Shares of Chinese coffee chain Luckin Coffee Inc. (LKNCY, Financial) could become worthless, according to Quo Vadis President John Zolidis, who has been following the company closely.
"We believe there is a very significant probability that the equity will have no value after a restructuring, based on the company's current secured creditors and unquantifiable legal obligations," Zolidis said.
Luckin's shares were trading near $7 on Friday (down 45%) after filing for bankruptcy protection. At $7, the market cap willstill be close to $2 billion.
Zolidis says that "the value of the business is still extremely suspect given that last year's Ebitda margins were near negative 40%."
Then there's Luckin's business model and strategy.
Ever since launching its first stores in Beijing and Shanghai three years ago, Luckin Coffee appears to be obsessed with two things: beating Starbucks (SBUX, Financial) in store count and cups of coffee sold to customers. And it has done whatever it takes to accomplish that mission sooner than later by opening small "pick-up" shops in buildings and college campuses at a feverish pace. That's how the company reached 4,509 stores by the end of 2019, beating Starbucks, which has 4,123 stores.
Meanwhile, Luckin has been using an app to streamline its operations and analyze consumer preferences. It has also been giving many cups of coffee away to win customers, which has helped it gain a massive user base.
Still, there's an essential ingredient missing from Luckin's strategy, a business model that rivals Starbucks.
At the core of Starbucks' business model is the "third place," an "affordable luxury" standing between home and the workplace where people can share and enjoy a cup of coffee with friends and colleagues.
At the core of Luckin's business model isn't a "third place." It's the fast delivery of coffee everywhere, making it a commodity—a product that the competition can easily replicate.
Business strategists know very well what that means: price destruction and earnings erosion to the point where the return on invested capital is equal or below to what money can earn elsewhere, as evidenced by a sizable negative economic profit.
| Company | ROIC | WACC | Economic Profit (ROIC-WACC) |
| Luckin Cofee | -234.00% | 0.00% | -234.00% |
| Starbucks | 3.83 | 5.9 | -2.07 |
| Dunkin | 13.52 | 5.46 | 8.06 |
Simply put, Luckin's business model and strategy create a great deal of value for consumers. But they don't capture value for stockholders. The company has been losing rather than generating income and cash.
| Financials 2018-12 | Value |
| Operating Cash Flow | -$190.40 |
| Free Cash Flow | -336.5 |
| Net Income | -235.12 |
| Cash flow for dividends | 0 |
Why have investors been chasing after Luckin's shares ahead of its bankruptcy filing? Accoring to Zolidis, "shares have moved higher on retail buying, and there is little professional price discovery at work in the market."
We all know what happens to these investors in the end.
Disclosure: I own shares of Starbucks.
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