Luckin Coffee Inc

OTC:LKNCY

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to Luckin Coffee's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Alicia Guo, the Head of Investor Relations of Luckin Coffee for prepared remarks and introductions. Please go ahead, Alicia.

[Alicia Guo, executive]

Hello, everyone, and thank you for joining us on today's call. Luckin Coffee announced its first quarter 2024 financial results earlier today. Today, you will hear from Dr. Guo Jinyi, Chairman and CEO of Luckin Coffee; and Ms. An Jing, CFO of Luckin Coffee. After the company's prepared remarks, the management team will conduct a question-and-answer session based on questions submitted via the company's webcast.

We will be referring to a slide presentation on today's call, which can be found via a conference call webcast link as well as on the company's IR website. The IR website link is investor.lkcoffee.com. During today's call, the company will be making some forward-looking statements regarding future events and results. Statements that are not historical facts, including, but not limited to, statements about the company's beliefs and expectations are forward-looking statements. Forward-looking statements involve inherent risks and uncertainties. Further information regarding these and other risks is included in the company's filings with the SEC.

With respect to any non-GAAP measures discussed during the call today, the accompanying reconciliation information related to those measures can be found in the earnings press release issued earlier today. During today's call, Dr. Guo will speak in Chinese and his comments will be translated into English. Now I would like to turn the call over to Dr. Guo Jinyi, Chairman and CEO of Luckin Coffee. Dr. Guo, please go ahead.

[Jinyi Guo, executive]

[Interpreted] Hello, everyone. Welcome to today's earnings conference call, and thank you for continuing to support Luckin Coffee. I am Luckin Coffee's Chairman and CEO, Guo Jinyi.

This quarter, despite a market landscape filled with both opportunities and challenges, Luckin Coffee continued to achieve rapid revenue growth and reached a new record high in our total number of stores. This was made possible by leveraging our unique business model, continuous product innovation and scale advantages. However, as industry competition intensifies and macroeconomic conditions fluctuate, we have experienced a slight dip in profits.

Adjusting to the current market environment, Luckin Coffee has quickly recalibrated its approach and solidify a resilient, sustainable expansion strategy so as to lay a solid foundation for the company's sustainable growth. Meanwhile, Luckin Coffee continues to reward its customers by offering promotions like the 10,000-store celebration event, ensuring more people can enjoy high-quality coffee at affordable prices.

With the rapid expansion of our stores, we've achieved a new historic high in cumulative transacting customers. We will continue to maintain a steady progress moving forward based on our established strategy. While continuing to reward our customers, we will also focus on expanding our market share and consistently providing consumers with high-quality, affordable and convenient coffee offerings. Through these efforts, we aim to drive continuous development of the Chinese coffee market.

Looking further into our numbers, we experienced robust year-over-year growth in revenue for the first quarter. However, profits saw a slight decline due to factors such as seasonality and rising competition within the industry. Our total net revenue reached RMB 6.28 billion, representing a year-over-year growth of 41.5%.

Operating profit stood at negative RMB 65.1 million with an operating profit margin of negative 1.0%. Self-operated store operating profits was RMB 320.8 million with a self-operated store operating profit margin of 7.0%. In the first quarter, the total number of net new store opened was 2,342 and a number of monthly average transacting customers was 59.91 million. Our CFO, An Jing, will share further financial details later on this call.

In the first quarter, Luckin Coffee added 2,342 new stores bringing our total number of stores to 18,590. Among these stores, there are 12,199 self-operated stores and 6,391 partnership stores. We continue to lead the market, expanding our comparative advantage over competing brands. As competition intensifies in the Chinese coffee market, we will remain vigilant in addressing customer needs and adhering to a prudent and sustainable store expansion strategy.

While we plan to increase our number of stores in higher-tier cities, we will also accelerate expansion into lower tier cities through our partnership model. Based on our analysis, we observed surge in consumer purchasing power in lower-tier cities during Chinese New Year. And the emergence of these holiday consumption patterns highlights the immense growth potential of the coffee market in these cities.

This further corroborates the direction of Luckin Coffee's development strategy. At the end of March, Luckin Coffee officially opened its Four Seasons and Eight Solar Terms theme store in Shenzhen in partnership with Kweichow Moutai. The Jiangxiang Flavored Latte, a collaboration between Luckin Coffee and Kweichow Moutai, has become a favorite among the younger generation and the customer base of this product has surpassed 25 million as leading brands in the Chinese coffee and baijiu sectors, respectively. Luckin Coffee and Kweichow Moutai are united by their commitment to high quality, further strengthening their long-term strategic partnership.

In terms of our product offerings, Luckin Coffee launched 22 new products in the first quarter, including the Chu's Orange Latte, Pear flavored Velvet Latte and the new GESHA series. Among them, the Pear flavored Velvet Latte sold more than 7.24 million cups in its first week alone. Consumers have also widely praised the Luckin Coffee's classic products.

In April, marking the third anniversary since the launch of our Coconut Milk Latte, total sales of this product surpassed 700 million cups. The Orange Americano also reached annual sales exceeding 100 million cups. Going forward, we will continue to uphold product innovation, consistently providing customers with high-quality products and a more satisfying consumption experience.

Behind the rapid growth of our products like the love and support of our customers. In the first quarter, we had about 22.92 million new transacting customers, While continuously acquiring new customers, we also maintain our ongoing brand promotion efforts continually deepening the popularization of coffee culture.

This year, Luckin Coffee's team of professional bean hunters once again gathered to kick off the 2024 Global Bean Search Journey, Odyssey to the God Shot in Yunnan, embarking on a journey to uncover high-quality coffee beans. In April, we were pleased to announce that Luckin Coffee became the exclusive official coffee partner of the 2024 Badminton Asia Championships.

Luckin Coffee remains proactively committed to China's carbon peak and neutrality targets. As part of this effort, we're dedicated to incorporating the principles of low carbon and sustainability across all aspects of our raw material procurement, manufacturing processes, operational activities and consumer interactions.

In March 2024, Luckin Coffee was proud to commence the trial operation of its first green coffee bean processing plant in Baoshan City, Yunnan province. The plant utilizes world-class technology in coffee cherry processing with an annual processing capacity of up to 5,000 tons.

This plant enables Luckin Coffee to further optimize its high-quality supply chain, enhance the overall quality of Yunnan coffee beans and drive the scale standardization and sustainable growth of Yunnan's coffee industry. This new plant employs water-efficient coffee cherry processing production lines and achieves zero industrial wastewater discharge, resulting in a significant reduction of exhaust emissions during the drying process of coffee beans.

Additionally, Luckin Coffee plans to establish a training center in our new location, providing training license related to coffee planting and processing-related knowledge for Luckin Coffee's employees and local farmers, teaching concepts relating to regenerative agriculture and sustainable production.

On April 20, we officially commenced the operations of the Luckin Coffee Jiangsu roasting plant in Kunshan Jiangsu province. The plant has received a total planned investment of USD 120 million and has an annual roasting capacity of 30,000 tonnes. This plan stands as the largest coffee roasting plant in China's domestic coffee industry to date, leveraging our industry knowledge and operational scale.

Our new site is deeply integrated with the coffee industry vertical supply chain, empowering industry-wide quality upgrades with new technology-driven productivity. These developments demonstrate Luckin Coffee's industry leadership in promoting high-quality, sustainable development.

The new roasting plant integrates green operational concepts throughout its production processes. For example, it employs sponge city designed for rainwater recycling utilizes solar photovoltaic power system for electricity, makes use of eco-friendly low-energy air conditioning systems and performs intelligent energy consumption, monitoring to reduce factor energy consumption and enhance energy management.

It also promotes dust-free exhaust emission from production and reduces waste gas emissions. These are the key highlights of our performance in the first quarter. Next, I would like to invite our CFO, An Jing, to present the financial data and commentary.

[Jing An, executive]

Thank you, Jinyi. Good morning, afternoon and evening, everyone. Thank you for today's call. We appreciate your continued interest and your support. I'm Jing An, the CFO at Luckin Coffee. And I will share our first quarter of 2024 financial performance.

Before we dive into our financial results, I would like to extend a heartfelt thank you to all of our dedicated employees, loyal customers and valued investors. Your ongoing support is instrumental to our success, and we remain committed to delivering value and innovation in the coffee industry.

Now I will take some time to highlight our 2024 first quarter results in detail. Let's start with our financial highlights. In the first quarter of 2024, the total net revenues for the quarter reached RMB 6.3 billion, marking an increase of 41.5% compared to the same period last year.

The growth was primarily driven by a surge in projected sales, the expansion of our store network and a substantial increase immensely transacting customers. Revenues from self-operated stores totaled RMB 4.6 billion, reflecting a 45.8% increase from the first quarter of 2023. However, the same-store sales growth for self-operated stores stood at negative 20.3% compared to 29.6% of the same quarter last year.

Additionally, our store level operating profit for self-operated stores stood at RMB 320.8 million with store level operating profit and margin of 7%. Furthermore, revenues from partnership stores contributed significantly, totaling RMB 1.5 billion representing a substantial 32.8% increase from the same quarter last year.

Operating loss for the quarter was RMB 65.1 million, primarily due to the increased operating expenses associated with our business expansion efforts. Turning to our operational results. We are pleased to report a substantial increase in our store footprint. During the first quarter, we opened a total of 2,342 net new stores, including 2 new stores opening in Singapore, bringing our global store count to 18,519. This included 12,199 self-operated stores and 6,391 partnership stores. By the end of the first quarter, our stores were operational in more than 315 cities throughout China, along with one overseas market.

We view our expansion into additional cities as a clear demonstration of our dedication to diversifying our geographical footprint and [ seize the fresh ] market opportunities. In the first quarter, our average monthly transacting customers reached 59.9 million, representing a staggering 103.2% increase from the same quarter last year. This underscores the continued strength of our brand and the growing demand for our products and services across diverse markets, despite facing certain challenges due to cold weather in the first quarter.

We are optimistic in our steadfast business growth and the ongoing expansion of our operations. Nevertheless, our commitment to operational excellence and the customer satisfaction remains unwavering as we navigated through these challenges and to pursue strategic growth opportunities.

Next, I would like to delve into the details of our margin performance. From a group level perspective, our reported overall operating loss for the first quarter of 2024 was RMB 65.1 million equivalent to an operating margin of negative 1%, a stark contrast to the positive 15.3% in the same period last year.

Meanwhile, we observed a net profit margin of negative 1.3% this quarter as opposed to the positive 12.7% in the same quarter of the previous year. This significant shift in our profitability was largely attributed to the reduced average selling price of our product aimed of ongoing RMB 9.9 high-quality coffee campaign, coupled with store rental, labor and material costs stemming from our rapid store expansion strategies.

However, these impacts were partially mitigated by the advantages presented by economics of scale. From a store level view, our store level profit margin of self-operated stores was 7% this quarter compared to 25.2% in the same period last year. The primary cause for this downturn was aforementioned reduction in the average selling price of our products.

The company's overall expenses surged by about 69% year-over-year, mainly due to our business expansion endeavors. Our general and administrative expenses as a percentage of revenue stabilized at 8.9% in the first quarter of 2024, marginally increasing from 8.1% in the same quarter of 2023.

In absolute terms, our G&A expenses experienced a 54.2% increase year-over-year, driven by augmented payroll cost, R&D expenditures, office supplies and the rise in share-based compensation from restricted share units and options granted to management and employees. Store rental and other operating costs roughly doubled this quarter compared to the same period last year. This uptick correlates with expansion in the numbers of operational stores and the volume of items sold this year, which result in the increase of payroll expenses, store rentals, utilities and other operational costs.

Compared to the previous year, our sales and marketing expenses as a percentage of revenue increased from 4.5% to 5.2% and the absolute value of such expenses rose by roughly 63.4% year-over-year. This increase is reflective of our strategic investment in enhancing brand recognition, expanding product education outreach. And reinforce our market position through diverse channels, thereby attracting new customers and retaining current customers.

Concurrently, commission fees paid to third-party delivery platforms so was a stand increase to accommodate the increased number of delivery orders. Loss and expenses related to the previously reported fabricated transactions and related restructuring were negative RMB 52.5 million as the company was entitled to receive approximately USD 7.3 million, which is RMB 52.7 million from a primary D&O insurance carriers pursuant to an arbitration award in the first quarter of 2024.

Then let's move on to balance sheet and cash flow statements. Following our restructuring in 2022 and the settlement of the federal class action suit, we have fully redeemed the offshore notes. This has enabled us to sustain a robust balance sheet, while unlocking flexibility to allocate excess financial capacity towards shareholder value.

As of March 31, 2024, our financial reserves, inclusive of cash, cash equivalents, restricted cash and short-term investments stood at approximately RMB 2.4 billion. This represents a reduction from the RMB 3.8 billion recorded at the close of 2023. This decrease was mainly attributable to the purchase of property and equipment and raw materials to meet the company's rapid footprint expansion.

During the first quarter, we had a net operating cash outflow of RMB 264.4 million compared to a net operating cash inflow of RMB 1.1 billion in the same quarter of 2023. Our substantial cash reserves, coupled with a sound balance sheet, provide a solid foundation that enable us to navigate risks effectively and secure a competitive edge in this unpredictable market environment.

So modest start to our first quarter aligns with our internal projects, given our ongoing rapid expansion of store locations. The overall coffee market in China continues to exhibit robust growth with industry tending towards more sustainable levels.

Despite anticipating continued volatility in market dynamics and the competition, we remain confident in our brand, our products and our dedicated employees, we are optimistic about our future growth as we are leading the industry with innovative and popular products and strategic promotion initiatives all of which holds the promise of further propelling our business forward. I will now turn it over to Jinyi for concluding remarks followed by Q&A.

[Jinyi Guo, executive]

[Interpreted] China's coffee industry is currently at a pivotal phase characterized by significant growth and strategic opportunities. Despite intense competition, Luckin Coffee as a leading brand in the coffee market in China is committed to expediting the expansion of our store network, enhancing our supply chain, fortifying our digital prowess, streamline costs and error rating efficiency. These concerted efforts are designed to extend and cement our competitive lead, consolidate our market-leading position and realize sustained, robust and rapid growth over the long term.

We're steadfast in our commitment to drive business expansion and increase market share, ensuring enduring value for our customers, shareholders and all other stakeholders. We also remain dedicated to social responsibility and the pursuit of sustainable practices. Our ongoing mission is to offer superior quality at more attractive prices, providing customers with coffee that is both delicious and affordable.

With the vision of becoming a global recognized coffee brand, we're making daily strides towards achieving our goal of becoming a global renowned century-old brand with enduring prosperity.

[Operator]

[Operator Instructions] I will turn the call over to Alicia Guo at Luckin Coffee, who will moderate today's Q&A session.

[Alicia Guo, executive]

Thank you. Now let's begin with the first question. How does the company view the significant drop in profit in the first quarter of 2024? Will there be any adjustments regarding the store expansion strategy?

[Jinyi Guo, executive]

[Interpreted] Thank you for your question. The profit drop in the first quarter of 2024 was attributable to a combination of objective factors and deliberate strategic adjustments. Objectively, the cold weather and considerable temperature variations in the previous quarter had a tangible impact on customer visits. Concurrently, the Chinese coffee industry is undergoing a period of rapid expansion, brimming with strategic opportunities, which has led to fierce competition. In light of these dynamics, our company has prioritized the market share as the core focus of our growth strategy and recalibrated the pace of our store expansion. This aggressive expansion strategy has allowed us to widen the gap with our competitors. The reorganization of our store portfolio has accentuated the seasonal nature of our stores, particularly those in malls and on straight fronts.

Nevertheless, the emergence of our holiday shopping trends has contributed to a more stable foundation for the company. With the onset of spring and warmer temperatures, we have seen an uptick in sales volumes. Yet, we continue to anticipate more challenges in the upcoming second quarter similar to our first quarter challenges. In the current increasingly competitive landscape, Luckin Coffee as the leader in the Chinese coffee market is committed to a robust and sustainable store expansion strategy while maintaining our high standards for new stores, guaranteeing the excellence of each establishment. We will continue to solidify our leading position in the industry through innovative products and customer-focused pricing strategies as we persist in our pursuit of generating substantial long-term value.

[Alicia Guo, executive]

Thank you Dr. Guo. Let's move on to the next question. Are there any updates to the company's capital strategy?

[Jinyi Guo, executive]

[Interpreted] As we have mentioned before, we will continue to monitor the U.S. capital markets, but our current emphasis is on the execution of our business strategy, which centers on the enhancement of our operational and developmental pursuits. We have no specific time line or schedule for uplifting on any mainboard market currently. Our current focus is on executing our strategic plans through the provision of superior products and services to our customers with the objective of increasing our market penetration and ensuring consistent long-term returns for our investors.

[Alicia Guo, executive]

Thank you, Dr. Guo, Ms. An. That is all the time we have for today's earnings conference call. We thank you for your participation on today's call. We look forward to providing you with regular business updates and look forward to speaking with you again next quarter.

[Operator]

This concludes our call today. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]