In less than a month, from the application to the completion of the listing, the frantic expansion of LUCKN COFFEE DRC (LK.US) has attracted the attention of investors.

LUCKN COFFEE DRC successfully logged on to the US stock market on NASDAQ on May 17. the opening price on the first day of trading was US $25, up 47.06% from the offering price, and the highest increase on the day was 52.7%. After that, it fell back to close at US $20.38, down 21.5% from the high, and still up 19.88% from the offering price, with a turnover of US $887 million and a turnover rate of 16.7%.

LUCKN COFFEE DRC's crazy expansion has always been questioned by investors, but judging from the management's decision, the company has not stopped its crazy expansion strategy. at the scene of the listing, LUCKN COFFEE DRC executives once said that the loss was in line with expectations. it is an established strategy to get customers quickly through subsidies, and the company will continue to subsidize for three to five years, without considering profits at present.

The radical business strategy may mask the managers' understanding of the growth profit point. Due to the huge expansionary expenditure and subsidy strategy, rapid growth is bound to be prepared for early losses. But blindly burning money, if the marginal benefit not only has not been improved, but also continues to deteriorate, when the money can not be supplied, it will collapse. The case of ofo is a classic lesson for investors.

Will LUCKN COFFEE DRC's business strategy repeat the mistakes of ofo?

The loss continues to expand.

LUCKN COFFEE DRC is a leading coffee service provider in China, adopting a new retail model to supply freshly ground coffee. It was established in October 2017. in less than two years, it had 2073 stores and 90 million cups of coffee sold in 2018. LUCKN COFFEE DRC has 2370 self-owned stores and a total of more than 16.8 million trading customers.

The company is expanding at an average rate of 139.4 stores per month, or 4.6 per day, compared with Starbucks Corp, who entered China in 1999 and just over 3000 in 2018, expanding less than 20 per year and less than two per month. Compared with LUCKN COFFEE DRC, it is really pitifully small.

The company has achieved rapid revenue growth through store expansion and high subsidies to attract users. From Q1 to 2019, Q1 revenue from 2018 to 2019 was 13 million yuan (RMB), 121.5 million yuan, 240 million yuan, 465 million yuan and 478.5 million yuan, respectively, but the range loss is also increasing. The net loss was 132 million yuan, 333 million yuan, 485 million yuan, 689 million yuan and 553 million yuan respectively.

Photo source: lucky prospectus

LUCKN COFFEE DRC's main income is coffee and beverages, accounting for 75.4% of Q1 income in 2019, which has exceeded 70% in previous quarters. From Q1 in 2018 to Q1 in 2019, the average income of coffee and beverage per store was 33000 yuan, 161000 yuan, 162000 yuan, 167300 yuan and 152400 yuan respectively.

The company's stores adopt a small store model (fast store), eliminating guest costs and operating mainly in a takeout model. Q1 in 2019, the company had 2163 cache stores, accounting for 91.3%, while the Q1-Q4 in 2018 was 44.4%, 28.6%, 57.05% and 87.4%, respectively. Judging from the proportion of historical store types, the cache store has become the strategy of the company's future expansion layout.

Areas where there is a high demand for coffee, such as office buildings, business districts and university campuses, are usually between 20 and 60 square meters. LUCKN COFFEE DRC's express store meets the needs of this part of the population with a faster pace of life, and the store's characteristics determine that it is mainly located in the more prosperous first-and second-tier cities, which is the biggest difference between the company and other coffee shops.

Source: lucky prospectus

From the perspective of marginal data, the number of marginal customers per store has increased quarter by quarter, with Q1 reaching 14600 customers in 2019, and the average number of customers per store has also increased quarter by quarter, but the average number of customers per store shows signs of slowing down.

According to the prospectus, as of March 2019, the company had accumulated more than 16.8 million trading customers, with a repurchase rate of 54%, and customer stickiness was high in the industry. in addition, the company also separately listed the cost of acquiring customers, and the cost of acquiring new customers improved quarterly, from 103.5 yuan in 2018 to only 16.9 yuan in 2019.

Expansion depends on financing to burn

The biggest problem of high growth is cost and expense. If growth is at the expense of profits and marginal components and expenses continue to deteriorate, high growth will not be sustainable. Through the breakdown of LUCKN COFFEE DRC's expenses by Zhitong Financial APP, on the whole, the company's cost and expense rate have improved, and the proportion of each expense has declined quarter by quarter, but so far, gross profit margin and profit margin (excluding depreciation) are still negative, Q1 gross profit margin in 2019 is-17%, profit margin is-87.8%.

The following is the proportion of the company's expenses:

The company's gross profit margin has always been negative, that is to say, its operating expansion is completely supported by financing (equity and debt). Under such circumstances, the money constantly expanding crazily and constantly burning financing will one day run out, but from the expense point of view, LUCKN COFFEE DRC's operating situation has indeed improved, and the positive gross profit margin seems to be the company's first strategy.

However, the company's management strategy is aggressive, does not consider profit, still adopts a crazy expansion strategy, according to the plan, the company will open 2500 new stores in 2019, bringing the total to 4500, surpassing Starbucks Corp to become the first in China. The question is, given the company's current cash position, how much longer can it burn?

Follow the old path of ofo?

Zhitong Financial APP learned that LUCKN COFFEE DRC's net operating activities in 2018 was-1.3107 billion yuan, while the net investment activities also reached-1.283 billion yuan, consuming 65.03% of the net financing. In 2019, the net operating cash flow of Q1 expanded to-628 million yuan, more than four times that of the same period last year. If 2500 units are expanded in 2019, it is estimated that more than 3 billion yuan will be burned according to the net outflow of operation and investment in 2018.

Q1 in 2019, the company's cash at the end of the period is 1.159 billion yuan, plus US $150 million in new financing, and has more than 2 billion yuan in cash at the current exchange rate. The company's current short-term debt has increased to 848 million yuan, of which 820 million yuan needs to be repaid within one year, and according to the 2019 expansion plan, it will burn more than 3 billion yuan net, and there is simply not enough cash on the account, totaling nearly 2 billion yuan more.

At present, the company is mainly equity financing, debt part is very small, 2019 Q1, the company's asset-liability ratio is 37.2%. The company still has a lot of room for debt financing, but there will be big problems if the company uses leveraged funds to expand, knowing that the company does not consider profitability at present, and debt problems may arise because of cash flow problems in the future.

Whether Lucky will repeat the mistakes of ofo in the future will mainly depend on the strategy of the management of the company. if the management insists on adopting a radical expansion strategy, as mentioned above, the money for the expansion to burn and repay short-term debt is expected to be nearly 2 billion yuan more after deducting the cash on the account, which, if financed through debt, will directly engulf the net assets of Q1 in 2019, resulting in the company's insolvent financial position.

To sum up, the company's Q1 revenue slowed month-on-month in 2019, and although fees and costs improved, gross profit margin and profit margin remained negative, and expansion funds could not be replenished through operating cash flow. The company adopts the cache store model to expand, which has an advantage over its peers in terms of cost and transaction convenience, but the revenue of each store is not optimistic. If the company continues to expand aggressively and does not consider profitability at the moment, there may be a shortage of cash flow at a later stage, given the company's current cash position. If the funding gap is replenished with leverage, the company is likely to face debt pressure in the future.