The Honest Company, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Honest Company's third quarter fiscal 2021 earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Mr. Sung Kim, VP Finance and Strategy at the Honest Company. Please go ahead, sir.

Good afternoon, everyone. Thank you for joining us for our third 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 Law, including statements about the outlook of our business and other matters referenced in our earnings relief 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 filing, as well as our earnings release issue 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 is the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to be 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.

Thanks, Sung. Good afternoon, everyone. We're excited to speak with you today. Honest is dedicated to providing safe, clean, and effective products to consumers around the world. We continue to work tirelessly to drive our mission of inspiring everyone to love living consciously. As noted in our earnings release, We delivered a solid quarter with top line growth versus the third quarter of 2020 and gross margin expansion from the first half of 2021. Revenue growth was primarily driven by volume reflecting increased productivity in existing distribution and new omnichannel expansion. Honest grew market share in the quarter across our core product categories and accelerated household penetration reflective of our brand values and efficacious products that resonate strongly with consumers. Overall, we're proud of our team's contribution to our results. We delivered on our brand mission while navigating headwinds stemming from a dynamic operating environment with significant inflationary pressure and supply chain challenges. We recorded our eighth consecutive quarter of year-over-year revenue and volume growth, delivered 20% year-over-year growth in our diapers and wipes and skin and personal care categories, and improved gross margin performance by 40 basis points from the first half of the year. Our financial results demonstrate the ongoing strength of our business. Our priority continues to be executing against our strategic initiatives. We're focused on broadening awareness of our brand, introducing breakthrough innovative products, and expanding our digital and retail presence. Now, I'll provide an update on our progress across these initiatives in Q3 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 increased our household penetration to 3.5% this quarter, up over 10%. as compared to Q3 of 2020. We continue to invest in driving household penetration within our skin and personal care business, where we drove 28% year-over-year revenue growth, both for this quarter and for the first nine months of 2021. This remains a strategic priority for us, as more than 40% of year-to-date new honest.com consumers have been acquired through our skin and personal care products. Second, we continue to support our breakthrough innovative products. In the third quarter of 2021, we saw strong results from our clean, conscious diaper that we introduced in the middle of the first quarter. Behind the improvements in performance and sustainability of this product, we witnessed nearly 20% year-over-year revenue growth for the quarter on our diaper business. Our diaper market share continued to increase this quarter as our diaper retail consumption growth outpaced the market. Honest grew 24% compared to the total diaper market, up 14%. In the third quarter of 2021, we also introduced our sustainable packaging initiative for beauty. The line now features tree-free packaging on all our secondary cartons. As part of this launch, we also introduced our daily defense collections. a new line of skincare products designed to defend the skin against environmental aggressors. The beauty restage has already begun to show signs of positive performance and has led to retail distribution gains. We expect this restage to be a growth driver for the business going forward. Third, we are pleased to deliver strong growth in our retail channel as our integrated omnichannel strategy has led to a more balanced mix of revenue across our channels. Our retail channel accounted for 53% of our total revenue in the third quarter, as opposed to only 44% in the third quarter of 2020, when consumers remained at home and shifted significantly to online shopping. In line with this macro trend, we've 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 28 percent in the third quarter of 2021 compared to 2020. We believe we're well-positioned with our omnichannel strategy to capture growth wherever our consumers choose to shop. Significant white space opportunity exists to expand our on-shelf presence and the depth of our product offering with new and existing retail partners. In the third quarter, the number of stores selling Honest products expanded to over 40,000 retail locations, up double digits compared to the same period in 2020, led by a significant increase in stores selling our skin and personal care products. Behind our sustainable packaging initiative for beauty, We're excited to announce that we will continue expanding into an additional 385 Target stores with our beauty products in Q1 of 2022. This will bring our beauty line into over 1,600 total Target stores and will increase our total points of distribution in beauty at Target by approximately 30%. In addition, We have gone exciting new distribution wins on our beauty restage with a key strategic retail partner in the drug channel. In Q4 of 2021, we are adding an incremental seven skincare items in line in roughly 3,000 Walgreens stores. In addition to that distribution in Q4, We are setting 1,500 end caps at Walgreens in Q1 of 2022 that will add 15 new items to our current assortment. Before I turn it over to Kelly, I want to take a moment to reiterate our commitment to ESG, which has been part of our DNA since our founding. 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 on society. 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 are pleased with our solid progress this year and believe we are well-positioned 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 third quarter results.

Thank you, Nick, and welcome, everyone. This quarter reflects our eighth consecutive quarter of year-over-year top-line growth. We also delivered consistent growth margins and evened out profitability performance despite a challenging macro environment, including significant levels of cost inflation and supply chain disruptions. 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. Third quarter revenue totaled $83 million, a 6% increase over Q3 2020. This was 47% growth as compared to the third quarter of 2019. Combined year-over-year revenue growth in the third quarter of 2021 on the diapers and wipes and skin and personal care businesses, which represented 96% of total revenue, was 20%. Diving into key drivers by product category, diapers and wipes grew 16% as we saw strong double-digit growth across both diapers and wipes. Our diaper business grew significantly behind the continued adoption of our plain-conscious diaper innovation launched earlier in the year. Our wipes also saw strong growth especially in the retail channel. Based on third-party data for the third quarter, our diaper consumption was up 24%, and our wipes consumption was up 23%, with both achieving market share gains. Skin and personal care grew 28%, driven by higher sales volume within the retail channel. Omni-channel demand for our skin and personal care products was driven by additional retail distribution, incremental assortment, and consistent investment in our content community commerce strategy. Based on third-party data for the third quarter, our personal care consumption was up 25% year-over-year, driving higher market share penetration during the quarter. Household and wellness, which represented 4% of total revenue, declined 71%. The launch of our new sanitizing and disinfecting products in Q3 of 2020 fueled household and wellness category revenue to four times the level in Q1 and Q2 of 2020, as both consumer and retail customers were eager to stock up on products that sanitize and disinfect. Consistent with an industry-wide trend, we've seen consumption and customer demand for these products significantly decline as consumers have become vaccinated and returned to pre-COVID routines. Current demand reflects a return to pre-COVID revenue for the category. Now turning to results by channel. Consistent with industry trends, we saw a continued rebound in the retail channel in the third quarter of 2021. Outside retail growth was aided by a strong increase in store traffic as consumers returned to in-person shopping. Retail channel revenue increased 28% to $43.5 million, up 61% on a two-year stack basis. Corresponding to the consumer-led shift back to retail, digital channel revenue declined 11% to $39.1 million, but was up 32% on a two-year stack basis. For the quarter, retail accounted for 53% of total revenue, up from 44% in the same quarter in 2020. We feel that our omnichannel model is a true competitive advantage. as we were able to be wherever our consumer chooses to shop and can capture consumers changing shopping behavior. Turning now to gross margin. Gross margin achieved 36% for the quarter. Gross margin headwinds for the third quarter of 2021 versus the third quarter of 2020 included higher input costs as well as the normalization of trade spend as retailers pulled back on trade promotions during the COVID-19 pandemic. Q3 gross margins were 40 basis points above first half gross margins as we benefited from cost evasion projects, product mix, and operating leverage. Key areas of year-over-year cost inflation included transportation, freight, and warehouse labor costs, which have progressively increased throughout the year. We continued our efforts to offset these headwinds in part by our continued focus on cost evasion, productivity improvements, and improve mix across the business. In Q3, we captured a full quarter of our clean conscious diaper innovation, which has improved our diaper margins by over 100 basis points. We've also had a number of other conservation initiatives launching throughout 2021, headlined by our sustainable packaging initiative for beauty that launched in Q3, which we anticipate will improve beauty gross margins by approximately 800 basis points. Given record levels of cost inflation, cost evasion, productivity, and pricing will be levers for us to deliver against our long-term margin and profitability target. Our pricing strategy has been to wait on taking pricing in order to expand market share, and we've been able to increase share across all of our core categories in the third quarter as well as year-to-date. Given the continued inflationary pressures we've seen in the market, we believe now is the right time to take pricing action and are confident that our products will continue to have the correct price-value relationship to drive share gains into the future. We've taken pricing action in diapers and selected items in our widespread personal care business that will go into effect at the beginning of Q1 2022. These price increases include mid- to high-single-digit increases on the majority of our diapers to offset inflation in our transportation and warehouse labor costs. We've similarly increased costs on select baby wipes and personal care items. We're monitoring input costs across our portfolio and believe we have the ability to take additional pricing actions in 2022 as needed across the rest of our portfolio. Total operating expenses increased 3.2 million versus Q3 of 2020 primarily driven by increased stock-based compensation expense and cost of operating as a public company. We invested $14 million in marketing this quarter, which reflects 17% of revenue behind our content, community, and commerce strategy, which funded increased influencer campaigns and investments in paid media for our skin and personal care product category to drive higher household penetration. During the quarter, we also made robust investments in research and development as we build our product innovation pipeline. This includes investments in product development, claims and clinical testing that qualify our products for certification and performance claims that resonate with the consumer and differentiate our products on-shelf. Now turning to the bottom line, top line growth and solid growth margins allowed us to deliver 1.2 million in adjusted EBITDA for the third quarter of 2021. We ended the quarter in a healthy position with $90 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 continue to retain financial flexibility to invest in incremental marketing, product innovation, and domestic and international expansion over the coming years. Looking towards the remainder of the year, trends for the balance of the year remain dynamic as we navigate an evolving environment with significant infant cost pressure, continued 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, our expectation for the year remains consistent with what we shared on our last earnings call. We expect diapers and wipes and skin and personal care in total to grow double digits in line with our expectations for the year. we expect to drive continued share expansion and overall household penetration in the fourth quarter. Based on macro household and wellness trends, consumer demand for sanitizing and disinfecting products has remained below 2020 levels. Given the current level of consumer demand and high level of customer inventory, we expect to see increases in price promotions and merchandising in the household and wellness category over the next few quarters. As we look forward to the future of our household and wellness product category, we are developing plans to reinvigorate the category, including product innovation that will allow us to continue to enhance our household and wellness portfolio. As it relates to margin, similar to the entire industry, we are seeing continued input cost inflation, and in some cases, an acceleration of headwinds in areas such as transportation, freight, labor, and packaging. To help mitigate these headwinds, similar to the first nine months of the year, we have cost evasion and productivity initiatives in place for the remainder of the year. As a result, we expect our annual gross margin for the year to be in the range of 35 to 35.5%. On operating expenses, we expect marketing for the full year 2021 to be roughly 17% of revenue. We expect SG&A for the full year 2021 to be roughly 27% of revenue. As we reflect on 2021 performance to date, we are pleased with the momentum and core strength of the business in diapers and wipes and skin and personal care, which collectively represent 96% of our revenue and have grown double digits year over year. We are also pleased with our growth margin and adjusted EBITDA results that we've been able to achieve even in an extremely challenging supply chain and inflation environment. As we continue to execute our strategy 2023, We have conviction in our long-term growth algorithm. The clean and natural market is outpacing growth versus conventional brands in our product categories. We're growing our market share in our core product categories as we invest in product and marketing innovation. We're expanding our points of distribution and driving our omnibus strategy with retail and digital partners. We are focused on executing our growth plan and driving higher long-term shareholder value while solidifying on its 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.

Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touchtone telephone. If your question has been answered, you wish to move yourself from the queue, please press the pound key. Our first question comes from Andrew Teixeira with JP Morgan.

Thank you. And thank you for taking my question. So as we think about like the, and I appreciate Kelly, all the background information on the guidance, not a formal guidance, but in terms of like how we should be thinking at the components. How you're seeing, like you said, double digits for diapers and wipes. You also said for the beauty, continuous strength with this restaging. Should we be thinking, therefore, of a high single, a low double-digit top-line growth for the year? I think that's kind of like where we can at least a low double-digit growth in the fourth quarter, which leads to about a high single for the year. And then how we should be expecting, as you commented, it seems that pretty much the inventory level is retail have been normalized within the diapers in the category and you're gaining a lot of share. Do you see that continue and how you see the responses in passing on some of the price of the cost increases that you suffered into the next fiscal year?

Yeah, I'll start just, you know, we're not giving specific full-year guidance, but given that there's been no change, you know, kind of the overall trend that, you know, kind of we're guiding to would be consistent to what we had in the last call. So no change at all to the full-year outlook. I mean, certainly we like where the business is trending. You'll have noted that we, you know, grew 20% in Q3 combined between diapers and wipes and personal care. And certainly, currently in the business, we're trending double-digit growth as you've seen in consumption data between diapers, wipes, as well as our personal care. Regarding your second question, we have seen really strong acceleration in the diapers and wipes. We feel we've gotten really strong traction through the launch of the Clean Conscious Diaper, but as well, a lot of our marketing kind of innovation influencer campaigns and general kind of traction that we're getting overall with the brand, we think has created some kind of continued positive trending above what historically has been more of a single-digit growth. We've seen stronger growth there than what we've seen historically. And one of the things certainly we're keeping our eye on very closely are birth rates. There's some early indications that that trend may be changing slightly. But clearly the story behind our consumption growth within diapers and wipes and our ability to increase market share in household and penetration has been the overall growth in the category, which is, you know, the natural category outpacing in total. You know, for the quarter, you know, our diapers, as we highlighted, the category was 14%. Our consumption in the 12 weeks ending 10-3 was 24%. So, you know, between diapers consistent with our wipes and our personal care, we're well outpacing about double of what we're seeing overall with the category. Your last question was about price, or did you have a follow-up?

Yeah, no, that's super helpful. And I think the guidance kind of implies that 35 to 35.5, if I understood it correctly, for gross margin for the year, that would place you, if my math is correct, that you're going to have an expansion in the fourth quarter. And I understand that the cost of evasion kicks in and you have more of the beauty coming in in the fourth quarter. Is that the way it implies a pretty nice uptick vis-a-vis last year? And that's the way it's probably the mixed impact that we should be aware of that will help you despite all these cost pressures?

Yeah, you know, we are, when you think about our year to date versus what we're guiding for the margin that is below where we are year to date. So the year to date, we're at 35.6 and we're guiding to 35.0 to 35.5. The reason for that is that we are seeing some additional headwinds versus what we talked about a quarter ago, and those come in further cost increases in transportation, particularly ocean freight, which impacts our wipes business. We talked a little in the call about the price promotion, which we're seeing a lot of support to grow demand in sanitizing and disinfecting, and you'll see us as well really promoting to build that business. And then we have also seen some price, limited price increases from our contract manufacturers as they're passing through cost increases that they're seeing. And that would come in areas such as packaging as resin prices have increased and their own transportation costs of their components that are coming in. So we're actually saying that we're seeing some additional headwinds. in margin versus what we saw and talked about in the Q2 call to the tune now that, you know, we're kind of at 35 to 35.5%. And when you go into a model, you'll see that that actually is kind of creates a pretty wide range for Q4, but the top edge of the range would be kind of at the year to date. results with a broader, certainly with the volatility in the market and kind of what we're seeing right now. We thought we could get to the top of some of the cost increases that we experienced, particularly in transportation. We thought they had leveled off, but we've seen further increases in Q3 and going into Q4 as well.

Yeah, I think I can totally see that in the model was just more referring to the level against last year. I think last year had a 33.6%. So that was probably the beginning of the pressures and some of the mixed effects of having more diapers vis-a-vis the beauty restaging. So it was more like on a year over year base, but I can take it offline.

I think that's correct. You're exactly right, Andrea. I mean, the key takeaway here is we like how the business is trending. Diapers and wipes, skin personal care are core businesses that we've been talking about. you know, growing 20%, you know, combined here in this Q3. We see that trend, that pacing of double-digit continuing, so we feel really good about that. And then this past quarter, we faced, in this kind of supply chain space, input costs, we had about roughly 2 to 3 million in supply chain disruption, you know, this past quarter, largely in wipes and personal care. So to be able to drive that top line at the level that we did, you know, and mitigate, you know, that two to three million of pressure in the system based on the supply chain disruption, you know, we're pleased with where we stand today. And again, similar to what we talked in Q2, you know, based on kind of the trends we see, and again, positive numbers when it comes to the core business, there's still continued volatility in the supply chain. We just want to be conservative and maintain those expectations for the year. That's the takeaway.

Thank you very much. I'll pass it on.

Thank you. Our next question comes from Laurent Guggenheim.

Good afternoon, Nick and Kelly. Well, maybe first would be a follow-up from the previous question. Could you maybe share with us the level of inventory you do have in diapers and wipes at retail? Are you selling as much as consumers are buying from retailers? I'd like to understand this first.

Yes, good question. Yeah, we have nothing to call out. The level of orders have been reflective of the underlying kind of consumption. So we're not seeing any disconnects. I know that was something that we talked about in the second quarter, but we haven't seen. They've been running generally in line, and there's nothing to call out there.

Thank you. And then in personal and skin care, so it was strong almost, I mean, 30% growth on top of 45% last year. But a bit lower, that's probably what we were expecting. So is there a reason why? And if you can give a bit more color about the growth in that segment, that would be good. I mean, you mentioned about 4,000 stores. Additional, that's probably more, I mean, personal care. So what kind of stores, if you can give us some more color here, as well as Is the growth coming from volume, mix, or price?

Yeah, I'll take the first part. And I'll let Kelly add some additional color. We're really pleased with the beauty restage and the progress that we're making with this initiative. And as we had discussed, you know, this last quarter there was a lot of transition that took place as it pertains to stores setting, you know, the new product line target, which is a key strategic partner of ours, was in the process of setting and making those transitions this past quarter. And based on the performance to date, that's why you see them also adding an incremental 385 doors, which is roughly around a 30% increase to take us to 1,600 doors, so that 385 is going to get added in Q1 of this year. So that's a good example of, hey, we're pacing well. We see the retailers taking that product on and expanding it. Walgreens, which has been a strategic partner of ours, is they kind of reinvent themselves through this health and wellness lens based on the new leadership that they have. within their organization, they've partnered with us to be able to introduce really the product line. There's seven new items that are going to go into 3,000 stores in Q4. And then we also have solidified 1,500 end caps with 15 of our core items in Q1 that's going to take place. So when you put that together, we like the progress that we're making against the beauty restage. There's always a timing component of when these stores get set, old inventory comes out, new in. But I think the way the consumption is pacing when you look at the skin and personal care business, consumption being up 25%, that doesn't lie. So we like the progress. And as we look at this next year going beyond Q4, There's a large commitment in this space with our key strategic partners, and you're going to continue to see us kind of drive that part of the business. The other interesting point here is we also, from an honest.com perspective, when you look at skin and personal care, we actually sourced from a number of perspectives, 41% of our new folks that are coming into honest.com came in through skin and personal care compared to 34% a year ago. So again, a testament to the new innovation in the new news within the marketplace. Kelly, anything else?

No, just, you know, so far the B2B stage is still kind of early innings. We feel it's really well received by consumers and customers. You know, the retailers really believe in it. Certainly it's gaining us distribution wins, as Nick highlighted, and they really see us as leaders in that space. So, you know, we're pretty excited, but it does tend to take a little time to get its legs under it.

Thank you, guys. I pass it down. Thank you.

Thank you.

Our next question comes from Stephanie with Jefferies.

Thank you. Good afternoon, everyone. Kelly, I want to go back to your comments on taking price action now. I think in the last quarter you talked about deferring. Sounds like you will be taking. Is any of the fourth quarter margin pressure in the guidance just a timing effect of having not taken price yet and still seeing some costing increases real time?

Yeah, I mean, certainly the new pricing goes into effect in early January, and so that doesn't benefit the quarter. When we kind of took a step back, we kind of took a look at our portfolio, and the pricing is actually going to be impacting about 35% to 40% of our portfolio. Again, we mentioned the majority of diapers and some select baby wipes and some other personal care items. So, you know, absolutely, you know, one of our considerations was really around our ability to cover our input cost headwinds, not just, you know, that we're seeing in Q4, but we expect and anticipate continuing into 2022, you know, being very thoughtful on just price-value relationship, you know, competition in diapers is important. Has already taken pricing. We feel we've gotten what we set out to do for the year, which is the market kind of share gains on, you know, by being kind of not the leader, but a follower on pricing. And, you know, we feel that kind of the timing is right now and the price value relationship is still there for the consumer for us to implement that new pricing early in 2022.

The other thing that I would add, Steph, when it comes to this space, as you think of kind of pricing and kind of the choices we made strategically that we've measured, you know, we did take price and we wanted to capture incremental share on diapers and wipes as well as skin and personal care. And when you look at our household penetration numbers, you know, we've added about 450,000 households over the last year, which, as you know, from a strategic perspective, is a key area for us as we drive new consumers into the honest brand. We're currently in about 4.5 million households. So to add an incremental 450,000 is a testament to kind of the marketing strategy that we have around content, community, and commerce. And we think that bodes well for us as we look and As you go into next year, we will be taking price around 35% to 45% of the portfolio. But again, the price-value relationship should maintain based on the suggested retail pricing within the market. And based on those new households that we've also captured, you know, selling that second, third item, et cetera, and making it an honest lifestyle household is the opportunity in front of us.

The only other thing I'd add, Seth, is certainly when we think about 2022 and look at the input cost overall pressures, the pricing that we're proposing is sufficient to cover that. You know, the key areas, as you know, the majority of our cost structure is not subject, you know, cost inflation. We have about a third of our cost structure that will be impacted by cost inflation in 2022. But again, the key areas are the same ones we talked about in the past. Transportation is small parcel and also warehouse labor rates, which have started to creep up and started, you know, certainly over the course of 2021.

Okay, that's really helpful. One more, Kelly, on the margins. I want to just understand a little bit about what's short-term versus the bigger picture. You also mentioned promotions in the sanitization sector. category. It sounds like there's some excess inventory that needs to be worked down. So also wondering how much of a burden that is on the fourth quarter margin relative to what would be more structural. It sounds like that's quite transitory, not something that you expect to carry forward into the fourth year.

Yeah. And, you know, certainly the price promotion, we're kind of expecting and planning for Q4 and into Q1. But we do feel that we're kind of, again, price following. That's what a lot of the industry is doing. And we want to be competitive. And we felt the pricing that we were at wasn't at the place. It made it competitive. We have seen some good acceleration, you know, kind of in the overall velocities now that we've taken some pricing, promotional pricing on that. And so we will feel we'll be in great position to kind of work through that. But that would be transitory in nature.

Yeah. And you see it within the market, Stephanie. When you look at hand sanitization, for example, consumption within the market, you look at IRI, the latest 13 weeks, down about 64%. So you're seeing the market right now and then the market react around more price promotion as retailers are looking to move through inventories in this space because they've been, again, pretty backed up in this area. And you're going to see, again, kind of this element that Kelly highlights. It's a point in time. But, you know, long term, we've got, you know, a commitment to household and wellness as we look at the innovation cadence, as I think you saw in September when we did our innovation day. around new news within a variety of segments as we get into this next year.

Very helpful. Thank you both. Thank you.

Our next question comes from John Keeppel with Bank of America. Hi, thanks for taking the question.

Hi, John. Hi, John. Hey, guys. I think you've answered this already. I just want to be pretty explicit. The benefit we saw in diapers and wipes in 3Q, there was no timing or quarterly impacts that are worth calling out that may or may not reverse in 4Q, right? That was just consumption all the way?

Yeah, you're seeing consumption all the way. When you look at the diapers, like we said, 24% increase in consumption this last quarter that you're seeing. The other piece is, you know, from a diaper perspective, this conscious diaper, we're also gaining share within the marketplace right now. So the consumption solid market share growth overall. And as we've highlighted going into Q4, you know, we continue to see kind of the trends that we've seen in Q3 for diapers, wipes, skin, personal care continue from a double-digit growth perspective.

Okay. Thank you. And then... If you guys could shed some light on quarter-to-date trends you're seeing that are worth calling out specifically. I mean, I guess you just covered the divers and wipes still up double digits. And if you guys have anything else that might have been glossed over.

No, I would just say, you know, all we can say quarter to date based on the data that's out there in the market and kind of where we're feeling good about where things are trending. And not just diapers and wipes. I want to also highlight skin and personal care from a trend perspective. There's really been a positive reaction around our conscious diaper. There's also, again, early but, you know, good, you know, feedback. especially when you look at some of our ratings and reviews as it pertains to our new beauty restage in skin and personal care. And at this point, we're executing exactly against the plan that we've discussed around diapers, wipes, skin and personal care. so we feel, you know, good where we stand today.

And the sanitizing and disinfecting, you know, we did call that out in the Q2 call, pretty much in line with our, you know, kind of in terms of what we called. I think some of the promotion will mean, you know, more volume, but doesn't really change that overall perspective on where that's trending for the quarter.

Right, fair enough. I guess just lastly, in terms of marketing, it's a percent of sales. Appreciate the guidance on the year. it seems like you guys have maybe taken a little bit of a more bullish approach, more emphatic on marketing, willing to spend a little bit more. Are you guys thinking about 15%, 16%, 17%, just sort of even high level, where you guys are thinking that number will be trending as a percent of sales longer term?

Yeah, you know, we've already said that we thought steady state was roughly 15% of sales. We have leaned in, you know, as you've seen, because we were supporting kind of what we had really strong innovation with our clean conscious diaper launch in Q1 and the beauty restage, we did lean in. which is why this year we'll be landing at roughly 17% of revenue. And again, as we go forward, we will lean in in pockets as needed to support particularly category extensions or other bigger innovation projects. We just happen to have two very large initiatives launch, innovation initiatives launch in 2021. So that certainly got us on the high end of the range. You could expect going forward between 15 to 17% and where we'll land within that will depend on, you know, kind of level of innovation that's launching within the year.

Yeah. And the only thing that I would add to it is, you know, when we look at the ROI and the investment profile in this space, because, you know, we have a lot of work that we do through our honest omni-analytics Seeing the household penetration number, you know, go up and adding 450,000 households and obviously seeing, you know, 20% combined growth on diapers, wipes, and skin and personal gear off of some pretty aggressive comps a year ago is kind of a testament to that marketing strategy and that investment profile working for us right now. So, you know, that is something that we're going to continue as Kelly highlights. Not only are we kind of micromanaging it from the ROI perspective, we're seeing the results on top of some pretty aggressive comps on the top line, as well as when you look at, you know, the household penetration component of $450,000 added to the 4.5 that we currently have. It's working. Great. Thank you.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. Our next question comes from Laura Champagne with Loop Capital.

Thanks for taking my question. It's a follow-up on the marketing side. So you've obviously expressed a willingness to keep spending at high rates. Will that remain focused on the launches in diapers? Is it about expanding beauty, or is this just kind of a evenly spread across the board on your products?

Yeah, I think from the top level, really, we're really trying to kind of extend our positioning as a lifestyle brand. So when we think about the consumer, you know, we have products that range from diapers up into beauty. You know, we're really looking, you know, to kind of increase touch points throughout that consumer by kind of this halo of lifestyle. You know, within as we invest, you know, clearly, you know, proportionally, you know, spend in areas of growth. So outpaced investment behind our beauty, our personal care. You know, certainly we're seeing the results in driving growth there. But we will continue to kind of share across our product portfolio and to ensure that all of our product categories get some of the marketing investment. For us, as you've heard us talk about increasing the touch points, increasing the share of wallet, and getting a consumer that already knows and loves honest products, to be aware that we have all this breadth, you know, kind of even within Q4, Q3 and Q4, we have some new products that we're excited about for the holiday, gift sets. You know, we have the launch of hand creams and some great innovation that is launching. And so really we'll utilize some of that marketing to really engage the consumer, you know, to ensure that they're aware of our products where we have products, and there will be a little bit of outpaced investment behind new areas of where we're seeing growth and new product launches.

Got it. And then if I can follow on on your price increases that you mentioned, we'll start to see in Q1. Historically, I think Honest has tried to charge a 10% to 20% premium on mainstream brands. Will that sort of umbrella stay at about that same range even as you raise prices into next year?

It's a great question. You know, what's really important for us, and this is why we were strategic in kind of monitoring kind of where pricing would net out within the marketplace. So as we've seen, for example, in the diaper category, pricing start to be reflected in the marketplace. we're going to be able to maintain based on the increases that we're targeting that price-value relationship versus the competitive set. So the percentages will be equivalized versus competitive set. And, you know, thus far as we've had discussions in this space with our key partners, we believe that that reflection within the market based on should be balanced based on historical.

Great. Thank you. Thank you, Larry.

And I'm not showing any further questions at this time. I'd like to turn the call to management for any closing remarks.

I just, you know, thanks, everybody, for taking the time to listen to our story. You know, we obviously, you know, are happy to be able to deliver against the commitments that we made against this quarter. We wish everybody a happy, safe holiday season, and we look forward to visiting with you next quarter. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.