By Ciara Linnane, MarketWatch
Hexo Corp. stock fell another 6% Friday, bringing its weekly losses to 14%, after CIBC downgraded the stock and said the 200 job cuts announced Thursday were the latest sign of the challenges facing the Quebec-based cannabis company.
“Compressed margins, lower Quebec market share (and a less attractive Quebec contract), management credibility issues, and a capital raise all serve as reasons to believe that both operations and sentiment could worsen from here,” analysts John Zamparo and Krishna Ruthnum wrote in a note to clients.
The analysts cut their stock price target to C$3 ($2.30) from C$4. Investors have been bullish on Hexo /zigman2/quotes/206508254/composite HEXO -4.37% /zigman2/quotes/200008967/delayed CA:HEXO -4.95% for a number of reasons, including its joint venture with Molson Coors Canada, which offered the backing of a strong consumer packaging goods partner, they wrote.
The company had a more attractive balance sheet than peers at about C$230 million in net cash, and the Quebec purchase contract was presented as one that would guarantee volumes for years, they wrote. Hexo was awarded a three-year contract in September of 2018 to manage a warehouse and distribution center for Quebec adult-use webstore orders. Quebec is Canada’s second-most populous province with about eight million people.
In June, however, Hexo management indicated that it would be short-sighted to enforce the contract for near-term gains.
“Whether or not this is the right move is debatable, but without the contract, Hexo is relatively undifferentiated versus peers, in our view,” said the note. “Today’s announcement of job cuts indicates to us that the company has not been able to capture meaningful share outside its home province, and we do not believe investors will wait until Quebec’s lack of retail footprint has been addressed.”
The company’s announcement of a C$70 million convertible debt offering on Thursday that caused it to postpone earnings was “curiously timed,” and acts as another question mark, the analysts wrote.
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Hexo will shut down several facilities near Niagara Falls, Ontario, as a result of the layoffs, according to people familiar with the matter. Those facilities were once operated by Newstrike Brands, which Hexo acquired in the spring. Hexo had 822 employees as of April 30, according to its last quarterly filing, and added about 250 more when its Newstrike acquisition closed in May.
The news is just the latest in a long line of problems at the company, including a revenue warning issued in early October and the resignation of its chief financial officer. The company is struggling as the rollout of legal cannabis in Canada has been stymied by a dearth of retail stores, due to regulatory obstacles and the slow pace of license approvals. Wall Street analysts have also tamped down expectations for the past several weeks, issuing a wave of price target reductions.