The Honest Company, Inc. (HNST) Q3 2026 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to The Honest Company's Third Quarter 2026 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your host, Chris Mandeville, Vice President of Investor Relations.

Good afternoon, and thank you for joining our third quarter 2026 conference call. Joining me today are Carla Vernon, our Chief Executive Officer; and Curtiss Bruce, our Chief Financial and Operating Officer. Before we begin, I will remind you that our remarks today include forward-looking statements and that actual results could differ materially from those projected. Please review the risk factors described in our most recent Form 10-K and our subsequent filings with the SEC. We assume no obligation to update any forward-looking statements. We will also discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release and in the appendix to the presentation posted on our Investor Relations website. Finally, please note that all consumption data included in our discussion today, unless otherwise noted, will reflect Circana MULO+ measured channel data for the 13 weeks ended September 27, 2026, as compared to the prior year. With that, I'll turn the call over to Carla.

Thank you, Chris, and hello to everyone joining us. Three quarters into this year, Honest has done what we said we would do. We have grown the top line and expanded margins to record levels. This strength is an outcome of methodical improvements and focused execution. We believe these results are durable and enable us to continue building this generation's most iconic personal care brand. With our year-to-date performance, we are raising our full year outlook on both the top and bottom line. As a further signal of their confidence in Honest's continued growth and financial health, the Honest Board of Directors has authorized a new $30 million share repurchase program. In a few moments, Curtiss will share additional details about this program. Now let's take a closer look at our third quarter performance. Organic revenue grew by over 9%, led by Wipes and Personal Care. Our underlying adjusted gross margin reached 49%, a new record for the company and an improvement of nearly 1,200 basis points compared to the prior year period. Underlying adjusted EBITDA was $6.3 million, resulting in an underlying EBITDA margin of 7.9%, which is an increase of 300 basis points year-over-year. During this period of strong financial performance, our consumption growth for the quarter moderated to 1% growth over the prior year. The shift of Amazon Prime Day from Q3 last year to Q2 this year accounted for the vast majority of the change in our quarterly trend. Looking at our year-to-date, our organic revenue and consumption remain well aligned with organic revenue up 7% and consumption up 6%. Additionally, our trends remain consistent from prior quarters with significant strength in our Personal Care and Wipes portfolio, which now make up more than 75% of our organic revenue and Q3 consumption of these categories grew by 13%. Now I'll share the detailed performance across our categories, beginning with Wipes. Our Honest community loves our cleanly formulated and sustainably designed wipes for their excellent performance. And with Wipes in categories, including baby wipes, flushable wipes, hand sanitizing wipes and makeup remover wipes, we have an option for almost every room in the home or every bag that is taken on the go. Our total Wipes portfolio grew 15%, which is over 5x faster than the comparative category average. And now turning to our 3 largest subcategories of Wipes and their consumption strength in the quarter. Our Honest all-purpose baby wipes, the category's leading natural baby wipes brand, grew 4% versus category growth of 1%. In Q1, we introduced our newest addition to this collection, the 1,152-count megapack, which is the largest configuration we've ever had in our Wipes portfolio. We are seeing strong performance as more households discover this offering, and the Megapack was instrumental in helping our portfolio take the #1 position in total baby wipes during Amazon Prime Big Deal Days last month. And now let's look at our flushable wipes. Our flushable wipes, which are made with 99% water and begin to break down as fast as toilet paper does, grew nearly 170% in the quarter. And we remain the fastest-growing branded player in the segment, doubling our market share year-over-year. And finally, our sanitizing wipes grew 41%, which was more than 2x faster than the category. This quarter, we also expanded distribution of our hand sanitizing wipes as we launched our naturally cented grapefruit variety into the drug channel with the addition of CVS. The strong growth in consumption and market share is a sign of the trust that we have earned by holding to the Honest standard in every product in our portfolio. It is our commitment to offering a portfolio formulated without using 3,500 ingredients of concern. This consistency makes the Honest brand an easy choice for households with sensitive skin and a high standard for clean. In addition to the growth of our Wipes portfolio, we also saw strength in our collection of Personal Care, where Honest consumption grew 11%. This was almost 3x faster than the comparative category growth of 4%. With a collection designed to bring joy to daily routines, Honest is the #2 ranked brand in total baby personal care with over 10% market share. And this year, we expanded our Personal Care collection into the big hit aisle with our fun collection of Pixar's Toy Story shampoo, Body Wash, Lotion and Bubble Bath. In market for less than a year, it has already taken more than a 2% share of the kid personal care category and can be found in retailers, including Amazon, Walmart, HEB and select Ahold Delhaize grocery banners. With the holidays just around the corner, our Disney offerings featuring Toy Story, Winnie-the-Pooh and Friends and Mickey Mouse make the perfect seasonal gifts and stocking stuffers. While Wipes and Personal Care both grew well ahead of their categories, our Diapers continue to be pressured. Diaper consumption declined 27% in the quarter. Our losses were not unexpected and were reflected in our plan. We know that there's an important segment of families that want a diaper thoughtfully designed to meet a high standard of sensitivity and care, and our focus is to provide the best option for these families at a price that works. Zooming out, we provide a broad range of Honest branded offerings across the baby and toddler aisles, including diapers, baby personal care and our licensed baby apparel products. This allows us to have a wide variety of ways to introduce young families to Honest and our high standard for clean, done joyfully. By leaning into our higher growth, higher-margin Personal Care and Wipes platforms, we are unlocking new scale and financial strength for Honest. For our current fiscal year, this strong performance can be seen across measures. Year-to-date, we have delivered nearly 7% organic revenue growth and underlying adjusted gross margin of over 45%, record profit margins and a robust $103 million in net cash. All of this gives us great confidence in our trajectory. Yet our most promising growth opportunity lies in narrowing the gap between our current household penetration and the full opportunity of our addressable market. Since 2022, we have welcomed nearly 3 million new households to Honest. And in Q3, our household penetration of nearly 8% continued a multiyear trend of Household growth. The opportunity is clear when we look across our categories and see that our leading competitors have anywhere from 7x to 12x more household penetration than Honest. In flushable wipes, our fastest-growing collection, household penetration is still under 1%. Each point of household penetration contributes meaningfully to our scale. For example, whether looking at baby personal care or flushable wipes, each additional point of penetration is estimated to be worth as much as $25 million to $30 million in annualized retail sales. With one brand that brings a trusted and consistent meaning across all of our categories, Honest has a unique ability to be well accepted in every household demographic. Our initial strategy began with making products that earn the trust of the 11% of households with babies. With nearly half of all parents expressing concern that their children have sensitive skin, Honest fits right in. But we also know that according to the National Institutes of Health and Industry Research, sensitive skin affects over 70% of adults. With this inspiration, we expanded our mission to include the remaining 89% of households with big kids or no kids at all. And in the third quarter, our growth in household penetration was a result of our successfully reaching these older households. Today, households without children make up more than half of all Honest Households. The broad trust of the Honest brand across Households is one of our advantages. We also benefit from the variety of categories we serve. Across our categories, we see that one Honest product can serve as the introduction to an Honest product in another category. Households that arrive through Wipes find their way to Personal Care and vice versa. And as we continue to grow and build trust with these Households, we are turning everyday routines into repeat purchases and repeat purchases turn into lasting subscriptions. Our progress in securing new households is grounded in our strategic pillar of brand maximization. This is the pillar that guides our efforts to scale the Honest brand in availability, revenue, awareness and trial. We drive these gains through 2 key brand maximization levers, physical and mental availability. Let me begin with physical availability, which is our focus in expanding our core items and innovations across more aisles, sets and digital platforms. The physical availability of our Wipes and Personal Care are a great example with distribution up nearly 20% year-to-date. As we continue to scale the Honest brand, we are investing in consumer messaging to drive long-term growth. Whether our community shops online or in-store, we want Honest to be the brand that they think of first and add to their shopping list by name. This is precisely the goal of the lever we call mental availability. This year, we are expanding our marketing efforts to build awareness, encourage trial and deepen brand affinity across a broader range of Households. In the third quarter, this included the launch of the Mother of all Standards, a full funnel campaign that highlights what differentiates Honest, our high standards for clean ingredients, effective performance and joyful design. The Mother of all Standards campaign debuted in July with national and streaming TV advertising. The strength of this campaign message is its ability to connect our products across categories and bring the Honest brand to life in new ways. In September, we expanded the campaign with a major activation around the U.S. Open Tennis Championships. This was an opportunity to bring Honest into a moment of cultural significance through an authentic connection, the high standards that shape the lives of extraordinary athletes. Our out-of-home advertising appeared across New York City on buses, in subway stations on billboards and in prominent locations around the tournament. At the center of the experience was a conversation hosted by Honest between Maria Sharapova, a 5-time Grand Slam champion and former world #1 tennis player and Allyson Felix, the most decorated women in Olympic track and field history. With more than 50 lifestyle content creators in attendance, these 2 remarkable champions had a deeply personal conversation that volleyed back and forth about the standards that have shaped their lives as athletes, women and moms. In addition to the strong social media impressions generated by our creator community, the event marked one of the few times Maria Sharapova has stepped on a public court since her retirement. We are honored that she shared that Honest branded moment with her 4.8 million followers in a video that generated almost 19 million views, becoming one of the highest performing posts of her career. By any measure, a very good return. Along with a great boost in brand awareness for the campaign, we also saw Q3 search interest in Honest rise roughly 40% over the prior quarter. With our the mother of all standards marketing campaign, we are making the investments necessary to expand our reach and earn our place in new households. Powerful brand-building investments like these drive our business forward. Additionally, our strategic pillar of operating discipline is what lets the business turn that investment into an increasingly sound and effective business structure. We are putting that same rigor into the systems and capabilities of the enterprise. This quarter, we added some core technology and information management systems that support data-driven decisions and greater financial efficiency. Today, we are a more growth-driven and structurally profitable enterprise. More people are choosing Honest, and it's undeniable that the brand has graduated from early stage to center court. With a clear balance of investments and executional discipline, we will continue to execute on our 3 strategic pillars of brand maximization, margin enhancement and operating discipline. With this progress in hand, we believe Honest is well positioned to be the most iconic personal care brand of this generation. And now I will turn the call over to Curtiss to provide more detail on our third quarter financial performance and raised outlook.

Thank you, Carla, and good afternoon, everyone. The third quarter is our strategy showing up in the numbers. We delivered record margin, growth concentrated in the platforms we chose and cash generated without leverage. That is the earnings power of the Honest model we have built to last. Let me take you through the quarter and then our updated outlook. Starting with the top line. Third quarter reported revenue was $84.6 million, a decrease of 8.6% compared to the prior year period. This decline reflects the strategic exits underpowering Honest growth and lower Diaper revenue. On an organic basis, revenue increased 9.2% to $79.3 million, driven by Wipes and Personal Care. Turning to gross margin. Our Q3 reported gross margin came in at 45%. On an adjusted basis, gross margin was 45.8%, an improvement of 850 basis points. Excluding the dilution from our apparel inventory liquidation, our underlying adjusted gross margin was 48.9%. That is a record for the company and an improvement of 1,160 basis points. This expansion was driven by supply chain efficiencies, lower fulfillment costs and favorable mix. Adjusted operating expenses increased $2.3 million to $36.5 million. The increase in operating expenses was driven entirely by a $2.9 million or 20% increase in marketing to support our higher growth, higher-margin Wipes and Personal Care platforms. This was partially offset by lower selling, general and administrative costs. Net income for the quarter was $91.3 million compared to $0.8 million in the prior year period. Results include an $89.4 million income tax benefit related to the release of substantially all of our valuation allowance against deferred tax assets previously carried on our books. This outcome is a testament to the hard work across our entire organization to execute on our strategy. It reflects the objective strength of our current financial model and management's clear expectation for sustained positive earnings in the years ahead. Adjusted and underlying adjusted net income were both $3.1 million compared to $0.8 million in the prior year period. Adjusted EBITDA was $6.3 million or 7.4% as a percentage of sales and 360 basis points above the prior year. On an underlying basis, which removes apparel liquidation revenue, our EBITDA margin was 7.9%, 300 basis points above the prior year. Our asset-light operating model continues to provide financial flexibility. We ended the quarter with $103 million in cash and cash equivalents and 0 debt. Year-to-date, free cash flow was $30.5 million. Turning to capital allocation. This quarter, we completed our inaugural $25 million share repurchase program, which was authorized this past February. With that execution behind us and with the balance sheet strength I just described, our Board of Directors has authorized a new share repurchase program of up to $30 million effective immediately. This decision is a direct reflection of our confidence in the structural improvements we have made to our operating model and the cash this business now generates. We believe our current valuation does not fully reflect those improvements. The program underscores our commitment to a disciplined capital allocation strategy, one that balances reinvestment in our growth initiatives with a clear focus on returning value to shareholders. Given our year-to-date execution, we are raising our full year guidance. Our updated full year 2026 outlook is as follows: reported revenue in the range of $322 million to $325 million, up from $319 million to $325 million. Organic revenue growth of 6% to 7%, up from 5% to 7%. Adjusted gross margin of 45.5% to 46.5%, up from the mid-40s. And adjusted EBITDA of $25 million to $26 million, up from $23 million to $25 million. Let me provide some additional color on Q4. As part of our ongoing strategy, we are stepping up our investments in SG&A and marketing. This is deliberate as it funds the capabilities that let us scale efficiently and the brand work that drives household penetration, which is the measure that compounds for our business over time. At the same time, the structural margin improvement we have delivered so far this year remains intact. Taken together, the third quarter is a continuation of what we delivered all year, growth concentrated in our priority platforms, a business structurally more profitable than a year ago and cash generated without leverage. Ultimately, this consistency powerfully validates our strategy. It gives us the confidence to raise our outlook today and the conviction that we will continue executing at a high level moving forward. With that, I will turn it back to Carla for final remarks.

Thank you, Curtiss. Before we move to Q&A, I want to express my deep gratitude to our incredible team of Honest Butterflies. These results are a demonstration of what a modern personal care company can deliver when the brand, the portfolio and the P&L are pointed in the same direction and operated with excellence. Taken together, our performance to date and the strength of this team gives us the confidence to deliver the raised outlook we shared today. Anchored by the Honest standard, we are on course to be this generation's most iconic personal care brand. With that, I will now turn it over to the operator to open the line for questions.

[Operator Instructions] Our first question comes from the line of Aaron Gray with AGP Alliance Global Partners.

Nice to see the accelerated organic growth. First question for me, just in terms of the 4Q guide on the top line. So the implied 4Q is 76 to 79. Just want to get some clarification on whether or not that does include apparel, if that's all organic. I know last quarter, you called about $10 million total in apparel left, I think you have about $8.5 million for the last 2 quarters. So if you assume $1.5 million in the fourth, that gets you about implied 4% to 9% organic growth for 4Q. So just wanted to know if I was reading through that correctly. And then if so, just any drivers essentially to the deceleration in growth in 4Q implied?

Aaron, good to talk to you again. The guide of 6% to 7% on a full year for organic revenue is inclusive of everything that we know today about apparel. And what we have been doing both in Q3 and in Q2 is excluding that from organic revenue. So I hope that clarifies it for you. And then the second part of your question, can you repeat that for me again, please?

Yes, I guess, so for the total revenue number, does that have any apparel in there?

In the reported number, we have about $1.4 million of revenue in the quarter related to apparel.

Okay. That answers that question, then. Second question for me, just think on apparel, but switching over to the license agreement. Can you give any incremental color? I know it was a new announcement last quarter, but what we should expect in terms of the ramp, the O5 partnership, what they have planned and how to think about potential contribution to the P&L?

Yes, excellent. So yes, it's O5, they have been a great partner for us thus far. As we have been talking in the last quarter, throughout 2026, it will be a rather immaterial impact on our performance. And we will come back in 2027, early next year and give you some more guidance about what we expect, but we're pleased with the partnership so far.

Our next question comes from the line of Anna Glaessgen with B. Riley Securities.

Nice outperformance in the quarter. I wanted to ask on a little bit of the timing of expenses between 3Q and 4Q. Obviously, some nice upside versus the street. Wondering if there was something that shifted into 3Q or potentially just to understand the difference in expectations and maybe some costing that may have shifted between the quarters?

Yes. So first, we're very pleased with the quarter, both top line gross margin and EBITDA delivery really came in, in line with our expectations. I'll just reiterate that when we last spoke, we did talk about a step-up in the second half against SG&A and marketing. You saw that marketing in the quarter, up 20% year-on-year, and we will continue to expect to do the same thing, similar things in terms of investing in SG&A and marketing in Q4, again, against our Personal Care and Wipes higher-margin platforms.

Great. And then following up on that, we've now seen gross margin in at least 45% in 3Q or close to 46%, projected around 45% in 4Q based on the guide. Should we be expecting this mid-40s gross margin to be carried through going forward?

Yes. I think what I would offer you here, Anna, is that we are really proud of the structural improvements that we've made in 2026. The improvement in our supply chain, the improvement in mix is exactly what we expected and what we committed to actually this time last year when we announced powering on this growth. So we are really proud of that. The structural improvements are here to stay, and we'll provide more color on what the expectations are from a gross margin standpoint in early 2027.

[Operator Instructions] And our next question comes from the line of Owen Rickert with Northland Capital Markets.

Congrats on another awesome quarter. First one for me, just on the non-parent households, I believe you mentioned it makes up more than half of all Honest Households now, which is pretty incredible. But do these no kids households have the similar repeat purchase and subscription economics as your original baby and parent households? Or do they show a different LTV basket size retention that's meaningfully different?

Owen, great to hear your voice. What I would say as I think about the role that these households play in our portfolio is it probably should almost go without saying that they're buying different kinds of items, right? By default, the no kid households are not buying these big single units of diapers in their transactions. So you are right. I think your intuition is right. Their baskets are different. But the other thing to take into consideration is that they are purchasing items that typically are purchased one for more than one room in the house. Often, if you think about something like lotion or shampoo body wash and you think about your own house, it's a very different kind of purchase or flushable wipes. Often, people will, for example, purchase a flushable wipes. They have one that's on display. They have another spare in the cabinet. They've got multiple bathrooms in their house that they're putting them in. So it is a very different kind of purchase dynamic. And then the other thing that is structurally important to know is, and I know we've said this, so forgive me for repeating myself, but the baby households make up 11% of U.S. households. Big kids that we define by households with kids ages 7 to 17 is a bigger population. That's 14% of the United States. And then we see that the households that we've been calling the no-kid household, that could be a household that's like my own, where there were kids, but they're growing up now or that could be a household that hasn't had kids or doesn't have kids, that's 70% of households. So it's a much bigger addressable market. The buy rate that we see in the no-kid households often starts in the Wipes category. That is the most common entry point for a no-kid household for us in our portfolio. And we love that because that's a loyalty and a subscription type of item and often it's an item that you just don't buy in singles.

Got it. Got it. Super helpful. And then secondly for me, great to see the new repurchase authorization after completing the prior one. But how are you thinking about the balance between repurchases versus reinvesting in brand building and innovation at this stage of the turnaround?

Yes. Owen, I mean, it's great, right, that we have $103 million of cash. We are generating -- our free cash flow is north of $30 million in this year, and we continue to have no debt, right? So we are in a pretty advantageous position. We continue to think about, first, reinvesting in the business to scale, right? That is still our #1 priority. And then we have the flexibility to continue to return value to shareholders as the secondary capital allocation strategy. And so that remains unchanged. And the reauthorization that was just agreed to with our Board, I think, is an indication of the confidence that we have in being able to continue to drive the performance that we've had over the course of 2026 into the future.

And I'm showing no further questions. So with that, I'll hand the call back over to CEO, Carla Vernon, for any closing remarks.

It's been such a pleasure to be with you all for our Q3 earnings. We look forward to talking to you next quarter, and thank you so much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.