Analyst on Charlotte's Web: 'We Stay Neutral, But Do Keep An Eye On This CBD Sector Bellwether Stock'

The Analyst

In a recent analyst note, Pablo Zuanic from Cantor Fitzgerald remained Neutral and lowered the 12-month price target price of Charlotte's Web Holdings Inc. CWEB CWBHF to USD 1.20 from USD 1.50 based “on CBD sectoral derating and reduced sales estimates.”

The Thesis

Zuanic noted Charlotte's Web reported “lackluster results” for the fourth quarter of 2021 on Wednesday and did not set guidance for 2022. Consolidated net revenue was $24.8 million, an increase of 4.7% sequentially, and a decrease of 7.8% year-over-year, due to sales and channel mixes and competitive DTC pricing.

Zuanic considered investors should pay attention to the stock. Charlotte’s could benefit from the FDA classifying CBD as a dietary supplement. Albeit the firm negative EBITDA and cash burn remain valid concerns, Zuanic values Charlotte’s innovation ramp (gummies, topicals, pet, drinks, cosmeceuticals, etc.), brick & mortar reach, and international optionality in 2023.

About 2021 Fourth Quarter

Sales were up 5% sequentially to $24.8 million, with eCommerce up 1% and B2B up 11% as the company entered new doors and rolled out new SKUs. “Management noted an ongoing shift to B&M from online, and to lower price formats (gummies/topicals vs. tinctures). The company remains the leader in both channels, with a 4.9% online share in the quarter (next competitor has 3.1%) and in “brick-and-mortar” stores.

Reported gross margins fell from 63% to 17% sequentially, in part due to inventory write-downs; excluding these items, gross margins fell 5 points to 55.4%.

EBITDA grew from -$2.8 million (-12% of sales) to -$4.5 million (-18% of sales). Likewise, operating cash flow worsened to -$9 million (FCF -$10.4Mn).

The company ended 2021 with $19.5 million in net cash and acknowledge $98 million in impairments.

Outlook and Strategy

Although no specific guidance was provided, Zuanic pointed to minimal sequential growth in the first quarter of 2022, “and profit margin upside being more back-loaded”.

“That said, the company is implementing a slew of new initiatives, and it is not just waiting for the passage of reform (House Bill HR841, if passed, would have the FDA classify CBD as a dietary supplement, which we believe would likely open the doors to the major retailers, both offline and online),” the analyst explained.

“The company continues to open new doors (GNC, among others, nationally; it opened 400 new doors just in CA, including 200 Vitamin Shoppes, are recent favorable legislation on CBD F&B was passed in that state). In an asset-light manner, the company is set to grow its international business, including the UK market, a deal with InterCure in Israel INCR INCR INCR, Canada (it is now harvesting hemp there), and Germany,” Zuanic noted.

“We believe international travel may be more of a 2023 story,” he concluded.

Photo Courtesy of Lelen Ruete.