5 Truths From the Clean Beauty Brand’s Filing – WWD

Jessica Alba’s The Honest Co. has laid it all out, pulling back the curtain on the inner workings of the clean beauty company in its registration for an initial public offering.

The unveiling was not unexpected.

WWD reported in February that the company tapped Morgan Stanley, J.P. Morgan and Jefferies to work on the IPO and that it had already filed for an offering confidentially. The company was said to have considered an offering in 2016, but stayed private as it retooled and in 2018 took $200 million from consumer private equity giant L Catterton.

Honest, which now has 191 employees, has long been under the microscope as one of the few celebrity-led businesses to really scale and an early mover in clean beauty. The brand also faced down a series of high-profile lawsuits claiming that some of its products, including its sunscreen, were ineffective and not natural. Those suits were settled with a $7.4 million fund and labeling changes.

Now the filing has publicly revealed specifics on the company’s financials, structure and plan going forward.

There are still questions, including just how many shares the company plans to sell if it does indeed take the plunge and grab the Nasdaq “HNST” ticker. But the contours of the business are much more clear today.

Here, five takeaways from the filing.

Alba — Honest’s founder, chief creative officer and chair — is clearly an asset to the business, described in the filing as “a globally recognized Latina business leader, entrepreneur, advocate, actress, and New York Times bestselling author” with 39 million social media followers. She is a key voice for the company and appears in its marketing.

But the company also runs a risk for being so closely tied to one person, particularly since she can walk away.

“We believe that the success of our brand depends in part on our ongoing affiliation with Jessica Alba,” said Honest, which has a “likeness agreement” with Alba that she can leave at any time with prior written notice.

“Upon termination of the likeness agreement, we could, among other things, be required to pay damages to Ms. Alba, lose our ability to associate the brand with Ms. Alba, and sustain reputational damage,” the firm said. “We depend on Ms. Alba’s social media reach and influence to connect with consumers and provide insight on current trends. If Ms. Alba objects to a proposed use of the licensed property, we may be prevented from implementing our business plan in a timely manner, or at all, outside of previously approved usages or usages consistent with certain pre-approved product guidelines.”

2. Honest Financials

With the IPO filing, Honest was forced to give up the financial secrecy that private companies enjoy.

Last year, Honest’s revenues grew 27.6 percent to $300.5 million, with 35.5 percent of that coming from skin and personal care products. Fifty-five percent of the company’s sales came from e-commerce while the rest came from the roughly 32,000 stores that carry the brand.

Net losses narrowed to $14.5 million from $31.1 million in 2019 as gross margins increased 370 basis points to 35.9 percent of sales. Adjusted earnings before interest, taxes, depreciation and amortization grew rose 4 percent to $11.2 million.

3. Who Owns What

Alba still owns 6.7 percent of the company, but it’s L Catterton’s THC Shared Abacus that is the lead shareholder with a 37.5 percent stake. The other big shareholders are: Institutional Venture Partners (with a 13.9 percent stake), Lightspeed Venture Partners (12.3 percent), Fidelity (9.3 percent) and General Catalyst (5.1 percent). Chief executive officer Nikolaos Vlahos has a 4.1 percent stake.

It is not clear just how many shares the company might sell in the offering, raising money to fuel the business, and how many of the shares sold would come from investors cashing out.

The offering, or a sale if the company decides to take a different path, would determine just how much those stakes are worth, converting paper money into real world dollars.

4. Growth Plans

The company plans to drive growth by engaging customers, connecting with them wherever they’re shopping and selling them new products.

Among the finer points the company detailed in the filing:

• “Our unaided brand awareness of 25 percent among diaper buyers illustrates an opportunity to broaden our consumer base and drive future growth.”

• “We intend to leverage our in-house innovation capabilities to launch new products that disrupt adjacent product categories. Our direct relationship with our community of consumers provides insight into those categories in which latent demand exists.” Last year, 22 percent of the company’s revenues came from new products.

• “We plan to grow Honest.com by leveraging our deep connection with existing consumers and drawing new consumers through increased brand awareness and investing in performance marketing.”

• “In 2020, international sales represented 2 percent of our revenue while a significant number of Jessica Alba’s social media followers were located outside the United States. We plan to accelerate our growth outside the United States by leveraging the Honest brand and global reach of Jessica Alba.”

5. Walking the Talk

In her letter to shareholders — a standard feature in IPO registration statements — Alba lays out the company’s journey, detailing her own childhood struggles with asthma and allergies, her concerns as a new mom and then her David-and-Goliath rise in the consumer products business.

She details what she described as an “honest moment” as the company grew.

“Our rapid growth was compromising key business functions and we were outgrowing our infrastructure,” she said. “In order to fulfill our mission, we needed the expertise and experience of a world-class business leader. Finding Nick Vlahos fulfilled what felt impossible at the time, a partner who cares as much about our mission as I do and believes that you can build a robust business around what Honest values most. With Nick as our chief executive officer, we’ve solidified our foundation and built our organizational capabilities and processes, including research and development, procurement, supply chain and operations to deliver on our promise and set the path for the future.”

Alba also stressed her commitment to diversity: “As a female founder and woman of color, I know how important it is to create a working environment with an inclusive approach to personal support and professional opportunity. We haven’t hesitated to step up, put our stake in the ground and push to build a kind of company that reflects the true scope of our communities and values. With the support of our CEO and our chief people officer, we’ve created a future-facing culture. We prioritize diversity and inclusion into our recruitment, hiring and development processes.”

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