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DATE

Wednesday, November 5, 2025, at 4:45 p.m. ET

CALL PARTICIPANTS

  • Chief Executive Officer — Carla Vernon
  • Chief Financial Officer — Curtiss Bruce
  • Head of Investor Relations — Elizabeth Bouquard

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RISKS

  • Revenue Decline — Reported revenue was $93 million, down 7% year over year, attributed to declines in diapers, apparel, and honest.com.
  • Gross Margin Compression — Gross margin dropped 140 basis points to 37%, primarily from tariffs and deleverage on lower volume.
  • Full-Year Guidance Reduction — Management lowered full-year fiscal 2025 (ending Dec. 31, 2025) revenue and adjusted EBITDA guidance, citing "potential disruptions to revenue related to the wind-down of strategic exits and anticipated declines in diaper revenue."

TAKEAWAYS

  • Gross Margin -- 37%, a year-over-year decline of 140 basis points, caused by tariff costs and volume deleverage, partially offset by reduced trade spend and a favorable product mix.
  • Adjusted EBITDA -- $4 million and a 4% margin, Adjusted EBITDA decreased by $3.5 million year over year, primarily due to lower foreign exchange effects.
  • Net Income -- Net income was approximately $1 million, marking the third consecutive quarter of positive net income.
  • Operating Expenses -- Operating expenses decreased by $4 million, driven mainly by a $6 million reduction in SG&A, partially offset by $1.6 million in higher marketing spend to support the diaper launch.
  • Cash & Liquidity -- Ending cash position was $71 million and no outstanding debt; inventory increased, primarily due to tariff mitigation and the new diaper rollout.
  • Consumption Metrics -- Overall consumption increased 2%; wipes portfolio up 24%; baby personal care up 10%; diaper consumption was down double digits; excluding diapers, overall consumption was up 13%.
  • Household Penetration -- Household penetration reached 7.4%, an increase of 80 basis points year over year, with a repeat rate of 32% (up 30 basis points).
  • Amazon Performance -- Amazon (NASDAQ: AMZN) became the largest customer, consumption growth was up 16% year over year and the diaper category was up 3% year to date on Amazon.
  • Transformation 2.0 Launch -- Management initiated the "Powering Honest Growth" program according to Carla Vernon, to exit honest.com, the apparel relationship, and Canada, shifting focus and resources to core wipes, personal care, and diapers categories.
  • Exit Impact and Cost Savings -- Strategic exits account for about 20% of revenue across low-margin businesses, with one-time transformation-related charges of $25 million-$35 million and $8 million-$15 million in projected annual cost savings related to Transformation 2.0.
  • Outlook -- As-reported revenue guidance is in the range of (3%) to flat for full-year fiscal 2025; Organic revenue, excluding exited categories, is expected to grow 4%-6% for fiscal 2025; The adjusted EBITDA outlook for fiscal 2025 has been revised down to $21 million-$23 million from $27 million-$30 million.

SUMMARY

Management introduced Transformation 2.0, prioritizing profitable growth by exiting three lower-margin businesses and focusing operational resources on wipes, personal care, and diapers. Cost optimization initiatives are expected to yield annual savings of $8 million-$15 million beginning in 2026, offset by one-time transformation costs of up to $35 million associated with Transformation 2.0. Organic revenue growth remains positive, with a forecast of 4%-6% for fiscal 2025, while reported revenue and adjusted EBITDA (non-GAAP) guidance for fiscal 2025 have both been lowered to reflect the impact of strategic exits and continued headwinds in the diaper category.

  • CEO Vernon stated that "Our Q3 results faced a challenging consumer environment and market headwinds," specifically highlighting underperformance in the diapers and apparel segments.
  • Year-to-date organic revenue for the core portfolio grew 6% in fiscal 2025; management emphasized continued progress in wipes (up 24% in consumption) and baby personal care (up 10%).
  • CFO Bruce detailed that the exits from honest.com, apparel, and Canada will be completed by the end of fiscal 2025, with cost reduction effects materializing in 2026.
  • CEO Vernon said, "According to our in-house quality team, our diaper consumer complaints are down 21% versus last year," indicating quality improvements post-redesign.

INDUSTRY GLOSSARY

  • SG&A: Selling, General, and Administrative expenses; indirect costs not tied directly to production or goods sold.
  • SKU: Stock Keeping Unit; a unique identifier for each distinct product and service offered.
  • Tariff Mitigation: Strategic actions to manage cost exposure resulting from import/export duties on goods.
  • Pass-through site: An e-commerce platform designed to direct traffic to third-party retailers for fulfillment, rather than selling directly.
  • Consumption: Total purchase and use of the company's products by end consumers, as tracked by market panels or sales data.
  • Price Pack Architecture: Strategy of offering products in varied sizes or bundles to meet consumer price sensitivity or entry-level demand.

Full Conference Call Transcript

Elizabeth Bouquard: 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 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 referenced 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.

Carla Vernon: 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 two-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, 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. Excluding 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 nine 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, representing more than one-third 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, H-E-B, 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. 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 number one 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 two through five. 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 two 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, Eeyore, 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 430% 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 decline. For the quarter, our diaper consumption is down double digits. This is largely driven by two 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 design.

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 two large customer-specific promotional events that were not repeated in the quarter at our two largest brick and mortar retailers. In addition to these two drivers, the pressures of 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 design, 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 ComfortDry technology for up to 100% leak protection, softer layers, and a better fit with comfort stretch across the waist tabs and legs. According to our in-house quality team, our diaper consumer complaints are down 21% versus last year. While this is promising, we're 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 price. 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 diaper 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. We're not finished. Our first transformation initiative succeeded in changing the business' financial trajectory by preserving cash, boosting profitability, and embedding strong financial rigor across the organization.

In fact, over the last two and a half 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 eight 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.

Curtiss Bruce: 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 two large promotional events with our two 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 de-emphasis 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 FX. 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 two 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 three important changes. First, by the end of this year, we will exit honest.com as a direct-to-consumer fulfillment channel but 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 unprofitable 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 two 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, 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 two 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.

Curtiss Bruce: 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 Growth, 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.

Operator: Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone. We ask that you limit yourself to one question. One moment, please. And our first question comes from the line of Aaron Grey with AGP. Hi, good evening and thank you for the questions.

Aaron Grey: 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. You know, now you're profitable with a stronger balance sheet. So first question is, you know, why the decision to make this now and then how do you feel like this positions you to unlock greater growth opportunities going forward? Thank you.

Carla Vernon: Hi, 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, get still opportunity, and provide 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. Our wipes business is growing double-digit. Baby personal care.

So we know that if we continue to simplify the focus of our resources, and dial up the attention and the focus on those brands, they're 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 past few years, we are finding for us 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.

Aaron Grey: Okay. Great. Appreciate that color there, Carla. 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 change? 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. Thank you.

Carla Vernon: Great. 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 plays a very important role for us. Strategically, this is a category that allows us to welcome new consumers, households, 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'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 than sedative. 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 that it is early still because the inventory was a flow in, so 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 gendered 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 $19.99 price point diaper to allow more purchases at entry. So for us, as you can see, we're trying to address the two 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? That's what we're going to continue to do.

Aaron Grey: That's helpful color. Really appreciate that, Carla. I'll jump back in the queue.

Operator: Thank you. Our next question comes from the line of Anna Glaessgen with B. Riley Securities.

Anna Glaessgen: Thanks for taking my question. Good afternoon, guys. I guess I'd like to turn back to diapers. Clearly very competitive. You know, on the one hand, you introduced new innovation with the diaper redesign. So you would think 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. 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.

Carla Vernon: Sure. Well, I think one of the things that's sometimes masking our overall diaper performance is that our diaper issues we're facing at Target are unique to this quarter. I just want to remind, 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 this time at Target, and we didn't repeat it. So we've seen that in the quarter. We are also experiencing the loss of the gendered prints. So when I look at our diaper business at Target versus at the market ex-Target, it's really quite a tale of two cities.

Outside of Target, year to date, the Honest diaper business is up 5% in 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 that. Those diaper purchases that are at your house. So we look to be continuing to watch the results of the new and diaper, but I'm very encouraged by the fact that the complaints are down 21% for the year.

Anna Glaessgen: Carla, I just want to clarify. I may have misheard. I think you said that ex-Target diapers consumption was up 5%. But I think earlier, you said Amazon was up 3% year to date. So is there a channel that's outgrowing Amazon?

Carla Vernon: I think it's that's a great question, Anna. And so I just want to make sure that I'm getting my math right. What I was talking about with the 3%, and if I said it wrong, then please forgive me, Amazon is up 3% in the quarter. And year to date, they've had stronger growth at the first half of the year. And year to date, ex-Target, our total diaper business is up 5% in consumption. So forgive me if I didn't say that correctly the first time.

Anna Glaessgen: Okay. So the 3% was specific to the quarter. So it's not quarter. So the three and five are not comparable. Okay. That's right. Okay. Perfect. Is there a way some of that 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.

Anna Glaessgen: Got it. Yeah. Because I was gonna ask, you know, clearly, Amazon is the highest growing channel for a lot of companies across the board. Is there any way to share what ex-Target and ex-Amazon, what that other retailer block is kind of growing at? Are they more consistent with Target, or is it more consistent with, you know, maybe a low single-digit decline or you know, flattish?

Carla Vernon: Yeah. I don't really have that information handy with me. But let's make sure we just do a follow-up.

Anna Glaessgen: Okay. Thanks, Carla. Thanks, team.

Operator: Thank you. One moment, please, for our next question. Our next question comes from the line of Owen Rickert with Northland Capital Markets.

Owen Rickert: Hi, Carla. Hi, Curtiss. Thanks for taking my question here. What's the timeline in sequencing for these exits? Are you winding them all down in 4Q? Or will this extend into '26?

Curtiss Bruce: 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.

Owen Rickert: Got it. Thank you. That's Sorry. Go on, Curtiss.

Curtiss Bruce: No. I was just gonna add, you know, 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 savings beginning in 2026.

Owen Rickert: Got it. Thanks. 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?

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

Operator: Thank you. Our next question comes from the line of Shivhana Choudhry with JPMorgan.

Shivhana Choudhry: Hi, thanks for taking our question. I was just wondering a couple of questions. First of all, we are hearing of a heightened promotional environment from other HPC peers. Diapers is no exception. It has 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, the promotion, the price like architecture that you just mentioned, how have these been received? And I have another question. Thanks.

Carla Vernon: Shivhana, let me answer that. As we look at the pricing levers that we've introduced into the market, one of the things that's most visible in the period that we're talking about is that we've introduced a rollback strategy at Walmart, and we're very pleased. We're seeing velocities increasing. We're seeing the market respond very well, which tells us that indeed this is a consumer that in this category is, you know, really giving consideration as they get to that shelf at what is the price point that they can really get in with. And so we like the idea of in this current moment, making sure we're really aligned with the consumer pricing needs, price value needs.

I don't remember the other question. I think the other question you asked was what could you repeat that? How are the retailers taking the

Operator: Shivhana, your line is now open.

Shivhana Choudhry: Hi. Can you hear me? I can hear you. Sorry. We must have had you on mute.

Carla Vernon: No worries. No worries. I was just asking about the level general level of inflation you're seeing in your other core categories such as your wipes and baby personal care?

Carla Vernon: Yeah. You know, 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 gonna 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 entrant really showing growth. So that behavior is very different in our diaper category. Than when we study our baby personal care category, whereas you know we are the leading brand. So we really do drive that category.

And 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 that consumer confidence level and consumer macroeconomic changes affect the categories.

Operator: Thank you. And our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Dana Telsey: Hi. Good afternoon, everyone. With the new 2.0 plan in place or that's being put in place now, what does the new algorithm of the business look like? How do you think about the cadence of next year with any of the streamlining of costs coming in? How do you frame the financial statement? Thank you.

Curtiss Bruce: Yeah. For the question. And so again, the Transformation 2.0 Powering Honest Growth is the two-part program. Focused on getting to our higher margin right to win categories of wipes, personal care, and diapers. And, of course, we are exiting the non-strategic lower margin categories and channels. And the second part of the program will be to optimize the cost structure rightsizing our SG&A and our supply chain footprint.

We do expect that lowering the removing the low margin categories in our continued focus on growing the bottom line faster than the top line, and I think marked by this year in Q2, we had our highest gross margin delivery of over 40% I think it's a proof point for what is possible in the future. The exit of these non-strategic categories is about 20% of the business and these businesses are well below our average gross margin. And again, that gives us confidence that when we get to the new business that we've got a strong potential to drive growth in 2026.

We're happy to share more details about 2026 when we get to our earnings call in February. I think part of the macroeconomic environment that we're in today prevents us from getting more specifics about the potential gross margin structure that we'll have next year.

Operator: Thank you. 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.

Carla Vernon: Thanks so much for joining the call, 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.