Hexo’s terrible, no good, very bad week

By Craig Behnke and Mike Regan

Days after Hexo’s CFO resigned, the company announced a huge miss to fiscal fourth-quarter revenue and withdrew its 2020 revenue guidance.

The stock has fallen roughly 29% on the news.

The stock move isn’t a surprise; this was a massive miss. Management expects this quarter’s revenue to be at CA$14.5 million-CA$16.5 million versus their previous guidance of about CA$26 million.

The company also withdrew its fiscal 2020 revenue outlook of CA$400 million. The consensus estimate for 2020 revenue was CA$299 million, so it’s clear investors and analysts had not placed much confidence in the company’s outlook anyway.

We can’t help but wonder what the assumptions were behind that fiscal 2020 revenue outlook.

Management cited a host of issues that led to the reset for the quarter and next year:

  • Lower product sell-through.
  • Pricing pressure.
  • Slower-than-expected store rollouts.
  • Delays by the Canadian government in cannabis derivative product approval. 

The company noted early signs of pricing pressure, but pricing data from the Canadian government show increases in the medical and nonmedical markets through the first two quarters of 2019 (see chart below).

Cannabis implicit price index, Canada
Price Change Q/Q
1Q19 2Q19
Medical 10.4% 2.8%
Nonmedical (licensed) 0.1% 3.8%

Source: Statistics Canada

Hexo management now faces a steep uphill struggle to restructure operations and sales to adapt to changing market conditions and regain investor confidence that it can accurately guide and then execute the business plan.