The name Luckin Coffee (LKNC.Y 4.01 percent) likely brings to mind the risks associated with investing in Chinese stocks. However, the company’s narrative is now shifting. This controversial coffee shop has begun to reinvent itself three years after the company’s crisis, in which it was discovered that its previous management had fabricated $300 million worth of sales.
1. Luckin Coffee is reinventing itself
While it may take years (if ever) for Luckin Coffee to completely shed the stigma of its past fraud, management has done a fantastic job of turning the ship around. In April, the company emerged from Chapter 15 bankruptcy, a process designed to restructure its debt in the United States without significantly affecting the company’s operations.
As part of the reorganisation, Luckin Coffee and some of its U.S. creditors agreed to retire a portion of the company’s $460 million in debt in exchange for $320 million in cash, as well as new bonds and shares, with the intention of enhancing Luckin’s capital structure and turning over a new leaf. In addition, the company agreed to pay the Securities and Exchange Commission (SEC) a $180 million fine to settle accounting fraud charges for overstating its 2019 revenue.
Jinyi Guo, the new CEO of Luckin Coffee, acknowledges that some may still be sceptical of the company due to its history. CNN reports that Luckin has hired external attorneys to evaluate its operations.
As a Chinese company, Luckin is not necessarily subject to the same reporting requirements as its American counterparts, but the intense external scrutiny from lawyers, the media, and regulators should be sufficient to keep management honest.
2. The economy is thriving
The first-quarter earnings of Luckin Coffee were a resounding success. Total nett revenue increased 90 percent year-over-year to $379.3 million as same-store sales increased by 42 percent and the company opened 556 new stores, bringing its total store count to 6,556. Starbucks operates only 5,654 locations in China, making Luckin Coffee the largest coffee chain by store count on the Chinese mainland.