Starbucks' grande-sized sales drop in China squeezes profits

© Reuters. Starbucks cups are pictured on a counter in the Manhattan borough of New York City, New York, U.S., February 16, 2022. REUTERS/Carlo Allegri

By Deborah Mary Sophia and Hilary Russ

(Reuters) -Starbucks' quarterly sales decline in China was four times worse than the coffee chain expected and it has no "line of sight" into when business there will fully recover, the company said on Tuesday, sending its shares down 2.2% in extended trading.

Starbucks Corp (NASDAQ:SBUX)'s comparable sales in China fell 29% in its first fiscal quarter ended Jan. 1, pulling international comparable sales 13% lower.

Investors are scrutinizing global brands like Starbucks that have significant exposure to China as they worry about the lingering financial impact of the pandemic there.

While the country has largely abandoned its zero-COVID policy and began reopening in early December, fewer people are picking up their Starbucks coffees at stores due to widespread COVID-19 outbreaks.

Seattle, Washington-based Starbucks does not have "clear line of sight into the timing of recovery" and believes sales will continue to decline through this quarter, Chief Financial Officer Rachel Ruggeri said on a conference call.

Still, traffic started recovering in January and was "fantastic" during Lunar New Year, Starbucks China Chief Executive Officer Belinda Wong told investors on an earnings call on Thursday.

"We do have short-term uncertainties, and we need to be cautious and the recovery may remain nonlinear," she said, adding that people were returning to offices and social gatherings.

Starbucks posted a profit of 75 cents per share on an adjusted basis versus analysts average expected profit of 77 cents, according to Refinitiv.

The steep losses in China "took us by surprise by a huge margin because we were expecting trends to improve compared to the last quarter," said Edward Jones analyst Brian Yarbrough.

China has been Starbucks' fastest-growing market. It added a net 69 stores there over the quarter for a total of 6,090 locations.

The chain still plans for 9,000 total outlets there by the end of 2025, executives said. Ruggeri reiterated the company's overall guidance for global comparable sales growth of 7% to 9% for its fiscal 2023.

COLD BREWS AND REWARDS

Losses in China were offset by North American sales, which jumped 10% as a younger and wealthier coffee-loving crowd shrugged off inflationary pressures and continued to buy customized cold drinks and snacks.

Global comparable sales at Starbucks rose 5%, compared with analysts' average estimate of a 6.75% rise, according to Refinitiv IBES data.

Active membership in the recently revamped Starbucks Rewards loyalty program grew 15% to 30.4 million in the United States.

Promotions and seasonal menu items like its Irish Cream Cold Brew and Peppermint Mocha drove increased U.S. traffic on some weeks in November and December. But overall, monthly visits to Starbucks were consistently lower than last year, according to location analytics firm Placer.ai.

Starbucks is also facing more U.S. competition, with Dutch Bros Inc building thousands of new locations. Visits to U.S. Starbucks cafes fell 16% in the last quarter of 2022, a bigger dip than rivals Dunkin' and Peet's Coffee, according to data from Gravy Analytics.

Starbucks reported an operating margin of 14.4% for the quarter, down from 14.6% a year earlier, pinched by heavy investments to modernize its stores through technology as well as elevated labor and raw material costs.