Hexo’s Declining Sales Picture Triggers Sell-Off in Cannabis Sector

Article by Naill McGee, Globe and Mail

Hexo’s declining sales picture triggers sell-off in pot sector NIALL MCGEE

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.
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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.
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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.
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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.
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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.
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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.
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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.”
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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.
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“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.
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“The actual rollout and maturing of this market is just going a lot slower than people anticipated.”

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