Sometimes it’s amazing what a little honesty can do, or so Honest Company (HNST) found out recently. Despite posting a loss that proved wider than expected, the consumer goods maker still managed to rally about 3% so far today, as it beat revenue estimates. Given its upcoming plans but potentially-limited upside potential, according to analysts’ price targets, I’m neutral on HNST stock.
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The Honest Company posted earnings per share (EPS) of -$0.11 per share. This was a wider loss than the -$0.09 analysts projected. Despite this, the company turned things around in the revenue department. HNST posted $78.5 million in revenue, whereas the Zacks consensus was looking for $75.7 million.
Most of Honest Company’s woes are familiar ones, mostly tracing back to higher costs. Yet, the company also has some plans to advance. It might just have some real room to grow, but there are also several paths to failure in front of it.
The last 12 months for Honest Company shares have mostly been downhill. After an inspirational start to August that featured a climb to briefly challenge $15 per share in September, it all turned around from there.
From a 52-week high of $14.20, Honest Company shares slid until hitting a bottom at around $2.50. The company has since recovered somewhat, and it now looks to once again challenge the $4 per share mark.
Will HNST Stock Go Up? Analysts Weigh In
Turning to Wall Street, Honest Company has a Hold consensus rating. That’s based on three Holds assigned in the past three months. The average Honest Company price target of $3.67 implies 6.85% downside potential.
Analyst price targets range from a low of $3 per share to a high of $4 per share.
Investor Sentiment Offers Troubling Insight
As much potential as Honest Company might have, it’s got some very troubling signs in the investor sentiment metrics department. HNST has a 1 out of 10 Smart Score on TipRanks.
That’s not only the lowest level of “underperform,” that’s the lowest score possible. It suggests near-assurance that Honest Company will ultimately lag the broader market.
That’s just where the bad news starts. The company also took a hit in insider trading. There have been plenty of Uninformative Buys taking place. However, virtually all the informative transactions for the last three months have been Sell transactions.
Thus, we have a picture where there has been substantial insider buying but an overall negative sentiment from insiders. Over the last year, Buy transactions have led Sell transactions by 43 to 26. Most of the informative transactions, however, have been Sell transactions. That’s similar to what we saw in just the last three months.
Honest Company Has Been Making Moves
Give Honest Company credit. It’s made quite a few big strides in the last couple of months. It’s stepped up its operations with Ulta Beauty (ULTA). That move gave it access to 635 store locations, giving its product line wider exposure.
The Honest Beauty Clearing Collection will be available not only at Ulta locations but also on Ulta’s website. This gives the largely-digital Honest Company new potential markets to address. Even if these expansions are only minimally effective, that’s still an expansion of revenue that the company can certainly use.
Additionally, Honest Company announced a push into Walmart (WMT). That move will not only make Honest Company products appear on another website—Walmart’s—but, starting this fall, Honest Company will also have products in Walmart stores.
A further expansion into brick-and-mortar shopping should have positive results. Again, even if the expansion is only minimally effective, that’s that much more potential revenue for the company.
Plus, there should be a nice multiplier effect here. “Minimally effective” for a product available in Walmart should still be pretty high. There are a lot of Walmart shoppers, after all.
New revenue streams will certainly give Honest Company a leg up. It’s also made new connections with less familiar names like SuperOrdinary and Shoppers Drug Mart, but there are still plenty of problems. After all, Honest Company has no shortage of competitors in the consumer goods field.
While consumer goods are comparatively resistant to inflation and recessions, low-cost alternatives will likely be sought out wherever possible. People still need soap and deodorant and such, no matter what their economic picture looks like. However, that’s not saying they need one particular kind, especially if they’re trying to keep the lights on and food on the table.
Conclusion: A Path to Victory With Several Branches to Failure
Honest Company certainly does have great potential. While it actually has downside risk right now since it’s trading above its average price target, the range of price targets is so narrow that any of these targets could be shattered tomorrow. The difference between the high and the low is one dollar.
Honest Company has some serious value thanks to its founder, Jessica Alba, and her name recognition factor in the field. The company’s value proposition is also worth noting. People like the idea of “clean and conscious” consumer products. Yet, the company’s high-minded ideals come with costs. We saw as much in the difference between revenue and earnings.
That’s perhaps the biggest reason I’m neutral right now. Honest Company has made some excellent moves forward. It’s got solid value propositions and is delivering on these. Yet, its costs are going to be high just by its very nature. High costs will hurt businesses going forward into a recessionary environment.
Cost cutting is one of the first priorities for businesses in a recession for a reason. Honest Company won’t be able able to cut many costs without cutting its competitive advantage in the process. That, in turn, will limit its growth capability, going forward – for now, at least.
