Starbucks misses expectations as China Covid surge hurts international sales

Starbucks on Thursday reported quarterly earnings and revenue that fell short of analysts' expectations as weak international demand weighed on its results.

In China, the company's second-largest market, transactions at cafes open at least 13 months plunged 28%. During the quarter, the Chinese government relaxed its zero Covid policy, which led to new outbreaks of the virus. Outgoing CEO Howard Schultz said that more than 1,800 of its 6,090 Chinese locations were closed at the peak of the latest Covid wave.

Despite weak performance in China, CFO Rachel Ruggeri reiterated the company's fiscal 2023 outlook. However, Starbucks now expects negative same-store sales growth in China through the fiscal second quarter, followed by a reversal of the trend in the second half of the fiscal year.

Shares of the company fell more than 1% in extended trading.

Here's what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

The coffee giant reported fiscal first-quarter net income of $855.2 million, or 74 cents per share, up from $815.9 million, or 69 cents per share, a year earlier.

Excluding restructuring and impairment costs and other items, Starbucks earned 75 cents per share.

Net sales rose 8% to $8.71 billion. Globally, its same-store sales rose 5%, driven by a 7% increase in average transaction spend.

In the U.S., Starbucks saw same-store sales growth of 10%, thanks to customers spending more and a 1% bump in traffic. Customers bought a record $3.3 billion in gift cards over the holiday season.

Schultz also said that while many retailers reported falling traffic and weak holiday sales, those with Starbucks locations inside their stores said the coffee chain drew traffic and sales.

Its U.S. rewards program reached 30.4 million active members, up 15% from the year-ago period and 6% from the prior quarter. The coffee chain recently changed its loyalty program, making it more expensive to redeem points for a hand-crafted drink but cheaper for beverages that are easier to make.

Outside its home market, Starbucks' same-store sales shrank 13%, dragged down by China's dismal performance.

But China's sales are already improving. Ruggeri said the country's same-store sales plunged 42% in December but just 15% in January.

The company opened 459 net new locations in the quarter.

Looking to 2023, the company is projecting revenue growth of 10% to 12% and adjusted earnings per share growth on the low end of 15% to 20% for fiscal 2023.

Schultz also teased an announcement coming later in February. He said he discovered "an enduring transformative new category" when he visited Italy last summer.

"The word I would use to describe it without giving too much away is alchemy," he told analysts on what's expected to be his final conference call as chief executive.

Laxman Narasimhan is slated to take over as CEO on April 1.

Read the full Starbucks earnings report.