Hexo Corp. says it expects fourth-quarter sales to be much lower than previously estimated and withdrew its 2020 revenue forecast amid a sluggish industry-wide environment for Canada’s licensed cannabis producers, sending the company’s shares plummeting and sparking a sector sell-off.
Gatineau, Que.-based Hexo said it expects to sell about $15.5-million worth of product in the quarter ending July 31 – 40 per cent less than previously forecast. As recently as June, the company predicted $26-million in sales. Hexo also withdrew its previously predicted $400-million sales forecast for next year and didn’t provide a new estimate. Hexo will report its fourth-quarter and fiscal year earnings Oct. 24.
Hexo chief executive officer Sébastien St-Louis in a statement blamed the bleak sales forecast on a number of macro headwinds, including “slower than expected store rollouts, a delay in government approval for cannabis derivative products and early signs of pricing pressure.” Openings of cannabis stores have been particularly slow in British Columbia and Ontario, where lengthy application processes have led to delays.
Shares in Hexo fell 23 per cent on the Toronto Stock Exchange to close at $3.76, the biggest single-day percentage drop since the company went public in 2017.
The warning from Hexo had a broad negative impact on the entire sector, with Canopy Growth Corp., Aurora Cannabis Inc. and Aphria Inc. falling 10.8 per cent, 9.3 per cent and 13.5 per cent, respectively, in Toronto trading on Thursday.
Hexo’s financial revision comes less than a week after its chief financial officer abruptly resigned. On Oct. 4, the company announced that Michael Monahan, who’d only been with Hexo since May, had left, citing family reasons.
When asked if the poor financial forecast and the departure of Mr. Monahan were linked, Hexo spokesperson Caroline Milliard referred The Globe and Mail to the company’s press release last week, and wrote that Mr. Monahan, whose family is in the United States, “underestimated the time he would need to spend in Gatineau and in Ottawa to work closely with the teams.”
Hexo is the latest Canadian cannabis company to blindside investors in the past few months. In August, Smiths Falls, Ont.-based Canopy Growth reported a significantly bigger loss than expected in its latest quarter and pushed out the timeline to achieve profitability. Edmonton-based Aurora Cannabis, meantime, missed the Street’s sales estimates in its latest quarter, even after it had already pared back its forecast.
“We’re in a really turbulent patch right now and this is just another piece on that stack weighing on investor confidence,” Matt Bottomley, analyst with Canaccord Genuity Group Inc., said in an interview.
“The actual rollout and maturing of this market is just going a lot slower than people anticipated."
In a report to clients earlier this week, RBC Dominion Securities Inc. analyst Douglas Miehm outlined a number of challenges the legalized Canadian cannabis industry is facing, including a potential oversupply. According to his calculations, licensed producers have shipped “nearly twice as much product” to provincial wholesalers as they have have sold.
Licensed producers are also facing intense competition from illegal quarters.
“We believe that just 12 per cent of recreational consumption currently takes place in the legal channel based on Health Canada data and our consumption estimates. The price of legal cannabis has also increased since legalization. More alarming, however, is that pricing in the illicit channels has continued to decline postlegalization and is nearly 50 per cent cheaper than its legal counterpart,” Mr. Miehm wrote.
The sector is also bracing itself for possible regulatory restrictions in Canada over the sale of vaping products, which are due to become legal later this year.
The Centers for Disease Control and Prevention (CDC) in the United States on Thursday said it had documented 1,299 cases of lung injury, including 26 deaths, associated with e-cigarette product use or vaping. According to the CDC, the evidence suggests that a high incidence of cases involved people using products containing THC, a psychoactive compound found in cannabis.
Quebec is considering rolling out tighter standards on cannabis derivative products, including lowering THC levels in beverages to 5 milligrams from the current 10 mg Health Canada standard, and an outright ban on gummies. Quebec is Hexo’s largest customer, thanks to a supply deal with the Société des alcools du Québec.
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