Luckin Coffee (LK) announced earnings today before the market opened for the first time since their IPO and results were a mixed bag.
LK reported a loss per share of $0.48 compared to the expected $0.43. Revenues exceeded expectations totaling $132.4 million versus the expected $130.3 million. The company also reported a 2Q loss of $99.2 million. Luckin would like to focus on this number: total net revenues were 909.1 billion yuan, which represents a 648% increase from the year earlier. The company also announced that they reduced the loss per store from 81.7 million to 55.8 million yuan. LK attributed this to better efficiency and bargaining power.
“We believe this is the result of our distinguished value proposition of delivering our customers high quality, high convenience and high affordability,” CEO Jenny Zhiya Qian said in a statement.
The Chinese Starbucks competitor IPO’d in May at $17 per share and the stock rallied more than 50% into early August. During its red-hot July, Luckin also announced a joint venture with the Kuwait Food Company Americana, which will set them up to launch a retail arm in the Middle East and India. This move was well received as the Americana Group currently operates 29 food production sites as well as 1,800 restaurants in the Middle East. India is among the world’s fastest-growing markets for packaged coffee, new research by Mintel shows, expanding at a compounded annual rate of over 15% between 2012 and 2016. Only Indonesia and Turkey are growing faster.
In China, Luckin added 593 stores in the quarter bringing the total store count to 2,963 across 40 cities (the company is intending to reach 4,500 stores by the end of 2019). The majority of these stores are kiosks and pick-up locations, where customers can quickly get coffee or they act as delivery hubs. These low-rent spaces account for 91% of operations and do present positive value propositions for the future, and that future seems to hinge on Luckin expanding to beyond coffee or shaving down the price of marketing significantly in the next year or so. Also consider this, of Luckin’s locations, a majority of stores are a .25 mile radius from a Starbucks. This means that Luckin in right in Starbuck’s retail territory, and, without a doubt, the competition is on.
Building a Network
Luckin’s aggressive spending and discount promotions are keeping the company in the red and based in results today traders are not sure customer acquisition will climb once the discounts start as the stock has shed 14% of its price at the time of writing.
However, as we stated in our initial preview of Luckin, is the company a technology company or a beverage company? Luckin thinks about its company as creating a “coffee network”. Recently, the company added tea and small bites. So, does the company’s growth come down to converting the Chinese into coffee drinkers versus creating a network effect for the company’s brand?