Welcome to IPO This Week; in this episode we are featuring Jessica Alba’s The Honest
Company, which is all set for its IPO…today I want to go over some of the details of the
company and the actual IPO as well as to look at the pros and cons of investing in The Honest
Company stock and I’ll also let you know my personal thoughts on if investing in the
company makes sense to me. But first, big shout out to the Healthy, Wealthy, and Wise
community for checking back in. And if you’re new here, my name is Kevin. And as you’re
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to see these videos as soon as they come out. Alright on to The Honest Company IPO; let’s
hit the background first. So this company was started by actress Jessica Alba, who many
of you know from some of her movies, particularly the Fantastic Four. Personally, I started
watching her way back on her TV show “Dark Angel”…which I thought was an awesome
show, and even though it didn’t last that long, I thought she was fantastic in it. Now,
I have to say this, I know there’s a segment of you out there that would rather me keep
this picture of Jessica up throughout the video than looking at me, and I get it. But
until she puts me in one her projects, well I’m gonna keep the camera on me in mine.
Now if she were to reach out and promote this video, I’d do a director’s cut and have
her picture up throughout. But anyways, back to the genesis of the company…so apparently
as a kid, she dealt with a lot of health issues growing up, particularly with asthma and allergies.
Well, obviously she went on to get healthy to be able to get into acting. But, when she
had her first baby…a lot of those past experiences came back when her baby experienced an allergic
reaction from the laundry detergent she had used. Now as a mother wanting the best for
her child, this lead her on a crusade to find better products, trying DIY solutions, and
then even to eventually lobbying to Congress. However as she stated in her letter to potential
investors, she felt that the status quo in shopping for these products was so difficult,
because some products were too expensive and others hard to find or even non-existent.
So this lead her to the decision to want to develop a brand that made it easy to know
that all of that brand’s products were safe for its customers and the planet by developing
clean, sustainable, and effective products that could be accessible to all people. And
thus, the birth of The Honest Company which officially launched in 2012. And now 9 years
later, Jessica Alba and management look to the take the company public.
So now let’s talk about today, basically what products they have and how they’re
doing. So The Honest Company claims to have 3 major three categories of products: Diapers
and Wipes, Skin and Personal Care, and Household and Wellness. As far as the breakdown of revenue,
Diapers and Wipes bring in over half of it, in fact 63% of total 2020 revenue. And then
next is the Skin and Personal Care category at 26% with the remaining 11% of revenue coming
from Household and Wellness. Now as far as what the total revenue is, for
2020 it came in at just over $300 million, up almost 28% from 2019 when it came in at
about $235 million. As far as the 3 categories we’ve mentioned, the biggest year over year
revenue growth actually came from the smallest category, Household and Wellness, which was
up 116% from 2019 levels. And then the Diapers and Wipes category grew at 16% while Skin
and Personal Care grew at a 35% clip year over year.
Now when it comes to future growth, the company believes that the “clean and natural”
segments of the Diapers and Wipes, Skin and Personal Care and Household and Wellness markets
are growing pretty significantly, as a result of what they see as the increasing shift in
consumer demand for “better-for-you” products. In 2019, The Honest Company estimated that
the clean and natural U.S. Diapers and Wipes market was $1 billion dollars and is growing
at a 16% compound annual growth rate through 2025, Skin and Personal Care was a 12 billion
dollar market growing at a 10% compound annual growth rate also through 2025 and then Household
and Wellness market came in at $4 billion in retail sales, growing at 4%. The company
believes that their market share is less than 5% for each market, thereby giving them an
opportunity for further growth. Now if you’re like me, you’re thinking
about these markets and wondering what their margins are and how tight they could be. Well
according to their filing, their gross margin increased to just a sliver under 36% in 2020,
which sounds like a pretty good number to me for the markets they’re competing in.
So as far as getting their products out there, well it’s the 21st century so they use both
a digital and retail approach where 55% of their revenue comes from digital channels
such as direct to consumer from their website, as well as Amazon, and then the other 45%
of their revenue comes from the retail side, such as through their partnerships with companies
such as Target and Costco; and in fact, the company says that their products are in over
32,000 stores throughout the US, Canada, and Europe. And then according to their prospectus,
the company looks to target expansion into the Asian markets as part of its growth strategy.
As far as profitability, well it’s not profitable and hasn’t been since inception. In 2020,
the company generated a net loss of $14.5 million, however that was significantly down
from just over $31 million in 2019. Now with IPOs, we know a lot of them come out while
they’re still not profitable, so you have to get a sense if they have the combination
of the approach and products to get there. So let’s see what we got.
Well a big thing The Honest Company has going for it is they have a story behind their marketing.
So they talk about being clean and sustainable, and to back that up, they entered into an
agreement to participate in a program to offset the greenhouse gas emissions resulting from
their Honest.com shipments through the end of 2022 by way of carbon offset projects.
As to that initiative, they report that their domestic Honest.com shipments were carbon
neutral from May 2020 to October 2020 as a result of this program and, again, they expect
this to continue through the end of 2022. And then with so much focus on diversity,
people of color represent nearly half of their workforce and women represented 68% of their
total workforce and 53% of their leadership. Not a surprise from their founder being a
woman of color herself. And of course another important part of their
brand is in products that are natural and promote wellness. There has been so much growth
in these markets in all kinds of areas, whether in the products they sell to something like
organic food in general. And then you have the increasing public awareness of what people
put into or onto their bodies and in areas that many people feel passionate about, whether
its climate change or just wanting corporations to share the values they have, these are all
things The Honest Company has going for it. Now unfortunately, they also have some really
tough realities to deal with. One is that the markets they compete in are not only competitive,
but crowded with some bigger, more deep-pocketed companies. Some of these names include Proctor
& Gamble with their Pampers brand, Johnson & Johnson, L’Oréal, Este Lauder, and they
even list Clorox as a competitor. How many of these have you heard of? Iconic names,
right. And even a name I wasn’t as familiar with was just as big of a competitor, and
that’s the Kimberly-Clark Corporation, who just so happens to make a product named Huggies.
And that’s a name I do know. And I know they’re big, too.
For me, the issue is what happens as these companies continue to move more and more into
The Honest Company’s bread and butter. Sort of like, 10 years ago, outside of a farmers
market, if you wanted organic food, you pretty much had to go to Whole Foods because they
owned that market. And because they owned the market, they could price their items in
a way that provided some good margins—they weren’t called Whole Paycheck for no reason.
But over time, the big names in grocery, like Walmart and Krogers, obviously saw this and
started selling their own organics. And then of course everyone else did, too. And that
lead to organic food prices dropping across the board, which was great for consumers,
but maybe not so much for Whole Foods. Competition definitely put a dent in their pricing and
obviously this was a factor in getting acquired by Amazon a couple of years ago. Now on the
flip side, first mover status and a growing demand by consumers for organic and non-GMO
food lead to a bigger market for sure, but it’s still hard to argue that the competition
didn’t force some operational changes by Whole Foods.
Now obviously premium-priced products can survive against lower cost competitors. There’s
no bigger example than Apple. People still buy their iPhones and iPads, even though there
are Android options that might be a third of the price. Now part of that consumer demand
is due to the quality of the product, and Apple has built that into their brand. But
even against some competitors that have hardware that outpower an iPhone, people still stick
with Apple for their next phone. And part of that is because they are all in on the
brand. Apple has done a lot right, the latest being their push for user privacy, and have
developed a rabid, if not cult-like following. Which brings me back to The Honest Company.
Could they be the Apple, or even the Whole Foods of their target markets? The premium
products that people are willing to buy just to stick with a brand. Maybe, but I don’t
know that the Honest Company has built enough of a lead by having a big enough customer
base. And then another thing: whereas people can show their perceived status by holding
an iPhone, does holding wipes made by The Honest Company hold the same cache? Particularly
as the bigger competitors come up with similarly effective products that can also undercut
their pricing. I don’t know. And while The Honest Company has done a great job in identifying
and exploiting niche markets, do you feel that they’ve shown enough of an ability
to out-innovate the bigger competitors as they come in with their much more abundant
resources? Do you feel they have that competitive moat they we talk about all the time on the
channel? Do we think they have the brand name to insulate them from the Proctor & Gambles
of the world. For me, I just can’t say yes to any of these questions. So while I like
everything they do, and they stand for….and as I said, I’m a fan of Jessica Alba, I’m
sitting on the sidelines with my money while rooting them on at this point. Now I’m willing
to watch them and see if they can out-execute the big names and keep growing their brand.
Afterall, I’m always a fan of the Davids when they’re fighting the Goliath’s and
I would love to see it happen. I’m just not sold on this being a company to own at
this point, just a little too risky for me as an investment.
But that’s me! And remember, that’s just my own thoughts and by no means am I a financial
advisor making any recommendations of what you should do or not do. Having said that,
what do you think? Let me know in the comments. I always enjoy hearing your thoughts…and
I’m always open to changing my opinions if presented with a strong enough argument.
Now if you are interested in The Honest Company IPO, the stock is expected to price between
$14 and $17 on Tuesday. If it prices at the high end of the range, the company would hold
a valuation of 1 and a half billion dollars. And then, as of this recording, we expect
public trading to begin on Cinco de Mayo, Wednesday, May 5th. The Honest Company stock
will trade under the ticker: HNST. Alright, so I hope you enjoyed the video,
and if you did, again, please press that like button and share with your friends and on
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thank you for watching, and have a great day!