Luckin Coffee Inc

OTC:LKNCY

Earnings Call Analysis

Luckin Coffee Achieves Record Revenue and Profit Amid Expansion

Luckin Coffee reported robust third-quarter results, with total revenue reaching RMB 10.8 billion, a 41.4% increase year-over-year. This milestone reflects the company’s strong market presence and innovative product offerings, including RMB 7.8 billion from product sales alone. Operating profit soared to RMB 1.56 billion, with a margin of 15.3%, while net profit stood at RMB 1.3 billion, a net margin of 12.8%. The company opened 1,382 new stores, raising its total to 21,343 locations. Looking ahead, Luckin aims for sustained growth and expects to refine its operations to enhance profitability and operational efficiency.

Growth Amid Challenges

Luckin Coffee has once again demonstrated resilience and growth in a complex market environment. In Q3 2024, the company reported total net revenue of RMB 10.8 billion, marking a remarkable year-over-year increase of 41.4%. This growth can be attributed to an expansion in the number of products offered and an increase in the customer base, which saw monthly transacting customers rise to 79.85 million, a 36.5% increase year-over-year.

Record Revenue Milestone

For the first time ever, Luckin Coffee’s single coffee revenue surpassed RMB 10 billion. This achievement not only signifies the company's expanding market presence but also reflects the effectiveness of its unique business model and marketing strategies. The revenue from self-operated stores alone totaled RMB 7.5 billion, with a notable 45.9% increase from the previous year.

Profit Margins Reflect Operational Efficiency

Luckin reported an operating profit of RMB 1.56 billion, resulting in an operating margin of 15.3%. The net profit for the quarter was RMB 1.3 billion, reflecting a net margin of 12.8%. The company also achieved a self-operated store profit margin of 23.3%, indicating strong operational efficiency and cost management, especially in its self-operated segment.

Same-Store Sales: A Mixed Picture

Despite the overall growth, same-store sales for self-operated stores experienced a decline of 13.1%. This was primarily due to a high comparative base from the previous year, which saw significant increases. However, this decrease narrowed compared to prior quarters, suggesting a stabilizing trend as the average selling price adjusts closer to last year’s levels. The company anticipates a more favorable outlook for same-store sales as it refines its expansion strategy.

Significant Expansion of Store Network

Luckin Coffee continued its aggressive expansion strategy by adding a net total of 1,382 new stores during the quarter, bringing the total store count to 21,343 by the end of September. This includes 13,936 self-operated stores and 7,407 partner stores. The focus remains especially strong on centralizing operations in top-tier cities while also gaining traction in lower-tier markets.

International Ventures: Progress in Singapore

Luckin’s international strategy is taking shape with the establishment of 45 self-operated stores in Singapore, generating RMB 91.4 million in net revenues. Although the international business is not yet profitable, the operational losses are narrowing, and the management remains optimistic about the future potential of this market.

Commitment to Product Innovation

In Q3, Luckin Coffee launched 28 new specialty beverages aimed at diversifying its product lineup while responding to consumer preferences. Notably, a new light milk tea series sold over 44 million cups in its first month, demonstrating the company's ability to quickly adapt to market demands and capitalize on emerging trends.

Future Guidance and Strategic Vision

Looking ahead, Luckin Coffee is committed to maintaining a focus on product innovation and enhancing its supply chain. The company plans to purchase approximately 120,000 metric tons of coffee beans from Brazil over the next two years to secure quality inventory while investing further in sustainable coffee cultivation practices. Management remains cautiously optimistic about achieving a stable growth trajectory moving forward.

Sustainability Initiatives

Luckin Coffee is not only focused on profitability but is also committed to sustainable development. The company has initiated various projects aimed at enhancing supply chain sustainability and ensuring ethical sourcing of coffee beans, thus aligning its business practices with broader environmental goals.

Closing Remarks

Overall, Luckin Coffee’s performance showcases strong growth fundamentals backed by a clear strategy for expansion and sustainability. Investors should consider the company's aggressive market positioning, product diversification efforts, and the potential for future profitability in international markets as critical factors influencing its long-term value.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to Luckin Coffee's Third Quarter 2024 Earnings Call. [Operator Instructions] Today's conference is being recorded. At this time, I'd like to turn the call over to Ms. Carol Liu of Investor Relations Manager of Luckin Coffee for prepared remarks and introduction. Please go ahead.

[Carol Liu, executive]

Hello, everyone, and thank you for joining us today. Luckin Coffee announced its third 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.

[Operator Instructions] We will be referring to a presentation on today's call, which can be found on the company's IR website, 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 this 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 company 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 your continued interest in and support of Luckin Coffee. I am Guo Jinyi, Chairman and CEO of Luckin Coffee. Despite being a complex market environment, I'm pleased to report that the company achieved solid growth in the quarter this year. Thanks to our unique business model, expanding scale advantage, ongoing product innovation and leading brand strength. For the first time ever, our single coffee revenue surpassed RMB 10 billion, and both revenue and profit reached new highs. These achievements are a result of the collective efforts of all Luckin Coffee employees and resort and life of our more than 300 million cumulative [indiscernible] customers.

I would like to take this opportunity to express [indiscernible] to them.

Looking ahead, we will continue to focus on our established strategy, deepen on our domestic store layout, continuously expand market share, further consolidate our media edge and strive to enable more consumers to enjoy high-quality, cost-effective products. We are committed to promoting the sustainable and healthy development of China's coffee.

Please turn to Page 5. Looking into our numbers. In the third quarter of this year, we maintained growth momentum from the second quarter, and the business performance continued to improve. While steadily expanding our store network, we saw both revenue and profit reach new highs. Total net revenue was RMB 10.80 billion, marking a 41.4% year-over-year increase. Operating profit was RMB 1.56 billion, with an operating margin of 15.3%. Net profit was RMB 1.3 billion, reflecting a net margin of 12.8%. Self-operated store operating profit was RMB 1.75 billion, with a self-operated store operating margin of 23.3%.

In the third quarter, the total number of net new store openings was 1,382. Our accumulative number of transacting customers exceeded 300 million, and the number of monthly average transaction customers was 79.85 million. Our CFO, Ms. An Jing, will share further financial details later on this call.

Please turn to Page 6. In terms of store profit, the store footprint in the domestic market, we continued to deepen our store layout, adding 1,374 net new stores, bringing the total number of stores in Mainland China to 21,298. Among this, there are 3,891 self-operated stores and 7,407 partnership stores, further expanding our leading advantages in store count and the market layout.

China's public market is currently experiencing a strategic period of rapid development, with coffee consumption growing in popularity and the market share extending swiftly. Facing this valuable opportunity, we will continue to prioritize our store layout strategy by increasing density in top-tier cities, so maintaining our efforts to expand into lower tier cities. In the international market, we continue to make steady investments in Singapore this quarter with a net increase of 8 stores bringing the total number of stores to 35 at the end of this quarter.

We have been operating in Singapore for 1.5 years now. Although the overall business in Singapore has not yet achieved profitability, the losses has significantly narrowed, and overall operations are moving in a positive direction.

Looking ahead, video steadily expand overseas market on an ongoing basis, explore and create innovative organizational model for international business and continuously increasing investments, driving to enable consumers worldwide to enjoy Luckin Coffee's high-quality coffee and services.

Please turn to Page 7. In this quarter, Luckin Coffee has launched 28 specialty [indiscernible] beverages along with several light products, expanding our product boundaries to provide our customers with a more diverse range of choices. In August, we introduced the light milk tea series and the light milk tea has sold more than 44 million cups in first month. Centered around the concept of coffee in the morning, tea in the afternoon, we are committed to meeting consumers' diverse needs during non-coffee hour, achieving audit and out scenario coverage of our product offering.

In addition, the [indiscernible] series launched at the end of September, received best grade at plan, with first week sales exceeding 3.33 million cups. During this quarter, we also successfully launched several branding collaborations, including [indiscernible], [indiscernible] and [ Butter Beer ], all of which were well received and supported by consumers. By end of the third quarter, the number of cumulative transacting customers surpassed 300 million, with the number of monthly average transacting customers increasing by more than 10 million compared to the previous quarter, reaching 79.85 million, that's a new high.

To ensure stable supply for our over 20,000 stores, we are committed to increasing investment in our supply chain. In August, Luckin Coffee broke ground on a new innovation and production center in [indiscernible]. This center, along with the 2 major losing plants in [indiscernible] and [indiscernible], will form a roasting supply network with an annual capacity of 100,000 metric tons.

Moving forward, we will continue to enhance supply chain integration to ensure that every type of coffee our consumer purchase is of consistently high quality.

In addition, we are intensifying our procurement efforts in premium coffee beans regions worldwide. 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. Moving forward, we will further accelerate our procurement plan in coffee-producing countries across Southeast Asia, Africa, Central America and South America, bringing high-quality coffee beans from those regions to Chinese consumers.

Luckin Coffee is deeply committed to the sustainable development of our entire supply chain and continuously enhance our communication and collaboration with places of our regions, setting standards, conducting trainings and providing support to boost the sustainability of source cultivation. This not only improves the quality and the yield of raw material, but also contribute to the protection and enhancement of the ecological environment in this region as well as the living standard of coffee farmers.

In September, we [indiscernible] experts from relevant fields to our green coffee in processing plants in [indiscernible] Inland, to provide training for local coffee farmer and business representatives on the coffee industry, regenerated agriculture and the biodiversity conservation. We also organized the factory and the local community volunteer to form a volunteer service team to support the sustainable development of inland coffee and the protection of the local environment.

In the third quarter, Luckin Coffee completed the Brazil stop of its coffee -- global coffee research plan. As the groundbreaking termini of the [indiscernible] factory in August, we joined hands with his excellent [indiscernible], the Brazilian ambassador to China, and jointly launched the Luckin Coffee Brazil Coffee Culture Festival. Brazil, with with long history of coffee cultivation and the world's largest coffee production capacity, has extensive practical experience in the sustainable development, including regenerative agriculture and agricultural production technology innovation. We will continue to collaborate with Brazil's coffee regions, establishing office and support centers for farmers, promoting responsible sourcing, farmer assistance, coffee culture exchange and regenerative agriculture research. This will foster practice and exchange, learning and implementation about global coffee producing regions, contributing to the sustainable development of China's 4 coffee-producing areas and global coffee regions. These are the key highlights of our performance in the third quarter.

Next, I will now turn it over to our CFO, An Jing, to present the financial data and the commentary.

[Jing An, executive]

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

Before we go over the results, I want to express my gratitude to our hard-working employees loyal customers and trusted 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 third quarter results in detail. Please turn to Slide 10. Let's start with our financial highlights. I'm pleased to share our strong third quarter 2024 results. Total net revenues of Q3 2024 reached RMB 10.2 billion, reflecting a large increase in 41.4% compared to RMB 7.2 billion in the same period of last year. This growth was mainly driven by an increase in the number of products so and expansion of stores in operation and a notable increase in monthly transacting customers despite a decrease in the average selling price of our products.

Revenues from product sales were especially strong, totaling RMB 7.8 billion, representing a year-over-year increase of 46.3% from RMB 5.4 billion in Q3 2023. This reflects our focus on expanding product offerings and enhancing our customer engagement.

Net revenues from freshly brewed drinks, our core product category, reached RMB 7.2 billion in Q3 2024.

Revenues from self-operated stores totaled RMB 7.5 billion, marking a 45.9% increase year-over-year. Same-store sales growth for self-operated stores in the third quarter was negative 13.1% compared to positive 19.9% and in the same quarter of 2023 due to exceptionally high base from last year. The same-store growth is improved quarter-by-quarter, and we are actively working on maintaining this trend.

Also, revenues from partnership stores amount to RMB 2.3 billion, a strong 27.2% increase compared to Q3 2023. Meanwhile, our operating income for the quarter was RMB 1.6 billion, representing an operating margin of 15.3%.

As we continued to explore and expand our business in the national markets, we have successfully opened 45 self-operated stores in Singapore. By the first 9 months of 2024, net revenues from the Singapore market amounted to RMB 91.4 million, while costs and expenses mainly including store operations, regional expenses, and his world cost incurred at headquarters totaled around RMB 167.7 million.

Slide 11 shows our store operating information. Our store growth remains strong throughout Q3. We saw a net income of 1,382 stores, resulting in a 6.9% quarter-over-quarter growth from the number of stores at the end of Q2. The total includes 8 new stores in Singapore, bringing the total stores in Singapore to 45, which underscores our ongoing efforts to explore and expand in international markets.

By the end of the third quarter, our total store count reached 21,343, including 13,936 self-operated stores and 7,407 partnership stores. Our average monthly transacting customers in the third quarter reached 79.8 million, an impressive 36.5% increase compared to 58.5 million in the same quarter of the last year. This strong growth not only highlights the success of our customer engagement and retention strategies, but also position us favorably against the competition and a changing customer preference.

Next, let's move on to the details of our profitability. Please turn to Slide 12. On a group level, our reported overall operating margin for the third quarter was 15.3%, up from 13.4% in the same period last year. This rise in profitability is mainly due to changes in our product structure, which posted the gross profit of our products. Additionally, our enhanced operational efficiency and operating average significantly contribute to the improved financial performance in this quarter.

Meanwhile, we reported a net margin of 12.8% in this quarter compared to 13.7% in the same period of last year. For our self-operated stores, the profit margin remained stable at 23.3% this quarter compared to 23.1% in the same period of last year.

During this quarter, the company's overall operating expenses increased by 38.2% year-over-year, mainly due to our business expansion efforts. Our general and administrative expenses remained stable at 6.3% of revenue in Q3 2024, down from 6.7% in Q3 2023. In absolute terms, G&A expenses increased by 32.3% year-over-year, mainly driven by higher payroll costs, greater research and development spending, additional office supplies and an uptick in share-based compensation.

Relative to the previous years, our sales and marketing expenses, as a percentage of revenue, increased to 5.8% from 5.3% in the same period last year. In absolute terms, these expenses rose around [ 3.2% ] year-over-year. This increase is a result of our strategic investment in boosting brand recognition, expanding product education initiatives and fortifying our market position through multiple channels. Also, the rise in commission fees paid to the third-party delivery platforms was needed to handle the increased value to volume of -- the increased volume of delivery orders.

Loss expenses related to the previous reported fabricated transactions and related restructuring were negative RMB 102.5 million in this quarter compared to RMB 3 million in the same quarter of 2023. This loss change is because the company become entitled to receive [indiscernible] compensation of USD 50 million, which is about RMB 105.2 million under its [indiscernible] insurance, directors and officers liability and a company reimbursement insurance following the receipt of the base layer composition.

Now let's move on to the balance sheet and the cash flow statement on Slide 13. Our disciplined approach and robust cash position allow us to maintain both balance sheet strength and flexibility, positioning us to effectively navigate the current macro environment during the third quarter, our net operating cash inflow remained consistent at RMB 1.3 billion, compared to the same period the last year. As of September 30, 2024, we have about RMB 4.8 billion in cash, including cash and cash equivalents, restricted cash, term deposits and short-term investments.

Our strong cash flow generation and the healthy cash position continue to support our ongoing requirements, ensuring we can meet all our business needs and provide additional growth potential.

In closing, I want to recognize our team for their dedicated efforts and the tireless work to elevate the Luckin Coffee experience in our stores, at our roasting plants and in our support centers. Their strong commitment and hard work have been the [indiscernible] of our success. And I want to extend my deepest thanks to our employees for their valuable contributions.

To end, I would also like to express my sincere appreciation to all our investors for their unwavering support and confidence in our vision. We strive to continue to deliver strong execution and growth. Moving forward, we remain commitment -- committed to meeting the ongoing needs of our customers and establishing Luckin Coffee as a leading coffee brand worldwide.

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

[Jinyi Guo, executive]

[Interpreted] Behind the continuous milestone achieved by Luckin Coffee, less the hard work of our Luckin Coffee coffee employees, the love of our consumers to support and encouragement from our partners and the trust of our investors, on behalf of Luckin Coffee, I would like to extend my sincere gratitude to our stakeholders who care for and support us. Looking ahead, Luckin Coffee will continue to deepen its store layout strategy. sustain product innovation, strengthen brand advantages and increased supply chain investment to further consolidate and expand the market-leading position. While focusing on business growth and market share improvements, we will further optimize our cost structure and enhance operational efficiency to create long-term sustainable value for customers, shareholders and all stakeholders.

Additionally, Luckin Coffee will place greater emphasize our social responsibility, uphold the concept of sustainable development and closely align with the company's core values, striving to build Luckin Coffee into a world-class coffee brand and create greater value for society. Thank you all. Let's move on to the Q&A session.

[Operator]

[Operator Instructions] And our first comes from Yongjian Yi from Minsheng Securities.

[Yongjian Yi, analyst]

[Interpreted] My is about the same-store growth. How does the management [indiscernible] fluctuations in SSG metric? And the recent [indiscernible]. Additionally, could you provide us with more insights into the future outlook for the [indiscernible]?

[Jinyi Guo, executive]

[Interpreted] Yes. Thank you. Yes, the same-store sales growth is a very important metrics, and we always keep attention on that. So I would like to turn this question to Ms. An Jing to answer. Thank you.

[Jing An, executive]

Okay. So the company, we have consistently paid close attention to this indicator. Over the past few quarters, as you mentioned that the SSG has experienced significant fluctuations, which is largely due to our strategic positioning amidst the rapid growth of China's coffee market. and the heightened industry competition. So the fast to pay the expansion of our store network and the [ 9.9 ] promotion since June 2023 have notably impacted our asset in SSG.

Overall, we think the fluctuation in SSG align with our expectations. And we believe that last year's rapid expansion will ultimately support our long-term development. We have now -- as you all know that we now surpassed 20,000 stores, providing us with a considerable scale advantage. In this quarter, the SSC, just we just mentioned that the self-operated store SSSG is negative 13.1%, a [ narrowing ] compared to previous quarters. This improvement is mainly because the average selling price of this quarter exhibited a smaller deviation from the same quarter last year, compared to the price difference observed between the preceding quarters, and their corresponding period last year.

And and now we shifted to a more variable pace of expansion and the price gap to further reduce, we anticipate further improvement of the SSG in the upcoming quarters.

Looking ahead, as the company enter a more stable and sustainable growth pace, we will continue to closely monitor the same-store sales. This metric will not only serve as a key reference of assessing our marketing performance, but we believe that will provide valuable insight for our strategic decision-making. By leveraging this insight, we aim to refine our store opening strategies to ensure new locations align with market demand.

Additionally, through sales trend analysis, we will actively pursue product innovation and our opportunities to boost our overall competitiveness and insurance steady and sustainable growth. That's my answer.

[Operator]

Our next question comes from Ya Jiang from Citic Securities.

[Ya Jiang, analyst]

[Interpreted] This is Jiang from Critic. Congrats on another strong quarter. My first question is about overseas expansion. Could you share more details or maybe more color of Luckin Coffee plan to go abroad? And also, is there any update to the company's global capital market strategy?

[Jinyi Guo, executive]

[Interpreted] Yes. Thank you for your question. So going to abroad is a very important question that we always think about that. And today, I would like to share some systematic thinking about the thing. So overall, our Luckin Coffee's vision is to create a world-class coffee brand and become a part of everyone's daily life. So we believe that to achieve this, in addition to financial indicators such as revenue, profit and market value, it should also reach world-class levels in indicators such as the number of stores, coverage and brand image establishment and international influence. So now Luckin Coffee is striving to doing that.

So if we're looking at the global market, the Chinese markets have a large customer base, strong consumption power and the broad market space, especially with the accelerated development of coffee consumption happens in recent years. The market potential is continuously expanding and ceiling for the development of the China's cofree industry as a whole is still rising. So we firmly believe that China will one day become the world's largest coffee consumption market. So facing this historical opportunity, we will continue to focus on our domestic markets, further strengthen our network and continuously consolidate and expand Luckin's industry-leading advantage to capture the maximum benefit from the industry's rapid development.

So compared to the domestic market, the overseas customers already have developed -- already have a very mature coffee consumption habits, so making the overall overseas market generally mature. So our overseas business is still in a very initial stage of exploration and investments. We still need to continue to increase investment in areas such as store network expansion, supply chain enhancement, brand establishment, the granularly refined and form [indiscernible] advantages in cost structure and the customer experience, striving to win the recompilation and favor of local consumers.

So although our initial exploration in Singapore has resulted in some financial losses, it has provided us with an invaluable experience and insight into the complexity of the overseas operation. The international market is full of opportunity, but it also presents significant challenges. It indeed require patience, time and continued investments. So we remain both patience and confident in our ability to succeed. Meanwhile, we are evaluating opportunities in the United States and other markets. Given the maturity situation and the competitiveness of the U.S. coffee markets, we intend to approach our expansion strategy there with careful consideration and a disciplined execution plan.

So going forward, we will pay close attention to overseas business and communicate progress to the market in a timely manner. Meanwhile, we will also actively explore and create innovative organizational models for international business, expanding our overseas business through more suitable methods and flexible strategies.

So regarding to your second question, so in terms of the overseas capital markets, as communicated before, we will continue to monitor the U.S. capital markets. However, our primary focus remains on executing the company's business strategy. So given the complex market and the regulatory environment, there is currently no definitive timetable for enhanced listing on the [indiscernible]. For now, we will continue to focus on business development, aiming to increasing market share by delivering high-quality products and services to our customers while creating sustainable long-term value for our shareholders. Thank you.

[Operator]

Due to time restraints, no further questions will be taken at this time. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Carol Liu, executive]

Thank you, Dr. Gou and Ms. An. So 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 your call today. You may now disconnect.