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Hexo Sees Sales Boost As Low-Cost Flower Cuts Into Illicit Market

June 16, 2020

Ottawa, Ontario-based Hexo Corp. reported a 30% jump in net revenue for its fiscal third quarter, ended in April. Net revenue reached C$22.1 million ($16m), up from C$17.0 million ($12.5m) in the second quarter. The boost in sales was accompanied by improved operational performance that saw gross margins grow to 40% and operating expenses drop to C$26.8 million ($19.7m).

Hexo also sold a great deal more product than it has in past quarters. Adult-use grams and gram equivalents of cannabis increased 42% to 9,338 kg. The company attributed this growth to the popularity of its recently launched value brand Original Stash, which retails for C$4.50 ($3.32) a gram. This price is low enough to compete with the illicit market, which habitually undercuts legal pricing. Other new products like hash and oil extract drops also contributed to the overall growth.

The company took a net loss of C$19.5 million ($14.4m) for the quarter, down sharply from C$281.5 million ($208m) the previous quarter. The improvement stems in large part from the absence of certain impairments that drove up losses in the second quarter, including the sale of a Niagara facility that resulted in a C$138.3 million ($102m) charge and a C$111.9 million ($83m) impairment of goodwill. All things considered, Hexo logged an adjusted EBITDA loss of C$4.3 million ($3.17m). Since the fiscal fourth quarter of 2019, the company has seen its EBITDA loss shrink steadily. In addition to increased efficiencies across operations, reduced and refocused marketing expenditures have also lessened its losses.

Hexo plans to achieve positive EBITDA in the first half of fiscal 2021. However, it cautioned that the ongoing Covid-19 pandemic could impact that timeline. While three months of lockdown have bolstered “consumer spending on recreational activities that can be enjoyed in the comfort of their homes,” Hexo argued that the more decisive factor is the expansion of retail in its key markets. “Our plans to achieve adjusted EBITDA positive in the first half of fiscal 2021 will depend on the growth of retail stores in our two largest markets, Ontario and Quebec,” the company said. “It is difficult to determine the timing of new licenses for new retail stores in Ontario and the build out of additional stores in Quebec. We await additional information from the authorities of each province and territory.”—Danny Sullivan

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