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Why Charlotte's Web Stock Unraveled Today

By Rich Smith – Aug 12, 2021 at 11:48AM

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Investors seem to have arachnophobia after weaker-than-expected sales growth.

What happened

Shares of hemp-oil hawker Charlotte's Web Holdings (CWBHF -4.21%) fell 3.9% through 10:20 a.m. EDT after the company reported what appeared to be an earnings beat for fiscal Q2 2021 -- $0.04 per share lost where Wall Street had forecast a loss of $0.05 per share.

That's the good news. The bad news is that Charlotte's Web's revenues didn't measure up to expectations. Instead of the $28.4 million in sales that analysts had forecast, Charlotte's Web reported sales of just $24.2 million.    

Kid looking through a magnifying glass at a spider in a web

Image source: Getty Images.

So what

Charlotte's Web claimed that it expanded its already No. 1 market share position in CBD Q2, and its sales did grow 11.4% year over year. Most sales -- about 65% -- were made direct-to-consumer over the internet, but this revenue stream grew only 1% year over year. Where the company experienced growth, it was in business-to-business sales, which were up 38%.

All of the above is what you'd expect to see in an opening economy in which people resume venturing out to shop at physical stores, and Charlotte's Web confirmed that "many consumers transitioned from online shopping back to brick and mortar retail" in the quarter, noting that "this was especially evident within our largest and most established medical and healthcare practitioner channels."

Now what

What's surprising here is that you ordinarily expect direct-to-consumer sales to be more profitable than the other kind, but in Charlotte's Web's case, it seems the opposite was true. Gross profit margins in the quarter grew 1260 basis points to 65.5%.

What's more, going forward, Charlotte's Web "anticipates [further] gross profit improvements as its new production and fulfillment facility becomes fully operational." With operating costs declining, moreover, I'd say that by and large things are looking up for Charlotte's Web despite the quarterly loss -- and investors selling the stock today may well be making the wrong call.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Charlotte's Web Holdings. The Motley Fool recommends Charlotte's Web. The Motley Fool has a disclosure policy.

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