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Luckin Coffee’s investors “should no longer rely upon” its previous financial statements over the last three quarters of 2019, as the figures have been faked by its COO Jian Liu.
Shares of Chinese coffee company Luckin Coffee Inc (NASDAQ: LK) crashed on Thursday. LK stock closed 75.57% down at $6.40 and continued falling after hours. In the pre-market trading at the moment of writing, Luckin Coffee shares are $5.63, another 12.03% down. Such a plunge followed the announcement of Luckin Coffee about its COO providing fake sales figures.
As Luckin Coffee has said, its chief operating officer Jian Liu and some employees have inflated the company’s revenues by as much as 2.2 billion yuan (US$310.5 million). Therefore, its investors “should no longer rely upon” its previous financial statements over the last three quarters of 2019.
Luckin Coffee’s Investigation into Fake Sales
Luckin Coffee is a Chinese rival of Starbucks (NASDAQ: SBUX) with over 4,500 locations in China. Since its founding in 2017, it has been showing good performance and boasting high revenues. But its earnings are in question, especially those for the last three quarters of 2019.
On January 31, research firm Muddy Waters published an anonymous 89-page report on Twitter and raised questions about the truthfulness of Luckin Coffee’s financial results. According to this report, the number of sales per store was inflated by at least 69% in the third and by 88% in the fourth quarter of 2019. 11,200 hours of tracking in-store video footage backed the information.
On March 6, 10 US law firms decided to file a lawsuit against the company on behalf of investors.
Following the allegations, Luckin Coffee started an internal investigation. It also formed a committee of three independent board directors to oversee it.
As the investigation has shown, Jian Liu who has served as a chief operating officer at Luckin Coffee since May 2018, provided fake sales figures. The fabrication from the second to the fourth quarter of 2019 amounted to about 2.2 billion yuan ($310 million). That equates to about 40% of its annual sales.
The company commented:
“The information identified at this preliminary stage of the Internal Investigation indicates that the aggregate sales amount associated with the fabricated transactions from the second quarter of 2019 to the fourth quarter of 2019 amount to around RMB2.2 billion ($310 million). Certain costs and expenses were also substantially inflated by fabricated transactions during this period.”
Luckin Coffee added:
“The above figure has not been independently verified by the Special Committee, its advisors or the Company’s independent auditor, and is subject to change as the Internal Investigation proceeds.”
To get the trust of investors back, Luckin Coffee needs some time and proper management.