Charlotte's Web: Slow Progress

Summary

• Charlotte's Web reporting another disappointing quarter continuing a 2-year string of frustration for shareholders.
• The company is highly tied to the FDM channel unable to move forward with CBD ingestibles due to issues regarding FDA regulations.
• The stock has a minimal stock valuation of $270 million providing strong upside once the CBD market fully opens up.
• This idea was discussed in more depth with members of my private investing community, Out Fox The Street. Learn More »

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Another earnings reporting season has passed and Charlotte's Web Holdings (OTCQX:CWBHF) didn't fail to disappoint shareholders yet again. A lot of the problems are outside of the control of a market leader in the CBD space due to issues with regulations. My investment thesis continues to tilt Bullish on the stock due to long-term positive dynamics in the sector, but investors must buckle up for a bumpy ride.

Another Miss

For Q3'21, CWH reported another highly disappointing revenue total due to supply constraints and market dynamics. Most importantly, regulations still haven't opened up the CBD market for ingestibles, even in California where Assembly Bill 45 opened up the market, in theory.

The company reported Q3'21 revenues of $23.7 million, or reportedly $4.8 million below consensus estimates. Though, the estimates don't appear reasonable considering the somewhat closed CBD market and those expectations requiring $4.3 million in sequential revenue growth.

CWH has now reported large quarterly misses like clockwork over the last couple of years. The company first topped $25 million in quarterly revenues back in Q2'19. Despite buying Abacus Health, CWH still can't top those revenue levels over two years later.

Source: SA earnings page

During the September quarter, the company ran into a couple of issues holding revenues back. First, the supply chain disruptions cost CWH ~$1.1 million in sales. Second, the market shift to lower priced products like gummies hit revenues by another $1.0 million. The end result led to a total hit of $2.1 million in a quarter that would've otherwise slightly topped Q3'20 levels.

Regardless, investors want to see strong growth, not debates over whether sales were set for flatlining. A lot of my previous research highlighted some of the bills introduced to fully regulate the CBD space to get the FDM channel off the sidelines on dietary products. Even the passage of California AB 45 still hasn't appeared to move the sales needle to where CWH was willing to provide meaningful guidance.

The issue remains that the FDM segment, even in California, isn't willing to move forward with selling ingestible CBD products until the FDA issues regulations. On the Q3'21 earnings call, CWH CEO Deanie Elsner provided the following details highlighting the problem:

The FDM channel was forecasted to represent 66% of total CBD category sales, while e-commerce was forecasted to represent about 15% of CBD sales. Today, due to a lot of regulation, the FDM channels represents about 6% of the current CBD sales, while E-commerce represents about 38% of CBD sales.

A lot of the issues stem from the lack of progress from the FDA in formulating regulations on ingestibles. Considering, CWH claims 23.4% market share in the FDM channel per Nielsen, the lack of progress in this segment, including in California, remains problematic for the company.

Again, the CEO suggested the company would move forward with meaningful distribution expansion in the current quarter and into 2022, including the already announced 1,000 stores in California:

Further and importantly, we are planning a significant increase in our distribution nationally and in California in Q4, following the legalization of CBD through the recent Assembly Bill 45.

Promise Still Exists

Ultimately, the data lines up for an eventual bill at the Federal level that gives the FDA a path to regulate CBD. In the meantime, the California Assembly Bill could open up other states to approve CBD at the state level, setting up the product approval path similar to THC in the U.S.

As highlighted many times in previous research, the combined CWH and Abacus Health were once forecasted to top $400 million in annual sales. Analysts even had forecasted the company reaching close to $200 million in sales next year before the FDA failed to move forward with regulating the sector.

Data by YCharts

The stock only has a market cap of $270 million leaving plenty of upside once the CBD market fully opens up. After a tax refund from the IRS, CWH should have ~$32 million in cash to fund the business. The company is heading towards breakeven results, so the biggest risk is any prolonged legislative delays leading CWH needing to raise additional funds at depressed equity prices. The company has already invested heavily in new production facilities eliminating those needs to the market fully opening up.

Takeaway

The key investor takeaway is that CWH is primed for growth even before FDA regulations with international expansion, new products and the California market opening up. Ultimately though, the stock faces a volatile ride as the company struggles to grow in a tough regulatory environment where the FDM channel hasn't opened up. Investors should sue the weakness to build a position in a CBD leader, but the stock is far from risk free.

Disclosure: I/we have a beneficial long position in the shares of CWBHF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.