Luckin Coffee down almost 70% on Thursday on fraud claims
Luckin Coffee (NASDAQ:LK) stock tanked more than 80% (and is
down 66% at the time of this writing) after the company revealed an
investigation that essentially proved what Muddy Waters alleged months ago.
Luckin Coffee admitted to inflating its sales numbers after an internal
investigation.
Luckin Coffee reveals investigation
In a press release filed with the Securities and Exchange
Commission, the China-based coffee chain said its board of directors formed a
special committee to oversee an internal investigation. The probe looked into
issues brought to the board's attention when the company's 2019 financial
statements were audited.
The special committee consists of three independent board
members. The committee retained independent legal advisors and forensic
accountants to conduct the investigation into Luckin Coffee's sales. The probe
is still in the early stages.
The special committee told the board today that Chief
Operating Officer Jian Liu and several employees "engaged in certain
misconduct, including fabricating certain transactions." The alleged
misconduct started during the second quarter of 2019. The special committee
recommended that Liu and the other employees be suspended and called for the
suspension and termination of "contracts and dealings with the parties
involved in the identified fabricated transactions."
The board accepted the committee's recommendations and
implemented them immediately. Luckin Coffee "will take all appropriate actions,
including legal actions, against the individuals responsible for the
misconduct."
Sales inflated
Luckin Coffee is a wildly successful coffee chain in China
which is sometimes compared to Starbucks.
Indeed, Luckin recently overtook Starbucks in terms of number of stores
in China, and now operates over 4000 locations.
The investigation into Luckin Coffee's financial numbers
indicates that about RMB2.2 billion in sales was fabricated between the second
and fourth quarters of 2019. That means nearly half of the coffee chain's sales
last year were fabricated. Some costs and expenses were also inflated during
those three quarters.
The special committee, its advisors and its independent
auditor have not independently verified that sales number, so it could change
as the investigation continues. Luckin Coffee is studying the total financial
impact of the misconduct on its financial statements. Thus, the company advises
investors not to rely on its previous financial statements and earnings
releases for the nine months ending on Sept. 30.
Luckin Coffee's internal investigation is ongoing.
Muddy Waters has been short Luckin Coffee
Noted short-seller Muddy Waters alleged fraud at Luckin
Coffee earlier this year, citing an anonymous report later obtained by
ValueWalk. Muddy Waters founder Carson Block started shorting the stock after
receiving the report.
The person who wrote the anonymous report said the company
was "fabricating financial and operating numbers" since the third
quarter of 2019. However, Luckin Coffee's internal investigation reveals that
the fabrication stretches back to the second quarter.
The company did not reveal many details about the
fabrication of sales numbers. However, the person who wrote the report to Muddy
Waters offered a number of "smoking guns." The person said the coffee
chain was inflating the number of items sold per day by at least 69% in the
third quarter and 88% in the fourth quarter.
They based that on over 11,000 hours of store traffic video.
Muddy Waters looked at almost 26,000 customer receipts and claimed that the
company inflated its net selling price by at least 12.3%. They also said store
losses amounted to 24.7% to 28%. Excluding the products that were given away
free, they said the actual selling price was 46% of the listed price instead of
55% as claimed by the company.
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