Starbucks slips as lingering China weakness hits results

Starbucks Corp. reported profit and comparable sales that trailed Wall Street’s expectations as weakness in China weighed on results, sending shares down in late trading. Executives reaffirmed confidence in the country and predicted a recovery there this year. 

Comparable sales of 5% in the quarter ended Jan. 1 were below the average estimate for 6.8% growth compiled by Bloomberg, with the Seattle-based company saying China “materially impacted” performance. 

Starbucks shares fell 1.7% in premarket trading in New York on Friday. The stock gained 10% so far in 2023 through Thursday’s close. 

The world’s second-largest economy, where Starbucks is betting big, has proven to be a tough market for the company in recent years as on-and-off Covid restrictions and spikes in cases have hurt mobility. 

“In early December, Zero Covid was lifted and Covid infections spiked across China, resulting in a dramatic decline in consumer activity across the country and causing the most severe Covid disruptions any retailer had encountered,” Chief Executive Officer Howard Schultz said during a call with analysts. 

He added Starbucks is seeing a rebound in activity there and is still targeting 9,000 locations in the country by the end of 2025 — up from the current tally of 6,090. The company said it currently has no restrictions to its operations in China. 

Comparable sales in China fell 29%, compared to analysts’ average estimate for a 13% decline. That pushed international comparable sales to a 13% drop, deeper than the estimated 3.9% decline. 

“Compared to what they originally thought, there’s probably a delayed timeline as to when China improves,” Edward Jones analyst Brian Yarbrough said. “The near-term choppiness continues to be somewhat of an issue.” He added that “the US remains pretty strong, but the China results are obviously well below expectations.”

In the US, same-store sales surpassed estimates and comparable transactions — another key metric — were positive. The results show that Americans are still absorbing higher prices for Starbucks drinks that Schultz has labeled an “affordable luxury.”

Operating margin was 14.4% in the quarter — lower than a year earlier, but above the average estimate of 13.9%. The company said higher spending on wages and benefits and inflation contributed to higher costs, while it was partially offset by higher menu prices in North America.

Starbucks is keeping its projections for the current fiscal year unchanged. Incoming CEO Laxman Narasimhan is set to take over April 1. –BLOOMBERG