Nowadays, more and more adults understand that it is important to lead a healthy lifestyle not only in childhood. It has become fashionable to go in for sports, eat healthy food, give up alcohol and tobacco, and make a choice in favor of exclusively natural cosmetics. For several years, the production and sale of products for a healthy lifestyle has become a powerful industry with billions of dollars in turnover.
In 2012, a Hollywood actress Jessica Alba founded the company The honest company, which has made it its mission to create a society of conscious consumers and change many types of consumer goods. On May 4, her IPO will take place on the NASDAQ exchange. The shares will be traded the next day under the ticker “HNST“.
The Honest Company Business
The Honest Company is actively promoting sustainable consumption ideas to the masses. The company strives to use innovation in the creation of its products, which allows expanding the list of offered product categories. The Honest Company develops exceptionally thoughtful, sustainable and clean products.
In promoting its products, the company draws the attention of consumers to the most important things for them – home, family and health. The Honest Company works with people of all genders and ages at all stages of life. No matter where they are: at home or on the road.
The company now offers three categories of products:
- For home.
- Diapers and napkins.
- Personal hygiene and skin care.
Sales are carried out directly and through online channels, including through the company’s website. The same implementation takes place on a subscription model, in which the company has become a pioneer in its industry. More than half of the revenue comes from digital channels. The marketing cost effectiveness ratio is 0.9. This means that every dollar spent on advertising generates 0.9 USD in revenue. Here is the company’s growth zone, which we will talk about in more detail when analyzing its financial indicators.
The Honest Company is working to expand its product line, as the company’s market is actively developing and is in the early phase of growth. The main investors in the company were Lightspeed venture partners, General Catalyst, Fidelity and THC Shared Abacus… It is necessary to consider the Honest Company business in the context of the development of trends in its targeted market.
Market and Competitors The Honest Company
According to the company, the market for environmentally friendly products for children and personal care reached 130 billion USD in 2019. Average annual growth rates to 2025 will exceed 3%, which is confirmed by research in the past. So, according to Food Business News this figure in 2014 – 2017 was 3.5%.
The share of “clean” products in this market will be around 5%, with upside potential. The reason for this will be the changing mood in society. According to the survey Nielsen, 48% of consumers are changing their habits towards healthier products. Moreover, among the dominant generation of “millennials” this figure reaches 75%.
This market is represented by companies that have won their market niche. The largest of them are:
- Johnson & Johnson Consumer
- Procter & Gamble
- Estee lauder
- The clorox company
- Pacifica beauty
The growth of the company’s business volumes directly depends on the speed of changes in the tastes and preferences of the target audience. The Honest Company has focused on product categories where people don’t usually save. Let’s analyze the financial statements of the company.
Financial performance of the company
The company, according to the reporting data in the S-1 form, does not generate net profit, so let’s start the analysis with revenue. For the entire 2020, The Honest Company had sales of $ 300.52 million. The relative growth by 2019 was 27.56%. In 2019, relative to 2018, there was no growth in this indicator. The coronavirus pandemic has made people more sensitive about their health.
Gross profit in 2020 amounted to USD 107.90 million, which is 42.25% more than in 2019. Thus, the gross margin was 35.9%. This indicates an increase in business efficiency, which will allow you to get a net profit sooner. This is evidenced by the dynamics of net loss reduction.
The net loss in 2020 amounted to USD 14.47 million, which is 53.44% less than in 2019. With such a pace of development, the company can report on its net profit for the current year.
The company’s accounts have USD 63.68 million in cash, with current liabilities of USD 38.43 million. In this case, the net cash position will be USD 25.26 million. As you can see, the bankruptcy of the company is not threatened.
Strengths and weaknesses of The Honest Company
Let us now assess the risks and benefits of investing in the company’s securities. The strengths of The Honest Company include the following:
- PR and promotion by a Hollywood star.
- The growth rate of revenue for the last year exceeded 25%.
- Net loss decreased by more than 50% in 2020.
- The company’s target market is at an early stage of growth.
- Strong management of the company.
- The original subscription sales model.
- Application of innovations in the creation of a product line.
The risks of investing in a company include:
- Strong competitors.
- Dependence on the subjective tastes of the target audience.
- The company is unprofitable and does not pay dividends.
- Revenue growth is unstable.
IPO details and capitalization estimate of The Honest Company
During the initial rounds of financing, the company raised USD 376 million. The placement underwriters were Samuel A. Ramirez & Company, Inc., Citigroup Global Markets, Inc, Penserra Securities LLC, Loop Capital Markets LLC, CL King & Associates, Inc., Telsey Advisory Group LLC, Morgan Stanley & Co. LLC, JP Morgan Securities LLC and Jefferies LLC, BofA Securities, Inc.
As part of the placement, it is planned to sell 25.8 million ordinary shares at a price ranging from USD 14 to USD 17 per share. With an IPO at the upper end of the price range, the volume of funds raised will reach 400 million USD. Capitalization will amount to USD 1.4 billion.
Since the company is unprofitable, we use the P / S (capitalization / revenue) ratio (multiplier) to assess the growth potential of its shares. At the placement, P / S will be 4.67, in the lock-up period this figure may reach 8. In this case, the upside on securities will reach 70% (8 / 4.67 * 100%).
Taking into account all of the above, I recommend this company for medium-term investment.
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