The stock market bounced higher Thursday morning, clawing back some of the ground it lost on Wednesday. The latest news on the economy was dire, as initial claims for unemployment benefits nearly doubled to 6.65 million on a seasonally adjusted basis. However, oil prices soared by $5 per barrel on reports that Russia would consider production cuts, potentially putting a floor under the plunging energy markets. As of 11 a.m. EDT, the Dow Jones Industrial Average (DJINDICES:^DJI) was up 308 points to 21,252. The S&P 500 (SNPINDEX:^GSPC) rose 36 points to 2,506, and the Nasdaq Composite (NASDAQINDEX:^IXIC) gained 70 points to 7,431.
It’s been easy to lose perspective on individual stocks during the COVID-19 pandemic, as the entire market has often moved up or down in lockstep. However, an accounting scandal involving Luckin Coffee (NASDAQ:LK) reminded investors that company-specific surprises can still send an individual stock down sharply — and benefit the shares of rivals like Starbucks (NASDAQ:SBUX).
Luckin opens an investigation
Shares of Luckin Coffee were down almost 70% as of 11 a.m. EDT after having plunged more than 80% earlier in the session. The Chinese coffee company made a surprising revelation about its recent financial performance that forced many investors to reevaluate their views on the stock.
Luckin has formed an independent special committee in order to oversee an internal investigation regarding issues raised in the audit of its 2019 financial results. Three independent members of the Luckin board of directors will work with outside legal advisors and forensic accountants to investigate alleged misconduct among key employees, including now-suspended COO Jian Liu.
According to the special committee, Liu and workers reporting to him allegedly started fabricating transactions beginning in the second quarter of 2019. The size of the alleged fraud is massive, with the total sales involved amounting to 2.2 billion Chinese yuan, or more than $300 million.
As a result, Luckin has said that investors shouldn’t rely on previous financial statements for the second and third quarters of 2019. Those figures had indicated substantial growth in sales, but the questionable transactions could wipe out those results.
Image source: Starbucks.
Good news for Starbucks?
Many investors had seen Luckin’s extraordinary growth as a potential threat to Starbucks, which has also focused on trying to capitalize on the fast-growing Chinese consumer market. Starbucks shares rose 4% Thursday morning as industry watchers figured that the allegations of fraud would give the Seattle-based coffeehouse pioneer a stronger competitive position in the world’s most populous nation.
Yet it’s unclear how much Luckin’s problems will help Starbucks. The two companies have had different focus areas, with Starbucks offering larger store locations similar to its worldwide network while Luckin operates smaller kiosk-sized stores. Luckin has concentrated more on maximizing order throughput and efficiency, while Starbucks has aimed to offer its coffeehouse experience.
For those who had ignored claims from short-selling analysts earlier this year that argued that Luckin’s results were questionable, the revelation was particularly difficult. Only time will tell what the special committee finds out — and whether Luckin can recover from it.