Luckin Coffee (LKNCY) announced that it has appointed Jinyi Guo as chairman and chief executive officer as the Chinese troubled coffee chain seeks to win back investor confidence following an accounting debacle involving fraudulent action.
The coffee chain said that its board of directors approved for Guo, a director and former acting CEO, to replace founder and former chairman Charles Zhengyao Lu, who was ousted by shareholders. In addition, Jie Yang, Yang Cha, Feng Liu, and Ying Zeng were also appointed as independent directors, while David Hui Li, Erhai Liu and Sean Shao ceased to be board directors following an extraordinary general meeting July 5 and board meeting July 12.
Shares in Luckin Coffee have plunged 93% this year as the chain is desperately trying to save its reputation following allegations that Chief Operating Officer Jian Liu, and several employees, fabricated billions of yuan in revenue from transactions in the 2Q-4Q19 period . Subsequently a special committee was formed to oversee an internal investigation.
Earlier this month, the company’s special committee of the Board of Directors found that the fabrication of transactions began in April 2019. According to the investigation, the company’s net revenue in 2019 was inflated by about RMB 2.12 billion ($300 million). Meanwhile Luckin’s costs and expenses were inflated by RMB 1.34 billion in 2019.
On recommendation of the committee, the Board of Directors had fired CEO, Jenny Zhiya Qian, COO, Jian Liu.
Amid the string of scandals it is not surprising that KeyBanc’s Eric Gonzalez downgraded the Starbucks (SBUX) rival to Hold following the scandal and removed his $56 price target, explaining: “it will take several years for management to repair its credibility.”
Meanwhile Needham analyst Vincent Yu wrote: “all previous financial numbers can no longer be relied upon. Given the ongoing audit investigation process and reduction in visibility into Luckin’s financials, we are suspending our rating.”
In just over two years, Luckin has expanded to over 4,500 stores across China. (See LKNCY stock analysis on TipRanks).
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