Earnings Call Transcript
Honest Company, Inc. (HNST)
Earnings Call Transcript - HNST Q2 2021
Operator, Operator
Ladies and gentlemen, thank you for standing by. And welcome to The Honest Company's Second Quarter Fiscal 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Sung Kim, VP Finance and Strategy at The Honest Company. Please go ahead, sir.
Sung Kim, VP Finance and Strategy
Thank you. Good morning, everyone. Thank you for joining us for our second quarter fiscal year 2021 conference call. Joining me today are Nick Vlahos, Chief Executive Officer; and Kelly Kennedy, Chief Financial Officer. Before we start, I would like to remind you of our legal disclaimer 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 SEC filings, as well as our earnings release issued today 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 the forward-looking statements in light of new information or future events. 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 today's financial results earnings release. A live broadcast of this call is also available on the Investor Relations section of our website at investors.honest.com. With that, I will turn the call over to Nick.
Nick Vlahos, CEO
Thanks, Sung. Good morning, everyone. We're excited to speak with you on our second earnings call as a public company. Honest is dedicated to providing safe, clean, and effective products to consumers around the world. We continue to tirelessly work to drive our mission of inspiring everyone to love living consciously. As you saw in our earnings release, we had a solid quarter with topline growth, sequential gross margin expansion, and continued progress against our strategic initiatives despite facing a challenging environment. We saw our seventh consecutive quarter of year-over-year revenue and volume growth even in light of the significant COVID-19 demand in the second quarter of 2020. Revenue grew 3% in the second quarter of 2021 on top of the 16% growth that we saw in the second quarter of 2020 versus 2019. Additionally, we achieved solid gross margins of 36% in the second quarter as our cost evasion initiatives and improved product mix offset inflation headwinds and normalized levels of trade spend. As we mentioned in our Q1 earnings call, we were impacted by a reduction of inventory at a key digital partner. Even in the face of the $6 million headwind, our first-half revenue and volume grew 8% compared to the first half of 2020, that's on top of the 25% growth rate in the first half of 2020 versus 2019. Our focus continues to be executing against what we can control, our strategic initiatives to remain constant. We continue to focus on broadening awareness of our brands, introducing breakthrough product innovation, increasing our digital and retail presence, and continuing our commitment to ESG. Now, I will provide an update on our progress across these initiatives in Q2 2021. Starting with marketing innovation, we continued to expand brand awareness and consumer touchpoints through the use of marketing campaigns leveraging our Content, Community, and Commerce strategy. By inspiring authentic dialogue and creating lasting connections, we drove 16% growth in our Skin and Personal Care business this quarter and 28% growth for the first half of 2021. This continues to remain a strategic focus for us as more than 40% of new honest.com consumers are acquired through our Skin and Personal Care products. Throughout the second quarter of 2021, we continued to invest in integrated marketing campaigns supporting our Skin and Personal Care business, which combined earned media coverage, sponsored influencer content, user-generated content, and paid media. Two campaigns that exemplify these full-funnel tactics were our Honest Beauty Radiance campaign that featured our vitamin C serum and Gloss-C Lip Gloss and our See Your Beauty campaign around our Eye portfolio, including our Hero mask and Hero product. In total, these campaigns generated roughly 900 million total impressions across over 70 earned media placements, 100 pieces of sponsored content, and paid media, including whitelisting and brand-handled amplification. Jessica Alba created original content to support each campaign and amplified influencer context to help expand their reach. These campaigns led to strong consumer engagement, increased traffic to honest.com, and featured our award-winning products, including our most recent award win on the World Readers' Choice Award for our Extreme Length Mascara and Lash Primer. We believe these campaigns positioned our Beauty business extremely well as we launched our sustainable packaging initiatives for Beauty in the third quarter of 2021. Given the continued success of these programs, we expect to lean into marketing in the back half to continue to support the re-stage and pursue growth in Skin and Personal Care. Second, we continued to support our breakthrough product innovation. In the first quarter of 2021, we introduced our Clean Conscious Diaper that delivered improvements in performance, sustainability, and margin. This innovative product fully phased into the market in the second quarter of 2021, driving a lift on diaper consumption trends in the marketplace. Our new diaper is our best performing and most sustainable diaper yet. Behind these improvements in performance and sustainability, we saw mid-single-digit growth for the quarter on our Diaper business despite COVID-19 stock-up impact in the year-ago period. Our Diaper market share increased this quarter as our Diaper retail consumption growth outpaced the market. Honest grew by 33% compared to the total Diaper market at 20%. Beyond the breakthrough Diaper innovation, we also introduced new innovation in our Wipes, Household and Wellness, and Beauty categories in the second quarter with items such as our benefit wipes, which hydrate and nourish skin, and our scented sanitizing wipes, with natural fragrances. We've introduced our Honestly Healthy Serum-Infused Lash Tint and plant-based gel, which helped to build our Eye portfolio around our Hero Beauty product, our Extreme Length Mascara. Third, we were pleased to deliver strong growth in our retail channel as our integrated omnichannel strategy led to a more balanced mix of revenue across our channels. Our regional channel accounted for 53% of our total revenue in the second quarter as opposed to only 36% in the second quarter of 2020, where consumers sheltered in place and shifted to online shopping. In line with this macro trend, we have seen increased consumer willingness to get back into stores as more people have become vaccinated. As a result, we have seen a channel shift from digital to retail, causing an acceleration in revenue growth within our retail channel. Our retail channel grew 51% in the second quarter of 2021 compared to 2020. We believe we're well-positioned with our omnichannel strategy to capture growth wherever our consumer chooses to shop. Significant whitespace opportunities exist to expand our on-shelf presence and the depth of our product offering with new and existing retail partners. For example, we secured new physical and digital distribution for the back half of 2021, in line with our expectations, with over 30,000 new distribution points, with approximately half coming in the Skin and Personal Care product category. Highlights of this distribution expansion include the launch of our diapers with Walmart Canada, the launch of diapers and wipes on bjs.com, and the expansion of our total brand assortment with key grocery partners, including Kroger, Ahold, Hannaford, and Weifan. Before I turn it over to Kelly, I wanted to take a moment to reiterate our commitment to ESG, which has been part of our DNA since our founding. We have a deep sense of purpose and infused the ethical values of transparency, sustainability, diversity, and inclusion in all that we do. From developing products designed to be safe, working hand-in-hand with our charity partners to serve those in need, to embracing diversity and inclusion, we're on a mission to create real and meaningful impact. This quarter, we're excited to highlight our renewed partnership with our official charitable partner Baby2Baby. Since inception, Honest has donated over 26 million products, making an impact with individuals and families in need. To celebrate Baby2Baby's 10-year anniversary, we are committed to donating 10 million products over the course of 2021 and 2022 to further support our community and help Baby2Baby distribute essential items to underserved communities. In summary, we believe we have built the foundation for Honest to continue to grow as a leading clean and natural wellness brand. We continue to capitalize on our strong content, community, and commerce platform to drive good growth across product categories and all consumer touchpoints. We're pleased with our solid start to the year and believe we're well-positioned to continue to advance our strategic growth plan. Now, I would like to turn the call over to Kelly Kennedy, our Chief Financial Officer, to review our second-quarter results.
Kelly Kennedy, CFO
Thank you, Nick. And welcome, everyone. This quarter reflects our seventh consecutive quarter of year-over-year topline growth with solid gross margin and profitability performance despite the challenging comparison to the COVID-19 stock-up behavior in 2020 and the headwinds of significant inventory de-stocking by a key digital partner. This quarter's performance reflects the positive momentum of the Honest brand, as well as our team's strong execution against our strategic priority. Starting with our financial results and key drivers. Second-quarter revenue totaled $75 million, a 3% increase over Q2 2020. As Nick highlighted, this was on top of the 16% growth we delivered in Q2 of 2020. After adjusting for the estimated $3.7 million of Diapers and Wipes revenue driven by COVID-19 stock-up in the second quarter of 2020, revenue growth in Q2 of 2021 was 9%. Diving into key drivers by product category, starting with Diapers and Wipes, the category decreased 2% as we lapped COVID-19 stock-up behavior in Diapers and Wipes in the second quarter of 2020. Of note, we saw mid-single-digit Diaper growth behind our new diaper innovation as we had our first full quarter with the innovation in market. Based on retail consumption from syndicated data for the last 13 weeks ending June 27, our Diaper business was up 33% and we grew Diaper market share during that time period. On a two-year basis, Diapers and Wipes grew 17% in Q2 2021 versus the second quarter of 2019. Skin and Personal Care grew 16%, driven by higher sales volume within the retail channel. Omnichannel demand for our Skin and Personal Care products was driven by our continued investment in our Content, Community, Commerce strategy and incremental merchandising programs with our retail partners. Based on retail consumption from syndicated data for the last 13 weeks ending June 27, we grew our Personal Care business by 18%, further increasing our market share during the second quarter. Skin and Personal Care grew 39% in Q2 2021 as compared to the second quarter of 2019. Household and Wellness declined 6% as consumer and customer demand for standardization products decreased as people became vaccinated and customers managed heavy levels of inventory. Now, turning to results by channel. For the quarter, the digital channel revenue declined 24% to $34.8 million, up 11% on a two-year stack basis. Retail channel revenue increased 51% to $39.8 million, up 45% on a two-year stack basis. Like many other brands, we saw a stronger than expected rebound in the retail channel in the first half of 2021. Outsized retail growth was aided by a strong rebound in store traffic as vaccinated consumers increasingly returned to in-person shopping as compared to the second quarter of 2020 when consumers sheltered in place and shifted their behavior heavily to online shopping. In the second quarter of 2020, our retail business only represented 36% of total revenue, but we saw a significant shift to a more balanced mix of revenue in the second quarter of 2021 as consumers came back into stores and retail accounted for 53% of total revenue. We also benefited this quarter from expanded distribution and incremental merchandising events with partners like Target and Costco in both our Diapers and Wipes and Skin and Personal Care categories. The decrease in the digital channel revenue was largely impacted by the reduction in inventory on hand by our key digital partner, who cut inventory and consumables in the second quarter to free up space for other products ahead of a major promotional event. While this inventory reduction was not specific to Honest, due to our higher digital penetration, it was more impactful for us. During the second quarter of 2021, revenue for this key customer declined by $6.4 million, while consumption by these partners and the consumers increased by 3%, each, as compared to the second quarter of 2020. Turning now to gross margin. Gross margin achieved 36% for the quarter, a sequential improvement of 110 basis points versus Q1. Gross margin for the second quarter was down approximately 50 basis points versus the second quarter of 2020, which benefited from lower levels of trade spend as retailers pulled back on events during the pandemic. Q2 gross margin was up over 700 basis points versus the second quarter of 2019, reflecting progress on diversifying our portfolio to higher-margin products and delivering against our cost evasion projects. Overall, input costs were higher in Q2 of 2021 versus Q2 of 2020, including higher transportation and freight costs. Those margin headwinds were offset in part by our continued focus on cost evasion, operating leverage, and improved mix across the business. In Q2, we captured a full quarter of our Clean Conscious Diaper innovation, which has improved our Diaper margins by over 100 basis points. We also have a number of other cost evasion initiatives launching throughout 2021, headlined by our Beauty Sustainability re-stage that launched in Q3 and is projected to improve Beauty gross margin by approximately 800 basis points. Given record levels of cost inflation, cost evasion will continue to be a focus area for us in 2021. We recognize that there is uncertainty around the input cost environment; we plan to closely monitor our productivity plans in relation to current inflation levels. Total operating expenses increased $19.8 million versus Q2 of 2020, primarily driven by three items. First, we had $11.1 million in one-time IPO and transaction-related expenses. Second, operating expenses included a $4.3 million increase in stock-based compensation, including the expense recognized in connection with performance-based equity that vested upon our IPO offering. Finally, we invested an incremental $3.4 million in marketing versus Q2 2020 as we supported the accelerated growth of our Skin and Personal Care business and the launch of our new Clean Conscious Diaper. Adjusted EBITDA for the second quarter of 2021 was a loss of $0.8 million. We ended the quarter in a healthy position with $95 million in cash and short-term investments with no debt on our balance sheet. We believe we are well-positioned to execute against our 2023 strategy and retain financial flexibility as we invest in marketing innovation, product innovation, and domestic and international expansion over the next few years. Looking towards the remainder of the year, trends for the back half of the year remain volatile as we navigate an environment that is dynamic, with significant input cost pressure, and continuing uncertainty around the COVID-19 pandemic and its impact on consumer behavior. With that in mind, I will now share some thoughts on our outlook for the remainder of 2021. As it relates to revenue, we continue to expect our Diapers and Wipes and Skin and Personal Care product categories to perform in line with our expectations for the year, which reflects continued market share penetration and double-digit topline growth in total. We believe our Clean Conscious Diaper resonates with consumers and will drive Diaper market share expansion. In the back half of the year, our baby wipes will return to a more normalized comparison period and our Skin and Personal Care business is prime for growth, behind our Content, Community, Commerce strategy, and our Beauty re-stage. Based on macro household and wellness trends, consumer demand for sanitizing and disinfecting products has decelerated at a more rapid pace than we expected as people become vaccinated and returned to their pre-COVID routines. For example, total market consumption data at retail for hand sanitizer products declined by 74%, and consumption for household cleaners and disinfecting products declined by 12% during the 13 weeks ending June 27 as compared to the same time period in 2020. We had planned Household and Wellness for 2021 to be roughly flat to the prior year, but we now expect 2021 Household and Wellness revenue to be roughly half of last year's revenue. As we look forward to the future of our Household and Wellness product category, we are developing plans to reinvigorate this category, including product innovation that will allow us to continue to diversify our portfolio and drive growth. As it relates to margin, we are pleased with the gross margin we've been able to achieve in the front half of the year, driven by our cost evasion initiatives and improved product mix. But we have ongoing cost evasion initiatives coming in the back half of the year, including our Beauty Sustainability re-stage. We do see continuing headwinds from input cost pressures, such as transportation, freight, and labor. As such, we expect our back half of 2021 gross margin structure to be in line with year-to-date results. As we reflect on 2021 performance to date, for the first six months of the year, we were proud to deliver against our topline revenue target in Diapers and Wipes and Skin and Personal Care in total. We also exceeded our gross margin and adjusted EBITDA expectations for the overall business despite the headwinds of a significant de-stocking event at a key digital partner. As we continue to execute our Strategy 2023, we have a strong conviction in our growth algorithm. The clean and natural market is outpacing growth versus conventional brands in our product categories. We are growing our market share in our core product categories as we invest behind our major products and marketing innovation. We are expanding our points of distribution and driving our omnichannel strategy with Retail and Digital Partners. Our focus is on executing on our growth plan and driving higher shareholder value over the long term, while solidifying Honest's position as the next-generation modern CPG company. With that, I will turn the call over to the operator to begin the Q&A portion of the call.
Operator, Operator
Thank you. Now, the first question comes from Dara Mohsanion with Morgan Stanley. Your line is open.
Unidentified Analyst, Analyst
Hey, guys. So, just wanted to start with e-commerce. The inventory drawdown you mentioned at one of your key customers, is that something that's sort of permanently comes out or is that more of a timing shift? And then, strategically as we think about the business longer term and e-commerce, it does seem like retail is coming back quicker than you expected, e-commerce not as strong as expected with the return to retail we are seeing from a consumer standpoint. So, just wanted to understand, might that impact your long-term growth expectations and how might your strategy change as a result of that shift that we're seeing?
Kelly Kennedy, CFO
Yes. Thanks, Dara. As we kind of think about the inventory impact that we saw in the quarter, I think we called out at our Q1 call that this partner chose to decrease inventory in certain categories, really to free up space ahead of their promotional event. Overall what we saw was historically, just because Honest is a high growth brand with high digital penetration, this partner tended to carry more weeks of supply than they did with other large CPG companies. We saw them reduce about 12 weeks of supply down to roughly 8, so that was the $6.4 million that we called out was about four weeks of inventory. As we look at what we're seeing in Q3, we have seen the order volume return to pre-destocking levels, so kind of in line with consumption. But we have not seen them return to higher weeks of supply, and we are not planning on it. We do have a new program with this partner that we're pretty excited about that will allow them to take over a small part of our distribution center and ship out of there. And this is a program that they offered with a lot of their other large CPG companies, so we're pleased to participate in that. As we think about the retail and direct mix, I think you'd recall going back to our roadshow. We talked a lot about in a couple of years being kind of this equal balance between retail and direct on a 50-50. It's just accelerated. There is no, really, structural change in how we think about the business, our strategy really just what we've seen is a more accelerated shift. And when you think about this year, we do expect to see roughly equal between retail and direct. And I think it's just the noise as it relates to the quarter, given that retail was only 36% in Q2 last year, just because people weren't in stores. And then this quarter, it was impacted not just because of that shift back to retail, but it was also impacted because of this de-stocking event, which took $6 million out of our digital dollar. So, if you add that back in, digital actually would have been a little larger than retail for the quarter.
Unidentified Analyst, Analyst
Okay. And then, just one follow-up with the higher commodity costs that we're seeing, have you put any thought into taking incremental pricing? And what are you thinking in terms of pricing actions relative to the increased inputs that you are seeing? Thanks.
Kelly Kennedy, CFO
Yes, there has been no change from what we disclosed last quarter. We are taking a cautious approach to increasing our market share, especially as we know that our competitors in the Diaper segment are adjusting their pricing strategies. Some of this adjustment has already occurred, while more is anticipated this fall. It remains a possibility that we are considering; however, we have not announced any pricing changes yet. As mentioned, we are quite satisfied with our results so far this year regarding gross margin. We have indicated that we expect the latter half of the year to maintain similar performance. Overall, we feel we have a solid strategy that balances our cost management efforts with the rising input costs we are experiencing, particularly with small parcel shipping and our decreasing transportation expenses.
Nick Vlahos, CEO
Well, the only thing I would add, Dara, it's good to hear your voice, is the fact that we continue to take market share right now. So, when you take a look, the underlying consumption of the business, and that's what I think we've got to drill down into, which is the Diaper business behind our Conscious Diaper initiative, we're growing share. You take a look at the 33% consumption increase over the last 13-week time period through June 27. Personal Care, when you look at the consumption data, up 18% overall, and again, taking share. And then when you look at the overall business from a consumption perspective for that same period, we're up about 17%. So, the key here is when you look at the first six months of the year, and again, new company, when you look at the size of this business, there are going to be fluctuations when you look at the quarter. But what we like seeing is what we talked about when we came out is making sure that, yes, drive the top line, and you look at the top line for the first six months of 8%, that's volume related. If you look at the industry, you guys know where the industry sits from a volumetric perspective; over the first six months of the year most are at negative mid-single digits to flattish over the last quarter, negative 10% to flattish from a volume perspective. So, at the end of the day, a lot of conviction around the strategy when it comes to the gross margin piece; as we had talked, we're happy that we've exceeded for the first six months of the year, our gross margin expectations as well as when you take a look at our adjusted EBITDA exceeding what we said. So, the anomaly here is kind of the external component around this partner from a digital perspective that made a choice. But when you see the fundamentals of the business, very strong based on what we've talked about and what we're delivering.
Unidentified Analyst, Analyst
Great, thanks.
Kelly Kennedy, CFO
Thanks, Dara.
Operator, Operator
And our next question coming from the line of Andrea Teixeira with JPMorgan. Your line is open.
Andrea Teixeira, Analyst
Hi. Good morning, everyone. Thank you. I have two questions. First, I wanted to ask about the innovation and marketing investment. Should we expect to see increased marketing spending in the second half based on your comments? Additionally, how much have new products contributed to sales in the second quarter compared to the first quarter in terms of sequential contribution? I also have a question for Kelly. I appreciate the breakdown for each division and the double-digit expectations for your key product lines, particularly noting that Wellness may account for about half of the full year. How should we interpret this? Does it suggest a significant rebound for Diapers and Wipes in the second half, or should we expect that the total company performance will remain in the high single digits for the year?
Nick Vlahos, CEO
Yes. Good morning, Andrea. I'll start off. As it pertains to innovation, we started the year from a strategic perspective. There were two big innovations for us. One was this Conscious Diaper, and we're executing with excellence against that. When you take a look at the Diaper business right now, we referenced it within Q2 mid-single-digit growth against the Diaper business. And as we've referenced kind of where the consumption sits right now with 33% increase when you look at the consumption over the last 13 weeks, so we're taking share. We're very excited about how that's performing today. The second component was our Beauty re-stage, which was the second big element of our innovation for the year. And that just started to hit the market. What we're seeing now within the Personal Care and Skin business, again, consumption data is showing about 18% increase overall for that 13-week time period. The other thing that we're seeing behind the marketing investment, so we're leaning in with the marketing investment because we're bringing new consumers into the franchise. One area we're looking at our datasets is just looking at honest.com and our digital side of our business; over the last year in 2020, we brought in about 34% new consumers came to honest.com within Skin and Personal Care. This year, thus far, what we're seeing is roughly about 44% coming in through our Skin and Personal Care business, so you start to see kind of that shift from a mix perspective. And you are starting to see that innovation that we put into the market, people are coming to us as we're leveraging the marketing investment, coupled with the innovation to drive really our strategy that we've talked about. Relevant content, community, advocacy, and then the commerce piece, which is omnichannel. So, wherever that consumer is interested in shopping, we're positioned for that. This quarter, we saw the consumer gravitate more towards retail and we are available there, that's why Retail grew 51% versus the year-ago. Now as things fluctuate, as we look at the back half of the year, as people start talking about Delta, we see they're talking about Lambda and different variants, that might shift, but we're well positioned to be able to capture that. So, again, one, innovation is working as planned. Two, we're marketing and spending against that innovation and we're going to continue to plan to spend against it because we're seeing overall market share increase, and we're seeing new consumers coming into the franchise based on our strategy as we start driving Skin and Personal care in these categories.
Kelly Kennedy, CFO
Yes. I'll add just for some clarification as it relates to the numbers. I think we communicated that we believe 15% to 17% as a percentage of sales is the right level for us from marketing because we have such big launches and innovation this year. We do expect to be at the high end of that range. As we think about innovation, clearly, it is driving predominantly the growth this year between the Clean Conscious Diaper and our Beauty re-stage. So as we think about kind of innovation as a percentage of our total growth, it's really outpacing really driving that growth. And finally, just a clarification as we think about the outlook that we're seeing, double-digit growth when you take Household and Wellness out of the equation. So, Diapers and Wipes, Skin and Personal Care in total for the year, we're going to be able to deliver double-digit growth. And I think the important thing to remember is, as we highlighted, we called out this COVID acceleration in 2020 of about $20 million. So, when you pull that out and think about the base as 280 for 2020, clearly, you can see what is kind of a strong robust mid-teens growth for the business, which is kind of the way we are thinking about it.
Andrea Teixeira, Analyst
Thank you, both.
Kelly Kennedy, CFO
Thank you.
Operator, Operator
And our next question coming from the line of Stephanie Wissink with Jefferies. Your line is open.
Stephanie Wissink, Analyst
Thank you. Good morning, everyone. I just want to follow up on Andrea's prior question just with respect to the growth. And Kelly, maybe the clarification is, you want us to sum Diapers and Wipes, and Skin and Personal Care together to get to double-digit growth, not the categories in isolation should each grow double digits?
Kelly Kennedy, CFO
Correct. I think the most important thing is that we are communicating that Diapers and Wipes, and Skin and Personal Care kind of delivered on our expectations for the first half. And all indications are that we will deliver and are in line with our expectations coming into the year. So, no change there. What's changed is really this deceleration of the Household and Wellness category that was at a much more rapid pace than we expanded kind of as we look at we've seen some small signs as COVID cases have increased, that there is potential for that to come back; and we've delivered some great innovation in Household and Wellness. You know, these are just launching in Q3 and you'll see on the shelf. It won't be a huge driver for us, but just thinking about that Household and Wellness last year, our expectations for the year were flat. And right now, what we did see in the first half, as you saw from our numbers, is about half the pace of what we anticipated coming into the year, even though we did anticipate, especially in the back half, a significant year-over-year decrease; it's actually declining faster than that.
Stephanie Wissink, Analyst
Okay. And then, I wanted to translate that down to gross margin because I think you're saying second half in line with the first half. So, just wanted to make sure we have the base correct if the first half was around 35.5%, or 35.6%, what is the effect of that reduction in the Household and Wellness revenue on the gross profit? Is there an absorption burden there? And then, maybe secondarily on that, if I just cut with the mix shift towards your Clean Conscious Diaper, which I think was a cost evasion improvement and Beauty and Personal Care being higher-margin, just wondering why we're not seeing a bit of a step-up in margin in the back half.
Kelly Kennedy, CFO
Yes. When considering our Household and Wellness segment, we haven't provided a breakdown of margins by category, but it aligns closely with our overall performance. The declines in that area don't significantly impact our gross margin due to product mix shifts. We are experiencing higher input costs, particularly in transportation and freight, which exceed our initial projections, along with some increases in costs for materials like resin. Additionally, we noted during our Q1 call that retailers canceled promotional events in Q2, affecting all brands, which poses a significant challenge for the latter half of the year due to normalized trade trends. Q2 saw the peak of those incentives, and this will have a lasting impact throughout the year. On a positive note, our Clean Conscious Diaper was fully introduced into the market in Q2, and while we don't have a complete annual view yet, it is expected to deliver a 100 basis point improvement across the Diaper line as we continue to restage Beauty products. Although it’s still early in the Beauty restaging phase, we anticipate seeing benefits as we move into Q3, particularly in cost efficiency, which will positively influence our gross margin. We are also benefiting from a favorable product mix; in Q2, Skin and Personal Care comprised 32% of our total business compared to 28% in the previous year, enhancing our overall margin, although Skin and Personal Care results were as expected. Lastly, we are experiencing some benefits from operating leverage, though this is somewhat mitigated by the revenue declines in Household and Wellness.
Stephanie Wissink, Analyst
Okay. Thank you very much.
Kelly Kennedy, CFO
Thank you.
Operator, Operator
Our next question coming from the line of Bryan Spillane with Bank of America. Your line is open.
Bryan Spillane, Analyst
Hey. Good morning, everyone.
Kelly Kennedy, CFO
Good morning.
Nick Vlahos, CEO
Hey.
Bryan Spillane, Analyst
Hi. So a couple of questions. First one, Kelly, just on the Household and Wellness, is this a base now that we should be using for projecting going forward if we basically kind of reset this business for what was, I guess, maybe a COVID benefit in hand sanitizer. Just trying to understand what we do with this new revenue base here? Is this what we use to sort of forecast normalized growth off of?
Kelly Kennedy, CFO
Yes. That's what we are doing. I mean, there's a lot of uncertainty as you know around COVID. While we might get some kind of pick up from the lows that we've seen, kind of in sanitizing and disinfecting spray in Q2, we are not anticipating that this has a comeback to prior level. We will have some innovation. I think we talked a little bit as we get into 2022 on some innovation coming in Household and Wellness. But, yes, a very large and significant component of that $20 million from COVID impacting 2020, more than half of it was in Household and Wellness space. So, that's really the driver.
Bryan Spillane, Analyst
Okay, that makes sense. Regarding the gross margin discussion for the second half of the year, the quarterly comparisons are quite different. Should we view it as remaining flat for each quarter? Last year's fourth-quarter gross margins were lower than in the third quarter, so should we expect some smoothing? I am trying to understand if there are any factors we need to consider regarding the timing of the gross margin commentary.
Kelly Kennedy, CFO
Yes, great question. So, last year there was an anomaly in the fourth quarter. We expect it to be normalized, no call-outs or puts and takes that we would call out between Q3 and Q4 on margin for us. So you could expect, what we say in line with first half that would be consistent for Q3 and Q4 as well.
Bryan Spillane, Analyst
Okay. And then, just last one. Just on the inflation and, again, just thinking about the relative from the last earnings call. Like inflation has been, I guess, in view really over the course of the year. But it sounds like, you know in the last month or two, you've seen some things that are maybe inflating more. So, just trying to get an understanding of kind of where those areas are? And if you can, maybe separate how much of it is coming from pure, I don't know, commodity inputs or market-based cost increases on certain inputs? And how much of it is just more tied to maybe some of the bottlenecks we're seeing in supply chains in the economy? Because it seems like one may be more transitory than the other, but just trying to understand the differences there?
Kelly Kennedy, CFO
Yes. We don't have a specific breakdown between market-based and bottlenecks, but both are contributing. When we think about kind of ocean freight, which is just a small piece of our business that comes over ocean, but just transportation across the board. And the main call-out that we are highlighting that was different than where we started the year predominantly is not in the input cost and transportation and freight because we did anticipate that. It's really around the labor where we have seen some kind of hire across the board and you've heard of this. As we think about our labor in the distribution center across the board, it's been challenging and rates have gone up there and we have to stay consistent with what we're seeing in the market. So, that's the one place. There are other smaller impacts rather than other things that are packaging-related for us and we were partially shielded because of our fixed-price contracts for our large commodity impacts. But again, we take surgical pricing. I think we talked a little bit about not taking broad-based pricing at this time. But certainly, as we see certain categories being impacted, we have had really good success on individual SKU or individual product lines to try to offset that. And we'll continue to do so. We're very focused on trying to offset these costs, but it's just a reality that we're seeing, particularly in the labor market.
Bryan Spillane, Analyst
Got it, okay. Thanks, Kelly. Appreciate it.
Kelly Kennedy, CFO
Thank you, Bryan.
Operator, Operator
And our next question coming from the line of Laura Champine with Loop Capital. Your line is now open.
Laura Champine, Analyst
Thanks for taking my question. It's on the Household and Wellness business because that's the most radical change in your thought process sort of year-on-year. Is this all just difficulty forecasting the shifts related to COVID recovery or is there something else happening in the channel that's driving the reduced expectations this year?
Nick Vlahos, CEO
Yes, I'll address that. From a broader perspective, it's clear that no one could have anticipated the events of the past year, especially when COVID impacted us so significantly. We witnessed this in the demand for disinfecting sprays and wipes, as well as in toilet paper and various other products. As we moved into this year, we estimated that overall revenue would be around 75% of what we experienced previously. However, when we analyze the market over the last 13 weeks, we've observed a 74% decline in hand sanitizer consumption, with declines of 11% to 12% in disinfecting sprays. We initially thought that consumption habits would be more stable by now, but that hasn't been the case. Based on the data and insights we have today, our Diapers and Wipes business, along with our Personal Care and Skin business, are performing as anticipated. The only exception is the macro event that unfolded last year. Currently, our understanding of consumption trends is not meeting our forecasts. However, situations are evolving. With variants like Delta and Lambda, we are prepared, just as we were a year ago, to take advantage of any changes. We are closely monitoring this and, as consumer behavior shifts, we are well-equipped with our brands, products, and our omnichannel strategy in both digital and retail to meet consumer needs.
Laura Champine, Analyst
Got it. Thank you.
Kelly Kennedy, CFO
Thank you, Laura.
Nick Vlahos, CEO
Thank you, Laura.
Operator, Operator
And our next question coming from the line of Laurent Grandet with Guggenheim. Your line is open.
Laurent Grandet, Analyst
Yes. Good morning, everyone. I'd like to come back actually to do the very first question, I mean the $6.4 million in the headwind you had in e-commerce. So, even if you assume that this e-commerce customer was growing 3%, let's say, the impact was a ballpark in $7 million. If you add that to the segment, actually you still have digital segment being down 9% or about $6 million. So, is that actually the shift you are seeing from e-commerce to retail, or is there anything else we should know to forecast better for e-commerce or the digital segment going forward?
Kelly Kennedy, CFO
Yes. Aside from the de-stocking event, the overall digital category and customer behavior reflect a significant traffic increase, with many reporting substantial business growth that doesn't negatively impact the digital segment. As an omnichannel business, we pride ourselves on being accessible wherever consumers choose to shop, which is a clear advantage. Although the future consumer trends are unpredictable, resulting in considerable variability, the overall effect remains evident. For instance, our diaper sales grew by 33% in the quarter, while the entire category increased by 20% in the track channel, which only accounts for about one-third of our business. It's clear that consumers are purchasing 20% more diapers, indicating a shift from digital to retail. We're pleased to see that we are exceeding category growth and expanding our market share, which is beneficial for us regardless of the shopping channel. We aim to enhance our overall market share no matter where consumers decide to shop.
Laurent Grandet, Analyst
Thanks. And a quick follow-up on that shift. I mean, is it fair to assume that e-commerce or digital is more profitable than retail? And by how much for you? And does it impact gross margin as I assume than the rest of the P&L?
Nick Vlahos, CEO
Yes. For us, when we take a look at whether it's digital or retail, and this was part of our thesis from the get-go, is we're agnostic when it comes to where that consumer is shopping. Because when you look at the margin profile across those businesses, they are privileged. So, that's a little different than maybe some of the traditional players that talk about one piece of business in a certain way. We talk about it through this omnichannel lens around this accessibility component. And that's why we have that ability to turn around and deliver against where that consumer is at that point in time. And now, as you start to see from a strategic perspective, consumers shifting more into retail, we're positioned to be there. If that starts to shift again back into digital, when you look at again some of these variants that a lot of folks are now talking about, we're well-positioned there also.
Laurent Grandet, Analyst
Okay, thank you. I'll pass it on. Thanks.
Kelly Kennedy, CFO
Thanks, Laurent.
Nick Vlahos, CEO
Thanks, Laurent.
Operator, Operator
And our next question coming from the line of Dana Telsey with Telsey Advisory Group. Your line is open.
Dana Telsey, Analyst
Good morning, everyone. Parsing apart the digital and retail side of the business, it sounds like you got new distribution points also. I think you mentioned over 30,000 new distribution points. Is that typical in terms of distribution points and what do you see in terms of the retail cadence going forward? And then I have a follow-up. Thank you.
Nick Vlahos, CEO
Yes. When we introduced our Strategy 2023 and we put our plans in place, this is part of our plan to be able to continue to drive our omnichannel business. And we look to drive accessibility with strategic partners. So, the 30,000 distribution points that we referenced was planned. And when you look at those partners, they're both on the dot com side, as well as on the physical retail side. So, we love the fact that we've got a partnership with folks like bjs.com now; that represents another footprint for us as we drive kind of the East Coast, up in Canada, securing Walmart Canada physical stores with our Diaper business now. We had some Personal Care business there and that's doing well and now we've picked up the Diaper business. So, that is part of the cadence of kind of how we drive the business as we look at both physical retail as well as the right strategic digital partners. And as we look forward, you're going to see a consistent cadence based on our long-range plans to be able to continue to balance that omnichannel component.
Dana Telsey, Analyst
Got it. As you consider the gross margin, which is now expected to remain flat in the second half of the year, similar to the results we've seen so far this year, it usually indicates an increase in gross margin. Do you view this as the new standard? How do you envision it progressing in the future?
Kelly Kennedy, CFO
Yes. Our thesis around gross margin expansion hasn't changed. We had some great cost evasion, it was a highly unusual year as it relates to input cost and inflation. And so, we're actually quite proud to be able to deliver kind of 36% for the year. As we think about continued expansion with the Beauty re-stage, product mix will continue to benefit us again, operating leverage as we grow the business. But the biggest driver really cost evasion and we do have cost evasion lined up coming in the back half of the year. So, nothing has changed in our overall thesis. Some of the timing of when we will be able to get to kind of our target gross margin will be reliant on some of these historic highs as it relates to input cost backing down in some way. And so, that will impact the timing.
Dana Telsey, Analyst
Thank you.
Kelly Kennedy, CFO
Thank you, Dana.
Operator, Operator
I'm showing no further questions at this time. I would now like to turn the call back over to management for any closing remarks.
Nick Vlahos, CEO
Very good. Well, first off, thanks everyone for joining us on this Friday morning. And I think the way I would summarize this is, as we look at kind of the remainder of this year, we have confidence in our plans, we have confidence in our three-year Strategy 2023, our road map that we've introduced, and that we're well-positioned, and this is just the beginning when you look at Honest as we continue to build this as the next-generation modern CPG company. And we appreciate you guys spending the time with us today, and we look forward to talking to you next quarter. Thank you.
Kelly Kennedy, CFO
Thank you.
Operator, Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.