Loop Capital analyst on Honest Co: ‘hopefully we can be more constructive’

The Honest Company (NASDAQ: HNST) has reported mixed first quarter results on Wednesday that resulted in shares trading lower 8% Thursday morning.

Q1 recap: sales beat overshadowed by losses

Honest Co reported a sales beat in the first quarter of $81.03 million versus expectations of $79.03 million. But other metrics disappointed investors and contributed to the selloff. Most notably, operating loss of  $4.1 million in the quarter marked a reversal from an operating income of $0.7 million in the same quarter in 2020. Adjusted EBITDA also dropped to $(0.1) million from $4.5 million last year.

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The shift from a profit to a loss is due to a 30% increase in expenses.

During Q1 2021, gross margin also dropped slightly compared to Q1 2020, mainly due to higher input costs and a more normalized level of trade spend. Operating expenses went up 30% to $32.5 million or 40% of revenue compared to $25.1 million or 35% of revenues in Q1 2020. The increase in operating costs as a result of increased selling, general, and administrative expense, increased marketing spend of $5.0 million, and increased research and development expenses.

Digital sales increased 2% to $42.5 million in Q1 2021 compared to Q1 2020. The company’s revenue from retail channels increased 58% to $30.9 million in Q1 2020 compared to Q1 2019.

Loop Capital could turn bullish on the stock

Loop Capital analyst Laura Champine maintained a “Hold” rating on Honest Co’s stock with an unchanged $20 price target. The analyst highlighted that the company’s revenue beat signals Honest Co doesn’t have to increase its marketing spend to generate incremental revenue.

Honest Co can leverage recent sales momentum for channel expansion, the analyst said. Management already has a “great relationship” with retail giant Target Corporation (NYSE: TGT), Costco Wholesale Corporation (NASDAQ: COST) only sells some of its products while Walmart Inc (NYSE: WMT) doesn’t carry any Honest Co products. She said:

We see lots of opportunities for more channel expansion. They haven’t guided to that at all.

Looking forward, Honest Co has some encouraging trends working in its favor. Although the company already prices its products at a 10% to 20% premium versus its competitors, it can still raise prices more as the premium “isn’t too high yet.”

The company can also lower prices to better attract the segment of the population who want to buy more natural products but refuse to pay a large premium.

Regardless of which direction the company heads in, management needs to take an aggressive approach towards expansion. She concluded:

Let’s see how aggressive they will be and hopefully we can be more constructive on this stock as we move through the year.