Shares for Chinese coffee chain startup Luckin Coffee surged 13.1% Wednesday after reporting better-than-expected Q3 results.

Why it matters: The results reassured investors concerned with the company’s subsidy-fueled expansion. The company’s net losses slowed during the period, reflecting an improved cost control strategy.

Details: Luckin’s net loss per American Depositary Share (ADS) was RMB 2.24 ($0.32), beating consensus analyst estimates of $0.37, and compared with a loss of RMB 3.60 in same year-ago period.

  • Luckin’s total net revenues were RMB 1.54 billion ($215.7 million), up 540.2% year on year from RMB 240.8 million in Q3 2018, topping analyst expectations of $211.88 million.
  • Net revenue uptick was driven by growth in its core beverage business, for which the number of transacting customers, effective selling price, and number of products sold per transacting customer increased.
  • Total operating expenses were RMB 2.13 billion ($298.3 million), representing an increase of 193.6% from the same period a year ago and driven by business expansion. Operating expenses as a percentage of net revenues decreased to 138.3% from 301.7% in Q3 2018, mainly driven by increased economies of scale and technology-driven operations.
  • The company had 3,680 stores as of the end of the quarter, quickly closing the gap with Starbucks, which now operates 4,000-plus stores in China.

“We exceeded the high-end of our guidance range, achieved a store level profit margin of 12.5% and experienced continuous growth across all key operating metrics. These achievements follow a clear trend: an increase in volumes, efficiency and, as a result, profitability.”

—Jenny Zhiya Qian, Luckin Coffee CEO

Context: Luckin Coffee, which has built a customer base based on smaller store footprints and affordable prices, forms a formidable challenger in China to global coffee chain Starbucks.

  • In addition to its core coffee business, the Startucks rival is expanding to tea-based beverages, a popular beverage category among Chinese consumers.

Luckin joins Starbucks in blurring boundaries between coffee and tea

Emma Lee is Shanghai-based tech writer, covering startups and tech happenings in China and Asia in general. We are looking for stories related to tech and China. Reach her at lixin@technode.com. More by Emma Lee

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