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Charlotte's Web Second-Quarter Results: Top and Bottom Lines Head in Different Directions

Keith Speights, The Motley Fool

When Charlotte's Web (OTC: CWBHF) reported its first-quarter results in May, the company gave investors some unwelcome news. Although sales increased by 66% year over year, quarter-over-quarter growth was slower than ever.

The cannabidiol (CBD) pioneer announced its second-quarter results before the market opened on Wednesday. This time around, Charlotte's Web returned to solid sequential revenue growth, but its bottom line didn't look so great. Here are the highlights from the company's latest update.

Cannabis plant with CBD chemical structure

Image source: Getty Images.

Charlotte's Web results: The raw numbers

Metric 

Q2 2019 

Q2 2018 

Change

Revenue

$25 million $17.2 million

45.3%

Net income 

$2.2 million $3.7 million

(40.5%)

Diluted earnings per share (EPS)

$0.02 $0.04

(50%)

Data source: Charlotte's Web.

What happened with Charlotte's Web this quarter?

Charlotte's Web recorded its highest quarterly revenue total in its history in the second quarter of 2019. After posting weak sequential revenue growth in Q1, the company increased revenue by more than 15% quarter over quarter.

Demand soared for all of the company's product categories. The biggest winner was CBD topicals, with 493% year-over-year sales growth. Sales for animal nutrition products jumped 91% from the prior-year period, with human nutrition product sales rising by 32%.

Charlotte's Web's expanded distribution network served as a key driver of this strong growth. The company now has over 8,000 retail locations carrying its products, more than twice as many as it had at the end of 2018. Five top national retailers now sell Charlotte's Web CBD products, including CVS Health.

The company also picked up a big new retail partner after the second quarter ended. In July, Charlotte's Web announced that grocery giant Kroger plans to carry its CBD topical products in 1,350 stores across 22 states. It was the biggest distribution agreement with a single retailer in Charlotte's Web's history.

But what about the company's declining bottom line? Gross margin slipped a bit, from 76.7% in the prior-year period to 75.3% in the second quarter of 2019. However, the biggest factor was Charlotte's Web's higher spending. The company reported operating expenses soared 98% year over year to $16.2 million. This reflected a 41.6% jump in employee head count, including the addition of several new executives.

What management had to say

CEO Deanie Elsner stated:

We have been experiencing increased sales through both our e-commerce and retail sales channels. Top tier mass retailers are entering the market as several national grocery and drugstore brands have announced their CBD plans. The majority of these are now carrying Charlotte's Web products. This is a significant development for the hemp CBD category. To effectively service projected growth, we have been building our executive leadership with experienced consumer-packaged goods (CPG) executives in sales, marketing, finance, data, and operations. Similarly, we are expanding our capabilities in cultivation, R&D, production, and distribution.

Looking forward

Elsner expects more large retailers will team up with Charlotte's Web and existing partners will roll out the company's products in additional states and locations throughout the rest of 2019. She cited Kroger as an example, with the supermarket chain adding four new states to its distribution recently.

Outgoing CFO Rich Mohr stated that the company forecasts "revenue growing at a faster pace than operating expenses in the back half of the year." He said that the company continues to expect full-year 2019 revenue between $120 million and $170 million. That's a relatively wide range, but Mohr said that there's a lot riding on the timeline of what happens with the U.S. Food and Drug Administration's (FDA) regulatory process and retailers' response to the FDA's actions.


Keith Speights has no position in any of the stocks mentioned. The Motley Fool recommends Charlotte's Web and CVS. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com