Luckin Coffee: Expected to Achieve 10,000-Store Target Ahead of Schedule.

Here are the minutes of Luckin Coffee's Q1 2023 Earnings Conference Call. For detailed financial analysis, please refer to "Luckin: Rapid Expansion and Full Recovery".

I. Business Review

1. Overall Business

In the first quarter of this year, with the adjustment of epidemic prevention and control measures, the catering industry recovered rapidly, and market competition gradually intensified. In the face of a fiercely competitive environment, the company still achieved high-speed growth in revenue and profit, and set a new record for store scale and user numbers. As of early April this year, sales of coconut lattes, which have been on the market for two years, exceeded 300 million cups, becoming a well-deserved innovative consumer product of the year. Last year and this year's first-quarter outstanding performance proves that Luckin Coffee's business model is effective, highly resilient, and has the efficiency advantage and growth momentum brought about by scale, as well as stable product quality and high brand recognition. We will firmly expand our market share and prove Luckin's strong and efficient operation ability to the market. The company will accelerate the speed of store opening, launch more delicious and affordable products, deliver more convenient services, and provide consumers with friendlier prices, to comprehensively give back to consumers and achieve the strategic goal of accelerating the enhancement of market share. At the same time, we will pay more attention to the healthy and sustainable development of our business, adhere to long-termism, keep our feet on the ground, and work hard to build Luckin into a world-class coffee brand.

Specifically, the first quarter not only continued the good growth momentum of the past, but also reflected the scale advantage of business with remarkable performance. Among them, the total revenue was RMB 4.4 billion, a year-on-year increase of 84.5%, operating profit margin was 15.3%, self-operating store profit margin was 25.2%, and same-store sales growth rate was 29.6%. The net number of stores increased by 1,137, and the total number of stores reached 9,351. Cumulative consumer numbers reached 150 million, and the monthly average transaction customers reached 29.49 million.

2. Sustainable Development

In 2023, we will seek sustainable development by deepening and orderly landing the work of sustainable development across all business lines based on the 0 to 1 foundation, so as to promote Luckin to achieve breakthroughs in pursuing long-term value, actively assuming social responsibilities, and helping the industry develop in a benign direction. While continuing to promote the establishment of a regulatory framework and mechanism for sustainable development, we will comprehensively carry out the construction of sustainable development strategic objectives. In the first quarter, the carbon accounting work was officially launched for the entire business line. To ensure the efficient and high-quality landing of relevant work, Luckin Coffee's sustainable development committee has established the Climate Change and Carbon Neutrality Subcommittee, which is responsible for identifying and controlling the company's greenhouse gas emissions, climate change, risk and opportunity identification, and other matters. Under the leadership of the subcommittee, working groups covering key business areas have been formed to lay a foundation for the scientific formulation and effective promotion of Luckin's carbon neutrality plan.

3. Internationalization

Creating a world-class coffee brand and making Luckin a part of people's daily lives is Luckin's corporate vision. At the end of March this year, Luckin Coffee opened two stores in Singapore, which entered the trial operation phase. Both stores are located in Singapore's fashionable and trendy gathering places and have been widely praised by young consumers since their opening. The landing of Luckin Coffee's Singapore stores is an important first step in Luckin Coffee's layout of overseas markets. The company hopes to use the Singapore market as a starting point for internationalization, to further refine the entire IT system and operating system by implementing Luckin Coffee's business model overseas. The brand positions itself as professional, youthful, stylish, and healthy, with an advanced new retail coffee business model that allows consumers around the world to enjoy high-quality Luckin coffee.

In terms of the brand, Luckin continues to strengthen its professional, youthful, stylish, and healthy brand tone, attracting more new users. As of the first quarter, the total number of consumer customers reached 150 million, with a monthly average transaction of 29.49 million, a year-on-year doubling. In March, the number of consumption users surpassed 30 million, a record high. While continuously producing popular items, the company is also focusing on its professional capabilities and is accumulating momentum in research and development, supply chain, and scale. The newly launched Bi Luo Chun Na Latte sold 4.47 million cups in the first week of the first quarter, and the Coconut Cream Iced Sipper sold over 6.66 million cups in the first week of April, with sales reaching over CNY 240 million, making it a well-deserved bestseller. In terms of coffee professional quality, the company is also increasing investment. In March this year, Luckin launched the Global Bean Finding Plan, with ten Luckin Coffee R&D personnel with Q-Grader certification, led by Anthony Douglas, the champion of the 2022 World Barista Championship, delved into six global high-quality coffee producing areas, looking for high-quality coffee beans for Luckin Coffee consumers.

As of the first quarter, Luckin is still the chain with the most coffee shops in China, which will continue to grow rapidly. The total number of domestic stores is 9,349, covering 240 cities, with a net increase of 1,135 stores in the first quarter. With the influx of more brands, the competition in the Chinese coffee market will become more intense, and the company will still actively increase the number of high-line urban stores while accelerating expansion in sinking markets through a joint venture model. In terms of supply chain, investment will continue to be increased to further strengthen the foundation. After the Luckin Jiangsu Baking Base officially broke ground in December last year, the Yunnan Baoshan Coffee Processing Plant will also break ground at the end of this year. Investment in the supply chain has created higher barriers and deeper moats, and continuously optimized costs.

II. Financial Review

Note: Financial indicators have been adjusted

1. "Delivery fees paid by customers for self-operated stores" have been added to the revenue of self-operated stores.

2. The third-party platform commission for self-operated stores has been deducted from the operating profit of self-operated stores and deducted from the cost items.

The first-quarter financial performance was impressive. Despite macroeconomic uncertainties, the positive trend of economic recovery benefited this quarter. With the relaxation of epidemic prevention measures, consumer spending has rebounded significantly. Luckin Coffee's performance in the Chinese coffee market has improved both month-on-month and year-on-year. Since early February, consumption trends have gradually rebounded to normal levels, and store operating rates have also returned to pre-epidemic levels. In addition to macroeconomic benefits, store expansion and menu expansion have also brought strong performance.

1. Overall Performance

In the first quarter, performance reached a historic high, with total revenue of 4.4 billion yuan, an increase of 84.5% year-on-year. All income sources showed growth, with self-operated store income increasing by 74.9% year-on-year, and same-store sales growth rate of 29.6%. Franchise store income increased by 106.7% year-on-year, and as of 23Q1, franchise store income accounted for 25.6% of total revenue. Profitability improved, with operating profit margin increasing from 0.7% in 22Q1 to 15.3% in 23Q1. While expanding the scale, costs were effectively controlled. The average monthly number of trading customers increased from 15.98 million in 22Q1 to 29.5 million in 23Q1, with a year-on-year growth rate of 84.6%.

2. Number of Stores

As of 23Q1, there was a net increase of 1,135 domestic stores and 2 new stores opened in Singapore, with a total of more than 9,300 stores, which highlights the huge scale effect. The expansion of stores and the recovery of consumption improved the profit structure and increased revenue and operating profit margin.

In terms of store composition, this quarter saw a net increase of 658 self-operated stores, including 2 stores in Singapore. Franchise stores increased by 479 and entered more lower-tier cities. As of March 31, 2023, there are more than 6,300 self-operated stores and more than 3,000 franchise stores. The store expansion strategy is to increase the store density in first-tier and second-tier cities, and rapidly penetrate into lower-tier cities to further improve store coverage. Currently, the expansion strategy is being steadily implemented.

3. Profitability

Operating profit margin increased from 0.7% in 22Q1 to 15.3% in 23Q1, and this was attributed to revenue growth, effective cost control, operational efficiency improvement driven by technology, and scale effects. The ratio of operating expenses to total revenue decreased from 99.3% in 22Q1 to 84.7% in 23Q1, and the net profit margin after adjustment for this quarter reached 12.7%.

The profit margin of self-operated stores reached 25.2%, up from 18.5% in the same period last year. This was due to the launch of new products, store expansion, and operational efficiency improvement, and the same route will be continued for franchise store operations in the future. In the first quarter, franchise store income increased by 106.7% year-on-year, reaching 1.135 billion yuan.

4. Expenses

Management expenses increased by 11.7% year-on-year, mostly due to the increase in headquarter personnel salaries, tax surcharges, R&D investment, and office supplies expenditure. On the other hand, the share-based compensation for restricted stock units and options issued to management and employees decreased. The management expense ratio decreased from 13.3% in 22Q1 to 8.1% in 23Q1.

Absolute sales expenses increased by 84% year-on-year, while the sales expense ratio remained at 4.5%. Brand promotion continued across various channels, and due to the increasing trend of takeaway orders, more will be invested in subcontracting service fees in e-commerce business and third-party delivery platform commissions. Expenses related to previous fake transactions and related restructuring accounted for 0.1% of this quarter's revenue, while the expense ratio for 22Q1 was 1.6%. This is mainly due to the successful completion of the overseas interim liquidation procedure in March 2022, and the settlement with overseas investors is close to completion. This expense will continue to decrease in the future.

5. Cash Position

23Q1 received RMB 1.073 billion in operating cash flow, compared to RMB 108 million in 22Q1. Currently, interest-bearing debt is zero, and the cash position is very strong. As of March 31, 2023, there is approximately RMB 4.4 billion in cash and cash equivalents, equivalent to USD 639 million. The company will regularly evaluate liquidity needs to ensure that it can meet business needs and further optimize its capital structure.

III. Q&A

Q: What is the company's prediction of the competition in the Chinese coffee market and its measures to face the competition?

A: In the past three years, the Chinese coffee market has developed rapidly and the competition has been very fierce. The influx of more brands has brought more vitality to the market and provided consumers with more choices. Luckin Coffee welcomes such benign competition and is willing to cultivate the Chinese coffee market with everyone to make the market bigger and stronger together. Of course, the company will also take a more active role in competition, pay more attention to customer value, and reward customers with more friendly prices in the long term. After years of effort, Luckin Coffee has established significant scale and cost advantages, which allows the company to maintain reasonable profit margins and competitive prices and cup volumes that other brands are difficult to compete with. Luckin Coffee is confident about its competition. Recently, a 9.9 store promotion, participated by some stores, has been launched. Through continuous innovation in marketing activities, Luckin Coffee hopes to continuously improve the customer acquisition capabilities and operational capabilities of these stores. The activity also rewards consumers who have supported and loved Luckin Coffee for many years. From periodic results, participating stores have achieved significant improvements in overall cup volume and revenue, giving customers more benefits. We plan to continue this activity for a long time, insisting on putting customers first, which is not only a major measure to promote the mature development of the Chinese coffee market, but also an important embodiment of putting customers first.

Q: What are the main driving factors for the company's operating profit margin reaching two digits again in 23Q1?

A: The operating profit margin reached a historical high of 15.3%, while the self-operated store profit margin maintained good momentum, reaching 25.2%. There are three main driving factors:

1. The relaxation of epidemic prevention policies and the gradual economic recovery have brought sales growth through store expansion and menu expansion. Over 1000 new stores were added in the first quarter, and 24 new SKUs were launched. The average monthly number of trading customers reached nearly 30 million. The sales of the newly launched Bi Luo Chun Spring Latte reached 4.47 million cups in the first week of this quarter. All of the above has pushed sales growth, improved brand power, and promoted steady growth.

2. In addition to sales growth, cost reduction also increased the profit margin. The application of technology in operations has significantly reduced operating leverage. The expense ratio dropped from 13.3% in 22Q1 to 8.1% in 23Q1. Fake transaction and reorganization-related expenses declined. Compared to the same period last year, this expense item was RMB 37 million, accounting for 1.6% of total revenue. In this quarter, the expense item decreased to RMB 5.9 million, accounting for 0.1% of total revenue, thanks to the completion of debt restructuring and nearing completion of settlements with overseas investors' litigation.

In the future, the company will continue to expand its stores and menu, and invest in technology-driven operations to improve operational efficiency. As coffee becomes a daily consumption for more and more Chinese customers, the company will benefit from the advantages of expanding scale, increasing brand strength and visibility, as well as operational leverage.

Q: Latest progress on the 23-year store opening plan and future store opening plan

A: Currently, Luckin Coffee's goal of ten thousand stores will be achieved ahead of schedule in the first half of this year, making it the first chain coffee brand in China to have more than ten thousand stores. Over the past three years, the company has built an industry-leading digital site selection and store expansion management system. After systematic analysis and judgment, the company believes that there are still many optional locations that can meet Luckin's location requirements, whether in first or second-tier cities or low-tier cities, and the market space is far from saturated. Moreover, as coffee consumption in China accelerates, the space for opening stores continues to expand, and the company is confident in future store expansion. The company will closely monitor market changes, maintain a strong competitive pace of opening stores, continuously improve Luckin Coffee's store coverage density, and better meet consumer demand.

Risk Disclosure and Statement for this article: Dolphin Investment Research disclaimer and general disclosure