The Honest Company: What Investors Need to Know

The Honest Company (NASDAQ:HNST) is a small but growing consumer goods business focused on serving the needs of discerning new parents. But should you buy the stock or just the products? In this episode of MarketFoolery, join Motley Fool analyst Emily Flippen and Motley Fool contributor Brian Feroldi as they take a deep dive into The Honest Company.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on May 18, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, May 18t. I’m the host of this Consumer Goods episode, Emily Flippen. Today, I am joined by fool.com’s ho-hum hitter of hidden hum-drum. I was so close. [laughs] It’s Brian Feroldi, here to discuss the newly public consumer-goods company, The Honest Company. Brian, you got me. You got me that time.

Brian Feroldi: Thanks, Emily. I’m happy to be here. Happy to be moonlighting on the Tuesday show.

Flippen: Hardly moonlighting. You had the great idea to talk about this company today. I’m really excited to have you on the show. All of our listeners love hearing from you. I love learning about this business and its co-founder, who is apparently famous, who I was just blissfully unaware of for so many years. It should be a good, fun show.

Feroldi: Listeners, I literally pitched Emily and said, “Hey, you want to talk about The Honest Company? It’s co-founded by Jessica Alba.” And Emily said, “Who’s that?” 

Flippen: [laughs] I feel like I am a much more informed person today because the first three or five pages of this S-1 were basically Jessica Alba’s story. This is certainly her company. She’s no longer the CEO of it, but very much, this was a company founded, led up by Jessica Alba and her personal experiences. While I may not be familiar with her and her work, the way that most people probably are, I feel like I know her a bit as a person and as a businesswoman. It was fun reading the first page of this S-1 to get a sense about who she is.

Feroldi: For those that aren’t familiar, I guess it’s not all that surprising. Jessica Alba is a famous Hollywood actress, but she spent the bulk of her career, really, the things she’s most well-known for is in the late ’90s and throughout the 2000s. Over the last 10 years, she has been appearing in films and movies, but not nearly as much as she was previously. I think a big reason why there is because she has been focused on The Honest Company. So it makes sense that if you happen in paying attention for the last 10 years, you’re not as familiar with who she is.

Flippen: I’m curious as you poked through this S-1. I mentioned at the start of the show, this is a newly public company. So all the information we’re going through today is off of this business S-1. What stood out to you about the backstory here for The Honest Company?

Feroldi: Jessica Alba was pretty honest with why she founded The Honest Company. Her founding story is actually quite interesting. Jessica Alba herself, as a kid, had severe asthma and allergies, so much so that she was regularly in and out of the hospital. Her allergies and asthma were that bad. At the time, at least when she was a kid, there weren’t any products on the market that she could really consume to make her better. She was forced to use all the same consumer products that all of us use all the time. Just for her body, she had some severe reactions to them. Thirteen years ago, she became a mom. She became pregnant and she was really worried that her kids were going to have the same reaction to consumer products that she did. She tried making her own products. She tried connecting with people online. She even went to Washington and lobbied for legislation to be made so that certain chemicals will be banned. That was unsuccessful. I love the way that she started the opening letter here. She says, “I founded The Honest Company because I had to.” It’s not like she was an entrepreneur with this great idea, and she wanted to go out there, and do it. She literally could not find on the market the products that she wanted to consume, so she built the company. Love that story.

Flippen: I do love a good backstory. The thing that stood out to me was a quote here also from Jessica Alba, which was, “I wanted Honest to be built on a type of business model that I had never seen created before. A mission-based for our profit model that addresses health equality, sustainability, and social injustice.” I thought that was really interesting. The idea of making this a for-profit business that’s mission-focused. With that in mind, let’s talk about the mission statement. [laughs] I read through this. I was not going to mention it, Brian. I had some thoughts about their mission statement, but I thought, look, nobody wants to pull up their podcast and listen to me rant about a mission statement. I’m just not going to touch on it. But then looking at the outline this morning and you saw beautifully, copy-pasted it in here. I can’t not comment on this mission. The mission is to inspire everyone to love living consciously, and move past the fact that this feels like a Feroldi title, that you can’t say 12 times fast because you’re going to stumble. Is that a good mission statement? Because you have more experience here than I do. To love living consciously? That tells me nothing about the business. I get that mission statements are supposed to be broad, but this one was broad to the point of completely meaningless to me, which was, in my opinion, an interesting choice for a company that was built to be mission-based.

Feroldi: I highlighted this because I love mission-driven companies. So many investors believe that they are just lip service. They breeze right past that and they view it as something that the HR team made the company talk about and made them put on the website. I understand why that is the case. The reason is most mission statements are exactly that. They are just corporate fluff. To me, I’ve come to realize that a great mission statement is one of the most powerful decision-making tools and stakeholder alignment tools that exists. If you are a mission-driven company and you can create a mission statement that’s simple, inspirational, and optionable, not only can you get your suppliers, your employees, your shareholders, your community, everybody focused on the same thing. But it also empowers lower-level employees to make decisions. If you were an employee at Honest Company and you had to make a decision about a supplier to choose or a new product, you ask yourself, does this product or does this decision inspire everyone to love living consciously? If the answer is yes, you do it. If the answer is no, you don’t do it. Now, I agree with you that this is more vague than I would like to see it. But I did want to point out that this is clearly a mission-driven company. And in my book, that’s a positive.

Flippen: I love that and I also love that we’re of two minds here. I think my issue with this mission statement in particular is that I think my Pinterest page could inspire everyone to love living consciously. I don’t know what that has to do with making a consumer packaged-goods business that sells tons of sustainable diapers. It’s not bad. But to me, it felt meaningless. But I will digress. This is not going to be a 30-minute Emily rips into the mission statement of The Honest Company Show. So we can move on.

Feroldi: Fair enough.

Flippen: Let’s talk a little bit about pricing here for the IPO. I think it’s probably where I get hung up the most on this business, as you mentioned, great backstory. But this is a nearly $1.5 billion business today. They went public just earlier this month. Pretty lofty valuation for a business that’s only done around, I think, $70 million in sales over the past year.

Feroldi: Yeah, this company is pricey and no big surprise here given that this is a popular consumer brand, plus the environment that we’re still in. Valuations have come down. They are still high in absolute terms. But yes, The Honest Company came public on May 5th. The ticker symbol is HNST. The stock price is about $16. So the company raised about $385 million after accounting for fees. What’s notable about that is that the bulk of that capital is not going to the company. It’s actually going to cash out existing shareholders and private equity firms. So the company is raising capital. They raised about $96 million in total, however, the remainder that $289 million in extra, that went to a private equity firm and a venture capitalist. That’s why reading these statements is important because it’s important to know where that capital is going. In the best case scenario, a company says, “We’re raising capital so that we can fund our operations and expand,” and they keep all that money for themselves. In the worst case scenario, the company gets none of that money and it’s just used to cash out shareholders. So this to me is a net negative for the company. Yes, they are. They did IPO and they do have a liquid market for their stock, but I wish that all of the proceeds were going to the company and none were going to existing shareholders.

Flippen: A fair argument I think in this case, but what is important about this business is, as you mentioned, they’re a consumer goods business, so despite, I guess, the cash out that’s happening, there’s some value in the awareness that Honest Company has in consumer’s minds, and we can get into some of the numbers here that I think are really telling about the market opportunity. But before we do so, let’s maybe explain the core business a bit. We keep saying consumer goods business, but it’s so broad. This is the Industry Focus: Consumer Goods show. The three main business categories here are diapers and wipes as one, skin and personal care as a second, and household and wellness as a third. Those each represented 63%, 26%, and 11% of their 2020 revenue. In case you can’t keep up with numbers like I can’t when people spew them at me, that means that 63% of their revenues are coming right now from diapers and wipes. That operates as the top of the funnel for the Honest Company. Bringing in diaper purchases, getting them familiar with the brands, mostly new parents in this case, and then getting them to expand their purchases elsewhere. It’s an interesting business model. I can’t say I remember the last time we covered a company that did 60% sales in diapers and wipes.

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Feroldi: You understand why it came that way. Again, Jessica Alba founded this company years ago as she herself was a new mother. So the products that they’ve rolled out match out what was [laughs] happening with her life at the time. But yes, almost two-thirds of sales are generated from diapers and wipes. That’s a very competitive market. Honest stands apart by offering the best materials, the absolute best products. You can actually go on their website and pick out the style of the diaper that you want. It’s delivered directly to your house. You can subscribe and save. This is all hypoallergenic, and organic, and basically every box that you could potentially check as consumers, if you were worried about allergies. That is, again, their core products, their primary product that really gets them into a consumer’s house. What’s notable about that is, that really builds the relationship between the brand and the consumer and it gets them in the door. From there, Honest says that nearly 50% of consumers end up purchasing two or more non-diaper products. So the diapers are almost like a loss leader to get the foot in the door, and it’s really the start of the relationship with The Honest Company.

Flippen: It is an interesting model, and they also have partnerships with other retailers. Their omnichannel approach to help grab that brand awareness. 55% of their revenue comes through digital channels, but another 45% of that, so nearly half-half, are coming from retail, and their retail partnerships include businesses like Costco, Target, Amazon. They’re in over 3,200 retail locations across the U.S., Canada, and Europe, mostly in the U.S. The thing that really stood out to me there was that a third of sales came directly from honest.com. Presumably that 50% of people who you mentioned, that are purchasing two or more non-diaper products, they came in, they bought the diaper maybe at their local Target or wherever it is that they’re doing the shopping, became familiar with the brand and they went out of their way, right? Just ordered online to get other Honest products. That’s how I pictured it in my mind. Some pretty impressive metrics there when you look at how their consumers come into the Honest ecosystem.

Feroldi: Yeah, I really like that. I’m glad that you highlighted that. That’s a very high number to have 33% of revenue coming directly. That’s margin that the company itself gets to capture that it doesn’t have to share with Costco, Target, or Amazon. It makes sense that this is a digital-first company, because one of this company’s biggest assets, spoiler alert, is Jessica Alba herself, and she maintains a massive presence on the internet and social media. She has over 37 million social media followers, and many people essentially equate her name with the brand of this company. So that’s a powerful lever that this company has from a marketing angle, is to pull people directly into the website. So again, they are not forced to share their margin with retailers. Now, they do want to be an omnichannel company. So while they started as a digital-first brand, to your point, they have expanded relationships with Costco, Target, Amazon, and I’m sure there will be more of those partnerships to come, but I love that this company is getting that much of its digital sales from consumers going straight to honest.com, because again, that’s margin that this company keeps for itself.

Flippen: Yeah. When you look at their long-term strategy here, what is also really interesting is that their ACV, their all commodity volume, which is a metric retailers used to look at the availability and awareness for distribution of their products. They only had about 40% ACV right now, whereas most other consumer goods companies are closer to 90% or even 100% ACV, which really shows the lack of distribution that Honest has right now. That could be perceived as a bad thing. But I think when you look at the cycle that somebody goes through, picking something up at their retailer, and then eventually going directly to honest.com to make that purchase, increasing distribution alone is a great opportunity for them, because it lets them bring people in on the diaper front before expanding their relationship with them on higher-margin products.

Feroldi: The company also has a subscribe and save subscription products. You can imagine, like you said, not ever hearing of the Honest brand walking into a Target, finding them, seeing the box, realizing that this brand fits what you’re looking for, opening up the box and then say, “Hey, order from honest.com, and you can save 17% and get these automatically delivered to you, and pick out your style.” That can open up some new customers for the company. One other thing that I thought that was interesting about this business that stood out to me, you noted that their major categories are diapers, No. 1, skin and personal care, No. 2, and household and wellness, No. 3, in that order. But 22% of the revenue that this company generated in 2020 was generated from products that were introduced that year. So these products were introduced to the market and instantaneously became a driver of 22% of sales. I love that this company is already looking beyond its core categories and has a history of rolling out new products successfully.

Flippen: And the market opportunity is only getting bigger. I’m actually kicking myself right now because last week, I had driven down to visit family for the first time in nearly a year and a half, now that we’re all vaccinated, saw my cousin who recently had a baby, a three-month-old baby, and I did not ask her about The Honest Company. That was a stupid mistake. I would have loved to have her opinions and thoughts before coming into this podcast today. But the market opportunity is growing. I mean that not just because of the COVID baby boom that we saw happen over the last year, but actually because of the opportunity within clean and natural products alone. When you look at The Honest Company and how they break down their addressable market, they’re not talking about the diaper market, or the skin personal care market, which are huge opportunities. I actually like how honest they were and talking about the much smaller market size, that is the clean and natural diapers, household care, wellness products, which is around $17 billion in the U.S. right now. So it’s a small market, but it’s rapidly growing, and that’s exactly the kind of niche that a business like Honest thrives in.

Feroldi: These products remind me very much of the organic food penetration rates when it comes to traditional food. Well, the last, say 20 years have seen huge growth in these categories. On a percentage basis, they are still the minority of sales. Only 11% of diaper sales are considered “natural” and only 14% of care products are considered natural. These numbers are continuing to grow and I expect them to grow for a long, long time, especially as millennials increase their buying power, these are categories that millennials are clearly willing to spend money on. That is a macro trend that is working in this company’s favor.

Flippen: The thing that perhaps blew my mind the most in this S-1, and I have reservations, I will get to them. But I have to highlight this, was the unaided brand awareness that this business has. This is when they go out to their target demographic, a company or third-party researcher will come out and they’ll say, “Hey, list all the diaper brands that you know,” and they’ll list them unaided. They had a 25% awareness rate, unaided awareness rate within their target market for their diaper products. That is amazing. I don’t think I’ve ever heard of that level of awareness before, and that’s really impressive when you consider that they have less than 5% market share in each of their key segments right now.

Feroldi: Yeah. That really just shows you the power of having a celebrity at the top of your business. Again, when it comes —

Flippen: A celebrity, who is she? 

Feroldi: A celebrity to some people, Emily, I guess I should say. Yeah, when it comes to a business like this, we’re going to get into the competition later, but I don’t think it’s a secret to say there’s a lot of competition in every single category that this company competes in. When it comes to how does a company stands out or stands apart from each other, there’s really only a few ways that they can do it. Distribution is one, and that is an area that this company is obviously well behind some of it’s big heeled competitors, but should get better overtime. Brand is two, and that’s great to see that the Honest brand is already producing that level of awareness. But No. 3 has got to be marketing. When I say marketing, I don’t say traditional marketing which spends billions of dollars on the Super Bowl ads or anything like that. I’m talking about organic social media marketing, and that I think is a key strength for this company. Again, solely because of the founder and her 37 million followers, which is a number that continues to grow overtime.

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Flippen: Maybe a quick clarification point, because as we tape here over Motley Fool Live, which Motley Fool subscribers will be familiar with, I’m already seeing that there’s some confusion between the company we’re talking about, The Honest Company, and Honest Tea, which is a brand owned by the Coca-Cola group. They do not produce kid food. Although I could see a situation in which they’d be successful, given that this is their target market, new parents and kids. But right now it is mostly diapers, personal care, household wellness products. Think about it when you’re walking through that aisle in Target that’s aimed at kid products, this is the target demographic that they’re going with. What’s probably further worth noting is, just how U.S.-centric this business is. In fact, as we tape, I’m sure U.S. based listeners right now to Industry Focus, probably have heard of this business, especially if they’re new parents. But I bet a lot of international listeners are thinking to themselves, what is this company? What is The Honest Company? They actually highlight international growth as a great opportunity for them in the future. Only 2% of revenue right now comes from outside the United States, which is in Canada and Europe, and they quote, “Plan to use Jessica Alba’s influence to reach Asian markets.” I’ll tell you what, I’m not sure if that feels like much of a cohesive strategy to me, but if she’s as famous as you say she is, then maybe I’m wrong.

Feroldi: I’m not very familiar with how famous Jessica Alba is in Asia, but I do know that she is a brand ambassador for basically the entire category of wellness and organic and hypoallergenic products. If the company is targeting Asia specifically because they think Jessica Alba has influence there, they would know that better than me. But to your point, international is a huge opportunity for this business currently making up 2% of sales, and that’s really just in Canada and Europe. So the company has barely even scratched the surface in those markets, let alone Asia. But even in the United States, there’s plenty of room for this company to grow. If this business does not work out for investors, it’s not because of lack of opportunity.

Flippen: Certainly. Let’s talk about what it takes for this business to work out and talk about some of the financial performance here. Revenue grew 28% year over year in the most recent quarter, to over $72 million, made up again, mainly of diapers, but the fastest-growing segment in there is actually their household products care. If you look over it since 2018, they have about 15-ish CAGR. So compounded annual growth rate in their total revenue. It’s not growing slowly. This is a growing business. Look, this is a consumer goods business, it’s not SaaS company. I think that’s where my concern comes in, valuing a business that’s in $70 million in sales at $1.5 billion.

Feroldi: Yeah, the company’s revenue is growing. Again, the clip that you just mentioned, 16% for their core diaper products, which makes sense. Again, that is their longest-lasting, most mature product line, so it makes sense that the growth is slowing and their personal care is growing at 36% and 170% for their final category. Again, at the top of the show, we called out that new product launches now make up 22% of sales. I think that’s a major reason why the household products are growing so quickly. The halo effect that this company gets from diapers, is a major reason to want to be bullish on this company because again, you get some experience with the diapers and if they help you develop a trust in the brand, you will spend on other categories, and clearly, consumers are doing just that.

Flippen: When you look at their balance sheet, how do you feel about it? I know you mentioned that they’re using the proceeds to pay off existing shareholders. Should we be concerned about a lack of liquidity?

Feroldi: After coming public, the company’s balance sheet actually looks pretty good. They took some of that capital and they invested it right into working capital so to build out their inventory, but they still retain about $110 million in cash on their balance sheet after coming public. On the liability side, they do have current liabilities of course, but they are long-term debt-free. So the balance sheet is actually looking pretty good. This company is still losing money, about $14.5 million last year, but that’s a relatively small number when compared to the balance sheet. I think that this company came public for good reasons and it’s post-IPO balance sheets look good even though, again, a few $100 million went to existing shareholders and not to the company’s balance sheet.

Flippen: I’m going to get into some of the bones I had to pick with this S-1 a little bit later. I will say, the financial performance is not one of them, although I suppose a prudent investor could spend a bit of time digging it apart. But before I get into what was lacking, let’s talk about one of the things that was more than explained in their S-1 which was management, corporate values, ESG, the corporate social responsibility, that was something that was extremely highlighted in this business’ S-1. How did you feel about the management team and how they laid that out?

Feroldi: Yeah. Jessica Alba is no longer the founder herself. She is still involved with this company as the company’s Chief Creative Officer. But a few years ago, she hired somebody named Nick Vlahos to take over the roles as CEO. He is currently the CEO. To your point, one thing that they really highlighted in their S-1 was just how women, how focused they are and inclusive of this company is. They did say, “People of color represented nearly half of our total workforce and women representing 68% of our total workforce, including more than 53% of our leadership team.” Given this company’s focus on diapers, personal care products, that’s something that I really love to see because this is a brand and this is a company that will really appeal to moms. So, having women up and down this organization making decisions really should make investors feel good.

Flippen: Yeah. It’s a pet peeve of mine when you have a business that is so heavily focused on a female audience that is run by mainly men. Not that there is an incapability there, but it always just highlights the disconnect I think that people see between being a customer and then being in management. Hopefully having those two things more in line tier in the case of The Honest Company, that will hopefully align the core customers and the needs of their core customers with the leaders who are making decisions. One of the things that I found interesting was when they talked about their addressable market, we didn’t mention this, but they really didn’t define what their core customer is. The only thing they said is that their target customer is someone who is modern, aspirational, conscious, style forward. They didn’t clarify gender, they didn’t clarify age, geography, ethnicity, or even income levels, despite this being a slightly premium product — not aggressively so but it’s more expensive than your Huggies, for instance. So putting all that together, I found it an interesting and weird decision, I guess, to highlight the diversity of the team at which is running this company, but then be so vague and broad with the lack of diversity I suppose, of their core customer.

Feroldi: To me, if I was to define this company’s core customer it would just be a Whole Foods shopper. If you’re the type [laughs] of consumers that’s going to lay out extra money to buy better for your foods such as organic foods and stuff, you’re also probably going to be attracted to the products that The Honest Company makes. That to me is how I justify it. Again, we both know that that’s a category of consumers that is growing rapidly. So to your point, these products are priced at a premium when you compare them to what exists out there. But the numbers clearly show that consumers are willing to pay that premium if they feel that what they’re getting on the other side is worthwhile to them. And for the growing number of consumers, I do think that that message will resonate.

Flippen: I know that one of the biggest risks that you wanted to highlight and talk more about is competition. But before you do so, I’m going to talk about what I perceive to be maybe a risk is a strong word. This pet peeve I have which is, they really didn’t break down any of their customer metrics and it’s something that maybe I’ve become spoiled with over the years. But I don’t like it when a business that is so dependent upon acquiring and retaining customers, provides zero metrics about customer acquisition costs, lifetime values, even retention, anything like that. It actually felt empty to me. I’m desperately reading through all the pages of this S-1 looking for any sort of connection. The only thing we’re given was this assertion that they have a goal of capturing significant wallet share, high repeat purchasing rates, and attractive customer lifetime value. That’s a goal and they didn’t quantify any of that as it exists today. So how you achieve a goal without having any quantifiable base to build off of, to me is lackluster. It’s a goal that is not quantified, is not tracked, is not transparent to shareholders. It’s not really a resounding statement and I find myself as an investor reading that statement thinking, man, they must have a really bad repeat purchasing rates, really unattractive customer acquisition costs, and a really high churn rates for their customers, if they’re not breaking those metrics out for us.

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Feroldi: Yeah. I think that’s a fair criticism. Prep for the show, I did go to honest.com and search around and pretended I was going to be at diaper customer because it wasn’t all that long ago that I was buying diapers hand over fist. If you go through their process, it’s very clear that they are trying to push you to the subscribe and save option, which from what I checked up, it looks like you save about 17% for automatically enrolling in an auto shipment of the diapers that come to your door. So yeah, it would’ve been great if they’ve reported, “Hey, we have this many million auto enrolled consumers and here is our repeat and here is our churn.” The fact that they didn’t put that in there, does speak volumes. On the flip side, Emily, I will say that you have to remember that diapers in particular, which again are the book of the sales, that’s not something you buy forever. Your kids are in diapers for a set period of time and then they graduate out of the diapers.

Flippen: You’re not still wearing diapers. [laughs] Am I the only one still doing that? 

Feroldi: From that perspective, you can’t possibly compare that churn rate to what you would for a SaaS company or something like that.

Flippen: Fair argument.

Feroldi: So that could be why they left it out. But yes, like you I would’ve loved to see a little bit more in there about customer acquisition cost or something along those lines.

Flippen: OK, I want to hear your argument about competition here. I guess as you pointed out, a buyer of diapers at one in your life, I imagine I was a buyer of diapers. I don’t remember it. What do you make about competition here?

Feroldi: Yeah, so there’s no secret that there is a lot of competition. Just in the company’s S-1, they would list companies like Kimberly Clark, Procter & Gamble, Johnson & Johnson, WaterWipes, Clorox, Unilever, Estee Lauder, L’Oreal, Reckitt Benckiser. And not to mention the countless number of smaller upstart brands that are trying to do exactly the same thing that Honest is doing and using digital channels such as Facebook and Instagram to promote themselves. I can’t even tell you how many ads I get when I go on Facebook and Instagram for products that are similar to these. So there is a ton of competition in each of the categories. Now this competition has been there the entire time and Honest has grown even with all that going against it. Because I think of again, the brand and the asset that this company has, that nobody else does, Jessica Alba. But still, it’s important to note that this is an extremely competitive market.

Flippen: When you look at this business model, the valuation you see today, Jessica Alba and its prospects and just that are you a buyer of this business model? Why or why not?

Feroldi: I think that there’s a lot of positives here. There’s a couple of negatives. I like the founding story. I like that this company is mission driven. I like that they are clearly innovating. They’re rolling out new products that are having success. I think the brand is pretty strong. We didn’t get into it, but the gross margin is improving. Two years ago, the gross margin was 25%, now it’s 36%. So that’s heading in the right direction. I like that a lot of consumers know this brand and are going directly to the website. I like that the majority of employees at this business are women and I like that they have a clean balance sheet. Those are all positives. 

On the flip side, I don’t like that this company is still losing money. The losses are manageable, again, about $15 million last year. That’s trending in the right direction, but I wish it was a little bit closer to profitability. I don’t like that it’s not growing as fast as I would have liked to see. Yes, they are expanding their top line at a double-digit rate. But given the stage that this company is at and the brand power, I would have expected at least 30% or even 40% revenue growth from this business. And I don’t like that a huge chunk of the IPO proceeds are going to cash out shareholders as opposed to the company itself. 

One of the things that’s worth knowing is that while this company touts itself as a mission-driven company and so pro women and stuff like that, if you look at their Glassdoor ratings, I just naturally expected they were going to be off-the-charts stellar. They’re just OK. The CEO Nick Vlahos gets 3.6 stars out of 5 and a 72% CEO approval rating. The company itself gets a 63% recommends-to-a-friend rating. That is not nearly as high as I was expecting it to be. So while the company puts forward a very cheery face about its culture and inclusiveness, it’s possible that actually working at the company might not meet those expectations. So if you combine all that together, I would say I’m interested in this company, I’m rooting for this company. But unless its growth rate seriously accelerates, I wouldn’t be a buyer. How about you?

Flippen: Actually agree with everything you said. This is the type of business where I always feel like I will buy their product any day of the week. But I’m not sure from a buyer of their business or in this case their stock in particular and I think probably a great business, a fine private business, probably makes a lot of employees and internal shareholders really wealthy. But as a public company, I’m not sure the business model as it stands today is all that viable given how small they are and how competitive this space is. It felt like I was reading through this S-1 feeling that I had was trying to be convinced that a rising tide will lift all boats. This natural market has a great mission-driven company. They’re just at the right place, at the right time and this is going to benefit everyone. 

When I got down to more granular levels, so not top-down, looking more bottom-up, I couldn’t figure out what it was about their approach in particular that made them really special and I think that’s probably where I get hung up a little bit. I had a lack of detail. Not only about their core customers, I had a lack of detail about their strategy for even expanding internationally, which was critical for them. I had a lack of detail about customer metrics, what they internally, we’re looking to improve a couple of weeks ago, Asit and I talked about Coupang on Industry Focus. One of the things that I really liked was that leadership had a very metric driven approach to how they are going to judge success. One of those factors was internal free cash flow. I love the fact that they were able to quantify what their goal was. I wish I had a little bit more of a quantifiable goal here and maybe this goes back to the mission statement. Maybe this goes back to how vague everything felt in this S-1. I lack details at every level, starting from the mission statement all the way down to their customer, to their strategy, to their core performance. For that reason, the products seem great, the leadership seems wonderful. I’m not a buyer though, of this business, not today.

Feroldi: Fair enough. It’s one that you can put on your radar and if this company, again really, because of the IPO, uses that extra cash to really reinvest in itself and accelerate the growth rate, I could see myself being interested in this business, but like you for right now, I’m just more interested in being a consumer of their products and not an investor.

Flippen: Well, Brian, if at any point in the future, your opinion about this company changes and you find yourself interested in becoming a buyer, I want you back on the show to explain to me why, give me the hard sell that I was missing in this S-1 and maybe we’ll have to circle back on it.

Feroldi: Sounds like a plan, Emily.

Flippen: Thanks again, Brian.

Feroldi: I’m very happy that you now know who Jessica Alba is, Emily. 

Flippen: I am too. Everybody listening is, too, I’m sure. Listeners, that does it for this episode of Industry Focus. If you have any questions or you just want to reach out to say “Hey,” you can always shoot us an email at industryfocus@fool.com or tweet at us @MFIndustryFocus. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Brian Feroldi, I’m Emily Flippen. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/05/26/the-honest-company-what-investors-need-to-know/

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