Starbucks Slips as Slowing China Growth Outweighs U.S. Boom
(Bloomberg) -- Starbucks Corp. reported quarterly results that outpaced estimates on the back of a strong U.S. recovery -- but a less optimistic outlook for the key Chinese market weighed on shares in late trading on Tuesday.
Global same-store sales, an important gauge of restaurant success, rose 73% in the fiscal third quarter ended June 27 compared with the year-earlier period, surpassing projections. U.S. same-store sales also beat estimates, and even grew 10% from two years ago -- prior to the pandemic -- on strong cold-beverage sales.
However, China same-store sales came in significantly below estimates, and the company said average customer spending also declined there. Starbucks said value-added tax exemptions in China boosted its Chinese and international sales figures in the period a year earlier, hurting comparisons with the recent quarter.
Starbucks shares fell 3% at 6:23 p.m. in late New York trading. The stock had advanced 18% this year through Tuesday’s close.
The tax impact explains part of the slower growth in China -- but investors may question the dramatic reduction in its guidance for the fiscal year. The Seattle-based coffee chain now sees comparable sales growing 18% to 20% in China, down from a previous range of 27% to 32%. Starbucks also trimmed its international outlook for the same measure.
The results highlight the company’s challenge as it rapidly expands in China, a crucial economy that has investors increasingly skittish about its government’s regulatory crackdown. Starbucks now has more than 5,000 China locations, with 600 new ones coming this fiscal year. It has established the market, along with the U.S., as its most important, so the results will garner close scrutiny on Wall Street.
Consumers remain cautious in China despite coronavirus outbreaks being largely under control for a year and the government on course to deliver 1 billion vaccines by the end of the week. Spending during a national holiday this past weekend was 25% lower than pre-pandemic levels, according to government data.
Starbucks executives voiced optimism on China in spite of the lowered expectations. Belinda Wong, who leads Starbucks’ business in China, said the company’s recovery in that market will be nonlinear but the company was “playing the long game” there and the company had full confidence in the nation’s consumer economy.
“There’s not a geopolitical situation that has really impacted us in China over the last couple of years,” Chief Executive Officer Kevin Johnson said during the earnings call. “I don’t really foresee that happening as long as we continue to stay focused on what we do, and what we do well.”
In the U.S., meanwhile, the results showed that rising vaccination rates are helping to bolster the company. Cold beverages accounted for three-quarters of all drinks sold in the U.S. in the fiscal third quarter.
Starbucks also expanded its digital customers by 48% from the same period a year ago to 24.2 million. The company says online and mobile customers are driving its recovery in key markets. The company’s adjusted operating margin of 20.5% exceeded Wall Street’s expectations despite labor and cost pressures.
The company didn’t explicitly comment on the recent spike in Arabica coffee prices brought on by a rare freeze in the key growing market of Brazil.
In its home region of the Americas, margin is being pressured by increased supply-chain costs due to inflation, the company said without offering more specifics.
Nevertheless, Starbucks narrowed its outlook for the year for comparable sales in the Americas to 21% to 22%, which represents the top of its previous range.
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