Honest S-1: Post from April 2021

Trading below its IPO price, has yet to prove it can drive needed growth outside diapers

Honest went public May 5th and is trading 33% below its IPO price. A lot of the fears in my thread below have proven true, reinforcing my belief that continued strong growth, proven capital efficiency and operating leverage are the three most important drivers of success in consumer product IPOs.

1/ Honest S-1 drops. A lot to like and a lot of questions / confusion for me after perusing it.

2/ One of the first brands to enter the public markets with a true sustainability message - stressing clean, thoughtfully designed, sustainable and effective products. A harbinger of (almost) all future consumer brand IPOs

3/ First S-1 I have seen reporting on women and people of color in leadership position. Once again, trailblazing. This will become a de facto standard for every brand to report

4/ The brand grew 27.6% YoY in 2020 to $300.5M, up from $235.6M in 2019. But... revenue was $237.9M in 2018. It's not clear how much of growth was a COVID bump from digital sales vs how much of the growth came from growth in new product categories?

5/ Product mix here is 63% diapers and wipes (+16.4% YoY), 26% skin and personal care (+35.5% YoY) and 11% household and wellness (+116.5% YoY). And 22% of 2020 revenue came from new SKUs.

6/ You have to believe here that the 25% brand awareness in diapers drove growth of the brand and that they can continue to innovate and grow in these other categories. And... that the COVID bump won't go away but instead led to acquiring strong cohorts of "forever" customers

7/ They have a long way to go financially. The business has 35.9% gross margins in 2020. This is comparable to Kimberly Clark. But.. KC has 18.8% operating margins and Honest still loses money. Honest frankly needs more scale to bring down SG&A, which today is 23.6% of sales

8/ Honest has been highly capital inefficient, having raised $497M to get here (according to Pitchbook). It engineered out very high venture scale return potential

9/ But it can get a 10x from here: (i) show international is a real lever (only 2% sales today); (ii) continue to develop and produce clean sustainable products across categories that are highly relevant to their mom consumer; (iii) operating leverage realized in mktg and G&A

10/ They have digital DNA (55% of sales are online!) and talk directly to consumers, which I like. If I were to bet, I'm guessing this trades at a market cap of maybe $1.5B. I'm sitting out here for a few quarters to see if they begin to execute against the levers above.

11/ Curious, are others (a) bulls re: Honest, (b) bears; or (c) on the fence