The Honest Co. is getting down to work, cutting jobs and looking to transform its business, making an initial public offering or deal to sell itself less likely in the immediate future.
The better-for-you consumer products business unveiled job cuts on Tuesday, saying it would eliminate 80 jobs, or more than 14 percent of its 552 employee workforce, in the first quarter, according to cofounder and chief executive officer Brian Lee.
“We’re really positioning the company for continued growth and success and really driving the company toward an omnichannel strategy,” he said. “We started off as an e-commerce business and quickly evolved into some offline channels as well. As we look toward the future, we’re building a foundation that will help in 2017 and beyond.”
Most of the job cuts will come as a Texas call center is automated, but the highest-profile departure will be David Parker, chief financial officer and chief operating officer. Cofounder Sean Kane, who was president and focused on a number of areas of the business, including digital, customer service, sales and marketing, is also stepping back but will stay on as an adviser while he starts a new company.
“We have plenty of capital in the bank; it’s not really about cost savings,” Lee said, noting that Honest, while maintaining its digital business, will be channeling more resources to branding, product development and offline sales.
The brand is sold through Target, Costco, Whole Foods and other retailers and will be looking for more real-world outlets where it can connect directly with customers. Honest Beauty, launched in 2015 and sold exclusively through Ulta Beauty, is said to have about $10 million in sales, according to industry sources.
Financial sources have been buzzing about Honest for months as the company explored an IPO or sale after tapping Goldman Sachs & Co. and Morgan Stanley, which declined to comment for this story. Several consumer products firms including Johnson & Johnson and Unilever were said to be interested in buying Honest, though Unilever purchased Seventh Generation for $700 million in October.
Lee said the broader process didn’t play into the changes that Honest is instituting. About 50 of the job losses will come as the Texas call center is shuttered and replaced with an automated system that helps customers manage their subscriptions for the brand’s products. Another 15 or so jobs will be lost as Honest closes its San Francisco office, which was acquired along with app development company Alt12, parts of which have already been integrated into the business. About 15 more people will lose their jobs at Honest’s Santa Monica headquarters.
Financial sources said the job cuts meant Honest has pushed “pause” on any IPO or sale plans. Another financial source added that with certain cofounders stepping back or out, it was likely the company would bring in a consumer packaged-goods executive for the brand’s next phase.
“Laying people off means the process isn’t working out as you thought and it means you’ll have to run the business,” said one financial source, adding that some of the restructuring moves could cut synergies out for a future buyer. “Maybe it means you’re going to IPO it, but you’re not going to sell it.”
Honest has about $300 million in sales but is not profitable, according to financial sources. The company’s $1.7 billion valuation from the venture capital markets of years past hasn’t helped matters either, sources said. One financial source referred to it as a “classic unicorn problem” – but added that if the business were able to turn a profit, it would likely be able to float in the public markets. Several sources noted that VC investors backed Honest like a technology business instead of a consumer products company.
“If there is automation that will reduce their go-forward overhead, that is a positive thing,” said Andrea Weiss, founding partner at The O Alliance. “From a business perspective, it is more intelligent to, at the first signs of weakness, start rationalizing.”
She added that differentiating the products from others in the natural space with marketing, branding and other consumer-facing projects would “be a way to bounce back and get more traction.”
“It could be a sign of rational business judgment,” Weiss continued. “It doesn’t sound like Nasty Gal, it’s none of that. It doesn’t have those kinds of markings on it right now.”
Martin Okner, managing director at SHM Corporate Navigators, said: “The company has been on the market for a while and it has not attracted a competitive enough strategic bid, which most likely indicates the underlying need to restructure their organization and rationalize overhead. What that will create for them is a new window of opportunity to approach the market.”
He said a private equity owner could potentially help Honest take its products into new channels.
“I don’t think the public markets would react favorably to a company that has gone through litigation challenges as well as a pretty public restructuring, and if they want to rationalize overhead, going public is a very costly initiative,” Okner said.