Hexo expects COVID-19 to dampen cannabis retail revenues from Ontario and Quebec markets

st-louis
Hexo CEO Sebastien St-Louis.

As Gatineau-based Hexo Corp. struggles to find its footing in Canada’s cannabis market, the licensed pot producer is expecting disruptions from the COVID-19 pandemic to hamper its revenues in the weeks and months ahead.

Hexo CEO Sebastien St. Louis discussed the impact of the novel coronavirus outbreak during the company’s second-quarter conference call Monday morning. He listed off the variety of ways Hexo has reformed its operations – measures such as staggering the company’s workstations and improving sanitation procedures at the company’s production facilities – and reaffirmed that the company is “confident” in its ability to continue producing pot throughout the pandemic.

While both the Quebec and Ontario governments have declared the cannabis sector an essential service, St-Louis said that restrictions put in place to help stem the spread of the virus will have a material impact on the Gatineau-based company’s earnings.

“The dramatic steps taken by our federal and provincial governments, along with most other nations of the world, over recent weeks have presented significant challenges for all businesses and ours is no different,” he said.

With physical distinacing guidelines from public health officials recommending against trips outside the home, brick-and-mortar pot stores have largely opted to close or else face dramatic declines in foot traffic. 

St-Louis referenced pot rival Canopy Growth’s decision to shutter its corporate-owned stores as an indication of the widespread impact coming to the industry. He noted that job losses throughout the Canadian economy could also dry up cannabis sales in the weeks and months ahead.

“This virus is having an enormous impact on humanity; it’ll certainly have an impact on the global economy,” St-Louis said.

The pandemic hit Hexo at a hard time, as the company looks to stabilize in a Canadian cannabis market that hasn’t yet lived up to its lofty expectations.

Though Hexo reported a 17 per cent bump in net revenues compared with a year ago, the company also posted a net loss of $298.2 million in the quarter.

The substantial losses are largely connected to a one-time impairment charge of $138.3 million from the closure and impending sale of the company’s Niagara production facilities, acquired through the firm’s $263-million acquisition of Newstrike Brands last year.

Though company officials told OBJ then that Hexo had plans to become a “top-tier” cannabis company through the Newstrike acquisition, St-Louis said Monday that the slower-than-expected rollout of retail licences in Ontario and Quebec, as well as a delay in regulatory approvals to sell cannabis-derivative products, has substantially affected Hexo’s ability to execute on its plans.

As a result, Hexo’s market capitalization has taken a substantial hit. The company’s share price sank as low as $1.10 Monday afternoon, a drop of 28 per cent from last week’s market close and a far cry from the stock’s 52-week high of $11.29. Hexo’s dramatic drop in value also pushed it to report a goodwill impairment charge of $111.9 million in the quarter, as its net assets now significantly outvalue its market cap.

If there’s a silver lining to the clouds swirling above Hexo, it might be the company’s value brand of pot, dubbed Original Stash. St-Louis says the recently launched low-cost bud drove a quarter-to-quarter increase of 57 per cent in adult-use product sales volumes.

Putting aside the fair-value costs that inflated the company’s Q2 loss, Hexo has also managed to trim its operating expenses 21 per cent and post a gross margin of 33 per cent across its entire product portfolio.

St-Louis said that Hexo can still be a leader in the Canadian cannabis market if it successfully pushes out its line of new derivative products and can position its value brand to take business from the illicit market.

“Original Stash proves that we can do that, and do that profitably.”