The Honest Company (NASDAQ:HNST) Reports Bullish Q1, Stock Soars

Anthony Lee /
2024/05/08 4:33 pm EDT

Personal care company The Honest Company (NASDAQ:HNST) reported Q1 CY2024 results topping analysts' expectations, with revenue up 3.4% year on year to $86.22 million. It made a GAAP loss of $0.01 per share, improving from its loss of $0.20 per share in the same quarter last year.

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The Honest Company (HNST) Q1 CY2024 Highlights:

  • Revenue: $86.22 million vs analyst estimates of $83.28 million (3.5% beat)
  • EPS: -$0.01 vs analyst estimates of -$0.08 ($0.07 beat)
  • Gross Margin (GAAP): 37%, up from 27.5% in the same quarter last year
  • Free Cash Flow of $260,000, down 97.3% from the previous quarter
  • Market Capitalization: $269.8 million

“Our first quarter results demonstrate our strong start to 2024. Our clear focus on profitability, delivering sales growth and achieving record gross margin of 37% as a public company is attributable to continued execution of our Transformation Pillars of Brand Maximization, Margin Enhancement and Operating Discipline,” said Chief Executive Officer, Carla Vernón.

Co-founded by actress Jessica Alba, The Honest Company (NASDAQ:HNST) sells diapers and wipes, skin care products, and household cleaning products.

Personal Care

While personal care products products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.

Sales Growth

The Honest Company is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale.

As you can see below, the company's annualized revenue growth rate of 3.9% over the last three years was weak for a consumer staples business.

The Honest Company Total Revenue

This quarter, The Honest Company reported decent year-on-year revenue growth of 3.4%, and its $86.22 million in revenue topped Wall Street's estimates by 3.5%. Looking ahead, Wall Street expects sales to grow 3.9% over the next 12 months, an acceleration from this quarter.

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Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

The Honest Company broke even from a free cash flow perspective in Q1. This quarter's result was great for the business as its margin was 4.2 percentage points higher than in the same period last year.

The Honest Company Free Cash Flow Margin

While The Honest Company posted positive free cash flow this quarter, the broader story hasn't been so clean. Over the last two years, The Honest Company's demanding reinvestments to stay relevant with consumers have drained company resources. Its free cash flow margin has been among the worst in the consumer staples sector, averaging negative 6.7%. However, its margin has averaged year-on-year increases of 26.2 percentage points over the last 12 months, showing the company is taking action to improve its situation.

Key Takeaways from The Honest Company's Q1 Results

We were impressed by how significantly The Honest Company blew past analysts' EPS expectations this quarter. We were also excited its gross margin outperformed Wall Street's estimates. Zooming out, we think this was an impressive quarter that should delight shareholders. The stock is up 7.8% after reporting and currently trades at $3.17 per share.

The Honest Company may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.