Lucking Coffee (OTCPK: LKNCY) stock is up at $22.53. That LKNCY stock has recovered from the $4 and change that we pooh-poohed it at is something of a surprise, to us at least. In our defence we'd say that the story back then didn't seem all that believable, but it is worth noting when we're wrong as well as that much more common crowing when we're right. Chinese companies that lied about $300 million and more of turnover haven't had a good record of coming back from the dead after all.
As we said back a few years about Luckin: “Back when this first happened, I had difficulty in getting the point over to people. A reasonable starting point is that if people fudge about one number, then they will about another. But put that to one side and think a little bit more about actual accounts. The agreed and admitted fact is that the company was, in its unaudited quarterly accounts, overstating both sales and the costs of sales. If you're going to be misleading then as your inaccuracies about sales rise, then you've also got to be inaccurate about your increasing bill for buying the things you're selling. Otherwise no one at all will believe your accounts even for a minute. That then means, though, that your cash balance is also wrong. Because your cash balance is something made up of the cash you've got from selling stuff. So, if your sales are wrong, then so must be your cash balance - because the cash balance comes from the money you've received for sales. What you do have to do though is make sure that your made-up cash balance matches across with your sales and costs of sales. Because accounts do and must balance. Misstatements about sales means that you must, by definition, be misstating about the resultant cash balance. Even if you happen, even by chance, to land upon the right figure, you've still been less than open about how you got there. So, we have no proof of the existence of the $780 million in cash other than the word of the management we know now been playing us anyway. And we also know that the accounts did balance, but there were "mistakes" in there about sales and costs. Thus the reported cash balance figure must in fact be wrong anyway.”
Because I didn't believe - righteously - some part of the accounts I didn't believe any part of the story.
Luckin Coffee share price from NASDAQ
That turned out to be much too gloomy a view. Of course, Luckin cleared out all of the old management, paid both the Chinese and SEC fines and have now been able to rebuild the business. The results are extremely impressive, LKNCY Q1: “Total net revenues in the first quarter were RMB4,436.7 million (US$646.0 million), representing an increase of 84.5% from RMB2,404.6 million in the same quarter of 2022. They are expanding fantastically quickly. Now, we could worry about the veracity of those numbers but there was an audit on the full year accounts for Luckin: “Luckin Coffee Files Audited Financial Statements for Fiscal Year 2022”. That important point there being “audit”.
So yes, we were wrong on that. As will always happen sometimes. But we'd, in our defence, point out that it really is the rarity when a company that has been lying through its teeth about its accounting numbers manages to come back from having done so. Well, Luckin Coffee has done so - good for them.
