The Honest Company Stock

Thank you. Ladies and gentlemen, thank you for standing by and welcome to the Honest Company's second quarter 2026 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand has been raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded.

It is now my pleasure to introduce Chris Mandeville, Vice President of Investor Relations at The Honest Company. Please go ahead.

Good afternoon, and thank you for joining our second quarter of the conference call. With me today are Carla Vernon, our Chief Executive Officer, and Curtis Bruce, our Chief Financial and Operating Officer. Before we begin, I will remind you that our remarks today include forward-looking statements subject to risks and uncertainties. We do not undertake any obligation to update these statements, and actual results may differ For a detailed discussion of these factors, please refer to our Safe Harbor Statements in today's earnings materials and our recent SEC filings. We will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and accompanying presentation, which are available at investors.honest.com. Finally, please note that all consumption data included in our discussion today, unless otherwise noted, will reflect CERCANA MULO Plus measured channel data for the 13 weeks ended June 28, 2026, as compared to the prior year.

that, I'll turn the call over to Carla. Thank you, Chris. Before I share our results for the second quarter of 2026, I want to welcome Chris in his new role as Vice President of Investor Relations. While Chris has already been with us for the last two earnings calls, we are thrilled that he has officially joined Honest. And now, I'm pleased to share our results for the second quarter of 2026, which reflect the continued strength and momentum of our business. We achieved strong organic revenue growth of nearly 7% and our highest profit margins in the history of the Honest Company with underlying adjusted gross margins of 43.8% and underlying adjusted EBITDA margins of 9.8%. Given our sound first half execution and confidence in the path ahead, we are raising our full year outlook. These Q2 results are a product of the ongoing structural improvements to our business and the team's continued commitment to operational excellence.

Importantly, this strengthened financial foundation provides us with additional horsepower to accelerate investments in support of all three of our strategic pillars of brand maximization, margin enhancement, and operating discipline. Looking specifically at our first pillar, brand maximization, this quarter clearly showcased the power of our strategy. We are encouraged by our momentum as we scale our broad collection of cleanly formulated and sustainably designed honest products. In addition to our top line results, our overall consumption growth was up nearly 8%. This growth continued to be volume-led and significantly outpaced the 2% growth in our comparative categories. Our vision to scale honest is grounded in two important consumer truths. The first key consumer truth is the resonance of our honest standard.

Our portfolio is formulated without 3,500 ingredients of concern that we choose not to use in our products. These high standards mean our products meet the high expectations of modern consumers who want clean formulation, excellent product performance, and joyful design in their personal care. The key consumer truth is the broad appeal of honest across households of all ages and stages. While we're often recognized for our wonderful portfolio of baby products, today over half of our households have no kids at all. Our strength across household types is an important driver of scaling the honest brand through our brand maximization strategy. Today, 89% of households in the United States do not have any children under the age of seven. 75% of all U.S. households have no children at all. We continue to see progress in Scaling Honest across a broad range of households.

This quarter, our household penetration of 8.1% improved 100 basis points, with nearly two-thirds of that growth coming from no-kid households. This growth gives us material evidence that more households are embracing Honest each year. In addition to this excellent progress, we are encouraged by the significant runway we see across our growth platforms. To put that opportunity into perspective, in baby personal care, key branded competitors hold household penetration anywhere from two to six times greater than we do. And in all-purpose wipes, larger brands have as much as five to seven times our household penetration. Let me share a closer look at how this momentum is being driven across our businesses, beginning with our WIPES portfolio. Our total wipes portfolio delivered consumption growth of 26% versus comparative category growth of 2%.

Our extensive wipes platform crosses several categories and uses. With such wide-ranging collections of wipes, Honest offers a variety of benefits that appeal to a broad range range of household types. Our collections include our Clean Conscious Wipes, which are the number one natural baby wipe brand and grew 16% this quarter. Our flushable wipes, which grew more than 200% in Q2, making us the fastest growing branded player in the segment. sanitizing wipes which grew 55% in Q2 and are the second largest hand sanitizing wipes brand in the category. These wipes businesses are all significantly outpacing the growth of their respective categories, and each delivers on the honest standard of clean formulation, strong product performance, and joyful design. This year, our flushable wipes entered the spotlight with a new campaign that speaks to the category in an elegant yet irreverent style that is candid in a way that only honest can be. In fact, our groundbreaking campaign called It's Time to Get Honest drove significant viral engagement, delivering well over 3 billion media impressions and increasing awareness of the honest brand across a new, broader community.

In addition to meeting the high standard for product quality, our flushable wipes packaging is designed to be a room accessory that is both elegant and unapologetic. collection is gaining strong traction online and across brick and mortar retailers including our recent addition into the feminine care aisle at CVS. Building on this momentum, we see greater things ahead in expanding distribution, increasing product offerings, and driving greater brand awareness for our flushable wipes. The strong Q2 performance of our wipes business also benefited from our three-pronged strategy to maximize tentpole merchandising events such as Amazon Prime Day. While strong consumer deal events can be treated as a one-time boost to sales, our team partners closely with retailers to ensure that we leverage these events to introduce our full, honest assortment to new shoppers, build recurring subscriptions, and increase brand discovery. We saw this working to great success across Prime Day, with 58% of the visitors to our Honest storefront being entirely new to the Honest brand. And our team has great plans to build on these early relationships to earn lasting loyalty across our full collection of honest products. Now turning to personal care. In Q2, our personal care portfolio grew 19%, outpacing the category's 5% growth rate.

We design our personal care products to bring genuine joy and happiness to everyday routines. For some members of our honest community, that means utilizing rich, beautifully authentic touches like the naturally derived soothing lavender in our signature baby personal care collection. And for the members of our community with the most sensitive skin, it means providing products that are gentle yet effective and often fragrance-free. By delivering on both preferences seamlessly, we maintained our position as the number two brand in total baby personal care. And earlier this year, the Honest brand made its debut into the big kid aisle, welcoming us into a new set of homes. The launch of our kid-friendly personal care lineup was timed in coordination with the Toy Story 5 movie premiere and in partnership with Pixar's media campaign. The film, which debuted 30 years after the original movie, delivered the number one biggest global opening weekend in Pixar history.

The magic of brands like Pixar and Honest is that they unlock the power of multi-generational appeal. Our Toy Story collection, which launched earlier this year at Walmart and Amazon, is getting ready to greet new families in the food channel, starting with retailers including HEB and Seller's. select Ah Hold Delhaize banners. More than ever, Honest is expanding to meet consumers with products they love wherever they shop. Before concluding my remarks, it's important to acknowledge that the strong results in the quarter include a dampening effect from our diaper business. Current headwinds and shifting consumer dynamics appear to be structural for the diaper category, with most national brands experiencing declines. While our diaper business is navigating these same pressures, we remain committed to providing families with a diaper offering that meets the expectations of the honest standard for quality, performance, and joy. Because of the importance of families with babies, we're pleased to announce a new strategic partnership allowing the Honest brand to maintain its important place in baby and family friendly apparel.

Through a new licensing agreement with an industry-leading apparel manufacturer, Honest will transition back to an outbound licensing approach for this category. We are glad that families will have the honest standard available to them when choosing bedding and baby apparel for their newest little ones. As you can see, we are energized about the strength of the Honest brand across all the segments we serve. Three and a half years ago, we began what was a necessary transformation to build a more powerful, honest brand and honest company. We are now a fundamentally stronger enterprise built on a durable foundation. The evidence of our progress is clear across an array of metrics. First, we're more strategically focused. We have intentionally shifted our revenue mix towards our higher growth and higher margin wipes and personal care platforms, which now represent over 70% of our revenue.

Second, we are more growth-driven. Since 2022, we have delivered an 11% consumption growth CAGR. And third, we are more structurally profitable. Our second quarter underlying adjusted gross margin of 44% is 1,500 basis points higher than we were in 2022. These gains have allowed us to make considerable progress towards operating a virtuous cycle for profitable growth. convictions are not simply based on metrics. Honest was founded to be more than a disruptor brand. We were built to bring the world a modern personal care company that delivers on a standard built for the modern era. Transformation alone is not the finish line.

Our ongoing goal is to achieve true scale. With great intention and clarity, we have identified right-to-win categories where we are leading and delivering exactly what today's modern households need. And we have executed this year in and year out with strict financial discipline. As we scale operationally, many of the important things about the Honest Company haven't changed. Our team of Honest Butterflies is an intense team of builders that pairs passion and vision with a focused approach to execution. Every product we create upholds our rigorous guiding principles. It's this joy, commitment, and uncompromising quality that makes honest, unique, and meaningful to households of all types.

And this is the true heartbeat giving the honest brand both relevance and power. With that, I will now turn the call over to Curtis to provide more details on our Q2 financial results and walk through our raised full-year outlook.

Thank you, Carla, and good afternoon, everyone. As you just heard, Q2 was a significant milestone that clearly validates our trajectory and highlights the robust results generated when our strategic focus meets disciplined execution. Let's dive into how that performance materialized across our metrics, starting with the top line. Second quarter reported revenue was $83.3 million, a decrease of 10.9% compared to the prior year period. This reflects the impact of strategic exits underpowering honest growth and our diaper revenue declines, which were partially offset by our continued strength in wipes and personal care. On an organic basis, revenue increased 6.7%, reflecting the momentum we continue to see in our higher-growth, higher-margin wipes and personal care platforms. Our Q2 reported gross margin came in at 48.4%.

An adjusted basis, gross margin was 50.1%, an improvement of 970 basis points. This expansion includes a $6.6 million tariff refund and dilution from our apparel liquidation. Excluding these two items, our underlying margin was 43.8%, an improvement of approximately 340 basis points. This was driven by favorable product mix and operational improvements, including earlier-than-expected realization of supply chain savings. Total operating expenses decreased by $4.1 million to $30.8 million, highlighting progress made to right-size our SG&A. Within this, we strategically increased marketing by nearly 20%. This step up in spend focused heavily on our wipes and personal care platforms was designed to capitalize on our momentum heading into the second half of the year.

This targeted allocation of capital supports our ongoing focus on driving household penetration, which remains our primary catalyst for sustaining long-term growth. Net income for the quarter was $10.7 million compared to $3.9 million in the prior year period. Adjusted EBITDA was $14.5 million, yielding an adjusted EBITDA margin of 17.3%. To understand our true underlying profitability, it is important to exclude the one-time tariff refund and apparel liquidation. In doing so, our underlying adjusted EBITDA margins of 9.8% expanded by approximately 160 basis points and marked an all-time high for the company. Our asset-light operating model continues to provide exceptional financial flexibility. We ended the quarter with $105.9 million in cash and cash equivalents and zero debt.

Free cash flow was $35.3 million for the first six months of the year. a substantial improvement compared to negative free cash flow of $3.8 million in the prior year period. This was primarily driven by increased earnings, continued working capital improvements, and our asset-light operating model. While we do expect a timing benefit regarding inventory to partially reverse in the second half of the year, we maintain a distinct line of sight to further long-term working capital improvements. Year to date, we have repurchased 5.6 million shares for $18.7 million at an average price of $3.35 per share. At the end of the quarter, $6.3 million remained under our existing share repurchase authorization. These actions underscore our commitment to balancing aggressive reinvestment in our growth initiatives with returning value to our shareholders. Our strong execution in the first half of the year, which drove our top-line momentum and structural margin enhancements, gives us the confidence to raise our outlook.

The tariff refunds provide additional flexibility and fuel for our strategic initiatives. We plan to aggressively reinvest these dollars now to accelerate household penetration and build a stronger wellness foundation for 2027 and beyond. With that context, our RAISE full-year 2026 outlook is as follows. reported revenue in the range of three hundred and nineteen to three hundred and twenty five million dollars which now includes an approximate ten million dollar benefit from apparel inventory liquidation revenue Organic revenue growth of 5-7%, up from 4-6%, reflecting accelerated momentum in the second half versus first half of the year. Adjusted gross margins to land in the mid-40s, up from the low 40s, as we expect a continuation of robust year-over-year expansion driven by favorable mix and supply chain efficiencies. and adjusted EBITDA of $23 to $25 million, up from $20 to $23 million. Lastly, please assume our new apparel licensing agreement will be immaterial to our 2026 results. As I wrap up, I want to reiterate how pleased we are with our strong execution through the first half of the year. Our record underlying profitability and robust free cash flow generation prove that our financial model is fundamentally stronger today than ever before.

With our pristine balance sheet, structural margin improvement, and strategic reinvestment of our tariff refund, we have the fuel needed to confidently fund our next phase of profitable growth.

With that, I will turn it back to Carla for final remarks. Thank you, Curtis. Before we move to Q&A, I want to express my deep gratitude to our incredible team of honest butterflies. Their passion and dedication are the true driving force behind the business performance results we shared today. As we look ahead, we will continue to deliver on our evergreen strategic pillars of brand maximization, margin enhancement, and operating discipline. By combining disciplined execution with our unwavering commitment to the honest standard, we are unlocking the true vision of a modern personal care company. We enter the second half of the year well-positioned to build on our momentum, deliver on our raised 2026 outlook, and continue creating long-term shareholder value. With that, I now turn it over to the operator to open the line for questions.

certainly as a reminder to ask a question please press star one one on your telephone and wait for your name to be announced to withdraw your question please press star one one again and we ask that you please limit yourself to one question and one follow-up question. One moment, please. And our first question comes from the line of Aaron Gray with Alliance Global Partners.

Hi, good evening and thank you very much for the questions. First question for me, just on the guidance, just quick clarification on the profit guidance, assuming that the tariff is not included in that full-year guide because I know I see the two adjusted EBITDA numbers, one including tariff, one not including for the quarter. And then secondly, in line of that for the profits, which is for the back half. if we take some assumptions on the profit ability versus what we saw, you know, in 2Q, it does seem like it's coming down with some assumed either marketing or SG&A spend based off the gross margin guide. So we'll get some color in terms of what you're expecting for marketing in the back half. And if you're seeing the ROI that you would have expected with the increased marketing that we've seen in the back half, in the first half of the year, thanks. Good evening, Aaron.

Let me clarify the adjusted gross margin guide. So our adjusted gross margin does does include both the favorable impact of the terrorists and also the depressing impact of the liquidation of the apparel on the full year. So that adjusted gross margin both. I think what's important to remember is the underlying performance. Again, as we think about Q2, underlying growth average year-to-date 44%, and now we have a expectation, or we continue to have the expectation, that our underlying gross margin performance will be stronger in the second half than the front half. The definition for adjusted has not changed from one quarter to the next, and it remains the same as you reflect on what the guidance is. Let me now get to the question you asked about marketing.

We will be investing, as the remarks said, we started off with marketing investment against both whites and personal care. We will continue to focus on those two categories to drive additional household penetration in the second half. a step up both in dollars and a percent basis. What I want to also the investments that we will be making in the second half are broader than marketing. We will be investing in capabilities to help us scale the business more effectively and efficiently as we move forward as well, you will see those investments come through the SG&A line.

And then, let me just hop in and tell you how we're marketing spending is working. Well, I mean, I'm feeling pretty great. You know, we see that for the quarter, consumption was up 8%. And we also reflected on just overall the trajectory of our business performance has been strong over the course of the three years. One of the things that you... unique about this year is that for the first time we were doing some marketing in different ways and on different things than we've done before. You remember that in the first half of the year we supported this launch into the big kid aisle with the Toy Story Pixar launch, which we were beneficiaries of being included in some of Disney's own marketing for the movie. and as well as our marketing for the movie, feeling really good about how those businesses have kickstarted off to the first half of the year. We also launched that Flushable Wipes campaign that I talked about in the script, and that there are some images you'll find in some of our investor presentations.

Adjust, supporting Flushable Wipes is a really new kind of marketing spending for us, because you remember that I've been talking about the strength of the honest brand across three different types of households, baby households, these big kid households, that's squarely where the Toy Story stuff is aimed. And then the households with no kids at all. And so our flushable wipes allow us to cascade across all those households. This campaign was the first time that Honest, on a national basis, on a big, broad campaign, did marketing directly to adult consumers for themselves for this brand at such a level. And you can see that it's working when you see our household penetration gains more than half of our households are households with no kids at all. And the larger part of the 100 basis points of household penetration increase we saw in the quarter came from no-kid households. This was really the first time we did big national campaign spending against those kinds of households.

Lastly, we also launched a really broad portfolio covering campaign that we call the Mother of All Standards. And this is a strong new campaign that... we can reach even more households now that we're in a position to drive some greater upper funnel marketing in the back half.

Thank you both, Curtis and Carla. That's helpful. Second quick question for me, just on the licensing apparel and switching to the licensing versus direct. Understand that it's going to be immaterial for 2026. Maybe just talk bigger picture about why you feel like that's going to be the right structure and setup for you guys and how you expect that segment to evolve for you guys maybe in 2026.

27 and beyond yes Aaron let me take that we our strategy of this enterprise being asset light and so the licensing model really lives into our asset light DNA and so we're excited to be able to be in the apparel business for consumers who love the honest brand for babies both both clothes and bedding and such. And so this is an opportunity for us to do two things, participate in the category and do it in an asset-like, low capital intensive way. And as you know, licensing is a margin to creative proposition and so we're excited on all fronts about this new agreement. We are not going to speculate about the sort of impact longer term. We're excited about the agreement. We've got a great new partner and is on the maintaining the strategy of being asset-light.

Thank you. And our next question comes from the line up there, Mosenian with Morgan Stanley.

Hi, good afternoon. It's actually Patty Cannata on for Dara. I just had a couple of questions. One, just to follow up on the reinvestment piece, you know, the stepped up reinvestment, you spoke about marketing, but could you say a bit more about, you know, how you're thinking or where the incremental dollars are going in terms of how you're prioritizing across not just marketing,.

innovation and distribution. Thank you. Oh, all right. It's nice to see you, or nice to hear from you. The way to think about this is that we've got strategic investments designed to map to the growth levers we've talked about in our strategy. As a reminder, we've talked about the growth levers in our strategies both by the platforms that are our highest growth, highest margin platforms. We are showing that we are gaining share. We are winning. Consumers clearly, households are embracing the products we bring, and that is wipes and personal care. Those are really broad platforms. When we talk about wipes and personal care, as a reminder, we are in the wipe segment in a number of ways.

We've got the baby aisle where we have our all-purpose wipes. We've got the general adult aisle where we've got our flushable wipes and our sanitizing, hand sanitizing wipes. We've got makeup remover wipes. So we're very broad-based and our wipes are winning. So we have a lot of opportunities to tell more households. our WIPES businesses are at less than 2% household penetration. So, and our competitive categories are significantly, from anywhere from two to six times more households buy those brands, know those brands. So we've got a lot of people that we get to talk to across many different WIPES platforms. So there's brand awareness, that we need to do, as well as just telling people about the honest standard and this really differentiated benefit that our products bring.

Similarly with personal care, our personal care is a business. We're the number two baby personal care business in that aisle and category. And we are up 19% in the personal care business. We want to continue fueling that leadership and talking to consumers, bringing new households in as baby households. That's a set of households that you have to constantly be recruiting against because new families come in and then families migrate over. So we'll be investing in those two platforms, both to make sure that we make consumers aware of all that we have to offer, as well as continuing to always recruit new households. Then, as a reminder, we we also have a strategy to be speaking broadly across households.

That's very new for us in terms of our marketing investment structure, making sure that across whether that is streaming or social or retail marketing, that we are showing up with the right creative messages and showing up in the right channels and media spends to talk to these very compelling 75% of households that have no kids at all and the other 14% that have big kids. So that's how we're going to be using a lot of our marketing as well as starting to take the honest brand in, you know, just bigger, broader ways that upper funnel marketing can can do to make sure more people understand this brand was built for the modern age. It's different than the other brands in the aisles, and we got a lot of people we need to tell about that. Now, all of our added investment spending in the back half is not marketing, and it's important to talk about that because you remember our third pillar of our strategy is operating discipline. We've been a founder-built startup, early-stage brand. We've got many, many systems that are getting more sophisticated and efficient as we continue to grow as a company. And so we are investing in making sure we're bringing online technologies that make us efficient, investing in this new and improved supply chain approach so that we can be working with our retail partners in a more integrated way. integrated way.

So our spending is across both marketing and how we operate.

That's really helpful. And just maybe a quick one on diapers. The categories are still obviously very competitive, but anything you could share with us in terms of promotion and pricing dynamics that you're seeing and just how you're thinking about the environment from here? Thank you.

you know what, I want to take kind of a two-part approach to this. So I want to start with diapers, and then I want to zoom farther out and talk about baby. First of all, it's, listen, it's not easy to say it, but the diaper category is very challenged right now. We're seeing it. We're hearing the other brands see it. We believe that what we're seeing, and Curtis and I have spent a lot of time in CPG, we have been in a lot of categories, we've seen a lot of errors and dynamics. And what we're seeing in the diaper category is something that looks like a lot of people are seeing it. looks structural and looks like it will be the dynamic for the foreseeable future. It It's very honest and important to think of it that way so that we make sure we manage that business wisely against this strategy we've committed to of growing the top line faster than our categories and expanding profit faster than we grow the top line.

So when we look at that for diapers, we see all the major national categories. branded players are losing share, they're losing unit growth, and that's really challenging. For us, as we see it, we've been investing in our diaper business in a couple of ways. We want to make sure, first of all, we bring a great diaper forward that delivers the honest standard. So you may remember we recently improved our actual diaper technology. And we wanted to make sure that people have that both product performance and that clean commitment that we bring to the aisle, along with that style, you know, the joy that we always bring in our diapers. That makes our diapers unique. And that's important because our diapers need to be worth it. We've also been investing in value, making sure that we show up with retailers to at least bring our diaper forward in the value we believe fits the Honest Brand.

But what I would say about our approach to baby, if you remember, we are actually winning in baby. We're doing very well. Our all-purpose baby was. are the number one natural baby wipe in the category, up 16%. We've got this beautiful extended portfolio of baby personal care products up almost 20% in the quarter. And with this addition of the licensing strategy we told you about in today's message, making sure that our soft, organic baby wipes onesies, baby bedding is available to those baby families so that we have a full surround. What we are most glad for is that our baby portfolio is allowing us to offset the dampening effect that we see structurally in diapers. And our business has evolved such that diapers are now actually less than 25% of our overall consumption. So between our wipes and our personal care business, that is now 70% of honest consumption.

So the way we're balancing it allows us to deliver this raised guidance and the continued commitment of top line that grows faster than our categories and bottom line that outpaces the top.

Thank you. And our next question comes from the line of Anna Glaskin with B. Reilly Securities.

Hi, good afternoon. Thanks for taking my questions. I'd like to touch on distribution. In the past you used to disclose ACV and talk about the number of doors you were in, but it got a little complicated between categories. Could you maybe just update us in terms of you're investing in marketing expand household penetration and the higher growth categories like wipes and personal care could you maybe remind us where you sit today in terms of distribution and how much expanded door growth could support growth ahead thanks.

Yes, I am so glad you said that, Anna. It started to get very complicated to talk about distribution because each of our categories is so dramatically different and they play in aisles with really, really different structural approaches to distribution. I'm going to just give you a contrast and an example what it means to have great. distribution of flushable wipes aisle, really different than trial and travel, really different than baby. So what we've tried to do to make it a little bit more uniform is still talk about the great runway ahead that we have and make it in a way that's sort of easier to monitor every time we're together with less of the noise and confusion. by focusing it on the household penetration, a little bit more of a uniform fact. Although I will note, it doesn't really allow us to tell you about the great growth we're doing online when we talk about distribution. So it is helpful to be focused on household penetration because it's really a better, more... holistic picture. When you're looking at household penetration, you are accounting now for what the collective business looks like as we become even more effective on our e-commerce channels, then it's important to have that unified language that works across both.

And as I told you, household penetration for the whole brand, while at 8.1% and up 100 basis points year over year. If you now break that apart and look at any one given piece of our business, how much household penetration do you have in personal care? How much household penetration do you have in flushable wipes? That's where the picture changes dramatically for a business like ours that crosses about 10%. categories, kind of accumulate them to get to the eight, but you look at them separately, that's where the magic is. I mean, we are doing phenomenally. Number two, baby personal care brand, and we have less than 3% household penetration in that aisle. Some of the brands in baby personal care have 6%. six times the households we do, and we're still number two. So imagine what happens with every point that we add on to household penetration. I'll just like one of the back of the envelope numbers for me, every point that we gain in baby personal care is worth anywhere from 25 million to 30 million in annual. sales so this journey we have of going to less than 3% penetration and in something like flushable wipes we don't even have 1% of the US household it's wild like it we're so new we only launched in that category three years ago some of our competitors have been out for twice as long as we have so we're very encouraged to already be the fourth largest flushable wipes brand with less than 1% of US U.S. households.

So we, again, we know that those households are worth anywhere from, you know, 20 to 30 million dollars every time we gain a point. So that's how we're focusing on the growth. And that's why we want to talk to you about that when we're, whenever we're with you.

Got it, thanks. That's super helpful, Carla. And then I just had a follow-up on SG&A. Pretty big step down year over year, and then given the investments in the back half, it seems like that's stepping back up. Was there anything that potentially shifted from 2Q to 3Q or anything to keep in mind there. Thanks.

Yes, I think I think the question and the performance that you saw on to Q2 1st, I would just want to recognize the execution of powering on this growth that was behind that in the front half. And then yes, you were thinking about it the right way. As you look at the 2nd, half of the year, we're talking about the investments in marketing. and SG&A capabilities to set us up for sustained long-term scaling. So we will see the SG&A step up from the, call it, low watermark that we had in Q2.

Thank you. Our next question comes from the line of Owen Rickard with Northland Capital Markets.

Hi, Carla. Hi, Curtis. Thanks for taking my questions here. First for me, how much of the second quarter organic growth acceleration was driven by distribution gains versus velocity improvement? And is that mix shifting any one way or the other? And how durable of a signal is that?.

Yes, what I tell you is that first of all, we came into this year expecting that we were going to have sequential improvement in organic revenue from first quarter to second quarter. The way to think about that was we were gaining distribution in Q1, and then we were expecting that that would take hold and begin to accelerate in Q2 and balance of year. And I think that's what we've seen happen in Q2, right? And so it is the growth behind our personal care and WISE portfolios that continue to have momentum and win in the marketplace.

Yes, and remember, Owen, I think one of the things we've talked about on some of our conversations with you is what we want to do now is make sure that we sync our innovation schedule with the reset schedules that retailers have, especially brick and mortar, and that we do that in a way that makes sure we get great returns on the innovation. investment across the year as we continue to build those. So in general, you'll tend to see that the innovation punch happens earlier in the year. Then we begin focusing on just really planting, as Curtis said so well, planting those roots really deep, making sure we invest in velocities, awareness, trial, and things like those tent pole merchandising. events like your Circle Weeks and your Amazon Prime Day really give us an opportunity. We try to make sure the innovation is out, it's ready, it is locked and loaded so that we get the chance. from the rooftops about it in those periods where you got a lot of eyeballs on the channel and on our site. So in general, what you're seeing is great performance in foundational durable momentum. And I think that the consistency of the consumption numbers is another indicator. cater for you, that this is not some kind of high heat and then cool down periods, very consistent growth.

Got it, got it. That's super helpful, guys. And then lastly for me... You know, the Powering Honest growth costs are winding down, and you actually had a much smaller restructuring credit this quarter than I expected. Are we essentially through all of the P&L noise related to Powering Honest growth?.

Yes, first, let me just take an opportunity to recognize the team here that has been executing against powering on this growth. We are going to deliver more savings and less cost than even the previous guidance that we had given. And so we are certainly in favor of that. excited about the opportunity to do that. From a completion standpoint, we are now live in our warehouse, so we've executed against the warehouse consolidation of again seeing some of those savings in Q2, and we are largely but not completely through the costs related to the program. But very pleased with the result and the impact that it's had on the structural profitability within the business.

Thank you. I'm showing no further questions. So with that, I'll now turn the call back over to CEO Carla Vernon for any closing remarks. I just want to take this opportunity once again to echo what Curtis said. We thank our teams. This has been incredible, powerful work. I also feel like if you have any interest in more answers, there's a great presentation our investors.honest.com website and we look forward to talking to you all next quarter.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.

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Ladies and gentlemen, thank you for standing by, and welcome to the Honest Company's First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded.

I would now like to hand the conference call over to Chris Mandeville, Interim Head of Investor Relations at the Honest Company. Please go ahead.

Good afternoon, and thank you for joining our first quarter 2026 conference call. With me today are Carla Vernon, our Chief Executive Officer; and Curtiss Bruce, our Chief Financial Officer.

Before we begin, I will remind you that our remarks today include forward-looking statements subject to risks and uncertainties. We do not undertake any obligation to update these statements, and actual results may differ materially. For a detailed discussion of these factors, please refer to our safe harbor statements in today's earnings materials and our recent SEC filings.

We will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and accompanying presentation, which are available at investors.honest.com. Finally, please note that all consumption data included in our discussion today, unless otherwise noted, will reflect Circana MULO+ measured channel data for the 13 weeks ended March 29, 2026, as compared to the prior year.

With that, I'll turn it over to Carla.

Thank you, Chris, and hello to everyone joining us. Today, I will provide a high-level look at our first quarter performance and offer insights into how we are successfully executing our strategy to profitably scale the Honest brand. Following my remarks, Curtiss will provide greater detail on our Q1 financial results and discuss our reaffirmed full-year outlook.

We are pleased with our start to 2026 as our recent actions to optimize our portfolio are bearing fruit. Our Q1 results demonstrate that Powering Honest Growth is leading to an enterprise that is more strategically focused, growth-driven and structurally profitable.

Let me begin with our first quarter results. By bringing a sharpened focus to our right to win categories and channels, we delivered organic revenue growth of 3.9% Delivering this growth on top of double-digit growth in the prior year underscores the momentum across our portfolio. As we continue to increase the availability of Honest products, we are also expanding our business across a broader set of households.

Over the last 3 years, we've been disciplined in our focus on driving shareholder value through top line scale and bottom line expansion, and in Q1, we did exactly that. In addition to delivering organic revenue growth, our adjusted gross margin of 43.5% was the strongest in our history. This year-over-year gross margin expansion of 480 basis points demonstrates the impact of our Powering Honest Growth initiative. By streamlining the focus to our right to win categories, we have ignited a virtuous cycle that allows our teams to successfully execute against our 3 strategic pillars of brand maximization, margin enhancement and operating discipline.

In Q1, our brand maximization strategy of growing revenue scale and consumer strength of the Honest brand was evident. We delivered 8.3% consumption growth significantly ahead of our comparative category average growth of 2.6% and a notable acceleration from the 3.4% we delivered in Q4 2025. Best of all, our momentum continued to be volume-led with unit consumption up 20%.

As I shared last quarter, the Honest brand benefits from 2 powerful dynamics. The first and most foundational is the growing consumer interest in cleanly formulated and effective products for people with sensitive skin.

The second dynamic is the unique competitive advantage of the Honest brand, which drives our commitment to upholding the highest standards in everything we do. This gives us the ability to build deep consumer trust and loyalty across a diverse range of households. This spans families with babies and toddlers to those with big kids and teenagers and even households with no kids at all.

In the United States, 89% of U.S. households do not have any children under the age of 6, while 75% of U.S. households have no children at all. This is why we are purposeful in designing a growth strategy that provides a broad range of products developed with a wide range of ages in mind. As a reminder, according to Numerator, over half of Honest's current buyers are for no kid households. Across all household types, the love for our cleanly formulated and sustainably designed personal care products continues to grow.

At Honest, every product must meet our industry-leading Honest standard, which is a set of guiding principles that includes a list of over 3,500 ingredients we do not use and that shapes every step of product innovation and development to ensure our high expectations for safety, efficacy and design. This appeal is evident in our growth.

In Q1, our total household penetration reached a new all-time high of 8.1%, up 50 basis points from year-end. We're proud to have welcomed 1.6 million new households over the past year. As we look at the opportunity in household penetration, we still have significant runway ahead. For example, in Baby Personal care, key branded competitors hold household penetration anywhere from 2x to 6x greater than ours.

In all purpose wipes, larger brands have as much as 5x to 7x the household penetration of Honest. This considerable market opportunity presents a clear line of sight to our next phase of growth with a focus on transitioning existing category buyers to Honest and welcoming entirely new households into these categories.

Now allow me to share more on each of these portfolios, beginning with wipes. In Q1, our total wipes portfolio delivered consumption growth of nearly 25%. With a wide and growing array of formats, Honest wipes are expanding throughout the store and across household types with products ranging from adult flushable wipes and hand sanitizing wipes to toddler flushable wipes and all-purpose baby wipes.

The consumption of our all-purpose baby wipes grew 14% this quarter, reflecting just how much our community loves having a stylish pop of design on their changing table, countertop or in their bag for those everyday cleanup moments. This quarter was the national rollout of our updated more shopper-friendly packaging for our all-purpose wipes. With this new bolder, more shoppable package design, it is much easier for people to discover these wipes on store shelves. We introduced our largest packaging format to-date, a mega pack that allows parents to maximize value and stay fully stocked on our wonderful sensitive skin safe wipes.

Our Honest flushable wipes are a clear standout in our portfolio, delivering Q1 consumption growth of more than 200% off of a still emerging base. These plush moist and plumbing safe flushable wipes have now grown at more than 10x the category rate for 3 consecutive quarters. As a result, we are now the #4 flushable wipe brand in the category, up from the #5 spot in Q4 2025. This momentum illustrates how our growing Honest community loves the unique combination of fashion, function and flushability we bring to the category, and we're just getting started.

A few weeks ago, we adopted a very stylish and thoroughly modern new approach to our marketing of flushable wipes. We kicked things off with a high-profile social media campaign in March, partnering with mega influencers specifically chosen to resonate across our target households. Whether you love an intimate conversation with Tia Mowry, a besty moment with Kat Stickler or a freestyle wrap by Hannah Berner, we had something for you.

The response from followers was immediate and the algorithm did its thing. In fact, 1 post amassed 1.5 million views across Instagram and TikTok in just its first 12 hours. Building on that incredible digital engagement, we launched a national campaign in April across a broad media landscape of video, social, out-of-home, festivals and more. The ads, posts and videos put the spotlight on the moments when even the most stylish and glamorous women get honest about why they love our flushable wipes. We didn't stop there.

This quarter, we also refreshed our collection of hand sanitizing wipes. In Q1, we relaunched our Lavender and Grapefruit scent in updated counterworthy packaging and rolled out our pocket packs in those 2 fresh scents. For the quarter, we saw a consumption increase of more than 60% on our hand sanitizing wipes, maintaining our position as the #2 brand in the category.

Now shifting to Personal Care. Our Personal Care collection delivered consumption growth of 16% in Q1. Our shampoo, body wash, bubble bath and lotion have long been a trusted choice in the 11% of U.S. households with children under the age of 6. In fact, with consumption growing 7x faster than the category, Honest has officially become the #2 brand across total baby personal care, jumping from the #4 position last year.

Now to build on that momentum, we are expanding our reach. We are pleased to have introduced our new Pixar Toy Story collection, bringing the Honest standard to the 89% of U.S. households with big kids and kids at heart. Initially, we launched the collection, both in-store and online at Walmart. As of a few weeks ago, I'm excited to announce that we added the collection to Amazon, which will meaningfully expand our reach just in time for the Toy Story 5 movie release next month.

Speaking of going to Infinity and Beyond, our brand literally reached new heights recently. During the live stream of the NASA Artemis II mission in April, astronaut Christina Koch radio Houston to ask Mission Control for help in tracking down the Honest lotion the crew had packed on board. It was incredible. It was an organic moment that highlights just how essential our products are to our community even in orbit. Not only was this an incredible affirmation that Honest products are for everyone, but because my own mother was a NASA hidden figure, this was a full circle moment in more ways than one.

Finally, let me share an update on our diaper portfolio, where we have seen progress on our performance. Our consumption declines in diapers were nearly cut in half, moderating to negative 9.6% in Q1 from 18.3% in Q4 2025 as we lapped the distribution losses of gender-specific prints at a key retailer late in the quarter. However, our outlook for the broader diaper category remains cautious. We are navigating a highly competitive and promotional environment that we expect will continue to pressure the category. While diapers remain an important option for families looking for the Honest standard of clean, we will prioritize our growth in households with babies and families with little kids through our higher growth, higher-margin wipes and personal care platforms.

Despite these localized category pressures, the broad strength of our portfolio is shining through. Our positive Q1 results show that we are financially stronger and on the right path with great possibilities ahead.

With that, I will now turn the call over to Curtiss to provide more detail on our Q1 financial results and walk through our reaffirmed full-year 2026 outlook.

Thank you, Carla, and good afternoon, everyone. As Carla mentioned, our first quarter results are a clear indication that the structural improvements we made to our business last year through Powering Honest Growth initiative are driving our growth and profitability today. We are pleased with our start to the year.

Before diving into the financial results, I want to provide a brief update on this transformation. We are seeing the immediate accelerated benefits of a highly favorable margin mix, driven by our sharpened focus on our right to win categories alongside the positive impact of our rightsized SG&A. As we look to the balance of the year, we remain firmly on track to realize our expected supply chain efficiencies in the second half of 2026. As a reminder, we expect Powering Honest Growth to deliver between $10 million to $15 million in annualized savings, serving as a powerful catalyst to further fortify our bottom line health and generate the fuel needed to reinvest in our growth.

Now turning to our first quarter performance. Revenue was $78.1 million compared to $97.3 million in the prior year period, primarily reflecting the impact of our strategic Powering Honest Growth category and channel exits. On an organic basis, revenue grew 3.9% to $78.1 million. This growth is particularly notable as it was achieved over a difficult prior year comparison, which was bolstered by retailer inventory buildup ahead of the 2025 tariffs.

Our performance this quarter reflects strong momentum behind our higher growth, higher-margin wipes and personal care platforms, partially offset by moderating diaper sales declines. These diaper results were driven by the initial lapping of previously disclosed headwinds related to a key retailers transition to gender-neutral prints. Q1 reported gross margin came in at 42.6%, a 390 basis point improvement compared to the prior year period.

On an adjusted basis, our gross margin of 43.5% was historically strong, reflecting favorable freight costs as well as mix from our higher growth, higher-margin wipes and personal care platforms, which was accelerated by Powering Honest Growth. These items were partially offset by tariffs.

Total operating expenses decreased $1.2 million year-over-year, including a modest restructuring charge related to Powering Honest Growth. Excluding this transitional cost, our adjusted operating expenses declined by $1.8 million. This reduction was driven by our structural SG&A improvements, which more than offset our plan to drive double-digit increases in marketing investments directed specifically toward our higher growth, higher-margin wipes and personal care platforms.

Coupling these structural cost savings with our meaningful adjusted gross margin expansion creates a powerful financial engine, underscoring our capacity to strategically reinvest in our brand while rightsizing our SG&A at the same time. Looking at our bottom line, we reported a net loss of less than $0.1 million for the quarter. Q1 adjusted EBITDA was $4 million, representing an adjusted EBITDA margin of 5.1%, down from $6.9 million and a 7.1% margin in the prior year period, largely due to lower reported revenue.

Regarding our balance sheet and cash flow, we continue to be in an exceptionally strong position. We ended the quarter with $90.4 million in cash and cash equivalents and 0 debt, while Q1 free cash flow was $3.8 million, a substantial improvement compared to the negative $3 million in the prior year period. This year-over-year increase was primarily driven by continued working capital improvements stemming from Powering Honest Growth and our rigorous focus on operating discipline.

During the quarter, we utilized $3 million of our newly authorized $25 million share repurchase program with an additional $8.3 million deployed subsequent to quarter end. In total, these repurchases were executed at an average price of $3.26 per share. These actions reflect our confidence in the structural improvements we have made to our business, the significant financial flexibility generated by our asset-light operating model and our commitment to balancing aggressive reinvestment in our growth initiatives with returning meaningful value to our shareholders.

Moving to our outlook. While we are encouraged by our start to 2026, we are also mindful that it is still early in the year, and we are navigating an environment where several macroeconomic uncertainties remain. That said, the actions we've taken to optimize our portfolio have created a much stronger foundation for profitable growth. We have effectively shifted our resources toward the categories where Honest has the clearest competitive advantage, and our 2026 framework reflects both the early returns of that discipline and our prudent approach to the balance of the year.

With that context, we are reaffirming our full-year 2026 outlook. We continue to expect the following: reported revenue declines of 18% to 16% due to our strategic exits, organic revenue growth of 4% to 6%, in line with our long-term algorithm, adjusted gross margins in the low 40s and adjusted EBITDA of $20 million to $23 million.

As I wrap up, I want to emphasize how pleased we are with our start to the year. We believe our first quarter results clearly demonstrate that sharpening our focus on our right to win categories has built a resilient financial foundation. We are executing with strict operational discipline and maintaining a clear line of sight towards sustainable, profitable growth.

With that, I will turn it back to Carla for final remarks.

Thank you, Curtiss. As we shared last quarter, Powering Honest Growth was about unlocking the full potential of our business model by serving as a force multiplier to our strategic pillars. We believe that our Q1 results confirm that the heavy lifting we did in 2025 is paying off. I'd like to thank our team of Honest Butterfly for their commitment and diligence in building our shared vision for Honest. Now more than ever, Honest is well positioned to deliver strong value creation for investors, expand our Honest community and build the enduring strength and meaning of the Honest brand.

With that, I will now turn it over to the operator to open the line for questions.

[Operator Instructions]. Your first question comes from the line of Aaron Grey with AGP.

First question for me, I just want to talk a little bit about the reiterated guidance. I can certainly understand the commentary in terms of wanting to have to take a prudent approach for the remainder of the year. Just given if you take the run rate for 1Q, that kind of takes you to the high end of your guide now. Curious if there's any shipment timing that hadn't impacted the Q or any type of seasonality we should be thinking about ahead just given some of the other top line initiatives we talked about right now -- earlier on the call that should obviously lead to some nice sales trajectory.

Aaron, this is Curtiss. We are certainly pleased with the revenue growth in Q1. It represents a very good start to the year and in line with our expectation and I say we're equally pleased with the consumption of 8% growth as well, and that was on our higher growth, higher-margin portfolios in Wipes and Personal Care.

As you think about the full-year, we're just reiterating our guidance, right? We are still expecting to be able to deliver on the 4% to 6% organic growth. We don't have any concerns coming out of the quarter that there was any dislocation in revenue performance and the consumption performance.

Second question for me is in terms of marketing spend, some uptick there sequentially to about $14 million. Maybe talk about some of the strategy that you have. You talked about it a little bit, Carla, in your prepared remarks. I'd love to hear in terms of some of the initiatives you have to help support the growth for some of the brand launches and expansion there.

Sure. Why don't I get started? Aaron, we really believe that marketing is a force multiplier here at Honest, and it has always been an important piece of the fabric of building this powerful brand. We think we've got a strategic advantage because ever since our beginning, we've been very brand forward, very consumer forward. We know that this investment we're making in marketing is going to be a very powerful driver of this improved awareness that's key to our growth strategy.

As you know, we have -- the success we've demonstrated on household penetration gains have been very balanced across our products and our consumer types, and that's because we've been very intentional as we allowed ourselves to be more focused coming out of Powering Honest Growth. That degree of focus is allowing us to point our marketing dollars and our marketing strategies strongly towards our key categories.

In this quarter, what you've already seen is we kicked off a fantastic marketing campaign against our flushable wipes business. You remember in my comments, we are now the fourth largest brand in flushable wipes, and we delivered more than 200% consumption growth in the quarter. We just about 4 weeks ago, started kicking off a very groundbreaking campaign. You can see some images from that campaign in our investor slide presentation, our social media feed as always.

This campaign really takes a different approach than other flushable brands in the category. We are living up to our name of being honest, right? We've got these really glamorous, beautiful women talking about the role that a flushable wipes plays in their life and why they love our particularly soft and plush and cleanly formulated wipes. We've got that campaign off to a very strong start. It includes a social media lens where we've got mega influencers across different demographics.

Also, what we have going now is, as I mentioned, our Toy Story 2 launch behind our new portfolio of kid personal care kicked off as Pixar began the early initial rounds of driving buzz against that movie. That movie launches in June. We're really just getting into the window where our own awareness driving of that portfolio is heating up as well as Disney's. We've got some other great stuff planned for later in the year that I look forward to coming back and talking to you about.

Yes. Aaron, let me just reiterate and maybe add on to Carla's comments. We definitely believe that brand building is a strategic advantage for us here. We're going to continue to invest in marketing as we look to strengthen the business and create a sustainable growth platform. This is why it was so important for us to execute Powering Honest Growth. The gross margin acceleration, the gross margin expansion is really the fuel that we need in order to continue to invest in marketing to have a long-term sustainable business.

Our next question comes from the line of Anna Glaessgen with B. Riley Securities.

In the past, I think the classical brand discovery was talked about through diapers and then expanding through the broader categories that you guys offer. Now while we've seen diapers declining, we're also seeing continued nice gains in household penetration. Can you speak to how consumer discovery of the brand has shifted and how your go-to-market has shifted in response?

Wonderful. I'll give that a try. You are right, Anna. We are at our all-time highest household penetration, which is such an affirmation that we have picked categories where consumers love what we have and where our portfolios are very expandable across demographics and across types. A few things drive that.

I've talked a lot about the fact that the largest percent of households in America are not, in fact, the littlest baby households, but they are both those bigger kid households and the households like my own, my daughter ought to go off to college where maybe there was a kid in the household and there isn't anymore as well as households where maybe there were never any children in the household. What we found is that the benefit of Honest, which is that clean formulation, sensitive skin safe, that is relevant, not just for babies, right? That is relevant. We know that a degree of adults describing themselves as having sensitive skin is as high as 50% to 70% based on certain research.

Honest products that we make have been relevant to a broader set of households for a while. We already sell more than half of our -- or excuse me, more than half of our consumers are already in these households. What we're doing now is really putting the strategy and product innovation road map together with that consumer base and making sure we talk to them. This Flushables wipe campaign that I just talked to you about is a great example. We are talking to adults about why they will love Honest products. That is really a new form of expanded investment, and we're seeing it work because, of course, those businesses are -- the growth of those businesses is outpacing the pressures we're seeing in the diaper category. We feel really good about what that shift in mix and shift in focus has done for our business model.

Then one follow-up on marketing. Nice to see the investment in Wipe and the activation there, as you noted in the first quarter. Should we take that level of spend and assume that continues? Or was it elevated given the launch cadence that hit that quarter?

Yes. I'll take that one. This is Curtiss. As we think about marketing, we -- you're correct, we did have an increased level of investment in Q1. That was behind the activity that Carla previously mentioned. Like I said in the earlier remarks or the earlier question from Aaron, we are going to continue to invest in marketing. We're not going to sort of guide expressly to that line item, but the investment in marketing is going to be fueled by Powering Honest Growth, and then our -- both the revenue guidance and the EBITDA guidance reflect that increased investment.

Our next question comes from the line of Andrea Teixeira with JPMorgan.

Amazing story about your mom. Carla, I was just hoping Curtiss to talk about like the competitive environment we hear in general. I guess you're above and beyond that in terms of like your premium positioning. But on the diaper segment, there has definitely been a more competitive stance from a lot of the players. If you can comment on that.

Conversely, I know you've been getting a lot of new products in and distribution, and you clearly accelerated the delivery this quarter. I was just hoping if you can comment about like what are the learnings and what is the -- what are you seeing towards the back end of the year, as Aaron was saying in his question, right? I mean, you probably would have a potential to raise the guidance. I understand that, obviously, it's early in the year, but how we should be thinking of what's happening -- what has happened in the quarter and what it informs you through the rest of the year?

Great to hear from you, Andrea. Let me begin with the diaper portion first, and then I'll move on to the new product and distribution learning and our approach to that. Yes, we agree. The diaper category is under an enormous amount of pressure. That pressure is multifaceted, as we know, with macroeconomic pressures facing consumers, along with just increased competitive landscape that is more heated up than we've seen it in previous years.

For us, where we feel encouraged is that as we modeled our diaper business, we knew it was important to get past these distribution losses. Now that we are really lapping those distribution losses that we've been talking to you about, and we saw our own declines cut in half then that told us that as we've been looking at the category, things are playing out according to what we've built into the model and according to what we expected.

With that said, we know that those baby households are important, and so we think we show up differently than most of the other brands in the baby aisle in the baby category because we have the power of a single brand that applies broadly across even when just in the baby set with great meaning because people trust our products to really do what they say. As we are seeing, there are places where people feel that is very important and worth it to them, right? That is because I think that's clean trust we've always had. We love to think it has to do with also our beautiful design. It just they're beautiful products to use as we know, as well as making sure that they deliver on their sensitive skin friendly benefits.

We've got the power of a brand that can press multiple different ways in the aisle. That's why we're still seeing our growth is offsetting those declines that we're managing in diapers. When I think about new products and distribution, I guess I'll pick up on that same storyline, which is the Honest brand was always built broadly even from its beginning. What we have learned is that as we bring the brand into things like kid personal care, adult flushable wipes, hand sanitizing wipes, makeup remover wipes, trial and travel, we are finding the brand is a fit no matter where we take it to new spaces in the store, we take it to new rooms in anybody's household, we take it to new consumers. That does come with the need to invest in each of those categories. We have to show up and talk to that consumer group in that particular category against that job to be done. That's why you've seen that the team has built a financial model that allows us to go after these higher-margin categories while reinvesting.

Then let me just add because we're talking about innovation, we're certainly pleased with the start to Q1, particularly around the innovation. Our 2026 plan and our 2026 guidance on organic revenue was really balanced. It was innovation, velocity and distribution, and so this was not a singular one driver plan. We are still very confident in our ability to deliver with the success that we had with innovation and the distribution that went into the market in Q1.

If I can squeeze one about e-commerce and how you are potentially outperforming. I think it was always the case, but I just wanted to check in, in terms of a channel performance against Biggs?

I think you're talking about broad national e-commerce. Is that right, Andrea?

Yes.

Yes, we are continuing to be very pleased. First of all, we're seeing that across the board, whether it's your traditional brick-and-mortar retailers as they continue to build out their own focus in e-commerce in AI-driven purchases and shopping behavior or where you're looking at the sort of original pure-play e-commerce brands. Our brands, they really fit those models. We know that everyday essentials and consumables do very well in e-commerce. We're seeing a lot of strength for HTC in e-commerce in general.

Honest was -- we love to talk about this, right? We were born digital. We were one of the original DTC brands. We were built by the digital generation, and we were built for the digital generation. Our products really come to life very well in an e-commerce channel, and we're seeing that the algorithm plays out very strongly. with that being certainly one of the fastest places we deliver growth.

[Operator Instructions]. Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Two questions. One, as you think of the tracked channel consumption, which is up, I think, 8.3%, a real acceleration from the fourth quarter. As you think about going forward, how do you see the levels of demand? Is it new product drivers? Is it category drivers? How would you -- how are you planning go forward?

Then on the margin side, with the change in energy prices, how is it impacting your pricing, your customer? Any shifts that you've been seeing? How has it adjusted by channel?

Dana, let's start with that consumption acceleration. As you noted, when we exited the previous quarter, Q4, we reported consumption growth of 3%. In this quarter, we reported consumption growth of 8%. That growth is very encouraging to see given all of the complexities we've been talking about in the macroeconomic environment.

The way I think about the drivers and how that would play out for the rest of the year, this lapping of the distribution declines in diapers is certainly one of the components of why it is sort of more wind at our back on a consumption basis with regard to that piece of our portfolio. We should still see that in the year, but as we've talked about, the diaper category has a lot of pressures. That's why we want to make sure our guidance has got that consideration for the unknowns in the diaper category.

We also -- well, let me step back and say, Curtiss talked about our growth based on 3 very balanced drivers, right? We've got innovation as a driver. That includes innovation we launched last year, like flushable wipes entering brick-and-mortar for the first time last fiscal year. That stuff takes a while to catch on and drive awareness. The fruit continues to pay out and grow. Now we've got the awareness driving campaign to act as continued wind in the sales for that type of business.

Remember, I also mentioned last quarter, we did a considerable amount of our innovation launches for the year in the first quarter intentionally so that we have the ability to drive that all year. New items are a piece of our growth for the year. Then you've got the velocity and the continued availability increases. Those make out really the 3 ways we look at our growth: innovation, the velocity, velocity that consumers -- when they try our products, they love it. We have great repeat rates, and we are driving a lot of marketing to drive awareness. Then the distribution growth. There are a lot of drivers for us on distribution growth.

Sometimes our brand is already in a retailer, but we might only be in the baby set. When we enter and step our way into the flushable lifestyle, that drives a lot of distribution for us even in a retailer we're already in. Think of the kid personal care business the same. We were already in Walmart. We were already in Amazon, but that was an entirely new sort of branch to our tree, if you will, that we are now able to get the benefits of as we launch innovation and expand even in retailers we're already in.

Then I will take the inflation and fuel question here. We continue to monitor and evaluate the impact that the volatility in our macroeconomic environment could have on our business. This is where our asset-light model, our inventory position and the cost mechanisms we have with our suppliers enable us to manage risk in the short term. As we think about 2026, we are confident in our ability to still deliver against our expectations.

Our next question comes from the line of Owen Rickert with Northland Capital Markets.

Just quickly for modeling purposes, last quarter, you mentioned guiding to organic growth improving sequentially throughout the year. Is that still the right way to think about guidance right now?

Yes. Owen, it's a good question. We are pleased with our start, both on net revenue and on consumption. That was the sequential improvement that we talked about, and so that's in line with our expectations. We are still very confident in our ability to deliver the annual guidance, but we're not offering any updates on the cadence.

Then secondly for me, what early reads are you seeing from some of those newer product launches like the Sensitive Rich cream, Send Wipes and Hydro Rich cream just in terms of potential velocity and repeat?

A lot of those items launched in Q1, and so often in my experience, Owen, it is still early to have a true velocity run rate on new items like that. What becomes important is making sure that the shelf sets are all settled in so that we really have a clean read on that data and then driving that awareness.

What I would really anchor us on is that in almost any category where you look at Honest, our household penetration is so low that each of these new products really gives us an opportunity to reach into a new household and introduce the brand. For example, you brought up some of our baby items, Sensa Rich Cream, and that is in our Personal Care portfolio. Our Personal Care portfolio is still only at 2% household penetration, whereas what we see in brands that have been around the category longer, we see those with anywhere from 5 to 7x as much penetration as we have.

As we continue to make our way in these categories, drive familiarity with the awareness that the Honest brand is there, we feel very, very confident that there is so much runway from our loyal consumers as we continue to drive that growth.

I'm showing no further questions. With that, I'll hand the call back over to CEO, Carla Vernon, for closing remarks.

Well, thank you, everybody, for joining us this quarter as we continue to go to Infinity and beyond. We look forward to talking to you next quarter.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.

Ladies and gentlemen, thank you for standing by. Welcome to The Honest Company's Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference call over to Chris Mandeville, Interim Head of Investor Relations at The Honest Company. Please go ahead.

Good afternoon, and thank you for joining our fourth quarter and full year 2025 conference call. With me today are Carla Vernon, our Chief Executive Officer; and Curtiss Bruce, our Chief Financial Officer.

Before we begin, I will remind you that our remarks today include forward-looking statements subject to risks and uncertainties. We do not undertake any obligation to update these statements, and actual results may differ materially. For a detailed discussion of these factors, please refer to our safe harbor statements in today's earnings materials and our recent SEC filings.

We will also discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and accompanying presentation, which are available at investors.honest.com.

Finally, please note that all consumption data included in our discussion today, unless otherwise noted, will reflect Circana MULO+ measured channel data for the 52 weeks ended January 4, 2026, as compared to the prior year.

With that, I'll turn the call over to Carla.

Thank you, Chris, and hello to everyone joining the call. Honest enters 2026 as a more focused and agile organization. Over the last several months, we've moved assertively to execute the Powering Honest Growth transformation we laid out last November. By exiting Honest.com as a direct fulfillment website, the apparel category and our Canadian business, we've successfully narrowed our focus to our right-to-win core of wipes, personal care and diapers. With these exits, we've also rightsized SG&A in line with this more focused revenue base. Later in the year, we expect additional financial efficiency as we consolidate our warehouse footprint.

As a result of these actions, we begin 2026 with a leaner, higher-margin operating model poised for growth. Today, my discussion will be focused on the organic view of the product and channel mix that defines the resulting businesses after the strategic exits from Powering Honest Growth. As a reminder, organic excludes the impact of the exits of apparel, Canada and Honest.com fulfillment.

Our execution in Q4 enabled Honest to deliver on our revised guidance for the year. In 2025, Honest delivered organic revenue of $294 million, up 5.3% versus last year and squarely in line with our long-term algorithm. Consumption growth of 5%, driven by double-digit growth in unit sales was in line with organic revenue growth and materially outpaced our comparative category growth of 2%.

In 2025, our wipes and personal care portfolios delivered strong performance with consumption growth of 30% and 12%, respectively, which drove market share gains for both. This strength and momentum offset the softness in diaper performance. In 2026, we expect the growth on wipes and personal care to continue offsetting weakness in diapers. I will share more on our diaper performance in a few moments.

Despite the volatile tariff environment, adjusted gross margins were 38.7%, an improvement of 50 basis points year-over-year, largely due to favorable product mix. Our 2025 adjusted EBITDA of $21.8 million was in line with our most recent guidance. We also closed out 2025 with a strengthened balance sheet, ending with $90 million cash on hand and no debt. I'm confident in the strength of our business, the discipline of our asset-light model and our anticipated future cash generation.

Based on that foundation, our Board of Directors has authorized a $25 million share repurchase program. This authorization reflects deep confidence in our strategy and our commitment to delivering long-term value for our shareholders.

Looking back on 2025 performance in more detail. We're particularly encouraged that momentum improved across the second half of the year with Q4 organic revenue improving by 6 percentage points over the Q3 decline and returning the business to top line growth of 1% in Q4. This inflection in revenue quarter-over-quarter was largely because we lapped 2 retailer-specific activations in 2024 that were mostly contained to Q3. Additionally, our total consumption improved by nearly 200 basis points quarter-over-quarter, driven by our higher-margin wipes and personal care portfolios.

Taken together, these drivers allowed our underlying strength to resurface in the fourth quarter. We're proud that this momentum is also reflected in our all-time highest household penetration of 7.6% at year-end. This penetration growth represents an increase of 1.7 million households versus the prior year, proving that the Honest brand continues to resonate with a widening audience.

And now turning to 2026. For the full year 2026, we expect to deliver organic revenue growth in the range of 4% to 6% while also driving margin expansion due to our more efficient operating model. This dual focus on top line leadership and bottom line health is central to our value creation thesis. As a reminder, we continue to drive our strategy through the 3 strategic pillars that guide every piece of our work: brand maximization, margin enhancement and operating discipline. This will be evident in our 3 growth drivers for 2026.

Our first 2 drivers support our goal of brand maximization, which is how we scale the Honest brand. Driver #1 is our continued growth and leadership in the baby category. Driver #2 is our plan to accelerate our growth in households beyond those with babies. In addition to being a top baby brand, Honest also performs quite well in households beyond baby. And in the U.S., 89% of households do not have any children under the age of 6. This includes the 75% of households that have no children at all. To complement our strategy of broadening the Honest brand, our third driver of 2026 is grounded in our margin enhancement and operating discipline pillars, which allow us to make continued progress on strengthening our financial profile and operational excellence. Let me begin with our brand maximization drivers.

The Honest brand is unique in its ability to travel seamlessly across categories, aisles and demographics. This was evident in our household penetration growth in 2025, which was balanced across households with no kids and households with kids. Even as we embrace this expanded approach to growth, our story always begins with babies. We believe there is no higher bar than the standard of care a parent gives to their precious babies. According to the National Institutes of Health, 42% of all parents and 49% of all first-time parents are concerned that their children have sensitive skin. This is why our Honest Standard, our rigorous set of guiding principles that help shape every step of product development, including our commitment to formulating without the use of more than 3,500 ingredients of concern resonates so strongly with our community. Honest is trusted by parents who demand a high standard of clean and refuse to compromise on safety or performance.

Let me spend a moment addressing our diaper performance in 2025. The double-digit consumption declines on our diaper business had a dampening effect on the otherwise strong growth of our wipes and personal care collections. And while diapers are no longer our largest category, they are an important way to introduce the brand to the 11% of U.S. households with kids ages 6 or under.

Our diaper declines were largely driven by retail assortment shifts at select brick-and-mortar retailers, the lapping of 2 large promotional events, which I discussed earlier, and macroeconomic pressures driving consumers towards lower-priced items. Because today's parents expect a value equation that balances price with performance and safety, we're strengthening that equation for our diaper business through thoughtful investment in pricing and improvements to price pack architecture while continuing to deliver the quality materials, fit and style that we are known for.

Now turning to baby wipes and personal care. We are confident that our 2026 baby growth plan will deliver the ongoing strong momentum of our core products, along with a robust lineup of baby-focused innovation, much of which is rolling out this quarter. In 2025, our total Honest wipes portfolio delivered remarkable growth with consumption up more than 30%, which is 6x faster than the comparative categories.

A standout performer was our all-purpose baby wipes collection, which grew consumption by 25%, materially outpaced the category and delivered the largest dollar share growth of any all-purpose baby wipes brand. One of the key drivers in this growth was trade-up to larger sizes. In response to the demand for value and convenience, we are launching our largest baby wipes configuration to date with 16 of our full-size packages for what we call our mega pack.

Our baby personal care success is driven by the same demand for clean, safe ingredients we see across the Honest portfolio. With 12% consumption growth in 2025, we're building on this momentum with a strong innovation lineup in 2026. On the heels of the successful launch of our first partnership with Disney, we're expanding our Mickey & Friends bath time and bedtime items into additional retailers this year.

Our baby personal care portfolio also focuses on bringing the sustainability and value that today's parents are seeking. This quarter, we are adding a new item to our collection of milk-carton-style 32-ounce refills with the addition of our fragrance-free shampoo and body wash. This gable-top packaging, which is our largest size offering, uses 89% less plastic than our standard 10-ounce bottle. And earlier this month, we launched our fragrance-free sensitive-rich cream moisturizer with a beautifully light and creamy texture that is clinically proven to deliver 48-hour moisturization for babies' delicate skin.

As I shared earlier, in addition to growing with baby households in 2026, we will also bring intention and focus to our growth of Honest in households with bigger kids and no kids at all. This leverages momentum that has been quietly building. According to numerator data, 54% of current Honest buyers are in no kid households, and we have a history of appealing to those households in several ways.

Many families who trusted Honest for their babies stick with us even after the kids grow up. Some of our most popular items from the baby aisle like our shampoo and body wash, body lotion or our conditioners and detanglers are favorites among households that don't have babies anymore. These are also households that discover Honest through products like our sanitizing wipes or our adult flushable wipes. Regardless of the reason, we have big plans to unlock more growth in households where the kids are older or where there may be no kids at all.

The next natural step in this journey is our expansion into the section of the store dedicated to products for big kids. We know that as kids grow, they want things that show they are growing up, but that doesn't mean they lose the need for the gentle and clean formulations we bring. So we're practically cartwheeling with glee at our first launch into the big kid aisle in partnership with Disney Pixar's Toy Story. We are now taking bath time to infinity and beyond with a lineup of 6 items that add Woody, Buzz, Jessie and more Toy Story friends to the Honest family. The collection launched this month online and in stores at Walmart and will roll out at additional retailers ahead of the Toy Story 5 release this summer.

In 2026, we are also poised to continue our growth in the 75% of U.S. households that don't have any babies or little kids. We have a two-pronged approach for growing with these no kid households. In many instances, we have seen that our existing items are already a great solution for these households. So in 2025, we began evolving our marketing messages to introduce these older households to our personal care items and wipes.

We're also designing new items specifically with this broader set of households in mind. A great example of this success is our beautiful countertop-friendly adult flushable wipes collection, which grew consumption by 175% in 2025 and has ascended to the top 5 in Amazon's personal cleansing wipes set. Following our 2025 launch into brick-and-mortar retailers, including H-E-B and Target, we are striking while the iron is hot as we rolled out our flushable wipes into Walmart stores earlier this month. Also, in addition to our successful fragrance-free offering, we expanded the range of our sanitizing wipes by adding full-size packs in 2 new scents, grapefruit and lavender, alongside convenient pocket packs for on-the-go occasions. These are rolling into market as we speak.

This strategy to grow across demographics is not a pivot. It's an advancement of what's working. Our community has spoken, the Honest brand and the Honest Standard are for everyone from babies and kids to kids at heart.

And finally, we are also driving value creation through our focus on margin enhancement and operating discipline. Now that we've exited our lower margin and less strategically aligned categories and channels, we will be able to deliver end-to-end efficiencies in our supply chain, along with improvements to inventory management and reductions in SG&A. And with these Powering Honest Growth actions in place, we expect to deliver gross margins in the low 40s in 2026.

We have strengthened our balance sheet, lowered our cost structure and have clear momentum in our right-to-win categories. And today, we believe Honest is better positioned than ever to deliver long-term value to our shareholders while building a stronger, bigger Honest.

With that, I'll now turn things over to Curtiss to provide more detail on our Q4 and full year 2025 performance as well as our 2026 outlook.

Thank you, Carla, and good afternoon, everyone. The financial results we are sharing today represent the conclusion of a necessary and decisive chapter for The Honest Company. While our headline numbers for 2025 reflect the deliberate streamlining of our portfolio, the underlying metrics reveal a business that is fundamentally stronger than it was a year ago.

Through Powering Honest Growth, we have built a stronger financial foundation, specifically designed to power our future expansion. This program is expected to deliver between $10 million and $15 million in annualized savings, serving as a direct catalyst for margin expansion while at the same time, providing us with the fuel to reinvest and drive growth in our highest margin portfolios.

To that end, our execution is moving at pace. Since our announcement in November, we have seamlessly exited nonstrategic channels and categories, taking actions to rightsize our SG&A and initiated plans to consolidate our footprint that will deliver structural improvements and efficiencies in 2026 that will endure well beyond this year. The performance and guidance I will detail today provide evidence of this continued scale for Honest.

Beginning with our fourth quarter results, revenue was $88 million, down 11.8% year-over-year. This decline primarily reflects the deliberate impact of our strategic exits. These headwinds were partially offset by the continued momentum Carla detailed in our total wipes and baby personal care collections. On an organic basis, revenue grew 0.7% to $71.3 million, reflecting continued momentum in our total wipes and personal care categories, largely offset by ongoing diaper sales declines. Importantly, this was a significant inflection from our third quarter performance as we lapped select merchandising headwinds, observed continued strength in our wipes and personal care portfolios and executed on targeted investments.

Gross margin was 15.7% compared to 38.8% in the prior year period. This was primarily related to a discrete inventory write-down on apparel as we finalized our exit of this lower-margin portfolio. Additionally, an increase in tariff costs was also a slight headwind compared to the prior year period. These pressures were partially mitigated by favorable product mix as we shift toward our higher-margin wipes and personal care portfolios and a decrease in fulfillment costs. On an adjusted basis, our gross margin was 38.3% and generally in line with the prior year period.

Operating expenses increased $2 million year-over-year. This reflected $4.2 million of the total restructuring costs we expect to realize from Powering Honest Growth. This was partially mitigated by lower year-over-year SG&A, primarily reflecting a reduction in legal expenses. Q4 marketing expenses were consistent with the prior year period. In the quarter, the company reported a net loss of $23.6 million, primarily related to the onetime costs associated with Powering Honest Growth. Adjusted EBITDA for the fourth quarter was $3.8 million, down $4.8 million versus last year, largely due to lower revenue. Adjusted EBITDA margin was 4.3%.

Turning to our full year 2025 results. Revenue was $371.3 million, representing a 1.9% decrease compared to the prior year. This top line performance primarily reflects the intentional impact of our strategic exits under Powering Honest Growth. On an organic basis, full year revenue increased 5.3%, landing squarely within our long-term algorithm and highlighting the underlying strength in our core wipes and personal care portfolios.

Our GAAP gross margin for the year was 33.3% compared to 38.2% in 2024. This contraction was driven largely by a discrete inventory write-down on apparel and a headwind from increased tariff costs. These factors were partially offset by more favorable product mix. On an adjusted basis, gross margin was 38.7%, an increase of 50 basis points over the prior year, highlighting the underlying health of our core business.

Total operating expenses decreased by $9 million or 5.8%, primarily driven by a reduction in SG&A related to lower legal and stock-based compensation expense compared to the prior year. This was partially offset by the aforementioned discrete restructuring costs and a strategic increase in marketing to support our growth. For the full year, we reported a net loss of $15.7 million compared to a loss of $6.1 million in 2024, with the variance almost entirely attributable to the discrete costs associated with our transformation. On an adjusted basis, net income was $8.3 million. Finally, adjusted EBITDA was $22 million, which landed within our updated outlook range and compared to $25.9 million in 2024.

Now turning to our cash flow and balance sheet for the year. We generated free cash flow of $13.6 million, a substantial improvement compared to the $1 million in the prior year. This strength was driven by significant working capital improvements stemming from our focus on operating discipline. Our balance sheet ended the year in an exceptionally strong position with $89.6 million in cash and cash equivalents and 0 debt. This capital position, coupled with our asset-light operating model, provides us with significant financial flexibility.

As Carla shared earlier, with this strength as the backdrop, our Board of Directors has authorized our inaugural share repurchase program of up to $25 million effective immediately. This decision is a direct reflection of our confidence in Powering Honest Growth and the substantial near- and long-term benefits we expect this transformation to deliver. We believe our current valuation does not fully reflect the structural improvements we are making to our operating model, and this program underscores our commitment to a disciplined capital allocation strategy, one that balances reinvestment in our growth initiatives with a clear focus on returning value to our shareholders.

As we look ahead, the decisive actions we've taken to optimize our portfolio have created a much stronger foundation for profitable growth. We have effectively shifted our resources toward the categories where Honest has the clearest competitive advantage, and our 2026 framework reflects the early returns of that discipline. For 2026, we expect the following: reported revenue declines of 18% to 16% due to our strategic exits; organic revenue growth of 4% to 6%, in line with our long-term algorithm; adjusted gross margins in the low 40s; and adjusted EBITDA of $20 million to $23 million.

To provide greater color on these figures, we anticipate sequential improvement in our organic growth throughout the year. While we face difficult comparisons in the first half of 2026, particularly in Q1 due to last year's retailer inventory buildup ahead of tariffs, our momentum will be driven by a robust pipeline of innovation and significant distribution gains established early in the year that will build throughout the remainder of 2026. For modeling purposes, it is also important to account for a high teens percentage headwind to reported sales resulting from the strategic business exits we finalized in 2025. While this impacts the reported top line, it effectively concentrates our resources on our most profitable categories.

Our adjusted gross margin expectations reflect the continued success and ongoing shift in our revenue base toward our higher-growth, higher-margin wipes and personal care portfolios. As these categories represent an increasing share of our total business, we expect a consistent mix benefit to our consolidated margin profile. However, tariffs will remain a year-over-year headwind until they enter the base period beginning in Q2.

Regarding supply chain efficiencies realization under Powering Honest Growth, we expect these savings to materialize in the second half of the year as we move past the implementation phase of our footprint optimization. Specifically, we are consolidating from 2 fulfillment centers into our state-of-the-art facility in Las Vegas with a focus on automated large-scale retail fulfillment. We are executing against a comprehensive project plan designed to ensure the continuity and stability of our operations. By applying our core principle of operating discipline to this move, we are focused on maintaining strong service levels for our retail partners and consumers throughout the process.

Finally, our adjusted EBITDA expectations reflect the operational leverage inherent in our leaner business model. To fully appreciate the significance of our profitability outlook, it is important to look beyond the absolute dollars. While we expect our adjusted EBITDA performance to be consistent with the prior year, it is being generated off a materially lower reported sales base. The fact that we are maintaining our profit levels while intentionally shedding nearly 1/5 of our top line is a testament to the fundamental improvement in our business model.

In terms of shape of the year for adjusted EBITDA, we expect performance to strengthen as the year progresses, mirroring the cadence of our organic growth and gross margin profile. When we look at the long-term earnings power of The Honest Company, we see a business that has moved past the era of structural complexity and into a phase of structural leverage. Regarding our top line potential, our 4% to 6% organic growth algorithm remains the appropriate yardstick for our long-term framework anchored in our focus on driving sustained market share gains.

Just as brand maximization is a catalyst for revenue growth, we see a similarly long runway for continued margin enhancement. As our higher-margin, higher-velocity products continue to outpace the broader portfolio, we are establishing a new elevated baseline for gross margin. Additionally, the supply chain efficiencies and SG&A rightsizing we expect to realize are not onetime wins. We believe they are structural enhancements to our earnings power.

As I close, I want to express my confidence about 2026 and the great future ahead for Honest. We are moving forward with a more productive portfolio, a stronger financial foundation and clear line of sight toward sustainable, profitable growth. We are committed to ensuring that the Honest brand thrives in the modern household for years to come.

With that, I turn it over to Carla for final remarks.

Thank you, Curtiss. Powering Honest Growth was never just about restructuring. It was about unlocking the full potential of the Honest business model and brand. In 2025, we did the heavy lifting to streamline our portfolio and establish a stronger financial foundation. And now in 2026, we build on the great momentum of our core products, our strong brand building and our great innovation lineup.

This year, as always, our progress is due to the incredible execution by our team. Curtiss and I offer our sincere thanks to our employees, proudly known as our Honest Butterflies across our L.A., Las Vegas and Minneapolis locations. Their resilience and commitment as a community continues to power our success. We enter 2026 with a high degree of confidence in our ability to deliver sustainable, profitable growth. Thank you for your support as we build a stronger, more focused and enduring Honest.

And now I turn it over to the operator to open the line for questions.

[Operator Instructions] Your first question comes from the line of Owen Rickert with Northland Capital Markets.

It's great to see the underlying strength of the organic business with that returning to positive territory. With the $25 million share repurchase announcement signaling confidence from the Board here, how should we think more about the cadence of organic growth building throughout 2026?

Owen, Carla here. As we exit 2025, we really tried to express and indicate our confidence in the momentum we see as we're exiting the year. We leave Q4 with consumption of north of 3.5%, and that really sets us up well for the strength that you heard about on our wipes and personal care businesses, where we expect to see really continued strong performance in the year.

We've got such a lineup of innovation against what we know works on those businesses. In the wipes portfolio, I talked about a bunch of the new products that are already shipping in the quarter; personal care entering that kid personal care set for the first time. So we're expecting the complement of new product innovation along with momentum on the core.

But we really want to undergird all of that with the strength of our business model through supply chain improvements that we're also going to see across the year. Curtiss shared in his remarks that we're going to be optimizing our fulfillment center footprint. Some of those benefits will happen as the year runs. And our SG&A really bringing that in line with our new smaller revenue base was an important piece of progress we wanted to demonstrate on our transformation, and we'll be doing that over the course of the year. I think Curtiss can dive into more of the specifics quarter-over-quarter, but overall, we're really looking forward to seeing that continued strengthening over the course of the year.

Yes. So let me just add the momentum that Carla is talking about that we're exiting the year with gives us a lot of confidence to be able to deliver our guidance of 4% to 6% organic revenue growth for the year. It's worth noting that, that organic growth will, however, represent down 18% to down 16% on a reported basis. In order to help with the modeling, we have provided the 2025 quarterly organic base that is in the press release. You can also find it on the website in the IR section on our Q4 [ presentation ].

In terms of the phasing from an organic growth perspective by quarter, we do expect to see sequential improvement in our growth rate as we lap the tariff inventory build in Q1 of 2025. We are absolutely confident in our ability to deliver our guidance on both the top and bottom line.

Got it. Super helpful, guys. Secondly for me, with nearly $90 million of cash and no debt, how do you balance buybacks with reinvestment in maybe marketing and innovation going forward, especially with the stated goal of accelerating growth in those core categories?

Yes. So let me start by just saying what a milestone this is for The Honest Company as a public entity to have our inaugural buyback authorization. I think that is quite an achievement, quite a milestone for us. And as we said in the remarks, it's a reflection of our ability to execute Powering Honest Growth. It's a reflection of, as you just stated, the $90 million we have in cash and 0 debt. And that $90 million was a significant increase from our balance at the end of Q3, so I think that is representative of our ability to execute Powering Honest Growth as we close the year.

It also marks, I think, our confidence in our ability to execute the transformation program, our continued ability to generate cash and the confidence we have in our ability to deliver on our 2026 guidance. It also -- we believe that valuation does not reflect the potential of this business nor our ability to execute the transformation. What we will continue to do is prioritize investment in growth. We will maintain liquidity to weather any macroeconomic headwinds that could be in front of us, and we will balance that with returning value to shareholders. That is our capital allocation plan.

Our next question comes from the line of Aaron Grey with Alliance Global Partners.

Just want to dive a bit deeper in terms of some of the growth opportunities. In the past, we've talked about ACV opportunities, both in terms of breadth and depth. You alluded to some of the innovation earlier on the call. Curtiss, you also talked about some distribution in terms of the sequencing of the growth. So I just want to get some further color in terms of maybe you can size out how much of the growth you're expecting now is from breadth versus depth for the year 2026 and we think about some of the growth opportunities.

Aaron, nice to talk to you. As we look at how we've built 2026 with a top line growth algorithm in the 4% to 6% range, that growth is driven by a really nice balance of things. I think balance is such a -- going to be such a theme for us. So the growth is driven in a very well-balanced way by innovation of core -- excuse me, innovation of new product items and gaining distribution through the launch of those new product items like we just talked about entering an entirely new aisle. The kid personal care aisle is a different part of the store than where we are, where you find a lot of bubble baths and stuff. And so we have an entire new lineup entering that aisle with 6 new items at the launch. Those already rolled out in the year. That's a great example when we say growth driven by distribution of new items.

We are also seeing growth and distribution gains on our core items as well. So I love talking about like we rolled out our flushable wipes over the last 2 years, only entering brick and mortar for the first time in 2025. This quarter, seeing our first brick-and-mortar launch at Walmart of the flushable wipes, so we've got a lot of strength and engine behind core items that still have more distribution upside. That's just one example.

So we have distribution of the core. We have innovation of new items. We have the momentum and velocity of the core. So the items that we already have in market are doing quite well. For example, our all-purpose baby wipes are doing very well. So as Curtiss talked about, we really want to fuel the growth of our core by making sure we have marketing investment across that as well. So it's really a three-part growth and balance as you see our growth.

The other way to think about that, which I talked about today, is we're talking about household types, which is also an important unlock for us. We're also balanced in that regard. So our business is surprisingly across kid and no kid households. Today already, 54% of our revenue is from households with no kids. And our household penetration growth was also very balanced in 2025 with growth coming from no kid households and growth coming from households with little kids. So as we look at driving that growth, we drive that growth with items created for those different kinds of households as well as marketing designed to talk to those households and give them the awareness of the product.

Okay. Great. Second question for me is just on the cost savings. So it moved up again. It was 8 to 15, I believe, last quarter, now 10-15. So good to see the lower end of that raised a bit. But I want to talk about maybe the sequencing of those savings and when we can expect it to flow through the P&L and then maybe some color in terms of what would move that towards the lower and higher end of the range and the key factors there.

Yes. So thanks for the question. I just want to jump in here and reiterate the fact that we guided now to a gross margin in the low 40s. I am sure you remember back in Q2, when we crossed the 40% gross margin threshold for the first time, there was quite a bit of excitement with us on that achievement. So as we look at 2026 and we talk about the guidance, we did guide to the low 40s on an adjusted basis. Those savings are going to come or that performance is really connected to a couple of things.

Number one is, as we think about the higher margin categories that are driving growth in wipes and baby personal care, we will have a sustaining mix benefit throughout all 4 quarters related to mix. The second big driver for that outsized performance will be the transition from 2 warehouses down to 1. And so that execution is planned to start having the benefit in our business in the second half of the year. We -- as you think about sort of the range of outcomes, I think the potential for more or less really comes down to the ability of the -- or the impact from a mix perspective, is there more upside on the higher-margin pieces of the business that will drive a higher mix benefit and then related to the timing and the absolute value of the savings related to the warehouse transition.

Our next question comes from the line of Shovana Chowdhury with JPMorgan.

I wanted to delve a little bit further into the diaper. It's 30% of your sales, and you called out the decline in the diaper revenue. First, I wanted to clarify, is this decline mainly due to the general neutral print issue with Target, which should not be a headwind this year? Or is it really a factor or like worsened by the fierce competition in the category?

And what is your expectation for the diaper performance in the future? And if you could also give me -- give us a sense of -- you did mention in your prepared remarks about the thoughtful pricing in diapers and improving in price pack architecture. What is the price gap that you're seeing? I understand your more premium products, there's usually a price gap. But what is this price gap? And how much are you willing to close this gap? And if you can just give us like some thoughts on the latest trends and market share performance, specifically for your diapers, that would be very appreciated.

All right. Shovana, I want to make sure I break apart the different components of your question and make sure I address them. So let me start by stepping back and saying that it's been a very volatile year. 2025 was a very volatile year for the diaper category overall. And I know people are probably hearing that not just from us. The category overall for 2025 was down 1%. And we know that there are a number of drivers that are causing that to happen for the category. One of the biggest things that we're seeing is that with the macroeconomic uncertainty, consumers in the diaper category, in particular, have been shown to switch to lower-priced diaper items. And what we're seeing is category -- the category is just losing dollars overall as consumers shift to lower-priced items. And so that certainly affects us as well when we see those consumer shifts.

We also know that for us, last year, we had that lapping issue that I talked about that was a real driver of our Q3 diaper declines but was pretty well sort of encapsulated to a Q3 impact. And then we know that we had the portfolio simplification over the course of the year. Some of that portfolio simplification was indeed due to the ones you brought up, Shovana, the loss of the gendered prints at one of our largest retailers. We know that retailers are doing some shifts and simplification of their sets overall. So that was among one of the drivers.

As we look at the future and what we expect, we do believe that 2026 is likely to be another challenging year for Honest in diapers, and we -- that will be driven somewhat by some of the same factors, the macroeconomic uncertainty. We're going to be watching that just like everyone. I mean, there's a lot, and it's been changing quickly in the category. And there have been some aggressive moves by some of those low-priced competitors. So we'll keep our eye on that.

We do believe that the portfolio simplification that we're experiencing will continue into the course of the year, but that's already in our guidance, Shovana. So what we expect from our diaper business in '26 is already reflected in this 4% to 6% top line growth algorithm. And when we think about how we want to address it in the future, you are right. We want to make sure we've got the right price value offering that makes sense for our business while maintaining our commitment to driving margin expansion as a whole. So we want to do that in the right way and in a way that means so much to our consumers. But that's also why we need to have a very balanced growth portfolio overall for our baby business in general because we have a lot of strength we bring to the aisle and a lot of margin strength we bring as a leading baby brand that is not dependent on diapers the way it used to be so much when diapers was the bigger piece of our business.

You did ask me about pricing and the price gap. Our average price gap can be anywhere ranging from 20% to 30% of a price premium on an Honest diaper. We do know we develop our diaper to a higher standard of clean, always trying to push the categories that we're in to bring the Honest Standard to life through the offering we bring and with the highest expectations of our sensitive skin consumers. So that is something we need to make sure we get right in our cost structure, and that's all been built in as we've already reflected in the guidance for the year.

Our next question comes from the line of Anna Glaessgen with B. Riley Securities.

I guess I'd like to start as a follow-up to the prior question on diapers. Just curious especially given the dislocation we've seen this year given retailer actions in the category. Roughly, how should we think about consumption trends versus the industry? And then building off the prior commentary around the price premium and consumers trading down, I guess, how should we think about returning to consumption in excess of the industry in light of those headwinds to premium products?

I'm going to speak to the consumption trends. I want to make sure I do totally understand your question, Anna, so if I'm not hitting on it, please let me know with a follow-up. For our 2025 performance, as we look at our diaper consumption, we did share that we had double-digit declines in diapers. Now that's not the same everywhere. That's what's been very interesting about us in our diaper performance.

The category overall was down 1% as a diaper category. When we look at our diaper performance and we take out our performance at Target, our diaper consumption grew 2% for the year last year. So we definitely have seen that our diaper dynamics can be different based on the different consumer patterns at the various retailers. But overall, we are certainly experiencing the sort of broad-based challenges and headwinds that the diaper category faces.

Again, I would say that as we have built our 2025 model, we've been very clear-eyed about what we expect from our diaper business and from our consumption. And as we look at our expectations to grow consumption overall across our portfolio for the year, our wipes and personal care businesses are performing so strongly, and that's one of the reasons why we are also bullish on our ability to grow with our highest margin businesses where they can drive the biggest impact on our portfolio and against the households that love what we have and want more of it. So that's why we have a very balanced approach to our growth next year.

Got it. That's really helpful. So it seems to suggest, taking out the noise at that key retailer underlying share actually -- or underlying performance actually exceeded the category.

It did.

Okay. Perfect. And then building on a prior question on the first quarter, the commentary of sequential improvement in organic growth through the year seems to imply that the first quarter is expected to produce year-over-year organic growth. Is that fair?

Yes, that's very fair. We do expect organic growth in Q1. We expect sequential improvement thereafter, but you heard that correctly.

Got it. And then just one more if I could. You're now a couple of quarters into the shift from DTC. Any high-level thoughts on your expectations for transfer of those sales to your retailers and anything you've seen thus far?

Yes. I think we had a conservative assumption on the flow back to retailers as we exited the fulfillment. What we've seen early days and I guess very complicated and complex to attribute exactly where it's coming from when you look at the -- some of the early green shoots that we've seen as we've made that change on some of the retailer dot-com sites, but it has exceeded our original expectation. And so we're happy with the early, call it, qualitative performance that we've seen.

And our next question comes from the line of Dara Mohsenian with Morgan Stanley.

Just a couple of follow-ups. A, on the diaper side, you mentioned some investments in value. Can you just give us a sense of some of the adjustments you're making from a promotional cadence standpoint, a pricing standpoint in 2026? Is that the most important intervention you're making in diapers? Or are there other things that should also drive improved performance? And is there a point where you think you can get back to consistent growth?

And then just on the share repurchase side, how do you think about repurchases? You mentioned that you see greater value here than perhaps the market is. Do you expect to repurchase aggressively? Or is this more a program that's in place for opportune repurchases over time as opposed to putting the dollars to work right away?

Yes. Maybe I'll start with the repurchase, and then we'll pivot to the first part of that question. So the repurchase authorization of $25 million was open-ended, right? And so we've got no specific time horizon that we are executing against. I think when you look at the benchmarks, however, in the industry, it would indicate that most public companies when they have an authorization program sort of reach that limit or renew their program over the course of a 2- or 3-year time horizon. We absolutely believe that the valuation is not fully reflective. We will be opportunistic. I cannot tell you specifically when and how much, but we believe that is undervalued and we have an opportunity.

And I'll -- let me just hit the -- let me hit the diaper. I think you were asking about diaper pricing and diaper value overall. So I know you know, but obviously, retailers set the pricing strategy that's in the market. And we don't discuss in advance any of our specific approaches to where we're going to execute and advance merchandising or promotional support against our categories.

What I would say is, in this category, in the diaper category right now, we do see that when we look at the overall performance of the category, the observation you can make is that consumers are shifting to lower-priced diaper offerings, many of which are manufactured in China. And so we can take from that, that bringing consumers the right value equation is important.

What we also see is that, last year, when we take out the impact of one of our large retailers, our diaper business did grow. So what that tells us is that our diaper business has a good value offering for the people who want the kind of diaper that we offer. What's important as we look ahead is making sure we've always got that right, that we balance benefits and price with our overall responsible business model strategy and that we also understand that the Honest brand has become very scalable across many categories and that that's one of the reasons why we're shifting towards higher margin, higher growth areas because this business will grow forward with baby households against a very broad array of categories like baby personal care, like wipes, like lotions. So we feel very good about our baby strategy, and we will keep our eye on the right way to manage our diaper business.

And if I could just wrap that up, I just want to just reiterate that we have taken modeling several multiple different scenarios on how our diaper business moves or doesn't move throughout 2026. And all of that is reflected in the guidance that we provided today.

I'll now hand the call back over to CEO Carla Vernon for any closing remarks.

I just want to thank everybody for joining us for the call today and giving us the opportunity to tell you about the confidence we have about 2026. I look forward to talking to you all next quarter.

Ladies and gentlemen, this does conclude today's conference call. Thank you for participating, and you may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to the Honest Company's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the call over to Ms. Elizabeth Bouchard, Senior Director, Investor Relations at the Honest Company. Please go ahead.

Good afternoon, everyone. Thank you for joining our third quarter 2025 conference call. Joining me today are Carla Vernon, our Chief Executive Officer; and Curtiss Bruce, our Chief Financial Officer.

Before we start, I would like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our earnings release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release issued today as well as our SEC filings for a more detailed description of the risk factors that may affect our results.

Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events, except as required by law.

Also during this call, we will discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the financial results section of today's earnings release. A live broadcast of this call, along with presentation slides that we reference in our prepared remarks, are available on the Investor Relations section of our website at investors.honest.com.

And with that, I'll turn the call over to Carla.

Thanks, Elizabeth. Good afternoon, everyone, and thank you for joining us today. Let me begin my comments by sharing an update on our third quarter. Our Q3 results faced a challenging consumer environment and market headwinds. Despite delivering key profitability metrics as expected, our revenue in the quarter came in below expectations. This revenue decline was due to the underperformance of our diapers and apparel categories, which are experiencing the downward pressure of a challenging consumer macroeconomic environment.

While we are disappointed with the revenue results, we continue to grow and outpace the market in our wipes and personal care categories. We also stayed committed to disciplined execution, which delivered positive net income for the third consecutive quarter and adjusted EBITDA ahead of expectations. Having evaluated the drivers of diaper softness in the quarter, our team took actions quickly to strengthen our consumer value proposition through pricing, merchandising, and size. We have also focused investment and resources against our stronghold areas of wipes and baby personal care. I will share more details on these actions in a moment. But first, I want to introduce an additional strategic program that we are taking to position Honest for profitable growth in 2026 and beyond.

Today, we launched Transformation 2.0, powering Honest growth. This is a new and important step, which allows us to sharpen our focus on growing the categories where we have a demonstrated right to win while also improving the profitability of Honest. Powering Honest growth is a 2-part transformation program that allows us to direct our resources to our core categories of wipes, personal care, and diapers, while exiting certain lower-margin nonstrategic categories and channels. This includes exiting honest.com as a direct fulfillment website, exiting our relationship with our current apparel provider, and exiting Canada. Because these categories are lower margin, exiting them only has a modest profit impact in the short term. We are confident these changes will drive greater focus on our core product categories and enable continued growth and improved profit margins. As we make these changes, we will be implementing cost optimization actions that lead to a simplified operating model, stronger financial foundation, and improved cost structure. Curtiss will cover more of the details later in his remarks.

Now allow me to share more specifics about our performance in the quarter. Let me begin with an overview of our key consumer indicators. First, our overall consumption for the quarter was up 2%, modestly trailing the overall category growth of 3%. When we dig further into this data, we see some important bright spots. In fact, if we look at our performance at Amazon, which is now our largest customer, Honest consumption growth is up 16% year-over-year. Our numerator household panel data indicates that more households are buying Honest products. Our household penetration of 7.4% increased 80 basis points year-over-year, and our consumer loyalty to our Honest products is getting stronger. Our repeat rate of 32% increased 30 basis points versus the prior year. And when we look at our consumption momentum, it's important to understand how our business is performing outside of our diaper declines.

Ex diapers, the consumption on the remainder of the business was up a robust 13% in the quarter, outpacing our comparative categories at 5%. To provide further insights on our performance, let's take a look at the core product categories of wipes, personal care, and diapers that are the focus of powering Honest growth. Our Wipes and Personal Care categories performed strongly in the quarter. Combined, Wipes and Personal care make up more than 50% of our revenue and are key drivers of our growth for the last 9 months. In particular, both our Wipes and Baby Personal Care categories delivered strong double-digit consumption growth this quarter, underscoring the continued consumer demand for the high-quality and cleanly designed formulas across these product lines.

Our wipes, which include items across all-purpose wipes, toddler and adult flushable wipes, hand sanitizing wipes, and makeup remover wipes, are now the largest piece of our portfolio, representing more than 1/3 of our sales for the quarter. Consumption growth across our total wipes portfolio was up 24% versus category growth of 3% and I'm proud to say our all-purpose wipes remain the leading natural baby wipes in the category. This quarter, we took an important step in expanding our flushable wipes in physical stores outside of the baby aisle. This expansion marks the launch of adult flushable wipes in high-traffic aisles at brick-and-mortar stores, including Target, HEB, and Harris Teeter. Our adult flushable wipes distinguish themselves by providing elegantly modern, counterworthy packaging that can be proudly displayed anywhere you want a cleanly designed flushable wipe.

This launch continues our strategy to expand Honest into areas of the store that drive incremental foot traffic and household penetration beyond baby households. Year-to-date, Honest flushable wipes consumption grew over 160% versus the category growth of 2%. And at Amazon, Honest adult flushable wipes are the fastest-growing flushable wipes, with subscriber growth up more than 100% year-to-date, and have quickly climbed into the top 10 items by market share in the personal cleansing wipes category. With the combined growth in e-commerce and brick-and-mortar retailers, our flushable wipes business is a promising addition to our wipes portfolio.

We have also expanded the distribution of our sanitizing wipes into Walmart, adding more than 700 points of distribution. Our teams are supporting this expanded wipes distribution by elevating the role of these fast-growing businesses in our advertising, social media and key retailer events.

Next, let me share more about Baby Personal Care, which now makes up about 20% of our revenue and is another area where we are performing well and believe we have the right to win. Our Baby Personal Care collection is the #1 natural baby personal care brand in the United States, with consumption growth up 10% in the quarter, outpacing growth of the category, which is up 2%. Within our Baby Personal Care portfolio, our sensitive skin collection grew consumption 77% year-to-date. This strong growth is continued evidence that consumers are seeking effective and trustworthy solutions to meet the growing demand for sensitive skin care products. We know that sensitive skin affects more than 70% of adults and that incidences of children with skin allergies have more than doubled since 1997.

With our dedication to the Honest standard, which is a commitment we make to formulate our products avoiding the use of 3,500 ingredients of concern, we are pleased that we continue to be a valuable solution to consumers with sensitive skin needs. Recent innovations and distribution gains position us to continue capturing growth in personal care. This quarter, we are excited to share the launch of our first product collaboration with Disney across our Baby Personal Care collection. Disney is the leading revenue-generating global licensor, with their characters ranking as the most recognized for families and children ages 2 through 5. And this collaboration marks Honest's first use of licensed characters in baby personal care. Across our shampoo body wash, lotion, hair conditioner, and bubble bath items, we have introduced Mickey Mouse himself across 2 different fragrance collections.

Mickey is on our Sweet Cream items that are sold individually, and he's featured on our Lavender gift set in cozy settings perfect for bedtime. We're delighted with the strong performance of this collaboration and the joy it has brought to our Honest community. For fans of uncented items, we also have a collection featuring Disney's Winnie the Pooh and some of Pooh's closest friends, ER, Piglet, and my personal favorite, Tiger. With charming packaging, these Disney items make perfect gifts for baby showers and holiday moments.

In support of the Q4 holiday season, we have a dedicated marketing plan to support these items across digital and retail. And now that you know more about these strengths in our portfolio, I'd like to address our performance in diapers, which continued to experience headwinds in the quarter. While no longer our largest category, diapers represents about 30% of our revenue and still plays an important strategic role in introducing new parents and some grandparents to Honest each year. In Q3, diapers were the leading driver of our revenue declines in the quarter. Let me walk you through some of the key drivers of our diaper declines.

For the quarter, our diaper consumption is down double digits. This is largely driven by 2 key drivers. First is the assortment simplification of our diaper set at our largest brick-and-mortar retailer. As we shared previously, the SKU reduction at this retailer resulted in the elimination of the gender-specific diaper prints to streamline the set to focus on gender-neutral designs. It is worth noting that the gender-specific diapers remain available in e-commerce and across other brick-and-mortar retailers.

Second is the lapping of 2 large customer-specific promotional events that were not repeated in the quarter at our 2 largest brick-and-mortar retailers. In addition to these 2 drivers, the pressures in the consumer macroeconomic landscape are impacting consumers' shopping behaviors. As consumers have become more value and price conscious, we are seeing an impact in the diaper category, which is also down 2% for the year. Across the category, most major national brands are declining as consumers are shifting their purchases to lower-priced items.

Because of the increased importance of price and value, we're taking actions to improve our value to diaper shoppers. These actions include introducing a significantly improved diaper that is superior to our previous designs, ensuring that we continue to deliver product quality that meets consumer expectations. As you recall, we launched these design improvements last quarter, which included enhanced comfort dry technology for up to 100% leak protection, softer layers, and a better fit with comfort stretch across the waist cabs and legs. According to our in-house quality team, our diaper consumer complaints are down 21% versus last year. While this is promising, we are still in the early stages of assessing the new diapers marketplace performance. Beyond improvements to our diapers quality, we have increased investment in a variety of pricing levers across merchandising, promotions, and everyday pricing.

With these investments in price value, we've seen positive early results in the velocities with one of our key national retailers. We're now applying these improved price value strategies more broadly across the market. Additionally, we introduced a smaller pack size to offer a lower entry price for cost-conscious consumers. While the declines in our diaper business have been significant at our brick-and-mortar retailers, our diaper business is growing 3% year-to-date at our largest customer. The actions we have taken to improve our diaper business demonstrate we are committed to having a very compelling diaper offering to serve Honest families and welcome new households to the Honest brand.

Across the journey of improving and strengthening the Honest Company over the last few years, we have demonstrated the ability to make market progress on growing the Honest brand and strengthening our financial foundation, and we're not finished. Our first transformation initiative succeeded in changing the business' financial trajectory by preserving cash, boosting profitability, and embedding strong financial rigor across the organization. In fact, over the last 2.5 years, I'm proud that our teams have significantly improved key metrics, including improving gross margin by over 1,300 basis points, improving our cash position from $9 million to $71 million, and achieving 8 quarters in a row of positive adjusted EBITDA.

Before I turn it over to Curtiss, I want to be clear that we are committed to making the improvements needed to address the declines in our diaper business through swift actions in the year and by streamlining our focus against our key categories of wipes, personal care, and diapers. As our teams continue to execute with excellence, I remain confident in our ability to drive long-term value and growth for our shareholders while building the scale and power of the Honest brand.

Now I will turn it over to Curtiss to share more details.

Thank you, Carla, and welcome, everyone. First, I will discuss our third-quarter results. Second, I will share more details on our Transformation 2.0, powering Honest growth. Third, I will provide our outlook for the remainder of the year. In the third quarter, we delivered revenue of $93 million, down 7%, driven by a decline in diapers, apparel, and honest.com. As a reminder of what Carla stated in her remarks earlier, we were lapping the highest growth quarter from last year, up 15%, which included 2 large promotional events with our 2 largest brick-and-mortar retailers. We also saw headwinds related to the simplification of our assortment at our largest brick-and-mortar retailer. And finally, we also saw declines in apparel.

In the quarter, our revenue was also down due to declines on honest.com, which is about 10% of the business, and down 23% versus last year. The deemphasis on this business was a strategic choice for us as we shifted away from lower-margin channels. Revenue growth in wipes was not enough to offset the previously mentioned declines. Gross margin in the third quarter was 37%, down 140 basis points versus last year. In the quarter, the gross margin decline was primarily due to tariff costs and the impact of deleverage from lower volume. These impacts were partially offset by lower trade spend and favorable product mix. And now turning to operating expenses.

Operating expenses decreased $4 million compared to the prior year quarter and decreased 170 basis points as a percentage of revenue. This decrease in operating expenses was largely attributed to a decrease in SG&A expenses of $6 million compared to last year. This was partially offset by an increase in marketing expenses of $1.6 million to support our new diaper launch. We also delivered positive net income of approximately $1 million. Adjusted EBITDA for the third quarter was $4 million, down $3.5 million versus last year due to lower year-over-year add-backs. Adjusted EBITDA margin was 4%. We maintained a healthy balance sheet, ending the quarter with $71 million in cash and no debt outstanding.

Our cash position continues to benefit from a capital-light business model, giving us flexibility. Our free cash flow was down versus last year, largely due to higher inventory. Our higher inventory is largely a result of our tariff mitigation strategies and transition to our new diapers. In line with our focus on operating discipline, we will continue to manage our inventory levels carefully.

Next, I would like to provide more color on our Transformation 2.0, powering Honest growth. This transformation is aimed at improving simplicity, focus, and profitability of the enterprise. The transformation will have 2 main components that are also outlined in our investor presentation on Slide 5. Part one, to drive greater focus and growth on our fastest-growing, more profitable, and most important categories of wipes, personal care, and diapers, we're making 3 important changes. First, by the end of this year, we will exit honest.com as a direct-to-consumer fulfillment channel, but we will maintain the ability to direct purchases to leading retailers and remain a resource for educating consumers. This change is a reflection of shifts in consumer shopping behavior and a resource-intensive and low-margin fulfillment model.

Second, we will also be exiting our apparel partnership as a fully owned product category as this is a complex and profit-dilutive part of our business. And third, we are exiting direct sales to Canadian retailers. This was a subscale, low-margin part of our business, which added to the complexity of incremental inventory. And now part 2 of the transformation, we will be optimizing our cost structure by rightsizing SG&A and implementing supply chain efficiencies.

As we simplify our business, we are reducing our SG&A to align with a more streamlined business model and increased focus on core product categories. Concurrently, we're taking steps to optimize our supply chain footprint and inventory management, along with leveraging technology to improve systems to maximize efficiency across the entire organization. Collectively, these strategic actions will result in one-time costs related to Transformation 2.0 of $25 million to $35 million and return approximately $8 million to $15 million of annual cost savings. We believe that these changes will lay the foundation for a stronger and more efficient Honest.

Next, I will share the financial outlook, which you can also find on Slide 13 of our investor presentation. For our 2025 outlook, I will provide a view in 2 ways. First, I will provide a view of the full business on an as-reported basis. Second, I will provide an organic revenue outlook, which excludes revenue from the categories and channels we are exiting as part of powering Honest growth. We have provided a full reconciliation of revenue to organic revenue on Slide 15 in our investor presentation. We are lowering our full-year guidance for revenue and adjusted EBITDA. Our full year 2025 financial outlook for revenue and adjusted EBITDA includes revenue outlook as reported, inclusive of apparel, honest.com, and Canada is now in the range of minus 3% to flat. This is driven by potential disruptions to revenue related to the wind-down of strategic exits and anticipated declines in diaper revenue.

Revenue outlook on an organic basis, excluding apparel, honest.com, and Canada, is for growth in the range of 4% to 6% year-over-year. To provide more context, organic revenue year-to-date grew 6% and adjusted EBITDA to be in the range of $21 million to $23 million, versus the original range of $27 million to $30 million. Our adjusted EBITDA outlook is lower primarily due to lower revenue and volume deleverage. In closing, we are proud of the continued strength of the Honest brand in our core categories that have clear bright spots, including double-digit consumption growth in Wipes and Baby Personal Care, underscored by our strong year-over-year increases in key consumer engagement metrics. We are committed to making improvements in our diaper category in order to have a compelling diaper offering critical to welcoming new households to the Honest brand. With the launch of Transformation 2.0 powering Honest Group, our teams remain focused and disciplined to execute our strategy.

Together, Carla, the Honest team, and I are committed to driving sustainable growth and building lasting value for our consumers and shareholders. Thank you to our Honest team for their continued hard work and dedication this year. With that, thank you for joining our call today. Now I will turn the call back to the operator.

[Operator Instructions] Our first question comes from the line of Aaron Grey with AGP.

First question for me just comes on Transformation 2.0. So Transformation 1.0 obviously came at a time when you guys were unprofitable and had a weak balance sheet. Now you're profitable with a stronger balance sheet. So first question is why the decision to make this now? And then how do you feel like this positions you to unlock greater growth opportunities going forward?

Aaron, thanks so much. I appreciate you really reminding us in the progress that we've made on the first phase of transforming the Honest Company. It was so important, as you said, to improve the business model, improve profitability, and our financial foundation. As we look at what will enable the future growth for Honest, it's really still grounded in the pillars we articulated, where we believe there is much more opportunity to scale this brand with our brand maximization and continue to be disciplined about how we operate the business model with our margin enhancement pillar. So with that, we really looked at where we have the right to win, the categories that are best poised to be very resonant with consumers. still opportunity and provide us that strength from a profitability perspective, higher margin and higher profit.

When we look at the group of categories that we are going to focus on of wipes, personal care, and diapers, which we're calling our organic portfolio, that business is actually up 6% year-to-date in a time that we know that macroeconomic conditions are very challenging. The wipes business is growing double-digit, baby personal care. So we know that if we continue to simplify the focus of our resources and dial up the attention and the focus on those brands, they're very well poised to grow. One of the other things that I think our transformation journey has shown us is for Honest, there's a real cost to complexity. We've been a complex business, and we've been simplifying it over the few years.

We are finding for us, it's true that less is more. It drives greater focus for us about how we drive the advantage and scale that we're looking for. So that's what is the underlying philosophy behind powering Honest growth, allowing us to make sure we focus our resources to drive against these clear places where we have the right to win.

And second one for me, just diving a bit deeper into diapers, which remains core for you guys. How should we think about the redesign and how that's helped some of the velocity trends? I know it's still a little bit earlier. And then in reference to your prepared remarks, it sounds like you made some price value adjustments for one of the retailers that helped to drive velocity. So just some more color on that and how we're thinking about the diaper designs and maybe the price gap evolution, which I think you alluded to doing a test for during the quarter. So how we should think about that going forward would be helpful.

Well, I just talked about the Powering Honest growth program that we've introduced. And one of the things I want to make sure is very clear to everyone. Diapers has a key role in this transformation program that we're talking about because when I think about the diaper category for Honest, Diapers plays a very important role for us. Strategically, this is a category that allows us to welcome new consumers, households, shoppers into the Honest portfolio because that entry and life stage change of having your first baby and really exploring new products works well as a time when you're seeking new solutions. And then for us, specifically, the core benefits that Honest focuses on of clean products and good for sensitive skin, it just makes sense for us that that's a category where we can meet new consumers when they're at a time of life where they're looking for that and where it's never been more important for them. So we really think this category is important to us.

When we look at how our diaper business is doing now, you are right. We think that there are a few important areas to address for diapers. We are not satisfied with how our diaper performance is overall, but the first step for us was to introduce that new better diaper. I think I mentioned in the script, it is early still because the inventory -- it was a flow in, so the inventory had to really settle out. I think we're quite well advanced now on seeing that as the majority of diapers on the shelf. And when we look at our customer complaints, our consumer complaints are down 21% year-to-date for our diaper business. So that's a really good sign. The other thing that gives us real encouragement is our diaper business at Amazon, which Amazon is now our largest retailer. Year-to-date, our diaper business is up 3% at Amazon. So that shows us that with a consumer that's highly omnichannel, highly digital oriented, which has always been right for the Honest brand, the diaper business is working very well.

And one of the things that's unique about Amazon, as you may recall, one of the reasons our diaper business is down so much at Target is because they made a choice to simplify their portfolio with the gendered prints and really focus on gender-neutral prints. At Amazon, where we are growing 3% year-to-date, we still have our gender prints. We still have our full selection. So we're learning a lot about what works for our diaper consumer and how incremental those prints are. The thing that's important right now is as consumers are experiencing these macroeconomic pressures, we wanted to make sure that we were addressing the pricing concerns that we are seeing as we're seeing diaper category purchases shift from all the major national brands to the low-cost brands. So we have introduced pricing in a variety of forms at shelf. We've seen some pricing velocity work when we're addressing absolute price point that we're seeing on the shelf with one of our major customers.

So we are looking at how we need to apply that more broadly. And then we have done price pack architecture work. The price pack architecture work includes creating some lower entry point price point diapers because originally, our Honest diapers had some pretty steep pricing that's a little bit difficult for families to embrace under these conditions. So we're very pleased that we've introduced this like $19.99 price point diaper to allow more purchases at entry. So for us, as you can see, we're trying to address the 2 things that really drive price value. That is what does it feel like to pay for the diaper, and is the diaper worth it when you get it, and that's what we're going to continue to do.

And our next question comes from the line of Anna Glaessgen with B. Riley Securities.

I guess I'd like to turn back to diapers. Clearly very competitive. On the one hand, you introduced new innovation with the diaper reset. So you would think that that would be a catalyst for share. But then on the other hand, you have a lot of competition, particularly literally at the lower end, and you have a more price-sensitive consumer. I guess bigger picture, how are you thinking about the best way to compete in a category where maybe innovation isn't getting as rewarded as we would have thought previously? Just any bigger picture thoughts there.

Sure. Well, I think one of the things that's sometimes masking our overall diaper performance is that our -- the diaper issues we're facing at Target unique to this quarter, I just want to remind, part of the declines in our diaper business that we're seeing this quarter are because we're lapping that promotional event that we did a onetime-only event last quarter this time at Target, and we didn't repeat it. So we've seen that in the quarter. We are also experiencing the loss of the gender print.

So when I look at our diaper business at Target versus the market ex Target, it's really quite a tale of 2 cities. Outside of Target, year-to-date, the Honest diaper business is up 5% consumption. So that tells us that we are providing a diaper that is very meaningful in the market. When we think about the new and improved diaper innovation, I think it just takes a while because sometimes people have those diapers in their house already, and you have to kind of work through that -- those diaper purchases that are at your house. So we look to be continuing to watch the results of the new and improved diaper, but I'm very encouraged by the fact that the complaints are down 21% for the year.

Carla, I just want to clarify what I heard. I think you said that ex-Target diaper consumption was up 5%. And I think earlier, you said Amazon was up 3% year-to-date. So is there a channel that's outgrowing Amazon?

I think it's -- that's a great question, Anna. And so I just want to make sure that I'm getting my math right. What I was talking about with the 3% and if I said it wrong, then please forgive me. Amazon is up 3% in the quarter. And year-to-date, they've had stronger growth at the first half of the year. And year-to-date, ex-Target, our total diaper business is up 5% in consumption. So forgive me if I didn't say that correctly the first time.

Okay. So the 3% was specific to the quarter. So the 3% and 5% are not comparable.

That's right. Some of that also is due to as Amazon was flowing in the new diaper in this quarter, as we can see, sometimes there's just a little bit of noise in the numbers in the quarter as you transition into the new diaper. So they had a stronger front half, and then that's the quarter.

I was going to ask, clearly, Amazon is the highest growing channel for a lot of companies across the board. Is there any way to share what ex-Target and ex-Amazon, what that other retailer block is kind of growing at? Are they more consistent with Target? Or is it more consistent with maybe a low single-digit decline or flattish?

Yes. I don't really have that information handy with me, but let's make sure we just do a follow-up.

And our next question comes from the line of Owen Rickert with Northland Capital Markets.

What's the timeline and sequencing for these exits? Are you winding them all down in 4Q? Or will this extend into the first half of '26?

Yes. Thank you for the question. As we talk about the Powering Honest growth program, focusing on the core categories of wipes, personal care, and diapers with the exit of the low-margin nonstrategic categories. Honest.com, we expect to wind down by the end of this year. And then we will be pivoting to what we call a pass-through site for sales. Canada, we expect to wind down by the end of this year as well. And we are also exiting the apparel partnership. Again, we expect that wind-down to take place by the end of this fiscal year as well.

I just want to add, the second part of the program is about optimizing the cost structure to align with the new size of the business and to align with the strategy. And so we will start seeing expenses related to the transformation program in Q4 and then the execution and the savings beginning in 2026.

And then quickly, I guess, how are you handling some of that existing inventory, maybe in the apparel business and fulfillment commitments for these exits?

Yes. We have a strategy to wind those down in a very efficient and effective way. And then the one-time cost that we provided the $25 million to $35 million is inclusive of any of that sort of hangover that you might be alluding to.

Our next question comes from the line of Shivhana Choudhry with JPMorgan.

I was just wondering a couple of questions. First of all, we are hearing of a heightened promotional environment from other HPC peers, and diapers is no exception. And one, can you please speak to the level of promotion you're seeing in general, and also specifically in diapers? And then can you give us a sense of how some of your pricing levers like the promotions, the price architecture that you just mentioned, how have these been received? And I have another question.

Shivhana, let me answer the question that, as we look at the pricing levers that we've introduced into the market, one of the things that's most visible and most -- in the period that we're talking about is that we've introduced a rollback strategy at Walmart, and we're very pleased. We're seeing velocities increasing. We're seeing the market respond very well [Audio Gap] us that indeed, this is a consumer that in this category is really giving consideration as they get to that shelf at what is the price point that they can really get in with. And so we like the idea of in this current moment, making sure we're really aligned with the consumer pricing needs and price value needs. I don't remember the other question.

I think the other question you asked was what -- could you repeat that?

How are the retailers taking -- I was just asking about the level -- general level of inflation you're seeing in your other core categories, such as your wipes and baby personal care.

Yes. The other categories are not demonstrating right now the same degree of price sensitivity that we're seeing in diapers overall. So I did mention that one of the things we're seeing in the diaper category overall is that almost all of the national players, I think I'm going to say all of the national players, and even the private label segment, they are all declining on dollar volume in the quarter, with only the very low price entrant really showing growth. So that behavior is very different in our diaper category than when we study our baby personal care category, where, as you know, we are the leading brand. So we really do drive that category. And when we look at the wipes category overall, we're seeing strong growth from the Honest brand even as we are sitting at a bit of a higher price tier, and we know that our benefits really mean a lot in that category.

So none of our categories seem to be under quite the same pressure at this point as diapers, although, of course, it's going to be important to keep watching how those -- that consumer confidence level and consumer macroeconomic changes affect the categories.

And our next question comes from the line of Dana Tesley with Telsey Advisory Group.

With the new 2.0 plan in place, or that's being put in place now. What does the new algorithm of the business look like? What -- how do you think about the cadence of next year with any of the streamlining of costs coming in? How do you frame the financial statement?

Yes. Thank you for the question. And so again, the Transformation 2.0 powering on this growth is the 2-part program focused on getting to our higher-margin right to win categories of wipes, personal care, and diapers. And of course, we are exiting the nonstrategic lower-margin categories and channels. The second part of the program will be to optimize the cost structure, rightsizing our SG&A and our supply chain footprint. We do expect that lowering the -- removing the low-margin categories and our continued focus on growing the bottom line faster than the top line -- and I think marked by this year in Q2, we had our highest gross margin delivery of over 40%, I think, is a proof point for what is possible in the future.

The exit of these nonstrategic categories is about 20% of the business, and these businesses are well below our average gross margin. And again, that gives us confidence that when we get to the new business that we've got a strong potential to drive growth in 2026. And we're happy to share more details about 2026 when we get to our earnings call in February. I think part of the macroeconomic environment that we're in today prevents us from giving more specifics about the potential gross margin structure that we'll have next year.

I'm showing no further questions at this time. So with that, I'll hand the call back over to CEO, Carla Vernon, for any closing remarks.

Thanks so much for joining the call, listening to where we are on our journey. We're very excited about powering on its growth as we go forward. Look forward to talking to you all next quarter. Thank you.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.