Luckin Coffee: Unaudited Q3-2019 Financial Results

Beijing / CN. (lci) Luckin Coffee Inc., a pioneer of a technology-driven new retail model to provide coffee and other products of high quality, high affordability, and high convenience to customers, announced its unaudited financial results for the third quarter ended September 30, 2019.

Third Quarter 2019 Highlights

• Total net revenues from products in the quarter were RMB 1,493.2 million (USD 208.9 million), representing an increase of 557.6 percent from RMB 227.1 million in the same quarter of 2018.
• Average monthly total items sold in the quarter were 44.2 million, representing an increase of 470.1 percent from 7.8 million in the third quarter of 2018.
• Cumulative number of transacting customers increased to 30.7 million, representing an increase of 413.4 percent from 6.0 million as of the end of the third quarter of 2018. During the third quarter of 2019, the Company acquired 7.9 million new transacting customers.
• Average monthly transacting customers in the quarter were 9.3 million, representing an increase of 397.5 percent from 1.9 million in the third quarter of 2018.
• Total number of stores at the end of the quarter were 3,680 stores, representing an increase of 209.5 percent from 1,189 stores at the end of the third quarter of 2018.
• Average total net revenues from products per store in the quarter were RMB 449.6 thousand (USD 62.9 thousand), representing an increase of 79.5 percent from RMB 250.5 thousand in the same quarter of 2018.
• Store level operating profit in the quarter was RMB 186.3 million (USD 26.1 million), or 12.5 percent of net revenues from products, compared to a loss of RMB 126.0 million in the third quarter of 2018.

«We are very pleased with our results in the third quarter. We exceeded the high-end of our guidance range, achieved a store level profit margin of 12.5 percent and experienced continuous growth across all key operating metrics. These achievements follow a clear trend: an increase in volumes, efficiency and, as a result, profitability. During the quarter, product revenue grew at 557.6 percent, which was 1.2x, 1.4x and 2.7x the growth rate of average monthly items sold, average monthly transacting customers, and number of stores, respectively,» said Jenny Zhiya Qian, Chief Executive Officer of Luckin Coffee.

«During the third quarter, sales from freshly-brewed coffee drinks continued to maintain very strong growth, and we believe we will reach our goal to become the largest coffee player in China by the end of this year. With our distinguished value proposition of high quality, high affordability and high convenience we believe that Luckin Coffee has become part of more and more Chinese consumers’ daily lives. China’s coffee market remains highly underpenetrated so we are very excited about the growth potential ahead of us,» said Qian.

Qian added, «At the same time, we continued to enrich our product offerings during the quarter. We launched Luckin Tea products nationwide in July 2019 and experienced strong incremental demand during the quarter, contributing to an increase in per store revenue and higher customer retention rate. We also started selling cups and other merchandise products and entered into a joint venture agreement with Louis Dreyfus Company to produce and sell co-branded Not From Concentrate juice products.»

Qian continued, «We also strategically launched Luckin Tea as an independent brand and developed our new retail partnership model. In addition, we are engaged in ongoing discussions with potential strategic partners to set up joint ventures in markets outside of China. We consider these initiatives as an evolution of our current business model and are part of our strategy to serve more customers.»

«With our disruptive technology-driven new retail model and our newly-launched retail partnership model, we believe we can rapidly expand into adjacent markets with limited capital expenditures while maintaining a high degree of operational control and efficiency. We are pleased to have taken meaningful steps accomplishing our goals this quarter and remain extremely excited about the future of our business,» concluded Qian.

Third Quarter 2019 Unaudited Financial Results

Total net revenues were RMB 1,541.6 million (USD 215.7 million) in the third quarter, representing an increase of 540.2 percent from RMB 240.8 million in the third quarter of 2018. Total net revenues from products were RMB 1,493.2 million (USD 208.9 million) in the third quarter, representing an increase of 557.6 percent from RMB 227.1 million in the third quarter of 2018. Net revenues from products growth was primarily driven by a significant increase in the number of transacting customers, an increase in effective selling price, and an increase in the number of products sold per transacting customer.

• Net revenues from freshly brewed drinks were RMB 1,145.4 million (USD 160.2 million), representing 74.3 percent of total net revenues in the third quarter of 2019, compared to RMB 192.7 million, or 80.0 percent of total net revenues, in the third quarter of 2018.
• Net revenues from other products were RMB 347.8 million (USD 48.7 million), representing 22.6 percent of total net revenues in the third quarter of 2019, compared to RMB 34.4 million, or 14.3 percent of total net revenues, in the third quarter of 2018.
• Other revenues, which mainly include delivery fees, were RMB 48.4 million (USD 6.8 million), representing 3.1 percent of total net revenues in the third quarter of 2019, compared to RMB 13.7 million, or 5.7 percent of total net revenues, in the third quarter of 2018.

Total operating expenses were RMB 2,132.5 million (USD 298.3 million), representing an increase of 193.6 percent from RMB 726.4 million in the third quarter of 2018. The increase in operating expenses was the result of business expansion. Meanwhile, operating expenses as a percentage of net revenues decreased to 138.3 percent in the third quarter of 2019 from 301.7 percent in the third quarter of 2018, mainly driven by increased economies of scale and the Company’s technology-driven operations.

• Cost of materials were RMB 721.1 million (USD 100.9 million), representing an increase of 375.5 percent from RMB 151.6 million in the third quarter of 2018, as a result of the increase in sales of products. Cost of materials decreased to 48.3 percent as a percentage of net revenues from products in the third quarter of 2019 from 66.8 percent in the third quarter of 2018.
• Store rental and other operating costs were RMB 477.3 million (USD 66.8 million), representing an increase of 176.6 percent from RMB 172.5 million in the third quarter of 2018, mainly due to increases in the number of stores and headcount. Store rental and other operating costs decreased to 32.0 percent as a percentage of net revenues from products in the third quarter of 2019 from 76.0 percent in the third quarter of 2018.
• Depreciation expenses were RMB 108.5 million (USD 15.2 million), representing an increase of 275.8 percent from RMB 28.9 million in the third quarter of 2018, mainly as the result of increases in depreciation of leasehold improvements and the increase in the purchases of equipment for operation due to the increased number of stores. Depreciation expenses decreased to 7.3 percent as a percentage of net revenues from products in the third quarter of 2019 from 12.7 percent in the third quarter of 2018.
• Sales and marketing expenses were RMB 557.7 million (USD 78.0 million), representing an increase of 147.6 percent from RMB 225.3 million in the third quarter of 2018, mainly due to increases in advertising expenses as the Company launched new marketing initiatives, entered into new cities and launched Luckin Tea as an independent brand. The increase in sales and marketing expenses reflect strategic investments in branding which, management believes, will bring long-term benefits to the Company. All promotions and coupons provided to customers, other than free product promotion expenses, are reflected in net revenues from products and therefore not included in sales and marketing expenses. Sales and marketing expenses decreased to 36.2 percent as a percentage of net revenues in the third quarter of 2019 from 93.5 percent in the third quarter of 2018.
• General and administrative expenses were RMB 246.1 million (USD 34.4 million), representing an increase of 108.0 percent from RMB 118.3 million in the third quarter of 2018. The increase in general and administrative expenses was mainly driven by business expansion and share-based compensation to senior management. General and administrative expenses decreased to 16.0 percent as a percentage of net revenues in the third quarter of 2019 from 49.1 percent in the third quarter of 2018.
• Store preopening and other expenses were RMB 21.8 million (USD 3.0 million), representing a decrease of 26.9 percent from RMB 29.8 million in the third quarter of 2018, mainly due to decreased rental costs before opening as a result of improved efficiency for new store openings. Store preopening and other expenses decreased to 1.4 percent as a percentage of net revenues in the third quarter of 2019 from 12.4 percent in the third quarter of 2018.

Operating loss was RMB 590.9 million (USD 82.7 million) compared to RMB 485.6 million in the third quarter of 2018. Non-GAAP operating loss was RMB 550.1 million (USD 77.0 million), representing 35.7 percent of total net revenues, in the third quarter of 2019, compared to RMB 485.6 million, or 201.7 percent of total net revenues, in the third quarter of 2018.

Net loss was RMB 531.9 million (USD 74.4 million) compared to RMB 484.9 million in the third quarter of 2018. Non-GAAP net loss was RMB 491.1 million (USD 68.7 million), representing 31.9 percent of total net revenues, in the third quarter of 2019, compared to RMB 483.9 million, or 201.0 percent of total net revenues, in the third quarter of 2018.

Basic and diluted net loss per ADS was RMB 2.24 (USD 0.32) compared to a loss of RMB 3.60 in the third quarter of 2018. Non-GAAP basic and diluted net loss per ADS was RMB 2.08 (USD 0.32) compared to a loss of RMB 3.52 in the third quarter of 2018.

Net cash used in operating activities was RMB 122.8 million (USD 17.2 million) compared to RMB 719.6 million in the third quarter of 2018. The decrease was primarily driven by a reduction of operating loss and a favorable working capital profile.

Cash and cash equivalents and short-term investments were RMB 5,543.9 million (USD 775.6 million) as of September 30, 2019, compared to RMB 1,761.0 million as of December 31, 2018. The increase was primarily driven by the net proceeds of USD 158.8 million from the issuance of Series B-1 convertible redeemable preferred shares in April 2019 to certain investors and the net proceeds of USD 657.2 million from the IPO and the concurrent private placement.

Key Operating Data

For the three months ended or as of	2018-06-30	2018-09-30	2018-12-31			2019-03-31		2019-06-30		2019-09-30
Total stores	624	1,189	2,073		2,370		2,963		3,680
Pick-up stores	356	903	1,811		2,163		2,741		3,433
Relax stores	22	45	86		109		123		138
Delivery kitchens	246	241	176		98		99		109
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Cumulative number of transacting customers (in thousands)	2,917.8	5,984.3	12,529.5		16,872.3		22,777.5		30,723.7
Average monthly transacting customers (in thousands)	1,207.6	1,877.4	4,325.9		4,402.0		6,166.0		9,339.7
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Average monthly total items sold (in thousands)	4,001.0	7,760.3	17,645.1		16,275.8		27,593.0		44,244.6
Freshly brewed drinks	3,743.7	6,220.4	13,418.8		13,077.2		21,055.7		34,655.4
Other products	257.3	1,539.9	4,226.4		3,198.6		6,537.3		9,589.2

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Guidance

For the fourth quarter ending December 31, 2019, the Company expects net revenues from products to be between RMB 2.1 billion and RMB 2.2 billion. This forecast excludes any revenue generated from stores operated under the new retail partnership model. This forecast reflects the Company’s current and preliminary views, which are subject to change.

Key Definitions

• Net revenues from products. Calculated as the sum of net revenues from freshly brewed drinks and net revenues from other products.
• Average total net revenues from products per store. Calculated by dividing net revenues from products during the period by the average number of stores during the period.
• Transacting customers for the period. Refers to a customer who bought at least one item offered on the Company’s mobile apps or through third-party platforms in a given period, regardless of whether the customer paid for the item or merely ordered through the free product marketing initiative. Each unique mobile account is treated as a separate customer for purposes of calculating transacting customer.
• Cumulative number of transacting customers. The total number of transacting customers since inception.
• Average monthly transacting customers. The number of average monthly transacting customers in the three months during the quarter.
• Average monthly total items sold. Calculated by dividing the total number of items sold during the quarter by three.
• Store level operating profit (loss). Calculated by deducting the cost of materials, store rental and other operating costs, and depreciation expenses from net revenues from products.
• Store level operating profit (loss) margin. Calculated by dividing store level operating profit (loss) by net revenues from products.
• Non-GAAP operating loss. Calculated by adjusting operating loss for non-cash share-based compensation expenses.
• Non-GAAP net loss. Calculated by adjusting net loss for non-cash share-based compensation expenses and change in the fair value of warrant liability.
• Non-GAAP basic and diluted net loss per share. Calculated as non-GAAP net loss divided by weighted average number of basic and diluted share.
• Non-GAAP basic and diluted net loss per ADS. Calculated as non-GAAP net loss divided by weighted average number of basic and diluted ADS.