Jun 14, 2021

Hexo’s Q3 revenue marred by missed sales, crowded marketplace


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Hexo Corp. released disappointing quarterly results Monday that missed analyst expectations as the cannabis producer reported a steep decline in sales in certain key provincial markets.

Hexo said it generated $22.6 million in revenue in its fiscal third quarter, down 29 per cent from the prior three-month period and up just two per cent from a year earlier. The Ottawa-based company said it missed out on sales in Quebec and Alberta by not meeting quality standards for some of its cannabis products in those markets.

The company also said it posted negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $10.8 million in the quarter, thus losing some of the momentum it carried from the prior three-month period when it achieved adjusted profitability.

Analysts expected Hexo to report $34.5 million in revenue and adjusted EBITDA of $600,000.

Hexo has been making a strong run for the top spot in the fiercely competitive Canadian cannabis market with a string of acquisitions over the past year, including deals for Zenabis Global Inc., 48North Cannabis Corp., and Redecan Pharm totalling about $1.3 billion.

Stifel Analyst Andrew Carter, who has a "hold" rating and an $8 price target on Hexo's shares, said in a report Monday that the disappointing sales should turn investors’ attention back to Hexo’s core business, rather than its headline-fetching takeovers. 

"While Hexo's aggressive M&A activity had the potential to shift focus from any disruption in the company’s momentum, particularly in a quarter where results were challenged across the sector, the magnitude of the underperformance drives scrutiny for the core business as well as the ability to realize value from the three acquisitions," Carter said. 

While Hexo is likely to reap the benefit of its market share gains once its deals for 48North and Redecan close later this year, the company experienced challenges getting some of its products to market during the quarter, said Hexo Chief Executive Officer Sebastien St-Louis.

"We offlined three genetics that were responsible for quite a bit of sales in Quebec thinking we would replace them with the strains that we had tested in our genetics lab that had performed better than those current strains," St-Louis said.

"What happened nine months later, when we actually cultivated outside of our greenhouse, is we did not hit the same quality [for those strains] that had been done in our indoor facility in Bradford, so that was very disappointing."

St-Louis also said the company made a mistake in selling some hash products that were not as potent as what other competitors were selling into the Quebec market.

"What we underestimated was essentially the speed at which the cannabis industry moves and that was a mistake that will never happen again," he said.

Hexo's cannabis-infused beverage venture also had a rocky quarter, with sales of its pot drinks down 10 per cent from the prior three-month period to about $3.1 million due to increased competition and lower sales in Ontario.