The Honest Company’s not terrible but not very good 2016

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The Honest Company has become a beloved brand in many homes in its five-year history. But the consumer products business has also taken its lumps in 2016.

It’s currently fighting civil lawsuits brought against it by consumers who say they were misled by the company’s labeling of various products, including its laundry detergent and sunscreen.

Relatedly, Honest was called out by The Wall Street Journal earlier this year after the outlet commissioned two independent lab tests of the company’s laundry detergent and determined it contained an ingredient — sodium lauryl sulfate — that’s commonly found in other products but that Honest has warned consumers not to use. (Honest has disputed the labs’ findings and says its detergent instead uses a different compound called sodium coco sulfate. Still, it’s now reportedly reformulating its detergent without that second compound.)

The company also — gasp — failed to go public or get acquired this year, despite a Bloomberg report back in February that it was exploring an IPO with the help of Morgan Stanley and Goldman Sachs and more recent reports (confirmed by TechCrunch) that it was talking with several big consumer products giants about a sale.

Among those reported suitors: Unilever, which soon after agreed to acquire a different company that makes “green” household products — Seventh Generation.

Presumably, each of these developments has been humbling for a young company that’s reportedly generating $300 million in annual revenue and was said to be valued at $1.7 billion in August 2015, when it raised its most recent round of funding from investors.

While Honest wasn’t the first consumer products outfit to market itself as safer than its predecessors, it has garnered a lot of attention from customers, investors and acquirers — as well as been a target for critics, it says — because of its star co-founder, actress Jessica Alba.

Not that the company is throwing in the towel. Far from it, Honest instead appears to be undergoing a shift, both away from its origins as an e-commerce business, as well as from the broader non-toxic household products that it was originally focused around. In fact, don’t be surprised if Honest eventually goes public or gets acquired as primarily a cosmetics company.

First, there’s the opportunity. While household products may be a much bigger market — and we aren’t suggesting that Honest will abandon this territory — the U.S. beauty and personal care market alone was reportedly valued at $80 billion last year. It pays to sell lipstick. Estée Lauder, the New York-based maker of prestige women’s products, trades at a roughly $30 billion market cap right now. Meanwhile, Paris-based L’Oréal, one of the biggest personal-care companies in the world, has a market cap of $93.6 billion.

One could also see how Honest, which became popular with parents willing to pay a premium to avoid certain chemicals, might change alongside Alba, who remains the face of the company. Though she was a parent to two very young daughters when the company was founded in 2011, she may be less interested in selling diapers, detergent and baby formula as her children grow up. (New parents may feel less of a connection to her than several years ago for the same reason.)

Yet the bigger indicator that the company is switching up its strategy came last week when the fashion industry trade journal Women’s Wear Daily reported that Honest is cutting 80 employees, or roughly 14 percent of its workforce. Among those leaving are CFO and COO David Parker, and co-founder and president Sean Kane, who is reportedly stepping back to start a new company. Parker was previously CFO of the market research consultancy Lightspeed Research. Kane was previously a VP at the price-comparison platform PriceGrabber.

Honest CEO Brian Lee told WWD that the job cuts reflect Honest’s growing evolution away from its reliance on e-commerce and a focus on more offline channels. But Lee also mentioned wanting to grow Honest’s beauty business and to expand internationally — points that Honest’s chief marketing officer, Chris Thorne, also made on stage at our Disrupt show in New York earlier this year.

Indeed, the company launched a makeup and skin care line in September 2015 under the label Honest Beauty, and it seems to be making a push to make those products, which are available for order online, much more widely available on shelves. Most notably, Honest has been placing its skin care and makeup products in a growing number of Ulta locations, a chain of more than 700 beauty stores in the U.S. Thorne also said to expect standalone retail locations of Honest Beauty. (So far, it has only opened and closed a pop-up store in L.A.)

Honest Beauty further launched a hair-care line recently, and WWD reported in October that it’s planning to  launch in Canada. That same piece also reported that Honest Beauty is looking to move into Western Europe and Australia. TC sources have also said for some time that the company is looking to expand into Europe.

Honest Beauty is still a small business in the grand scheme of things. WWD has reported that brand had reached “more than $10 million in retail sales” as of October. But WWD wrote in a separate story that the new label is “upping its retail presence at Ulta by 20 percent” and that it recently hired celebrity makeup artist Daniel Martin as a creative color consultant to help with future product development.

Will it grow to become Honest’s largest revenue stream? It’s too soon to know, and if Honest gets acquired any time soon, we may never find out.

Still, faced with lawsuits over some of its household-related products — suits that Honest has described as “baseless” — it’s easy to imagine that the company is having more fun developing concealers and hairsprays right now, and looking for new ways to ensure that for everyone concerned, 2017 is a better year for Honest than 2016 proved to be.