5 Step Turnaround Plan for Honest

TLDR:

Hola from South America
Honest Co’s Dire Turnaround
Tool: Stay.ai

On my way to BA!

This one is shorter today as I’m flying out to Buenos Aires in 5 hours. I’m going down for a work trip but am really excited for the asado and tango.

If anyone has any recommendations on what to do in BA always hit that reply. Looking for cool ideas to go around town, and always looking for good food recommendations.

Today’s going to be a fun one. We’re going to pretend turn around a DTC OG Honest Company.

Getting Honest out of the s**t and back into the black.

Honest Co’s 2022 earnings came out and they are NOT good. Honest is in dire shape and needs to radically update its business asap.

The stock is down -91% all-time since IPO’ing in May 2021, is trading at $1.66/share. The market cap is currently

Suffice it to say things are not going well and there’s some real changes that need to be made. So let’s run a thought experiment on how to turn the company around and see what lessons you can take away for your business.

I have no affiliation with the company. I’m not a customer, investor, or vendor. Just an admirer who’s followed along their journey for the past decade.

Let’s imagine I have a Hedge fund at my disposal who can take Honest private for $160m. Let’s look through their numbers and identify how to turn this company around.

The key stats from their 2022 earnings to inform our strategy.

1. $375m in Revenue

   1. $200m of that is Diapers, growing at 1% YoY

   2. $60m is Skin & Personal care growing at -11% YoY

2. Products are sold in 50k retail locations (16%+ YoY)

3. 2022 Gross Profits: $92m (GM% 29%)

4. 2022 SG&A + Marketing: $135m!!

5. 2022 Net loss: -$49m

6. Winning awards across all product categories.

Let me be crystal clear here. This is a good business. There are strong bones for this to be a successful and should be trading at a higher multiple than 0.5x Revenue.

But there is one critical point of failure in their strategy. A lack of focus is killing multiple wonderful lines. Honest & CO. wants to be a household, skincare, wellness, beauty, cleaning, and fashion business. You probably got confused just reading that.

They know they own high income moms who care about the environment, but are stuck halfway from being a brand and a marketplace. I don’t know anything about the product quality or consumer love, but all of these units would be more successful on their own.

Mushed together they’re operating 4 different businesses with a sustainability halo. The 4 businesses I could indentify:

1. High-End Baby brand (Diapers + related products)

2. Beauty/Skincare Brand

3. Household/Cleaning Brand

4. Baby Fashion/Apparel brand

All of these businesses have different margin profiles, operating investments, and product dev cycles, which is what’s causing the foundational problem and why the overall business is in the toilet.

29% Gross Margins at Honest’s scale is unacceptable for a brand that sells Beaty/Skincare, but could be acceptable for a retail-heavy Diaper chain. The problem is there’s no clear strategic narrative. But the data tells all…

Honest and Co. is really a diaper business. It’s that simple. Diapers account for 50% of their revenues and when you add in the remaining baby related products it’s the driver of their business. Operating 3 other businesses is what’s getting them in trouble and how they lost $49m last year.

The craziest stat to me is that SG&A + Marketing 146% of their Gross Profits. To run a profitable business you need SG&A + Marketing at <100% of Gross Profits. Usually you want them to be significantly lower than 100% to have enough dollars left over to cover operational expenses (team, offices etc) and be profitable.

This stat indicates to me their strategy is failing. The point of going multi-category is to reduce the Sales & Marketing expense as a % of sales by selling more products to the same customer. With SG&A + Marketing at 146% of Gross Profit they aren’t accomplishing this objective.

Tool that Needs to be on your radar

If you’re looking for a subscription replacement, Stay.ai should be on your radar. Friends of the newsletter like Snow, Obvi and Olipop have all made the switch for more customization, deeper subscription management, and data to build a best in class subscription program.

They also claim on their site that they’ve never had a brand churn. Not sure if that’s still true, but one helluva claim for a new Shopify app working with 250 brands.

Here’s my 5-step turnaround plan:

1) Triple down on diapers + related products. Move EVERYTHING else to a TIER 2 priority.

2) Sell off the Beauty/Skincare business.

3) Launch the baby apparel biz under a new brand with a new team.

4) Wind down the Household/Cleaning biz.

5) Stop selling other companies’ products on Honest.com.

Each one of these has its own issues.

1. Multiple business units is pulling Honest’s focus away from ruthlessly prioritizing the diaper business and squeezing out as much margin and growth as possible.

2. The Beauty/Skincare brand is languishing as the second fiddle It’s actually shrinking -11% YoY. It’s not big enough to be the main priority, but too big to ignore. It’s the middle child and would have more enterprise value if nurtured properly.

3. Apparel isn’t just a bolt-on company. Nailing styles, culture, and the supply chain requires incredible focus, capital, and hunger. This needs to be it’s own company.

4. Someone got too greedy during COVID and didn’t think about whether cleaning merchandise actually makes sense in the overall catalog. This seems like a “spreadsheet smart” decision that’s sidelining valuable working capital.

5. The marketplace is another vestige of bad strategy. Honest makes enough of their own products that retail in 50k doors. They are a brand/manufacturer not a marketplace it’s time they acted like it.

If I could get in there and run my playbook…

1. The diaper biz is the sole focus. Get it back to growth mode + better margins (Diapers is a $57.4b TAM w/ 5% CAGR).

   1. At $200m/yr Honest has SOOOOOO much room left for growth, splitting focus is irresponsible.

2. Sell a $60m/yr Beauty biz that should have ~80-90% margins with slowing growth.

   1. This business line alone could be sold for $90-100m and would recoup most of the initial acquisition capital.

3. Spin out and own a fast growing $15m+/yr Baby clothes startup. This is another opportunity too large to play second fiddle not big enough to split the team’s focus around.

   1. An independent company tackling the proj. $82B TAM by ‘27 would give this entity the proper legs to stand on to be a billion business itself.

4. Liquidate slow/dead cleaning/household inventory off the books and reinvest that capital in core growth.

   1. Honest wins on diapers not tile cleaners.

5. DTC-ify the online shopping experience and stop muddying up the waters with other company’s products.

   1. Streamline the experience around what parents need to take care of their babies and sell them more high margin Honest products.

If this strategy plays out as plan selling the beauty line itself would close to cover the acquisition. Then Honest would own a portfolio of focused, sustainable, high-end brands successfully growing at better margins with massive retail distribution. And could probably turn $180m purchase into $500m in ENT value.

It’s more of a hold co strategy with separate teams, budgets, strategies that all target the same customers leverage similar resources. They have many great pieces in place, but the lack of focus on each one is killing their overall profitability.

It’s unlikely they’ll be able to make this level of changes as a public company. This strategy will require significant investment and a lot of disclosures if they were made while Honest was still public. With Honest where trading at 0.5x their current revenue it feels like a steal and virtually inevitable they get taken private.

I’m just hoping someone can run this playbook and save one of the DTC OGs who built a lot of the playbooks we now use today. There appears to be a lot of value left in front of this business if it was structured to properly take advantage of it.

🧠 The Takeaway

Lack of focus (strategy and catalog) is killing a great eCom business. Now is the time to refine and prune the catalog to get to the optimal business.

1. Honest Co is wildly unprofitable because it’s attempting to run 5 businesses in one.

2. Sell off Beauty/Skincare, Spin off apparel, and Shut down Cleaning supplies/ + the marketplace to get back to growing the core.

3. Play the long game in huge markets. Honest Co. is a public company with <1% of the diaper market and SOOOO much room left to grow.

👷 What can you do about this?

1. Be ruthless about your product catalog.

2. If you’ve hit meaningful scale but growth is slowing and it feels like you’re running multiple companies. Maybe you should be.

3. Don’t underestimate how big something gets over decades. A leading product in a huge market takes years —> decades to become massive. Don’t get distracted in the mean time.

As always. Stay confident, connect with your customers, and keep crushing it.

Jeremy Horowitz

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