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3 Worrisome Trends in Charlotte's Web's Q3 Results

By Keith Speights - Nov 13, 2019 at 12:45PM

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Several things aren't headed in the right direction for the CBD leader.

There's no question that Charlotte's Web Holdings ( CWBHF 0.81% ) has been a phenomenal growth stock over the last few years. The company led the charge as cannabidiol (CBD) products hit the mainstream in the U.S. and reaped the benefits of the CBD surge.

Many thought that 2019 would really be the year for Charlotte's Web to hit its stride after hemp was legalized in the U.S. in December 2018. But it's been one step forward and two steps back for the company so far this year.

You can add another step backward after Charlotte's Web reported its third-quarter earnings results before the market opened on Wednesday. In particular, there were three worrisome trends in the CBD leader's Q3 update.

Person in white coat wearing blue gloves holding a bottle of CBD oil next to a cannabis plant.

Image source: Getty Images.

1. Weak revenue growth

You'd think that Charlotte's Web's sales would be soaring with CBD more popular than ever. And compared to the prior year, sales are soaring. The company announced Q3 revenue of $25.1 million, up nearly 42% year over year.

However, that revenue total reflects very weak quarter-over-quarter growth: Charlotte's Web generated revenue of $25 million in the second quarter of 2019. It also badly missed the consensus analysts' estimate of $32.5 million.

In two of its last three quarters, Charlotte's Web has delivered disappointing sequential revenue growth. This trend is concerning, especially considering that the company has more than doubled the number of retail locations carrying its products so far this year.

2. Deteriorating bottom line

In August, Charlotte's Web then-CFO Rich Mohr said that the company expected revenue to grow faster than operating expenses in the second half of 2019. Those words were encouraging, since Charlotte's Web earnings declined year over year in Q2.

But Mohr's prediction didn't pan out in the third quarter. Charlotte's Web reported a net loss in Q3 of $1.3 million, or $0.01 per share. Wall Street analysts expected positive earnings of $0.05 per share.

The reality for Charlotte's Web was exactly the opposite of what Mohr said would happen. As we've already discussed, quarter-over-quarter revenue growth was practically nonexistent. However, the company's operating expenses doubled from the prior-year period and jumped 21% from the second quarter.

3. Falling guidance

Six months ago, Charlotte's Web expressed confidence that its full-year 2019 revenue would fall between $120 million and $170 million. Three months ago, the company reiterated that guidance but hedged a little. Then-CFO Mohr stated, "Where we fall within this range will substantially be determined by future developments with the FDA, associated retailer response, and the timeline of these events."

Charlotte's Web isn't even hedging now. CEO Deanie Elsner said that the company expects full-year 2019 revenue in the range of $95 million to $100 million. That's not only well below what Charlotte's Web has been projecting, but it's also below the lowest revenue estimate among analysts.

Elsner added that the company should "maintain growth rates for 2020 in the 40% to 50% range." But with the company overpromising and underdelivering on its 2019 guidance, some might question whether Charlotte's Web will be able to deliver on Elsner's projection for 2020.

What could push the worries aside

There's no sugarcoating for these worrisome trends. However, one thing could easily push all of these worries aside: a positive decision by the FDA on CBD ingestible products.

Currently, most of Charlotte's Web's big retail partners in the food and drug industries only sell its CBD topical products because they're waiting for clarity from the FDA on ingestible products. But ingestible CBD products enjoy much higher consumer demand.

CEO Elsner said that Charlotte's Web "remain[s] hopeful that broad political support will help drive quick regulatory resolutions in 2020." If her hopes become reality, Charlotte's Web's current problems will be solved. Until that happens, though, the trends might not be friends to the CBD pioneer.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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