Jessica Alba’s personal care brand, the Honest Company (NASDAQ:HNST), raised $413 million in an initial public offering (IPO) priced within its marketed range last week.
Shareholders sold approximately 25.8 million shares at $16 per share. This was at the midpoint of the target range of $14 to $17 per share.
The company offered 6.5 million shares to the public with existing shareholders offloading 19.4 million. Based on the number of outstanding shares, the IPO valued the company at around $1.45 billion.
A fully diluted valuation of the Honest Company, including employee stock options and restricted stock units, values it at over $1.7 billion.
Alba owns 5.65 million shares of the company, but did not sell any of her shares. Investors who did sell shares were L Catterton, Institutional Venture Partners, Lightspeed Venture Partners and General Catalyst.
Company Background
The company was founded in 2011 by Jessica Alba, who is the company’s chief creative officer, and it has become a globally recognized brand. It has lucrative partnerships with major retailers such as Amazon (NASDAQ:AMZN) and Target (NYSE:TGT).
According to the company’s S-1/A registration statement, the Honest Company has three product segments: diapers and wipes, which represented 63% of 2020 revenue; skin and personal care, which made up 26% of revenue in 2020; and household and wellness, with 11% of 2020 revenue.
Honest Company Brand
For many people reading this, the Honest Company sounds like Johnson & Johnson (NYSE:JNJ) or many other personal care brands. What distinguishes the Honest Company from its rivals is that the company is tackling an understocked market.
Alba founded the company after having spent a childhood battling asthma and allergies. She felt that existing baby products did not meet the challenge of providing harm-free products, especially to sensitive children. One of the most important reasons for this is because of the ingredients used by many of the company’s rivals.
The Honest Company offers products free of harsh chemicals that contribute to ailments suffered by children. Alba has gone so far as to appeal to Congress to regulate the sale of these chemicals.
The Honest Company is riding a series of secular waves that have really taken off during the global health crisis. Readers of the Rare Metal Blog know the importance of secular trends to profitability.
As people become more focused on personal wellness, and less harmful cleaning products, there is a growing market for the kind of products that the Honest Company sells. These trends have seen revenues rise for firms such as Procter & Gamble, who make Pampers diapers and Tide laundry detergent.
The company believes that it is operating in growing segments. It estimates that in 2019, the clean and natural diaper category in the US generated around $1 billion, skin and personal care generated $12 billion, and household and wellness totaled $4 billion.
The forecast compound annual growth rate (CAGR) of the three categories between 2019 and 2025 is, respectively, 16%, 10% and 4%. Broadly, the company believes it has 5% of the market and that it can grow its market share appreciably.
The Honest Company has seen revenues rise as well. Sales in 2020 were $301 million, up 28% from 2019. Nevertheless, the company made a loss of $14.5 million in 2020.
What's The Downside
The trouble is that the pandemic-era boom in personal care products is already fading. Added to declining demand, inflationary pressures have meant that personal care brands are forced to buy inputs at higher prices.
The instinct is to say that the Honest Company and its rivals simply pass costs on to their consumers. The challenge, as the Honest Company’s lack of profitability shows, is that when a company does not have a wide moat, that is to say, robust competitive advantages, it simply cannot pass on costs to customers without those customers moving to cheaper brands.
More established brands which one would think have some degree of pricing power, have admitted that their results have been affected by inflationary pressures. Procter & Gamble (NYSE:PG), toilet paper maker Kimberly-Clark (NYSE:KMB). and Clorox (NYSE:CLX) have already demonstrated deteriorating operating results as a consequence of inflationary pressures.
Not only is demand weakening as input prices rise, but shipping costs have also risen.
Supply chain problems have been acknowledged by the company, which admits in its S-1/A filing that it expects “sustained market turmoil” due to the effects of the global health crisis and economic uncertainty.
The company stated that “If the disruptions caused by the COVID-19 pandemic continue for an extended period of time, our ability to meet the demands of our consumers may be materially impacted.”
Conclusion
Given the above, the question is, should an investor buy stock in the Honest Company. The secular trends underpinning revenue growth pre-date the global health crisis.
However, the disruptions that have emerged—and given rise to inflation—are likely to hurt near-term operating results.
Taking a long-term view, it may be better to buy when those hits have come and the share price has dipped below the IPO price and buy for the long-term, knowing that in the future the company will deliver excellent results.