. Please stand by while we compile the Q&A roster. Our first question coming from the line of Dara Moustien with Morgan Stanley, your line is open.
spk08: Hey, guys. So just wanted to start with e-commerce. The inventory drawdown you mentioned at one of your key customers, Is that something that sort of permanently comes out, or is that more of a timing shift? And then strategically, as we think about the business longer term on e-commerce, it does seem like retail is coming back quicker than you expected, e-commerce not as strong as expected with the return to retail we're seeing from a consumer standpoint. So just wanted to understand that. might that impact your long-term growth expectations and how might your strategy change as a result of that shift that we're seeing?
spk04: Yeah, thanks, Sarah. As we kind of think about the inventory impact that we saw in the quarter, I think we called out at our Q1 call, you know, that this partner chose to decrease inventory in certain categories really to free up space, you know, ahead of their promotional event, you know, Overall, what we saw was historically, just because Honest is a high-growth brand with high digital penetration, this partner tended to carry more weeks of supply than they did in other large CPG companies. We saw them reduce from about 12 weeks of supply down to roughly eight. So that was the $6.4 million that we called out was about four weeks of inventory. You know, as we look at what we're seeing in Q3, we have seen the order volume return to kind of pre-destocking levels, so kind of in line with consumption. But we have not seen them return to higher weeks of supply, and we're not planning on it. You know, we do have a new program with this partner that we're pretty excited about that will allow them to kind of take over a small portion part of RDC and ship out of there. And this is a program that they offer with a lot of their other large CPG companies. So we're pleased to participate in that. As we think about the retail and direct mix, I think you'll recall going back to kind of our roadshow, we talked a lot about in a couple years being kind of this equal balance between retail and direct, kind of 50-50. It's just accelerated. There's no really – structural change in how we think about the business, our strategy, really just what we've seen is a more accelerated shift. And when you think about kind of this year, we do expect it to be roughly equal between retail and direct. And I think it's just the noise as it relates to quarter, given that retail was only 36% in Q2 last year just because people weren't in stores. And then this quarter, it was impacted not just because of that shift back to retail, but it was also impacted because of this destocking event took $6 million out of our digital dollar. So kind of if you added that back in, digital actually would have been a little larger than retail for the quarter.
spk08: Okay, and then just one follow-up with the higher commodity costs that we're seeing in Have you put any thought into taking incremental pricing and what are you thinking in terms of pricing actions relative to the increased inputs that you're seeing? Thanks.
spk04: No change from what we disclosed last quarter. We're taking a wait and see kind of opportunity to take share, really gain trial with consumers. As we know, our competition, particularly in diapers, is taking pricing. So some of that pricing has gone in. Some is coming in this fall. It's still an option that we're considering and is on the table, but we have not announced any pricing action at this point. And as you heard, We gave a little color. We're thinking, you know, we're feeling pretty good about our results year-to-date on gross margin. We did give some guidance that we think the back half of the year will be in line with that as well. So we're feeling like we have a really good balance between our conservation products to offset the input cost inflation that we're seeing, which is predominantly kind of in small parcel BTC shipping and then our inbound transportation.
spk09: The only thing I would add, Dara, good to hear your voice, is the fact that we continue to take market share right now. So when you take a look at the underlying consumption of the business, and that's what I think we've got to drill down into, which is the diaper business behind our Conscious Diaper initiative, we're growing share. You take a look at 33% consumption increase over the last 13 weeks. time period through June 27th. Personal care, when you look at the consumption data, up 18% overall, and again, taking share. And then when you look at the overall business from a consumption perspective for that same period, we're up about 17%. So the key here is when you look at the first six months of the year, and again, new company, when you look at the size of this business, there's going to be fluctuations. When you look at the quarter, But what we like seeing is, you know, what we talked about, you know, when we came out is making sure that, yes, drive the top line and you look at the top line for the first six months up 8%. That's volume related. If you look at the industry and you guys know where the industry sits from a volumetric perspective over the first six months of the year, most are at, you know, negative mid single digits to flattish. And over the last quarter, you know, negative 10 to, you know, flattish from a volume perspective. So, At the end of the day, you know, a lot of conviction around the strategy when it comes to, you know, the gross margin piece. As we had talked, we're happy that we've exceeded, you know, for the first six months of the year, our gross margin expectations, as well as when you take a look at our adjusted EBITDA exceeding kind of what we said. So the anomaly here is kind of the external component around this partner, you know, from a digital perspective that made a choice. But when you see the fundamentals of the business, very strong based on kind of what we had talked about, what we're delivering. Great. Thanks.
spk00: Thanks, Tara. Our next question coming from the line of Andrea with JP Morgan. Hi.
spk01: Good morning, everyone. Thank you. So I have two questions. First, for Nick, I wanted to ask more on the innovation and the marketing investment. So should we continue to see an elevated marketing spending in the second half from your commentary, and how much of new products have contributed to sales in Q2 against Q1 in terms of sequential contribution? And also a question for Kelly. I appreciate the breakdown for each of the divisions and the double digits expectations for your key product lines. And then the wellness being probably half for the full year. So how we should be thinking, it implies a big, for you to get into a double digits algorithm implies a pretty strong rebound for diapers and wipes in the second half. Or should we be thinking that the company will be more high single for the year?
spk09: Yeah, good morning, Andrea. I'll start off. As it pertains to innovation, you know, we started the year from a strategic perspective. There are two big innovations for us. One was this conscious diaper, and we're executing with excellence against that. When you take a look at the diaper business right now, we referenced it within Q2, mid-single-digit growth against that diaper business. And as we've referenced kind of where the consumption sits right now with 33% increase when you look at the consumption. over the last 13 weeks. So taking care, you know, we're very excited about how that's performing today. The second component was our beauty restage, was the second big element of our innovation for the year. And that just started to hit the market And what we're seeing now within the personal care and skin business, again, consumption data is showing about 18% increase overall for that 13 week time period. The other thing that we're seeing behind the marketing investment. So we're leaning in with the marketing investment because we're bringing new consumers into the franchise. One area we're looking at our data sets is just looking at honest.com and our digital side of our business. You know, over the last year in 2020, we brought in about 34% new consumers came to honest.com within skin and personal care. This year, thus far, what we're seeing is roughly about 44% coming in through our skin and personal care business. So you start to see kind of that shift from a mixed perspective and you're starting to see that innovation that we put into the market. People are coming to us as we're leveraging the marketing investment coupled with the innovation to drive really our strategy that we've talked about. Relevant content, community advocacy, and then the commerce piece, which is omni-channel. So wherever that consumer is interested in shopping, We're positioned for that. This quarter, we saw the consumer gravitate more towards retail, and we're available there. That's why retail grew 51% versus a year ago. Now, as things fluctuate, as we look at the back half of the year, as people start talking about Delta, we start talking about Lambda and different variants, that might shift, but we're well-positioned to be able to capture that. So again, one, innovation is working as planned. Two, we're marketing and spending against that innovation. And we're going to continue to plan to spend against it because we're seeing overall market share increase and we're seeing new consumers coming into the franchise based on our strategy as we start driving skin, personal care in these categories.
spk04: Yeah, and I'll add just for some clarification as it relates to the numbers. I think we've communicated that we believe 15% to 17% as a percentage of sales is the right level for us for marketing. Because we have such big launches and innovation this year, we do expect to be at the high end of that range. As we think about innovation, clearly it is driving predominantly the growth this year. between the clean conscious diaper and our beauty restage. So as we think about innovation as a percentage of our total growth, it's really outpacing and really driving that growth. And finally, just a clarification as we think about the outlook that we're saying double-digit growth when you take household and wellness out of the equation. So diapers and wipes, skin and personal care in total for the year, we're going to be able to deliver double-digit growth. And I think the important thing to remember is, as we highlighted, we called out this COVID acceleration in 2020 of about 20 million. So kind of when you pull that out and think about the base as 280 million, For 2020, you know, clearly you can see what is kind of a strong, robust kind of mid-teens growth for the business, which is kind of the way we're thinking about it.
spk00: Thank you, Ro. Thank you. Our next question coming from the line of Stephanie Wissing with Jefferies. You'll let yourself in.
spk05: Thank you. Good morning, everyone. I just want to follow up on Andrew's prior question just with respect to the growth. And, Kelly, maybe the clarification is you want us to sum diapers and wipes and skin and personal care together to get to double-digit growth, not the categories in isolation should each grow double digits.
spk04: Correct. I think the most important thing is that we are communicating that diapers and wipes and skin and personal care kind of delivered on our expectations for the first half. And all indications are that we will deliver and are in line with our expectations coming into the year. So no change there. What's changed? is really this deceleration of the household and wellness category that was at a much more rapid pace, I think, than we expected. You know, kind of as we look at, you know, we've seen some small signs as COVID cases have increased, that there, you know, there's potential for that to come back. And we've, you know, we've delivered some great innovation in household and wellness, you know, kind of this is just launching in Q3, and you'll see on the shelf, you know, won't be huge, you know, driver for us, but just Thinking about that household and wellness last year, our expectations for the year were flat. And right now, what we saw in the first half, as you saw from our numbers, is about half the pace of what we anticipated coming into the year. Even though we did anticipate, especially in the back half, a significant year-over-year decrease, it's actually declining faster than that.
spk05: Okay, and then I want to translate that down to gross margin because I think you're saying second half in line with the first half, so just want to make sure we have the base correct if the first half was around 35.5 or 35.6. What is the effect of that reduction in the household and wellness revenue on the gross profit? Is there an absorption burden there? And then maybe secondarily to that, if I just could, with the mix shift towards Your clean conscious diaper, which I think was a cost evasion improvement, and beauty and personal care being higher margin. Just wondering why we're not seeing a bit of a step up in margin in the back half.
spk04: Yes. So when you think about our household and wellness, we haven't broken down margins by category, but when you really think about it, household and wellness is pretty much in line with the total. So kind of declines in that category doesn't drive product mix shifts within our gross margin. in any material way. When we think about kind of the puts and takes, I mean, clearly we are seeing input costs like everyone else at much higher rates than we anticipated. That's really coming in in transportation and freight, you know, ocean freight in a small amount, some of our input costs like resin. The other thing that I just want to remind, I think we talked about this in our Q1 call, but Q2, retailers were canceling our promotional events, not just ours, everyone's. So we also, the biggest headwind we have kind of for the back half is kind of this normalized trend of trade for the back half of the year. Q2 is the largest quarter of that, but for the whole year, that'll be impactful. The positives, again, the clean conscious diaper, we're fully in market in Q2, so we don't have the full year, but we'll get the benefit of that 100 basis point improvement across the diaper line. As beauty restaged, it's still getting on the shelves. So it's very early in beauty restage. It's kind of getting up and running in Q3. We will get the benefit of that. So cost evasion being the biggest positive within our gross margin. We are also benefiting by product mix. You'll see skin and personal care was 32% of our overall business in Q2 versus 28% last year. So we are getting the benefit of that product mix. although, again, skin and personal care in line with expectations that was anticipated within our numbers. And then we, again, are benefiting from operating leverage, not as much to the extent because of household and wellness revenue declines.
spk05: Okay. Thank you very much.
spk04: Thank you.
spk00: Our next question coming from the line of Brian Spillane with Bank of America. Your line is open.
spk11: Hey, good morning, everyone. Good morning. Hey. Hi. So a couple questions.
spk12: First one, Kelly, just on the household and wellness, is this a base now that we should be using for projecting going forward? Have we basically kind of reset this business for – You know, what was, I guess, maybe a COVID benefit in hand sanitizer? Just trying to understand what we do with this, with the new revenue base here. Is this what we use to sort of, you know, forecast normalized growth off of?
spk04: Yeah, that's what we're doing. I mean, there's a lot of uncertainty, as you know, around COVID. And, you know, while we might get some kind of pickup from the lows that we've seen kind of in sanitizing and disinfecting sprays in Q2, we are not anticipating that this has a comeback to prior levels. You know, we will have some innovation. I think we talked a little bit as we get, you know, kind of into 2022, some innovation coming in household and wellness. But, yes, a very large and significant component of that $20 million COVID impact in 2020, more than half of it was in this household and wellness space. So that's really the driver.
spk12: Okay, that makes sense. And then on the gross margin commentary for the back half of the year, you know, the comps, the quarterly comps in the back half are pretty different. So should we interpret it as being flat to each quarter? Or I guess the fourth quarter last year, the gross margins were lower than the third quarter. So do we smooth them out? Just trying to understand if there's anything we should be contemplating, I guess, in terms of phasing the gross margin commentary.
spk04: Yeah, great question. So last year there was an anomaly in the fourth quarter. We expect it to be normalized, no call-outs, more puts and takes that we would call out between Q3 and Q4 on margin for us. So you could expect what we say in line with the first half. That would be consistent for Q3 and Q4 as well.
spk12: Okay. And then just last one, just on the inflation, and again, just thinking about the relative from the last earnings call, you know, like inflation's been, I guess, in the, you know, in view, really, over the course of the year. But it sounds like, you know, in the last month or two, you've seen some things that are maybe inflating more. So just just trying to get an understanding of kind of where those areas are. And if you can, maybe separate how much of it is coming from pure, you know, I don't know, commodity inputs or, you know, market-based, you know, cost increases on certain inputs and how much of it is just more tied to maybe some of the bottlenecks we're seeing in supply-changing economies. Because it seems like One may be more transitory than the other, but just trying to understand, you know, the differences there.
spk04: Yeah. I mean, we don't have a specific breakdown between market base and bottlenecks, but both are contributing. You know, when we think about kind of, you know, ocean freight, which is just a small piece of our business that comes, you know, kind of over ocean freight, But just transportation across the board, the main call-out that we are highlighting that was different than where we started the year predominantly is not in the input cost and transportation and freight, because we did anticipate that. It's really around the labor, where we have seen some higher, across the board, and you've heard this, as we think about our labor in the distribution center across the board, it's been challenging. And rates have gone up there and we have to stay kind of consistent with what we're seeing in the market. So that's the one place. There are other smaller impacts, resin and other things that are kind of packaging related for us. We're partially shielded because of our fixed price contracts for our large commodity impacts. But again, we take surgical pricing. I think we talked a little bit about not taking broad-based pricing at this time. But certainly, as we see certain categories being impacted, we have had really good success you know, on individual SKUs or individual product lines to try to offset that. And we'll continue to do so. You know, we're very focused on trying to offset these costs, but it's just a reality that we're seeing, particularly in the labor market.
spk11: Got it. Okay. Thanks, Kelly. Appreciate it.
spk04: Thank you, Brian.
spk00: Our next question coming from the line of Laura Champagne with Loop Capital. Your line is open.
spk03: Thanks for taking my question. It's on the household and wellness business, because that's the most radical change in your thought process sort of year on year. Is this all just difficulty forecasting the shifts related to COVID recovery, or is there something else happening in the channel that's driving the reduced expectations this year?
spk09: Yeah, I'll take that one. I think, you know, from a macro perspective, I mean, no one would have predicted kind of the, you know, last year, kind of during the same time period, kind of what transpired, you know, when COVID hit at the levels that it happened. You know, you saw it in disinfecting sprays and wipes. You saw it, you know, in toilet paper and all the things that happened a year ago. As it translated to this year, we took into consideration that the overall impact revenue would be about 75% of what kind of had transpired. But when you look at from a macro perspective of kind of what's happened in the market, and when you look at the last, you know, 13 weeks, we're seeing, you know, negative 74% consumption in places like hand sanitizer, down 11 to 12% in disinfecting type sprays. Those are the things that, you know, we thought, you know, as we looked at the plans, that consumption and behavior would have been a bit more sticky at this point. And we're not seeing that. So based on data and based on the information we see today, that's why, again, you look at diapers and our wife's business, you look at our personal care skin business, we're executing as expected. The anomaly here is this macro event that's happened last year and that right now, based on the visibility we have, we're not seeing that consumption pacing based on that expectation from a forecasting perspective that we had. Now, things are changing. Delta variant, lambda variant, what transpires were well positioned like we were a year ago to be able to capitalize on that. But again, that's something that we're monitoring closely, and as consumers start to potentially shift, we're well-positioned with the brand, with our products, as well as, importantly, the omni-channel component of this from both a digital and retail perspective to capture that consumer.
spk03: Got it. Thank you. Thank you, Laura.
spk06: Thank you, Laura.
spk00: Our next question, coming from Delana, Laurent Gourdet with Guggenheim. Your line is open.
spk07: Yes, good morning, everyone. I'd like to come back, actually, to the very first question. I mean, the $6.4 million headwind you had in e-commerce. So even if you assume that this e-commerce customer was growing 3%, let's say, the impact was, I mean, ballparking $7 million. Yes. If you add up that to the segment, actually, you still have digital segment being down 9%, or about $6 million. So is that actually the shift you are seeing from e-commerce to retail, or is there anything else we should know in order to forecast better for e-commerce for digital segment going forward?
spk04: Yeah, outside of that one event, the destocking event, the total digital category, the customer behavior that we're seeing and everyone is talking about, is people are vaccinated. They're going back in stores. You'll see many, many retailers talking about this huge traffic surge they're seeing and growth in their business and not at the expense of the digital business. So as a true omni-channel business, we talk about being wherever the consumers want to shop. I think that's a real advantage. As Nick mentioned, who knows what the future holds. when the consumer shifts, it creates this significant noise. But yes, that impacts overall. And I think you're seeing that when you look at the tract channel data. For example, our diapers in the quarter were up 33%. The whole category was up 20% in the tract channel. That only represents about a third, you know, kind of a picture inch, about a third of our business. Clearly, you know, people aren't buying 20% more diapers. That is completely a shift, you know, between digital to retail. You know, what we're excited about is that we're outpacing the category growth and driving, you know, kind of expansion of market share. That's great for us. regardless of whether it's digital or retail. We're looking to really kind of grow our total market share kind of regardless of what channel people shop at.
spk07: Thanks. And a quick follow-up on that shift. I mean, is it fair to assume that e-commerce or digital is more profitable than retail? And does it impact more gross margin, as I assume? than the rest of the P&L?
spk09: Yeah, for us, when we take a look at whether it's, you know, digital retail, and this was part of, you know, our thesis from the get-go is, you know, we're agnostic when it comes to where that consumer shopping, because when you look at the margin profile across those business, they're equivalized. So that's a little different than maybe some of the traditional players that talk about, you know, one piece of business a certain way. We talk about it through this omnichannel lens around this accessibility component, and that's why we have that ability to turn around and deliver against where that consumer is at that point in time. And now as you start to see from a strategic perspective, you know, consumers shifting more into retail, we're positioned to be there. If that starts to shift again back into digital, when you look at, again, some of these variants that, you know, a lot of folks are now talking about, we're well positioned there also.
spk07: Okay, thank you. I pass it on. Thanks.
spk00: Thanks, Mark.
spk07: Thanks, Mark.
spk00: Our next question coming from the lineup, Dana Telsey with Telsey Advisory Group. Your line is open.
spk02: Good morning, everyone. Parsing apart the digital and retail side of the business, it sounds like you got new distribution points also. I think you mentioned over 30,000 new distribution points. Is that typical in terms of distribution points? And what do you see in terms of the retail cadence going forward? And then I have a follow up. Thank you.
spk09: Yeah, when we introduced our strategy, 2023, and we put our plans in place, you know, this is part of our plan to be able to continue to drive, you know, our omni channel business, and we look to drive accessibility with strategic partners. So The 30,000 distribution points that we reference was planned. And when you look at those partners, they're both on the dot-com side as well as on the physical retail side. So we love the fact that we've got a partnership with folks like BJ's dot-com now that represents another footprint for us as we drive kind of the East Coast up in Canada. securing, you know, Walmart, Canada, physical stores with our diaper business. Now we had some personal care business there and that's done well. And now we've picked up the diaper business. So that is part of the cadence of kind of how we drive the business as we look at both physical retail, as well as the right strategic digital partners, you know, and as we look forward, you're going to see a consistent cadence based on our long range plans. to be able to continue to balance that omnichannel component.
spk02: Got it. And then as you think about the gross margin, which is now guided to flat in the back half, in line with the year-to-date results in the back half of the year, it seemed like typically you'd get an uplift in the gross margin. Do you see that as this is the new normalization? How do you envision that go forward?
spk04: Yeah, our thesis around gross margin expansion hasn't changed. You know, we had some great cost evasion. It was a highly unusual year as it relates to input costs and inflation. So we're actually quite proud to be able to deliver kind of a 36% for the year. You know, as we think about continued expansion with the beauty restage product mix, you know, we'll continue to benefit us. Again, you know, operating leverage as we grow the business But the biggest driver, really, cost evasion. And we do have cost evasion lined up coming in years to come. So nothing has changed in our overall thesis. Some of the timing of when we will be able to get to kind of our target gross margin will be reliant on some of these historic highs as it relates to input costs backing down in some way. So that will impact the timing.
spk02: Thank you.
spk04: Thank you, Dana.
spk00: Now, final question coming from the lineup. John Anderson with Will and Blair. Your line is open.
spk10: Yeah, thanks for the question. I wanted to ask again about the second half of the year, just a little bit more detail on the outlook. In diapers and wipes, it looks like the comp in the third quarter is about as challenging as the comp in the second quarter. And then if you look at skin and personal care, the comp actually gets more challenging in the third quarter relative to the second quarter. But more broadly speaking, when you talk about double-digit growth in diapers and wipes and in skin and personal care individually in the second half of the year, is there any more color you can give us on you know, the relative magnitude. I'm assuming diapers and wipes, you'd be looking for something in the, let's say, low double-digit range, something much stronger than that on the back of the beauty restage in skin and personal care. But just a little bit more color there would be helpful.
spk04: Yeah, and again, we haven't guided to each category individually being double-digit. We're just in total when you take out household and wellness. So, you know, clearly the beauty restage will, as you said, we've seen outpaced growth in our skin and personal care. We anticipate that to continue for the back half, but in line with our expectations. I think when we look at what we're seeing right now in diapers, We are seeing strong consumer response to the clean, conscious diaper, and we are also seeing continued market share expansion there as well. So we are actually quite pleased with kind of where the trajectory is for diapers. Wipes had a pretty challenging first half in Q2 comp, and the comp gets less challenging as we go into the back half of the year for wipes. And so as we think about diapers and wipes in total, again, it's the strength of what we're seeing right now in consumption trends. And you can see some of that in the tracked retail data. And then coming off of the softer comp on wipes and then skin and personal care, again, the trajectory that we're seeing, it's really early in the beauty restage, but we have good expectations in the back half of the year that that will fuel skin and personal care growth.
spk09: Yeah, and I would just add, John, just building on what Kelly just highlighted, just to get crystal clear here, you know, as we had planned at the start of the year and we've communicated, the back half, you know, diapers and wipes, no change based on our expectations. Skin and personal care, back half, no change based on our expectations. And really what we've kind of articulated here today is this household and wellness macro factor that's happening in the marketplace that you guys have been seeing within the market around consumers not driving that incrementality from a consumption perspective that was expected post the initial COVID bump a year ago. We haven't seen that. And that's the component that we're talking about as being the change within the plant.
spk10: Okay, that's helpful. Thank you. Just as a follow-up on some of the information that you shared around customer acquisition and a larger portion of your household acquisition or consumer acquisition coming in through beauty, is that a deliberate thing on your part being driven by incremental marketing spend against that part of your business? And is that something that you like to see or is better to acquire a new customer into the beauty franchise as opposed to the diapers and wipes franchise? Just trying to get a little bit of sense for how you're thinking about that and what you're doing to drive it. Thank you.
spk09: Sure, absolutely. It's a great question. Number one, from a strategy perspective, we talked this during the roadshow time period and we were talking it when we introduced kind of the strategy to each of you was, number one, making sure that, you know, we're looking to bring new consumers into Honest through different categories. And skin personal care was one of those. A year ago, you know, we brought in about 34% new folks. And this year, we're seeing about 44% coming in to Honest.com through that skin and personal care. So, yes, from a strategy perspective, we like seeing that. And then what we're driving is cross-pollinization around not only are they coming in within a skin product, but then how do we also then ship them over to potentially a color product? And we like seeing that because, again, when you look at our strategy here at Honest, we're interested in driving that penetration, going deeper with consumers to buy that second and that third item from a consumer perspective. And that's a key focus for us as we continue to drive our strategy.
spk04: And I'll just add real quickly, John, that as we think about kind of what we take away is really this diversification in our customer base. becoming a broader appeal. A couple of the stats that we saw in Q2, we've talked in the past about kind of just the male consumer, the growth in the male consumer for us. It did tick up slightly from 18% of our overall business to 19% in Q2. We've also seen continued expansion in our Gen Z growth. appeal within this is within DTC jumping from 11% of our revenue in Q1 to 13% in Q2 so we continue to see great progress and so it's a combination of you know kind of having broader appeal and bringing more new customers in as well as you know, really growing share of wallet and having more products that really appeal to and resonate with consumers. So really expanding the overall brand presence within the household. So two very intentional strategies on our part.
spk10: Great. That's helpful. Thank you.
spk00: Thanks, John.
spk08: Thanks, John.
spk00: I'm sure no further questions at this time. I would now like to turn the call back over to management for any closing remarks.
spk09: Very good. Well, you know, first off, thanks, everyone, for joining us on this Friday morning. And I think, you know, the way I would summarize this is, you know, as we look at kind of the remainder of this year, you know, we have confidence, you know, in our plans. We have confidence in our three-year Strategy 2023, our roadmap that we've introduced, and that we're well-positioned. And this is just the beginning when you look at honest, as we continue to build this as the next generation modern CPG company. And we appreciate you spending the time with us today, and we look forward to talking to you next quarter. Thank you.
spk00: Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
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