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

• Distribution agreement with GNC: GNC, a renowned specialty retailer of nutritional products with over 2,000 stores across the United States, recently signed a national distribution arrangement with the company. The first six kinds of Charlotte's Web Gummies will be available for purchase at GNC retail stores in 24 states, with plans to extend into more states. GNC is expected to become one of the company's major retail customers this year, which is a big plus.

• California state Assembly Bill 45 passed into law legalizing hemp CBD in California: Following the approval of Assembly Bill 45 on October 7, 2021, the Company announced its expansion of retail distribution in California. The law now allows the retail sale of hemp-derived cannabidiol (CBD) products, including as dietary supplements, topicals, over-the-counter, and pet goods. Following the approval of AB 45, Charlotte's Web anticipates that California stores will expand or begin receiving product shipments from the company.

• Hint of demand revival: Revenue for the nine months ended September 30, 2021, was USD 71.2 million, an increase of 4.3% compared to the nine months ended September 30, 2020. In the same period B2B revenue increased 10.6% compared to the previous corresponding period respectively, due to consumers returning to brick-and-mortar retail shopping, higher sales volume from the acquisition of Abacus. Moreover, increased in marketing, targeted promotions, coupled with higher demand for the Company’s new topical and THC-free ingestible products, also supported the growth. Continuation of the above trend is likely to support the upcoming performance.
  

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.

Financial overview of Q3 2021 (In thousands of United States dollars)

Source: Company Filing

• In Q3FY21, the company posted its revenue of USD 23.7 million, compared to USD 25.1 million in pcp. The decline was primarily due to a 9.3% y-o-y decline in Direct-to-consumer (DTC) revenue at USD 15.1 million.

• Gross profit stood at USD 14.9 million, slightly higher from USD 14.7 million in pcp, supported by lower cost of sales.

• The company reported improvement in cost metrics and posted lower general and administrative cost and lower sales & marketing costs. As a result, total operating expenses in the period declined to USD 23.9 million against USD 28.3 million in pcp.

• Lower operating expenses helped the company to clock minimized operating loss at USD 8.9 million against USD 13.5 million in pcp.

• Net loss and comprehensive loss also lowered to USD 0.9 million, compared to a net loss of USD 6.5 million in pcp.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group 

Stock Recommendation

The company changed its portfolio offer and increased its presence across new channels as the market developed from early users of higher cost CBD oil tinctures to lower priced candies, topicals, and pet products. This resulted in higher unit sales and market share across all channels, but lower overall net revenue compared to Q3 2020. However, it recorded lower operating expenses, which helped them to reduce its net losses in the reported period. Moreover, the Company announced its expansion of retail distribution in California following passage of Assembly Bill 45. 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. Hence, considering the aforesaid facts and valuation done, we recommend a ‘Speculative Buy’ rating on the stock at the at the closing price of CAD 1.34 on January 17, 2022.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached

Technical Analysis Summary

One-Year Technical Price Chart (as on January 17, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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