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Luckin Coffee shares drop 15% as Q2'19 revenue growth disappoints

Luckin Coffee Inc.'s shares opened down almost 15% Aug. 14 after the Chinese coffee chain posted lower-than-expected sales growth and widening operating losses in its first earnings report since its IPO in May.

For the second quarter ended June 30, the company's net revenue was 909.1 million yuan. The figure represented a 648.2% increase from 121.5 million yuan in the year-ago quarter but was lower than the S&P Global Market Intelligence consensus estimate of $133.2 million, or about 934.8 million yuan.

The Beijing-based company, which raised $561 million in its May IPO, almost doubled its operating losses in the second quarter compared to the prior-year period. Luckin Coffee reported a non-GAAP operating loss of 619.3 million yuan compared to 343.4 million yuan in the second quarter of 2018.

Luckin reported an adjusted loss of 3.28 yuan per American depositary share compared to a loss of 6.80 yuan in the year-ago period.

The company said it projected net revenue from products in the third quarter ending Sept. 30 to be between 1.35 billion yuan and 1.45 billion yuan, compared to 870 million yuan in the second quarter.

Analysts have blamed the company's cash-burning spree on its strategy of using subsidies and vouchers to keep the prices of its beverages below those of Starbucks Corp. Luckin Coffee has vowed to take on Starbucks in China with its aggressive discount plans and breakneck growth in store numbers.

Luckin Coffee CEO Jenny Zhiya Qian said in a statement that the company is on track to achieve its store-level break-even point during the third quarter of 2019 by reducing store operating losses "as a result of benefits of scale and increased bargaining power, operating efficiency from technology, and higher store throughput." The company said it launched its tea product in the second quarter of 2019 to capture the high demand for the beverage in the Chinese market.

"We are pleased with the performance of our business as we continue to execute against our long-term growth plan," Qian said in a statement. "Total net revenues from products sold increased 698.4% year-over-year, driven by a significant increase in transacting customers, an increase in the average number of items purchased by our transacting customers and higher effective selling prices," Qian added.

Luckin's sales and marketing expenses ballooned 119.1% to 390.1 million yuan for the second quarter compared to 178.1 million yuan in the prior-year period.

The company said its average monthly transacting customers in the second quarter grew 410.6% to 6.2 million compared to 1.2 million in the second quarter of 2018. The coffee chain was launched in late 2017.

Luckin Coffee opened 593 sites during the second quarter, with total store numbers reaching 2,963 at the end of the quarter compared to just 624 stores at the end of June 2018. The company is targeting 2,500 store openings in 2019, according to its IPO prospectus.

Luckin Coffee reported before U.S. markets opened. In early morning trading on the Nasdaq Stock Market, its shares were down 14.8%, or $3.63, at $20.92.

As of Aug. 13, US$1 was equivalent to 7.05 yuan.