The Honest Company, Inc. Q3 FY2025 earnings call

• Q3 Performance: Faced a challenging consumer environment with revenue below expectations due to underperformance in diapers and apparel, but wipes and personal care were growing and outpaced the market. - Transformation 2.0: Focus on growing wipes, personal care, and diapers; exiting honest.com, apparel partnership, and Canada. Cost optimization to rightsize SG&A and improve supply chain efficiency. - Category Highlights: Wipes saw 24% consumption growth, baby personal care had 10% growth. A Disney collaboration was launched in personal care. Diapers faced headwinds but new diaper design and pricing actions were implemented.

Wipes: Consumption growth across total wipes portfolio was up 24% versus category growth of 3%. Wipes represent more than 1/3 of sales for the quarter. Adult flushable wipes were launched in physical stores, and e-commerce growth was strong. Personal Care: Baby Personal Care is the #1 natural baby personal care brand in the US, with consumption growth of 10% in the quarter versus a 2% category growth. The sensitive skin collection grew consumption 77% year-to-date. A Disney collaboration was launched in the Baby Personal Care collection. Diapers: Revenue declined due to a challenging consumer macroeconomic environment, with consumption down double digits. Impacted by assortment simplification at brick-and-mortar retailers and lapping promotional events. However, the diaper business was growing 3% year-to-date at Amazon. Apparel: Exiting the apparel partnership as part of Transformation 2.0. honest.com: Exiting as a direct-to-consumer fulfillment channel. Canada: Exiting direct sales to Canadian retailers.

• 2025 revenue outlook: Full business range minus 3% to flat; organic revenue (wipes, personal care, diapers) expected to grow 4%-6% year-over-year. - Adjusted EBITDA outlook: $21M-$23M versus the original range of $27M-$30M. - Transformation 2.0 one-time costs: $25M-$35M, with annual cost savings of $8M-$15M.

• Consumer macroeconomic challenges impacting diaper and apparel sales. - Execution risks related to the implementation of Transformation 2.0. - Inventory management risks due to tariff mitigation strategies and transition to new diapers.

Q: First question on Transformation 2.0, why now and how it positions growth?

A: Carla Vernon states that the first phase of transformation improved the business model, and now focusing on right-to-win categories like wipes, personal care, and diapers which are growing, leveraging brand maximization and margin enhancement.

Q: Diving into diapers, redesign and velocity trends.

A: Carla Vernon discusses the new diaper design with 21% lower customer complaints year-to-date, diaper business growing 3% year-to-date at Amazon, and pricing adjustments to address consumer price sensitivity.

Q: Timeline and sequencing of exits.

A: Curtiss Bruce says honest.com, Canada, and apparel exit will be completed by the end of 2025, with cost optimization actions in Q4 2025 and annual savings starting in 2026.

Q: Promotion level in diapers, pricing levers, inflation in other categories.

A: Carla Vernon mentions pricing levers working, other categories like wipes and personal care less price-sensitive compared to diapers, with diapers seeing declines in dollar volume while personal care is growing.

Q: New business algorithm, cadence of next year.

A: Curtiss Bruce discusses Transformation 2.0 focusing on high-margin categories, exit of nonstrategic businesses, and potential gross margin improvements in 2026, with more details to come in the February earnings call.