Good day, and thank you for standing by. Welcome to The Honest Company First Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your first speaker today to Sung Kim, Vice President, Finance and Strategy. Thank you. Please go ahead..

Thank you. Good afternoon, everyone. Thank you for joining us for our first quarter fiscal year 2021 conference call. Joining me today are Nick 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 filings as well as our earnings release issued today for a more detailed description of the risk factors that may affect our results.

Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Also, during this call, we may discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures, and a reconciliation of these non-GAAP to GAAP measures in today's financial results earnings release.

A live broadcast of this call is also available on the Investor Relations section of our website at investor.honest.com. With that, I'll turn the call over to Nick..

better-for-you credibility, expressive brand personality and functional excellence. Our products have garnered strong ratings and reviews across categories with industry-leading NPS scores, while formulating according to our Honest standard and No list, avoiding over 2,500 chemicals and materials we chose not to use.

Our brand promises to always strive to provide clean, sustainable, effective and thoughtfully designed products for our consumers. Second, we're focused on disrupting large consumer categories.

The total addressable market for our categories of Diapers and Wipes, Skin and Personal Care and Household and Wellness is estimated to be $130 billion with $17 billion representing the clean and natural market in those categories.

Importantly, the clean and natural market is projected to grow in the high single digits through 2025, 6x the rate of the conventional market, giving us a unique advantage. As we create products in our attractive consumer categories, we're focused on three key differentiators to give us a competitive advantage.

Number one, we're focused on driving marketing innovation to increase consumer awareness of our products.

Since inception, we've grown our brand and deepened our consumer relationships through our Content, Community, Commerce strategy, as we educate and entertain and build long-lasting consumer connections with over 43 million followers on social media.

These relationships with our consumers inform our product development, and allow us to move faster to bring new and improved products to market. Number two, we have built a high-performance in-house product development team with a proven track record of bringing breakthrough, award-winning products to market.

This capability has allowed us to diversify our revenue across product categories and to drive accretive innovation through our costovation process.

And number three, our integrated omni-channel approach drives discovery and accessibility and allows us to efficiently scale our business while making us agnostic to the channel our consumer chooses to shop. In fact, our sales are balanced with 55% transacted digitally, and 45% at retail in 2020. Now let's pivot to our Q1 2021 results.

Our Q1 accomplishments reflect the continued execution of our strategy against these key priorities. Number one, starting with marketing innovation. We continue to expand brand awareness and consumer touch points through the use of key marketing campaigns that leverage our Content, Community and Commerce strategy.

By inspiring authentic dialogue in creating lasting connections, we were able to drive 42% growth in our Skin and Personal Care business. This is a strategic focus for us as more than 1/3 of new honest.com consumers enter through our Skin and Personal Care products. Let me highlight one key campaign that we launched in Q1.

Our morning routine campaign, featured Jessica Alba, showcasing a variety of morning routines for the whole family, emphasizing the versatility of our personal care offering through multiple life stages.

The content underscores the breadth of personal care product line by utilizing a solution set – a four hero personal care items, our shampoo and body wash, conditioner, basin body lotion and conditioning to tangler.

We engaged our Honest community by launching a compelling and comprehensive campaign to utilize paid media and was supported by strategic influencer gifting and press features in premium publications. The campaign had a total reach of over 90 million impressions across social media, influencer, press and paid media.

According to our consumer engagement strategy, we created a unique solution-oriented content, drove advocacy through our Honest community and ultimately generated commerce through unique honest.com solution sets around the morning routine campaign.

This is just one example of how we leaned into marketing innovation to drive strategic growth in the quarter through incremental marketing investment. Second, we introduced product innovation with strong consumer response. During the quarter, we introduced breakthrough innovation in Diapers and Wipes.

We launched our Clean Conscious Diaper that delivers improvements in performance, sustainability and margin. With regards to performance, our new diaper features, advanced leak protection, a new wetness indicator and product features designed for every stage of a child's development.

In addition to the improved performance features, the Clean Conscious Diaper's also our most sustainable diaper yet. Our diapers continue to feature sustainably harvested, totally chlorine-free fluff pulp and a 100% plant-based backsheet.

We were able to further improve the sustainability and environmental impact of this offering by moving to a more efficient diaper design that uses less material in the diaper, and 100% post-consumer recycled cardboard in our diaper boxes.

Finally, in addition to improved performance and sustainability, we're very proud to achieve improved margins on our diaper due to our more efficient diaper design. Early consumer and marketplace response has been strong. Over the course of the year, we expect to release a consistent cadence of new product innovation.

Third, we are pleased to deliver growth across both our digital and retail channels as our integrated omni-channel strategy continues to accelerate digital and retail share of shelf. This quarter, we delivered double-digit revenue growth on top of 36% growth in Q1 2020. Our 2-year stock is 48% growth.

Overall, we have seen increased consumer willingness to get back into stores as consumer behavior in response to the COVID-19 pandemic changes, and have seen a channel shift and an acceleration in revenue growth within our retail channel.

We're well positioned with our omni-channel strategy to capture this growth as evidenced by our retail growth in Q1 2021. Significant white space opportunities still exist to expand our on-shelf presence and the depth of our product offering with new and existing retail partners.

For example, in Q1 2021 we increased both our door penetration and our assortment on beauty at Target, increasing from roughly 900 stores to over 1,200 stores with skin care and color now sitting in an integrated shelf set in the beauty aisle. In total, we added approximately 10 additional items to our core target beauty set.

Before I turn it over to Kelly, I wanted to take a moment to reiterate our commitment to ESG, which has been part of our DNA since our founding. We have a deep sense of purpose and infused the ethical values of transparency, sustainability diversity and inclusion in all that we do.

From developing products designed to be safe to working hand-in-hand with our charity partners to serve those in need to embracing diversity and inclusion, we're on a mission to create real and meaningful impact.

In the first quarter, we launched several breakthrough initiatives that have deepened our commitment to offering environmentally friendly products.

In addition to the launch of our Clean Conscious Diaper, we were also proud to launch our conscious cleaning essentials, a sustainable solution that seeks to reduce waste without compromising on effectiveness. According to our estimates, approximately 600 million household plastic bottles may end up in a landfill each year.

As part of our effort to reduce the amount of single-use plastic thrown away each year, the Essentials collection features reusable sprit-spray top bottles, along with cleaning concentrates for bathroom, glass and multisurface cleaning.

In addition to reducing plastic waste, the lightweight concentrate plugs cut down on the amount of water shipped around the country, providing us with an opportunity to lower our carbon footprint. Consumer response has been strong. And we're inspired by the impact that simple, sustainable changes can make.

Regarding social impact, we're very proud of our partnership with our chartable partner, Baby2Baby. Since inception, we have now donated over 25 million products, making an impact with individuals and families in need. As it relates to our governance efforts, in May, we're pleased to welcome James White and Susan Gentile to our Board of Directors. Mr.

White brings nearly 30 years of professional experience in the CPG and retail industries; and Ms. Gentile brings more than 25 years of experience in the finance sector across industries. The background they bring to Honest will help ensure we continue to reflect the needs and wants of our consumers in the communities we serve in all that we do.

With these two new additions, we are very proud of a Board that is 56% people of color and 33% women. In summary, we believe we have built the foundation for Honest to continue to grow as a leading clean and natural wellness brand.

We continue to capitalize on our strong Content, Community and Commerce platform to drive good growth across product categories and all consumer touch points. We are pleased with our strong start to the year and believe we are well positioned to continue to advance our strategic growth plan.

Now I'd like to turn the call over to Kelly Kennedy, our Chief Financial Officer, to review our first quarter results in more detail..

first, consistent double-digit top line growth over the next few years; second, ongoing gross margin expansion with a path to 45% long term; and third, improved EBITDA profitability with a long-term target of 20%. With that, I'll turn the call over to the operator to begin the Q&A portion of the call..

[Operator Instructions]. Our first question comes from the line of Steph Wissink from Jefferies..

Our question is just on the business momentum. If Kelly or Nick, you could talk a little bit about what you're seeing in Q2. And then I think it would be helpful just to rationalize the lap to COVID last year in the Q2 quarter.

Is there anything we should be aware of in the base from a comparability perspective?.

Yes, sure. I'll take that. Thank you for the question, Steph. Obviously, in Q1, you can see lots of momentum in the business. We are seeing strength based on our visibility with the [traction function] (ph) data, we look at IRI.

But really underlying a shift in something we're -- you'll be hearing a lot about is the shift from digital to retail because as the economy starts to open and strengthen. And so this shift for us is kind of creating this volatility.

As an example, you saw in Q1, our retail business represented 48% of our total business in Q1 in 2021, while a year ago it was 43%. And while there is typically - is going to be volatility in our business from quarter-to-quarter, this quarter we've seen benefits.

But what we're currently seeing in our business right now really is consumption outpacing shipments. So we do want to highlight kind of if you think about business right now, this could have a potentially material impact on the quarter but it's happening real time. We're in the middle of our quarter, and it's something that we're monitoring.

We have a significant digital event that takes place at the end of the quarter, and so kind of a lot of eyes and kind of visibility to coming out of this event and our trends here. Obviously, we always manage for the long term. Underlying consumption remains really strong.

We're not giving specific quarterly guidance, but certainly a trend that we want to give some visibility to. And we'll be getting back together here in August and we'll be able to share kind of a lot more about the business and kind of the results kind of this -- kind of mega event that's happening at the end of our quarter..

Okay. That's great. And Nick, if I could just have a follow-up question on beauty and skin care. You talked a lot about Target as an illustration of the white space opportunity, but that category seems to be a real important power driver of the model.

So talk a little bit about where you think you are in terms of SKU, assortment breadth, opportunity to build out those full brand experiences.

Like you talked about at Target, where are you with some of your other retail partners in really harvesting that opportunity to grow that sleeve of the business?.

Yes. Thanks, Steph, for the question. I think, number one, the way we look at it is, first and foremost, we're really pleased with the strength that we're seeing within Target with this expansion we put into place.

Number two, we're also, from a digital perspective, as you look at kind of skin, the personal care results and that 42% growth, when we drill down in beauty, we're seeing acceleration within that part of the business.

So we're seeing it, we're seeing a nice mix between both cosmetic and the color side as well with skin starting to move, and now, as things start to open up. Here in California, I walked into a store today, and I was able to not wear my mask, and we're starting to not wear masks more and more.

So we're starting to see the consumer start to gravitate more and more to our mix being both on the cosmetic as well as on the skin side. What we're seeing is from a distribution, from an assortment standpoint is in different retail. So for example, Target, Ulta.com is another example.

As well as our results internationally, when we look at Douglas over the last quarter, we saw actually Douglas was about 23% growth this past quarter. We're seeing definitely the depth that we're driving around distribution on the digital as well as the physical shelf, and we're starting to see the repeat.

And that's why when you see the results in Q1, that's 42%. 63% a year ago, and that's over 100-plus percent on a stack basis. So again, a lot of opportunities still, but a lot of good momentum as you look at the results coming out of Q1, and that's going to position us well when you think about the beauty restage, which is going to hit in Q3.

Because just a reminder, that's going to be not only from a packaging perspective, this 100% tree-free packaging that we're thrilled about when you look at the improvements around the business, it's already doing extremely well, but also importantly, new products.

We have a new daily defense collection that we're going to be introducing as well as a new lash tinted serum initiative around that from an innovation perspective.

So a lot there, and then coupled with that is roughly about 800 basis points of gross margin expansion that's going to take place against that initiative when you look at the [indiscernible]..

I show our next question comes from the line of Wendy Nicholson from Citi..

And actually, Kelly, I wanted to circle back and just hear a little bit more about what you were just saying in that line of questioning about how consumption is outpacing shipments, and you've got the big digital promotion coming up at the end of the month.

So I'm just trying to understand, are you worried about having out of stocks? Is there a chance that you would move that promotion? Like how is everything working from a supply chain? Just wanted to really understand if there was a risk that either at the time of that promotion or at the retail level, there was a chance you couldn't fulfill demand..

Yes, great question. I'm glad you asked the follow-up Wendy. It is not -- we're in a good inventory position. What we're seeing really is around this shift, and we're seeing a retail partner where their shipments are not reflective of the underlying consumption. So we mentioned volatility from time to time. From quarter-to-quarter, we can see shifts.

Sometimes it goes in our favor, sometimes it goes the other direction. And right now, what we're seeing in the business is specific to kind of the shift between digital and retail and one of our partners, essentially kind of managing their working capital. So we're not going to have -- yes..

Got it. Okay. And that is not a worry that, gosh, maybe they're going to cease to carry Honest Diapers or something like that. There's nothing untoward or anything we should be worried about in terms of that relationship..

No, I would say this is an extremely strategic relationship. And we have -- we'll be getting some great prominence, and we've been working with them as well just behind this event, an event that we've done kind of in past years. But again, we're leaning into it. And we're really excited. It's just that it's not representative overall in the underlying.

Typically, we've seen replenishment follow this event. And the timing is at the end of our quarter, so it's kind of different than it's been in the past..

Understood. Okay. I really appreciate that clarification. That's very helpful. And then maybe for you, Nick, I had a question just about the competitive environment. Some of your competitors have announced price increases on the baby care side.

And as we start to see those higher prices maybe show up on shelf over the next couple of months, do you think it impacts your pricing at all? I mean, obviously, you're more premium priced generally, but do you intend to keep the same price gap, i.e., raise your prices as well? Or do you think that's a more compelling proposition because the price gap won't be as large if you don't raise prices.

Just how do you think about sort of the elasticity of demand for Honest diapers depending on what the competitive pricing environment is like?.

Yes. Thank you, Wendy. A couple of things on that. Number one, I would think about it this way. So the conscious diaper that we just introduced in Q1 really started to hit the market kind of the second half of Q1.

And you look at our marketing investment, we put in about an incremental $5 million of marketing this quarter, really driven against the conscious diaper initiative as well as our skin personal care businesses kind of benefited disproportionately from that standpoint.

So by introducing that in the market with the features that we referenced, this is the most sustainable diaper as we look at the comparison versus kind of where we've been as we look to continue to improve from an innovation perspective.

What we're starting to see in the market behind that investment and that new product, again, it's still early, but hitting the market, we're going to see our share start to pick up from a track perspective. So at the start of the quarter, our shares stood -- and this is looking at all outlet IRI, MULO data over the last 12 weeks.

Our share sits now at about 1.4% on the diaper starting the quarter, it was sitting at about 1.2%. So we like the fact that we're starting to see share start to pick up.

And then importantly, what we're seeing now is from a category perspective, and Kelly referenced this, we've seen about over the last 12 weeks, about 13% growth versus the category declining at 1%. So we like the position that we're in because coupled with that is the second part of the question around input costs.

Remember, this initiative was also a costovation. So not only a product improvement for us, from an innovation perspective, but we also picked up additional gross margin on this product. So as a margin win for us also.

The second component that you're referencing that we're looking at, we understand that there are some of these manufacturers that have taken price. We're closely monitoring the input cost and kind of that volatility that sits in the market right now.

Right now, when you look at our plans, we have sufficiency around productivity and this costovation that we're driving both in our diaper business in the second half, it will be our beauty restage that I referenced earlier. But it's one that we're taking a very close look at.

Right now, we like the fact that the conscious diaper, we've introduced it, we're starting to take a little bit of share, we've got a lot of momentum from that standpoint. What's going to be important is to really understand and see where the cost structure is going to sit moving forward around some of the inflation that everyone is seeing.

And we're monitoring that right now. And again, today, we have sufficiency within our plans as it pertains to mitigation, but that's something that we're closely looking at..

Our next question comes from the line of Laurent Grandet from Guggenheim..

Nick and Kelly, very good job. So I do have really curious question about a comment you made in your [indiscernible] or your press release regarding this $3.4 million in personal care you sold in the quarter.

Just want to understand, basically, is it on top of what you planned originally? Or is it something that was already planned? And really, when you say in exchange for future marketing and transportation credits, I mean I really like to understand this a bit more, if you can..

Sure. I'll take that one. I'll give you context. Always part of the plan.

So when you see the level of innovation and the cadence that you see from Honest that we continue to introduce in a very rapid pace, we have, in this example, legacy inventory, approximately $3.4 million that we partnered with Active International on to be able to -- prior to this Q4 restage, to be able to sell through that inventory.

The good news there is that inventory is being sold at an accretive gross margin to where the company landed Q1 at. So that's a positive. Two, we're also putting outside of our warehouses, getting this product move through the system to position the new product that we're going to be bringing in and be able to start staging our inventory.

So it is a benefit. The second part of that question is around really the credit component. And the way this works is we have marketing credits as well as transportation. And how we use those is really against current digital media partners that are already part of the Honest go-to-market as well as in-store visual merchandising vendors that we use.

So as we start to transition this product in the marketplace, we have both the marketing component as well as the in-store component with current vendors that we can utilize those individual credits against. So, it's a strategic play for us.

It's part of our transition plan and puts us in a good position as we talk about this new beauty restage that's coming as it pertains to Q3 to be able to start to really start to accelerate, not only great innovation with the 100% tree-free packaging as well as the new items.

But also start to capture the additional incremental gross margin that we're driving at about 800 basis points against that initiative..

I show our next question comes from the line of Dana Telsey from Telsey Advisory Group..

As you think about diapers and obviously, the share that you've gained and the growth in the first quarter and how you've outpaced the market is very impressive. How do you see this Clean Conscious Diaper initiative going forward.

Is that a margin enhancer, too? And how are you planning wipes go forward? And then just on another note, on the beauty restage, what type of marketing investment do you make there? And does that continue through the balance of the year?.

Yes, I'll take the first one, Dana, thank you for the question. And I would say on the conscious diaper is we've kind of built out that innovation. We do this type of work when it comes to the performance and being able to address these key consumer dissatisfiers.

And we've done this in a way now where we're also increasing the margin structure against that business. So it's got the right proposition for us because we talk about good growth always, which is this consistency around not just driving top line but also the margin expansion components that we want on the business.

So that's rooted in the current proposition. The key for us will be, as I referenced earlier, the earlier question, will be maintaining the sufficiency within our consistent annual productivity plans, and we have 3-year productivity plans that we drive against the business to really mitigate kind of the cost environment.

And that, again, is something that we're closely looking at. And then I'll let Kelly pick up on the second part of the question..

Yes. I think -- as we think about marketing spend, we think the right level for us is kind of in the 14% to 17% revenue range. We did have some great kind of marketing and linked into marketing spend because of the great innovation that we had. We will support the beauty restage that's coming in Q3.

We continue to see Skin and Personal Care be just a great driver for us of growth and you would expect that over the back half as well. So we think it's the right place for marketing. We will continue to lean in as we see the return and see it drive top line growth. But you could expect for us to kind of stay within in that guided range of 14% to 17%..

Got it.

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

Yes. I think there was a mention of this earlier.

As we think about kind of looking at digital versus retail, it's helpful to look at 2-year stack as well because we want to remind everyone the COVID -- kind of the COVID trend that happened in Q1 was all around kind of a shift on consumer stock-up behavior, and there was kind of a growth both in retail and digital last year.

In Q1 of 2020, retail grew 58% and digital grew 23%. So when you think about digital on a 2-year stack, we are seeing a significant shift versus what was happening a year ago. So the key trend that we spoke about earlier is really the shift from digital back to retail. But again, we also saw digital acceleration as well..

Yes. And the other thing that I would add on that is with some of our key retail partners on the digital side, in 2020, we saw really this migration from kind of -- in the 20% range to moving more closely to 30%-plus when you look at the amount of business that they're doing.

But coupled with that is a lot of also a click-and-collect pickup that's taking place within retail. So it's not just the digital component, but also the visitation as it pertains to the stores.

And that's where we're seeing more and more both within our own data sets and with some of our strategic partners kind of the people are more and more gravitating towards the retail side.

Now the good news is, and that's why we're always strategy-led, is that we have an omni-channel strategy that we built and that we're agnostic when it comes to consumers that want to shop at honest.com, great. You want to shop amazon.com, you want to shop at Target, you want to shop at HEB, you have that opportunity with us.

And that's why I think we're well positioned as we look at based on where that consumer shops. Consumers at the end of the day, they don't shop channels, they shop brands at the end of the day. So we're well positioned..

I show our next question comes from the line of Bryan Spillane from Bank of America..

Just, I guess, two quick ones related to the channels. One is just, I guess, following up on an earlier question with regards to the -- I guess, the shipments being behind consumption.

Is that specific to retail? Or is it spread across retail and digital? And then the second question I had is when we're thinking about channel agnostic -- or agnostic by channel going forward on margins, assuming that -- like that's true today, as we think about the margin expansion that you're expecting over the next few years, would that also -- would that relationship hold meaning -- I guess, is the margin opportunity bigger in one channel versus the other? Or would you expect that even as margins are expanding, you're still sort of agnostic, whether it's digital or retail?.

Yes. Thank you, Bryan, for the follow-up question. We -- the trend that we were mentioning earlier is specific to the digital channel. As it relates to thinking about the margins between -- right now, they're relatively in line, and we expect that to continue over the next few years to be not materially different.

In the longer term, we do think there is an opportunity, as we leverage the business and leverage the fixed cost within our digital channel, that we would be able to expand the margins in the longer term better in the digital channel. So -- but we are -- we do feel right now we're pretty well balanced between the 2.

We would expect that to continue over the next few years. So you would have to look further out than just kind of 1 to 2 years to see a material difference between the margin structure digital versus retail..

I show our next question comes from the line of Laura Champine from Loop Capital..

I wanted to talk a little bit about your international opportunity which I think management has acknowledged is very significant, but that it's longer term.

How would you get started there? And what's on deck for you to do in the next couple of years in terms of international growth?.

Laura, thank you for the question. A couple of things on this one. When it comes to international, we have already -- it represents about 2% of our business in 2020. What we have done in international, we haven't been -- we haven't -- I've built a lot of businesses over the years. We haven't been planting flags. We've been very strategic and methodical.

So when you take a look at one of our core quarters where we introduced the brand with was Douglas in Europe. And I referenced earlier, the consumption trends as it pertains to Q1 to do was up about 23%.

As an example, we're going to build this business in a methodical way when it comes to driving both the digital side of the business with a partner like Douglas as well as the retail side. An example also is Cult Beauty in the U.K. is another strategic partner of ours in the skin, personal care space.

So number one, you'll see us be methodical in going deeper and wider in the geographies that we've already built out because we've got awareness behind our marketing investments. We started to see the repeat. Again, we're in our early innings as it pertains to international.

And then we're going to continue to drive strategically what we do here, which is this kind of omni-channel component that you're going to see through the retailer partnerships that we've established.

And as we look at the rest of this year and you start looking further out, you're going to see us continue to build off kind of that core and those principles that we have established in 2020 moving forward. So I hope that gives you some context..

So Nick, if I can try to summarize that, it sounds like you're going -- you expect to move partner by partner rather than geography by geography. So even though some of the markets in Asia look very exciting to us, you'd rather find the right partner and then take it from there.

Is that a reasonable assessment?.

Right. And I've seen a lot over the years where businesses get challenged is when they don't have the right kind of beachhead from a partnership perspective because that localization is so important, especially when you're a young brand like ours.

So being very strategic, have the right alignments from a partnership perspective and a principle around really building something together because there's added value for both parties.

In the examples that we've leveraged in Europe, both partners, like our digital capabilities, our content, community and home strategies, so those are enablers for them as well as the initiatives around innovation and the cadence we have around clean beauty that actually works.

So when you put those things together, that's how we're going to continue to approach it as we look at Europe, number one. And then as we start talking strategically and we share a broader strategy in the future, we'll go into greater detail with other geographies..

I show our next question comes from the line of Andrea Teixeira from JPMorgan..

So on -- I have a question on distribution and then a follow-up on gross margin. On the distribution side, if you can break down the 12% growth you had in the quarter, how much was distribution velocity within the same doors and/or shelf and price mix? And then a clarification on the gross margin commentary.

I think Nick mentioned the conscious diaper being accretive to margins and not contributing into, I think, half of the quarter, and also the 100 basis points benefit from restaging in Q3. So I was just wondering if we should be prepared for more impact in gross margin in Q2 against the Q1, so sequentially.

Or this increase in additional mix that you're seeing from online to wholesale also being a negative. And specifically to that, if you can clarify one commentary.

Kelly, you're saying that the shipments trailing consumption, in particular in digital, is that something specific to this customer which may be putting a lot more emphasis on you on the retail side? So basically increasing -- and I'm thinking of that, one, that you are online and you're not in store.

Is that something that has happened? So you're gaining more distribution in the physical stores and then that's going to be shifting because of that because they're staging your new in-store? There's a lot there..

Yes. And -- no, that's okay. I'll speak to all 3, and the first and the last are actually related because as we think about kind of Q1 growth and the sources of that growth, it was actually balanced between philosophy, innovation and distribution, which is, of course, some of the power between our growth strategy as they complement and work together.

The -- you are right. As we're seeing some of the consumer behavior shift between digital and retail, I do think that just creates some volatility as kind of -- as people ramp up on kind of their inventory pace and leaks in inventory to reflect the change in demand. So I think the 2 are related.

As we go into Q2, we're seeing, again, a lot of demand come through velocity in the retail channel. So that can be kind of the -- as you think about current trends in the business, velocity is a little more heavily weighted to what we're seeing today predominantly in the retail channel.

As it relates to the gross margin impact, we have -- as Nick highlighted, we have a really robust costovation, ahead of the cadence with the introduction of the Clean Conscious Diaper in Q1. Beauty restage is materially different overall margin structure, although a growing -- a small but growing piece of our overall business.

We are -- as we kind of think about gross margin, we're looking at the input cost versus the costovation that we have lined up. And right now, they are in line, and we're feeling kind of good about our ability to deliver our gross margin structure. I think what Nick was alluding to earlier is we have a level of inflation kind of anticipated.

We do have some contracts that protect us against some. You had some inflation in certain parts of our business, but we're seeing some strong inflation in transportation and freight, and that is an area that we're offsetting with that cost ovation.

So I think as we go through the year, we'll be coming back to let you know if we see anything different in August. Right now, we chose -- the one thing that we didn't talk about is the driver of growth is pricing because it was really all volume. We didn't take any big material pricing at this point. We haven't announced any pricing.

We are really excited about some of the opportunity to kind of grow our share as other people take their pricing up, and we're going to continue to evaluate as we go through the year and keep an eye on input cost inflation.

And again, at this moment, no additional action we feel is needed, but we want to keep that as an open option for us for the future..

Our last question comes from the line of Jon Andersen from William Blair..

Congrats on the start, Nick and Kelly. I have just a broad-based question on customer acquisition. You mentioned earlier, I think, nearly 1/3 of Honest users are coming in through the Skin and Personal Care, the beauty franchise.

What is the right mix of kind of customer acquisition by product category as you move the business forward over the next 2 to 3 to 4 years? And how does that influence your marketing kind of tactics and innovation tactics as you move forward?.

number one, sourcing them specifically through honest.com; and then where are we turning around and tracking that second and third purchase from a data set standpoint.

And what I mean by that is we look at then how do we appropriate the additional dollars to be able to continue to kind of fuel that element from a strategy perspective, whether it's new acquisition or how do we monetize that consumer on that second or third item within the marketplace.

Now what we're seeing, again, through that Skin and Personal Care side of the business, we're seeing stickiness now as we're starting to drive over this past quarter, and you're seeing it in the results with the growth rates in Skin and Personal Care based on that strategy from an omni-channel perspective. I'll let Kelly add some additional color..

Yes. As we think about really broadening the appeal of the Honest brand, I mean, we're looking at multiple levers. Clearly, we want there to be balanced in terms of customer acquisition across our different products, but we're particularly focused, as Nick mentioned, on Skin and Personal Care.

The other thing we wanted to highlight is we continue to keep our eye on kind of the overall metrics as it relates to gen Z acquisition, this balance between male, female. We saw some good progress in Q1 of 2021. And on both of those metrics. Gen Z in particular, was 9% of our customers in 2020 up to 14% in 2021.

That's really exciting because it means we have more appeal across a broader audience. And as well, we track -- we've predominantly been kind of a female-focused brand, but we -- as we highlighted, some of these great campaigns, we really are trying to make them appeal beyond and appeal to the male consumer as well.

And so we're -- as we think about marketing, we think about campaigns, we try to keep that appeal much broader. And the overall percentage of kind of our male customer base went from 18% to 20% in Q1 '21 versus prior year. So really excited to see about the momentum we're seeing there as well.

And we'll continue to track that and keep an eye, and make sure that, that appeal is well balanced, and we're growing the appeal kind of across our customer base..

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

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

Thank you..

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