Charlotte’s Web (CWBHF): Patience Should Reward Long-Term Shareholders

Charlotte’s Web (OTCQX:CWBHF), for a time, was one of the most recognizable names in the cannabis sector, but since cannabis fell out of favor from optimism that expected results that weren’t sustainable in the short term, it took down the whole sector, including the CBD specialist.

CWBHF soared to a high of over $25.00 per share on April 1, 2019, quickly fell to about $11.00 per share, and temporarily rebounded to a little under $24.00 per share on August 8, 2019, before its share price fell off a cliff, eventually collapsing to its 52-week low of $0.355 on September 27, 2022.

Since then, it jumped to about $0.85 per share before pulling back to the $0.65 per share it is trading at as I write.

In this article we’ll look at some of the numbers from its recent earnings report, some of deals it’s making to move the company forward, and why patient investors will be rewarded over the long term.

Latest numbers

Third quarter revenue was $17 million, down $6.7 million, or 28.1 percent from the $23.7 million in revenue the company generated in the third quarter of 2021, and down $1.8 million from the prior quarter’s revenue of $18.8 million. Revenue was down in direct-to-customer (D2C) and business-to-business (B2B) retail outlets.

Among the headwinds slowing growth was physical retailers were cutting back on shelf space, with overall CBE distribution points falling by approximately 20 percent from 2021. While that had an impact on the performance of the company, with its distribution points down 14 percent year-over-year, it retained more shelf space than its competitors because its “products have the highest velocity in the category with total distribution points.”

Another headwind was consumers moving toward lower-cost gummies in response to concerns over economic conditions. In the third quarter gummie sales were 37 percent of the company’s revenues, up 7 percent from the third quarter of 2021.

The largest impact concerning business-to-customer (B2C) revenues was the decline in traffic to its e-commerce site, something it has to improve in order to drive sustainable growth in the future.

The other headwind cited by the company for the decline in revenues was the change in mix in B2B and B2C. In most products B2B sales has higher price points that B2B, which deliveries wider gross margins.

Based upon the shelf issue mentioned above, B2B shipments declined in the reporting period, with revenue falling to $5.3 million in the quarter, down 38.1 percent, or $3.3 million year-over-year.

Some of that is being mitigated by signing up new distributors, but management said it’s not seeing the benefit of those wins because it takes months for the process to bring products to the retail shelves.

D2C revenue was $11.8 million, down $3.4 million or 22.5 percent from last year in the same reporting period. That was attributed to a decline in traffic to its e-commerce site. Some good news there is when customers do visit the site, conversion rates were up 1.1 percent from the third quarter of 2021. We’ll get into it later in the article, but its partnership with MLB should help to drive traffic to its e-commerce site.

Gross profit was $8.9 million, or 52 percent of revenue against the $14.9 million and 62.9 percent of revenue in the same reporting period in 2021.

Gross margin in the quarter was 52.5 percent, down from the high 50s to low 60s modeled by the company for revenue that exceeds $22 million. The primary reason for that was the increase in sales of gummies and the decline in sales of tinctures. Tinctures are produced at the company’s facility and command wider margins, while gummies are sourced out, resulting in the lower gross margin.

SG&A were $15.1 million (excluding a one-off $4.1 million credit related to the pandemic), down 38 percent from the $24.3 million in SG&A year-over-year. The full-year total will result in annual savings of over $30 million in comparison to 2021’s SG&A.

That brought about an operating loss of $3.9 million in the third quarter, up 58.3 percent from the $9.4 million operating loss year-over-year.

Adjusted EBITDA for the third quarter was $0.6 million, up $5.5 million from the adjusted EBITDA of negative $4.8 million in the third quarter of 2021.

Net loss in the quarter was $7.6 million, or ($0.05) per share, compared to the net loss of $0.8 million, or (0.01) per share last year in the same reporting period.

At the end of the third quarter the company had $16.5 million in cash and $61.00 million in working capital, up from the $14.8 million in cash held in the prior quarter, but down from the $64.6 million in working capital it had in the second quarter.

With the recent BAT debenture investment of $56.8 million, cash on a pro forma basis stands at over $70 million at this time, and working capital jumped to over $100 million.

Recent deals

There were a number of distribution deals and partnerships entered into during the third quarter, which could be what CWBHF needed to sustainably turn the corner and return to growth.

Among them was being named the “Official CBD of Major League Baseball” on October 12, 2022, partnering with Tilray for manufacturing and distribution in the Canadian market, a multi-year distribution deal with Southern Glazer’s Wine & Spirits, SBM LLC employee-sponsored benefit plan, wholesale distribution agreement with Cardinal Health, distribution agreement with Stark Foods, Hanson Faso Sales and Marketing, and the aforementioned debenture investment from BAT.

Southern Glazer’s Wine & Spirits

The multi-year deal with Southern Glazer’s Wine & Spirits will bring Charlotte’s Web CBD capsules, gummies and oil tinctures to the retail customer network of Southern Glazer, which has a presence in 44 states.

Tilray agreement

CWBHF entered into an agreement with Canadian-based Tilray (TLRY) for “licensing, manufacturing, marketing and distribution of Charlotte’s CBD hemp extract products in Canada.”

Per terms of the deal, Tilray will “acquire and extract Charlotte’s WebTM proprietary hemp biomass, and manufacture into final product at their facilities in Canada.”

Tilray is expected to start distributing tinctures in early 2021, with gummies and topicals to follow later.

Hanson Faso, Stark Foods and Cardinal Health

I’m lumping Hanson Faso, Stark Foods and Cardinal Health together because they all represent distribution deals that could be a positive catalyst for CWBHF.

While together they represent a lot of potential, what investors should watch is how they impact the company as measured against some of the loss in shelf space it has been experiencing at physical outlets.

These deals not only need to offset the loss in revenue, but surpass it. Either way, the company is stronger because of adding these distribution outlets to its business, than if it hadn’t at all. The level of impact on the performance of the company is what needs to be watched going forward.

SBM LLC

SBM LLC represents a new vertical for Charlotte’s Web, being an employer-sponsored benefit plan. Through the plan, employees can receive coverage for themselves and their pets in regard to products offered by CWBHF.

What’s most important here to me is if the company can leverage this deal and expand to other benefit plans. If it’s able to do so, this could be an extraordinary long-term growth catalysts for the company.

Official CBD of Major League Baseball

Maybe the most important deal by the company was in becoming the official CBD of Major League Baseball. It’s the first sports league to enter into a partnership with CWBHF.

It should be understood that this isn’t a rights deal but a partnership. MLB is a shareholder in the company, and will receive revenue once a pre-determined threshold is met in regard to cobranded products.

In the near term the significance of the deal is to expand the brand-awareness of the company far beyond what it currently is. To that end, management stated it will work with MLB on a media plan that will reach a variety of outlets associated with MLB. The end result for this as for the overall value of the partnership is that it is the most effective tool the company has to drive traffic to its e-commerce site, which if it is successful, will drive higher revenue and improved margins, which will result in better earnings.

In its earnings report management commented on the huge potential the partnership represents, with MLB’s “massive 175 million fan base, 180 million social media followers and 111 million broadcast viewers and millions of active email subscribers.”

Investment from BAT

Earlier I mentioned the $56.8 million investment from BAT via a convertible debenture, which resulted in a 19.9 percent stake in CWBHF by BAT that is convertible at the discretion of BAT.

The conversion price is $2.00 per share on the TSX. It carries a 5 percent interest rate and a 1.5 percent step down based upon U.S. regulations of CBD in the U.S.

Conclusion

Charlotte’s Web has been struggling since the general cannabis sector lost some of its early luster in the eyes of consumers. I know there’s difference between CBD and recreational and medical cannabis, but consumers tend to lump them together, and they move in unison with one another in relationship to market sentiment.

After falling to its 52-week low of $0.355, its share price has struggled to regain traction until early October, when it finally started to climb above the $0.40 per share mark. While it has fallen since it reached about $0.85 per share on October 26, it appears to be trading at higher lows than it has since May 2022.

The obvious question going forward is whether or not the new deals the company has entered into will be enough to offset its loss of shelf space and the decline in traffic to its e-commerce site, which has higher prices and wider margins.

The partnership with MLB should be a positive catalyst for the company if it’s able to expand brand awareness beyond where it stands today. And if it does boost its e-commerce traffic, that would probably be enough to drive the company to profitability over time.

As for the distribution deals it has entered into, we’ll have to wait until products are on the shelfs to see whether or not it is enough to make up for the lost shelf space it has been experiences from retailers.

I like CWBHF decision to cut costs while being aggressive in entering into more distribution deals, as well as the interesting deal with SBM LLC, which if it garners the attention of similar employee benefit plans, could be a nice long-term catalyst for the company.

Add to that the investment from BAT, and the company is taking the right steps to ensure it has the ability to invest in initiatives that will increase revenue, drive down costs, and widen margins.

If it’s able to execute on its plans, patient investors should reap the benefits further down the road. And at its current entry point, it offers a relatively safe place to start building a position for those that use dollar-cost averaging as their strategy.