The stock price of Chinese coffee chain Luckin Coffee (Nasdaq: LK) was up and down on Friday, January 31 after a US-based short seller released a report by an anonymous author accusing the coffee chain of exaggerating the number of items sold per store per day. The report claimed Luckin inflated its 2019 Q3 sales by 69% and Q4 sales by 88% after analyzing 11,260 hours of related video footage.
The report, released by Muddy Waters, alleged Luckin is a “fundamentally broken business” and accused it of fraud, calling into question Luckin’s reported net prices, advertising expenses, as well as its total items sold. The report also mentioned several alleged business model flaws, arguing Luckin’s market and pricing strategies in China are wrong. Muddy Waters did not provide author details likely for fear of being sued.
Founded by American short-seller Carson Block, Muddy Waters primarily targets Chinese companies. The research firm shorted Chinese sportswear company ANTA Sports in 2019 and Chinese education enterprise TAL Education in 2018. In 2017, it targeted China Huishan Dairy, whose stock fell by a record 85% in Hong Kong, knocking about USD 4.1 billion off its market value. Muddy Waters, however, has not succeeded with every move.
Luckin Coffee opened 4,507 stores by the end of 2019, outnumbering Starbucks’ 4,100 stores and making it the largest coffee chain in China. As the first Chinese unicorn to go public within two years of its establishment, Luckin had high hopes for its IPO. Confident in the growth of coffee consumption in China, the company strategically opened pick-up stores around office buildings, commercial areas, and universities.
On January 8, Luckin announced a new strategic move, launching two separate kinds of unmanned vending machines: one selling coffee and and the other snacks. With the development of unmanned coffee and vending machines, Luckin can quickly expand. Though it started as a coffee chain, Luckin has rolled out tea beverages and a range of pastries and snacks
Citron Research, another well-known American short-seller, backed Luckin by holding its stock rather than shorting it. Citron said it did not trust the report and said it reckons Luckin’s business is “on fire” in China and will await its management’s response.
Luckin Coffee submitted a report to the SEC on February 3 rejecting the recent short-selling report’s accusations. Luckin denied that it had exaggerated its sales, explaining that online ordering enables the key data to be tracked in real time. Since the orders are completed through third-party payment platforms, Luckin believes the data on its net prices and total sales can be verified.
Furthermore, Luckin said the anonymous report was based on willful misinterpretation and a lack of factual evidence. The company intends to adopt measures against false accusations and will continue building its business. It believes it will be able to succeed in the thriving Chinese coffee market.
(Top photo from Pixabay)