Honest Company’s IPO


By Akhil Vajjhala and Varshika Prasanna (NYU)

 

Summary of IPO


Honest Company, Jessica Alba’s consumer goods company went public via a direct listing on May 4th, 2021, and is listed on Nasdaq. The company’s stock went up 43.75% to close at $23.00 on its first day of trading.


The company debuted at $16 per share, raising $412.8M. Since launching on the IPO, its stock has traded in a range between $14.70 and $23.00 and has a market capitalization of $1.33B. Honest sells products including diapers, nursing pillows, vitamins and non-toxic household products. These are sold on Honest.com and through partnerships with brick-and-mortar stores including Costco and Target.



Company and IPO Profile:

  • Sector: Consumer Goods

  • Exchange floated: NASDAQ

  • Amount raised: $412.8M

  • Offered price and number of shares: $16 per share and 25.8M shares outstanding

  • Notable investors:

  • Lightspeed

  • Fidelity

  • General Catalyst

  • Lead Underwriters:

  • Morgan Stanley

  • Jefferies

  • JP Morgan

  • Key Figures:

  • EV: $501.11M

  • EV/Revenue: 1.67x

  • EV/EBITDA: -57.69x


Strategic Rationale


The company moves to list its shares as it plans to strengthen its online business while fortifying its presence at third party sellers and in international markets, especially lucrative Asian regions. The Los Angeles based company said that it was planning to fund marketing and direct to consumer advertising using proceeds from the IPO, as well as launch new products and purchase other businesses that complement the work Honest does. The company also mentioned in its IPO prospectus that it plans to utilize Alba’s strong presence on social media with 39M followers across social media accounts, as she has a “significant global reach” and “an innate and invaluable ability to resonate and engage with the consumer, driving trends across demographics and generations.” The company plans to accelerate their international expansion by leveraging the Honest brand and global reach of Jessica Alba outside the United States. They plan to prioritize markets where consumer trends towards clean, ingredient-led products are growing.


Market Reaction


Build Up

Jessica Alba co-founded Honest in 2011, but her journey started in 2008 when she was pregnant and couldn’t find reasonably priced natural and eco-friendly baby products. Alba teamed up with Brian Lee, an attorney who co-founded LegalZoom.com, and the two of them provided the initial seed capital of $6M. They turned to Silicon Valley to find the business’ growth in 2011. Venture capital money started flowing in from the likes of General Catalyst and IVP. Honest banked on e-commerce and was also able to attract both high-end boutiques in New York and L.A. as well as major retailers such as Costco, Target and Whole Foods. Within three years, the company was doing $150M in sales and had raised nearly $100M from investors, at a valuation of $865M. In 2015, Honest had grown to an estimated $250M valuing Jessica Alba, who had an approximate 15% to 20% stake, at $200M. In a round of Series D Financing, Honest closed a $100M which valued the company at $1.7B. An IPO seemed on the horizon. However, plans for the IPO were tabled due to a class-action lawsuit. In 2017, the company cut down its workforce, discontinued some of its offerings, and upgraded or reformulated 90% of its products and moved away from its focus on direct to consumer to right the ship. These changes helped Honest grow its gross margins. When COVID-19 hit in 2020, people became more cautious about their health and what products they were bringing into their homes. This created a surge in demand for baby products, lotions and sanitisers, and Honest’s IPO plans to capitalise on that demand.


Potential Risks and Downsides


The most notable risk that investors have to look out for comes from Honest’s financial performance. The company reported a net loss of $14.5M last year. It further claimed that it expected such losses to continue into 2021. Its preliminary estimates call for a loss of $4.5M and $5.5M for the three months ending on March 31. For the period a year ago, it reported a net income of $559,000. Honest said it expected sales for the period ending March 31 to come in at between $78M and $80M. That would be up from $72.4M a year ago.


The next notable risk is health and safety concerns. Honest came under public scrutiny due to a lawsuit emerging in 2016 that claimed Honest’s products contained a harsh chemical it had pledged to avoid. The company then reached a $7.35M settlement for wrongly labelling ingredients in some products (laundry detergent, dish soap and surface cleaner) as natural, plant-based or chemical-free. The company 2017 recalled baby wipes due to mould. It also recalled a bubble bath production in January due to concerns about "potential contamination," according to the filing. The Honest Company IPO paperwork also cites "health and safety incidents or advertising inaccuracies or product mislabeling" as risks to the company.