Starbucks' China Rival Luckin Coffee Turns Up Profit in Q3

China's largest coffee chain has been successfully recovering from its 2020 fraud scandal.
Nov. 22, 2022 22:20
Starbucks' China Rival Luckin Coffee Turns Up Profit in Q3

(CapitalWatch, Nov. 22, New York) Starbucks' rival in China, Luckin Coffee Inc. (OTC: LKNCY), which has been recovering from its scandalous downfall in 2020, released its third-quarter report Tuesday, showing 66% revenue growth and expansion to nearly 8,000 locations.

The company said in a statement today that revenue in the three months through September reached $547.5 million. It also booked an operating income of $82.3 million in contrast to operating loss of $940,000 in the same period a year ago.

By the end of Q3, Luckin counted 7,846 stores in China, of which 5,373 were self-operated stores and 2,473 were partner-operated. Revenue from partner stores made up 23% of the net total. The number of average monthly customers increased 71% year-over-year to 25.1 million, according to the report.

Net income in the September quarter was $74.3 million, or 24 cents per share. That figure includes a one-time non-cash gain of $17.5 million related to the senior notes extinguishment and stands in stark contrast to the large losses the company logged as it battled the consequences of its fraud scandal.

The case, called on by several short-sellers in early 2020, tanked Luckin's market value and forced it to delist from the Nasdaq by mid-year – in January of the same year, the stock had risen over $50 per share. 

The company confirmed to have inflated its sales in 2019, the year it celebrated its $561 million IPO in New York. Its top executives, including the founder and chairman, got booted, and Luckin paid fines to both the U.S. Securities and Exchange Commission and to Chinese regulators.

Since, Luckin has been led by a new chairman and chief executive, Jinyi Guo. After he took the reins and pledged to regain investors' trust, Guo had to fight for his seat in an internal conflict against the former executives.

So far, Guo seems to have taken control of both situations – the internal conflict and Luckin's push out of mistrust. Year-to-date, OTC-traded shares of Luckin are up 84%, at $17.99 apiece. To compare, in the middle of Luckin's scandal in the spring of 2020, its market value fell below $2 a share. And Guo is issuing optimistic forecasts:

"During the last two years, we have rebuilt our teams across the organization, bringing in some of the industry's top talent," he said in the statement today.

"I am exceptionally proud of the dedication from everyone at Luckin Coffee, as we continue to solidify our position as a world-class coffee brand. Furthermore, the release of our 2020-2022 corporate governance report showcased our determination to create both customer value and social value and laid a solid foundation for the long-term sustainable development of Luckin Coffee."

On the downside, Luckin said in its report today that Covid-related store closures are expected to continue in the months ahead and will negatively impact the company's performance.

Luckin showed that its losses and expenses related to the fraud case of 2020 decreased by 88% to $1.3 million in the third quarter since the company "successfully completed its provisional liquidation in March 2022 and substantially resolved all outstanding litigations." These expenses in the third quarter were for legal fees for U.S. securities litigations and other advisory service fees.

Luckin Coffee has become China's largest coffee chain despite its troubles. It has long achieved its pre-IPO milestone of outnumbering Starbucks (Nasdaq: SBUX) in China – the latter celebrated its 6,000th China store opening in late September.

Still, competition is intense among coffee retailers in China's market – recently, the Chinese branch of Canadian coffee chain Tim Hortons (Nasdaq: THCH) partnered with e-commerce titan Alibaba Group (NYSE: BABA; HKEX: 9988) to bring coffee products to millions of users of Alibaba's online marketplaces. Also backed by tech giant Tencent Holdings (HKEX: 0700; OTC: TCEHY), Tim Hortons China is growing its presence fast and expects to open 2,750 stores in the country by 2026.