China's fastest-growing coffee enterprise, Luckin Coffee (NASDAQ:LK), surprised investors with another quarter of torrid growth on Wednesday, though bottom-line losses continued. In its second earnings release since its May 2019 IPO, the coffee chain relayed substantial progress on a number of key metrics. Luckin's third-quarter report delighted investors, and the growth stock rose 13% on the trading session. Note that all comparative numbers that follow are presented against those of the prior-year quarter.

Luckin Coffee: The headline numbers

Metric Q3 2019 Q3 2018 Change
Revenue RMB 1.54 billion [$215.7 million] RMB 240.8 million 640%
Net loss (RMB 531.9 million) [($74.4 million)] (RMB 484.9 million) (9.6%)
Diluted loss per share (RMB 0.28) [($0.04)] (RMB 0.45) 37.8%

Data source: Luckin Coffee. RMB = renminbi. 

Key highlights from the quarter

Steaming blue coffee cups on a wooden table.

Image source: Getty Images.

  • Revenue from product sales of 1.49 million RMB exceeded the high end of management's guidance of between 1.35 billion and 1.45 billion RMB.
  • Average monthly transacting customers jumped by 398% to 9.3 million.
  • Total store count increased by 210% to 3,680 stores.
  • The average "total net revenues from products" that Luckin generated per store during the three-month period increased 80% to RMB 450,000 ($62,900).
  • Store-level operating profit swung from a loss in the prior-year quarter of RMB 126 million to a profit of 186 million RMB ($26 million). Store-level profits equaled 12.5% of net revenues from products.
  • The company's net loss expanded at a much slower rate than revenue, and it also improved sequentially against the 688 million RMB loss recorded in the second quarter of this year.
  • Net revenue from freshly brewed drinks of 1.145 billion RMB ($160.2 million) represented 74.3% of total revenue during the quarter, down from 80% in Q3 2018, as the company continues to build out noncoffee offerings such as baked goods, juices, and teas.
  • Luckin also made progress in its drive to decrease delivery sales as it opens up a denser array of stores. Delivery accounted for 3.1% of total net revenue, versus 5.7% in the prior comparable quarter.
  • In July, the company launched its Luckin Tea brand, via products available in Luckin Coffee stores and a new Luckin Tea store format.

Business model extensions

In addition to the launch of Luckin Tea, which is aimed at China's vast tea-drinking market, the company introduced a new "retail partnership model" during the quarter, which has similarities to a traditional franchise operation.

Under this program, new retail partners will be responsible for the leasing of space, hiring of staff, and day-to-day store operations, while gaining the benefit of Luckin's branding, cashier-less mobile ordering and payments platform, and supply chain. 

However, retail partners won't be required to pay an initial franchise fee and will share revenue on a tiered basis with Luckin. This allows the partner to reinvest more in operations in the early stages of the business, while Luckin will receive a greater percentage of revenue once sales start to climb. This asset-light expansion of Luckin's model should allow for faster store growth, with less capital at risk.

In Luckin's earnings press release, CEO Jenny Zhiya Qian commented on both of these business model extensions:

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. ...

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.

Looking ahead to the fourth quarter

Luckin Coffee doesn't roll out a detailed slate of estimates each quarter, preferring to benchmark its expectation for net revenues from products. For the fourth quarter, the company expects net revenues from products to fall between RMB 2.1 billion and RMB 2.2 billion ($301 million at the midpoint of the range). This estimate excludes revenue from the new retail partnership initiative. If Luckin can again substantially scale its top line while controlling losses, it may yet win another round of endorsement from investors next quarter.