HEXO shares plunge after pot producer issues sales warning, pulls guidance

A Hexo Corp logo is pictured behind cannabis plants at their facilities in Gatineau, Quebec, Canada, September 26, 2018. REUTERS/Chris Wattie

Shares of HEXO Corp. (HEXO.TO)(HEXO) plunged more than 20 per cent in on Thursday after the Canadian cannabis producer warned of weaker sales and pulled its financial guidance for fiscal 2020.

The Gatineau, Que.-based company is blaming “lower-than-expected product sell-through,” and now expects net sales for the fourth quarter to be between $14.5 million and $16.5 million, and net sales for the year to be approximately $46.5 million to $48.5 million.

In June, HEXO reported $13 million in net sales for its fiscal third quarter ended April 20. The company said at the time it was on track to double that figure in Q4 of 2019. HEXO issued guidance of up to $400 million in net revenue in its 2020 financial year.

“Withdrawing our outlook for fiscal year 2020 has been a difficult decision,” chief executive officer Sebastien St-Louis said in a news release on Thursday. “Given the uncertainties in the marketplace, we have determined that it is the appropriate course of action.”

The move follows the abrupt resignation of chief financial officer Michael Monahan on Friday. Monahan said he left the company for personal reasons.

HEXO said the slower-than-expected rollout of retail stores, government delays for derivative products, and “early signs of pricing pressure” that are being felt nationally added to the company’s decision to revoke previously issued financial guidance.

Crowdsourced data from Statistics Canada showed the price for a gram of legal cannabis fell for the first time in the third quarter. A number of industry observers have predicted prices received by licensed producers will decline into 2020, prompting discounts at ‘mid-range’ flower at retail stores. Analysts are also raising concerns about supply glut in provincial warehouses and harvest levels that outstrip legal sales.

St-Louis said that over the past quarter Hexo has began "re-configuring our operations" to focus on high-selling strains and initiated a new sales strategy.

“We are also placing a greater focus on profitability,” St-Louis added. “We are evaluating our plans and operations to see where we can be even more efficient.”

Beacon Securities analyst Russell Stanley downgraded HEXO shares to “hold” from “buy” and slashed his price target to $4 from $14 on Thursday.

“Notwithstanding our downgrade, it is worth noting that HEXO’s balance sheet remains strong,” he wrote in a research note. “Even based on our revised estimates, which contemplate considerable investments in working capital as sales improve, our forecast shows that HEXO has ample balance sheet capacity to support its growth.”

Matt Bottomley, an analyst at Canaccord Genuity, cut his price target to $7 from $10 and maintains a “buy” rating on the stock. He was surprised by the magnitude of HEXO’s expected fourth-quarter revenue miss, but not the suspension of full-year 2020 guidance.

“We believe HEXO’s planned capacity and leading position in Quebec make achieving these levels technically possible. However, hurdles independent of the company (lack of retail stores, legislation of additional product forms) are increasingly being noted by all LPs,” he wrote in a research note. “This view is now being echoed by HEXO management.”

Toronto-listed shares fell 23.16 per cent to $3.75 at 2:50 p.m. ET. New York-listed shares declined 23.68 per cent to $2.80.

The company is set to report fourth-quarter and year-end financial results before markets open on Oct. 24.

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