Luckin Coffee Could Stumble When IPO Lockup Expires

When the lockup period for Luckin Coffee (Nasdaq: LKends on November 13th, its pre-IPO shareholders will have the opportunity to sell large blocks of currently-restricted shares.

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(Source: S-1/A)

Just 14.2% of LK's outstanding shares are trading pursuant to the IPO, so there could be a large increase in trading volume when the lockup expires. Significant sales of currently restricted shares could flood the secondary market when the LK IPO lockup expires causing a sharp, short-term downturn in LK's share price. Aggressive, risk-tolerant investors should consider shorting shares of LK ahead of the company's lockup expiration.

Business Overview: Retail Coffee Brewer in China

Luckin Coffee is the second largest retail coffee brewer in China in terms of cups of coffee sold and the number of retail outlets. Founded in 2017, Luckin Coffee uses a new retail model that embraces technology to provide its customers with affordable, convenient, and high-quality coffee drinks.

(Source: LK company website)

The company uses its mobile apps to handle the entire customer order and purchasing process. This gives their coffee drinkers a 100% cashier-less experience. In addition, Luckin Coffee notes that it improves their operational efficiency and promotes customer engagement.

The company operates three types of retail outlets. However, as part of the strategy, they focus on outlets called pick-up stores. These outlets have limited seating, and the company locates them in areas that are known for high coffee demand such as university campuses, office buildings, and other commercial areas.

Customers must use the mobile app to order coffee. They select either pick up or delivery and pay online after ordering. A text message is sent to the customer when the coffee drink is ready - typically about three minutes. Delivery takes approximately 30 minutes.

In addition to focusing on using technology to drive the customer experience, the company strives to maintain a high quality of coffee. Their SEC filings note that their coffee won the gold medal in the 2018 IIAC International Coffee Tasting competition.

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Disclosure: I am/we are short LK.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any ...

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