After the storm, has Luckin Coffee's brief honeymoon period arrived?

On the evening of October 30th, Beijing time, $Luckin Coffee(LKNCY.US) announced its Q3 2024 financial report. With the seasonal effect combined with reduced subsidies, Q3 performance continued to improve sequentially from Q2, overall performance exceeded Dolphin's expectations.

Specifically:

(1) Actively slowing down the pace of store openings and exploring overseas markets:

In terms of the number of stores, there was a net increase of 1,382 stores in Q3 compared to the previous quarter. Among them, there were 880 self-operated stores and 502 franchised stores. Dolphin believes that after two years of rapid store openings, considering the limited domestic market space and to mitigate the impact of new stores on existing ones, the company’s decision to voluntarily slow down the pace of openings is a rational move. Additionally, Singapore, as the company's first overseas pilot location, added 8 stores in the third quarter, with losses narrowing compared to previous periods.

(2) Same-store sales growth decline narrows, single-store profitability continues to improve:

The same-store sales, which investors are particularly concerned about, declined by 13.1% year-on-year in Q3, narrowing by 7.8 percentage points compared to Q2. Dolphin believes this is mainly due to the slowdown in store openings, which reduced the impact of new stores on existing ones. Furthermore, according to our calculations, the revenue and net profit per self-operated store improved sequentially during the peak season and with reduced subsidies, reaching 550,000 yuan and 130,000 yuan, respectively, with profit margins recovering to 23%. Considering that last year, Luckin launched the popular product, the Sauce Fragrance Latte, which resulted in a relatively high base from both cup volume and ASP perspectives, we believe the profitability recovery of single stores in Q3 is relatively good.

(3) Continued increase in paying users, significant contribution from new products:

In Q3, the number of paying users continued to grow, with the average monthly paying users approaching 80 million. This data temporarily alleviates our concerns about potential user losses due to reduced subsidies. We believe this is partly due to the excellent performance of the company's major product, light milk tea (with monthly sales exceeding 44 million cups), which achieved the conversion of new users across categories. On the other hand, it also indicates that the company's mainstream customer base is relatively insensitive to price changes.

Performance Indicators Overview

Dolphin's Viewpoint

In the short term, Q3, being the peak season for coffee consumption throughout the year, combined with the slowdown in subsidy intensity, the company delivered a good report card in Q3. Key indicators such as same-store revenue growth, number of paying customers, and single-store profitability all demonstrate the company's strong operational capabilities in the short term. Therefore, Dolphin believes that the company's valuation has a high certainty of short-term recovery. However, in the medium to long term, we believe investors need to consider 1) After the number of stores in the domestic market reaches a ceiling, the company's growth will gradually transition to seeking increments in overseas markets or enhancing its profitability through integration and optimization of existing stores, at which point there may be a downward adjustment in valuation. 2) On the other hand, although the price war initiated by Kudi may be nearing its end, Luckin's market share in the freshly brewed coffee sector remains relatively stable However, we believe that after entering the light milk tea segment, Luckin will still face challenges from leading ready-to-drink tea brands represented by Bawang Chaji, and the uncertainty regarding whether there will still be intense price wars remains high.

The following is a detailed analysis

I. Actively slowing down store openings, continuously improving single-store model

As expected in Dolphin Jun's commentary for the first and second quarters, Luckin's store opening speed continued to slow down in the third quarter. In Q3, there was a net increase of 1,382 stores compared to the previous quarter. Among them, 880 were self-operated stores and 502 were franchised stores. Dolphin Jun believes that after experiencing rapid store openings in the first two years, on one hand, considering the limited domestic market space, and on the other hand, to mitigate the impact of new stores on existing stores, the company’s decision to actively reduce the pace of store openings is a rational move.

In terms of international expansion, Luckin opened 8 new stores in Singapore in the third quarter, bringing the total number of stores to 45. Dolphin Jun believes that as the domestic market gradually approaches saturation, international operations are expected to become the company's second growth curve, and it is recommended to actively monitor the company's internationalization progress in the future.

In addition, according to the company, the upper limit for the number of stores in the domestic market is approximately 30,000, and the current total number of stores has reached 21,000. We expect that in terms of the number of stores, a bottleneck may be reached after 2026, and the subsequent focus will be on integration and optimizing the profitability of individual stores.

1. Improvement in single-store model

1) Q3 same-store sales decreased by 13.1% year-on-year, narrowing by 7.8 percentage points compared to the second quarter. Dolphin Jun believes this is mainly due to the slowdown in store opening speed, which has reduced the impact of new store diversion. In addition, based on our calculations, the revenue and profit of self-operated stores have also improved on a quarter-on-quarter basis during the peak season and under the background of reduced subsidies, reaching 550,000 yuan and 130,000 yuan, respectively, with the profit margin recovering to 23%. Considering that last year Luckin launched the popular product sauce-flavored latte, which resulted in a relatively high base in terms of both cup volume and ASP, Dolphin Jun believes that the profit recovery situation for single stores in Q3 is relatively good.

2) The number of monthly paying users reached 7,980, an increase of 15% compared to the previous quarter. The number of monthly active users also continued to rise in the third quarter, temporarily alleviating our concerns about potential user losses due to reduced subsidies. We believe that on one hand, the company's major product, light milk tea, performed excellently in the third quarter (with monthly sales exceeding 44 million cups), converting new users, and on the other hand, it also indicates that the mainstream customer base is relatively insensitive to price

II. Store expansion remains the primary engine for revenue growth

In the second quarter, Luckin Coffee's total revenue reached 10.2 billion yuan, a year-on-year increase of 41.4%, slightly exceeding expectations. Specifically, self-operated stores generated revenue of 7.8 billion yuan, with a quarter-on-quarter growth rate increasing to 46.3%, further raising their share of total revenue to 77%, mainly due to the continuous expansion of directly operated stores; franchise stores generated revenue of 2.3 billion yuan, with a slight rebound in growth compared to the second quarter.

III. Increased cup price + optimized operational efficiency drive continuous recovery of profitability

1）In the third quarter, the gross profit margin increased by 3 percentage points to 39%, gradually approaching pre-price war levels. On one hand, the company's subsidy efforts continued to decline in the third quarter, coupled with high growth in light milk tea sales driving up cup prices; on the other hand, after the launch of the self-built Kunshan baking base in August, the procurement costs of raw materials continued to decrease.

2）Improvements in internal operational efficiency led to continuous improvement in expense ratios. In terms of expense ratios, although the company increased marketing efforts during the peak season in the third quarter, resulting in a 0.7 percentage point increase in sales expense ratio, the company achieved continuous improvement in management expense ratio through internal cost reduction and efficiency enhancement, as well as refined operations.

Ultimately, the operating profit margin for self-operated stores recovered to 23.3%, an increase of 1.8 percentage points quarter-on-quarter, while other businesses of non-self-operated stores also saw reduced losses.

The overall operating profit margin of the group reached 15.3%, achieving a net profit attributable to the parent company of 1.3 billion yuan, a year-on-year increase of 32%, with profitability continuously improving.