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Charlotte’s Web Reports Mixed Q1 Performance

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Today, Charlotte’s Web Holdings (NYSEARCA:CWEB)(OTCMKTS:CWBHF) reported a mixed first-quarter performance. For the quarter ended on March 31, the company reported revenues of $21.7 million, which beat analysts’ expectations of $20.78 million. However, the company’s adjusted EBITDA was negative $5.7 million—slightly lower than analysts’ expectation of negative $5.6 million. Charlotte’s Web CEO Deanie Elsner said, “The first quarter revenue was ahead of expectations driven by our strong DTC Ecommerce sales enabled by our new technical platform and capabilities. Operationally we have not had any business disruptions from COVID-19 and have adapted well to the remote working environment.”

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Charlotte’s Web’s revenue fell marginally

Charlotte’s Web’s revenue fell 0.9% YoY (year-over-year) from $21.7 million in the first quarter of 2019. The decline in B2B (business-to-business) sales dragged the company’s revenue down. However, growth in DTC (direct-to-sales) sales offset some of the declines. The company’s DTC sales grew 29.4% to $14.1 million during the quarter. Meanwhile, the company’s B2B fell by 31.5% to $7.4 million. Charlotte’s Web blamed increased competition in the natural retail channel and the FDA’s failure to set regulatory guidelines for the F/D/M (food/drug/mass) channel for the decline in its B2B business.

The growth in the DTC business increased Charlotte’s Web’s revenue contribution to its total revenue from 50.2% in the first quarter of 2019 quarter to 65.6%. More online traffic and high conversion rates due to the company’s marketing and social media programs drove its DTC sales. The company’s new consumer acquisitions increased by 25% YoY, while its conversion rates grew by 77%.

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Charlotte’s Web’s adjusted EBITDA falls

As expected, Charlotte’s Web reported a negative EBITDA in the first quarter. The company’s adjusted EBITDA declined from positive $4.5 million in the first quarter of 2019 to negative $5.7 million. Lower sales and a decline in the gross margin dragged the company’s EBITDA down. For the quarter, the company’s gross margin declined from 72.8% to 69.8%. Meanwhile, Charlotte’s Web’s operating expenses also increased by 76.5% to $23.3 million. The company’s operating expenses increased due to investments to expand its capacity and also make it to a CPG (consumer-packaged goods) company.

Liquidity

By the end of the quarter, Charlotte’s Web’s cash was at $53.0 million. During the quarter, the company utilized $14.9 million for operations. Meanwhile, the company used just $3.7 million in the first quarter of 2019. Charlotte’s Web is constructing a production and fulfillment center that’s 137,000 square feet to support its growth, which increased the company’s outflow during the quarter.

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Outlook

During the first quarter, Charlotte’s Web expanded its footprint to over 11,000 retailers. The company also signed its first national retail partner for pet products. The company is in discussions with other national pet retailers. Meanwhile, on March 22, the company signed an agreement to acquire Abacus Health Products in an all-stock deal. The company’s management expects the deal to close late in the second quarter or early in the third quarter. However, Charlotte’s Web requires Abacus shareholders’ approval. The deal also has to satisfy customary closing conditions. Abacus has an expanded range of topical CBD SKUs sold through more than 12,000 retail units, which include the three largest US pharmacy chains. So, Charlotte’s Web expects to acquire 34.7% of the market share in the F/D/M retail segment through this acquisition.

Speaking about the 2020 expectations, Charlotte’s Web CFO Russ Hammer said, “We are modeling for revenue growth of 10% to 20% in 2020 and a return to positive adjusted EBITDA by the end of the year.” He also said, “As our new facilities come online later in the year, we expect to harness cost savings through our vertically integrated supply chain to support meaningful increases in adjusted EBITDA, and then continue to leverage against higher revenue as we enter 2021 and 2022.”

YTD stock performance

So far this year, Charlotte’s Web has lost 46.9% of its stock value. The FDA’s warning letter in November 2019, concerns about dilution due to new equity offerings, and weakness in the cannabis sector appear dragged the stock down. Meanwhile, strong first-quarter sales could drive the company’s stock up. Charlotte’s Web has underperformed its peers and cannabis ETFs this year. YTD, Cresco Labs (OTCMKTS:CRLBF) and Curaleaf Holdings (OTCMKTS:CURLF) have fallen by 40.8% and 9.7%, respectively. The ETFMG Alternative Harvest ETF (NYSE:MJ) has also declined by 36.0% during the same period.

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