Cannabis company HEXO (HEXO) was coming off a poor finish to fiscal 2020 when it released its year-end and fourth-quarter results on Oct. 29. Although net sales of 27.1 million Canadian dollars grew by 76% year over year, the company's net loss of CA$169.5 million, which was weighed down by writedowns and losses, spooked investors. The company desperately needed an improved performance this past quarter and fortunately, it delivered with strong top and bottom lines.
HEXO released its first-quarter results of fiscal 2021 on Dec. 14, and there were many positives that investors could take away from the earnings report. Here are four of the highlights from the quarter that were among the most promising from the three-month period ending Oct. 31.
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1. HEXO's beverage sales of CA$3.1 million grew 54% from Q4
A key area of interest to HEXO investors is how the company does on beverages. Truss Beverages, HEXO's joint venture with Molson Coors, was supposed to give the company a big advantage in the beverage market by partnering with a big-name brewer. And the results are encouraging thus far. Net revenue from beverage sales in Q1 totaled CA$3.1 million, up 54% from CA$2 million in Q4.
Truss claims it is "number one in beverages," which is supported by retail data from HyFyre that shows that Truss has a 35% share of the cannabis-infused beverages market in Canada, while rival Canopy Growth is at 33%.
Cannabis-infused beverages are a new segment of the market this year for Canada, and it's one way cannabis companies can unlock additional growth. HEXO's dominance in that area gives it a big advantage over its peers. Its total net revenue for the period of CA$29.5 million was CA$2.3 million higher than Q4's total of CA$27.1 million, and the CA$1.1 million increase in adult-use beverage revenue made up a big part of that quarter-over-quarter growth.
2. Dried flower sales rose 7%, thanks to Original Stash
One way Canadian cannabis companies have been trying to combat the black market for pot is by introducing value brands. In HEXO's case, that's Original Stash, and it was pivotal to its growth in Q1.
The company credited Original Stash for much of the 7% quarter-over-quarter growth that it achieved in the dried flower segment, stating that the 28 gram version of the product grew at a rate of 28% during the period and that its smaller product offering at just 14 gram was even more popular, with sales increasing at a rate of 42%.
Generating any sales growth is a challenge this year in the cannabis industry, especially with competition on the rise. The increasing popularity of Original Stash is a positive sign for HEXO as it demonstrates that the company has found a way to continue to grow sales, potentially luring more customers away from the black market.
3. Operating loss was smaller than in Q4
Cannabis investors should never neglect the bottom line. And one number that looked great on HEXO's financials in Q1 was its operating loss of just CA$2.6 million. It was a huge improvement from the CA$106.2 million loss the company incurred just three months earlier. Q4 was full of losses and writedowns, and HEXO noted in its earnings release that the lack of non-recurring charges this past quarter helped improve its bottom line.
However, it's still important to see that for yourself, as non-recurring charges can sometimes pop up on an income statement, even though they're not supposed to be regular items on there. There's no substitute for actually seeing those charges drop off, as it can be a red flag to investors if non-recurring items continue to weigh down financials (since it suggests they may not be temporary). That's why HEXO cleaning up its financials, bringing down expenses, and not having one-time expenses bring down its numbers in Q1 is a positive sign and should get investors excited that perhaps the worst may finally be behind the company.
4. Level of cash burn is improving
Another important consideration is cash burn. Improving its cash position can allow the company to be more self-sufficient, whether it wants to grow its business organically or just avoid diluting its shareholders through share issuances. During the three months ending Oct. 31, HEXO only used CA$6.1 million to fund its day-to-day operating activities. During the same period last year, it burned through CA$34.2 million. In its most recent fiscal year ending July 31, HEXO used up CA$94.6 million just on its operations.
The slowing cash burn is a great sign for investors, and they'll want to keep an eye on it to see if HEXO can continue to keep its cash balance strong. As of Oct. 31, HEXO reported cash and cash equivalents of CA$149.8 million.
Is HEXO a buy after these results?
Overall, Q1 was a strong start to fiscal 2021 for HEXO, and investors should be happy with this latest earnings report. Year to date, the marijuana stock is still down more than 30% and significantly underperforming the Horizons Marijuana Life Sciences ETF.
One good quarter doesn't mean HEXO is out of the woods, but it could be key to turning things around. If the Ontario-based cannabis company can build on these results and continue to grow its beverage business, it could be one of the top Canadian pot stocks to own in 2021.
It's not a stock I'd consider buying just yet, but it's definitely worth keeping on your watch list, as there's a lot of potential here.
