The Honest Company (HNST)

Personal care company The Honest Company (NASDAQ:HNST) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, with sales up 12.8% year on year to $97.25 million. Its GAAP profit of $0.03 per share was $0.03 above analysts’ consensus estimates.

Company Overview

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

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.

Competitors in the personal care products market that are increasingly their focus on natural and eco-friendly products include Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB), and private companies such as Seventh Generation and Babyganics .

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $389.4 million in revenue over the past 12 months, The Honest Company is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers. On the bright side, it can grow faster because it has a longer list of untapped store chains to sell into.

As you can see below, The Honest Company grew its sales at a decent 8.3% compounded annual growth rate over the last three years. This shows its offerings generated slightly more demand than the average consumer staples company, a useful starting point for our analysis.

This quarter, The Honest Company reported year-on-year revenue growth of 12.8%, and its $97.25 million of revenue exceeded Wall Street’s estimates by 5.7%.

Looking ahead, sell-side analysts expect revenue to grow 3.3% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and indicates its products will face some demand challenges.

The Honest Company’s unit economics are higher than the typical consumer staples company, giving it the flexibility to invest in areas such as marketing and talent to reach more consumers. As you can see below, it averaged a decent 35.3% gross margin over the last two years. Said differently, The Honest Company paid its suppliers $64.75 for every $100 in revenue.

This quarter, The Honest Company’s gross profit margin was 38.7%, up 1.8 percentage points year on year and exceeding analysts’ estimates by 2.6%. The Honest Company’s full-year margin has also been trending up over the past 12 months, increasing by 7.2 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Although The Honest Company was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 3.3% over the last two years. Unprofitable public companies are rare in the defensive consumer staples industry, so this performance certainly caught our eye.

On the plus side, The Honest Company’s operating margin rose by 5.6 percentage points over the last year, as its sales growth gave it operating leverage. Still, it will take much more for the company to show consistent profitability.

This quarter, The Honest Company generated an operating profit margin of 2.6%, up 4.1 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Although The Honest Company’s full-year earnings are still negative, it reduced its losses and improved its EPS by 66.5% annually over the last three years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, The Honest Company reported EPS at $0.03, up from negative $0.01 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts forecast The Honest Company’s full-year EPS of negative $0.02 will reach break even.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

The Honest Company has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.5%, subpar for a consumer staples business.

Taking a step back, we can see that The Honest Company’s margin dropped by 6.6 percentage points over the last year. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business.

The Honest Company burned through $3 million of cash in Q1, equivalent to a negative 3.1% margin. The company’s cash burn increased meaningfully year on year and is a deviation from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

The Honest Company’s five-year average ROIC was negative 29.5%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer staples sector.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

The Honest Company is a well-capitalized company with $72.82 million of cash and $10.99 million of debt on its balance sheet. This $61.83 million net cash position is 11.3% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly The Honest Company blew past analysts’ EPS expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a solid print. The stock traded up 7.3% to $5.14 immediately following the results.

Updated: June 14, 2025 at 10:49 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

The Honest Company’s business quality ultimately falls short of our standards. Although its revenue growth was decent over the last three years, it’s expected to deteriorate over the next 12 months and its brand caters to a niche market. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

The Honest Company’s EV-to-EBITDA ratio based on the next 12 months is 16.7x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $7.17 on the company (compared to the current share price of $4.58).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.