Survived 9.9! Luckin Makes a Comeback, Cotti barely survives

Luckin Coffee: Rising from the Ashes of the Price War, Luckin Returns as a Champion! $Luckin Coffee(LKNCY.US)

Luckin Coffee (LKNCY) released its Q4 2024 financial report (ending December 2024) before the US stock market opened on February 20, 2025, Beijing time. The revenue slightly exceeded expectations, and the core operating profit significantly surpassed market expectations. The essence behind this is the improvement in single-store operational efficiency after the slowdown in store opening speed. Here are the key details:

1. Domestic store opening speed slows down again, with a new addition in the overseas market. In terms of the number of stores, Luckin added a net of 997 stores in Q4 compared to the previous quarter. Among them, self-operated stores and franchised stores increased by 655 and 342, respectively. On one hand, considering the limited domestic market space (the total number of stores has exceeded 22,000, getting closer to the ceiling of 30,000 stores), and on the other hand, to mitigate the impact of new stores on existing ones, the company has proactively reduced the speed of new openings and improved single-store operational efficiency as expected. Regarding overseas expansion, after testing the waters in Singapore, the company signed a franchise partnership in Malaysia and opened 2 stores, making overseas expansion promising.

2. Both volume and price rise, with a significant narrowing of same-store sales decline. The same-store sales growth rate (SG), which reflects Luckin's organic growth per store after excluding the impact of new stores, declined by 3.4% year-on-year, narrowing by 9.7 percentage points compared to Q3. In terms of cup volume, as Luckin slows down its store opening speed and improves operational efficiency, the cup volume per store has been steadily increasing since Q2, currently estimated to exceed 430 cups/day, approaching historical highs. In terms of cup price, according to research information, due to the continued reduction of 9.9 subsidy stores in Q4 and the launch of new products like the Little Yellow Butter Americano and Fair Island Latte, the current cup price of Luckin is close to 14 yuan/cup, slightly higher than the same period in 2023.

3. Monthly active paying users continue to rise. In Q4, the company had 77.8 million monthly active paying users, a year-on-year increase of 24.5%. Against the backdrop of continued reduction in subsidy intensity, the increase in paying users further confirms that Luckin's core customer base is less price-sensitive and has strong brand loyalty.

4. Core operating profit significantly exceeds expectations. Against the backdrop of soaring raw material costs, particularly coffee bean prices, although Luckin's gross margin was slightly below expectations, thanks to the improvement in single-store operational efficiency and the continuous release of scale effects, the single-store operating profit margin increased significantly by 6.1 percentage points to 19.6%, approaching the historical average level before the price war. The company's management expense ratio decreased by 1.4 percentage points to 6.6%, driving the company's core operating profit to reach 1 billion yuan (23% above market consensus expectations).

5. Core Performance Indicators Overview:

Dolphin Research's Overall View:

In Dolphin Research's view, the most unexpected point this quarter is the significant improvement in same-store sales, driven by a slowdown in store opening speed leading to reduced diversion from existing stores and the company's operational efficiency improvements. This improvement in same-store sales, combined with rigid expenses such as rent and labor, has significantly enhanced the profitability of individual stores. The profitability, which was previously criticized by the market, has received a strong rebuttal in this financial report.

Furthermore, entering 2025, Dolphin Research believes that based on recent actions from Luckin Coffee and Cotti, there can be a more optimistic outlook for Luckin from a competitive landscape perspective:

1) Counter-cyclical price reduction, shortening the payback period for franchisees. Since early 2024, due to extreme weather conditions, the two major coffee bean-producing countries, Brazil and Vietnam, have faced significant production cuts, leading to a more than 70% surge in coffee bean prices throughout the year. However, Luckin announced that starting in January 2025, the price of coffee beans purchased by franchisees from Luckin will be reduced by 16.8%. Additionally, prices for other 86 raw materials, such as coconut milk and pure milk, have also been adjusted downward.

Dolphin Research believes that in the context of soaring coffee bean prices, Luckin's counter-cyclical price reduction and benefits to franchisees can effectively accelerate the payback period for franchisees and is expected to capture some prime locations from coffee and milk tea brand franchisees that have lost due to rising costs, thereby expanding market share and consolidating its competitive advantage. (Since 2021, the closure rate of chain coffee and milk tea shops has been rising year by year.) Luckin's confidence comes from its long-term commitment to large-scale direct sourcing from production areas and self-built roasting factories, resulting in a cost advantage far exceeding that of its peers.

Cotti's "offbeat" strategy poses little threat: For investors in Luckin, the most desired "feel-good" scenario is naturally Cotti experiencing a funding flow break and "collapse" in 2024, allowing Luckin to soar. However, the reality is that Cotti has not yet closed stores on a large scale; by the end of 2024, Cotti's global store count is close to 10,000, second only to Luckin.

Nevertheless, Dolphin Research believes that currently, whether in terms of supply chain efficiency, brand strength, or franchisee loyalty, the gap between Luckin and Cotti is gradually widening. As Luckin steps out of the price war and gradually repairs its cup price, Cotti can only rely on the "forced" expansion of its 9.9 store-in-store model at the cost of sacrificing brand value (Cotti's store-in-store model has paused recruitment in December and shifted to a convenience store model). Therefore, even if the "red-blue battle" between Cotti and Luckin will not conclude in the short term, Dolphin Research is not concerned about the threat posed by Cotti.

From a valuation perspective, it currently corresponds to Luckin Coffee at 22x. Considering Luckin's CAGR of 15% from 2025 to 2029, along with its leading premium in the chain coffee market and overseas growth potential, the valuation level is not considered high.

I. Investment Logic Framework

According to the disclosure from Luckin Coffee, the company is divided into two main business lines: self-operated business and franchise business.

The self-operated business generates revenue from Luckin Coffee's directly operated stores, which currently exceed 14,000 locations. These stores are primarily located in first- and second-tier cities, which is significant for Luckin Coffee's brand image. The self-operated business is the company's profit base, accounting for over 80% of profits.

The revenue from the franchise business includes: sales of raw materials (coffee beans, milk, coconut milk) to franchisees, profit sharing from franchise stores (based on a tiered system according to different store gross profit situations), equipment sales, delivery services, and other services. Among these, raw material sales account for nearly 70%, making it the core revenue source for the franchise business. Currently, there are over 8,000 franchise stores, contributing about 20% to revenue, primarily targeting third- and fourth-tier markets to seize quality locations in these markets. Although the current opening speed of franchise stores is faster, their profitability is not as strong as that of self-operated stores.

II. Store Opening Growth Continues to Slow, Single Store Profitability Significantly Improves

In terms of the number of stores opened, Luckin added a net of 997 stores in Q4 2024 compared to Q3, with self-operated stores/franchise stores netting 655/342 respectively. The growth rate has continued to slow compared to Q2 and Q3, approaching levels before the price war in 2023 (to respond to Cotti's 9.9 price war and rapid store openings, Luckin accelerated its store opening speed in 2023 to seize quality locations). This indirectly confirms that Cotti's threat to Luckin is continuously weakening.

Volume and Price Both Rise, Same Store Sales Revenue Increases Significantly. As a core indicator reflecting the organic growth of Luckin's same-store sales after excluding the impact of new stores, the same-store sales growth rate (SSSG) declined by 3.4% year-on-year but narrowed significantly by 9.7 percentage points compared to the third quarter. In terms of cup volume, as the store opening speed slows, the dilution effect on old stores decreases, leading to a continuous increase in single-store cup volume since Q2, with current estimates exceeding 430 cups/day, approaching historical highs. In terms of cup price, according to research information, due to the continued reduction of 9.9 subsidized stores in Q4 and the introduction of high-priced new products like the Little Yellow Butter Americano and Fair Island Latte, the current cup price for Luckin is close to 14 yuan/cupSlightly improved compared to the same period in 2023.

The number of monthly active paying users continues to increase. In Q4, the company had 77.8 million monthly active paying users, a year-on-year increase of 24.5%. Against the backdrop of a continued slowdown in subsidy intensity, the sustained increase in paying users further confirms that Luckin's core customer group has a low price sensitivity and strong brand loyalty.

3. Higher quality growth of self-operated stores

In Q4, Luckin achieved a total revenue of 9.61 billion yuan, a year-on-year increase of 36.1%, slightly exceeding expectations (the market consensus expected 9.56 billion yuan). Breaking down the business, self-operated and franchised businesses achieved revenues of 7.57 billion yuan and 2.05 billion yuan, respectively, with year-on-year growth of 43% and 16%. The growth rate of a self-operated business is higher than that of a franchised business. Based on research information, Dolphin Research speculates that in Q4, Luckin increased subsidies for some franchisees (targeting densely populated areas for Cotti stores).

4. Internal efficiency optimization + operational efficiency improvement drive continuous improvement in operating profit margin

In terms of gross margin, due to extreme weather conditions caused coffee bean prices to rise unexpectedly (coffee bean prices rose again by 25% in Q4, with a cumulative increase of over 70% for the year), although the company hedged through methods such as locking in prices in advance, the gross margin still slightly fell short of expectations.

With the improvement in single-store operational efficiency and the continuous release of scale effects, the single-store operating profit margin significantly increased by 6.1 percentage points to 19.6%, approaching the historical average level before the price war. The company's management expense ratio decreased by 1.4 percentage points to 6.6%, driving the company's core operating profit to reach 1 billion yuan (23% above market consensus expectations).

Dolphin Research [Luckin Coffee] Past Research:

Earnings Season

October 31, 2024 Earnings Commentary: “After the Storm, Has Luckin's Brief Honeymoon Period Arrived?”

July 30, 2024 Earnings Commentary: “Cudi 'Is Not Dead', Has Luckin 'Grown Old'?”

April 30, 2024 Earnings Commentary: “Luckin: Can It Stand Firm for the Final Leap?”

February 24, 2024 Earnings Commentary: “Luckin: The Darkest Before Dawn”

November 1, 2023 Earnings Commentary: “Racing Forward, How Many Good Days Are Left for Luckin?”

August 3, 2023 Earnings Commentary: “Luckin 'Ten Thousand Stores' Racing, The Leader's Momentum Is Under Control”

May 2, 2023 Earnings Commentary: “Luckin: Store Opening Frenzy, Full Recovery”

March 2, 2023 Earnings Commentary: “New Luckin 'Rising from the Ashes'” In-depth

January 16, 2024 "Unsteady Cotti, Unkillable Luckin"

March 14, 2023 "Cutting Down the Tumor, Luckin Wins the Comeback Battle"

February 14, 2023 "Luckin (Part 1): Coffee Goes Rural, Can the Boom in County Towns Continue?"

This article's risk disclosure and statement: Dolphin Research Disclaimer and General Disclosure