U.S. Markets’ Cold Restart

Chinese coffee company and coffeehouse chain Luckin Coffee is back in the news after flying under the radar for the last two years. But don’t worry, it’s not for a bad reason this time. 👍

For those unfamiliar with the company, it was best known for coming public on the Nasdaq stock exchange in May 2019 and being rocked by an accounting scandal shortly after. In early 2020, investigative investment firm MuddyWatersResearch published a report that indicated the company had heavily inflated its sales numbers. 🕵️‍♂️

That investigation caused more investors to look into the company as the COVID-19 pandemic began, forcing Luckin to shut down most of its stores. Ultimately, an internal investigation found that former COO Jian Liu had committed and hidden fraud, and the stock’s decline caused co-founder Charles Lu to default on a margin loan collateralized by Luckin shares. 

As the issues mounted, the company was fined by the Securities and Exchange Commission (SEC) and Chinese regulators, leading to a Chapter 15 bankruptcy filing in February 2021. That allowed it to retrench its operations, settle existing claims, and reach a global settlement of $187.5 million with its angry shareholders. 📝

Since then, CEO Jinyi Guo has been leading the turnaround efforts, with the company reestablishing itself in China and now looking to expand into other countries. Additionally, it’s looking to regain its listing on the Nasdaq, currently trading in the “over-the-counter” (OTC) market in the U.S.

Anyway, as for why the company was trending today. Well, it was coffee sales for a change. ☕

The company recently launched a new partnership with Kweichow Moutai to bring an alcohol-infused latte to its stores. The product set a record on its launch day, selling more than 5.42 million cups. That topped previous hits such as its cheese latte and coconut cloud latte, which sold 1.31 million and 660,000 cups, respectively. 

$LKNCY shares rose more than 5% today as the company continues its steady ascent. 📈

The small-cap automotive retailer operates in the integrated auto sales and finance segment of the used car market. 🚗

America’s Car-Mart saw revenues jump 8.6% YoY to $368 million, narrowly topping estimates. Meanwhile, adjusted earnings per share of $0.63 missed expectations of $0.98.  

Looking at volumes, the company’s customer count rose 8.1% to 104,734 active customers. Total retail unit sales rose 2.4%, with a growth of 8.2% for same-store retail revenue. And sales volume productivity per store per month was 34.2 vs. 33.6, a 1.8% increase. 📊

Turning to profitability, gross profit per car sold rose 3.74% to $6,768. Additionally, gross margins increased 260 bp to 36%, with executives now expecting future gross margins above previous guidance. However, the company’s provision for credit losses as a percentage of sales rose to 30.9%, as net charge-offs continue to rise amid its core customer base. 

The higher loan loss provisions overshadowed improvements elsewhere in the business. This figure is returning to pre-pandemic levels, stressed by longer contract terms and a higher average interest rate for the portfolio of loans. ❌

Essentially, more expensive cars have caused customers to finance their purchases at less favorable terms. And as the economy slows and/or used car values fall, delinquencies become more likely.

The automobile market continues to be a tough one for retailers. Demand is pressured by high automobile prices and financing rates, while low inventories and higher repair and replacement costs pressure supply. If the economy weakens, the demand side of the equation will only get more difficult and likely see loan delinquencies tick up further. 😬

$CRMT shares fell 14% on the day, now sitting at the same levels as early 2019. With that said, like many of its peers, its longer-term trend remains higher. 🙃