With the S&P 500 down 11% year to date, 2022 has been a tough year for many companies. But Luckin Coffee (LKNC.Y -0.04%) has bucked the trend, with its shares rising by an impressive 48% over the same period as it normalizes operations after its bankruptcy restructuring.
Let's explore why Luckin's long-term growth story could be just getting started.
An impressive turnaround story
In 2020, an internal probe discovered that Luckin Coffee's previous management fabricated roughly $300 million in 2019 sales. This bombshell finding sent investors rushing for the exits. And the company's stock price plunged from its all-time high of $50 in January 2020 to under $2 before its delisting from the NASDAQ just six months later.
But between then and now, Luckin has reshuffled its management, paid off some of its regulatory fines, and completed a Chapter 15 bankruptcy designed to restructure debt without impacting regular operations.
Luckin Coffee also changed its business model, dropping a growth-at-any-cost approach in favor of a more strategic expansion that involved closing underperforming stores and developing a franchise network. So far, these efforts are paying off.
Do I smell profits?
Luckin Coffee's second-quarter results highlight the company's transformation. Revenue jumped 72% to 3.3 billion Chinese RMB ($493 million), powered by an impressive 41% bump in same-store sales. Management released 34 new products and continues to open new company-owned and franchise partnership stores, bringing Luckin's total store count to 7,195 by the end of the period.
But the most exciting developments are on the bottom line.
Operating income increased from a negative 48 billion RMB to 242 billion RMB (roughly $36 million) as the company's sales scale faster than its expenses. And while it will take time for Luckin to generate consistent net income because of lawsuits and fines related to its previous fraud, the improvement in operating income shows the company is moving in the right direction despite a net loss of 115 billion RMB ( $17 million) in the period.
A U.S. listing could unlock value.
With a price-to-sales (P/S) ratio of just 2.9, Luckin Coffee trades at a slight discount to its closest comparable competitor, Starbucks, with a P/S ratio of 3.2 despite its massive growth rate. To be fair, a discount should be expected considering Luckin's prior history of fraudulent reporting as well as the fact that it operates outside of the U.S. But this could also represent a great value for investors as the company continues to bounce back from the crisis and regain the market's trust.
A return to more liquid U.S. equity markets could also be a nice boost to Luckin's valuation because it could give the shares more legitimacy (the company currently trades over the counter). According to the Financial Times, management is exploring plans to potentially relist on the NASDAQ by the end of the year. While nothing is guaranteed, the report suggests Luckin's possible relisting could face fewer regulatory challenges (compared to a regular Chinese IPO) because its shares already trade in the U.S. Stay tuned.