Starbucks stock falls as earnings — weighed down by China sales — miss estimates

The company said that while global same-store sales for the quarter rose 5% year over year, same-store sales in China fell 29% because of a spike in COVID-19 infections there in December, dragging down international same-store sales, which had an overall drop of 13%. Still, Chief Financial Officer Rachel Ruggeri said on the call that “excluding China, we had tremendous growth across markets.” She also said the company’s fiscal 2023 outlook remains unchanged.

In the U.S. and North America, same-store sales rose 10% year over year, mostly driven by price increases — a 9% rise in average ticket, or the amount spent by each customer who visits, while comparable transactions increased 1%. Net revenues for the North America segment increased 14% year over year to $6.6 billion, contributing to what the company said was record revenue of $8.71 billion, which fell shy of analysts’ expectation of $8.79 billion.

“We posted today’s strong results despite challenging global consumer and inflationary environments, a soft quarter for retail overall and the unprecedented, COVID-related headwinds that unfolded in China in Q1,” Starbucks interim Chief Executive Howard Schultz said in a statement.

On his last earnings call before new CEO Laxman Narasimhan takes over, Schultz expressed optimism about a recovery in China and said all of the company’s stores there are now open without restrictions. And Belinda Wong, CEO of Starbucks China, said on the call that she saw “fantastic traffic” during Lunar New Year, although she said the China business is “still in the very early stages of our recovery journey.”

Starbucks stores in the United States and China made up 61% of the company’s worldwide portfolio in the first quarter, with 15,952 stores in the U.S. and 6,090 stores in China. Starbucks ended the quarter with 36,170 stores after opening 459 net new stores in the quarter, according to its earnings report.

Starbucks reported first-quarter net income of $855.2 million, or 74 cents a share, compared with $815.9 million, or 69 cents a share, in the year-ago period. Adjusted for restructuring and impairment costs as well as transaction costs related to the sale of the Seattle’s Best Coffee brand, earnings were 75 cents a share, compared with an expected 77 cents a share by analysts surveyed by FactSet. Executives said the challenges in China affected earnings by 6 cents a share. Revenue was 8% higher than the $8.05 billion the company reported in the year-ago quarter.

Starbucks’ outlook, from the previous quarter’s earnings call, called for U.S. comparable sales growth in the range of 7% to 9%, and earnings growth at the high end of the 15% to 20% range.

Shares of Starbucks have increased more than 13% in the past 52 weeks, and are up nearly 10% so far this year, while the S&P 500 index
SPX,
+1.47%
is up nearly 9% year to date.

Schultz also teased to what’s coming next for him: a trip to Milan, Italy, where he said he plans to introduce “something bigger,” which will be a “game-changer” for the company. The hint that he gave analysts was the word “alchemy.”