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6 Things You Overlooked in Pot Stock Charlotte's Web's First-Quarter Report

By Sean Williams - May 30, 2019 at 6:06AM

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The headline numbers simply don't tell the full story.

Whether you're a relatively new investor or someone who's been putting your money to work for years or decades, one thing you likely understand is that "earnings season" is just a myth. From the beginning of the year to the end, publicly traded companies are reporting their quarterly or annual results, and the marijuana industry is no exception.

Although we're past the traditional confines of earnings season for Wall Street, it didn't stop hemp-oil and hemp-derived cannabidiol products manufacturer and distributor Charlotte's Web Holdings (CWBHF 8.00%) from reporting its first-quarter operating results after the closing bell on Tuesday, May 28.

Two gloved hands holding a full vial and dropper of cannabidiol oil in front of a hemp plant.

Image source: Getty Images.

An under-the-hood look at Charlotte's Web's first-quarter performance

Charlotte's Web already reported preliminary data on May 8, so Wall Street and investors had a good idea of what to expect when the company lifted the hood on its first-quarter performance. Ultimately, organic sales grew 66% year over year, to $21.7 million, with gross profit margin hitting 72.8%, not including fair-value adjustments to biological assets. The company also notes that its products were in more than 6,000 retail doors as of the end of March, representing a gain of better than 2,300 retail doors during the quarter.

The end result of this growth, after a substantial uptick in operating expenses, was $2.3 million in net income, or $0.02 per diluted share, down a bit from the $3.1 million it earned in Q1 2018, equating to $0.04 per then-diluted share. 

Why the decline in net income if the company is performing so well? According to management, it's the result of ongoing investments in infrastructure and personnel needed to "build its internal capabilities to support expected revenue growth for the remainder of 2019 and beyond." In other words, you've got to spend money to make money, which is precisely what Charlotte's Web is doing in this instance.

Did you overlook these key facts and figures?

But if you focused solely on the headline numbers in Charlotte's Web's first-quarter report, you likely missed out on some key pieces of data and discussion. Here are six important facts and figures you should know.

An accountant chewing on his pencil as he closely examines figures from his printing calculator.

Image source: Getty Images.

1. Sequential quarterly sales growth was the slowest on record

As much as I personally like to praise Charlotte's Web's growth opportunity and its push into profitability before most pot stocks, not every aspect of its first-quarter report was good news. For example, sequential quarterly sales growth almost slowed to a crawl in the first quarter ($21.7 million in Q1 2019 versus $21.5 million in Q4 2018), and it was certainly the weakest sequential sales growth in the company's short history.

Not much in the company's press release offers an explanation as to why sales virtually flatlined from the sequential fourth quarter. However, my suspicion is that the company had maxed out its extraction yield from the 300 acres of hemp it had planted, thereby putting an interim ceiling on very near-term sales, despite the massive increase in retail doors.

But as you'll note in the next point, this minuscule sequential sales growth is likely only a one- or two-quarter issue.

2. Charlotte's Web is planting more hemp in 2019 than first announced

A second interesting factoid is that the earnings press release notes Charlotte's Web's intention to plant 700 acres of hemp in 2019 (and beyond) to account for rapidly rising demand. That's more than double what the company planted last year, and is even more than the company alluded to just three weeks prior.

In the company's preliminary first-quarter results press release, now-former CEO Hess Moallem said:

We planted 300 acres of hemp in 2018 and harvested 675,000 pounds of raw hemp compared to 63,000 pounds in 2017. For the 2019 season we are doubling the acres planted to ensure we will have the volumes required to meet anticipated demand through 2020 and into 2021. We share in the market's enthusiasm and are confident in our long-term opportunity to increase our brand and market leadership position.

But the company didn't double its acreage... it more than doubled it to 700 acres from 300. That moves the aforementioned sales ceiling even higher for 2019 and beyond. 

Two miniature shopping carts, with one holding a cannabis flower and the other carrying cannabidiol oil vials.

Image source: Getty Images.

3. Retail channel sales rose to 51% of total revenue

When the company released its preliminary Q1 results, it noted that roughly half of its sales would be direct-to-consumer. This means that having 51% of sales derived from retail stores more or less jibes with what it said three weeks ago.

But what you may not have noticed is that retail channel sales as a percentage of total sales rose from 47% to 51% year over year. This isn't entirely surprising as the company has pushed its oils, capsules, and topical products into new doors and national retailers. The downside, though, is e-commerce sales (i.e., direct to consumer) usually offer higher margins. Thus, even though Charlotte's Web's visibility is increasing, it could face slight margin pressure as a greater percentage of sales moves to physical outlets as opposed to e-commerce.

4. It's now a CBD pet-market player

In case you missed it, Charlotte's Web also threw its hat, or should I say paw, into the ring as a cannabidiol (CBD) products player for pets.

According to the Brightfield Group, which is already on record calling for a compound annual growth rate (CAGR) in global CBD sales of 147% between 2018 and 2022, the CBD pet market could be worth $1.16 billion worldwide by 2022 (representing a 151% CAGR between 2018 and 2022). Just a few weeks ago, Charlotte's Web launched an all-new lineup of 12 hemp-extract products being marketed under the PAWS brand. This includes hemp-extract flavored chews, flavored and unflavored oils, and a topical balm for pets. It may not be a major revenue producer, but it's a rapidly growing channel that should nevertheless be on investors' radars. 

A researcher in a white lab coat with a clipboard taking notes in the middle of a hemp grow farm.

Image source: Getty Images.

5. A major decision by the FDA on CBD is upcoming

It's worth pointing out that Charlotte's Web's first-quarter operating results press release devotes a few paragraphs to the passage of the Farm Bill in December, which legalized hemp production, and the May 31 public hearing by the Food and Drug Administration (FDA) on regulating hemp-derived CBD.

Although CBD products are mostly legal throughout the U.S., the FDA has put its foot down on CBD additives in food and beverages. This public hearing, along with additional discussions, will help the FDA shape its policy on whether or not to allow CBD to be added to food and beverages. A favorable policy here would be a feather in the cap for a company like Charlotte's Web.

6. Charlotte's Web's CEO has a background in the food industry

Last but not least, Charlotte's Web's newly appointed CEO, Deanie Elsner, brings a boatload of experience over from the food industry.

According to the press release announcing her hiring, Ms. Elsner served as the President of Kellogg's Snack Business Unit, which is the largest business unit in the company's portfolio, and served in various leadership positions for over two decades with Kraft Foods, which is now part of Kraft Heinz. These are packaged-goods giants that operate globally, which means that Ms. Elsner is the perfect person to lead Charlotte's Web's push into food products, assuming a positive decision on CBD additives in food by the FDA.

Big things are happening at Charlotte's Web, and the headline earnings figures simply don't tell the entire story.

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