Honest Company outlines Transformation 2.0 with 4%–6% organic revenue growth target amid exit from low-margin categories

Earnings Call Insights: The Honest Company (HNST) Q3 2025

MANAGEMENT VIEW

* CEO Carla Vernon reported that third-quarter results faced a challenging consumer environment, with revenue below expectations due to underperformance in diapers and apparel, and highlighted that "we continue to grow and outpace the market in our wipes and personal care categories." Vernon announced the launch of "Transformation 2.0, powering Honest growth," a strategic program to focus on core categories—wipes, personal care, and diapers—while exiting lower-margin nonstrategic categories and channels, including honest.com, the apparel provider relationship, and Canada.
* Vernon explained, "Because these categories are lower margin, exiting them only has a modest profit impact in the short term. We are confident these changes will drive greater focus on our core product categories and enable continued growth and improved profit margins." She also mentioned, "Honest flushable wipes consumption grew over 160% versus the category growth of 2%."
* CFO Curtiss Bruce stated, "In the third quarter, we delivered revenue of $93 million, down 7%, driven by a decline in diapers, apparel, and honest.com." Bruce added, "Gross margin in the third quarter was 37%, down 140 basis points versus last year." He shared, "We also delivered positive net income of approximately $1 million. Adjusted EBITDA for the third quarter was $4 million, down $3.5 million versus last year."

OUTLOOK

* Bruce announced a revised full-year 2025 outlook, stating, "Our full year 2025 financial outlook for revenue and adjusted EBITDA includes revenue outlook as reported, inclusive of apparel, honest.com, and Canada is now in the range of minus 3% to flat." He further detailed that "revenue outlook on an organic basis, excluding apparel, honest.com, and Canada, is for growth in the range of 4% to 6% year-over-year."
* The adjusted EBITDA outlook was updated to a range of $21 million to $23 million, down from the original range of $27 million to $30 million, attributed to lower revenue and volume deleverage.

FINANCIAL RESULTS

* Honest reported third-quarter revenue of $93 million, a decrease of 7%, with gross margin at 37%, down 140 basis points from the prior year. Positive net income of approximately $1 million was achieved, and adjusted EBITDA was $4 million, with a 4% margin. Operating expenses decreased by $4 million compared to the prior year quarter, driven by a $6 million reduction in SG&A expenses, partially offset by a $1.6 million increase in marketing costs. The company ended the quarter with $71 million in cash and no debt.
* The decline in revenue was primarily due to softness in the diapers, apparel, and honest.com businesses, which offset the growth in wipes and personal care. Apparel, honest.com, and Canada collectively represented about 20% of revenue and were described as well below average gross margin businesses.

Q&A

* Aaron Grey, Alliance Global Partners: Asked about the timing and rationale behind Transformation 2.0 and prospects for future growth. Vernon responded that the move was driven by focusing on categories "best poised to be very resonant with consumers...higher margin and higher profit," emphasizing the cost of complexity and the philosophy that "less is more."
* Grey inquired about the impact of diaper redesign and pricing adjustments. Vernon indicated that complaints on diapers were down 21% year-to-date and noted growth at Amazon, "our diaper business at Amazon...is up 3% at Amazon." She explained pricing architecture changes, including introducing a lower entry price of $19.99 for diapers.
* Anna Glaessgen, B. Riley Securities: Sought clarification on diaper growth by channel. Vernon confirmed, "Amazon is up 3% in the quarter," and year-to-date, ex-Target, diaper business was up 5% in consumption. Further details on other retailers were unavailable.
* Owen Rickert, Northland Capital Markets: Asked about the timeline for exits. Bruce confirmed that honest.com, Canada, and the apparel partnership "will wind down by the end of this fiscal year." Rickert also inquired about inventory management for exited categories, and Bruce said the one-time cost of $25 million to $35 million includes these transitions.
* Shivhana Choudhry, JPMorgan: Questioned promotional intensity and pricing responses. Vernon stated, "We've introduced a rollback strategy at Walmart...seeing velocities increasing." She noted that price sensitivity is most acute in diapers, while wipes and personal care are less affected.
* Dana Telsey, Telsey Advisory Group: Asked about the business model post-Transformation 2.0. Bruce explained, "removing the low-margin categories...gives us confidence that when we get to the new business that we've got a strong potential to drive growth in 2026."

SENTIMENT ANALYSIS

* Analysts pressed on the rationale, execution, and timing of Transformation 2.0, with a neutral to slightly negative tone on the revenue and diaper category declines, but were receptive to the strategic focus and cost reduction plans.
* Management maintained confidence in the brand's core categories but showed a more defensive stance on diaper performance and the need for pricing adjustments, using phrases like "we are committed to making improvements" and "we're very pleased that we've introduced this like $19.99 price point diaper."
* Compared to the previous quarter, analysts' tone shifted from cautiously optimistic to more pressing on downside risks, while management's tone moved from confident and growth-focused to more defensive and strategic.

QUARTER-OVER-QUARTER COMPARISON

* The prior quarter reaffirmed guidance for 4%–6% revenue growth and $27 million to $30 million adjusted EBITDA, while this quarter lowered the as-reported outlook to minus 3% to flat and reduced adjusted EBITDA guidance to $21 million to $23 million. The strategic shift to exit low-margin segments is new for this quarter.
* The focus of analysts moved from distribution gains and margin expansion in the previous quarter to questions about the sustainability of diaper growth and the rationale for narrowing the business scope.
* Management's confidence in transformation remains, but their language is more cautious and focused on core businesses and profitability versus broad-based expansion.

RISKS AND CONCERNS

* Management cited continued pressure in the diapers segment due to macroeconomic headwinds, price sensitivity, and category declines, noting that "most major national brands are declining as consumers are shifting their purchases to lower-priced items."
* Transformation 2.0 entails one-time costs of $25 million to $35 million and revenue disruption risks from exiting non-core segments.
* Analyst questions highlighted possible execution risk around winding down inventory and contracts in discontinued categories and the challenge of restoring growth in the diaper business.

FINAL TAKEAWAY

Honest Company management emphasized a strategic pivot with Transformation 2.0, focusing on core, higher-margin categories while exiting low-profit segments to establish a more efficient and profitable operating model. Despite short-term revenue and margin headwinds, the company is positioning itself for organic revenue growth of 4% to 6% and cost savings to drive long-term shareholder value, with continued commitment to improving the diaper business and leveraging strength in wipes and personal care.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/hnst/earnings/transcripts]

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