Starbucks shares rise as brisk U.S. sales outweigh declines in China

Starbucks Corp. shares rose as a strong U.S. performance and higher prices helped to offset lower traffic and sluggishness in China, where Covid-19 measures have sharply suppressed demand.

The results reinforce the message found in recent reports from McDonald’s and Chipotle Mexican Grill: Americans are still opening up their wallets to eat out – even if inflation is starting to erode purchasing power.

Sales of $8.15 billion came in slightly above expectations in the fiscal third quarter ended July 3, Starbucks said Tuesday in a statement.

The average ticket – or cost per order – rose 6%, but comparable transactions fell 3%. This shows that higher prices are making up for a lower volume of sales.

Starbucks stock rose 1.1% at 9:36 a.m. in New York trading on Wednesday.

The results “demonstrate the early progress we have made in just four short months,” founder and interim Chief Executive Officer Howard Schultz said.

Since taking over in April, Schultz has shaken up management, halted share buybacks and attempted to blunt a growing union drive in the U.S..

On a call with analysts, Schultz said Starbucks has a “reinvention plan” that will affect “every aspect” of the business. Details are expected during the company’s investor day on Sept. 13.

He said the company has raised prices by around 5% in the last 12 months.

Other coffee sellers have also pushed prices higher with Dutch JDE Peet’s reporting better-than-expected first-half sales Wednesday after increasing prices by 1 euro-cent per cup on average.

While U.S. diners are still spending – with cold drinks being a particular standout – the Chinese market remains a source of uncertainty.

On-and-off pandemic rules have restricted mobility in major cities, and comparable sales in the country fell 44% during the quarter.

That’s deeper than the 39% drop expected by analysts.

The chain recently began reopening dining rooms across Shanghai, leading to an immediate improvement in performance, the company said.

“It was definitely a mixed report,” said Bloomberg Intelligence analyst Michael Halen. “Good news here in the U.S., and bad news overseas.”

Starbucks said its financial guidance remains suspended “for the balance of this fiscal year” amid unpredictability in China’s pandemic restrictions.

However, Chief Financial Officer Rachel Ruggeri said the company expects margins and profit to be lower in the fiscal fourth quarter than in the previous period.

She cited a slow recovery in China, stepped up investment and one-time tax items that won’t recur.

This shows that persistent inflation and unpredictable costs continue to cause headaches.

Operating margin in the quarter was 15.9% in the quarter, above analysts’ projection but still a 400 basis-point decline from a year earlier.

The company attributed this to inflation, higher wages for workers and anti-Covid measures in China.

Higher prices in North America and sales in Europe helped to offset the pressure. While transactions fell overall, they rose 1% in North America.

“It was nice that they didn’t see any loss of transactions in the U.S. with price being up,” Halen said.

The company has seen a recent reduction in worker turnover, a spokesperson said.

In April, Schultz told employees that 80% of baristas had been with the company less than a year, a figure he called “shocking.”

The company, which said it hired a record number of employees so far this fiscal year, is trying to convince its workers that they will be better off if they don’t unionize.

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