Passing on Hims&Hers

TLDR:

Wedding Weekend!

Why Hims&Hers is too dangerous for my taste

I got Married!

Going to keep this short today since I’m in between meals after an incredible weekend. There are few things in my life so far that have been so impactful. Seeing everyone in your life happy for you and celebrate you is a truly special moment.

I’m definitely still processing it.

Today we’re going to take the newsletter in a slightly different direction. Hims&Hers is the first deal I’d pass on if I had the chance to look at it. Every week we usually review a 👍 or 👎 biz. Today we’re going to talk about a sideways thumb biz.

Why I wouldn’t take the bet on Hims&Hers

Hims & Hers is the last of DTC-mania holdouts. Running the VC blitzscale/growth-at-all-costs playbook as a public company. It’s rapidly approaching the cliff of grand slam or cautionary tale.

Trading at $9.11/share with a $1.91B market cap, the surprising piece to me is that the public markets actually don’t hate this brand. It’s only down -7% since it’s Sep ‘19 IPO and despite going on an absolute rollercoaster the last 24 months has mostly returned to it’s pre-COVID price. 👈 That’s actually really meaningful in today’s market.

But… if this came across my desk I’d pass on this deal. It's burning its cash like Pablo Escobar on the run, chasing every dollar in Topline growth. The path from here is either going into it with monopolistic market share or explosion entering the upper atmosphere.

Losing -$65.6m in ‘22 and started ‘23 with only $46.7m in Cash this company is 1-2 bad quarters away from full Icarus mode.

Here’s the 3 reasons I wouldn’t want to own Hims & Hers.

The Financial breakdown

The Financial TLDR:

A high growth company and spending like one. With 78% Gross Margins the business has such strong fundamentals, but is still in full 🚀 mode. They’re still spending like they’re raising their Series J. A bold, bold strategy.

Topline growth is impressive at +94% YoY. Rare for the brands we’ve looked at so far. But that comes at a price. The Marketing budget which was 52% of Rev also increased +100% YoY.

When adding in SG&A + Tech costs their OPEX is 91% of Revenue. This is the type of behavior you’d expect from a software business that is planning on flipping the switch to incredibly profitable coasting on 90% Gross margins once it gets to a certain size. It’s almost like they forgot they have 22% COGS they continue to pay for and aren’t going anywhere anytime soon.

Despite having incredible margins (78%) it’s spending too much money to be profitable, and needs to grow into the very big shoes they’ve created for themselves.

Here’s are the 3 reasons I wouldn’t acquire Hims&Hers:

1) There’s no real off ramp here.

This is scaling to the moon or exploding at orbit.

The Growth-at-all-costs playbook has put them in a tricky game of chicken. Their SG&A was so high in ‘21 (59% of Rev) that they had to grow their way out of it.

So what did they do? Went full throttle on Marketing, doubling their spend YoY and continue to spend 52% of their Revenue on marketing. Growth is good and you need to spend money to grow. It’s my literal day job, but 52% as a public company!?

I hope I don’t need to say it at this point, but that’s too much money for this sized business. An earlier high growth business with a massive opportunity in front of you might go up to 30%-50%. But 52% for a public company is rare. Head scratcher rare.

So why are they spending marketing dollars like it’s burning a hole in their pocket?

They needed to grow Topline aggressively to afford their Overhead (SG&A), which is the most Silicon Valley tail-wagging-the-dog strategy I’ve seen. They hired so many people to grow the company that they needed to spend that much on marketing to drive enough sales to afford the people they hired for growth.

If you’re confused by that strategy, that’s okay. It because of the broken logic in the thought process.

Now don’t get me wrong. If they can double again they’ll crush and turn this into a $5B. Then I’m the pessimistic hater from the sidelines.

But if they don’t and can’t grow into the scale where they’re profitable at this type of spending, they’ve thrown out their parachutes/lifevests/lifeboats. And that won’t be pretty.

Takeaway: Topline should determine Overhead. Not the other way around.

2) There isn’t any debt on the books.

I know what you’re thinking. Debt = Bad. Why would you want to see debt on a fast-growing successful company.

Once you get to a company of this size, debt usually comes with significantly better terms, as a revolving line of credit (LOC) and other financial vehicles. They don’t have to use it, but a bank will make the debt available to them to tap into as they need for a specific fee + interest.

Here’s Hims&Hers problem:

They’re losing $61m/yr. and have:

• $47m in Current Liabilities

• $46m in Cash

That isn’t rare for a company in growth mode as they are reinvesting the majority of their cash into the business, but what happens if they hit a rough quarter or two and need cashflow?

They don’t have easy access to capital. If cash gets tight because they continue to aggressively invest in marketing and fewer customers end up buying, they could become insolvent faster than you think. Insolvent → Bankruptcy.

Where the strategy becomes gnarly.

Today, those debt relationships are harder and more expensive to establish. I’m not saying they wouldn’t be able to secure some type of debt if they wanted. But the terms aren’t as favorable anymore and there’s a lot more hoops to jump through then 2-3 years ago. Feels like a missed opportunity for them to shore up a contingency plan just in case.

Again no lifeboats/parachutes etc.

Takeaway: There’s a reason public brands have Debt/LOCs.

3) Do they need to spend $29m on Tech and Dev?

Don’t get me wrong there is a crucial technical component to their business model. Facilitating the Telehealth piece of connecting patient to Dr, getting the prescription for the order definitely requires a complex software build.

But does it require $29m/yr worth of tech overhead?

Today every eCom company should really question whether they are building a platform or a unique way to sell. If it’s a platform that most likely means you’re building a marketplace (Amazon, Jet.com, etc) where you’re investing in the tech infrastructure that brands will utilize to sell on, creating new sales pathways for brands. Even with that being said plenty of new marketplaces are building on top of Shopify already.

Yes, it’s cooler looking and you have more flexibility to build it on your own, but for a company clawing to profitability, $29m (6% of Rev) is a considerable investment.

That isn’t to say they’d be able to reduce their Tech overhead to $0 by moving to Shopify or any eCommerce platform. Obviously they’ll continue to have tech overhead. But how much do they really need to make this work?

Shaving off $2m-$10m in Tech overhead greatly helps this company move from unprofitable and burning through cash → cash flow positive with a sustainable business model.

Takeaway: Tech costs are some of the easiest places to drive profitability.

Final Thoughts

This isn’t to bash on Hims&Hers. They’re is a great business that’s creating really interesting experiences. The first company to ride the Telehealth + expiring patents trends. A pioneer in reinventing how people get access to prescription drugs.

But they’re running the old VC playbook in the new market and it feels like they are approaching Icarus status. To me a reason this is a pass is because they shouldn’t have to need to play this high tightrope game.

With less overhead they could greatly cut back marketing costs, grow more sustainably, profitably, and let this evolve into the digital Walgreens over years to decades. Instead they may, or may not, make it to 2026.

But with all that being said, you should check out their site experience forhims and forhers.

The way they break down Merchandising and UX for each audience is realllllly interesting.

They’re basically running 2 separate sites for each audience under the same brand/template/layout. The content is completely and positioning are completely different, but built all on the same model.

For Hims:

• Looks like the Sciency-version of an Old Spice Commercial. No recognizable celebrities.

• Merchandising is much more focused on sexual health and hair loss.

• Very product focused with CTAs geared towards getting into the funnel quickly.

For Hers:

• First image is Kristen Bell in a classic Attractive celebrity-focused styel

• Products are geared towards Mental and Hair Health.

• Very User focused with more images of customers + pushing to quizzes to learn more.

My question is who’s going to do that on Shopify + an LP builder first? This is an amazing experience, but in reality this can be done with smart LPs based on traffic and a mildly unique collection page experience. To belabor the point. Cool, but is it $29m/yr cool?

🧠 The Takeaways

Hims&Hers is a once in a generation business opportunity. Is their leadership team treating it like one?

1. Blitzscaling playbook requires a company to put the pedal to the metal. Public companies need a contingency plan.

2. They don’t have access to real debt. They don’t need it today, but what’s their parachute?

3. $29m/yr on Tech & Dev is a lot of ongoing support.

👷 What can you do about this?

1. Align your Overhead and growth plan to your Topline numbers. Not the other way around

2. Secure a flexible LOC if you still can.

3. If you aren’t on Shopify. What are you waiting for?

The best ideas in business are usually approaching your same problems with a different approach.

Aspiring Acquirer

P.S. If you’d like to learn more check out some of our other resources:

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