Remember when Luckin Coffee was growing at such an exponential rate in China that it put Starbucks on its heels?
Yeah, about that.
The coffee chain admitted on Thursday that some of its trades were fabricated from the second quarter of last year in an extraordinary announcement that caused the company’s shares to fall.
Manufactured sales were around $ 310 million, based on exchange rates. That would represent about 41% of the $ 759 million the company would have generated in sales last year, according to information from financial services site Sentieo.
Luckin’s shares, which are traded in the United States, fell more than 70% on Thursday morning.
The Beijing-based company, which opened its first location in 2017 and had 4,500 units by the end of 2019, said it has formed a special committee of its board to oversee an internal investigation into the issues uncovered during an audit of its financial statements last year.
According to the company, COO Jian Liu and several employees who report to him “have committed certain faults, including falsifying certain transactions.”
The special committee recommended the suspension of Liu and the employees involved in the misconduct.
Luckin said that in addition to manufactured sales, some costs and expenses were also inflated. The committee did not independently verify its manufacturing estimate.
“The company is evaluating the overall financial impact of the misconduct on its financial statements,” Luckin said in a statement. “As a result, investors should no longer rely on the Company’s previous financial statements and results for the nine months ended September 20 and the two quarters beginning April 1, 2019 and September 30, 2019.”
Luckin’s admission is just coming two months after a famous short seller, Muddy Waters Research, published a “credible” claim that the company had inflated the numbers. The investment firm called it a “fundamentally broken business trying to instill the culture of coffee drinking in Chinese consumers through incredible discounts and free coffee.”
The allegation has led Luckin to vigorously defend his company, arguing that “all key business operating data” is “tracked in real time and can be verified.” He called the allegations “misleading and false”.
Now, in early April, it looks like the investor was right.