Luckin Coffee Inc. (LKNCY) Earnings Call Transcript & Summary

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, Investor Relations Manager of Luckin Coffee, for prepared remarks and introductions. Please go ahead.

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. After the company's prepared remarks, there will be a question-and-answer session. 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 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.

[Interpreted] Hello, everyone. Welcome to today's earnings conference call, and thank you for your continued interest in and support of Luckin Coffee. I'm Guo Jinyi, Chairman and CEO of Luckin Coffee. Despite facing 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 innovations and leading brand strength. For the first time ever, our single quarter revenue surpassed RMB 10 billion and both revenue and profit reached new highs. These achievements are the result of the collective efforts of all Luckin Coffee employees and the support and love of our more than 300 million cumulative transacting customers. I would like to take this opportunity to express my heartfelt thanks to them. Looking ahead, we will continue to focus on our established strategy, deepen our domestic store layout, continuously expand market share, further consolidate our leading 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 market. 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 reached new highs. Total net revenue was RMB 10.18 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 stores 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 cumulative number of transacting customers exceeded 300 million, and the number of monthly average transacting customers was 79.85 million. Our CFO, An Jing, will share further financial details later on this call. Please turn to Page 6. In terms of store profit and 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 13,891 self-operated stores and 7,407 partnership stores, further expanding our leading advantages in store count and the market layout. China's coffee market is currently experiencing a strategic period of rapid development with coffee consumption growing in popularity and the market base expanding swiftly. Facing this valuable opportunity, we will continue to prioritize our store layout strategy by increasing density in top-tier cities, while maintaining our efforts to expand into lower-tier cities. In the international market, we continued to make steady investments in Singapore this quarter with a net increase of 8 stores, bringing the total number of stores to 45 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 have significantly narrowed and overall operations are moving in a positive direction. Looking ahead, we will steadily expand overseas markets on an ongoing basis, explore and create innovative organizational model for international business and continuously increasing investment, 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 freshly-brewed beverages along with several light food 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 Jasmine Milk Tea has sold more than 44 million cups in its first month. Centered around the concept of coffee in the morning, tea in the afternoon, we are committed to meeting consumers' diverse needs during that coffee hour, achieving all-day and all-scenario coverage of our product offerings. In addition, the Little Butter series launched at the end of September received best [ Great Attraction ] with first week sales exceeding 13.33 million cups. During this quarter, we also successfully launched several branding collaborations, including Black Myth: Wukong, Zanmang Loopy, and Butter Bear, all of which were well received and supported by consumers. At the 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, set a new high. To ensure stable supplies for our over 20,000 stores, we are committed to increasing investment in our supply chain. In August, Luckin Coffee broke ground on its new innovation and production center in Qingdao. This center, along with the 2 major roasting plants in Kunshan, Jiangsu, and the Pingnan, Fujian, 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 cup 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 plans 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 training and providing support to boost the sustainability of source cultivation. This not only improves the quality and the yield of raw materials but also contributes to the protection and enhancement of the ecological environment in these regions as well as the living standards of coffee farmers. In September, we invited experts from relevant fields to our green coffee bean processing plant in Baoshan, Yunnan, to provide training for local coffee farmers and business representatives on the coffee industry, regenerative 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 Yunnan Coffee and the protection of the local environment. In the third quarter, Luckin Coffee completed the Brazil stop of its global coffee research plan. As a groundbreaking ceremony of the Qingdao factory in August, we joined hands with his excellency, Marcos Galvão, the Brazilian ambassador to China, and jointly launched the Luckin Coffee Brazil Coffee Culture Festival. Brazil, with its long history of coffee cultivation and the world's largest coffee production capacity, has extensive practical experience in sustainable development, including regenerative agriculture and agriculture 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 among global coffee producing regions, contributing to the sustainable development of China's core 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.

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 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 last year. This growth was mainly driven by an increase in the number of product sales 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% in the same quarter of 2023 due to the exceptionally high base from last year. The same-store growth improved quarter-by-quarter, and we are actively working on maintaining this trend. Also, revenues from partnership store 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 international 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 as well costs 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 underscore 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 last year. This strong growth not only highlights the success of our customer engagement and retention strategies, but also positions us favorably against the competition and 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 boosted the gross profit of our products. Additionally, our enhanced operational efficiency and operating leverage significantly contributed 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 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 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 53.2% 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 volume of delivery orders. Loss expenses related to the previously 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 became entitled to receive excess layer compensation of USD 50 million, which is about RMB 105.2 million under its D&O insurance, directors and officers liability and company reimbursement insurance following the receipt of the base layer composition. Then 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 macroenvironment. During the third quarter, our net operating cash inflow remained consistent at RMB 1.3 billion compared to the same period 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 of our business needs and provide additional growth potential. In closing, I want to recognize our team for their dedicated efforts and 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 grounds of our success. And I want to extend my deepest thanks to our employees for their invaluable contributions. To add, 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 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 for concluding remarks, followed by Q&A.

[Interpreted] Behind the continuous milestone achieved by Luckin Coffee lies the hard work of every Luckin Coffee employee, the love of our consumers, the 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 all 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 increase supply chain investment to further consolidate and extend 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 emphasis on 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 Instructions] And our first comes from Yongjian Yi from Minsheng Securities.

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

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