Luckin Coffee Inc

OTC:LKNCY

Earnings Call Analysis

Luckin Coffee Sees Significant Growth in Q2 2024

In the second quarter of 2024, Luckin Coffee achieved substantial growth, with total net revenues increasing by 35.5% year-over-year to RMB 8.4 billion. The company opened 1,371 new stores, bringing their total to nearly 20,000 globally. Their operating income was RMB 1.05 billion, resulting in an operating margin of 12.5%. Net profit for the quarter was RMB 871 million, with a net profit margin of 10.4%. The number of monthly transacting customers grew significantly by 61.8% year-over-year to reach 69.7 million. Luckin Coffee continues to focus on market expansion, product innovation, and sustainable practices.

Impressive Revenue Growth

In the second quarter of 2024, Luckin Coffee achieved remarkable financial performance. The company reported total net revenues of RMB 8.4 billion, marking a significant 35.5% increase from the same period last year. This growth was driven by higher product sales, an increased number of operational stores, and a surge in the number of monthly transacting customers. Revenues from product sales alone grew by 39% to RMB 6.6 billion.

Expanding Store Network

Luckin Coffee saw substantial growth in its store operations. In Q2 2024, the company opened 1,371 new stores, including 5 in Singapore, bringing the total to an impressive 19,961 stores. This expansion included both self-operated and partnership stores, covering more than 330 cities across China and one overseas market. Notably, the store count surpassed 20,000 by July 18, 2024, consolidating Luckin's position as the largest coffee chain in China.

Customer Engagement on the Rise

The average number of monthly transacting customers reached 69.7 million in the second quarter of 2024, a dramatic 61.8% increase from 43.1 million in Q2 the previous year. This demonstrates Luckin’s success in attracting and retaining customers, highlighting the brand's growing popularity and robust customer base.

Profitability and Margins

Despite some challenges, Luckin Coffee managed to report a net profit margin of 10.4% in the second quarter of 2024, a significant improvement from a negative margin the previous quarter. Operating income stood at RMB 1.05 billion with an operating margin of 12.5%. This rebound in profitability was partly attributed to increased sales of iced drinks during warmer weather. However, margins from self-operated stores decreased to 21.5% from 29.1% due to lower average selling prices, though this was offset by economies of scale and more efficient store operations.

Operational Expenses and Investments

Operating expenses rose by 46.2% year-over-year, reflecting Luckin’s extensive efforts to expand its business. General and administrative expenses remained stable at 7% of revenue. While the relative cost of sales and marketing expenses also increased slightly, these investments were directed towards enhancing brand recognition and market presence, ultimately contributing to long-term growth.

Commitment to Sustainability

Luckin Coffee remains committed to sustainable development. The company opened its 20,000th store, built in accordance with LEED Platinum standards to provide an eco-friendly and comfortable environment. Luckin is also investing in green operations and advancing research in coffee health in collaboration with the Beijing University Health Science Center.

Future Outlook

Looking forward, Luckin Coffee aims to maintain its momentum by continuing its store expansion strategy, focusing on both high-tier and lower-tier cities through a partnership model. The company plans to keep launching popular, seasonal beverages and ramp up marketing efforts to drive consumer demand through the busy summer season. With a strong balance sheet and solid financial foundation, Luckin is well-positioned for sustainable growth and market expansion.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to Luckin Coffee's Second 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 second 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 volatile market environment and noticeable industry seasonality, Luckin Coffee has demonstrated strong resilience in the face of opportunities and challenges. Thanks to our advanced business model, continuous product innovation and scale advantages, we've achieved rapid revenue growth and returned to normalized profit growth.

Regarding store expansion, we've consistently followed a steady and sustainable development strategy. As of July, our number of stores has passed 20,000, reinforcing our position as the leading coffee chain brand in China and further solidifying our industry-leading advantages. Meanwhile, we continue to reward our consumers, allowing more people to enjoy high-quality coffee at more affordable prices.

With the rapid expansion of our stores, the number of monthly transacting customers has reached a new record high. We'll continue to maintain a steady progress moving forward based on our established strategy. While continuing to reward our customers, we'll 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, during the second quarter, our revenue saw strong year-over-year growth, and our profits returned to healthy levels. Our total net revenue reached RMB 8.4 billion, representing a year-over-year growth of 35.5%. Operating income was RMB 1.05 billion, with an operating margin of 12.5%. Net profit was RMB 871 million, with a net profit margin of 10.4%. Self-operated store operating profit was RMB 1.35 billion, with a self-operated store operating profit margin of 21.5%. In the second quarter, the total number of net new store opened was 1,371, and the number of monthly average transacting customers was 69.69 million. Our CFO, An Jing, will share further financial details later on this call.

In terms of store expansion, in the second quarter, Luckin Coffee added 1,371 net new stores, bringing the total number of stores to 19,924 in China. Among them, there are 13,019 self-operated stores and 6,905 partnership stores, covering all provinces in Mainland China. We continue to lead the market, expanding our relative advantage over competing brands. As competition intensifies in the Chinese coffee market, we will remain vigilant in addressing consumer needs, maintaining high store quality and adhering to a steady and sustainable store opening strategy while increasing the number of stores in high-tier cities. We will also accelerate expansion into low-tier city markets through our partnership model.

On the international front, the number of stores in Singapore reached 37 this quarter. On July 18, inspired by the slogan Luck in Hand, Luckin Coffee officially opened its 20,000th store in Beijing, Zhongguancun, with the flagship store being named [ In The Hand ].

As the largest coffee chain brand in China by store count, Luckin Coffee remains focused on the user experience. We're committed to product innovation, increasing supply chain investment and continually enhancing our digital advantages to drive high-quality development in the Chinese coffee industry.

In terms of our product offering, Luckin Coffee launched 30 new SKUs in the second quarter, including the aromatic coconut-flavored latte, lemonade Americano and light coffee series, with super cup options. Among the new products, the light coffee lemonade surpassed 5.08 million cups in sales during the first week of launch.

In terms of branding, Luckin Coffee has successfully developed several brand collaborations, including Sesame Street, movie A Chinese Odyssey and Party Animals. Additionally, combining the 4 health attributes to our products, we have launched a campaign called Luckin Coffee's [ Fit and Ice Summer ]. 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 lies the love and support of our consumers. In the second quarter, we had about 24.87 million new transacting customers. To ensure a consistent and stable supply of high-quality coffee across all 20,000 stores nationwide and to continually serve our customers, Luckin Coffee remains committed to sourcing premium coffee beans from top-quality regions around the world including Brazil, Ethiopia and Yunnan, China.

In June of this year, in the presence of Brazilian Vice President, Geraldo Alckmin, Luckin Coffee entered into a series of letters of intent to purchase approximately 120,000 metric tons of coffee beans from Brazil over the next 2 years. This cooperation will effectively promote the development of Luckin Coffee's global high-quality supply chain and continuously provide consumers with high-quality coffee services.

Moving to sustainability. We followed a sustainable development strategy of being a force for a brighter future, gradually incorporating green and low-carbon principles into every aspects of our production and operations.

On July 18, Luckin Coffee's 20,000th store officially opened. As another important milestone in Luckin's development, this store is designed and built in accordance with LEED Platinum standards, providing consumers with a green, fresh and comfortable environment. Currently, we have established 3 LEED Gold-certified stores in Xiamen, Tianjin and Hangzhou. We will continue investing in green operations to further advance our sustainable development efforts.

Simultaneously, as a leader in China's coffee industry, Luckin Coffee is also advancing research in coffee health. In collaboration with the Beijing University Health Science Center, we launched the Health Innovation Base in May. The base will focus on driving the deep integration of industry, academia and research in the fields of coffee health, working together towards being a force for a brighter future.

These are the key highlights of our performance in the second quarter. Next, I will now turn it over to 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 joining today's call. We appreciate your continued interest and support. I'm Jing An, the CFO at Luckin Coffee, and I will present our financial performance for the second quarter of 2024.

Before we review the results, I want to express sincere gratitude to our dedicated employees, loyal customers and valued investors. Your continued support is crucial to our success. And we are dedicated to providing value and innovation in the coffee industry.

Now I will take some time to highlight our 2024 second quarter results in detail. Let's start with our financial highlights. I'm pleased to share the great results of the second quarter of 2024. In Q2 2024, we earned RMB 8.4 billion in total net revenues, which increased by 35.5% from RMB 6.2 billion in the same period last year. The solid growth was coming from a higher number of products sold, an increase in operational stores and a growing number of monthly transacting customers. This performance highlights the strength of our business model and our ability to deliver value to our stakeholders.

In detail, revenues from product sales were RMB 6.6 billion, up 39% from RMB 4.7 billion in Q2 2023. Net revenues from freshly brew drinks were RMB 6 billion, accounting for 71.6% of total net revenues, up from 68.2% in Q2 2023.

Revenues from self-operated stores in Q2 2024 surged to RMB 6.3 billion, a major increase of 39.6% from RMB 4.5 billion in the same quarter of 2023. Also, revenues from partnership stores amounted to RMB 1.9 billion, a strong 24.5% increase from RMB 1.5 billion in the same quarter of 2023. Meanwhile, our operating income for the quarter was RMB 1.1 billion, an operating margin of 12.5%.

Moving to operations. We are pleased to see strong growth in our store network. In the second quarter, we opened 1,371 new stores, which includes 5 in Singapore, growing our global footprint to 19,961 stores. 13,056 of those are self-operated stores, and 6,905 are partnership stores. This quarter, we also opened stores in more than 10 new cities. And now our stores cover more than 330 cities across China, along with 1 overseas market.

In the second quarter, our average monthly transacting customers were 69.7 million, a 61.8% increase from 43.1 million compared to the same period last year. We are pleased with this strong growth, showing that Luckin is winning and keeping customers.

Next, let's take a closer look at our margins. On a growth level, our reported overall operating income for the second quarter was RMB 1,050.7 million, and our operating margin was 12.5%, compared to 18.9% in the same period last year and minus 1% in the previous quarter. The rebound in profit is mainly due in part to more cups of icier drinks sold because of warm weather. We are pleased to report that our net profit margin surged back to 10.4% this quarter from minus 1.3% in the last quarter. In Q2 2023, the net profit margin was 16.1%.

Looking at our self-operated stores, the profit margin returned to 21.5% this quarter compared to 29.1% in the same period of last year. The main reason for this decline was a decrease in the average selling price of our products as we mentioned before. The decrease was offset by better economies of scale from the increased number of products sold as well as more efficient stores.

During this quarter, the company's operating expenses increased 46.2% year-over-year, mainly due to our efforts to expand our business. Our G&A expenses remained stable at 7% of our revenue in Q2 2024 compared to 6.9% in Q2 2023. In absolute terms, our G&A expenses increased by 38.6% year-over-year. This growth was mainly due to higher payroll costs, increased R&D, office supplies and a rise in share-based compensation.

Relative to the previous year, our sales and marketing expenses as a percentage of revenue marginally increased from 4.9% to 5.1%. And the absolute value rose by roughly 42.5% year-over-year. The rise reflects our strategic investments in enhancing brand recognition, expanding products' education outreach and strengthening our market position through diverse channels. At the same time, commission fees paid to third-party delivery platforms increased to meet the higher number of delivery orders.

Loss and expenses related to the previously reported fabricated transactions and the related restructuring were RMB 1.2 million this quarter.

Let's move on to the balance sheet and the cash flow statements. We have a strong balance sheet and cash position, which help us compete and stay agile in this tough market. During the second quarter, we had a net operating cash inflow of RMB 1.5 billion compared to a net operating cash inflow of RMB 1.4 million in the same quarter of 2023. Also, we secured RMB 300 million in short-term bank loan to increase liquid cash on hand for operations. As of June 30, 2024, we have about RMB 3.8 billion in cash and cash equivalents, restricted cash, term deposit and short-term investments. We will continue to review our cash position to ensure we can meet all of our business needs and fund future growth.

In closing, I'm proud of the strides we have made over the past few years of rapid growth and brand building. Our team continues to drive through industry challenges, enhancing its position and delivering on our sustainable growth plan.

Lastly, I want to thank our employees and partners within and outside of over 20,000 stores national-wide. Their hard work delivers high-quality coffee and a unique customer experience that makes Luckin Coffee a leading coffee brand in China.

I will now turn it over to Jinyi for concluding remarks followed by Q&A.

[Jinyi Guo, executive]

[Interpreted] As Luckin Coffee surpasses 20,000 stores, we remain the largest coffee chain brand in China in terms of store count. Despite intense competition, we will seize the strategic opportunity presented by the rapid growth of the Chinese coffee market by continuously expanding our store network, enhancing our supply chain, fortifying our digital prowess, streamlining costs and elevating efficiency. These concerted efforts are designed to expand further and solidify our leading advantage, strengthen our market-leading position and realize sustained, robust and rapid growth over the long term.

Looking ahead, we will continue to focus on business growth and market share, delivering long-term value to our customers, shareholders and 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 to build a world-class coffee brand and become a part of everyone's daily life, we are making daily strides towards achieving our goal of becoming a global renowned centuries-old brand with enduring prosperity.

[Operator]

Ladies and gentlemen, we will now begin the Q&A session. 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. What were the main drivers behind Luckin's rebound in performance in the second quarter? Will this profit margin be sustainable.

[Jinyi Guo, executive]

[Interpreted] Thank you for your question. We are very pleased with our overall performance in the second quarter. While improvements in external factors such as weather played a role, the majority of the positive results stem from our proactive adjustments and the effective utilization of our business model advantages.

Specifically, as the weather warmed up and seasonal negative factors diminished in the second quarter, our rapidly enlarged footprint allowed us to effectively reach more consumers during the peak season. Additionally, our strategic focus on placing stores in malls and street fronts resulted in the strong performances at individual locations and a general rise in cup sales across our stores.

In terms of products, total sales surpassed 750 million items in the second quarter. We launched 25 new freshly brewed beverages domestically, which accounted for 24% of our total sales volume in China. Additionally, by leveraging our digital and scale advantages, we implemented effective cost cutting and efficiency-enhancing measures in the second quarter. These initiatives were a major driver behind the improvement in our profitability.

In the upcoming third quarter, which is still a busy season for consumption, we'll keep launching summer-friendly products and ramp up our marketing efforts to drive new consumer demand. Our goal is to maintain strong revenue and profit levels for the company.

[Alicia Guo, executive]

Thank you, Dr. Guo. Let's move on to the next question. The pace of store openings slowed down in the second quarter. Will the company make further adjustments to its store opening strategy?

[Jinyi Guo, executive]

[Interpreted] Thank you for your question. We believe the coffee industry in China is rapidly developing. As consumer coffee habits continue to grow, the market will keep expanding. Meanwhile, the ceiling for the coffee industry keeps rising, placing it in a long-term period of strategic growth opportunities.

In light of this historic opportunity, we will focus on market share as our core development goal at current stage. We'll adjust our pace based on competition, keep a close eye on our market position and work to strengthen our leading advantage.

At the same time, in response to the complex external environment and the competitive landscape, we will uphold our store opening standards to ensure quality and achieve healthy sustainable growth. As we continue to expand our store network, we will solidify our market-leading position through innovative products and customer appreciation strategies, striving to create long-term value. Thank you.

[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.]