Charlotte's Web (CWBHF 5.00%) hasn't officially announced when it will release its fourth-quarter results, but based on last year's schedule, the report will likely come out later this month. It is going to be an important period for the hemp producer, as it will either cap off a disappointing fiscal year or represent the start of a turnaround for the business.
In a cannabis industry that has no shortage of revenue growth, Charlotte's Web has been the exception -- posting relatively stagnant numbers for the past few years. For the stock to get out of its rut, investors will need to see some real, tangible progress from the company in Q4. Here's a recap of the company's struggles and what investors should look for in the next earnings release.
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Why investors aren't bullish on the stock
The hemp producer was a lot more appealing when there weren't many product options for cannabis consumers. But now that Virginia has become the 16th state to legalize recreational marijuana and 36 states permit pot for medical use, there are more producers out there catering to consumers looking for a high or relief from pain through tetrahydrocannabinol (THC).
That means more competition for Charlotte's Web, which helps explain why its products are in more locations but its sales numbers haven't improved in turn. The company last released its earnings results on Nov. 12, 2020, and sales for the period ending Sept. 30, 2020 totaled $25.2 million and increased by just 0.4% from the previous year. That was also the highest revenue number the company had ever attained. Sales have struggled to push much higher past the $25 million-mark, despite first reaching that level more than a year ago.
The only place where the business seems to be growing is in terms of the number of locations carrying its products. As of last quarter, that tally stood at around 22,000 -- up more than double from the 9,000-plus "doors" that its products were behind a year ago. But that number is meaningless unless it translates into sales growth.
Investors have noticed the lack of realized revenue growth. While Horizons Marijuana Life Sciences ETF has risen 74% over the past year, Charlotte's Web has underperformed the cannabis industry indicator, falling 8%.
What to look for next quarter
There is no way around it -- for the Q4 report to be a good one for the company, Charlotte's Web will need to produce a better revenue number. Investors can realistically stop at the top line when looking at the next earnings report because without any progress there, it's unlikely that the rest of the financials will be any better. The company has incurred a loss in each of the past five quarters, and expenses have been on the rise as Charlotte's Web has been building a 137,000 square foot facility. Operating expenses over the last three quarters totaled $81.1 million and were 65.2% higher than they were a year ago.
In order to offset some of those rising expenses, the top line is going to need to be a lot stronger. Last quarter, Abacus Health Products, which Charlotte's Web acquired in 2020, contributed $2.5 million in revenue and could be pivotal in helping the company deliver stronger results this coming period. Another reason the business could do better is that in Q3, its business-to-business sales dropped 29.2% due to COVID-19. But CEO Deanie Elsner said that the company was "seeing signs of improvement" in that segment. Its direct-to-consumer market, which includes online sales, showed much stronger growth, rising by 27.5% from the prior-year period.
It isn't a horrible outlook for Charlotte's Web, but it is by no means certain that things will improve in Q4. Even if the company does generate a stronger sales number, it still might not be enough to get its bottom line out of the red. With a $6.6 million loss in Q3, even hitting $30 million in sales wouldn't have been enough for Charlotte's Web to finish in the black.
Should you buy Charlotte's Web stock?
I'm not optimistic that things will get better for Charlotte's Web in Q4 -- or over the long run. Consumers will only have more choices for cannabidiol (CBD) or THC-based products in the months and years ahead, with marijuana legalization continuing to progress across the U.S. That means more competition and a tougher time for the hemp business to grow and stay out of the red.
With so many other cannabis investments out there, investors are better off buying shares of companies that are already either profitable or (at least) consistently growing sales by double digits.
