Luckin Coffee: Profit 'Squat' is Just for a Better 'Jump'

Luckin Coffee (LKNCY) $Luckin Coffee(LKNCY.US) released its Q3 2025 financial report (ending September 2025) before the U.S. stock market opened on November 17, 2025, Beijing time. Overall, in the third quarter, against the backdrop of peak season and continued delivery subsidies, Luckin's revenue accelerated quarter-on-quarter, showing a very impressive performance. However, the downside was the impact of the 'delivery war,' which led to a surge in delivery costs, significantly affecting profit margins, although this was within Dolphin Research's expectations.

1. Store opening speed hit a new quarterly high. In terms of store numbers, Luckin added a net 3,008 stores in Q3 2025, with the quarterly store opening speed even surpassing the levels during the 2023-2024 price war with Cotti.

Dolphin Research believes the essence behind this is that the management, based on the slowing price war in the industry in 2025 and reduced pressure from vicious competition, chose to accelerate the penetration into lower-tier markets.

2. Same-store sales growth accelerated quarter-on-quarter. As a core indicator reflecting Luckin's intrinsic growth per store after excluding new store effects, same-store sales growth (SSSG) increased by 14.4% year-on-year, expanding by 1 percentage point from the second quarter.

Breaking it down, since the management clearly stated in the early-year conference call that the price per cup would not change significantly, the substantial increase in cup volume is the main driver of same-store growth, largely driven by delivery subsidies.

3. Monthly active paying users exceeded 100 million for the first time. In Q3, Luckin's monthly active paying users reached 110 million, up 40.7% year-on-year, further accelerating from Q2.

Dolphin Research speculates that this is mainly due to the company's increased efforts in operating its own app starting in the third quarter, attempting to convert the 'massive traffic' brought by delivery subsidies into private domain traffic.

4. Fulfillment costs soared, core operating profit fell short of expectations. In terms of gross margin, although coffee bean prices slightly rebounded in the third quarter, Luckin's gross margin reached 63.8%, the highest level for the same period, due to large-scale direct procurement and the continuous ramp-up of self-built roasting plant capacity utilization, releasing scale effects.

Besides the significant increase in delivery costs due to the higher proportion of delivery business, other expenses narrowed compared to the same period last year due to the release of operating leverage, ultimately achieving a net profit attributable to the parent company of 1.28 billion yuan (Non-GAAP net profit of 1.42 billion yuan).

Core performance indicators at a glance:

Overall view of Dolphin Research:

Considering that buy-side funds generally trade based on high-frequency core data such as cup volume, price per cup, and store numbers, the short-term stock price has already relatively reflected the stage performance. Against this backdrop, Dolphin Research steps out of the BBG expectations to discuss with everyone based on the actual performance this time, combined with Luckin's recent marginal changes and competitive landscape:

Firstly, the market's most concerned issue is the impact of the 'delivery war' on Luckin's performance: During the second quarter report, the market's general concern was that the narrowing of subsidies in the third quarter would put considerable pressure on Luckin's same-store growth.

However, from the actual results, although the 'delivery war' peaked in July, and the State Administration for Market Regulation stepped in to guide platforms towards rational competition, the subsidy intensity in August and September narrowed quarter-on-quarter but did not shrink much.

According to research information, currently, the revenue proportion of Luckin's delivery platform remains above 30% (normal level is between 10%-20%), at a relatively high level. Therefore, the double-digit high growth of same-store sales in the third quarter is largely driven by delivery subsidies.

To smooth the impact of future subsidy narrowing on same-store sales as much as possible, combined with conference call information, the company has significantly increased its efforts in operating its own app since the third quarter, attempting to convert the 'massive traffic' brought by delivery subsidies into private domain traffic, specifically including:

1) Reducing the discount intensity on third-party platforms, issuing the highest value discount coupons, Coffee Star Medals, and Ruiwang Cards exclusively through its own app's membership system and WeChat private domain, ensuring the lowest price across all channels within its own app.

For the first time, the Lucky AI 1.0 intelligent agent was launched within the app, integrating the Doubao large model, which can not only provide precise recommendations and coupon issuance based on consumers' historical orders but also allow consumers to interact with the intelligent agent via voice and complete orders, greatly enhancing conversion rates and transaction efficiency.

Through a series of combined strategies, Luckin successfully converted the one-time public domain traffic brought by the 'delivery war' into private domain traffic within its own app, which not only means higher user loyalty and more user assets in the future but also higher operating profits due to avoiding commissions and traffic fees from delivery platforms.

Additionally, regarding the competitive landscape, Dolphin Research has already analyzed in detail in "Luckin: The 'Blue Cup' Surges, Is the 'Coffee King' on a Smooth Path?" that neither the 'old rival' Cotti nor the cross-industry competitor Gu Ming can cause substantial impact on the current Luckin, and it is more of a process of jointly expanding the market.

From the perspective of delivery subsidies, as long as the subsidies do not end, it is actually more beneficial to leading companies like Luckin. Therefore, from the perspective of the competitive landscape, it is relatively stable, which can also be indirectly confirmed by Luckin's continuous high-speed store expansion for two consecutive quarters.

In terms of valuation, based on the operating conditions of the first three quarters, assuming that delivery costs remain high in the fourth quarter, putting some pressure on profits, Dolphin Research estimates the annual profit to be approximately 4 billion yuan, corresponding to 19x.

Considering that the probability of Luckin's profit end compound growth rate exceeding 20% in the next three years is relatively high, giving Luckin a certain valuation premium, under a neutral scenario, Dolphin Research believes that Luckin's reasonable market value is 15.5 billion USD at 23x.

Below is a detailed analysis

I. Investment Logic Framework

According to Luckin Coffee's disclosure, the company is divided into two main business lines: self-operated business and franchise business.

1) The self-operated business is the revenue from Luckin Coffee's directly operated stores. Currently, there are nearly 19,000 directly operated stores, mainly in first- and second-tier cities, which are of great significance for Luckin Coffee to build its brand image. The self-operated business is the company's profit base, accounting for over 80% of profits.

2) The franchise business revenue includes: sales of raw materials (coffee beans, milk, coconut milk) to franchisees, profit sharing from franchise stores (based on a tiered system according to different store gross margins), equipment sales, delivery services, and other services, with raw material sales accounting for nearly 70%, being the core revenue source of the franchise business.

Currently, there are over 10,000 franchise stores, accounting for about 20% of revenue, mainly targeting lower-tier markets, aiming to capture quality locations in these markets. Although the current franchise store opening speed is faster, their profitability is not as good as self-operated stores.

II. Store Opening Speed Hit a New Quarterly High

In terms of store numbers, Luckin added a net 3,008 stores in Q3 2025, with the quarterly store opening speed even surpassing the levels during the 2023-2024 price war with Cotti. Dolphin Research believes the essence behind this is that the management, based on the slowing price war in the industry in 2025 and reduced pressure from vicious competition, chose to accelerate the penetration into lower-tier markets.

After all, for a chain ready-to-drink beverage in the expansion stage, the speed of store opening is a comprehensive reflection of competitiveness. From the store opening pace, at the current rate, compared to the company's annual target of 4,000 stores set at the beginning of the year, it has already been completed ahead of schedule, greatly exceeding expectations.

Additionally, from the overseas progress, in the third quarter, the company steadily expanded stores in Southeast Asia (Singapore & Malaysia) and the United States, currently still in the early trial stage.

As a core indicator reflecting Luckin's intrinsic growth per store after excluding new store effects, same-store sales growth (SSSG) increased by 14.4% year-on-year, expanding by 1 percentage point from the second quarter.

Since the management clearly stated in the early-year conference call that the price per cup would not change significantly, cup volume remains the main driving factor.

In terms of cup volume, besides the incremental brought by delivery subsidies, based on the previous analysis, due to the company's increased efforts in app operations, whether it is launching the Lucky AI 1.0 intelligent agent or issuing exclusive coupons within the app, increasing the exposure of Coffee Star Medals and Ruiwang Cards, the core purpose is actually to enhance the consumer's purchasing experience within the app and cultivate user repurchase stickiness.

Additionally, from the product category perspective, in the third quarter, the company significantly increased its innovation efforts in healthy beverages, launching new products such as Aloe Americano (with aloe vera particles) and Daily Vitamin C Fruit and Vegetable Tea, creating a healthy brand image, while continuously launching various fruit coffees in the summer to provide consumers with more flavor choices.

In terms of price per cup, due to Luckin's strategic reduction of high subsidies and inefficient orders on third-party delivery platforms in the third quarter, guiding customers back to its own app, coupled with the launch of new products like Aloe Americano and fruit coffee, Dolphin Research speculates that the price per cup slightly increased (new products are generally priced higher than regular Americano).

Monthly active paying users exceeded 100 million for the first time. In Q3, Luckin's monthly active paying users reached 110 million, up 40.7% year-on-year, further accelerating from Q2.

III. Fulfillment Costs Soared, Core Operating Profit Fell Short of Expectations

In Q3, Luckin achieved total revenue of 15.29 billion yuan, up 50.2% year-on-year, exceeding BBG's expectation of 14 billion yuan.

Breaking down the business, self-operated stores achieved revenue of 11.5 billion yuan, up 46.6% year-on-year, while franchise business revenue was 3.8 billion yuan, up 62.3% year-on-year, growing faster than self-operated stores. Dolphin Research speculates that this is mainly due to the incremental brought by delivery platforms concentrating in lower-tier markets (mainly franchise stores).

In terms of gross margin, although coffee bean prices slightly rebounded in the third quarter, Luckin's gross margin reached 63.8%, the highest level for the same period, due to large-scale direct procurement and the continuous ramp-up of self-built roasting plant capacity utilization, releasing scale effects.

According to Luckin's operational bases in Fujian and Jiangsu, the 45,000-ton capacity can supply 20,000 stores, and with the 55,000-ton roasting base under construction in Qingdao, there is still significant room for cost compression in the future.

Breaking down the expense side, in the third quarter, the company's delivery costs reached 2.89 billion yuan, up 211% year-on-year, with the proportion of revenue rising significantly from 9.1% in the same period last year to 18.9%, becoming the biggest drag on the company's profits in the third quarter.

However, from a mid-term perspective, since delivery subsidies are not sustainable, for Luckin, the soaring delivery costs this quarter are actually only a short-term impact. Subsequently, with the increase in the proportion of self-pickup, the delivery cost rate is likely to fall back to the normalized level of below 10%.

Other expense items, including sales expense ratio and management expense ratio, narrowed compared to the same period last year due to the release of operating leverage, ultimately achieving a net profit attributable to the parent company of 1.28 billion yuan (Non-GAAP net profit of 1.42 billion yuan).