Luckin Coffee Inc

OTC:LKNCY

Earnings Call Analysis

Significant Growth in Revenue and New Stores

Luckin Coffee reported a strong performance with total net revenue reaching RMB 7.06 billion, a notable 91.2% year-over-year increase, and same-store sales growth of 13.5%. The company's focus on product innovation led to the launch of 102 new products and over 2 billion items sold. The addition of 26 million new transacting customers in the quarter contributed to a significant customer base expansion. Luckin's dedication to corporate social responsibility included a RMB 5 million donation to support disaster relief efforts. For fiscal year 2023, revenues increased by 87.3% to RMB 25 billion, with a net profit margin rise to 11.4% from 3.7% last year. The company opened 8,034 new stores, achieving a year-over-year store unit growth rate of 97.8%, signaling its commitment to market leadership and growth.

Record-breaking Performance Amidst Market Challenges

2023 marked a significant milestone for Luckin Coffee, as it doubled the number of stores from the previous year, achieving record-high revenue amid intense competition. The company's robust expansion strategy yielded an impressive 91.2% year-over-year revenue increase in Q4, although profit growth rate dipped due to anticipated factors like seasonality and promotional events. The full-year saw revenues surpass RMB 20 billion, a 87.3% leap from 2022, with operating income hitting RMB 3 billion and a healthy operating margin of 12.1%. Luckin Coffee's commitment to scale and innovation led to the introduction of 102 new products with 8 SKUs hitting over 100 million units in sales.

Expansive Store Growth and Customer Acquisition

The company made strategic strides by opening over 8,000 stores, growing the store count past 16,000 and securing the largest store footprint in China. Same-store sales growth registered at 13.5% for self-operated stores with a striking 21% growth figure in fiscal year 2023. Moreover, they added 2,975 stores in Q4 alone, with a projection to exceed 20,000 by 2024. This aggressive expansion complements their commitment to delivering quality coffee globally, with a presence in over 300 cities domestically and expansions into markets like Singapore. These efforts attracted over 26 million new transacting customers in Q4, contributing to an average monthly customer base of 62.4 million – a testament to Luckin's strategic success.

Strengthening Market Share with Strategic Partnerships

The year saw Luckin's partnership model thrive, bringing in revenues of RMB 6.2 billion from partnership stores. This model, particularly effective in lower-tier cities, complements their dominance in larger urban areas and is a vital part of their strategy to blanket the Chinese market. The brand's reach and strategy enhancement is exemplified by becoming the official coffee partner of the Australian Open in China and Southeast Asia. Additionally, the company's involvement in corporate social responsibility, such as donating RMB 10 million for disaster relief, showcases Luckin's commitment to its public welfare brand and the communities it serves.

Financial Resilience and Forward-Looking Projections

Thanks to significant growth and operational efficiencies, Luckin reported a net profit margin of 11.4% for the full-year 2023, up from 3.7% in the previous year. Store-level operating profit margins were impressive at 22.2% for the full year, highlighting operational success. General and administrative expenses as a percentage of revenue improved due to scale benefits, even with expenditures rising in line with expansion. The company concluded 2023 with no interest-bearing debt and RMB 3.8 billion in cash reserves, positioning it for continued investment and growth. Luckin conveys strong confidence in maintaining market leadership and delivering shareholder value despite anticipations of competitive market dynamics in the upcoming year.

Long-Term Strategy and Market Vision

Luckin Coffee believes in sustaining growth by focusing on market share expansion, efficient operations, and innovating the customer experience. Their roadmap includes further expansion, optimizing the store model based on performance, and strengthening their digital and technological capabilities. Looking ahead, the company envisions building an absolute market-leading position and maintaining a long-term, sustainable growth trajectory, all while creating a world-class coffee brand.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, welcome to Luckin Coffee's Fourth Quarter and Full Year 2023 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 fourth quarter and full year 2023 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.

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. 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's Chairman and CEO, Guo Jinyi.

2023 was a significant milestone year for Luckin Coffee. In terms of scale, the number of Luckin Coffee stores doubled from the previous year, reaching a new record high. In terms of performance, despite facing intense industry competition, Luckin Coffee achieved another year of record-breaking revenue, thanks to its unique business model, continuous product innovation and scale advantage.

The overall level of profit remained healthy and manageable, aligned with our expectations and the direction of our strategic development. In the fourth quarter, Luckin Coffee continued to reward consumers through the 10,000-store celebration event promotion, allowing more consumers to enjoy high-quality coffee at preferential prices.

Meanwhile, our number of new transacting customers also reached a historical high. We successfully created several blockbuster products, breaking records for single item sales at Luckin Coffee. Going forward, we will continue to steadily progress according to our established strategy while expanding market share and consistently providing consumers with high quality, affordable and convenient coffee offerings.

By doing so, we aim to drive continuous development of the Chinese coffee market while simultaneously rewarding our customers.

Specifically, Luckin Coffee experienced robust year-over-year revenue growth in the fourth quarter. However, due to factors such as seasonality, promotional events like the 10,000-store celebration event and intense industry competition, the profit growth rate experienced a decline in line with the company's expectations.

The total net revenue reached RMB 7.06 billion, marking a 91.2% year-over-year increase. The operating profit margin stood at 3%, with a self-operated store operating profit margin of 13.5%. Same-store sales growth was 13.5%, with 2,975 net new store openings. In addition, monthly average transacting customers surpassed the 62 million. Our CFO, An Jing, will share further financial details later on this call.

Looking back at 2023, Luckin Coffee made breakthrough progress, achieving several remarkable milestones in the Chinese coffee market. Our revenue surpassed RMB 20 billion with operating profits exceeding RMB 3 billion, achieved significant growth compared to 2022. In 2023, we opened over 8,000 new stores, bringing our total store count to over 16,000, reinforcing our position as the coffee chain brand with the largest number of stores in China.

Meanwhile, our total cumulative transacting customers reached 230 million, firmly placing us in a leading position in the industry. These achievements would not have been possible without the support of our shareholders, partners and the dedication of nearly 110,000 Luckin employees who have accompanied us every step of the way, working diligently to drive the company forward. We express our heartfelt gratitude to all of you.

In the fourth quarter, Luckin Coffee added 2,975 new stores, bringing the total domestic store count to 16,218, maintaining our leading position in the market. Among the total number of stores, there were 10,598 self-operated stores and 5,620 partnership stores. As competition intensifies in the Chinese coffee market, we will continue to closely monitor customer demands and store quality.

Additionally, we plan to further increase the number of stores in high-tier cities and accelerate expansion into lower-tier city markets through the partnership model to expand our market share. We anticipate that by 2024, the number of Luckin Coffee stores will surpass 20,000.

In terms of the development of our overseas markets, in the fourth quarter, Luckin Coffee has reached a total of 30 stores in Singapore, adding 12 new stores from the third quarter. In the future, we will continue to expand our footprint in the Singapore market, optimizing our store model while also eyeing other overseas markets, including, but not limited to, Southeast Asia.

Our goal is to allow more consumers to enjoy our high-quality coffee worldwide.

In terms of product, Luckin Coffee launched 102 new products in 2023. The number of total items sold in 2023 exceeding 2 billion. with a number of freshly made beverages sold surpassed 1.9 billion cups. By the end of 2023, Luckin Coffee had 8 SKUs with sales exceeding 100 million units. In addition, the Jiangxiang-flavored latte broke our single item sales record selling 45.83 million cups throughout the year. This resulted in its single item sales revenue, surpassing RMB 900 million and earning numerous industry awards, including the 2023 [ EDGE ] Awards annual high-quality product.

Moving forward, we will continue to uphold product innovation, consistently providing customers with higher quality and more satisfying consumption experiences. Thanks to the dual effect of accelerated store expansion and continuous product innovation. Luckin Coffee acquired over 26 million new transacting customers during this quarter, with our average monthly transacting customers exceeding 62 million.

Throughout 2023, we had more than 95 million new transacting customers, marking another historic high. Along with the continuous growth of new customers, we have been consistently promoting our brand and deepening the popularization of coffee culture.

This year, Luckin Coffee became the Australian Open's official coffee partner in China and Southeast Asia.

Along with the continuous improvement of our operational and financial performance, Luckin Coffee is also actively involved in corporate social responsibility measures, driving the development of the company's public welfare brand and the execution of public interest initiatives.

This past summer, due to the impact of Typhoon Doksuri, Zhouzhou City in Hubei province suffered severe flooding. Luckin Coffee donated RMB 5 million through the China Foundation for rural development to support emergency rescue. Community health and epidemic prevention and transitional resettlement of affected populations as well as post-disaster reconstruction.

On December 19, 2023, following the 6.2 magnitude earthquake in Jishishan County, Linxia Zhou, Gansu province, Luckin Coffee once again donated RMB 5 million through the China Foundation for rural development, becoming one of the earliest enterprises in the restaurant chain industry to respond to disaster relief needs.

In 2023, our sustainable developments were well recognized, and we have received a series of honors and awards.

Going forward, leveraging our digital DNA, Luckin Coffee will start from facilitating healthy company development and collaborate with partners and customers to continuously practice sustainable development leading the industry's progress.

Together with the younger generation of customers, we aim to create sustainable value and unite our strength towards being a force for a brighter future. These are the key highlights of our performance in the fourth 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 joining us today. I'm An Jing, the CFO at Luckin Coffee. And today, I will be sharing the information regarding our fourth quarter and full year 2023 financial performance.

Before we start, I would like to extend my heartfelt thanks to our dedicated team, loyal customers, esteemed partners and investors for their continued support.

Now, I would take some time to highlight our 2023 fourth quarter and full year financial result in detail.

Let's start with our financial highlights. Despite the impact from seasonality, we are pleased to see that our fourth quarter 2023 results continued to exhibit strong year-on-year business growth. In the fourth quarter of 2023, our total net revenues reached nearly RMB 7.1 billion, reflecting a remarkable 91.2% increase from the same quarter of 2022.

This growth was driven by various factors, including an increase in productive sales, rapid expansion of stores in operation and a surge in monthly transacting customers. Revenue from self-operated stores in the fourth quarter reached RMB 5.1 billion, representing an increase of 89.2% from RMB 2.7 billion in the same quarter of 2022.

Same-store sales growth for self-operated stores in the fourth quarter of 2023 reached 13.5%. Additionally, revenues from partnership store in the fourth quarter of 2023 amounted to RMB 1.8 billion, a substantial 109.1% increase from the same quarter in 2022.

Operating income in the fourth quarter was RMB 212.7 million with operating income margin of 3%. Well, our financial achievements in the fourth quarter of 2023 are in line with our expectations. Our primary strategic priority is to remain focused on expanding our market share to serve more customers. This strategic approach aligned with our dedication to providing an enhanced experience for a growing customer base, solidifying our positions in the market and ensuring sustainable long-term success.

As we reflect on the fiscal year 2023, our journey has been defined by remarkable growth and unfavoring commitment with total net revenues soaring to nearly RMB 25 billion, representing an impressive 87.3% increase from fiscal year 2022. Our focus on expanding market shares and serving our ever-growing customer base has been the cornerstone of our success.

Revenues from self-operated stores in the fiscal year 2023 were RMB 17.9 billion, which represents an 82.7% year-over-year increase. Same-store sales growth for self-operated stores in fiscal year 2023 achieved an impressive 21%. Revenues from partnership store in fiscal year 2023 were RMB 6.2 billion, representing a substantial 102.8% increase from fiscal year 2022.

Operating income for fiscal year 2023 reached RMB 3 billion, with an operating income margin of 12.1%. By upholding our commitment to providing exceptional service and expanding our reach, we are positioned for the continued success in the dynamic landscape of the coffee industry.

We prioritized expanding of our market share, resulting in 2,975 net new store openings and a quarter-over-quarter store unit growth rate of 22.4%. Concluding in the fourth quarter with 16,248 stores.

As of the end of the fourth quarter, we and our partners operated our business in more than 300 cities across China and in 1 overseas market. We believe that our expansion into new cities is a strong reflection of our commitment to diversify our geographic presence and capture new market opportunities.

For the full year of 2023, in the pursuit of excellence, we opened 8,034 new stores, achieving a remarkable year-over-year store unit growth rate of 97.8%. Our dedication to providing exceptional service and in reaching the coffee experience has propelled us forward, making fiscal year 2023 a testament to our commitment to market leadership and sustainable growth.

In the fourth quarter of 2023, average monthly transacting customers reached 62.4 million, a substantial 154.2% increase from the fourth quarter of 2022. This notable increase highlights the popularity of our brand and the increasing interest in our products.

Average monthly transacting customers in fiscal year 2023 were 48.4 million, representing an increase of 124.1% from 21.6 million in fiscal year 2022. As we continue to focus on enhancing the customer experience, this remarkable increase in monthly transacting customers reflects the success of our customer-centric approach and the effectiveness of our strategy in reaching and engaging a wider audience.

Looking ahead, we are positioned to leverage this momentum implementing innovative initiatives to further elevate customer satisfaction, foster brand loyalty that continued our trajectory of impressive growth in the coming quarters.

Next, I would like to spend some time on the details of our margin profiles. On a group level, our reported overall operating margin in the fourth quarter of 2023 was 3% compared to 8.5% in the same period of last year. The job in our profitability profile was mainly driven by the decrease in the average selling price as we continued our 10,000 store celebration event campaign as the weak traffic in the winter season, while the decrease was to some extent offset by the benefits of economies of scale. However, we are pleased to see our reported operating margin for the full year of 2023 reached 12.1% compared to 8.7% in last year.

We believe the full year margin improvements were largely driven by our active approach to introduce new products and attracting new customers, operating efficiency and scale benefits. Meanwhile, we reported a net profit margin of 4.2% in this quarter compared to 1.5% in the same period of last year.

In the fourth quarter, we reported an income tax benefit of RMB 31 million, resulting from the release of a valuation allowance against the deferred tax assets in the fourth quarter. Thanks to the largely reduced uncertainty of the company's business performance.

After a certain number of the company's operating entities have turned to cumulative losses into cumulative profits. For the full year of 2023, our net profit margin increased to 11.4% from 3.7% last year. From a store level view, our store level operating profit margin of self-operated stores with 13.5% and 22.2% in Q4 and fiscal year 2023, respectively.

Meanwhile, overall operating expenses increased as a result of our business expansion. We are pleased to see our expenses ratio continue to be more efficient and resilient due to economies of scale and our technology-driven operations during this quarter.

Our general and administrative expenses as a percentage of revenue decreased from 11.1% in the fourth quarter of last year to 8% in the fourth quarter of this year due to scale benefits.

On an absolute value basis, our G&A expenses increased by 36.6% year-over-year as we spend more on payroll cost, expenditures for office suppliers, R&D expenses and tax surcharges and the stamp duties as a result of business expansion. Well, G&A expenses increase were offset by a decrease of the share-based compensation for restricted share units and options easier to management and employee.

Compared to last year, we spent a 1.3x more on sales and marketing expenses as we continue to strategically invest in branding to increase the brand awareness in large product education coverage and bolster our current positioning through various channels, attracting new customers and retaining current customers.

Meanwhile, in this quarter, we spent more on commission fees to third-party delivery platforms, which is in line with increased delivery orders. We recorded a negative RMB 41.5 million about a negative USD 5.8 million of loss and expenses related to the previously reported fabricated transactions and related restructuring.

As the company rolled off approximately USD 6.3 million, about RMB 44.7 million, in the fourth quarter of 2023 following the final settlement with certain underwriters relating to defense costs, including, but not limited to alternative fees and expenses incurred in investigating and defending the fabricated transactions and the restructuring. The company had successfully completed its provisional liquidation in March 2022.

Last but not least, let's talk about our balance sheet and cash flow statement. During the fourth quarter, we had a net operating cash outflow of RMB 926.7 million compared to a net operating cash inflow of RMB 48.3 million in the same quarter of 2022. This is mainly due to the increased purchase of raw materials to meet our rapid footprint expansion and business growth as we fully redeemed the offshore notes in 2022 following the restructuring and paid the federal [ class ] settlements.

We now have no interest-bearing debt and we ended 2023 with about RMB 3.8 billion of cash in bank and on hand, including cash and cash equivalents, restricted cash, term deposits and short-term investment. We will continue to review our liquidity requirements on an ongoing basis to ensure that we can meet all our business needs and providing additional growth potential.

We have confidence that our expanding market presence and a solid cash position. Together with our strategic capital allocation approach can create exceptional shareholder return while maintaining balance sheet flexibility to fund our critical investments and create a competitive advantage.

Finally, I would like to thank the entire team for their hard work and execution, which drove our strong 2023 results. Well, we expect a volatile market dynamics and a competition to continue in the China coffee market. We remain confident in the market opportunities and our strategy as we look to 2024, our current pricing strategy and the business expansion plans, combined with our strategic and promotional calendars and innovative product offerings provide us with competitive advantage in the market as well as additional growth potential. I will now turn it over to Jinyi for concluding remarks followed by Q&A.

[Jinyi Guo, executive]

[Interpreted] Luckin Coffee has achieved one milestone after another, a result of the combined efforts of our hard-working employees, love of our customers, support of our partners and trust of our investors. At present, China's coffee industry has entered a critical stage of high-growth strategic opportunities.

Despite fierce industry competition, Luckin Coffee as a leading brand in a coffee market in China is committed to accelerating store network expansion, investing in supply chain development, strengthening digital advantages, optimizing costs and improving efficiency. All these efforts aim to further expand and solidify our competitive advantages. Ultimately, building an absolute market-leading position, while also achieve long-term, healthy, high speed and sustainable growth.

Going forward, we will continue to focus on business growth and market share, delivering long-term value for our customers, shareholders and other stakeholders.

Additionally, we will remain focused on social responsibility and practice sustainable development. We will continue to deliver better quality and better prices and provide customers with coffee that is delicious and affordable. Our vision is to create a world-class coffee brand. and we're delivering as we work toward that goal.

Lastly, Mr. Wu Gang, our Senior Vice President, currently in charge of Public Affairs and Strategic Cooperation will be departing from the company for personal reasons. We would like to take this opportunity to thank him for his significant contributions for the past few years and wish him all the best in future endeavors.

[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]

Now let's begin with the first question. How does the company view the significant drop in profit in Q4? And are there plans for pricing adjustment?

[Jinyi Guo, executive]

[Interpreted] Thank you for your question. Based on the company's strategic decisions to continuously reward customers and expand the market, our fourth quarter profits experienced a decline due to seasonal factors and adjustments in product portfolio structure. This decline aligns with both the objective industry trends and the company's strategic expectations. The company is satisfied with the overall performance and results in this quarter.

In the fourth quarter, our average monthly transacting customers exceeded 62 million and new transacting customers exceeded 90 million in 2023. China's coffee industry is experiencing rapid growth with huge growth potential and surging competitiveness, and the market is far from saturated. Based on these assessments, we will closely monitor market changes, continue to focus on customer value and aim to provide high-quality products while using scientific and user-friendly pricing strategies to further reduce the decision-making cost for users, expand our user base and enhance overall consumption frequency.

Facing the current intensified competition, Luckin Coffee as the market leader, will continue with our current store expansion and pricing strategies and commitment to providing long-term returns to our customers to further enlarge our market share. We're confident that we can maintain and solidify our market-leading position and strive for long-term value.

[Alicia Guo, executive]

Thank you, Dr. Guo. Let's move on to the next question. In 2024, is the company continuing the store expansion strategy from 2023?

[Jinyi Guo, executive]

[Interpreted] Thank you for your question. The current coffee market in China is still in the early stages of development as China's urbanization rate continues to rise steadily, the consumer base for freshly brewed coffee is large and steadily growing. Benefiting from coffee market education, consumer habits related to coffee consumption will be further cultivated. As the leading representative in the industry, Luckin Coffee has spearheaded the localization and improvement of coffee products in China, thereby lowering the barriers to coffee acceptance.

Although in terms of the overall store counts, Luckin Coffee has already become the top brand in China's coffee industry. There is still significant room for expansion in the sector, both in terms of the current stage of industry development and the cultivation phase of consumer habits.

In 2023, Luckin Coffee had 8,034 net new store openings. Rapid store expansion brings the rapid growth of new customers and skill benefits, reflecting on data from the past few years. The coffee consumption habits of Chinese customers exhibit cyclical patterns. However, driven by Luckin Coffee's unique advantages, including product innovation, brand experience, and extensive store network coverage. The coffee market in China has shown an accelerated development momentum. It is precisely these potential new growth customers that forms the strong customer base that emboldens us to continue expanding our store presence.

In 2024, while closely monitoring store profitability, we will continue rapid store expansion, proactively respond to market competition and better meet customer demands.

[Alicia Guo, executive]

Thank you, Dr. Guo. 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. I 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.]