by Ian Harvey
August 23, 2019
Luckin Coffee Inc – ADR (NASDAQ: LK) – the “Starbucks of China” - went public May 16 at $17 a share, generating a 19.9% first-day return. Since then, LK stock has gone sideways. While the U.S.-China trade war has savaged China-focused stocks, Luckin has “bucked the trend” – and is already up more than 16% (100% on an annualized basis).
Luckin is the fastest growing and second-largest retail coffee operator in China and is on track to soon become the largest player in the space. At the same time, the China economy is rapidly urbanizing and expanding, and the coffee market in that economy is surging higher, rising by over 30% last year. That makes Luckin the hyper-growth leader in a rapidly expanding market, a combination which ultimately implies tremendous long-term growth potential.
It’s so successful in China that U.S.-based heavyweight Starbucks Corp. (NASDAQ: SBUX) is copying upstart Luckin’s strategies.
Luckin Coffee shops are tiny, with just a small serving area for the one or two baristas and a few stools where customers can sit while they wait for their brew.
Customers are encouraged to place their orders ahead of time on a special company app.
YOU NEED TO BE IN TO PROFIT!
Why the Initial Option Trade on Luckin?
Luckin Coffee is counter-punching Starbucks by unveiling a new tea drink brand dubbed Xiǎolù (“Little Deer”) Tea. It rolled out four fruity summer drinks in April. Now the company will gradually introduce a range of tea-based beverages – some new, some traditional – in its 3,000 stores across 40 cities.
Luckin Tea was launched as an independent brand, along with a pilot program that would expand its retail partnership model to recruit partners across the globe. Luckin Tea has enjoyed strong demand since it was launched in April. "To further capitalize on the opportunity in the freshly-brewed tea market, we are strategically launching Luckin Tea as an independent and complementary brand and rolling out the store footprint nationwide," Luckin Coffee Chief Operating Officer Jian Liu said in a statement. "We will continue to maintain the high growth of the coffee business, while taking the tea drinks as another important driver to further explore the breadth and depth of the market."
This decision to offer juices and tea-based beverages is part of a broader strategy. If you look at where Luckin Coffee is spending its ad dollars and giving discounts, it’s clear the company is driving customers toward cool drinks and light meals – diversifying its revenue and cementing its relationship with the white-collar Chinese professionals whose incomes are rising.
Analysts’ are very optimistic about Luckin’s move forward with only one rating the stock with a hold rating, whilst the other six have given a buy rating to the company. Luckin presently has a consensus rating of “Buy” and a consensus target price of $25.20.
What now for Luckin Coffee?
Recently Luckin Coffee announced it would spin off its bubble tea business. It said it would open separate stores that will focus on selling tea drinks across the country.
Since debuting several tea beverages in April, sales far exceeded expectations, said Liu Jian, the company’s chief operating officer.
Liu said compared to the current Luckin stores that are mainly located in big cities like Shanghai and Beijing, the new tea-focused stores will be located in smaller cities. Compared to its current stores that are entirely run by the company, the tea stores will offer franchise partners special incentives such as access to sales data and tech know-how, Liu said.
Where to Now?
Luckin Coffee Inc. is scheduled to issue its next earnings report on Monday, January 1st.
Brokerages expect that Luckin Coffee will announce earnings per share (EPS) of ($0.39) for the current quarter. Analysts have made estimates for Luckin Coffee’s earnings, with the lowest EPS estimate coming in at ($0.41) and the highest estimate coming in at ($0.36).
What Can You Do?
Find out what we are recommending “Stock Options Made Easy" members to do.....
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What trade has been considered?
AS ALWAYS THE DECISION IS YOURS!
An Important Note: That any suggestions for options trade considerations require investors/traders to use their own discretion as to when to enter or exit! As well, it is advisable to do further research and due diligence before executing your trade.
It is sometimes best to exit a trade, if there is already sufficient profit accrued, before an earnings report is presented. GREED can be the undoing of a nice profit!