The Los Angeles-based Honest Company, Inc. (HNST) is a Jessica Alba-backed sustainable products-focused consumer goods concern that made an impressive stock market debut on May 5, 2021. Its shares soared in price to hit their 52-week high of $23.88 on its first day of trading. Also, in July 2021, the company announced a new sustainable packaging initiative for Honest Beauty that features 100% recyclable cartons using 100% tree-free paper made from upcycled sugarcane by-products.

The stock surged in price on November 11 after the company beat third-quarter consensus sales estimate by 2.7%. However, it has lost 36.8% over the past six months to close yesterday’s trading session at $9.53. 

HNST’s digital sales fell 11% year-over-year to $39.11 million in the third quarter, and its losses increased significantly. Furthermore, its near-term prospects look bleak because its business could continue to be impacted by ongoing supply chain issues.

Here are the factors that could influence HNST’s performance in the coming months:

Top Line Growth Doesn’t Translate into Bottom Line Improvement

HNST’s revenue from the Diapers and Wipes segment increased 16% year-over-year to $53.85 million in the third quarter, and its revenue from its Skin and Personal Care segment came in at $25.38 million, up 28% year-over-year. However, its Household and Wellness segment revenue came in at $3.43 million, down 71% year-over-year. This was due to an overall reduction in consumer demand for sanitizing and disinfecting products as more consumers became vaccinated against COVID-19.

The company’s operating loss in the quarter increased 164.6% year-over-year to $4.59 million. HNST’s net loss came in at $5.14 million, representing a 158.6% year-over-year rise, while its loss per share remained flat at $0.06. In addition, its adjusted EBITDA decreased 43.8% year-over-year to $1.21 million.

Ongoing Investigation

Several law firms have launched investigations into HNST for potential violations of the federal securities laws. It is alleged that the company’s IPO registration statement was materially false and misleading and omitted several facts, including that before its IPO HNST’s results had been significantly impacted by a multimillion-dollar COVID-19-driven stock-up of products in the Diapers and Wipes category and Household and Wellness category.

Lofty Valuation

In terms of forward EV/S, HNST’s 2.68x is 32.7% higher than the 2.02x industry average. The stock’s 2.84x forward P/S is 90.6% higher than the 1.49x industry average. In addition, its 5.37x forward Price-to-Book is 57.4% higher than the 3.41x industry average.

POWR Ratings Reflect Bleak Prospects

HNST has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. HNST has a D grade for Momentum, which is consistent with its 36.8% loss over the past six months.

The stock has a D grade for Quality. This is justified because HNST’s trailing-12-month EBITDA margin is negative, versus  the 13.85% industry average. Its trailing-12-month ROTC and ROTA are also negative, compared to the 7.29% and 4.67% respective industry averages.

HNST has a D grade for Growth and an F grade for Sentiment, which are in sync with analysts’ expectation that its EPS will remain negative in fiscal 2021 and 2022.

HNST is ranked #65 of 70 stocks in the Consumer Goods industry. Beyond what I have stated above, we have also given HNST grades for Value and Stability. Get all the HNST ratings here.

Bottom Line

Even though HNST reported better-than-expected sales in its last reported quarter, its losses widened significantly. It is currently trading below its 50-day and 200-day moving averages of $9.55 and $12.93, respectively, indicating a downtrend. Furthermore, analysts expect its EPS to remain negative in the coming quarters. So, we think the stock is best avoided now.

How Does The Honest Company (HNST) Stack Up Against its Peers?

While HNST has an overall POWR Rating of D, one  could check out these other stocks within the Consumer Goods industry with an A (Strong Buy) rating: Mannatech, Incorporated (MTEX), Société BIC SA (BICEY), and Ennis, Inc. (EBF).

HNST shares rose $0.04 (+0.42%) in premarket trading Tuesday. Year-to-date, HNST has declined -58.57%, versus a 26.24% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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