Taking Honest Co. back to $2B

TLDR:

What Content I consume.

Getting Honest FIt to hit $2B.

LBAB Community - Content I Consume

I get asked alot: “Where do you consume content?” 

It comes from a whole host of sources: Books, Podcasts, YouTube, but today I’m going to share where I consume the most: Social. 

2 years ago, when I started seriously creating content, I ran the Russell Brunson playbook. I streamlined all of my posts and feed on my core central content themes. The only content I consume is from the best in the space who I want to learn more from.

That way, I let the algorithm curate my feed around what they are doing. It’s not just posts, but likes, comments, and reshares. I essentially hacked into their newsfeed to see what they’re consuming.

Here are the 5 great accounts I consume to learn more about the M&A Ecomscape.

1. Drew Sanocki - The eCom OG. Every day in March, he shared a tip from successfully turning around 3 distressed $100m brands to successful 9-fig exits. Check out the series here.

2. Fan Bi - DTC distress breaking news. Fan posts regularly on deals and what’s going on in the DTC deal making space. When news of a deal comes out, Fan usually breaks it.

3. Ben Cogan - He doesn’t post often, but when he does, it's a global view of the aggregator market. Ben is looking through hundreds of SMB books every year and sharing the trends with everyone.

4. Sean Frank - When Sean’s not s**tposting, going to war with SaaS, or trying to get you to buy wallets, he’s diving into thoughtful analysis of public bizs in the space.

5. Jason Andrew - my brother from another downunder mother. He takes the accountant lens on brand teardowns and how to go about this. His content is much more focused on the Australian market.

Hope these are helpful. Also, reply to this post with your favorite accounts in the space. Who should I be following?

And now for one of the easiest ways to 5x our money. Let’s get Honest Co. back on the right path.

Let’s Examine This Biz

Honest cannot get profitable to save themselves because they’re over-extended, lack focus, and slap Jessica Alba’s face on too much.

Despite improving their financials this year, Honest is the perfect ex. of how extending a brand too far spreads your resources too thin and kills profitability.

Trading at $4.19/share with a $401m market cap, -78% the last 5 years, this celebrity-backed brand should be a $2B cap biz but can’t get out of their own way miscalculating market sizes.

This mountain cliff performance isn’t just post-COVID pullback. This biz can’t get profitable and lacks the focus to be a top-tier Public Consumer Brand.

Whether it’s a desire to be a “bigger brand” or a lack of confidence in their core biz, Honest isn’t hitting the growth it should.

Despite the stock 4xing since we analyzed it last year (cough cough would have been a great time to buy cough cough), it should be at $2B+ with profits and growing at a consistent rate. But it’s spread itself too thin and can’t capitalize on the massive opportunities staring it in the face.

Financial Summary

TLDR Analysis: Won’t Grow to profitability

• In a year with Marketing & R&D cuts, SG&A still grew.

• Gross Margin is consistently 29% (L3) For a DTC brand?

• OPEX is -$139.4m on a $100m Gross Profit ☠️☠️☠️

A 1.17x Rev multiple is generous for a biz with no earnings and has lost -$40m/yr pretty consistently the last 3 years. This biz has bloat in all the wrong areas and really should be a top tier Baby brand if they could get out of their own way.

Let’s Save This Biz!

I wish we had bought this thing last year when it bottomed out at $100m. Could have scooped it up for $130m and already 4x’d our money.

But I still believe a $2B+ biz is trapped here. Let’s go all in on Baby and set it free.

1) Divest Everything that isn’t Babycare

Honest is the perfect ex of when product + category extension goes too far. 

The US baby care market is $98B and projected to grow to $168B by 2032. Honest is wasting its time chasing any opportunity besides eco-luxury baby care.

Why are they wasting their time pursuing any other market?

They are known and loved for their baby products. They know customers love their diapers and related products. Bet the farm on Baby.

Stop wasting time on other categories.They know baby matters. This is what comes up when you search Honest Company on Google:

When pairing that with their Sales breakdown by product it really makes you question what are they thinking?

Get out of Skincare/Makeup. Laundry Detergent. Hand Sanitizer. Baby Clothing (which is its own website). These are all products that might sell well, but aren’t gangbuster products for Honest.

Baby is. Baby has been. And Baby will be. Every year, consumers have kids. Younger parents are more and more eco-friendly. Own that market.

If anyone under the age of 40 making $100k+/yr isn’t buying Honest diapers, that is Honest’s greatest failure. Not whether they can sell lipstick and laundry detergent to moms.

Takeaway:  Extract the full value of your current TAM before moving to the next.

2) Migrate to Shopify tech stack. Save BIG

This is the classic DTC overspending on Tech “because eCom is our unique advantage” garbage. We’re going to save $5-10m/yr just migrating them onto Shopify.

Their Current Tech stack:

• SalesForce Commerce Cloud

• Attentive

• BaazarVoice

• Dash Hudson (Referral Marketing)

• Hotjar

• Klarna

• Klaviyo

• VWO

• Wunderkind

• Yottaa

SFCC is an easy $1m+/yr making everyone else on this list an easy 6-fig contract. Per vendor.

When you add up the internal team to maintain all of these tools, we’re probably talking $6m -$10m a year in total costs. 

Migrating this entire stack to Shopify and equivalent Shopify providers will cost a fraction of the $. Then we’ll save another couple million removing the integrators and dev teams to maintain the entire stack. We’ll add a couple of apps that we custom built.

And the best part? We’ll negotiate great deals because every single Shop app will be gunning for our biz—we’ll be a Top 10 customer for all of them.

You can tell that they’re already contemplating this. The new baby line Honest Baby Clothing on Shopify Plus. It’s the obvious move more and more brands will pursue over the next decade.

Takeaway: SFCC/Custom = too expensive to make sense.

3) Exit to P&G or Unilever for the Distribution

While Digital is currently growing the fastest (+10% YoY), this biz will be dictated by Retail availability. The time it’ll take for Honest to rebuild that vs. plugging into the behemoth’s ecosystem isn’t going to be worth it.

When you think about the core buying moment for Diapers it’s in the moment. When the s**t literally hits the fan and you need to clothe your baby. Someone is running to the grocery store to buy more diapers. 

Yes, Honest has made some brilliant moves with the Diaper Cake and subscription play, but those alone won’t scale it to $1B in sales. A major international retail footprint will. The deals a mega conglomerate has with retail chains would guarantee Honest more better placement and better rates solely because of the conglomerate’s scale and relationships. 

Could Honest build this themselves? Maybe, but that will take a very long time (especially internationally). It’s a time-, capital-, and resource-intensive investment best played out when you have a long time horizon.

For a biz that has $30m in the bank and loses $40m/yr, that isn’t where I’d place my bet.

The conglomerates will unlock this brand and bridge it to the next level of profitable scale, turning Honest into the Eco-lux Pampers.

Bonus points if I can convince Jessica Alba to become the face of the Baby division. That alone would make it worth it for the conglomerate to pay a healthy multiple.

Takeaway: Conglomerates do have economies of scale.

Final Thought

Pick a great product in a great market and focus, focus, focus. The only time you should seriously consider other markets is when the well’s running dry.

To clarify what I mean here: Honest crushed diapers. That’s their bread and butter. There’s plenty of room to extend within that category. Just think of all the other products you’ll need with diapers:

• Wipes

• Diaper bags

• Ointments and creams

• Trainers

Those are all great product expansions within a category to increase AOV and give customers a reason to repurchase. And they did exactly that.

What it ISN’T is category extension (Laundry detergent or baby clothes). That is building a completely new core competency, and let’s be Honest here. In eCom, it’s a whole new supply chain, team, biz model.

These crossroads are the hardest for any scaling biz. In these moments, you need to make a data-driven philosophical decision.

Analyze how big your current market is. Take stock in how much you’ve sold and deeply ask yourself how much room you have left for growth.

If I was sitting in Honest boardroom, and they said @ $200m in Sales, we don’t have enough room for growth in a $168B category my only reaction would be:

It’s so easy to get out over your skis in the moment when you’re growing like crazy and crushing it. But if your market is big enough, don’t load yourself down with other bizs or side quests. Stick to the original mission. Break and reform the biz, then get after the largest opportunity possible. 

At the end of the day, that is the recipe for success.

🧠 The Takeaways

Honest is recovering but has too many priorities and not enough focus to win in the competitive Baby market.

1. Gut every biz that isn’t Babycare. Focus on the $168B market at hand.

2. Migrate to Shopify and save $10m/yr

3. Scaled Retail distribution is key here. Get there ASAP.