With its share price roughly doubling in the last 12 months, Luckin Coffee (LKNC.Y 2.92%) has been one of the best performers in my investment portfolio. And while the Chinese coffee chain is still bouncing back from its previous management's mistakes, a stellar growth rate and reasonable valuation mean the bull run might be just getting started.
1. Luckin turned a challenge into an opportunity
You might be familiar with Luckin Coffee for all the wrong reasons. In 2019, the company's then-CEO Jenny Zhiya Qian fabricated roughly $310 million in sales -- leading to fines and a delisting of the stock from the Nasdaq exchange (it now trades over the counter). The company also completed Chapter 15 bankruptcy proceedings, to reorganize its U.S. debt obligations without liquidating its international business.
But the crisis may have been a blessing in disguise. Luckin used the opportunity to change its management and begin prioritizing profitable growth instead of growth at all costs. These efforts have led to excellent operational results.
2. Operational results are spectacular
Luckin Coffee's second-quarter earnings highlight its ongoing business transformation. Total net revenue jumped 88% year over year to $855.2 million, led by same-store sales growth and the opening of a whopping 1,485 new locations, bringing the total number of stores to 10,836. To put Luckin's scale in context: Its biggest rival, Starbucks, has just over 6,500 stores in China and 35,711 locations globally.
While Luckin Coffee is still far from an international coffee giant, this could soon change. In March 2023, the company opened its first location abroad in the Southeast Asian nation of Singapore. And by August, management had already opened a total of five locations in the country, suggesting some level of international success that can be replicated in other nations like Thailand, South Korea, or even the United States.
Image source: Getty Images.
Luckin's potential to replicate its success in China in other countries is one of the biggest long-term draws for the stock. The company's unique cashless business model is well-suited to younger generations and the "touch-free" culture that became common during the pandemic, in which people prefer less face-to-face human interaction.
3. The valuation is still reasonable
Despite enjoying significant returns on my Luckin Coffee position, the stock still offers good value. With a price-to-sales (P/S) ratio of just 3.7, shares are dirt cheap considering its growth rate and potential for international expansion. For context, established restaurant giant McDonald's has a P/S ratio of 8.7. Starbucks has a P/S of 3.3, despite seeing its second-quarter revenue grow by just 14% compared to Luckin's 88%.
There is no easy explanation for Luckin Coffee's relatively low valuation. Perhaps some investors are reluctant to trust the company given its checkered past. But since it replaced management and reworked its corporate governance strategy (focusing on checks and balances and division of responsibility), the company seems in much better shape now. It could just be a matter of time before Luckin's stock valuation starts reflecting its business transformation.
