Similar to most pot stocks, Charlotte’s Web Holdings (TSX:CWEB) has witnessed a tough year. The stock was trading at a record high of $29 in August 2019 and touched a low of $3.08 in October this year. CWEB was impacted due to sluggish sales amid the pandemic and several other structural issues.
However, since the start of October, the stock has returned over 100%. Does this mean it has bottomed out and will surge higher by the end of 2020?
Recent Q3 results
In the September quarter, Charlotte’s Web reported sales of US$25.2 million, which indicated a sequential growth of 17% but was flat year over year. The company benefitted from DTC (direct-to-consumer) sales, which were up 28% and accounted for 66% of total revenue.
During the earnings call, CWEB CEO Deanie Elsner said, “Our DTC e-commerce revenues grew 28% year over year to $16.7 million as a result of effective online marketing, targeted segmentation of customers, and personalized messaging, which drove a 98% increase in our conversion rate versus a year ago. In addition, new customer acquisitions grew 52% and retention grew 65%, and our subscriptions grew 139%.”
The company’s net loss widened to US$6.6 million, or US$0.05 per share, in Q3, compared with a loss of US$1.3 million in the prior-year quarter. Comparatively, its net loss was US$14.4 million in the June quarter. CWEB’s revenue and net loss were largely in line with analyst estimates.
So, we can see that Charlotte’s Web’s upward surge in its stock price was not driven by its Q3 results. In fact, pot stocks have made a strong comeback this month on the back of a Joe Biden presidential win. The Democrats are expected to legalize cannabis for recreational use, which will provide pot producers access to traditional sources of debt capital as well as rapidly increase their addressable market.
A look at the company’s key financial metrics
CWEB said if you exclude its acquisition of Abacus, sales in Q3 were down 10% year over year due to the pandemic. However, they also grew 8% on a sequential basis and a quarter-over-quarter sales growth is forecast in Q4 as well.
CWEB has been able to offset tepid retail sales by strong DTC growth in 2020, and this shift in buying behaviour will help the firm to increase online sales in the upcoming decade.
The company’s gross margin also fell to 60.3% in Q3, compared to 71.3% in the prior-year due to product sales mix, portfolio repricing, and topical distribution in the B2B segment. It expects COGS (cost of goods sold) to decrease in the second half of 2021, as its new production facility will be operational, which will also positively impact the bottom line.
CWEB said it has initiated an expense optimization program and identified operational reductions of over 10% in the second half of 2020. This will help it reduce expenses by $12 million in 2020. It has managed to reduce banking and merchant fees by partnering with JP Morgan, realizing US$400,000 in quarterly savings.
Charlotte’s Web ended Q3 with a cash balance of US$65.9 million and working capital of US$129 million. It is debt-free and expects to exit 2020 with US$60 million in net cash.
