Charlotte's Web (OTC:CWBHF) released its fourth quarter and year-end results on March 24. The company finished the year with revenue of $94.6 million, which was up more than 36% from the $69.5 million it reported in 2018. Charlotte's Web also reported a loss of $15.6 million in 2019 compared to a profit of $11.8 million in the prior year.
Although the company posted a profit in three of its past five quarters, the last two have been in the red. And that's a trend that could continue, as there are three problems investors should consider before investing in Charlotte's Web today.
1. Lack of revenue growth despite more stores carrying its products
In one sense, Charlotte's Web has done well in making its products available in more stores throughout the country. As of the end of 2019, the company's products were in 11,000 retail stores. With its recent acquisition of Abacus Health, which also makes cannabidiol (CBD) products, Charlotte's Web will now have a presence in 15,000 locations.
And while that's great news, the problem is that being in more locations hasn't translated into stronger sales numbers for the company. As of Dec. 31, 2018, Charlotte's Web products were in 3,680 locations.
Although the 36% sales growth is good, it looks a bit less impressive given that the number of retail doors has tripled during the past year. And in the fourth quarter alone, revenue rose by just 6% from the $21.5 million Charlotte's Web recorded a year ago. Q4's revenue figure of $22.8 million is also the lowest the company has recorded since the first quarter of 2019 when its top line came in at $21.7 million. Meanwhile, the company's retail presence has been increasing during that time.
It's not as if Charlotte's Web is seeing a shift from retail to online; in 2019, the direct-to-consumer segment of its business made up 57% of revenue compared to 56% in 2018.
2. Inventory suggests the company is struggling to move product
The company's inventory number only confirms that Charlotte's Web is running into challenges growing its sales. Despite the increase in revenue, Charlotte's Web has nearly three times the inventory that it had on hand at the end of 2018. From a balance of $24 million worth of inventory on Dec. 31, 2018, that number ballooned to more than $64 million by the end of the following year. What's even more concerning is that that's after the company wrote down its inventory with a provision worth $15.9 million in 2019. Most of the provision came in Q4 where it recorded a charge of $13.9 million, with $12 million of that relating to the company's finished goods. In the notes to its financials, Charlotte's Web says: "This increase is primarily due to expiration of products prior to estimated sales."
In the previous year, Charlotte's Web recorded an inventory provision of just $399,000. In the company's frequently asked questions listed on its website, Charlotte's Web says its hemp oil products should see no degradation for up to one year, if stored properly. Other experts also say that cannabis begins to degrade around the one-year mark.
As of Dec. 31, the company had $37.5 million worth of inventory in harvested hemp and seeds. That's more than triple the $10.5 million it had on Dec. 31, 2018. With lackluster revenue growth, it wouldn't be surprising if, a year from now, Charlotte's Web has to adjust down its inventory number yet again.
3. Expenses continue to climb
Slow-moving inventory is one problem, but when combined with rising costs, what you're left with is the likelihood of greater losses ahead in future quarters. And that's a problem that's apparent with Charlotte's Web. In 2019, the company's operating expenses doubled from $37.3 million to $75.4 million. It looks even worse when taking revenue into account: In 2018, operating expenses were just 53.7% of sales compared to 79.7% in 2019.
While the company's likely to scale back many of those expenses in the wake of the COVID-19 pandemic and tougher economic times ahead, it's become a much more difficult job now than it would have been before the company's costs became so bloated. In the general and administrative section of its expenses, the company more than doubled its personnel-related expenses, from $13.1 million a year ago to $26.9 million this past year.
Investors should avoid Charlotte's Web until it can address these issues
Year to date, shares of Charlotte's Web are down more than 42%. That's slightly worse than the Horizons Marijuana Life Sciences ETF, which has fallen 40% over the same period. However, its relatively low price is not enough of a reason for investors to buy shares of Charlotte's Web today. Until the company can show that it's growing sales and is able to return to profitability, it's too risky of a buy, as a weaker economy in 2020 could only exacerbate the cannabis stock's problems even further.