Most public CPG companies are in their quiet periods ahead of earnings. But there were still significant developments with the CPG companies that are not (yet) public. There is a report that Impossible Foods plans to go public either through an IPO or SPAC sometime later this year and The Honest Co., which was founded by actress Jessica Alba to offer natural baby and personal care products, filed a S-1 in preparation for going public (it plans to list under the ticker HNST). That gives the public more information about the growing company. In this edition of The Stockout, I explain why I believe the CPG industry should keep its eye on HNST.
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It is possible that Impossible Foods will go public later this year. Impossible Foods is reportedly exploring an IPO or a merger with a special purpose acquisition company (SPAC). The company is growing quickly, doubling its headcount the past year with plans to hire hundreds more employees. News outlets are reporting that Impossible may be valued at more than $10 billion, up from $4 billion in a 2020 valuation round.
In addition to providing liquidity, I wonder if the company may use capital to grow more aggressively into adjacent categories outside of its flagship plant-based burgers. Impossible’s closest competitor, Beyond Meat (Nasdaq: BYND) has posted sales growth of around 100% y/y in recent quarters. So far, Beyond has taken something of a different tack by expanding into other alternative meat categories, such as plant-based alternatives to meatballs, and growing its partnerships with fast food chains. I hope that Impossible goes public to have greater insight into plant-based meats and for the possibility that I might like the stock as much as I like the product.
Why the CPG industry should care about The Honest Co. IPO. The Honest Co. sells diapers, wipes and other baby products, as well as lotions, sanitizers and other personal care products. That puts the company in competition (at least indirectly) with CPG giants including Procter & Gamble, Clorox, Unilever and Kimberly-Clark. It is doubtful that The Honest Co. could ever compete on price alone given the scale of those larger competitors, but that was never its intention.
The Honest Co. provides customers with an upscale alternative to the major brands using more natural ingredients and argues that it competes in a different, and faster-growing, product category than those well-known brands. Its relative success will give the industry insight into how large the market is for premium better-for-you personal care products as well as how the market values companies that compete in that segment.
The company’s success also speaks to the influence that celebrity and social media have on the CPG industry. Alba is the company’s chief creative officer, and her image and influence are inseparable from the brand. But the day-to-day management is led by CEO Nick Vlahos, who joined The Honest Co. in 2017 after 22 years at The Clorox Co., most recently as chief operating officer.
The Honest Co.’s S-1 makes a strong case that there is lots of room for growth ahead. The company described its strategy as “spend to grow.” One use of the capital from the IPO will be to expand its adjacent product categories. Currently, the company’s revenue mix breaks down to diapers/wipes/baby, skin/personal care and household/wellness, which represent 63%, 26% and 11% of revenue, respectively, but those percentages are likely to change going forward. The company has amassed a loyal following with nearly 90% of The Honest Co. diaper buyers expanding their purchases into other product categories, suggesting it can migrate its customers into new categories and new SKUs. In fact, in 2020, 22% of its revenue came from SKUs newly introduced in 2020.
Outside of its existing clientele, brand awareness is low and the company estimates its brand awareness at only 25% based on survey results. Brand awareness should improve with a substantial advertising campaign, whereas previously, much of the company’s marketing came from social media and Alba’s large following. In addition, The company has a 40% all-commodity volume (ACV), which suggests there is untapped growth potential as a result of the products not being available in more retailers. Only 2% of the company’s revenue is from outside the U.S., representing another area with growth potential. The company also makes the case that it is participating in segments of personal care products (natural, premium and better-for-you) that have revenue growth rates that greatly exceed the overall personal care market.
The Honest Co. is truly taking an omnichannel approach to distribution. Seemingly every brand is touting its omnichannel credentials, but The Honest Co. strikes me as being one of the best omnichannel examples. The appointment of Vlahos as CEO in 2017 was in part driven by the company’s transition from online to omnichannel. The company gets 55% of its revenue from digital with about 30% of its sales coming from Honest.com. The remaining 45% of revenue comes from the retail channel, with Target, Amazon and Costco being its three largest retail partners. Seventy-nine percent of recent diaper buyers who originate their purchases on Honest.com also shopped for the diapers in retail and brick-and-mortar stores.
The Honest Co. is a comeback story. 2020 was a strong year for The Honest Co. Revenue increased 28% to just over $300 million, and the company’s net loss declined from $31 million to $14.5 million. Ten years since the company’s founding, the brand has already withstood the test of time in the difficult-to-break-into CPG space. But it wasn’t a straight shot up and the company has had to contend with lawsuits with allegations that were counter to the stated purposes of the brand. For example, in 2017, the company settled a lawsuit claiming that it fraudulently labeled products as chemical-free along with making other untrue “clean label” claims. There has been other product litigation that the company describes in its S-1. The Honest Co. has also never been profitable in its 10-year history, but that is not unusual for a growth-focused CPG company early in its life cycle. As revenue continues to grow and diversify, it would not surprise me if the company finds profitable niches throughout the personal care industry.
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