HEXO Corp Q1: Better Than the Others?

HEXO Corp. (TSX:HEXO), one of the Canadian marijuana stocks, reported Q1/20 financial results on December 16, 2019

SmallCapPower | December 20, 2019: HEXO Corp. (TSX:HEXO) (NYSE:HEXO), one of the Canadian cannabis stocks, reported Q1/20 financial results on December 16, 2019, before markets opened. HEXO reported a $62.4M net loss on revenue of $14.5M, which missed consensus estimates of $24.4M and $16.1M. In addition, revenues were on the lower end of management guidance of $14.0M to $18.0M.

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Figure 1: HEXO Financial Highlights

Source: Company reports, Ubika

Net revenue slip 6% quarter over quarter. Net revenue of $14.5M was 10% below consensus estimates of $16.1M and was on the low end of rereleased guidance of $14.0M – $18.0M. Lower net revenues were mainly a result of decreased weighted average selling price/gram, which fell to $4.46 (was $4.86 during Q4/19), albeit lower selling price/gram was partially offset by higher volumes (kilogram equivalents) sold. Additionally, embedded in revenue in the quarter were ~$1.3 M in price concessions and ~$720K in provisions for sales returns. During the quarter, HEXO’s original stash (which sells for ~$140.0 for 28 grams, $5/gram) began sales in ON and QC with plans expand reach to BC and AB in Q2/20.

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Gross margins contracted by 188 basis points, but in-line with estimates. Management announced that they are targeting gross margins of 40%, once edible sales begin. However, management also warned that they expect further margin compression in the near term as they are targeting lower costs through restructuring. HEXO recorded a $25.5M impairment loss on inventory, which was due primarily to a surplus of excess trim. Adjusted EBITDA loss decreased to $24.6M (was $29.8M), the Company decreased SG&A expenses by 25% during the quarter. But, in our view, the Company either has to significantly increase sales or reduce SG&A by even more to reach its target of positive EBITDA by the end of F2020.

Approximately $125M in available liquidity in balance sheet. HEXO closed the quarter with $54.6M in cash and cash equivalents and announced the closing of a $70M convertible debenture. The Company estimates that it has ~$60-80M in capex remaining, in addition to ~12M in commitments with its JV with Molson.

Key takeaways. Overall it was another lackluster quarter for HEXO, missing estimates on both revenue and net income, however the revenue decline was not as sharp as some peers such as Canopy Growth, Aurora, Organigram, and Supreme Cannabis, which posted quarter-over-quarter declines of -15%, -24%, -24%, -40%, respectively. HEXO’s operating income (gross profit before FV minus SG&A) is negative -$30.5M, which implies that they need to generate $100M in revenue at current margins and SG&A expense to have break-even income from operations. As such, HEXO needs to increase revenues and gross margins, and needs to reduce overhead expenses. Additionally, at its current level of sales, HEXO had 1.5 years on inventory on hand, although most of the inventory is likely to go to extraction for edibles and derivatives. This could be an indication that cultivators will face further margin compression.

Shares of HEXO closed Thursday’s trading session up 4.7% to C$2.66. HEXO stock trades at a market cap of C$653.1 million.

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