By Sam Boughedda
Loop Capital analyst Laura Champine downgraded The Honest Company Inc (NASDAQ:HNST) from Buy to Hold on Thursday, sending the stock down another 9%. The firm is also lowering their price target from $5 to $3.
Champine said the firm is concerned with comments from mass retailers, including HNST’s largest customer, Target (NYSE:TGT), which cut its profit outlook this week as it cuts prices to clear out unwanted inventory.
"Our PT moves lower on sales cuts and long-term estimates for lower gross margin as we expect inflation above our prior expectations. Our sales estimates are now below consensus this year and next year," wrote the analyst. "We expect Honest revenue to be -1% in 2022, with 34% gross margin.
The Honest Company said a month ago, it expected sales and margin to recover as they move through the year, but Champine said Loop Capital now thinks this will be tougher with retailers destocking and continued cost inflation.
"Revenue growth has been weaker than we expected since the company’s mid-2021 IPO, despite HNST being a well-known brand that should appeal to current sensibilities given the brand’s focus on natural ingredients and sustainable packaging. We had thought the positive catalyst would be the rollout of diapers throughout WMT’s stores later this year. We now see this benefit overshadowed near-term on mass retailers’ destocking efforts and continued mix shift away from the higher-margin digital channel," added Champine.
"We believe the current 10-15% premium HNST products command is likely to remain stable even as the company raises prices in 2022, as all vendors are under pressure to raise prices."