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Why Luckin Coffee Stock Is Falling Today

By Joe Tenebruso – Updated Jun 11, 2020 at 11:32AM

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The road to recovery may be harder than you think.

What happened

Shares of Luckin Coffee (LKNC.Y -1.04%) declined on Thursday after a key rival warned of heavy losses in the coming quarters. As of 11:33 a.m. EDT today, Luckin's stock was down more than 15%. 

So what 

It's been a rough few months for Luckin and its long-term investors. After the Chinese coffeehouse chain disclosed on April 2 that it had fabricated as much as $310 million in sales from the second quarter of 2019 to the fourth quarter, its stock plummeted. In the weeks that followed, Luckin's CEO and chief operating officer vacated their positions due to their alleged involvement in the scandal, and the company's chairman will reportedly face criminal charges in China for his role in the fraud. Today, Luckin's stock price is down roughly 85% from the level it traded at before news of the accounting scandal broke. 

But shares are actually up approximately 170% from the lows they reached in May. Some investors are betting that the company will eventually recover from these incidents and that its business still holds value.

A warning sign.

Luckin Coffee shareholders should take Starbucks' recent disclosures as a warning. Image source: Getty Images.

Unfortunately, recent announcements by Starbucks (SBUX -0.34%) throw that investment thesis into question. Starbucks said on Wednesday that it expects to suffer a sales decline of as much as $3.2 billion in its fiscal third quarter due to the impact of COVID-19. While much of those losses will occur in its core U.S. market, Starbucks projects its same-store sales in China to fall as much as 20% in fiscal 2020. 

Now what

Although Starbucks said that it expects its comps to "substantially recover" by the end of the fourth quarter, Luckin is in a far weaker financial position and may not be as able to ride out the coronavirus storm. It was already unprofitable before the pandemic, and its financials will likely look a lot worse after we know the full extent of its accounting shenanigans. Starbucks' warnings come at a terrible time for Luckin and could signal that more pain lies ahead for its investors.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Luckin Coffee Inc. and Starbucks. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Luckin Coffee Inc. Stock Quote
Luckin Coffee Inc.
$16.24 (-1.04%) $0.17
Starbucks Corporation Stock Quote
Starbucks Corporation
$86.28 (-0.34%) $0.29

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