Nasdaq-listed Luckin Coffee plunges 83% in pre-market trading after issuing an announcement acknowledging the existence of counterfeit transactions during the second quarter to the fourth quarter of 2019, involving sales of approximately 2.2 billion yuan.
The company said its board has set up a special committee to oversee internal investigations.
As soon as the news came out, Luckin Coffee's stock price fell sharply in pre-market trading. By the time of writing, the decline by 83% to $4.29 from yesterday's closing of $26.2.
Luckin Coffee said the company is assessing the overall financial impact of misconduct on its financial statements.
Therefore, investors should no longer rely on the company's previous financial statements and earnings releases for the nine months ended September 30, 2019, and the two quarters from April 1, 2019, to September 30, 2019, including previous guidance on product net income for the fourth quarter of 2019, and other information related to these consolidated financial statements.
Luckin Coffee came out of nowhere in 2017 and swiftly ate into Starbucks’ domination of China sales, with its intuitive mobile app, ubiquitous grab-and-go stores, and discounts so deep that they have frustrated some investors.
Luckin has opened 5,000 shops in China in a mere two years, more than Starbucks has opened in its two decades in the country.
On January 31 this year, Muddy Waters Research stated that it had received an anonymous 89-page report on Luckin Coffee, and thorough investigation, it was found that Luckin Coffee began fabricating financial and operating data from the third quarter of 2019.
According to the report, Luckin Coffee exaggerated the daily order volume of the store, the number of products per order, and the net selling price of each product, creating the illusion of a single store profit. It also exaggerated the advertising expenditure and falsely reported the proportion of other products except for coffee. Covered up the loss of the single store, so shorted Luckin Coffee.
According to the report, Luckin Coffee's average number of products per store increased by 69% in the third quarter of 2019, increased by 88% in the fourth quarter, and advertising expenditure in the third quarter of 2019 was exaggerated by more than 150%.
On February 3, Luckin Coffee issued an announcement, denying all the allegations in the muddy water short report, and stated that it intends to take appropriate measures to protect itself from malicious charges and protect the interests of shareholders.
But soon, several U.S. law firms filed a class-action lawsuit against Luckin Coffee, accusing Luckin Coffee of making false and misleading statements in violation of U.S. securities laws, with a deadline of April 13.
Regarding the issue of different opinions before and after the fraud, Luckin Coffee has not made any explanation.
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