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Chinese cafe chain Luckin Coffee (OTCMKTS:LKNCY) has been in all sorts of trouble in the past few months. However, in recent days, there have been some recent developments that might make the Luckin stock a more palatable proposition for investors. That being said, the company is still riddled with scandals and it is important for investors to take a closer look.

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Situation at Luckin

The company had been rocked by an accounting scandal earlier this year, however, Luckin managed to get away with a fine of only $9 million from the regulatory body in China.

While that may be a positive, investors need to keep in mind that the company will need to contend with a class-action lawsuit at the United States District Court for the Southern District of New York.

The company’s legal problems in China however seem to have eased up somewhat and it is now working on growing its sales yet again from its existing base of customers. Things are looking better than they were a few months back when it seemed that the stock was untouchable.

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Important Steps

The company may have taken certain steps to repair its business and reputation; however, it could take a long time before it can win back the trust of American investors. Instead, Luckin has decided to continue to boost its sales so that investors eventually take notice.

Earlier, the company had been focused on expanding the number of stores, but that strategy has now been discontinued. Now, Luckin is looking to focus on the existing customer pool for growing its sales.

Cash Burn

Despite the recent developments, it is important for investors to look a little deeper into Luckin. The company burned through as much as $700 million from the fourth quarter of 2019 up until the second quarter of 2020.

On top of that, it is left a cash balance of only $780 million and hence, it is going to be tough for Luckin to sustain its marketing push for higher sales.


It is also equally important to point out that there have been changes at the top after the accounting scandal blew up on the company’s face.

That is also expected to be a factor that might make investors a bit circumspect. The company may have made some right moves but the cash burn and the class action lawsuit still hanging over its head. Hence, the future of the company remains a bit uncertain at this point.

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