Late pricing (HNST)
The Honest Company reported adjusted EBITDA of -$1.6M, below consensus expectations of $2M. Revenues were above expectations, but margins were below. Revenue grew 2% with Diapers & Wipes up 1% (price increases were offset by declines in digital), Skin & Personal Care down 12% (digital partner reduced orders), and Household & Wellness up 101% (integrated baby clothing in Q3). By channel digital revenues decreased 14% while retail orders increased 18% from new distribution including Walmart, Publix, Ulta, and Kroger. ACV grew from 49% to 72% in 2022 while the presence in retail stores grew 16%.
Gross margins contracted 250bps to 27.5% due to higher fulfillment and product costs and a 300bps headwind from inventory write-offs for sanitization products. Supply chain costs were 800bps higher but were offset by 550bps of pricing, cost savings, and a favorable mix. Inventory levels were 52.8% above last year’s level despite only 1.8% sales growth. Management said the additional inventory was due to buying ahead of supplier price increases.
Management is guiding 2023 revenue and EBITDA to be flat compared to 2022. The company is implementing further price increases that will go into effect for the 2H of the year. About half the company’s revenue base will see a mid to high-single digit price increase. There is no debt on the balance sheet which gives the new CEO time to change the company’s direction. The company is late to implement price increases which may put it in a position of raising prices while the competition is doing the opposite. We are removing The Honest Company from our Short Bias list. After the sell-off in the share price yesterday to new lows we will redirect our resources on the next idea.
Online Grocery (KR, ACI, WMT)
Online grocery sales in February increased 1.5% YOY, improving from the 1.2% decline in January. The online share of grocery spending decreased by 30bps to 12.9% in February. Excluding ship-to-home sales, delivery sales fell 9%. Order frequency declined to the lowest level since the pandemic began. Digital grocery MAUs grew 5% YOY, while the average number of orders fell 9% to 2.5. Mass market MAUs increased more than 20% while grocery store MAUs decreased in the mid to high single-digit range. Pickup sales grew 5% in February. 1.5 times more households used grocery pickup than delivery in the month. Mass retailers continue to take share in online grocery. The relatively few mass retail chains have invested significant resources in their online offering and generally have lower prices than supermarkets which have numerous chains and are less able to invest in the offering.
Return to the office (KR)
A report from Springboard, a provider of shopping traffic counting, reported that traffic in American cities increased 30.6% at breakfast time and 19.2% at lunch time compared to February 2022. The average YOY increase in other dayparts was 18.3%. Downtown traffic across the country was 22.4% higher than last year, but still 22.6% lower than in 2019.
Office occupancy levels according to Kastle Office Systems have remained at 50.1% for the past three weeks. Kastle provides security systems at offices across the country. The company has reported door swipes since the outbreak of the pandemic. There is variation across the top cities, but numerous cities are close to half occupied while only Austin and Houston are comfortably above that level. The measured return of the office worker has spread out the headwind for food at home sales.
