HEXO Stock Plunges As It Becomes Latest Cannabis Casualty

HEXO Corp. (TSX: HEXO)(NYSE: HEXO) stock was plunging almost 20% as the company told Wall Street that its revenues would be lower than expected. The company said in a statement that it now expects net revenue for the fourth quarter to be approximately $14.5 million to $16.5 million and net revenue for the year to be approximately $46.5 million to $48.5 million.”

This is a far cry from the company’s claim in June that it was on track to reach $400 million in net revenue in 2020 and said it would double net revenue in the fourth fiscal quarter.

This follows the recent departure of the HEXO’s Chief Financial Officer Michael Monahan, who said last week he was leaving for family reasons. Hexo’s current vice-president of strategic finance, Stephen Burwash is now the company’s Chief Executive Officer. On the news of the departure of the CFO, Bank of America Merril Lynch analyst Christopher Carey downgraded Hexo from Underperform from Buy and lowered his price target to CA$9 ($6.76) to CA$4 ($3.01).

“Fourth-quarter revenue is below our expectation and guidance, primarily due to lower than expected product sell-through,” commented Sebastien St-Louis, CEO and co-founder of HEXO Corp. “While we are disappointed with these results, we are making significant changes to our sales and operations strategy to drive future results. Over the past quarter, we began re-configuring our operations to focus on high-selling strains and initiated a new sales strategy that we believe will meaningfully improve performance.  We plan to discuss these in more detail on our upcoming earnings call.”

The company went on to say that slower than expected store rollouts, a delay in government approval for cannabis derivative products and early signs of pricing pressure are being felt nationally. “The delay in retail store openings in our major markets has meant that the access to a majority of the target customers has been limited.  Additionally, regulatory uncertainty across the pan-Canadian system and jurisdictional decisions to limit the availability and types of cannabis derivative products have contributed to an increased level of unpredictability. As a result, HEXO is withdrawing its previously issued financial outlook for fiscal year 2020.”

Withdrawing our outlook for fiscal year 2020 has been a difficult decision,” added St-Louis. “However, given the uncertainties in the marketplace, we have determined that it is the appropriate course of action. We are also placing a greater focus on profitability. We are evaluating our plans and operations to see where we can be even more efficient. We are at our best when we are highly focused on our strategic priorities, always with a view to drive long-term value for shareholders. Growing low-cost, quality cannabis and developing innovative products is our priority and we are renewing our commitment to do so.”

Analyst Comments

Big picture: while there were already risks for Hexo, we felt they were balanced by a sound core operation and a new CFO who had a chance to regain Street credibility on forecasts/guidance by resetting the bar, with the potential that momentum regained in CQ120 with the launch of value-add formats,” Carey said.

The stock was lately trading at $2.98, down from its 52-week high of $8.40.

Debra Borchardt

Debra BorchardtDebra Borchardt

Debra Borchardt is the CEO, Co-Founder, and Editor-In-Chief of GMR. She has covered the cannabis industry for several years at Forbes, Seeking Alpha and TheStreet. Prior to becoming a financial journalist, Debra was a Vice President at Bear Stearns where she held a Series 7 and Registered Investment Advisor license. Debra has a Masters degree in Business Journalism from New York University.


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