Pot stocks plunge after Hexo issues revenue warning, pulls guidance
Pot stocks slid on Thursday after Quebec-based cannabis producer Hexo Corp. issued a revenue warning and pulled its guidance for its coming fiscal year, marking the latest jolt for a sector that has become increasingly sensitive to concerns over sluggish growth and mounting losses.
In a press release, Hexo said it now expects net revenue for its 2019 fourth quarter, which ended July 31, to be around $14.5 million to $16.5 million, and that net revenue for its 2019 fiscal year will be approximately $46.5 million to $48.5 million.
This followed guidance Hexo offered in June that suggested its Q4 revenue would double to around $26 million and that it was on track to hit $400 million in net revenue for its fiscal 2020.
“Fourth quarter revenue is below our expectation and guidance, primarily due to lower-than-expected product sellthrough,” said Sebastien St-Louis, the company’s CEO and co-founder. “While we are disappointed with these results, we are making significant changes to our sales and operations strategy to drive future results.”
Hexo said it was withdrawing the previously issued financial outlook for its fiscal 2020 as well, claiming that a delay in opening stores in its major markets had limited its reach with target customers and that “regulatory uncertainty” was increasing unpredictability. The move followed the resignation of the company’s chief financial officer, who cited family reasons, earlier this month.
“Withdrawing our outlook for fiscal year 2020 has been a difficult decision,” said 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.”
Shares of Hexo closed about 23 per cent lower in Toronto on Thursday, finishing the day at $3.76. Other pot producers saw declines as well, such as Tilray Inc. (down almost 13.5 per cent), Canopy Growth Corp. (down 10.8 per cent) and Aurora Cannabis Inc. (down 9.3 per cent).
Hexo’s woes are another sign of the challenges cannabis companies face in what remains a fledgling industry. They also underscore that investors are focusing more on traditional metrics, such as revenue and profits, and reacting accordingly.
The stock has responded negatively … given the reduced revenue visibility implied by this decision
Russell Stanley, analyst, Beacon Securities
Analysts had already expressed concerns about Hexo’s $400-milion revenue target prior to Thursday’s retraction.
“We believe downside risk exists because of the company’s sales guidance for F2020 ($400MM), which could be impacted by factors outside the company’s control (regulations; specifically a delay in the derivatives products market or onerous regulations),” wrote CIBC World Markets analyst John Zamparo earlier this month.
Beacon Securities said Thursday that it was downgrading Hexo to a hold from a buy. Analyst Russell Stanley wrote that they had been forecasting 2020 net revenue of $374 million compared to a consensus of $323 million, “and we therefore believe the analyst community had come to view the guidance as aggressive.”
“Nonetheless, the stock has responded negatively … given the reduced revenue visibility implied by this decision,” Stanley said.
“The name of the game is profits and free cash flow and there’s no sign of that ever happening for these companies.”
Barry Schwarts, chief investment officer, portfolio manager, Baskin Wealth Management
BMO Capital Markets analysts Tamy Chen and Peter Sklar said in a note earlier this week that there “may be downside” to Hexo’s fourth-quarter guidance given a 50-per-cent month-over-month decline in the sales that licensed producers made to provincial retailers in July.
“We believe the mid-term outlook could also be challenging as Hexo is trying to expand its dried flower sales into provinces outside of Quebec when these provinces are focused on working through their current inventory on hand,” the BMO analysts wrote.
Hexo still has a joint venture with beermaker Molson Coors Brewing Co. to develop non-alcoholic, cannabis-infused drinks. Zamparo said they valued Hexo’s stake in the JV company, Truss, at approximately $120 million.
“Uncertainty exists in the market for cannabis-infused beverages, but Molson Coors brings invaluable expertise in distribution (and) production,” he wrote.
Thursday’s selloff, however, was all retail investors, according to Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management.
“Retail investors got caught up in the excitement,” Schwartz said. “The name of the game is profits and free cash flow and there’s no sign of that ever happening for these companies.”
Hexo says it intends to release its complete results for the year ended July 31 on Oct. 24.