Luckin Coffee Inc. (LKNCY) Earnings Call Transcript

Ladies and gentlemen, welcome to Luckin Coffee's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's call is being recorded. Now I'd like to turn the call over to Ms. Nancy Song, Head of Investor Relations for Luckin Coffee. Nancy, please go ahead.

Thank you, and hello, everyone. Welcome to Luckin Coffee Second Quarter 2026 Earnings Conference Call. We announced our financial results earlier today before the U.S. market opens. The earnings release is now available on our IR website and via Newswire services. Today, you will hear from Dr. Guo Jinyi, Co-Founder and CEO of Luckin Coffee, who will share our strategic overview of our business. Then Ms. An Jing, our CFO, will discuss our financial results in greater detail. Afterwards, we'll open up the call for questions. During today's call, we will be making some forward-looking statements regarding future events and expectations. Any statements that are not historical facts, including, but not limited to statements about our beliefs and expectations are forward-looking statements. These statements involve inherent risks and uncertainties. Further information regarding these and other risks is included in our filings with the SEC. In addition, for non-GAAP measures discussed today, reconciliation information related to those matters can be found in our earnings press release. During today's call, Dr. Guo will speak in Chinese, and his comments will be translated into English. Now I'd like to turn the call over to Dr. Guo Jinyi, Cofounder and CEO of Luckin Coffee. Dr. Jinyi, please go ahead.

[Interpreted] Good day, everyone, and welcome to today's earnings conference call. Thank you for your continued interest and support for Luckin Coffee. We delivered solid second quarter results as we remain focused on executing our core strategy of high-quality sales growth. Amidst a dynamic market environment, we continue to strengthen our store network and product innovation capabilities while growing our customer base and deepening [indiscernible] share. These efforts further enhanced our long-term competitive advantages, helping us expand market share and reinforce industry leadership. Supported by continued growth in China's coffee consumption demand, we maintained an industry-leading pace of store expansion with more than 5,000 net new stores opened in the first half of the year. By the end of the second quarter, our global store count has surpassed 36,000 while cumulative transacting customers [indiscernible]. Total net revenues for the quarter reached around RMB 13.9 billion, up 29% year-on-year. Same-store sales for our self-operated stores declined 5.3% year-over-year in the second quarter, primarily due to the temporary high comparison base created by elevated full delivery subsidies in the prior year period. This performance was fully consistent with our previous expectations for the trajectory of business operations. Meanwhile, as full delivery competition gradually returned to more rational levels, our operating income resumed year-over-year growth in the quarter, growing 22% to RMB 2.1 billion with our pre margin of 13.4%. This further reinforced the recovery in our profitability. Our second quarter results once again validate the strength of our high-quality scale growth strategy and further strengthen our confidence in capturing long-term market opportunities. Next, I will walk you through the quarterly progress across our 3 core business pillars: people, products and places focusing on strong coverage, product innovation and customer experience. Following that, our CFO, An Jing, will share more detailed financial update. . Starting with our store network. We continue to expand our nationwide footprint based on our long-term view of customer demand. We further strengthened our presence of profits of all tiers, enhancing consumer accessibility and service capabilities to continuously unlock the long-term growth potential of China's coffee market. By the end of the second quarter, our global store count reached 36,310, up 39% year-over-year. We continue to lead the industry in both scale and expansion pace. In China, we added 2,668 net new stores during the quarter, bringing our total store count to 36,080. This includes 23,825 [indiscernible] stores and 12,462 partnership stores. China's coffee market remains in a high growth supported by driving penetration and increasing consumption frequency. Expanding our reach across all CV tires and consumption scenarios remains fundamental to building long-term market leadership [indiscernible] strong digital capabilities and strategic execution. We are able to precisely we identify consumer demand and efficiently expand our store network based on these impacts. Through data-driven selection, spatially-enabled store construction and intestine store operations, we continue to enhance expansion efficiency and operational consistency while maintaining store quality. This enables us to deepen consumer engagement and consistently translate market opportunities into sustained market share gains. Internationally, we continue to expand our overseas presence in a disciplined manner, leveraging the improved digital operating capabilities we have developed in China. We catered our approach to local consumer preferences and market dynamics to further improve our localized operations. In the second quarter, we added 46 net new stores, bringing our total international store terms to 223. This includes 89 self-operated stores in Singapore, plenty of self-operated stores in the U.S. and 114 franchise stores in Malaysia. Building on our presence in these markets, we will continue to refine our product offerings and enhance our operational and organizational capabilities. We will also continue to optimize store level economics and develop standardized, replicable operating practices laying the groundwork for our continued international expansion. On the product front, we continue to strengthen Luckin's positioning and [indiscernible] as a professional coffee brand. While leading innovative and health-conscious beverage trends through deeper insights into evolving consumer needs. In the second quarter, we launched 28 new freshly brewed beverages and over a dozen items. In the coffee category, we continue to develop signature products that embody Luckin's unique brand identity, reinforcing the competitive most built around our brand measure. During the quarter, our [indiscernible] once again gained significant traction as consumers discover creative ways of enjoying the product. This success demonstrates our ability to identify emerging trends, respond quickly to evolving preferences and continuously innovate the product experience, further strengthening the distinctive brand equity we have built over time. This product ranked among our top 2 best selling products by volume in the second quarter. an accumulative sales of the Little Butter series surpassed 500 million cups by quarter end. We're also continuing to strengthen our wellness-oriented product strategy and R&D focus, expanding our selection of light and refreshing beverage options to better align with the evolving taste preferences of our increasingly sophisticated customer base. During the quarter, we launched our menu flagship product, Americano, further deepening consumer recognition of Lockheed's signature Futami Americano offerings, while meeting growing demand for high-quality health cautions beverages. With sales surpassing 10 million cups with in its first week of launch. This product delivered encouraging repeat purchase and customer retention performance, reflecting its strong consumer beyond coffee. We introduced new product lines during the quarter, including Joe smoothies and ice milk beverages, further broadening our omni hedge grade product portfolio providing consumers with a one-stop beverage destination across various dayparts and the consumption scenarios. By the end of the second quarter, 5 of Luckin's 25 products that has each support 100 million cups in cumulative sales were non-coffee products, further demonstrating Luckin's strong brand adherence and product execution capabilities. On the customer front, we continue to enhance the customer experience through our accessible store network, high-quality product offerings and data-driven consumer [ impact ]. These trends further reinforce our brand measure on connections with consumers. To expand our customer base and increase purchase frequency. As mentioned earlier, the strong market response through Little Butter Americano reflects our efforts to deepen consumer engagement and co-create lasting brand memories and also further drove positive word of mouth and increased consumption. In addition, we continue to engage consumers through diversified brand initiatives including IT collaborations, delivering emotional value beyond the products themselves and fostering deeper brand readiness with our customers. Driven by product innovation and brand building, we added more than 25 million new transaction customers in the second quarter, bringing average monthly transaction customers to a new record high of over 110 million, up 23% year-over-year. By the end of the second quarter, our cumulative transacting customers approached 500 million. At the same time, our average monthly cost per customer also reached an all- time. These achievements reflects consumers' continued recognition of the Luckin brand and the products, while reaffirming that coffee consumption habits in China are continuing to be met. In addition, as part of our commitment to [indiscernible] responsibility, we remain attentive to consumers' growing health needs and incorporate our product philosophy of great taste and wellness into beverage development and the consumer experience. In recent years, we have continued to optimize our product strategy by enhancing supply chain quality and rising product evaluation standards, making health cautious innovation, an important focus of our product development. Through cleaner formulations and higher quality ingredients, we aim to deliver beverage experiences the balance, taste, quality and wellness. Meanwhile, we have continued to deepen collaboration with leading research institutions to advance coffee health research and consumer [indiscernible]. Since establishing the Peking University Health Science Center, Luckin Coffee has innovation base in partnership with Peking University Health Science Center in 2024. We have completed multiple innovative research projects and continue to apply upstanding savings to product investments. In June this year, together with [indiscernible], Peking University Health Science Center and other products. We jointly launched the coffee health education initiatives along with the release of the health and wellness trend in China's freshly prepared beverage market 2026. Looking ahead, we will continue to integrate research insights with product innovation and contribute to the sustainable and health functions evolution of the freshly brewed beverage industry. In summary, the second quarter marked another significant quarter in which we continue to validate and deliver on our long-term growth strategy. High-quality scale growth is not simply about increasing store count. It reflects our ability to continuously identify response to an even great demand and ultimately translates market demand into sustainable market share gains. Luckin is digitally driven, replicable and scalable operating model together with the brand equity, we have built over time. We continue to amplify the synergies across our store network, product innovation and the customer base. This creates sustainable growth momentum and positions us well to fully capture the historic opportunities presented by China's coffee market. Looking ahead, we remain committed to executing our high-quality scale growth strategy as we consistently enhance our capabilities across store network coverage, product innovation and customer experience. We aim to further expand our market share while creating long-term value for our customers, partners and shareholders. Finally, we are deeply grateful to our consumers partners and investors for their ongoing support and through our 220,000 Luckin team members for their valuable contributions to the company's growth. We will continue to work together towards building a world-class coffee brands and making Luckin Coffee a part of everyone's stay with us. Now I will turn the call over to An Jing to go through our financial results in detail.

Thank you, Guo. Good day, everyone. Thank you for joining today's call. In the second quarter, we delivered solid top line growth and the continued profitability recovery, reflecting our operational resilience and the strong execution of our growth strategy. Let me now walk you through the financial details. In the second quarter, total net revenues increased by 29% year-over-year to RMB 15.9 billion, mainly driven by a 30% year-over-year increase in GMV to RMB 18.4 billion. This growth was supported by higher total cup volumes across both self-operated and partnership stores as we continue to expand our store network and grow our customer base. . Revenues from product sales increased by 29% year-over-year to RMB 12.2 billion, reflecting the solid performance of our self-operated stores. Breaking down our product itself into 3 streams. Net revenues from freshly brewed drinks were RMB 11.2 billion, representing about 70% of the total net revenues. Net revenues from other production were RMB 892 million or about 6% of the total net revenues. Net revenues from others were RMB 171 million or roughly 1% of the total net revenues. Looking at our company-owned stores. Revenues from self-operated stores increased by 27% year-over-year to RMB 11.6 billion. Same-store sales growth was negative 5.3% for this quarter, mainly reflecting the high comparation base created by the elevated food delivery subsidies in the 5-year period. Store level operating profit increased by 26% year-over-year to RMB 2.5 billion with self-operated store level operating margin of 21.3%. Revenues from partnership stores increased by 28% year-over-year to RMB 3.7 billion, accounting for 26% of total net revenues. This growth was largely driven by continued expansion of our partnership store network. Sales [indiscernible] remained the largest contributor followed by the delivery service fees and profit sharing and royalty fees. Cost of materials as a percentage of the total net revenues were 39% compared to 37% in the same period of 2025, mainly due to [indiscernible] in average selling price and a certain raw material price. In absolute terms, cost of materials increased by 34% year-over-year to RMB 6.1 billion, largely due to increases in cup volumes in self-operated stores and the material sales to partnership stores. Store level -- store rental and other operating costs as a percentage of the total net revenues was 27% compared to 22% in the same period of 2025. In absolute terms, fixed expenses increased by 36% year-over-year to RMB 3.6 billion, mainly driven by higher payroll costs from cup volume growth and rising rental expenses due to continued store expansion. Delivery expenses as a percentage of the total net revenues decreased to 10% from 14% in the same period of 2025. This improvement was mainly driven by a lower proportion of delivery orders as well as lower average delivery cost for orders as we enhanced procurement efficiency. In absolute terms, delivery expenses decreased by 3% year-over-year to RMB 1.6 billion. Sales and marketing expenses as a percentage of total net revenues was 6% compared to 5% in the same period of 2025. In actual terms, sales and marketing expenses increased by 56% year-over-year to RMB 925 million, mainly due to higher spending on advertising and the promotion we at higher commission fees paid to the food delivery and live stream platforms. General and administrative expenses as a percentage of the total net revenue was 6% plus flat compared to the same quarter of 2025. In actual terms, general expenses increased by 34% year-over-year to RMB 985 million, mainly driven by higher share-based compensation and payroll costs as well as increased investment in research and development. Our GAAP operating profit increased by 22% year-over-year to RMB 2.1 billion with an operating margin of 13.4% compared to 14.1% in the prior year period. On a GAAP basis, operating profit increased by 26% year-over-year to RMB 2.4 billion with a non-GAAP operating margin of 15.1% compared to 15.3% in the prior year period. Net profit increased by 16% [Audio Gap] continued to maintain a strong net cash position of RMB 9 billion and a healthy leverage profile, supported by our robust cash generation capabilities and disciplined financial management. This provides us with flexibility to continue invest in future growth opportunities while returning capital to shareholders. During the second quarter, we repurchased 49 million Class A ordinary shares or 6 million ADS for a total consideration of $195 million and over $300 million share repurchase program. In closing, our second quarter marked another step forward in turning our long-term strategy into tangible results. Our expanded store network and growing customer base has positioned us well for long-term growth. Looking ahead, we will remain focused on disciplined execution, continuous improvement in operational efficiency and sustainable value creation for our shareholders. With that, we will open the call for questions. Operator, please go ahead.

[Operator Instructions] The first question today comes from Jessie Xu with JPMorgan.

[Interpreted] This is Jessie Xu from JPMorgan. Congrats on a very strong 2Q, very encouraging in the weak macro environment, especially against some challenges for the whole industry year-to-date. And second quarter turned out to be a beat in both same-store sales and also margins, clearly diverging from and outperforming the whole industry. So my question is mainly on second half outlook, considering a tough phase during July to August, how should we think about same-store sales trends for the second half? And as the delivery mix continues to normalize, how should we think about the margin and earnings outlook from here?

[Interpreted] Great. So thank you for the question. Since the beginning of the year, delivery platform compensation has gradually returned to a more reasonable level. We believe the [indiscernible] beverage industry is also moving towards a healthier and more sustainable development stage and the market compensation is increasingly shifting back to product innovation, operational excellence and consumer value creation. So all the areas where Luckin has consistently invest and build our long-term strength around. Right? So from an external perspective, food delivery subsidies have been scaled back more quickly than we initially expect at the beginning of the year. So the high pressure created by last year's elevated subsidies has also become more apparent, and it's already reflected in our second quarter same-store sales performance. As for the third quarter, as platform subsidies were particularly intense during July and August of last year, we expect the reduction high base effect to persist. At the same time, we are seeing improving trends in our profitability and margins supported by the continued decline in delivery mix from peak levels since the third quarter of last year as well as the improvement in our fulfillment efficiency. And from an internal perspective, we've also continued to optimize various products and operational initiatives this year with very encouraging results. For example, our cup size upgrade interest initiatives and product innovation around Little Butter Americano, I just mentioned, these efforts not only enhance customer experience, but also supported the overall average selling price and our cup volumes. Yes, overall, we remain cautiously optimistic about our operating performance in the second half of the year, we'll continue to adapt our strategies based on evolving market conditions and consumer needs and balancing the long-term growth opportunity with profitability improvement and driving higher quality and more sustainable growth for our business. Thank you.