Luckin Coffee shares plummet 76% after financial misconduct investigation launched

Luckin Coffee, a major Starbucks competitor in China, was downgraded at KeyBanc

Luckin Coffee says its chief operating officer and others have been suspended as the misconduct investigation wears on.

Published: April 2, 2020 at 3:08 p.m. ET, By Tonya Garcia

Luckin Coffee Inc., the up-and-coming Chinese coffee purveyor, saw shares plummet 76.8% 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 (LK) 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.

Luckin has been a competitor to Starbucks Corp. (SBUX) in China, selling coffee and other goods.

In February, short seller Muddy Waters Research raised allegations of fraud. Luckin Coffee denied the allegations at the time.

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.

Read: 5 things to know about Chinese Starbucks competitor Luckin Coffee

Since going public, Luckin has added smart vending machines called Luckin Pop and Luckin Tea.

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 84.5% for the year to date while the S&P 500 index is down 22.7% for the period.