HEXO Corp Retraction: Did Investors Overreact?

HEXO Corp. (TSX:HEXO), one of the Canadian marijuana stocks, lowered its Q4/19 revenue guidance and retracted its F2020 outlook, citing poor retail rollout particularly in Ontario and Quebec

SmallCapPower | October 11, 2019: HEXO Corp. (TSX:HEXO) (NYSE:HEXO), one of the Canadian cannabis stocks, provided investors with updated Q4/19 revenue guidance Thursday. Revenue guidance was well below investor expectations and management withdrew its F2020E revenue forecast. On September 27, 2019, we published an article called 4 Canadian Marijuana Stocks with Overly High Revenue Expectations and mentioned that HEXO could run into some issues meeting its F2020E revenue projections. The announcement comes less than a week after HEXO announced that CFO Michael Monahan had resigned.

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Q4/19 revenue expected to remain flat and F2020E revenue guidance of $400M withdrawn. The Company announced that its Q4/19 revenue is expected to come in between $14.5M to $16.5M, a modest increase over $13.0M in Q3/19, but ~50% lower than previous guidance of $26M in revenue for the quarter. HEXO also withdrew its F2020E guidance of $400M and did not provide updated numbers. The reduction in guidance was due primarily to lower-than-expected retail sales, particularly in Ontario & Quebec, a delay in government approval of edibles and concentrate products, and national price compression.

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Price target downgrades likely coming. Currently, the analyst consensus estimate for F2020E revenue for HEXO is $505M. This would imply that the Company would have to grow revenue by 80% per quarter, for the next five quarters to meet this target. With HEXO withdrawing its guidance of $400M, this likely means that HEXO’s revenue will be well below this number. Investors should expect further downgrades of the stock, which could put additional pressure on its share price.

Quebec edibles restrictions could further hinder HEXO. This is because HEXO’s revenues are derived primarily from Quebec and, as of June 2019, Quebec had to lowest amount of retail stores at 15, the fewest of any major Canadian province. Additionally, the Quebec government has limited the sale of derivatives and edible products, with the sale of candies, confections and desserts (including chocolate) banned. Edibles are expected to drive much of the revenue growth for Cannabis 2.0 for the rest of Canada – as a result, this ban could limit HEXO’s growth opportunity.

Truss joint venture with Molson Coors Canada could be a potential positive catalyst. In conjunction with its Q3/19 financial results, HEXO announced that it had sourced 200,000 kg of hemp-derived CBD to be extracted and used to make CBD-infused beverages with its JV with Molson. The Company also announced that it plans to launch CBD-infused beverages in eight U.S. states in 2020.

Key Takeaways. While the reduced revenue guidance is negative in the short term, HEXO could have some potential positives in the long term. HEXO has secured the largest supply agreement to date with the Société Québécoise du Cannabis (SQDC), with as much as 100,000 kg over three years (Year 1: 20,000 kg, Year 2: 35,000 kg, Year 3: 45,000 kg). Also, HEXO’s beverage partnership with Molson could turn out to be fruitful.

Shares of HEXO Corp closed Thursday’s trading session down 23% to C$3.76. HEXO stock trades at a market cap of C$1.2B.

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