Sam Boughedda

Loop Capital analyst Laura Champine downgraded The Honest Company Inc (NASDAQ:), went from Buy to Hold to Thursday, bringing the stock down an additional 9%. Also, the firm has lowered their price target by $5 to $3.

Champine said the firm is concerned with comments from mass retailers, including HNST’s largest customer, Target (NYSE:) This week, the company lowered its profit outlook as it reduced prices in order to get rid of unneeded inventory.

Our PT is moving lower due to sales reductions and longer-term estimates of lower gross margin. We expect inflation to be higher than our previous expectations. The analyst stated that our sales forecasts are below consensus for this and next years. The analyst stated that Honest revenue is expected to drop to -1% by 2022 and have a gross margin of 34%.

Champine stated that the Honest Company had said one month ago it expects sales and margins to rebound as they progress through the year. However, Champine claimed that Loop Capital thinks this will prove more difficult with continued price inflation and retailers stocking up.

“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 that the premium price of HNST products is stable at the moment, even if the company increases prices by 10-15% in 2022. All vendors are being pressured to increase prices.