Hexo Withdraws 2020 Outlook, Stock Falls 24%

Hexo (HEXO) is having a hard time. As of 11:43 AM ET today, the stock has fallen 24%. The company announced that it’s withdrawing its fiscal 2020 outlook. CFO Michael Monahan resigned this week. As a result, Bank of America Merrill Lynch double-downgraded the stock. Analyst Christopher Carey said that the company would reduce its revenue target for fiscal 2020. The company also provided preliminary fourth-quarter revenue results. Let’s see why Hexo made this decision.

Hexo withdraws its fiscal 2020 outlook 

Today, Hexo announced its preliminary revenues for the fourth quarter and year ended July 31. The company expects its net revenues for the fourth quarter to be approximately $14.5 million–$16.5 million. Meanwhile, the company expects its net revenues for fiscal 2019 to be approximately $46.5 million–$48.5 million.

Sebastien St-Louis, Hexo’s CEO and co-founder, said, “Fourth quarter revenue is below our expectation and guidance, primarily due to lower than expected product sell-through.”

Hexo withdrew its fiscal 2020 guidance. In the third-quarter earnings call, the company said it expects to generate revenues of $400 million in fiscal 2020. Hexo said that it’s on track to double its revenues in the fourth quarter. However, the company cited the following reasons for withdrawing the guidance:

  • slower-than-expected store rollouts
  • delay in government approval for cannabis derivative products
  • early signs of pricing pressure
  • regulatory uncertainty across the pan-Canadian system
  • increased unpredictability for the availability of cannabis derivative products

Hexo was gearing up for Cannabis 2.0 along with Aurora Cannabis (ACB), Aphria (APHA), Canopy Growth (CGC) (WEED), and Cronos Group (CRON).

BMO analyst Tamy Chen thinks that Hexo will miss its revenue guidance for the fourth quarter. Notably, he thinks that a 20% sales decline for the cannabis sector sequentially might be the reason.

Analysts’ fourth-quarter estimates for Hexo 

Analysts expect Hexo’s revenues to be around 25.7 million Canadian dollars for the fourth quarter. The company could also report a loss of 0.06 Canadian dollars per share this quarter. Analysts expect a negative EBITDA of 9.3 million Canadian dollars for the fourth quarter.

Aphria will release its results for the first quarter of fiscal 2020 on October 15. Overall, analysts expect the company’s revenues to be around 134.2 million Canadian dollars. The company’s revenues were 13.2 million Canadian dollars in the first quarter of 2019. Aphria could also report a loss of 0.01 Canadian dollars per share in the first quarter. To learn more, read Aphria: What to Expect from Its Q1 2020 Earnings.

Problems in the cannabis industry

The cannabis industry’s problems continue. The last two months were challenging. Marijuana legalization in the US brought a spark back in the industry. However, Hexo’s stock crash today is taking a toll on the other cannabis stocks. At 11:43 AM ET, Canopy Growth, Aurora Cannabis, Aphria, and Cronos Group have fallen 8.1%, 4.9%, 9.3%, and 6.3% today.

Meanwhile, Tilray (TLRY) is being investigated for potential securities violations and breach of fiduciary duty claims. The stock has fallen 10.3%. Tilray stock has fallen 46.5% since its inception. Hexo stock fell 2.2% in September. So far, the stock has fallen 29% in October.

What to expect now?

According to Hexo’s management, the company will adjust its sales and operations strategy to drive future growth. The strategies include producing high-selling strains and initiating a new sales strategy. Hexo will discuss the changes more in its fourth-quarter earnings call.

A Bank of America Merrill Lynch analyst said that Hexo’s CFO resigning abruptly poses a lot of questions about the company’s strategies and growth. Read Hexo: Why Did BofA Double Downgrade the Stock? to learn more.

Do we see problems ahead for Hexo? We’ll have to wait for more details in the company’s fourth-quarter results.

Hexo will announce its fourth-quarter results on October 24 before the market opens. We’ll see if Hexo faces more problems ahead.

For more analysts’ outlook on cannabis stocks, visit our Word on the Street page. For more cannabis-related news and updates, visit 420 Investor Daily.