It’s been 57 days since Luckin Coffee (OTCMKTS:LKNCY) had something to tell investors. That’s an incredible number of days for any public company to go without some investor engagement, especially one caught cooking the books. And yet, long-time owners of Luckin Coffee stock have seen their shares appreciate by 75% over this timeframe.
That’s some trick.
However, if you’re thinking about jumping back on Luckin’s bandwagon, you might want to look to Starbucks (NASDAQ:SBUX), its biggest competitor in China, for some guidance.
Starbucks Isn’t Faring Too Well
Seattle’s best reported its fourth-quarter results at the end of October. They weren’t very good. Its U.S. same-store sales fell 9%, while its Chinese growth engine saw comps fall by 3% during the quarter.
However, they were a breath of fresh air compared to Q3 2020, when U.S. and Chinese same-store sales fell 40% and 19%, respectively. Those two countries account for 61% of the company’s global portfolio, so they’re vital to getting back on track.
Anecdotally, here in Halifax, Nova Scotia, where I live, the manager of my local Starbucks did say its store was doing better than it’s ever done despite the changing customer base.
Further, the company’s Rewards loyalty program continues to generate new members — it reported that its 90-day active members in the U.S. in the fourth quarter grew 10% year-over-year to 19.3 million from 17.6 million at the end of fiscal 2019 — and that will definitely pay dividends in a post-Covid world.
So, if Starbucks is having a hard time in China, and it doesn’t have a fraud fiasco hanging over its head, how is it that Luckin Coffee isn’t suffering a similar fate?
We won’t know the answer to that until the company comes out of its cocoon and levels with investors.
Give Luckin Coffee Stock a Chance?
InvestorPlace’s David Moadel believes there might be hope on the horizon for the disgraced coffee purveyor.
“Every time it dips, Luckin always seems to come back up to the $4.50 level. Essentially, the stock’s been surprisingly steady and resilient. Right now, the stock trades at around $4.90. So — in its post-fraud, post-delisting second act — maybe there’s hope on the horizon for the company,” Moadel stated on Nov. 17.
Call me a cynic, but a steady stock price does not tell me that all is well with the company.
The markets have been on a practically non-stop bull run since March, despite the global GDP getting hammered into submission. And now that the entire world is experiencing a second or even third wave of Covid-19, investors can expect things to get worse before a vaccine arrives to calm everyone’s nerves.
In the meantime, Starbucks’ experience in China suggests Luckin’s numbers, should we finally get some, will be terrible at best and downright pathetic at worst.
So, under no circumstances would I give Luckin a chance. On the contrary, if you want to play China’s growing fascination with coffee, Starbucks is the smarter play until the world returns to normal post-Covid.
Starbucks Can Ride This Out
Starbucks can afford $5.1 billion in lost sales. Even after taking into account the hit from Covid-19 in 2020, the company still generated free cash flow of $114.2 million. That’s down big time from $3.2 billion in 2019, but it’s positive nonetheless.
I wouldn’t even know where to begin with Luckin.
The latest financial statements available for the company are for the nine months ended September 30, 2019, more than a year ago. At that time, Luckin had free cash flow of -$264.4 million on $409.8 million in sales.
The company’s internal investigation is said to have found $310 million in fabricated sales, which represented 42% of its estimated $732 million in fiscal 2019 revenue.
So, I will say Luckin finished fiscal 2019 with 264 million in free cash flow used on $422 million in sales. That hardly compares to Starbucks.
The bottom line is that Starbucks finished its latest fiscal year with more than $4.6 billion in cash on its balance sheet and net debt of $20.6 billion, or about 18% of its market capitalization.
To take a $5 billion hit to sales and still have a fortress-like balance sheet is a testament to its business.
Luckin can’t say the same. Not even close.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.