Charlotte’s Web Holdings Inc

Charlotte’s Web Holdings Inc (TSX: CWEB) is a Canada-based company engaged in producing and distributing hemp-based cannabidiol (CBD) wellness products. Its product categories include ingestible products (tinctures, capsules, and gummies), topicals, and pet products.

Key Highlights

• Achieves Organic Certification: The organization just announced that its corporate farmland and its 137,000 sq. ft. production and R&D facilities in Louisville, Colo., have received USDA organic certification. This certification clears the door for numerous product lines to wear the USDA Organic Seal, which is a major plus.
• Robust B2B performance: In the second quarter of 2021, the company's consolidated revenue rose by 11.4% year over year to USD 24.2 million. Consumers returning to brick-and-mortar retail purchasing following the economic reopening from pandemic lockdowns drove up business-to-business (B2B) revenue by 37.7% year over year. Similarly, activity and revenue in the B2B healthcare practitioner ("HCP") and medical channels rose, aided by the Company's purchase of Abacus Health in June 2020.
• Accelerating national and international retail expansion: By focusing on client acquisition and retention, as well as speeding national and international retail growth, the Company hopes to capitalize on the rapidly growing CBD wellness products sector. In addition, it would be extending its product line beyond Industrial Hemp-based items, which is a key positive. Furthermore, it is also investing research and development to find new product prospects. The management is looking for ways to increase manufacturing capacity, sales and marketing infrastructure, and gain more control.
• Planning to acquire Stanley Brothers USA Holdings, Inc.: Stanley Brothers USA Holdings, Inc. ("Stanley Brothers USA"), a cannabis wellness incubator, is a company that the Company has the option to buy. A collaboration with, or purchase of, Stanley Brothers USA would allow the Company to join the U.S. and/or worldwide cannabis wellness industry with an experienced and trusted team and brand (marketed under the name "ReCreate"), positioning it for possible new growth possibilities.

Financial overview of Q2 2021 (In thousands of United States dollars)

Source: Company

• In Q2 2021, the company posted higher revenue of USD 24.1 million against USD 21.6 million in pcp. The increase of 12% in the revenue was due to competitive pricing resulting in increased unit sales.
• On the account of lower cost of sales, which decreased 19% to USD 8.3 million, the group’s gross profit rose to USD 15.8 million, against USD 11.4 million in pcp.
• The company decreased its operating loss in the reported period to USD 9.1 million, against a loss of USD 18.0 million, primarily due to higher gross profit and controlled operating expenses in the reported period.
• Net loss minimized to USD 5.3 million, against USD 14.4 million in pcp. The decline in net loss was mainly due to above discussed rationales. 
  

Risks associated with investment

The company’s products are relatively new to the market, and a change in consumer preference may impact the overall demand dynamics. Moreover, due to the lengthy procedure of product-approval and product innovations, along with an increase in the higher input costs, the company might witness a subsequent fall in the profitability and margins.

Stock recommendation

As many consumers moved from online purchasing to brick-and-mortar retail, the ongoing economic recovery from the pandemic that began in Q1 accelerated in the second quarter, resulting in a 38% rise in the retail revenue. This was especially evident in its most well-established medical and healthcare practitioner channels. The management is concentrating on expanding the brand presence in both international and domestic markets. We believe the firm is best positioned to benefit from the return to brick-and-mortar retail since it has the largest market share in the food, pharmacy, mass, and natural specialty retail channels in the United States. Additionally, the company recently planted its first hemp crop in Canada and anticipate initial product sales by early 2022, which is a key positive. On the valuation front, the stock trades at a lower EV to Sales multiple of 1.9x on an NTM basis, versus the industry (Pharmaceuticals) median of 3.4x. Hence, considering the aforesaid factors, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 2.49 on October 19, 2021 with a lower double digit (in % terms) upside potential. 

Technical Analysis Summary

One-Year Technical Price Chart (as on October 18, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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