HNST - NASDAQ

Ladies and gentlemen, thank you for standing by. Welcome to Honest Company's first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference call over to Chris Mandeville, Interim Head of Investor Relations at The Honest Company. Please go ahead.

Good afternoon, and thank you for joining our 1st quarter 2026 conference call. With me today are Carla Vernón, our Chief Executive Officer, and Curtiss Bruce, our Chief Financial Officer. Before we begin, I will remind you that our remarks today include forward-looking statements subject to risks and uncertainties. We do not undertake any obligation to update these statements, and actual results may differ materially. For a detailed discussion of these factors, please refer to our safe harbor statements in today's earnings materials and our recent SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and accompanying presentation, which are available at investors.honest.com.

Thank you, Carla, and good afternoon, everyone. As Carla mentioned, our first quarter results are a clear indication that the structural improvements we made to our business last year through Powering Honest Growth initiative are driving our growth and profitability today. We are pleased with our start to the year. Before diving into the financial results, I want to provide a brief update on this transformation. We're seeing the immediate accelerated benefits of a highly favorable margin mix driven by our sharpened focus on our right to win categories alongside the positive impact of our right size SG&A. As we look to the balance of the year, we remain firmly on track to realize our expected supply chain efficiencies in the second half of 2026.

As a reminder, we expect Powering Honest Growth to deliver between $10 million to $15 million in annualized savings, serving as a powerful catalyst to further fortify our bottom line health and generate the fuel needed to reinvest in our growth. Now turning to our first quarter performance. Revenue was $78.1 million compared to $97.3 million in the prior year period, primarily reflecting the impact of our strategic Powering Honest Growth category and channel exits. On an organic basis, revenue grew 3.9% to $78.1 million. This growth is particularly notable as it was achieved over a difficult prior year comparison, which was bolstered by retailer inventory buildup ahead of the 2025 tariffs.

Our performance this quarter reflects strong momentum behind our higher growth, higher margin wipes and personal care platforms, partially offset by moderating diaper sales declines. These diaper results were driven by the initial lapping of previously disclosed headwinds related to a key retailer's transition to gender-neutral prints. Q1 reported gross margin came in at 42.6%, a 390 basis point improvement compared to the prior year period. On an adjusted basis, our gross margin of 43.5% was historically strong, reflecting favorable freight costs as well as mix from our higher growth, higher margin wipes and personal care platforms, which was accelerated by Powering Honest Growth. These items were partially offset by tariffs. Total operating expenses decreased $1.2 million year-over-year, including a modest restructuring charge related to Powering Honest Growth.

Excluding this transitional cost, our adjusted operating expenses declined by $1.8 million. This reduction was driven by our structural SG&A improvements, which more than offset our plan to drive double-digit increases in marketing investments directed specifically toward our higher growth, higher margin wipes and personal care platforms. Coupling these structural cost savings with our meaningful adjusted gross margin expansion creates a powerful financial engine, underscoring our capacity to strategically reinvest in our brand while rightsizing our SG&A at the same time. Looking at our bottom line, we reported a net loss of less than $0.1 million for the quarter. Q1 adjusted EBITDA was $4 million, representing an adjusted EBITDA margin of 5.1%, down from $6.9 million and a 7.1% margin in the prior year period, largely due to lower reported revenue.

Regarding our balance sheet and cash flow, we continue to be in an exceptionally strong position. We ended the quarter with $90.4 million in cash and cash equivalents and zero debt. Q1 free cash flow was $3.8 million, a substantial improvement compared to the negative $3 million in the prior year period. This year-over-year increase was primarily driven by continued working capital improvements stemming from Powering Honest Growth and our rigorous focus on operating discipline. During the quarter, we utilized $3 million of our newly authorized $25 million share repurchase program with an additional $8.3 million deployed subsequent to quarter end. In total, these repurchases were executed at an average price of $3.26 per share.

These actions reflect our confidence in the structural improvements we have made to our business, the significant financial flexibility generated by our asset light operating model, and our commitment to balancing aggressive reinvestment and our growth initiatives with returning meaningful value to our shareholders. Moving to our outlook. While we are encouraged by our start to 2026, we are also mindful that it is still early in the year, and we are navigating an environment where several macroeconomic uncertainties remain. That said, the actions we've taken to optimize our portfolio have created a much stronger foundation for profitable growth. We have effectively shifted our resources toward the categories where Honest has the clearest competitive advantage. Our 2026 framework reflects both the early returns of that discipline and our prudent approach to the balance of the year. With that context, we are reaffirming our full year 2026 outlook.

Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. We ask that you please limit yourself to 1 question and 1 follow-up question. You may then return to the queue. Please stand by while we compile the Q&A roster. Our first question comes from the line of Aaron Grey with A.G.P..

Hi, good evening, and, thank you very much for the questions here. First question for me, just want to talk a little bit about the reiterated guidance. You know, can certainly understand the commentary in terms of take a prudent approach for the remainder of the year. Just given if you take the run rate for 1Q, that kind of takes you to the high end of your guide now. Curious if there is any shipment timing that had an impact to the Q or any type of seasonality we should be thinking about ahead, just given some of the other, you know, top line initiatives you talked about right now, earlier on the call that should obviously lead to some nice sales trajectory. Thank you.

Good evening, Aaron Grey. This is Curtiss Bruce. We are certainly pleased with the revenue growth in Q1. It represents a very good start to the year and in line with our expectation. I'd say we're equally pleased with the consumption of 8% growth as well, and that was on our higher growth, higher margin portfolios in wipes and personal care. As you think about the full year, we're just reiterating our guidance, right? We are still expecting to be able to deliver on the 4%-6% organic growth. We don't have any concerns coming out of the quarter that there was any dislocation revenue performance and the consumption performance.

Yeah, Aaron, let me just reiterate it and maybe add on to Carla's comments. We definitely believe that brand building is a strategic advantage for us here. We're gonna continue to invest in marketing as we look to strengthen the business and create a sustainable growth platform. This is why it was so important for us to execute Powering Honest Growth. The gross margin acceleration, the gross margin expansion is really the fuel that we need in order to continue to invest in marketing to have a long-term sustainable business.

Okay, great. Really appreciate the color there, both Carla and Curtiss. I'll go ahead and jump back in the queue.

Thank you. Our next question comes from the line of Anna Glaessgen with B. Riley Securities.

Great. Thanks, Carla. Then one follow-up on marketing. It's nice to see the investment in wipes and the activation there, as you noted in the first quarter. Should we take that level of spend and assume that continues, or was it elevated given the launch cadence that hit that quarter? Thanks.

Yeah, I'll take that one. This is Curtiss. As we think about marketing, you're correct, we did have a increased level of investment in Q1. That was behind the activity that Carla previously mentioned. Like I said in the earlier remarks or the earlier question from Aaron, we are gonna continue to invest in marketing. We're not gonna sort of guide expressly to the that line item, but the investment in marketing is gonna be fueled by Powering Honest Growth, getting the market, and then our both the revenue guidance and the EBITDA guidance reflect that increased investment.

Great. Thank you.

Our next question comes from the line of Andrea Teixeira with JPMorgan.

Thank you, everyone, and good afternoon. Amazing story about your mom. Carla, I was just hoping, and Curtiss, to talk about like the Competitive environment we hear in general, and I guess you're above and beyond that in terms of like, you know, your premium positioning. On the diaper segment, there has definitely been a more competitive stance from a lot of the players. If you can comment on that. Conversely, I know you've been getting a lot of new products in and distribution, and you clearly accelerated the delivery this quarter.

Let me just add, 'cause we're talking about innovation, and we're certainly pleased with the start to Q1, particularly around the innovation. Our 2026 plan and our 2026 guidance on organic revenue was really balanced. It was innovation, velocity, and distribution. This was not a singular 1 driver plan, we are still very confident in our ability to deliver, with the success that we had with innovation and the distribution that went into the market in Q1.

All right. Thank you. I'll pass it on.

Thank you. As a reminder, to ask a question, please press star one one on your telephone. Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

I will take the inflation and fuel question here. We continue to monitor and evaluate the impact that the volatility in our macroeconomic environment could have on our business. This is where our asset light model, our inventory position, and the cost mechanisms we have with our suppliers enable us to, like, manage risk in the short term. As we think about 2026, we are confident in our ability to still deliver against our expectations.

Got it. Thank you.

You. Our next question comes from the line of Owen Rickert with Northland Capital Markets.

Hey, Carla. Hey, Curtiss. Thanks for taking my questions here. Just quickly for modeling purposes, last quarter, you mentioned guiding to organic growth improving sequentially throughout the year. Is that still the right way to think about guidance right now?

Yeah. Owen, it's a good question. We are pleased with our start, both on net revenue and on consumption. That was the sequential improvement that we talked about, that's in line with our expectations. We are still very confident in our ability to deliver the annual guidance, we're not offering any updates on the cadence.

Got it. Thank you.