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China closures drag down Starbucks results

Starbucks missed market estimates for quarterly same-store sales on Thursday, as a Covid-19 resurgence in China closed stores in several major cities and overshadowed a strong performance by its US business.

Fresh lockdowns to curb the spread of the Delta variant in Starbucks’ largest growth market of China have also hit businesses of several other restaurant chains, including Yum China.

The coffee chain posted a 7 per cent decline in China comparable sales in its fourth quarter, missing its forecast of roughly flat growth and offsetting a 22 per cent jump in the United States.

The company forecast global comparable sales growth in the high single digits in its current fiscal year 2022.

Shares fell more than 4 per cent in aftermarket trading.

But Chief Executive Officer Kevin Johnson also said higher prices, higher wages, new unit development, automation in stores, speedier cooking equipment and other investments will help it beat rivals and push its operating margin to its ongoing target of 18 per cent to 19 per cent in fiscal 2023.

“This is the time to take that market share that we know we can take, and that market share gain is permanent,” Johnson said in an earnings call.

The company said it would open 2,000 net new locations globally in fiscal 2022 versus 1,173 in 2021, about 75 per cent of them outside of the United States.

Johnson declined to say how much Starbucks would raise prices on Pumpkin Spice Lattes and other menu items.

But he said that “we are taking price and we will continue to take price in an inflationary environment.”

The chain will also invest in equipment – like warming ovens and cold brew systems – to speed up operations and let workers perform other tasks.

On Wednesday, Starbucks said it would raise pay for US workers with at least two years of employment and offer $200 referral bonuses, as it grapples with a nationwide labor shortage.

Starbucks is also closing some locations early in order to redeploy staff to other stores, Chief Operating Officer John Culver said during the call.

The coffee chain also committed to $20 billion of share repurchases and dividends over the next three years.

Analysts say the pressure in China should be temporary as restrictions ease and Seattle-based Starbucks opens more stores in the world’s second-largest economy to boost growth.

Global comparable sales rose 17 per cent in the quarter ended Oct. 3, compared with analysts’ average estimate of 18.5 per cent growth, according to Refinitiv IBES data.

Starbucks earned $1 per share on an adjusted basis – narrowly beating estimates of 99 cents.

  • Reporting by Praveen Paramasivam in Bengaluru and Hilary Russ in New York; Editing by Aditya Soni and Aurora Ellis, of Reuters.

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