You might remember Luckin Coffee (LKNC.Y 1.82%) for all the wrong reasons. In 2019, its former management fabricated $300 million worth of sales, leading to Chapter 15 bankruptcy and delisting from the Nasdaq exchange.
But the China-based coffeehouse chain has replaced its former executives and worked hard to reinvent itself. Those efforts are starting to bear fruit. The company’s story now hinges on rapid international growth, new product launches, and a low stock valuation.
Let’s explore why its shares are still a compelling long-term buy.
Luckin is building a competitive moat
American fast-food companies like Starbucks and McDonald’s have enjoyed massive international success outside the U.S. by offering something new and unique to other cultures. But sometimes, a more-local touch can be valuable. And this edge could be behind Xiamen-headquartered Luckin Coffee’s strengthening moat in the Chinese market.
Unlike Starbucks, Luckin has fully embraced local trends like contact- and cashier-free transactions, which are normalized in China and became even more popular after the pandemic.
Luckin has also overcome a historically coffee-averse culture (most Chinese consumers prefer tea), by offering significant variety in its drink selection. This strategy came to a head with the release of a coffee drink flavored with Moutai, a fiery local brand of China’s national liquor, baijiu.
The product rolled out on Sept. 4 before going viral on Chinese social media. Luckin sold a whopping 5.4 million Moutai lattes on the first day, setting a sales record for the coffee chain. Previous viral products include a cheese latte and a coconut cloud latte, highlighting the chain’s menu creativity and how this resonates with the Chinese consumer.
Business is booming
Luckin’s unique strategy is playing out well. Second-quarter revenue increased by 88% year over year to $855.2 million as the company expanded its footprint all over China and its first international market, Singapore, where it now has 14 locations, according to CNBC.
The company owes some of its rapid expansion to a franchise business model. Unlike Starbucks, which owns and operates all its locations, Luckin allows independent small-business owners to open and manage some of its stores in return for fees paid to the company.
As of the second quarter, these partnership stores represented roughly 34% of its 10,829 locations. This strategy frees up capital and shifts operational risk away from Luckin to the individual store owner/operators.
It’s not too late to buy the stock
While Luckin Coffee still enjoys impressive top-line growth, its burgeoning profitability is more exciting. The company’s operating income surged almost fivefold year over year to $161.7 million in the second quarter. And investors should expect the bottom line to continue growing as its coffee business scales up. The stock also remains relatively cheap from a valuation perspective.
With a price-to-sales (P/S) multiple of 4.2, Luckin is slightly more expensive than its biggest rival, Starbucks, which has a P/S multiple of 3.2 despite a much lower growth rate (12% year over year in the most recent earnings report). But Luckin operates in only two countries (China and Singapore), and it could potentially roll out its business in more markets, giving it significantly more room for growth compared to its more mature rival, which already operates in 80 countries.
Will Ebiefung has positions in Luckin Coffee. The Motley Fool has positions in and recommends Luckin Coffee and Starbucks. The Motley Fool has a disclosure policy.