Personal care company The Honest Company (NASDAQ:HNST) reported revenue ahead of Wall Street’s expectations in Q3 CY2024, with sales up 15.2% year on year to $99.24 million. Its EPS of $0 per share was also above analysts’ consensus estimates.

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“Our strong third quarter results are a clear reflection of the power of the Honest brand and the strength of the Honest team that has executed our strategy and Transformation Initiative with discipline and excellence. Our ability to grow profitably is evidenced in our results -- with double digit revenue growth reaching an all-time high, significant expansion in gross margin, and positive net income for the period,” said Chief Executive Officer, Carla Vernón.

Company Overview

Co-founded by actress Jessica Alba, The Honest Company (NASDAQ:HNST) sells diapers and wipes, skin care products, and household cleaning products.

Personal Care

While personal care products products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

The Honest Company is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefitting from economies of scale.

As you can see below, The Honest Company’s 5.3% annualized revenue growth over the last three years was tepid. This shows it failed to generate demand in any major way and is a rough starting point for our analysis.

This quarter, The Honest Company reported year-on-year revenue growth of 15.2%, and its $99.24 million of revenue exceeded Wall Street’s estimates by 6.9%.

Looking ahead, sell-side analysts expect revenue to grow 4% over the next 12 months, a slight deceleration versus the last three years. This projection doesn't excite us and indicates its products will see some demand headwinds.

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Cash Is King

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

The Honest Company has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.4%, subpar for a consumer staples business.

Taking a step back, an encouraging sign is that The Honest Company’s margin expanded by 12.9 percentage points during that time. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

The Honest Company’s free cash flow clocked in at $14.99 million in Q3, equivalent to a 15.1% margin. This result was good as its margin was 9 percentage points higher than in the same quarter last year, building on its favorable historical trend.

Key Takeaways from The Honest Company’s Q3 Results

We were impressed by how significantly The Honest Company blew past analysts’ revenue, EPS, and EBITDA expectations this quarter. We were also excited its full-year EBITDA guidance outperformed Wall Street’s estimates. Zooming out, we think this was a good quarter with some key areas of upside. The stock traded up 10.6% to $5.31 immediately after reporting.

Sure, The Honest Company had a solid quarter, but if we look at the bigger picture, is this stock a buy? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.