By Tonya Garcia, MarketWatch
Luckin Coffee Inc., the up-and-coming Chinese coffee purveyor, saw shares plummet 75.6% in Thursday trading after it formed a special committee of three independent directors to investigate “misconduct, including fabricating certain transactions” that spanned the second through fourth quarters of 2019 and involved RMB2.2 billion (about $310.1 million).
Jian Liu, chief operating officer at Luckin Coffee and a director of the company, has been suspended along with other staff implicated in the misconduct. And the company has suspended or terminated contracts and deals with parties involved.
Luckin Coffee may also take legal action. It has hired lawyers and forensic accountants to aid in the investigation.
The company says the investigation is in preliminary stages and it is still examining the financial impact.
“As a result, investors should no longer rely upon the Company’s previous financial statements and earning releases for the nine months ended September 30, 2019 and the two quarters starting April 1, 2019 and ended September 30, 2019, including the prior guidance on net revenues from products for the fourth quarter of 2019, and other communications relating to these consolidated financial statements,” Luckin Coffee said in a statement.
The company began operations in October 2017 and quickly grew to thousands of stores across China. The stock went public in May 2019. Its first trade was at $25, 47% above the $17 IPO price. Shares closed Wednesday at $26.20.
Most of Luckin’s locations are “pick-up stores” that offer limited seating and are in office buildings and other areas where the demand is high.
KeyBanc Capital Markets downgraded Luckin stock after the news, moving shares to sector weight from overweight.
“Following our conversation with the Company, we believe earnings visibility will be limited for the foreseeable future and it will take management several years to repair their credibility,” analysts led by Eric Gonzalez wrote. “Previously released financial statements and guidance can no longer be relied upon by investors, which likely calls into question the Company’s overall liquidity.”
In addition to a near-immediate stock downgrade, attorneys and their clients are already lining up to file lawsuits.
Quo Vadis called the expectations for Luckin’s performance “unrealistic.” Analysts there rate Luckin stock sell.
“The company has indicated that it ultimately expects to achieve unit level margins of 30% and to break-even at the corporate level by 3Q20,” wrote Quo Vadis in a note. “A $9 billion market capitalization for this unproven concept with an uncertain path to profitability is unjustified in our opinion.”
Luckin stock has fallen 83.7% for the year to date while the S&P 500 index /zigman2/quotes/210599714/realtime SPX +1.05% is down 21.8% for the period.