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Luckin Coffee Is A Donut

|About: Luckin Coffee Inc. (LK), USD
Summary

2019 new store expansion will require more spending in 2019.

Existing 2370 stores operated as losses with aggressive discounting. New 2500 stores will continue to exacerbate those losses.

2019 store build out and existing store operating losses will eat up half of the cash on hand by end of year.

Stay away from LK stock, until they can show they have a real business model with earnings power.

LK IPO’ed on Friday 5/17/19…i am still wondering how this company ever became public. Alot of people have written on the S1 filing so will spend more time on where this company is going.

March 2019 Quarter

Revenues (RMB)

478,510

% Breakdown

COGS

(275,812)

57.6%

Store Ops

(282,371)

59.0%

Depreciation

(83,979)

17.6%

S&M

(168,103)

35.1%

G&A

(172,962)

36.1%

Pre-Open

(22,374)

4.7%

Operating Loss (RMB)

(527,091) RMB

Operating Loss (USD)

($78,539) USD

Note: 2370 stores, 1857 transactions a month/store, 62 transactions a day/store, 36.2 RMB per transaction

December 2019 Quarter (My Own Forecast)

This assumes the company accelerates the store growth to 5000 by year-end and modest improvement in their individual store economics and reduction in couponing discounts. I still estimate -$100-120M USD operating loss in that quarter too.

Revenues (RMB)

1,341,000

% Breakdown

COGS

43.0%

Store Ops

45.0%

Depreciation

12.0%

S&M

25.0%

G&A

27.0%

Pre-Open

5.0%

Operating Loss (RMB)

(765,279) RMB

Operating Loss (USD)

($112,541) USD

Note: ~4970 stores, 2250 transactions a month/store, 75 transactions a day/store, 40.0 RMB per transaction

Company has stated it plans to add another 2500 locations in the balance of 2019 so that would take the store count from 2370 (Mar 2019) to close to 5000 (by Dec 2019). Given most stores are take-away/delivery outlets, average store buildout cost is about 355,000 RMB (start up costs, equipment costs, lease deposits). So estimate rest of 2019 capex buildout will be around 923M RMB (2500 locations x 355,000 RMB per store) ~$140M USD

Pre-IPO cash on balance sheet: $172M USD + ~$561M on IPO = $733M USD cash balance

2019 Q2-Q4 Operating Losses + Aggressive Marketing: ($250-300M USD)

2019 Q2-Q4 Store Buildout: ($140M USD)

Estimated Cash Balance Ending Dec 2019: $300M-350 USD

I estimate that the company has 2 years left before it runs out of cash. LK will either have to do a secondary offering or drastically cut its operating losses because the first 2370 locations still operate at negative free cash flow. Ultimately LK’s employees need to be paid timely and rent needs got be paid to stay in business. Maybe they can play some games with timing of payment to their suppliers but ultimately those vendor suppliers are at risk of not to be paid.

Tea/Coffee drink market is quite competitive. I believe these types of drinks are interchangeable. So just measuring pure coffee cup consumption is not reflective in the consumer demand. I think much of the consumers are ordering these cheese tea drinks which is why Luckin started to offer them too. Also every block there is 2-3 tea/coffee shop that are all competing for the same or similar consumer. Starbucks tends to be the the sticky foreign brand that offers a comfortable experience while the Yi Dian Dian and Hey Tea tend to have their loyal following due to branding and product quality.

Summary: I wouldn’t touch this LK stock. I just don’t see the value for the Chinese consumers outside of discounts. Once the discounts go away, i don’t expect consumers to be loyal.  I think this company goes to zero ("donut") in 3 years.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in LK over the next 72 hours.