The Honest Company: Overreliance On Jessica Alba’s Celebrity Influence (NASDAQ:HNST)

The Honest Company Rings The Nasdaq Stock Market Opening Bell To Mark The Company

Dimitrios Kambouris/Getty Images Entertainment

Investment Thesis

The Honest Company, Inc (NASDAQ:HNST), appears to be depending too much on its founder’s popularity as its main vehicle of marketing. This is evident from a statement made in the Annual Report 2021 which I reproduce here in full: “We believe that the success of our brand depends in part on our ongoing affiliation with Jessica Warren. We have an agreement with Jessica Warren, or the Likeness Agreement, which, among other things, includes a license for her likeness and imposes various obligations on us.”

HNST depends significantly on “Ms. Warren’s social media reach and influence”. However, the analysis of traffic driven from all its different social media sources suggests it has not been efficient in utilizing social media presence for the benefit of the company.

HNST needs to compete with the most established brands in the world. Currently, it is not financially profitable. In terms of market capitalization, it is also the smallest among its competitors. Hence, it has a lot of catching up to do in terms of financial profitability.

Company Overview

HNST sells clean products that are focused on sustainability and thoughtful design. From the latest annual report 2021, these are the 3 main product categories:

  1. Diapers and Wipes – This category makes up 63% of their 2021 revenue. These products are made with sustainably harvested, totally chlorine-free fluff pulp and other plant-derived. It is also packaged with a more efficient design than the previous diaper products and uses less material.
  2. Skin and Personal Care Products – This category makes up 32% of their 2021 revenue. These are bath, body, skincare, and beauty products that are designed to be clean, safe, and made with plant-based ingredients that are ethically sourced.
  3. Household and Wellness – This category makes up 5% of their 2021 revenue. These are household cleaning products like sanitizing wipes, and hand sanitizer made with key plant-based ingredients. It also includes prenatal vitamins. The company plan to introduce four new vitamin and supplement products in the second quarter of 2022.

Overreliance On Jessica Alba

Jessica Alba is the founder of HNST in 2012. She is also a well-known American actress, having been cast in a leading role in 2 of Marvel’s “Fantastic Four” movies between 2005 and 2007. In official documents submitted to SEC, she is often addressed using her husband’s first name as “Ms. Warren” or “Jessica Warren“.

Google Trend Analysis of Jessica Alba and The Honest Company

Google Trend Analysis

Based on Google trends over the last 20 years:

  1. She was most widely searched around the period 2005 to 2007, suggesting the collaboration with Marvel Studios helped to create the greatest breakthrough in her acting career in terms of popularity.
  2. However, after 2007, her popularity seems to decline drastically.
  3. In 2012, when the Honest Company was started, the search results for the company rises briefly and are now also on a decline.

In the company’s latest earnings call, the CEO seems to take pride in having Jessica as the main driver of HNST’s growth. In his own words: “Obviously, with Jessica Alba, the forefront is not only as our Chief Creative but also a mega influencer being able to really drive organic as we look at our programming in the back half of the year.

Our analysis of Google trend’s search volume suggests a less optimistic view of her capability as an effective influencer. In spite of Jessica’s initial popularity at the peak of her acting career, as the founder of HNST in 2012, her popularity appears to be on a consistent downtrend. Without having a more diverse and reliable driver of growth, it is unclear how successful the company will be in the long run if it continues to rely on one key person to drive the company’s awareness.

Investors should be aware of this potential ‘key man’ risk associated with the company.

Underutilization Of Social Media

In the annual report 2021, it was mentioned that “We depend on Ms. Warren’s social media reach and influence to connect with consumers and provide insight on current trends.” This statement suggests to me the company prioritizes the use of social media to create awareness and interest in the company’s products and services. Let’s explore whether HNST has been successful in doing that.

Based on insights from Similarweb, “the top social media networks directing traffic to honest.com are Pinterest, Twitter, and YouTube”, as can be visually inferred from this chart provided:

Social Network Distribution of honest.com

Similarweb

We compare the traffic volume driven by each social media to the volume of followers and tabulate it in the following table. Note that numbers collected from the relevant social media pages include both the company’s (honest.com) and Jessica Alba’s page.

Authors Calculation from different sources

Authors Calculation

These are the insights we can gather:

  1. HNST has the highest proportion of followers from Instagram but the proportion of traffic driven from Instagram is one of the lowest at just 6.96%.
  2. HNST has the lowest proportion of followers from Pinterest but the majority of the traffic still comes from Pinterest.
  3. The proportion of followers on Facebook is the second largest at 28.8%. Traffic driven by the ‘Others’ category is one of the lowest at just 10%. If I presume the traffic driven from the ‘others’ category includes Facebook, it means HNST has not effectively utilized the second largest category of followers (Facebook) to contribute to the overall driven traffic from social media.

Overall, it can be observed that the lion’s share of social media following comes from Facebook and Instagram. Collectively they would make up 77.6% of the total social media following. Unfortunately, only a paltry 17% of traffic is coming from these social media.

Based on this observation, it appears that the company has not been successful in efficiently converting social media traffic to its website.

Financial Comparison With Competitors

From the company’s annual report 2021, it is up against the most established brands in the world:

Competitions listed from Annual Report 2021

Annual Report 2021

We compare the financial profile with some of them (as highlighted above):

Seeking Alpha financial figures

Seeking Alpha

  1. At one glance, HNST is the smallest company in terms of market capitalization. However, it is also the youngest among the comparison list, having been publicly listed only in 2021.
  2. HNST appears to be performing ‘modestly’ in terms of revenue growth and gross margin. Established companies can afford to have relatively slower growth due to their strong brand being developed over many years. HNST, as a young company competing with these much more established brands, needs to demonstrate its ability to grow much faster than these bigger brands. Right now, we are not observing that in its top-line growth.
  3. While the other established brands in the comparison list are already profitable, HNST is still loss-making in net income and cash flow.
  4. One silver lining of HNST is that while unprofitable for now, it is not having any debts as compared to other competitors.
  5. Looking at the current ratio, it appears to have 4 times more assets with respect to liabilities. This is a positive contrast to its more established competitors having more liabilities than assets.

HNST clearly has lots of “catching up” in terms of achieving financial profitability. Investors who still believe in the company and the founder’s ability to execute in the long run can at most give it the benefit of the doubt that the company is listed only one year ago. With the extra funds collected by selling shares in the stock market, perhaps this would provide the resources needed for HNST to invest in better growth projects to rise above its much larger competitors. The investments might take some time to realize their financial benefits. Until HNST has shown significant improvement in financial results from invested growth plans, investors should adopt a wait and see approach when considering HNST as an investment

Valuation

HNST is not profitable in net income. Neither is it cash flow positive. As such, we cannot value the intrinsic value meaningfully using discounted cash flow or discounted net income. We shall compare the valuation of HNST using its Price or EV with respect to Sales and compare it with its competitors.

Seeking Alpha financial figures

Seeking Alpha

From the value of ‘Price/Sales’ and ‘EV/Sales’, HNST is clearly the most undervalued among its competitors. The current price may look relatively cheaper compared to its competitors but without a proven record of consistently producing high growth in performance, cheap can get even cheaper and so I will not regard this undervalued status as a buy signal.

Investment Risks

The company has a significant ‘key man’ risk that should not be ignored. It relies too much on Jessica Alba to drive awareness about the company. Jessica’s popularity appears to be waning as suggested by insights from Google Search as discussed earlier. Investors should wait and see whether the company is able to develop new drivers of growth that significantly pivot away from the current dependence on Jessica’s waning popularity.

Conclusions And Key Takeaway For Investors

The Honest Company’s products and services are not functionally very different from what its competitors have to offer. Its key marketing message appears to be promoting ‘clean and conscious living‘ with an emphasis that the products contain more ‘clean and natural‘ ingredients. It is unclear how effective this strategy is.

The key factor sustaining the company’s growth appears to be Jessica Alba’s popularity, but as discussed in previous sections, even this popularity is waning.

In terms of using social media, it is unclear why the company has not been able to fully utilize its largest groups of followers to drive traffic to its website.

The company is still relatively young as a public listed company. In spite of my earlier skepticism about Jessica’s effectiveness in promoting her own company’s products and services using a few ‘objective’ measures, we should not ignore the fact that there are already many successful examples of celebrities proven to be highly effective in product endorsements.

Overall, investors who do not have a position in HNST should consider a wait-and-see approach to observe whether HNST is able to execute in the long run and produce significant signs of being able to rise above the competition from its more established peers.

Investors who already have a position in the company and still believe in the long-term celebrity influence of Jessica Alba might want to consider trimming down their position to a small amount and consider it as a ‘speculative’ holding.

This article was written by

Individual investor primarily investing in companies with proven profitability. Occasional interest in smaller loss making companies that has exceptional growth potential.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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