Ladies and gentlemen, thank you for standing by, and welcome to the Honest Company's Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the call over to Ms. Elizabeth Bouchard, Senior Director, Investor Relations at the Honest Company. Please go ahead.

Good afternoon, everyone. Thank you for joining our third quarter 2025 conference call. Joining me today are Carla Vernon, our Chief Executive Officer; and Curtiss Bruce, our Chief Financial Officer. Before we start, I would like to remind you that we will make certain statements today that are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our earnings release issued today. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please refer to our earnings release issued today as well as our SEC filings for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events, except as required by law. Also during this call, we will discuss non-GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in the financial results section of today's earnings release. A live broadcast of this call, along with presentation slides that we reference in our prepared remarks, are available on the Investor Relations section of our website at investors.honest.com. And with that, I'll turn the call over to Carla.

Thanks, Elizabeth. Good afternoon, everyone, and thank you for joining us today. Let me begin my comments by sharing an update on our third quarter. Our Q3 results faced a challenging consumer environment and market headwinds. Despite delivering key profitability metrics as expected, our revenue in the quarter came in below expectations. This revenue decline was due to the underperformance of our diapers and apparel categories, which are experiencing the downward pressure of a challenging consumer macroeconomic environment. While we are disappointed with the revenue results, we continue to grow and outpace the market in our wipes and personal care categories. We also stayed committed to disciplined execution, which delivered positive net income for the third consecutive quarter and adjusted EBITDA ahead of expectations. Having evaluated the drivers of diaper softness in the quarter, our team took actions quickly to strengthen our consumer value proposition through pricing, merchandising, and size. We have also focused investment and resources against our stronghold areas of wipes and baby personal care. I will share more details on these actions in a moment. But first, I want to introduce an additional strategic program that we are taking to position Honest for profitable growth in 2026 and beyond. Today, we launched Transformation 2.0, powering Honest growth. This is a new and important step, which allows us to sharpen our focus on growing the categories where we have a demonstrated right to win while also improving the profitability of Honest. Powering Honest growth is a 2-part transformation program that allows us to direct our resources to our core categories of wipes, personal care, and diapers, while exiting certain lower-margin nonstrategic categories and channels. This includes exiting honest.com as a direct fulfillment website, exiting our relationship with our current apparel provider, and exiting Canada. Because these categories are lower margin, exiting them only has a modest profit impact in the short term. We are confident these changes will drive greater focus on our core product categories and enable continued growth and improved profit margins. As we make these changes, we will be implementing cost optimization actions that lead to a simplified operating model, stronger financial foundation, and improved cost structure. Curtiss will cover more of the details later in his remarks. Now allow me to share more specifics about our performance in the quarter. Let me begin with an overview of our key consumer indicators. First, our overall consumption for the quarter was up 2%, modestly trailing the overall category growth of 3%. When we dig further into this data, we see some important bright spots. In fact, if we look at our performance at Amazon, which is now our largest customer, Honest consumption growth is up 16% year-over-year. Our numerator household panel data indicates that more households are buying Honest products. Our household penetration of 7.4% increased 80 basis points year-over-year, and our consumer loyalty to our Honest products is getting stronger. Our repeat rate of 32% increased 30 basis points versus the prior year. And when we look at our consumption momentum, it's important to understand how our business is performing outside of our diaper declines. Ex diapers, the consumption on the remainder of the business was up a robust 13% in the quarter, outpacing our comparative categories at 5%. To provide further insights on our performance, let's take a look at the core product categories of wipes, personal care, and diapers that are the focus of powering Honest growth. Our Wipes and Personal Care categories performed strongly in the quarter. Combined, Wipes and Personal care make up more than 50% of our revenue and are key drivers of our growth for the last 9 months. In particular, both our Wipes and Baby Personal Care categories delivered strong double-digit consumption growth this quarter, underscoring the continued consumer demand for the high-quality and cleanly designed formulas across these product lines. Our wipes, which include items across all-purpose wipes, toddler and adult flushable wipes, hand sanitizing wipes, and makeup remover wipes, are now the largest piece of our portfolio, representing more than 1/3 of our sales for the quarter. Consumption growth across our total wipes portfolio was up 24% versus category growth of 3%, and I'm proud to say our all-purpose wipes remain the leading natural baby wipes in the category. This quarter, we took an important step in expanding our flushable wipes in physical stores outside of the baby aisle. This expansion marks the launch of adult flushable wipes in high-traffic aisles at brick-and-mortar stores, including Target, HEB, and Harris Teeter. Our adult flushable wipes distinguish themselves by providing elegantly modern, counter-worthy packaging that can be proudly displayed anywhere you want a cleanly designed flushable wipe. This launch continues our strategy to expand Honest into areas of the store that drive incremental foot traffic and household penetration beyond baby households. Year-to-date, Honest flushable wipes consumption grew over 160% versus the category growth of 2%. And at Amazon, Honest adult flushable wipes are the fastest-growing flushable wipes, with subscriber growth up more than 100% year-to-date, and have quickly climbed into the top 10 items by market share in the personal cleansing wipes category. With the combined growth in e-commerce and brick-and-mortar retailers, our flushable wipes business is a promising addition to our wipes portfolio. We have also expanded the distribution of our sanitizing wipes into Walmart, adding more than 700 points of distribution. Our teams are supporting this expanded wipes distribution by elevating the role of these fast-growing businesses in our advertising, social media, and key retailer events. Next, let me share more about Baby Personal Care, which now makes up about 20% of our revenue and is another area where we are performing well and believe we have the right to win. Our Baby Personal Care collection is the #1 natural baby personal care brand in the United States, with consumption growth up 10% in the quarter, outpacing growth of the category, which is up 2%. Within our Baby Personal Care portfolio, our sensitive skin collection grew consumption 77% year-to-date. This strong growth is continued evidence that consumers are seeking effective and trustworthy solutions to meet the growing demand for sensitive skin care products. We know that sensitive skin affects more than 70% of adults and that incidences of children with skin allergies have more than doubled since 1997. With our dedication to the Honest standard, which is a commitment we make to formulate our products avoiding the use of 3,500 ingredients of concern, we are pleased that we continue to be a valuable solution to consumers with sensitive skin needs. Recent innovations and distribution gains position us to continue capturing growth in personal care. This quarter, we are excited to share the launch of our first product collaboration with Disney across our Baby Personal Care collection. Disney is the leading revenue-generating global licensor, with their characters ranking as the most recognized for families and children ages 2 through 5. And this collaboration marks Honest's first use of licensed characters in baby personal care. Across our shampoo, body wash, lotion, hair conditioner, and bubble bath items, we have introduced Mickey Mouse himself across 2 different fragrance collections. Mickey is on our Sweet Cream items that are sold individually, and he's featured on our Lavender gift set in cozy settings perfect for bedtime. We're delighted with the strong performance of this collaboration and the joy it has brought to our Honest community. For fans of unscented items, we also have a collection featuring Disney's Winnie the Pooh and some of Pooh's closest friends, ER, Piglet, and my personal favorite, Tigger. With charming packaging, these Disney items make perfect gifts for baby showers and holiday moments. In support of the Q4 holiday season, we have a dedicated marketing plan to support these items across digital and retail. And now that you know more about these strengths in our portfolio, I'd like to address our performance in diapers, which continued to experience headwinds in the quarter. While no longer our largest category, diapers represents about 30% of our revenue and still plays an important strategic role in introducing new parents and some grandparents to Honest each year. In Q3, diapers were the leading driver of our revenue declines in the quarter. Let me walk you through some of the key drivers of our diaper declines. For the quarter, our diaper consumption is down double digits. This is largely driven by 2 key drivers. First is the assortment simplification of our diaper set at our largest brick-and-mortar retailer. As we shared previously, the SKU reduction at this retailer resulted in the elimination of the gender-specific diaper prints to streamline the set to focus on gender-neutral designs. It is worth noting that the gender-specific diapers remain available in e-commerce and across other brick-and-mortar retailers. Second is the lapping of 2 large customer-specific promotional events that were not repeated in the quarter at our 2 largest brick-and-mortar retailers. In addition to these 2 drivers, the pressures in the consumer macroeconomic landscape are impacting consumers' shopping behaviors. As consumers have become more value and price conscious, we are seeing an impact in the diaper category, which is also down 2% for the year. Across the category, most major national brands are declining as consumers are shifting their purchases to lower-priced items. Because of the increased importance of price and value, we're taking actions to improve our value to diaper shoppers. These actions include introducing a significantly improved diaper that is superior to our previous designs, ensuring that we continue to deliver product quality that meets consumer expectations. As you recall, we launched these design improvements last quarter, which included enhanced comfort dry technology for up to 100% leak protection, softer layers, and a better fit with comfort stretch across the waist cabs and legs. According to our in-house quality team, our diaper consumer complaints are down 21% versus last year. While this is promising, we are still in the early stages of assessing the new diapers marketplace performance. Beyond improvements to our diapers quality, we have increased investment in a variety of pricing levers across merchandising, promotions, and everyday pricing. With these investments in price value, we've seen positive early results in the velocities with one of our key national retailers. We're now applying these improved price value strategies more broadly across the market. Additionally, we introduced a smaller pack size to offer a lower entry price for cost-conscious consumers. While the declines in our diaper business have been significant at our brick-and-mortar retailers, our diaper business is growing 3% year-to-date at our largest customer. The actions we have taken to improve our diaper business demonstrate we are committed to having a very compelling diaper offering to serve Honest families and welcome new households to the Honest brand. Across the journey of improving and strengthening the Honest Company over the last few years, we have demonstrated the ability to make market progress on growing the Honest brand and strengthening our financial foundation, and we're not finished. Our first transformation initiative succeeded in changing the business's financial trajectory by preserving cash, boosting profitability, and embedding strong financial rigor across the organization. In fact, over the last 2.5 years, I'm proud that our teams have significantly improved key metrics, including improving gross margin by over 1,300 basis points, improving our cash position from $9 million to $71 million, and achieving 8 quarters in a row of positive adjusted EBITDA. Before I turn it over to Curtiss, I want to be clear that we are committed to making the improvements needed to address the declines in our diaper business through swift actions in the year and by streamlining our focus against our key categories of wipes, personal care, and diapers. As our teams continue to execute with excellence, I remain confident in our ability to drive long-term value and growth for our shareholders while building the scale and power of the Honest brand. Now I will turn it over to Curtiss to share more details.

Thank you, Carla, and welcome, everyone. First, I will discuss our third-quarter results. Second, I will share more details on our Transformation 2.0, powering Honest growth. Third, I will provide our outlook for the remainder of the year. In the third quarter, we delivered revenue of $93 million, down 7%, driven by a decline in diapers, apparel, and honest.com. As a reminder of what Carla stated in her remarks earlier, we were lapping the highest growth quarter from last year, up 15%, which included 2 large promotional events with our 2 largest brick-and-mortar retailers. We also saw headwinds related to the simplification of our assortment at our largest brick-and-mortar retailer. And finally, we also saw declines in apparel. In the quarter, our revenue was also down due to declines on honest.com, which is about 10% of the business, and down 23% versus last year. The deemphasis on this business was a strategic choice for us as we shifted away from lower-margin channels. Revenue growth in wipes was not enough to offset the previously mentioned declines. Gross margin in the third quarter was 37%, down 140 basis points versus last year. In the quarter, the gross margin decline was primarily due to tariff costs and the impact of deleverage from lower volume. These impacts were partially offset by lower trade spend and favorable product mix. And now turning to operating expenses. Operating expenses decreased $4 million compared to the prior year quarter and decreased 170 basis points as a percentage of revenue. This decrease in operating expenses was largely attributed to a decrease in SG&A expenses of $6 million compared to last year. This was partially offset by an increase in marketing expenses of $1.6 million to support our new diaper launch. We also delivered positive net income of approximately $1 million. Adjusted EBITDA for the third quarter was $4 million, down $3.5 million versus last year due to lower year-over-year add-backs. Adjusted EBITDA margin was 4%. We maintained a healthy balance sheet, ending the quarter with $71 million in cash and no debt outstanding. Our cash position continues to benefit from a capital-light business model, giving us flexibility. Our free cash flow was down versus last year, largely due to higher inventory. Our higher inventory is largely a result of our tariff mitigation strategies and transition to our new diapers. In line with our focus on operating discipline, we will continue to manage our inventory levels carefully. Next, I would like to provide more color on our Transformation 2.0, powering Honest growth. This transformation is aimed at improving simplicity, focus, and profitability of the enterprise. The transformation will have 2 main components that are also outlined in our investor presentation on Slide 5. Part one, to drive greater focus and growth on our fastest-growing, more profitable, and most important categories of wipes, personal care, and diapers, we're making 3 important changes. First, by the end of this year, we will exit honest.com as a direct-to-consumer fulfillment channel, but we will maintain the ability to direct purchases to leading retailers and remain a resource for educating consumers. This change is a reflection of shifts in consumer shopping behavior and a resource-intensive and low-margin fulfillment model. Second, we will also be exiting our apparel partnership as a fully owned product category as this is a complex and profit-dilutive part of our business. And third, we are exiting direct sales to Canadian retailers. This was a subscale, low-margin part of our business, which added to the complexity of incremental inventory. And now part 2 of the transformation, we will be optimizing our cost structure by rightsizing SG&A and implementing supply chain efficiencies. As we simplify our business, we are reducing our SG&A to align with a more streamlined business model and increased focus on core product categories. Concurrently, we're taking steps to optimize our supply chain footprint and inventory management, along with leveraging technology to improve systems to maximize efficiency across the entire organization. Collectively, these strategic actions will result in one-time costs related to Transformation 2.0 of $25 million to $35 million and return approximately $8 million to $15 million of annual cost savings. We believe that these changes will lay the foundation for a stronger and more efficient Honest. Next, I will share the financial outlook, which you can also find on Slide 13 of our investor presentation. For our 2025 outlook, I will provide a view in 2 ways. First, I will provide a view of the full business on an as-reported basis. Second, I will provide an organic revenue outlook, which excludes revenue from the categories and channels we are exiting as part of powering Honest growth. We have provided a full reconciliation of revenue to organic revenue on Slide 15 in our investor presentation. We are lowering our full-year guidance for revenue and adjusted EBITDA. Our full-year 2025 financial outlook for revenue and adjusted EBITDA includes revenue outlook as reported, inclusive of apparel, honest.com, and Canada, is now in the range of minus 3% to flat. This is driven by potential disruptions to revenue related to the wind-down of strategic exits and anticipated declines in diaper revenue. Revenue outlook on an organic basis, excluding apparel, honest.com, and Canada, is for growth in the range of 4% to 6% year-over-year. To provide more context, organic revenue year-to-date grew 6% and adjusted EBITDA to be in the range of $21 million to $23 million versus the original range of $27 million to $30 million. Our adjusted EBITDA outlook is lower primarily due to lower revenue and volume deleverage. In closing, we are proud of the continued strength of the Honest brand in our core categories that have clear bright spots, including double-digit consumption growth in Wipes and Baby Personal Care, underscored by our strong year-over-year increases in key consumer engagement metrics. We are committed to making improvements in our diaper category in order to have a compelling diaper offering critical to welcoming new households to the Honest brand. With the launch of Transformation 2.0 powering Honest Group, our teams remain focused and disciplined to execute our strategy. Together, Carla, the Honest team, and I are committed to driving sustainable growth and building lasting value for our consumers and shareholders. Thank you to our Honest team for their continued hard work and dedication this year. With that, thank you for joining our call today. Now I will turn the call back to the operator.

Our first question comes from Aaron Grey with AGP.

First question for me just comes on Transformation 2.0. So Transformation 1.0 obviously came at a time when you guys were unprofitable and had a weak balance sheet. Now you're profitable with a stronger balance sheet. So first question is why the decision to make this now? And then how do you feel like this positions you to unlock greater growth opportunities going forward?

Aaron, thanks so much. I appreciate you really reminding us of the progress that we've made on the first phase of transforming the Honest Company. It was so important, as you said, to improve the business model, improve profitability, and our financial foundation. As we look at what will enable the future growth for Honest, it's really still grounded in the pillars we articulated, where we believe there is much more opportunity to scale this brand with our brand maximization and continue to be disciplined about how we operate the business model with our margin enhancement pillar. So with that, we really looked at where we have the right to win, the categories that are best poised to be very resonant with consumers. There is still opportunity and provides us that strength from a profitability perspective, higher margin, and higher profit. When we look at the group of categories that we are going to focus on of wipes, personal care, and diapers, which we're calling our organic portfolio, that business is actually up 6% year-to-date in a time that we know that macroeconomic conditions are very challenging. The wipes business is growing double-digit and baby personal care. So we know that if we continue to simplify the focus of our resources and dial up the attention and focus on those brands, they are very well poised to grow. One of the other things that I think our transformation journey has shown us is for Honest, there's a real cost to complexity. We've been a complex business, and we've been simplifying it over the few years. We are finding for us that it's true that less is more. It drives greater focus for us about how we drive the advantage and scale that we're looking for. So that's what is the underlying philosophy behind powering Honest growth, allowing us to make sure we focus our resources to drive against these clear places where we have the right to win.

And second one for me, just diving a bit deeper into diapers, which remains core for you guys. How should we think about the redesign and how that's helped some of the velocity trends? I know it's still a little bit earlier. And then in reference to your prepared remarks, it sounds like you made some price value adjustments for one of the retailers that helped to drive velocity. So just some more color on that and how we're thinking about the diaper designs and maybe the price gap evolution, which I think you alluded to doing a test for during the quarter. So how we should think about that going forward would be helpful.

Well, I just talked about the Powering Honest growth program that we've introduced. And one of the things I want to make sure is very clear to everyone. Diapers has a key role in this transformation program that we're talking about because when I think about the diaper category for Honest, diapers play a very important role for us. Strategically, this is a category that allows us to welcome new consumers, households, and shoppers into the Honest portfolio because that entry and life stage change of having your first baby and really exploring new products works well as a time when you're seeking new solutions. And then for us, specifically, the core benefits that Honest focuses on of clean products and good for sensitive skin, it just makes sense for us that that's a category where we can meet new consumers when they're at a time of life where they're looking for that and where it's never been more important for them. So we really think this category is important to us. When we look at how our diaper business is doing now, you are right. We think that there are a few important areas to address for diapers. We are not satisfied with how our diaper performance is overall, but the first step for us was to introduce that new better diaper. I think I mentioned in the script, it is still early because the inventory had to really settle out. I think we're quite well advanced now on seeing that as the majority of diapers on the shelf. And when we look at our customer complaints, our consumer complaints are down 21% year-to-date for our diaper business. So that's a really good sign. The other thing that gives us real encouragement is our diaper business at Amazon, which Amazon is now our largest retailer. Year-to-date, our diaper business is up 3% at Amazon. So that shows us that with a consumer that's highly omnichannel, highly digital-oriented, which has always been right for the Honest brand, the diaper business is working very well. And one of the things that's unique about Amazon, as you may recall, one of the reasons our diaper business is down so much at Target is because they made a choice to simplify their portfolio with the gendered prints and really focus on gender-neutral prints. At Amazon, where we are growing 3% year-to-date, we still have our gender prints. We still have our full selection. So we're learning a lot about what works for our diaper consumer and how incremental those prints are. The thing that's important right now is as consumers are experiencing these macroeconomic pressures, we wanted to make sure that we were addressing the pricing concerns that we are seeing as we're seeing diaper category purchases shift from all the major national brands to the low-cost brands. So we have introduced pricing in a variety of forms at shelf. We've seen some pricing velocity work when we're addressing absolute price point that we're seeing on the shelf with one of our major customers. So we are looking at how we need to apply that more broadly. And then we have done price pack architecture work. The price pack architecture work includes creating some lower entry point price point diapers because originally, our Honest diapers had some pretty steep pricing that's a little bit difficult for families to embrace under these conditions. So we're very pleased that we've introduced this like $19.99 price point diaper to allow more purchases at entry. So for us, as you can see, we're trying to address the 2 things that really drive price value. That is what does it feel like to pay for the diaper, and is the diaper worth it when you get it, and that's what we're going to continue to do.

And our next question comes from the line of Anna Glaessgen with B. Riley Securities.

I guess I'd like to turn back to diapers. Clearly very competitive. On the one hand, you introduced new innovation with the diaper reset. So you would think that that would be a catalyst for share. But then on the other hand, you have a lot of competition, particularly literally at the lower end, and you have a more price-sensitive consumer. I guess bigger picture, how are you thinking about the best way to compete in a category where maybe innovation isn't getting as rewarded as we would have thought previously? Just any bigger picture thoughts there.

Sure. Well, I think one of the things that's sometimes masking our overall diaper performance is that the diaper issues we're facing at Target unique to this quarter. I just want to remind everyone, part of the declines in our diaper business that we're seeing this quarter are because we're lapping that promotional event that we did a one-time-only event last quarter at Target, and we didn't repeat it. So we've seen that in the quarter. We are also experiencing the loss of the gender print. So when I look at our diaper business at Target versus the market ex-Target, it's really quite a tale of 2 cities. Outside of Target, year-to-date, the Honest diaper business is up 5% consumption. So that tells us that we are providing a diaper that is very meaningful in the market. When we think about the new and improved diaper innovation, I think it just takes a while because sometimes people have those diapers in their house already, and you have to kind of work through those diaper purchases that are at your house. So we look to be continuing to watch the results of the new and improved diaper, but I'm very encouraged by the fact that the complaints are down 21% for the year.

Carla, I just want to clarify what I heard. I think you said that ex-Target diaper consumption was up 5%. And I think earlier you said Amazon was up 3% year-to-date. So is there a channel that's outgrowing Amazon?

That's a great question, Anna. I want to make sure I'm getting my math right. Amazon is up 3% in the quarter, and year-to-date they have seen stronger growth in the first half of the year. Year-to-date, excluding Target, our total diaper business is up 5% in consumption. I apologize if I didn't communicate that clearly the first time.

Okay. So the 3% was specific to the quarter. So the 3% and 5% are not comparable.

That's right. Some of that also is due to as Amazon was flowing in the new diaper in this quarter. As we can see, sometimes there's just a little bit of noise in the numbers in the quarter as you transition into the new diaper. So they had a stronger front half, and then that's the quarter.

And our next question comes from the line of Owen Rickert with Northland Capital Markets.

What's the timeline and sequencing for these exits? Are you winding them all down in 4Q? Or will this extend into the first half of '26?

Yes. Thank you for the question. As we talk about the Powering Honest growth program, focusing on the core categories of wipes, personal care, and diapers with the exit of the low-margin nonstrategic categories. Honest.com, we expect to wind down by the end of this year. And then we will be pivoting to what we call a pass-through site for sales. Canada, we expect to wind down by the end of this year as well. And we are also exiting the apparel partnership. Again, we expect that wind-down to take place by the end of this fiscal year as well. I just want to add, the second part of the program is about optimizing the cost structure to align with the new size of the business and to align with the strategy. And so we will start seeing expenses related to the transformation program in Q4 and then the execution and the savings beginning in 2026.

And then quickly, I guess, how are you handling some of that existing inventory, maybe in the apparel business and fulfillment commitments for these exits?

Yes. We have a strategy to wind those down in a very efficient and effective way. And then the one-time cost that we provided of $25 million to $35 million is inclusive of any of that sort of hangover that you might be alluding to.

Our next question comes from the line of Shivhana Choudhry with JPMorgan.

I was just wondering a couple of questions. First of all, we are hearing of a heightened promotional environment from other HPC peers, and diapers is no exception. And one, can you please speak to the level of promotion you're seeing in general, and also specifically in diapers? And then can you give us a sense of how some of your pricing levers like the promotions, the price architecture that you just mentioned, how have these been received? And I have another question.

As we evaluate the pricing strategies we've implemented in the market, one notable initiative during this timeframe is our rollback strategy at Walmart, which we are pleased to see is resulting in increased sales velocity. The market's positive response suggests that consumers in this category are carefully considering price points when making their purchasing decisions. Thus, we value the importance of aligning our pricing with consumer expectations and perceived value. I don't recall the other question you asked. Could you please repeat it?

How are the retailers responding to the general level of inflation you're seeing in your other core categories, such as wipes and baby personal care?

Yes. The other categories are not demonstrating right now the same degree of price sensitivity that we're seeing in diapers overall. So I did mention that one of the things we're seeing in the diaper category overall is that almost all of the national players, I think I'm going to say all of the national players, and even the private label segment, they are all declining on dollar volume in the quarter, with only the very low price entrants really showing growth. So that behavior is very different in our diaper category than when we study our baby personal care category, where, as you know, we are the leading brand. So we really do drive that category. When we look at the wipes category overall, we're seeing strong growth from the Honest brand even as we are sitting at a bit of a higher price tier, and we know that our benefits really mean a lot in that category. So none of our categories seem to be under quite the same pressure at this point as diapers, although, of course, it's going to be important to keep watching how those consumer confidence levels and consumer macroeconomic changes affect the categories.

And our next question comes from the line of Dana Telsey with Telsey Advisory Group.

With the new 2.0 plan being implemented, what does the new algorithm for the business look like? How do you anticipate the financial dynamics for next year with any cost streamlining? How do you view the overall financial statement?

Thank you for the question. The Transformation 2.0 initiative aimed at driving Honest's growth consists of a two-part strategy. First, we are focusing on shifting towards our higher-margin categories of wipes, personal care, and diapers, while stepping away from the nonstrategic, lower-margin categories and channels. The second part involves optimizing our cost structure by right-sizing our selling, general and administrative expenses, as well as our supply chain. We anticipate that exiting the low-margin categories will help us grow our profits at a faster rate than our revenues. This is evident in our Q2 performance, where we achieved our highest gross margin of over 40%, demonstrating the potential we have moving forward. The nonstrategic categories represent about 20% of our business and are significantly below our average gross margin, which gives us confidence in our ability to foster growth in 2026. We look forward to providing further details about our 2026 plans during our earnings call in February. However, the current macroeconomic climate limits our ability to share more specifics regarding the potential gross margin structure for next year.

I'm showing no further questions at this time. So with that, I'll hand the call back over to CEO, Carla Vernon, for any closing remarks.

Thanks so much for joining the call and listening to where we are on our journey. We're very excited about powering Honest growth as we go forward. Look forward to talking to you all next quarter. Thank you.

Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.