Not content with being a miser, is Luckin going to 'stir things up' again?

$Luckin Coffee(LKNCY.US) released its Q1 2025 earnings report before the U.S. market opened on April 29, 2025, Beijing time. Overall, the Q1 performance was decent, beating BBG expectations. However, since few sell-side analysts cover LKNCY, these expectations should only be taken as a rough reference.

Historical experience suggests that actual buy-side expectations tend to be more optimistic than consensus estimates. More often, trading decisions are based on higher-frequency alternative data metrics like "daily cup volume" and "weekly store opening speed," so short-term stock prices usually reflect earnings performance relatively fully.

Against this backdrop, Dolphin Research prefers to look beyond BBG expectations, focusing instead on company guidance, operational specifics, marginal trends, and valuation from a medium-to-long-term perspective.

Key takeaways:

1. Same-store sales growth turns positive as expected: Q1 same-store sales growth rebounded to +8%. While low base effects played a role, Dolphin Research had noted in recent quarterly reviews that quantitative and qualitative tracking suggested Cotti Coffee's competitive threat had diminished. The return to positive SSSG was anticipated, signaling LKNCY's emergence from intense competition.

Both volume and price contributed to growth. With more covert price hikes since March, Q2 growth may rely more on ASP increases.

2. Accelerated store expansion: Last quarter, management guided for 4,000-5,000 new stores in 2025, but Q1 alone saw a net addition of 1,757 stores (14 overseas). This pace exceeds original guidance.

Dolphin Research speculates that with recent easing in competitive intensity (despite Cotti's loud store targets), lower opening costs may have prompted LKNCY to rapidly secure prime locations before rivals rebound.

The competition isn't just Cotti. As brands like Mixue, Nayuki, Gu Ming, and Bawang Tea 姬 pursue capital operations and post-IPO expansions, competition for prime locations will intensify. LKNCY's Q1 acceleration appears defensive.

3. Surprisingly resilient margins amid offseason + expansion: F&B offseason typically pressures margins, especially for chains in expansion mode. Yet LKNCY's group and company-operated store margins held up well in Q1 with limited sequential declines.

Stable product gross margins (-0.3% QoQ) suggest limited impact from soaring coffee bean prices, likely due to LKNCY's bulk direct procurement + long-term cost-locking contracts. Current inventory levels indicate minimal spot purchasing needs.

Q1 Non-GAAP net profit reached RMB650mn. At this run-rate, Dolphin Research estimates FY25 profit could exceed RMB3.5bn (above initial guidance of RMB3.2bn), assuming stable competition (high bean prices raise entry barriers).

4. Strengthening brand equity: Monthly active paying users grew 24% YoY to 74.27mn in Q1. User stickiness isn't purely price-driven - subtle price hikes included premium winter drinks, higher list prices, and dynamic discount adjustments.

Despite ~5% higher cup prices, company-operated store cup volume grew 33% YoY with slight daily cup/store increases. Franchise stores showed similar trends. Rising purchases/user amid price hikes demonstrate growing brand premium.

5. Key metrics:

Dolphin Research's view:

Looking beyond expectations, we're satisfied with Q1 results because: Resilient profitability during offseason + rapid expansion reflects LKNCY's strong brand equity and cost control, supporting stable long-term growth.

Having weathered the worst competition, LKNCY now sits firmly as the "Starbucks of the East." While the F&B sector always faces competition, with Cotti's threat fading (its mismatched strategy poses little direct risk), competition with tea brands better suited to Chinese tastes is coming to the fore.

As LKNCY launches milk tea products (e.g., March's light tea series), Dolphin Research believes new competition has begun. Unlike Cotti's lose-lose tactics, this will be a long-term brand equity battle focused on product quality - LKNCY's strength.

This suggests future competition won't reach last year's extremes. Current priorities should balance domestic brand stewardship with overseas expansion, shifting investment focus from profit to revenue growth - watch management's growth commentary on the call.

Conservative FY25 profit guidance initially sparked a selloff, though the stock has recovered despite ADR risks. The market's logic may still be transitioning - post-earnings weakness could reflect conservative guidance amid expansion and bean cost pressures.

Assuming 4,500 new stores, modest ASP increases, slight cup volume declines, 2-3pp gross margin compression from bean costs, and controlled overseas spending, Dolphin Research estimates RMB3.5bn profit (20% growth), easily beating guidance.

A 25x P/E (slightly premium for growth) suggests $12bn valuation. Upside potential exists from overseas expansion or reduced ADR risks (Q1's appointment of capital-savvy Li Hui as Chairman). Conversely, heavy near-term spending could pressure multiples to 20x ($8bn). Investors should weigh these ranges against risk appetite.

Detailed analysis below

I. Investment framework

LKNCY reports through company-operated (14,000+ stores, 80%+ profits) and franchised segments (8,000+ stores, ~20% revenue). Franchise revenue mainly comes from ingredient sales (70%), with tiered profit-sharing.

II. Accelerated expansion + SSSG turnaround

Q1 net new stores (1,757) exceeded pace needed for full-year guidance. Dolphin Research attributes this to lower competition-driven opening costs and preemptive location grabs.

Volume-price recovery. 8% SSSG growth marks return to positive territory after a year, with both factors contributing. Company-operated cup volume grew 33% despite ~5% higher prices.

Monthly active paying users rose 24% to 74.27mn, with stickiness supported by strategic pricing rather than just discounts.

III. Margin resilience

Total revenue grew 41% to RMB8.87bn (above BBG's RMB8.3bn), with company-operated (+42%) and franchise (+38%) both strong.

Stable gross margins (-0.3% QoQ) reflect limited bean cost impact, thanks to long-term contracts like November 2024's 240k-ton Brazil deal ($5,787/ton vs. current $9,477). Similar March 2025 coconut sourcing agreements support margins.