Honest Co. hired Carla Vernón, a veteran of Amazon.com Inc., to guide the consumer-products startup out of rough waters. Her turnaround bid relies largely on the e-commerce giant’s biggest rival: Walmart Inc.

The company, which for years got most of its revenue from e-commerce, is betting an expanded presence in the aisles of the largest US retailer will provide the boost it needs following a 91% slump in its stock price since its 2021 public offering. Honest’s baby wipes, shampoos and body washes are arriving at all US Walmart locations this summer, while its diapers are now in about half of the discounter’s locations. 

Honest also plans to sell its baby clothes at Walmart this fall, according to a person who didn’t want to be named discussing internal plans. The idea is to create a store-within-a-store experience to establish a strong brand presence, the person said.

The Los Angeles-based firm is trying to revive growth after revenue and earnings slumped last year. Shoppers have cut back on cleaning supplies and home goods after pandemic restrictions were lifted.

The digitally native brand, founded more than a decade ago by actress Jessica Alba, hadn’t established a strong foothold in retailers — a misstep Vernón is looking to fix. After taking the helm in January, she has shaken up operations by eliminating the chief digital and strategy officer role and exiting the company’s Asia and Europe businesses. In May, she brought in Kate Barton, an Estée Lauder and General Mills alum, as chief growth officer to oversee all brand and omnichannel marketing.

Vernón’s moves seem to be paying off. This month, Honest reported strong retail results for the second quarter, which helped boost sales above analysts’ average estimate. Honest, which is also sold in Target Corp. and Publix locations, has seen its share of revenue from retail locations climb in recent years. It first entered Walmart stores in fall 2022, and has gained distribution since then.

“To tap a bigger part of the market, you really have to be present in physical retail locations,” William Blair analyst Jon Andersen said. “Going to Walmart is a great awareness builder for the brand.”

Honest declined to discuss future business plans that aren’t public. It’s seeing “balanced” growth in both retail and digital channels this year, the company said in an email. “Our growth at Walmart is complemented by strong growth with a variety of key retailers such as Amazon, Target, Kroger, etc.” 

Honest has said that Walmart is helping it gain new shoppers in the US South and Southeast, regions where it hasn’t had a strong following. Walmart now stocks Honest diapers and wipes in its aisles next to competing products, instead of just on end-of-aisle displays, Chief Financial Officer Kelly Kennedy said during an August 8 conference call.

“Initial indications are positive and we are seeing velocity growth” from the Walmart expansion, she said. “We’ve been able to significantly expand our reach.”

Honest captured investor interest in startups and e-commerce in 2021, selling shares at $16 each in its offering. Since then, results have largely fallen short of expectations, sparking a steady decline in the stock’s value. This year, the shares are down about 53%, trailing a 28% gain for the Nasdaq Composite Index. 

STORE MIGRATION

Honest’s move shows how digital and direct-to-consumer brands are turning to physical retailers as e-commerce growth slows. Online retailer Grove Collaborative Holdings, founded in 2012, entered its first brick-and-mortar location at Target in 2021 and this year also gained access to Walmart. Many packaged-food startups have done the same.

Honest isn’t abandoning its online business, which includes subscriptions for diapers and wipes. Digital sales also increased in the company’s most recent quarter. But a stronger brick-and-mortar presence could help offset weakness in the online channel. The company said there was lower traffic to Honest.com in 2022.

Investors want to see if Vernón can engineer a turnaround at Honest, which has operated at a net loss since its IPO. The company, which also sells makeup, shampoo and skin creams, has discontinued some lower-selling items such as sanitizing products that slumped as the pandemic eased. 

Andersen of William Blair estimates that the business’s earnings excluding items such as taxes and depreciation — a measure of profitability known as Ebitda — will turn positive in 2024 as its retail presence expands. But there are risks associated with going into Walmart and other brick-and-mortar chains, he warned.

“You may be expanding too quickly. You introduce items that don’t turn as well as you’d hoped at the shelves,” Andersen said. “You don’t see the repeat purchases, and then you end up risking having items de-listed, or carrying too much inventory.”