On August 5, The Honest Company (NASDAQ:HNST) reported second-quarter results that pulled in two directions at once. Total revenue dropped 10.9% to $83.3 million, but net income jumped to $10.7 million from $3.9 million a year earlier. Gross margin ballooned 800 basis points to 48.4%. The company also raised its full-year outlook. The headline numbers look great. The details underneath them tell a more complicated story.
Strip out the topline decline and a different picture appears. Organic revenue, which excludes the exited apparel and website fulfillment businesses along with Canadian sales, rose 6.7% to $80.2 million. Tracked channel consumption climbed 7.7% for the quarter ended June 28, well ahead of the 2.3% growth in the categories Honest competes in. That gap suggests the company is taking share, not just riding a rising tide. Growth in wipes and personal care products is doing the heavy lifting, offsetting a continued decline in diapers.
The balance sheet backs up the growth story. Cash and cash equivalents rose to $105.9 million as of June 30, up $33.8 million, with no debt outstanding. Operating expenses fell $4.1 million to $30.8 million, and SG&A as a percentage of revenue dropped roughly 380 basis points on operational efficiencies. Honest also bought back 5.6 million shares for $18.7 million at an average price of $3.35 during the first half of 2026. Management followed all of this by raising full-year revenue guidance to $319 million to $325 million and lifting its Adjusted EBITDA range to $23.0 million to $25.0 million.
The 800 basis point gross margin jump is not what it appears. CEO Carla Vernón's own numbers show why: after excluding tariff refunds, the discrete costs of the company's Powering Honest Growth exit, and the partial liquidation of leftover apparel inventory, Underlying Adjusted Gross Margin was 43.8%, up a more modest 340 basis points. Net income tells the same story from a different angle. The $10.7 million headline figure shrinks to $5.1 million in Underlying Adjusted Net Income once tariff refunds and Powering Honest Growth costs are stripped out. Adjusted EBITDA of $14.5 million becomes $7.8 million on the same basis.
None of that erases the progress, but it does mean a large share of this quarter's profit improvement came from items that will not repeat every quarter. And the topline itself is still shrinking. Revenue fell 10.9% year over year, driven by the strategic exits and the ongoing diaper decline, even as organic revenue grew. Investors reading only the press release headlines could walk away with a rosier picture than the underlying numbers support.
The number of hedge funds holding Honest fell from 19 in the prior quarter to 15 in the most recent one, a retreat rather than an accumulation. Short interest sits at 9.91% of float, a level that signals a real bear camp rather than routine hedging. Meanwhile, as of September 4, the stock trades at a forward P/E of 46.73, a multiple that assumes substantial earnings growth ahead. That combination is worth sitting with: a rich multiple, fewer funds sticking around, and a meaningful chunk of shares betting against the stock all at once.
The tension in this report is between a real, share-gaining organic growth story and a set of headline profit numbers inflated by tariff refunds and one-time inventory actions. For the growth story to matter, wipes and personal care gains need to keep outrunning the diaper decline without another round of one-time boosts to lean on. For the skeptics to be vindicated, the gap between headline and underlying profitability would need to widen again once the tariff refunds are gone. Both readings are sitting in the same earnings release.
While we acknowledge the potential of HNST as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock.
READ NEXT: 10 Best Future Stocks to Buy Under $10 and 12 Best Performing Semiconductor Stocks to Invest In.
Disclosure: None. Follow Insider Monkey on Google News.