HEXO Hits New Low In Wake Of Q1 Earnings
HEXO (NASDAQ:HEXO) reported its Q1 earnings and provided a forecast for profitability that has shares of the stock on the move. The caveat is that shares are moving lower right now and are just off the new low set in the wake of the report. As good as the forecast sounds, it’s not something we haven’t heard before and there is no guarantee profitability will come to pass.
The Canadian cannabis market has been plagued by a number of problems that just won’t seem to go away. The number one is overcapacity within the system, an overcapacity that HEXO itself is a part of and trying to alleviate. The company is shutting down a number of facilities due to redundancies within the system it is working hard to overcome. So, HEXO has a new strategic plan, but it’s not enough for us to get excited about, at least not yet.
HEXO’s Strategic Plan: The Path Forward
HEXO’s new strategic plan is called The Path Forward. The plan is focused on several areas that are intended to take advantage of missed revenue opportunities while cutting back on the costs the company can control. Those include up to $50 million in synergies with its new acquisitions as well as an effort to improve the balance sheet.
The company has over $220 million in convertible senior secured notes that it is trying to renegotiate. If this move is successful, it would cut down on interest expenses as well as the dilutive effects of convertibility.
Scott Cooper, President and CEO of HEXO relayed:
“We are taking immediate steps through our new strategic plan, The Path Forward, to strengthen our capital position, improve operations, accelerate organic growth and complete our transformation to be cash flow positive from operations within the next four quarters. Having visited all our core sites, and in meeting with our employees and customers, I am more confident than ever in HEXO’s future and our ability to accelerate the creation of short and long-term value for shareholders.”
The plan also includes some management changes, a new chairman of the board, and a pledge to be better with pricing. In total, the company is expecting to see net positive cash flow of $37.5 million this fiscal year with a total of $175 million over the next two.
HEXO Has Lackluster Q1
HEXO had a decent Q1, but, it was one without any really solid good news. The C$50.19 million (US$39.10) in revenue is up 29% sequentially and 70.3% from last year, but the gains are almost solely due to acquisitions.
The company completed the addition of Redecan and 48North during the quarter which added $14.6 million in revenue or about 29% of the net. The good news is that the non-beverage gross margin increased by 300 basis points to 28%, which does give a glimmer of hope that profitability is nigh.
Moving down the report, those glimmers are dashed by a widening loss, but there is a mitigating factor here as well. The increase in loss is due primarily to impairments related to overcapacity and investment turned sour. Backing those out, the loss is more in-line with last year and includes an increase in share-based compensation, marketing, and amortization.
The Technical Outlook: HEXO Is At An Extreme Low
Shares of HEXO are moving lower in the wake of the Q1 results and may move lower still, but there are signs the stock is overextending. The short-sellers have pushed the stock down to the lowest levels ever while the stochastic and MACD diverge from prices.
This is not a guarantee for a reversal, but does give some indication a bottom may be near. Assuming the company can move forward with The Path Forward, we would expect to see this stock begin bottoming over the next quarter or two.
