Charlotte’s Web: Are Its Q3 Earnings Good or Bad News?

Charlotte’s Web Holdings (CWEB) (CWBHF) reported its third-quarter earnings yesterday. After its earnings release, its stock closed at 12.28 Canadian dollars on the Toronto Stock Exchange (or TSE), 7.53% lower than its previous closing price.

Meanwhile, the stock closed at $9.29 on the OTCMKTS, 7.56% lower than the previous day. The company’s stock is down by 31.32% on the TSE and by 18.86% on OTCMKTS in 2019 YTD (year-to-date). Why is the stock falling? Let’s find out.

Charlotte’s Web Holdings missed analysts’ revenue and EBITDA estimates

In the third quarter, Charlotte’s Web’s revenues grew 41.21% year-over-year to $25.05 million. However, revenues fell short of the consensus estimate of $32.5 million. The company also reported non-GAAP earnings per share of -$0.01, lower than the consensus EPS estimate of $0.05. The company’s revenues grew YoY by 49.58% to $71.74 million in revenues in the first nine months of 2019.

Charlotte’s Web attributed its third-quarter revenue performance to double-digit growth in both its B2B (business-to-business) and B2C (business-to-consumer) sales. In the third quarter, the company’s B2B sales and B2C sales rose 66.4% and 38.7%, respectively, year-over-year. B2B and B2C channels also accounted for 48.8% and 51.2% of the company’s third-quarter revenues, respectively.

In the third quarter, Charlotte’s Web’s gross margin narrowed by 6.24 percentage points YoY to 71.39%. Its gross profit rose YoY by 29.71% to $17.86 million. The company’s adjusted EBITDA fell 86.79% YoY to $0.7 million, missing the consensus of $6.17 million.

The company’s third-quarter EBITDA margin of 2.8% fell YoY by 27.1 percentage points and missed the consensus of 20.6%. The company attributes the lower EBITDA to ongoing investments in personnel and infrastructure for the FDM (food, drug, and mass) channel.

Fiscal 2019 revenue guidance

In its first-quarter earnings call, Charlotte’s Web Holdings had guided for fiscal 2019 revenues of $120 million–$170 million. The company reiterated its guidance in its second-quarter earnings call. However, the company attributed the possible variations in actual fiscal 2019 revenues to FDA communications and the timing of distribution channel expansion.

During its third-quarter earnings call, the company significantly reduced its revenue guidance to $95 million–$105 million. This guidance implies fourth-quarter revenues of $23 million–$28 million, a YoY rise of 7% to 30%. Charlotte’s Web Holdings anticipates stronger fourth-quarter performance based on historical trends. The company expects an uptick in its B2C business in November and December.

Charlotte’s Web expects its fiscal 2020 revenues to grow 40%–50% YoY. This forecast doesn’t include the company’s performance in international markets.

However, the company expects revenues to grow at a faster pace after receiving clearer FDA regulations in the ingestible CBD (cannabidiol) space. The company expects FDA guidance by the end of Q1 2020. However, the company also highlights the possibility of the agency finalizing regulations by mid-2020 to mid-2021.

Margin and EBITDA guidance

Charlotte’s Web expects its gross margins and profits to trend similar to a CPG (consumer packaged goods) business. The company expects an ongoing shift in revenue mix toward the FDM channel to push down its gross margins.

However, the company also expects the dollar value of its gross profits to increase due to a rise in sales volume. Charlotte’s Web also expects to optimize its spending and reduce operating expenses as a percentage of revenues in Q2 2020.

The company has guided for low EBITDA margins in the first half of 2020. However, the company expects a double-digit adjusted EBITDA margin in the second half of 2020. The company also expects a new production facility to improve manufacturing efficiency and increase its adjusted EBITDA by late 2020.

What is working in favor of the company?

During its third-quarter earnings call, Charlotte’s Web highlighted the ongoing construction of its new 137,000-square-foot GMP-grade production facility. The company expects this facility to increase its production capacity tenfold. The company also expects this facility to come online in early 2020 and become fully operational by the end of 2020. Finally, this facility has the potential to support the company’s $2.0 billion worth of sales.

Charlotte’s Web Holdings has significantly expanded its distribution capabilities across retail partners and geographies. At the end of the third quarter, the company had placed its products in more than 9,000 retail outlets. The company expects the rapid growth in FDM to increase its presence in 10,000 retail outlets.

Charlotte Web Holdings expects rapid growth in its retail presence and expansion of portfolio in the FDM channel to be its biggest growth driver in fiscal 2020. The company anticipates growth in its B2C channel and natural channel in areas such as product portfolio and distribution in 2020.

The company is also focusing on its newly launched products such as gummies and pet lines. At the end of the third quarter, these new products accounted for 10% of the company’s portfolio.

Charlotte’s Web’s FDM channel strategy

Charlotte’s Web Holdings has been building up production and distribution capabilities to target the CBD-based FDM market. The company is focusing on increasing its distribution network as well as portfolio depth. The company, however, expects increased revenue volatility due to rising FDM sales.

In its third-quarter earnings call, the company highlighted the FDM channel as a major driver of its B2B retail sales. The company currently sells only topical products through the FDM channel. These products account for four out of 45 SKUs (stock-keeping units) in a store carrying all of its products.

However, topicals account for 10%–15% of the company’s portfolio sales. The FDM channel accounted for around 76% of the company’s new retail doors in the third quarter. The remaining 24% were associated with the company’s natural channel. A lack of clarity about regulations related to ingestible CBD products and especially dietary supplements has restricted the company’s growth in the FDM business.

Charlotte’s Web’s natural channel strategy

In its third quarter, Charlotte Web Holdings reported a 27% YoY increase in natural channel sales. The company offers topicals and ingestibles through this channel. The company has been seeing increasing pricing pressure in this space. However, the company was less affected due to its strong brand position.

B2C strategy

According to the company’s third-quarter earnings call, B2C is an important margin driver for Charlotte’s Web Holdings. The company has increased its customer reach through extensive marketing programs.

The company also launched a new e-commerce platform in October. In the third quarter, it reported a 68% YoY rise in customer impressions. Charlotte’s Web Holdings expects to add 10,000 new registered customers to its database every month. The company also reported a 57% YoY rise in revenues from its newly launched 12-item pet line.