Ladies and gentlemen, thank you for standing by, and welcome to The Honest Company's Fourth Quarter and Year-End 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Mr. Steve Austenfeld, VP, Investor Relations at The Honest Company. Please go ahead, sir..

Good afternoon, everyone. Thank you for joining our fourth quarter and year-end 2021 conference call. Joining me today are Nick Vlahos, our Chief Executive Officer; and Kelly Kennedy, our Chief Financial Officer.

Before we begin, 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 earnings release issued today as well as our SEC filings 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 any results of the new revision to these forward-looking statements in light of new information or future events, except as required by law.

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 the financial results section of today's 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, Steve. Good afternoon, everyone. Thanks for joining us today. As noted in our earnings release, our fourth quarter reflected continued revenue growth and market share gains in our core product categories.

Importantly, we saw 19% revenue growth in our core categories of Diapers and Wipes, and Skin and Personal Care, behind our Clean Conscious Diaper and our Beauty Restage innovation. Honest also grew market share in the quarter across these core categories.

Total revenue growth for the fourth quarter was 3%, with strong core category growth of 19%, offset by a decline in Household and Wellness as demand for our household sanitizing and disinfecting products remained lower than the prior year.

As a result, we have refocused our investments on the core parts of the business and invested in new innovation in the wellness subcategory that we will launch in the second half of 2022.

While gross margin and adjusted EBITDA for the fourth quarter were challenged due to inventory reserves taken on certain sanitizing and disinfecting products in response to demand declines, we believe that the actions we are taking will improve our margin profile starting in the second half of 2022.

Looking at our full-year 2021 results, I am proud of our Honest team for dealing with multiple macroeconomic challenges head on and continuing to execute against our long-term growth strategies around marketing innovation, product innovation, omnichannel distribution and social responsibility.

As we celebrate our 10-year anniversary this year, the Honest brand is poised to continue to lead the Clean Conscious consumer movement. As we embark on our next decade, let me illuminate what gives our team confidence and conviction that we are creating a modern consumer brand for the future.

First, a power of the Honest brand remains resilient in a highly volatile environment, reflected in our strong core category revenue growth of 13% in 2021 behind our Diapers and Wipes, and Skin and Personal Care business.

Second, our focus on driving growth with our Content, Community, Commerce marketing strategy yielded an increase in unaided brand awareness on diapers from 25% a year ago to 29% today, and we were able to expand and grow our household penetration to 4.9% by the end of 2021, an increase of 2.7 million new Honest households over the last two years.

Third, our investment in product innovation behind our Clean Conscious Diaper and Beauty Restage continues to pay off as we grew overall Honest retail market share and outpaced category growth in diapers, wipes and personal care for 52 weeks ending December 26, 2021.

Fourth, our omnichannel go-to-market strategy is continuing to advance as we expanded distribution to 43,000 retail locations as of the end of 2021, representing 49% ACV for the entire Honest brand, up from 40% two years ago.

Lastly, we expanded our ESG efforts with a continued focus on diversity and inclusion, environmental sustainability of our products and strong governance practices. Our R&D team has worked to increase the number of ingredients we choose not to use from 2,500 to 3,500 ingredients.

We have donated over 26 million products to date, supporting our commitment to social responsibility. Also, we are proud of the progress we continue to make with our Honest team. 65% of our leadership is female and 50% of our workforce is diverse.

As we look towards 2022, I'd like to provide an update on our long-term strategy and what has evolved since our initial public offering last year.

The Honest brand continues to resonate with a modern consumer as we celebrate our 10-year anniversary, as evidenced by core category growth, increased brand awareness, growth in household penetration, increased market share and new omnichannel distribution.

Our core categories of Diapers and Wipes, and Skin and Personal Care are expected to continue to drive topline growth and grow market share. We play in a large addressable market and are continuing to see clean and natural brands outpace conventional brands across our core categories of Diapers and Wipes, and Skin and Personal Care.

For example, in our Diapers and Wipes category, both clean and natural diapers and wipes grew approximately 7x faster than their conventional counterparts for the 52 weeks ending December 26, 2021. In our Baby Personal Care category, clean and natural brands grew over 10x faster than conventional brands during that same time period.

The Household and Wellness category continues to be challenged and has not met sales expectations. Although only representing 5% of our 2021 total company sales, we have not seen the stickiness in demand from our sanitizing and disinfecting portfolio that we launched in 2020. As a result, we will be deprioritizing these products.

We've shifted investment and innovation resources into the wellness subcategory, and we will be launching new product innovation midyear in our vitamin and supplements platform to reinvigorate growth and leverage our Honest.com subscription and omnichannel distribution partners.

In the digital channel, specifically, we, like many others in the industry, have seen softening traffic, rising consumer acquisition costs and stronger than expected return to in-store shopping.

In response, in 2022, we are increasing our investment in people and technology to improve our consumer online experience and revitalize growth in the digital channel.

Our main areas of focus include further optimizing the shopping experience on Honest.com, improving our mobile experience, streamlining our subscription business and building a personalization and rewards program for our Honest.com consumers.

As a result of the headwinds that we are seeing on household and wellness and digital, along with the sale of our legacy beauty inventory in Q1 2021, we are expecting revenue in the first quarter of 2022 to decline prior to the launch of our new innovation and new strategic retail partnerships that will drive growth in the subsequent three quarters.

As we look at our growth strategies, we continue to see strong progress against our three core drivers of marketing, innovation and distribution.

On the marketing side, we continue to focus on driving brand awareness through our content, community and commerce strategy and expanding our share of wallet with consumers by cross-selling our products across our portfolio.

We have seen strong results in 2021 on expanding awareness and deepening our household penetration, and that continues to remain a focus for the brand in 2022 and beyond. On product innovation, we continue to focus on delivering breakthrough innovation for our consumers across categories.

In 2022, we have exciting new products coming to include a new line of acne-focused skin care products, expansion of our mascara platform, new concealer lineup and a packaging restage on both our Baby Wipes and Personal Care business.

As we look to revitalize household and wellness, we are launching a new wellness supplements platform, focusing on hair, sleep, stress and immunity support. We also have a long-term pipeline of category adjacencies that we plan to methodically enter over the coming years where the Honest brand has a right to play and win.

We are excited to continue to bring newness to our categories in 2022 and drive growth through continued innovation. Finally, we continue to grow our distribution footprint and expect to expand our ACV over time.

In 2022, capitalizing on the strength of our omnichannel strategy, we feel we are well positioned to capture the shift that we are seeing from digital to retail. We are excited to announce key partnerships for each of our categories.

For our Diapers and Wipes, and Skin and Personal Care business, we are launching with walmart.com in the back half of 2022, with an in-store Walmart launch slated for late 2022.

In Skin and Personal Care, building upon the strength of our Beauty Restage, we will be launching a set of skincare products with Ulta in-store to complement our ulta.com business in the back half of 2022. Finally, we have partnered with GNC on our new supplement platform within household and wellness that we are launching in 2022.

In summary, our long-term growth strategy still reflects our belief that Honest growth in our core categories will outpace market growth. Consumer demand for clean and natural products is more relevant today than ever before. Our core categories of Diapers and Wipes, and Skin and Personal Care continue to perform and capture market share.

We recognize that the household subcategory of household and wellness has not met our expectations. As a growth company, we are shifting our focus with new innovation in the wellness subcategory.

As more consumers seek out our brand, we believe we are well positioned as a 10-year-old omnichannel business to deliver growth starting in the second quarter of 2022 and consistent growth in 2023 and beyond. Now I will turn it over to Kelly..

Thank you, Nick, and welcome, everyone. This quarter reflects our ninth consecutive quarter of year-over-year topline growth.

We are pleased with the underlying performance of our core categories this quarter as we faced a challenging macro environment including significant levels of cost inflation, supply chain disruptions and continued decline in our household and wellness category. Starting with our financial results and key drivers.

Fourth quarter revenue totaled $80 million, a 3% increase over Q4 2020. This was 26% growth compared to the fourth quarter of 2019. Our core categories, Diapers and Wipes, and Skin and Personal Care, represented 94% of total revenue and collectively grew 19% in the quarter. Diving into key drivers by product category. Diapers and Wipes grew 16%.

Our diaper business grew 24% behind the continued adoption of our Clean Conscious Diaper innovation launched in Q1 of 2021. Wipes revenue declined largely due to out of stock, driven by supply chain challenges.

Based on retail track consumption data for the fourth quarter, our diaper consumption was up 32% and our wipes consumption was up 34% year-over-year, with both achieving market share expansion.

Skin and Personal Care grew 26%, driven by additional retail distribution, incremental assortment, improved retail unit volume and investment in our Content, Community, Commerce marketing strategy, driving volume growth across both our digital and retail channels.

Based on retail track consumption data for the quarter, our personal care consumption was up 24% year-over-year, driving higher market share penetration during the quarter. Household and Wellness represented 6% of total revenue and declined 68% versus prior year.

Consistent with an industry-wide trend, we've seen consumption and customer demand for these products significantly decline as consumers have become vaccinated and return to pre-COVID routine.

As a result of declining demand, our inventory in sanitizing and disinfecting products was outsized, which resulted in increasing inventory reserves over the course of the year, including a $3.2 million increase in Q4. Now turning to results by channel.

In Q4 of 2020, we saw a surge in retail revenue as a number of retail partners had merchandising programs in sanitizing and disinfecting products. This quarter, we saw a normalization of the split between digital and retail, with retail accounting for 49% of total revenue and digital accounting for 51%.

Digital channel revenue increased 17% to $41.2 million, while retail channel revenue declined 8% to $39.2 million due to the prior year spike reflected in the Household and Wellness product category. Notably, retail grew 16% in our core categories of Diapers and Wipes, and Skin and Personal Care versus Q4 2020.

As we have previously highlighted, we believe our omnichannel model is a true competitive advantage, especially as the industry faces rapid and unprecedented shifts in shopping behavior.

Given our balanced digital and retail business and upcoming distribution expansion, we are better positioned as we strive to be wherever our consumer chooses to shop. Turning now to gross margin. Gross margin was 30% for the quarter, reflecting a 400 basis point negative impact from the sanitizing and disinfecting product inventory reserves.

Excluding this impact, gross margin for the fourth quarter would have been 33.9%, up from 33.6% in prior year. Gross margin headwinds for the fourth quarter of 2021 versus the fourth quarter of 2020 included higher input costs as well as the normalization of trade spend as retailers pulled back on trade promotions during 2020.

We were able to partially offset these costs with our Clean Conscious Diaper and Beauty Restage costovation projects as well as better product mix and operating leverage. Given record levels of cost inflation, we will be focusing on pricing, costovation and productivity as levers to drive long-term margin and profitability expansion.

We talked last quarter about our first round of pricing, which went into effect in January of 2022. Given continued cost headwinds, we have taken a second phase of pricing actions on additional items in our portfolio, focused on select personal care, wipes, beauty and diapers that will go into effect at the end of Q2 2022.

In total, we expect our price increases from the first and second quarters of 2022 to impact approximately two-thirds of our revenue base. Total operating expenses decreased $5.9 million versus Q4 of 2020, primarily driven by IPO-related expenses that occurred in the fourth quarter of 2020.

We invested $12 million in marketing this quarter, which reflected 15% of revenue behind our Content, Community and Commerce strategy to drive higher household penetration. Now turning to the bottom line. Adjusted EBITDA for the fourth quarter of 2021 was a loss of $3.9 million.

This number was heavily impacted by a $3.2 million sanitizing and disinfecting inventory reserve and a $700,000 donation of facemasks to our charitable partner, Baby2Baby, as demand for these products waned towards the end of the year.

We ended the year in a healthy position with $93 million in cash and short-term investments, with no debt on our balance sheet.

We believe we are well positioned to execute against our long-term strategy and continue to retain financial flexibility to invest in incremental marketing, product innovation, and domestic and international expansion over the coming years. Now turning to fiscal 2022.

We believe 2022 will be a year filled with continued progress against our strategic initiatives, offset by significant challenges, including input cost inflation, a continued decline in sanitizing and disinfecting demand, increased marketing costs impacting the traffic to our digital platform and the lapping of a few significant retail programs from 2021.

We are facing significant headwinds in the first quarter, including $5 million of revenue that occurred in Q1 2021 primarily related to the sale of legacy beauty products ahead of the restage. The first quarter also includes a roughly $7 million headwind on the digital business, driven by increased cost of marketing and declining consumer traffic.

As a result, we expect Q1 2022 revenue to decline roughly 15% versus Q1 of 2021. For adjusted EBITDA in Q1 2022, we expect a loss of approximately $10 million.

In total, we expect the subsequent three quarters to drive mid single-digit growth as we introduce new innovation, launch new strategic retail partners and improve the digital experience on Honest.com. As such, we expect total revenue for 2022 to be flat versus 2021.

As it relates to margins, similar to the entire industry, we are seeing continued input cost inflation and in some cases, an acceleration of headwinds in areas such as diaper costs, resins, surfactants, transportation and freight costs.

In total, we expect higher input costs to impact gross margins by around 300 basis points to 400 basis points for fiscal 2022. To help mitigate these headwinds, we expect our pricing to improve margins by about 300 basis points and expect to have improved product mix, operating leverage and conservation projects also positively impact gross margin.

As a result, we expect our annual gross margin for the year to be roughly flat to our gross margin of 34.3% from 2021. Both gross margin and adjusted EBITDA will be negatively impacted in 2022 by the implementation of a new lease accounting standard.

The impact will be a decrease of approximately $3 million to adjusted EBITDA, of which approximately $2 million will negatively impact gross margin versus the previous accounting standard. On operating expenses, we expect marketing for the full-year 2022 to be 15% to 16% of revenue, roughly $12 million to $13 million per quarter.

We expect SG&A for the full-year 2022 to be 25% to 26% of revenue, roughly $20 million to $21 million per quarter. For R&D, we expect the full-year 2022 to be 2% to 3% of revenue.

Finally, we expect full-year adjusted EBITDA to be in the range of negative $5 million to negative $10 million, reflecting a loss of $10 million in Q1 and sequential improvement over the remainder of the year as our strategic initiatives come into place.

As we embark on our next decade, we are pleased with the momentum and core strength of the business in Diapers and Wipes, and Skin and Personal Care, which collectively represents 95% of our 2020 revenue and have grown double digits year-over-year.

We are facing an extremely challenging supply chain and inflationary environment, but remain confident in our ability to expand margins and profitability over time. As we continue to execute our long-term strategy, we have conviction in our long-term growth algorithm. The clean and natural market is outpacing growth versus conventional brands.

As a leader in the natural space, we will benefit from this trend to grow market share in our core categories. Honest is a lifestyle brand with the power to expand our points of distribution, drive our omnichannel strategy and extend into adjacent categories over time.

We expect to see sequential improvement in revenue, gross margin and adjusted EBITDA as our strategic initiatives are executed over the course of 2022 and into fiscal 2023. We are focused on executing our growth plans 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..

one, what I call one-time items from last year; two, slowdown in digital; and three, household and wellness transition. So kind of let me walk you through these three areas.

Number one, this one-time item amount of $5 million is connected to this elevated sales last year due to the Beauty Restage and some of the COVID-related disinfecting and sanitizing products. Two, when you look at digital, it's kind of helpful if we'll take a step back.

Within CPG and within the market, when COVID hit and retail stores shut down, everybody shifted to digital. Now all of a sudden, you see digital softening and more people going into brick and into retail. And although we are blessed to have roughly 50-50 split between digital and retail, our ACV breadth on retail is still growing.

So in the near-term, kind of the shift to retail does impact us, particularly when you look at the fact that we have limited presence in the South, the Southeast as well as the Southwest. So what are we going to do about it? We are sticking with the strategy, we are being strategy-led and we are going to build out our distribution.

Walmart helps us as we've secured a partnership with Walmart, not only in dot-com, but also with physical retail, helps us in the South as well as the Southeast. Our Beauty Restage has been successful. We are expanding our footprint with Ulta. Historically, we've had Ulta.com.

We are now going into broad-based distribution and physical Ulta stores across the U.S. And then GNC, which gives us additional credibility around supplements across the U.S., we are going to significantly increase our ACV in the back half of 2022.

With more to come as we look at the rest of the year, and it really positions us well, as we always talk about, not just the short-term, but the long-term, not only for the back half of 2022, but also in 2023 and beyond. Number three, let me kind of turn to household and wellness.

And we all know when COVID hit, being agile, being nimble as an organization, we took advantage of that opportunity and capitalized really on this consumer need around disinfecting and sanitization when that industry struggled to meet consumer demand. But what we see now is consumer needs have changed.

This household part of the business is not as sticky. Consumers are starting to move away from sanitizing everything in their home to really taking care of their bodies more and being more and more focused on self-care as well as wellness. So for us at Honest, we are going to be agile and we are going to pivot.

But at the same time, we are going to stay on strategy by leveraging the Honest lifestyle brand for an opportunity that's been part of our innovation plan. And we are introducing a lineup of supplements that are going to be focused on where the consumer is today and where the needs are around sleep, immunity, stress.

And that starts with this partnership with GNC starting in mid-2022. So yes, we had some revenue challenges in Q1 with a meaningful portion being due to year-ago activity that only affects Q1. And on digital and household and wellness, we are taking steps that are going to yield better results this fiscal year.

Thus, we are expecting mid single-digit growth beginning in Q2 and the rest of the year. So in the end, we really believe it's helpful to keep in mind that Honest is still unique in three ways. One, this whole focus around wellness. We call it living consciously. We've been doing it now for 10 years, and we have a right to win in wellness.

Number two, when you look at omnichannel, the 50-50 split around digital and retail is the most balanced in the marketplace. So as consumers gravitate right now, they are interested more and more in retail. Tomorrow in the future, if gas prices continue to escalate, they might be more interested in less trips and more focused on digital.

We are well positioned to capture that consumer. And then three, we are agile. It allows us to take advantage of opportunities. Last year, there was this big move to more digitization, more people shopping via digital, and sanitization was a need due to COVID. We capitalized on that.

This year, we are going to pivot to self-care and wellness, in the supplement space that continues to evolve, and we've got the right to win based on our innovation and our capabilities. And lastly, we have a strong balance sheet. We have cash, we have no debt.

We are going to continue to invest in growing our business in the right way as we embark on this next decade. So hopefully, I hope that gives you guys more context and more visibility. That's very important. And with that, let's open it up to additional questions..

[Operator Instructions] Our first question comes from the line of Laurent Grandet of Guggenheim. Your line is open..

Okay. Thank you very much. I appreciate that. So wow, I don't know where to start, but maybe let's focus on the topline for 2022 and separating the first quarter from the rest. So if I understood well, I mean the second, third and fourth quarter will be about mid-single digits.

So even assuming your household and wellness cannot go to almost $2 million a quarter, so that would be minus 30. It means that diapers is – assuming diapers is growing half of what it was growing in 2021, which is kind of a challenge.

It will mean – and that's my question, that Skin and Personal Care, despite the Beauty Restage, it's just growing 10%, yes? So my question is really, I mean, how do you think the Beauty Restage is working? And why, if it's working, do you not plan to get better growth in 2022?.

Now, I'll start first with your first part of the question, which is around beauty. Generally, beauty, it was pretty well received. I think the real impact of the beauty restage still kind of in its early stages is really around these distribution wins.

So as we rollout – afforded us the opportunity to get into ulta.com and that's rolling out kind of over the course of 2022, in mid-2022. So we won't get a full-year impact to that. As we think about kind of beauty and the innovation that we've put in, we actually think it's been quite successful.

When we think about your question around 2022 revenue, the topline, what are the puts and takes as you think about kind of what's going against us and what's going kind of inner benefit, we'll break down kind of the growth that we're seeing with the number one driver being around velocity.

As we've seen in the track data, really a lot of strength in the retail and particularly in the track data. So we expect that for 2022 to be kind of the largest single driver of growth. We also will have a benefit of both new distribution as well as the innovation that we've talked about being smaller players.

And I think the thing that's critical there, Laurent, is that they're rolling out kind of in the back half so they're not early in 2022. So they're more of a benefit as we think about 2023 than in 2022. The next thing, as we think about pricing, Honest is a brand has never taken pricing on its diapers before.

While we're taking pricing on two-thirds of the portfolio, we're taking a pretty conservative approach on it, thinking that we will be hit with velocity when these roll out and go on shelf.

You'll see, when we talked about the 300 basis points in improvement on pricing, we're expecting two-thirds of that to hit us – to come back and hit us on lower velocity. We hope to do better than that. We tend – what we've seen in the marketplace is a short-term hit that over time, it gets back to regular velocity.

But we are not planning – and the guidance that we're providing today is not expecting any significant benefit out of pricing on the revenue line, although it certainly is driving benefit on the gross margin line. As we think about kind of the year-over-year headwinds that we're seeing in 2022 that are reflected in the guidance.

First is household, and we expect it to go down versus 2021 by about a third. So household is going to continue to be a pretty big headwind for us in 2022. A couple of other items that we just want to mention is we mentioned some of these onetime programs.

Again, we're going into the year kind of with an approach that if we haven't landed a program, it's not going into our numbers. So as we think about programs, we've had a lot of success with programs such as to Costco in 2020 – the past few years. We haven't kind of hit and landed a rotational program for 2022.

So that's not in the numbers at this point. And that is certainly a year-over-year headwind, along with the Beauty Restage and household as well. So that's kind of the buildup on the positive the negative.

We are expecting mid-single-digit growth in Q2 forward, but a big drag based on kind of the visibility in what we're seeing in Q1 on the full-year top line..

The only other I would add on is the fact that with – we're very pleased with how the Beauty Restage is performing. That's why customers like Ulta are going to be bringing in a subset of our items into their stores.

But importantly, when you look at the Beauty Restage, we also have types that flows in Q4 in places like Target, where we expanded the distribution of the Q1 and into our [indiscernible] stores and take us to roughly 1,600 stores as well as there was pipe with Walgreens that came in Q4.

So as you look at that 26% growth number for the quarter, there is a component of a lag as you go into Q1 as those sets start to get established..

One last thing I was going to mention as it relates to 2022, you heard us talk about this a little bit as it relates to Q4 is that we're not immune to some of the supply chain challenges. And one of the things that we saw kind of incrementally as we went through Q4 was the impact of supply chain.

A couple of areas that it hit us with the largest being in the baby wipes. You heard us mention that Q4 was actually a decline, although our consumption data was extremely strong, you’re chasing that demand [indiscernible] we also are seeing some out – some of our baby products in a [indiscernible].

We've had great success with beauty and so we are certainly chasing the strong demand that we're seeing in the beauty restage, but we are also being hit with some supply chain challenges..

Thank you. I will pass it along. There is plenty of other questions coming. Thank you. Bye-bye..

Thank you, Laurent..

Thank you. Our next question comes from Jonathan Keypour of Bank of America. Your line is open..

Hi guys. Thank you for taking the questions. So it seems like out of the 400 basis points of gross margin impact in 4Q, 390 bps was from the inventory reserves, is that correct? Which implies it only 10 basis – okay.

So then 10 basis points was from inflation in 4Q?.

Yes. So when you think about breaking down the gross margin, if you take the 30% and exclude the $3.2 million increase in our inventory reserve, the gross margin would have been 33.9%. So kind of the puts and takes where we basically offweighted our input cost inflation with costovation, better product mix and operating leverage.

So the inflation that we're seeing is accelerated in 2022 versus 2021, but we – the input cost inflation that we saw in Q4 was predominantly around transportation and in some kind of component costs, areas in personal care and beauty kind of higher cost levels from suppliers..

Okay.

And so will there be any continuation of the inventory impact into 1Q? Or is all of the margin compression in 1Q, basically the full brunt of the inflation we're seeing?.

Yes. So we were actually taking kind of increases in inventory reserves throughout the year as we saw demand. But basically, that large Q4 was kind of a cleanup of our outstanding inventory to completely align with the current demand that we're seeing in sanitizing and disinfecting with our inventory position. So….

Okay. And then if I can have a follow-up.

The $5 million of the Beauty Restage impact, that was predominantly in retail, correct? Is that right?.

Yes. That was completely in retail..

And so we should think about that as being – I mean that's going to be the driver of the weakness in 1Q – but that's only about 6%, right..

Yes. About $5 million is kind of a onetime impact in terms of the bump that we got the year before in the Beauty Restage as well as some sanitization and disinfecting demand..

Right.

And so that was in 4Q or are we going to see the $5 million in 1Q?.

That's 1Q..

Okay. So first of all, that's about 6% of sales as part of the – like the $5 million is only 6% of sales, and we're looking at down 15%. And then I'm just curious about what drove the softness in retail in 4Q and why we should be – because you've added 10,000 stores around about in 2021. The distribution has moved up pretty significantly.

I'm just wondering how we should think about the strength of retail going forward, especially, it's just – it's hard to square as consumers move back into retail, you guys add distribution, but the number is down 8% year-over-year.

I'm just wondering how to balance that out?.

Yes. I think that there is – in Q4, we had really large sanitization and disinfecting products. If you kind of take that out of the equation, retail actually grew 16% in Q4, if you take out household and wellness kind of the COVID-driven demand.

So I think what's unusual there was really what we were seeing in sanitization and disinfecting sales that were in the fourth quarter of the prior year. So again, what we're saying is it was kind of an unusual in the prior year and back to normalization back to kind of our half and half between retail and digital in the fourth quarter..

The other thing that I would just add is when you look at retail for 2021, in totality, it was up 20%. So as you think of – and that's coming off about 25% growth in 2020. So the last two years has been 25%, 20%.

As you look at the distribution and you look at what we're adding to the mix, what you're seeing is consumers are gravitating more towards retail right now. But they're gravitating more towards big-box retail and specialty retail. So what's important for us is being in the right retail.

So as you look at the back half of this fiscal year, that's the importance of the role Walmart is going to play from a big-box perspective as we see consumers start to gravitate in that space. And we're filling out an area of the country where we've had a significant void in the Southeast as well as the South.

And then second, specialty retail is excelling and Ulta is a key player. That's an important piece for us around the Beauty, Personal Care business. So between diapers, wipes, skin and personal care, beauty, we now have the right partners to be able to continue to grow and accelerate our business as we go into the back half of 2022..

And to give you some color on expectations for 2022 as it relates to channel split, you'll expect more strength in retail versus digital. We expect digital to be down mid-single digits for the year and retail to be up mid-single digits for 2022 in total..

Okay, great. Thank you guys..

Thank you, Jon..

Thanks..

Thank you. Our next question comes from Andrea Teixeira of JPMorgan. Your line is open..

Thank you. I have two questions for Nick and then a clarification for Kelly.

First, to Nick, what gives you confidence that the Beauty Restage will have better results than the products that were just made obsolete? What went wrong or any learnings from prior Qs? And more broader question is you have created an overhead right result was dimensionalized for to be a company that would grow at a much faster pace.

And what makes you believe that the new VMS adjacency will help the company make money on an EBITDA level for the first six months as it's embedded in your guide since it's relatively new to you? If you can give us some of the economics or some level of comfort. And the question for Kelly is bridging the negative EBITDA in Q1.

I think Jonathan had tried to bridge that. I understood that you – beside the $5 million for the Beauty Restage of the remaining inventory, you also have a $7 million impact from digital.

Is that it was ready just alluded to now that you have some negative impact already in the first quarter as you're comping very tough comps on e-commerce? Thank you so much..

Yes. Thank you. If you don't mind, I'll answer first the last question because it is exactly the $7 million is around this consumer shifting from digital into retail. What we're seeing is kind of two impacts.

We're seeing really across the board throughout digital, not just on honest.com, but as well as Amazon, we're seeing declining traffic as consumers go back to store.

We're also seeing considerable increase in just the cost of digital marketing that are making it more and more expensive to drive traffic to the site and are making it kind of unprofitable, not a great return for us.

So we're planning to kind of shift our overall – the way that we invest in marketing to support what's working right now which is a shift from digital into retail marketing..

I guess the question, a little hard to hear, but I believe, Andrea, we're talking about confidence around the beauty side of the business. And there's a couple of things that give us confidence.

One is the fact that we continue to increase our household penetration within the marketplace, which for the overall Honest brand, we've picked up roughly 2.7 million new households. So we feel good about the fact that our penetration is now up to 4.9%. So we continue to make progress there.

Number two, when you look at the restage and the expansion and the partners that we've added to the mix, our consumption data that we see is running in the double-digit levels from a consumption standpoint. The key now is we're also adding the Ulta piece to the business, which is scheduled to come in the second half of 2022.

So there's a little bit of a transition around pipe and kind of where that timing is going to land. But the overall health of the business for us, we're very pleased when we look at the ratings and reviews of the Beauty Restate. We're averaging around – they were between 4.5 to 4.8 million.

And then we're also adding new innovation to the mix, as we referenced a little bit earlier on the prepared remarks. So we do have really the three areas covered that we like to talk about around. One, kind of the marketing support behind this business to really drive marketing innovation over the next year.

Two, we have new news around product innovation. We have a full concealer lineup that we're going to be introducing that also offers hydration, kind of a dual benefit from a consumer perspective. And then three, we're driving the incremental distribution and the productivity.

So those are the areas that give us confidence as it pertains to beauty business..

Yes. I think when you talk about lessons from household, I think this is – it's right up the alley of what we – our new playbook for beauty in that we were very resourceful. We were able to act quickly to launch in the household space, but we haven't lined up kind of the right distribution partners.

So as we think about the right way to methodically launch innovation going forward, we're going to ensure that we have lined up distribution so that kind of we can be successful. And one of the other early indicators that we've seen, we had several weeks in the first quarter that were our best weeks ever as it relates to our color.

Again, we're seeing really great signs. And we are chasing some SKUs, as Nick mentioned, we have really exciting innovation lined up, including an expansion to our best-selling mascara, the concealer he mentioned as well as some other kind of skin care products that we'll be launching over the course of 2022..

That's helpful. I mean the one piece, and I apologize, I hope you can hear me better now is the fact that the VMS, what makes you think – I understand that, of course, the Honest ethos and the right to win in this category.

But with the learnings that you've had in making this business profitable because you're starting the year with a minus 10, right? And then you're guiding on an EBITDA level, you're guiding for minus 5 to minus 10. So you have to at least break even to reach the bottom of your guide in the remaining of the year.

And you're up against much more – I mean, obviously a headwind. So what makes you believe that as you pivot out of some of these SKUs, you're going to make money already in the first six months of VMS launches? So I get that you get the GNC and the lineup. But even in the wipes, in the disinfecting, you got Costco at the time.

So what makes you believe that now you're going to be able to do a complete new category and you're still going to be able to make money on an EBITDA basis given those headwinds?.

Yes. I guess there is two things that I would look at. Number one, I think it's – from a category perspective, it's really the margin structure of the category is really important compared to kind of the disinfecting and the cleaning. So we like kind of where the margin structure sits. We're not novices.

We have a small business in prenatal vitamins and postnatal that we've been involved with for quite some time, so we're familiar with the category. Three, when we look at kind of our offering and how we're approaching it, it's not a traditional play of just, here's a vitamin. We're really looking at spaces that are unique.

So take an example, the sleep product that we're going to be offering. Most companies have melatonin from a base perspective on something like that. This does not have melatonin. We'll have a proprietary magnesium-based kind of formula as well as natural herbs that we're going to be able to deliver against the consumer delight.

So my point here is, hey, we've got, one, the margin structure that's attractive. Two, we have some experience from an innovation perspective and a strategic product plan from an adjacency perspective that we've been evaluating.

And then number three, when you look at, yes, there's headwinds in Q1, as we highlighted around the $10 million, but then from an adjusted EBITDA perspective, as we look at the netting of the sequential Q2, Q3 and Q4 – we've got the right mix as it pertains to skin, personal care, diapers, wipes as well as the vitamins and supplements to be able to deliver against our expectations..

Okay. Thank you. I'll pass it on..

Thank you..

Thank you..

Thank you. Our next question comes from Jon Andersen of William Blair. Please go ahead..

Good afternoon. Thanks for the question. I wanted to start just by asking looking past the first quarter into the balance of 2022, you're kind of calling for mid-single-digit growth. And there are a lot of puts and takes, which we – you've talked about. But it does seem to me that you do have strong consumption trends in the core part of the business.

At present, there is innovation, to your point, Nick, cuing. And these new distribution partnerships with some key retailers are encouraging. But you're kind of calling for mid-single-digit growth on kind of a run rate basis, Q2 to Q4.

Is there a certain measure of kind of conservatism in your forecast at this point in light of what's happened subsequent to the IPO or – and/or is mid-single-digit growth kind of the right way to think about – the new way to think about kind of the topline growth algorithm on a longer-term basis? Thanks..

Yes. I'll take the start, Jon. It's a great question. I'll let Kelly also be back on it.

I think first and foremost, as you look at the world and where it sits today versus from when we did the IPO, not only the geopolitical challenges, the supply chains, the input costs headwinds as well as how consumer behavior continues to shift, we think it's super important that from a visibility perspective that each of you, our investors, have clarity around our plans, and we are going to err on the side of being more conservative.

I think it's prudent. I think it's important.

And based on what we can control, and we've got a great team here focused on what we can control, the cost side of the business that we're obviously addressing with around two-thirds of the portfolio where we're taking pricing; we can control our marketing investment around focusing on good growth within the categories of diapers, wipes and skin care and supplements; and then making sure that we can drive our thesis around accessibility and distribution from an omnichannel perspective, and that's where we have the new partnerships with the Ultas and the Walmarts that we've announced.

But going to err on the side of being cautious because the world keeps evolving, and we want to make sure that we're giving you the right visibility based on what we can see. But at the end of the day, we still have conviction in our long-term thesis from an Honest perspective. We have a 10-year history.

We just celebrated our 10-year anniversary of you know, we've seen trials and tribulations along the way.

But guess what, we've got another 10 years ahead of us with a strong balance sheet and great partnerships and programs from an innovation perspective as well as from an accessibility omnichannel perspective to drive this business not just in one fiscal year, but 2022 and beyond as we look at 2023, et cetera.

So I don't know, Kelly, would you?.

Yes, I would just add that, Jon, I would say we don't think that there's been a change to our long-term growth thesis, between marketing innovation as well as our distribution. We need to get past the headwinds that are hitting us not just in Q1, but in 2022.

And if you think about the distribution win and even the innovation, they're back half-focused. So we're not getting a significant impact of those in 2022. What they're doing is setting us up for a really strong foundation for 2023 and beyond. So I think that is a way to think about 2022 is that we believe that the category growth is still there.

We're seeing high single-digit category growth. We're outpacing the category growth. And we do think kind of getting past these headwinds and onetime impacts will return to some growth acceleration. Again, I think that we're kind of recommitting to double-digit long-term growth once we get beyond kind of the near-term years..

Okay. I have one more, but it's kind of a multi-parter on the digital part of your business. So you're calling digital kind of down mid-single digits in 2022.

I guess, would you say that's kind of the category level performance? Or are you losing share online? And is that related to – or maybe you can talk a little bit about some of the investments that you feel you need to make in the digital side to, I think, you put it, improve awareness building and traffic driving to the sites? And then cost of digital marketing, is that going up? Is that an industry-wide issue? Is it something related to just tapping into that next customer is getting harder and harder or costing more for the Honest brand? I know there's a lot there, but anything you can do to help us understand that would be great? Thanks..

Yes. Thanks, Jon. Good question. Let me start. Number one, when it comes to digital and kind of where is the consumer? We follow the consumer, where is that consumer today.

What we're seeing with some of the pure play digital players that we have partnerships with, they're being impacted in these core categories that we're in because they're seeing a shift into kind of the big box format from a retail perspective.

And remember, for us in retail, we also captured the retailer.com in the retail part of the business, not in the pure-play digital side.

So there is a component around our partners who are on the digital side that are facing some headwinds as it pertains to these categories as we see the consumer shift more and more into big box retail as well as into retailer dot-com with the Click and Collect that you start to see. So that's kind of the first piece that we're seeing.

And the good news there is we're well positioned with those retail partners to be able to drive not only the brick component, but also their retail kind of dot.com component.

For us, from an Honest perspective, what we're seeing and what we're anticipating is the fact that the consumer is going to continue to look for better experiences and even more value when it comes to honest.com. So there's really kind of four key areas that we're focused on, which is, one, we're optimizing our honest.com experience.

So things like our site speed, one-click checkout, that's going to be a key area that we're going to be investing in. Two, an enhanced mobile experience to continue to improve shopability and the experience around kind of the mobile web view and improving in that space.

Three is really our subscription and how we expand kind of the subscription benefit program.

Because what we're seeing values becoming a bigger deal in the market today as you look at kind of these macroeconomic issues, inflation, so how do we put benefit type programs with additional value within our subscription expansion? And then lastly, loyalty and rewards, again, there's a value connotation there.

But how do we continue to reduce churn, kind of improve the overall experience around omnichannel, retail as well as in-store and dot.com and that's an area that we're investing in from a technology perspective to continue to stay a bit ahead of the curve as that consumer gravitates within the marketplace..

Yes. Just to tag on to that, Jon, as we see the traffic declines – and this is something that we're industry-wide. The cost of digital marketing increases 20% to 30%. Those are industry-wide. That's not just to us.

We're really thinking of the investment in digital that we have to make kind of the honest.com experience completely seamless so that for the traffic that's coming, we can impact our conversion and we can really connect and stay relevant to that consumer. So that's kind of the investment that we'll be making over the course of 2022..

And I think one advantage we have at Honest is the fact that even as we see cost per click going up in Google, almost 40%, we're seeing the whole marketing piece continue to accelerate. We've really built out capability around social to be able to leverage social marketing.

Obviously, with Jessica Alba, the forefront is not only as our Chief Creative but also a mega influencer being able to really drive organic as we look at our programming in the back half of the year.

So those are areas that we're going to continue to invest in, coupled with the technology investment around digital to position us not just as we go into kind of 2022, the back half but also as we go into 2023 and beyond..

Thank you very much..

Thank you, Jon..

Thank you. Our next question comes from Steph Wissink of Jefferies. Your line is open..

Good afternoon, everyone. Two questions as well. One, Nick, for you and one for Kelly. I want to go back to Jon's question on CAC and just understand a bit more about the order of magnitude that you're seeing in terms of your acquisition costs.

Give us a sense of how sustained that is? And just a point of clarification, are you saying it's mainly ad rate driven? Or is it something about the competitive nature of the category that you're seeing cost to acquire is going up?.

And the answer to that is actually both. We're seeing the impact predominantly kind of in the digital paid search space. To the level of competition, we are seeing more and more people chasing the same consumer because the number of consumers coming online is down.

And so that’s impacting both media costs going up and then as well as more and more competition and bidding higher the cost up, whether it be in our category, but we're understanding it's not specific to our category..

Okay.

So translating that, your implied marketing expense step-up, you're still anticipating to acquire net new customers but it wouldn't be at the level you've experienced in the past?.

Not in digital. We're actually shifting our marketing spend into areas that support, for example, the new distribution, more retail marketing. Really investing behind where the consumer is going and where we know that we're winning right now, which is kind of in the retail channel..

Okay. That's helpful. And then, Nick, a question for you.

And this is just more, I think, philosophical, but how has your ability to forecast the business changed or improved? If you could just walk us through a little bit of how you've sharpened your forecasting process to give us some degree of conviction that this guidance is what you expect to achieve? I think we're just all maybe having a little bit of a confidence drag here today, understanding the ability to forecast?.

Yes. I think it's a very fair question. I think what's really important and what we've learned kind of this past year, we had one quarter that impacted us coming out of the gate, which was Q2 and what we're doing right now is making sure that each of you have visibility as it pertains to Q1.

And I think what's important for us and the investments we've made here is really refining, for example, our S&OP process from a team perspective to ensure that not only do we have visibility, but then also working with our strategic customers closer to be able to create, from a joint business planning process, visibility around inventory as well as supply.

So between S&OP as well as core partnerships, not just the senior level but really grass roots, when it comes to being connected with the customer. Those are improvements that we've made to be able to make sure that we've got the right demand signals.

And then obviously, as it pertains to procurement and how we're kind of developing kind of our mix is there is an environmental component to this or excuse me, macroeconomic component to it that we're dealing with a lot of the headwinds the industry is dealing with.

But I think we're doing a pretty good job in being able to mitigate a lot of the supply side risks in the marketplace based on the work that we've done this past year and leading into this year with even refinement around S&OP. So I hope that gives you context..

One thing I'll add to that, Steph, is I think one thing you'll see, I have learned about our business is there's a lot of volatility from quarter-to-quarter. So a couple of things. I think we have to take that into consideration in our guidance to ensure that we have kind of a baseline level and that we can provide as much kind of insight and color.

Like we're not giving quarter guidance, but we feel it's appropriate to make sure that everyone understands what we're seeing within our individual quarters that we give a lot of qualitative as well as some quantitative expectations and insights into specific onetime unknown trends in the quarter, especially coming off of COVID there's a lot of things packed into each individual quarter.

So I think our philosophy that has changed is really about how do we really give a lot of color and provide more insight as it relates to kind of the quarterly flow that we will expect to see in our business..

Okay. Just a clarification, Kelly. Are you guiding the Q2 to Q4 combined up mid-single digits? Or would you like us to model in that mid-single-digit range? And then just translation, when you say mid-single digits, could you give us magnitude? Every company uses that phrase slightly differently, so helpful to have a clarification..

Yes. We are calling mid-single digits kind of across Q2 through Q4. And so we're not getting into kind of [indiscernible] deeper. But when you model Q1 is negative 15%, you'll be able to back into a flat year.

And so hopefully, giving you that much specifics will allow you to kind of – but we mentioned that progressively, each quarter on a revenue basis, a margin basis and an EBITDA basis will get sequentially better on a percentage year-over-year growth, again, roughly 4% to 6%..

Thank you very much..

Thank you. Our next question comes from Laura Champine of Loop Capital. Your line is open..

Thanks for taking my question. I understand the issues impacting the household business and the personal care business. But in Q1, do you also expect diapers and wipes to decline? And it seems as if you're not going to keep share in Q1.

Are you losing share to mass brands, just given the inflation that consumers are facing on necessities across the board?.

Well, based on a 15% decline, we are expecting kind of across the board decline across all of our categories.

I think the way to think about the decline in digital specifically is as consumers have gone from kind of online where we have very strong penetration in market share and as consumers have gone back into stores, having less than 50% ACV, our consumers are not finding us on the shelf when they go in store, especially within NAS.

And so that's going to be a drag. As we start getting distribution, roll out Walmart later in the year, we think we can make a really great dent. And that's more of a short-term impact than a long-term impact. But absolutely, from consumers, as we've declined and seen traffic down, we have lost some share in the digital channel.

We've gained it in the retail channel. We're not losing share in the retail channel. We are just not in enough places to be able to make up and one-for-one between digital and retail..

Yes. What we've seen is, over the last couple of quarters, too, to give confidence, our diapers, wipes business in Q3 grew 16%. Q4 it grew 16% also. And then on top of that, we had growth on our diapers of 24% in this last quarter.

So there is a timing component and a fluctuation based on where the consumer is gravitating, but that's why, as Kelly highlighted, we're well positioned.

Because folks are seeing the strength of this diaper as well as our overall wipes business and are interested in the product, in the proposition, and that's why as we expand with Walmart in the back half of 2022, we're going to be able to now accelerate kind of the distribution and the footprint to drive that accessibility based on where the consumer is shopping..

Got it. And then lastly, I think you mentioned specifically that Costco was not in your numbers because you don't have a program for this year.

Does that, for some reason, disproportionately impact Q1? And any more color you can give us around that situation would be helpful?.

Yes, we have a base program in our shampoo and body wash with Costco, and that's continuing in 2022. We've had the past two years, in addition to that base business, we had a rotational business. This past year, in 2021, we had a bubble bath program in the back half, which was predominantly impacted Q3 and Q4.

And that is a program that we're actively talking and trying to sell in. And rotational programs come and go, but that was a very successful, a pretty large program for us. Given that headwinds, given the innovation that we have and the distribution that we'll be rolling out in the back half, that's not as impactful.

But certainly, I think the way to think about Q1 is the disinfecting in sanitization programs as being a onetime pretty big headwind that were – that was the tail end in Q1 of 2021 was kind of the tail end of those kind of rotational programs.

We still have some disinfecting and sanitizing programs both with Costco and other retailers that were onetime in nature..

Okay. Thank you..

Thank you. At this time, I'd like to turn the call back over to Nick Vlahos for closing remarks.

Sir?.

Very good. I appreciate everybody making the time to spend your afternoon and evening with us. I think the key takeaway for us is we have conviction in our business. You look at the skin personal care business and diapers and wipes, it's actually delivering against our expectations that we set out early on.

So we like the fact that we're driving double-digit growth in that space. We're growing market share. We're increasing our household penetration. And then we have good news on the horizon around our expansion from an omnichannel standpoint with distribution with partnerships with Ulta as well as Walmart and GNC.

And I just want to say that we appreciate everyone spending the time with us, on behalf of the team, I want to thank you, and we look forward to sharing our progress with you in our next quarterly earnings call. Thank you..

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