Although Starbucks reported Thursday that Q1 same-store sales grew in the U.S. by 10%, China’s lower-than-expected performance left the coffee giant 2 cents shy of meeting analysts’ predictions of 77 cents earnings per share.
“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,” interim CEO Howard Schultz said Thursday on a call with investors. Incoming CEO Laxman Narasimhan, who will take the lead next month, was also on the call.
Transactions at stores operating in China for at least 13 months dropped 28%, as the government relaxed its zero Covid policy, which led to outbreaks of the virus. Schultz said over 1,800 of its 6,090 Chinese locations were closed.
“We are expecting the second half of fiscal 2023 in China to be stronger than the first half, but uncertainties remain and the better part of valor is to remain cautious around precisely when our recovery in China will take full flight,” said Schultz, predicting that as customers return to pre-COVID routines they’ll flock to Starbucks stores. “Q1 headwinds will shift to tailwinds. We’ve seen this pattern repeat in markets around the world, including the United States.”
Rachel Ruggeri, EVP and CFO, said that although China’s comparable sales growth was a decline of 15%, it was a major improvement from a decline of 42% in December.
“While we’re seeing early positive signs of momentum rebuilding, headwinds related to COVID still exist in the market and are expected to impact the full Q2,” she said during the investor call. “As a result, we anticipate the negative impact on the operating income in Q2 to be comparable to or greater than Q1. Although we previously projected China recovery as early as Q3 of this fiscal year, we do not have clear line of sight into the timing of recovery and believe China’s contribution as a percentage of our fiscal 2023 consolidated operating income to be lower than our original guidance assumed.”
The chain’s other international markets, however, are strong.
“Outside of China and excluding the impact of foreign currency translation, our diverse international markets across the globe continued to outperform in Q1,” Ruggeri said. “Once again, these markets together achieved double-digit comp growth, driven primarily by transactions. Their revenue grew 25% in the quarter when excluding a 17% unfavorable impact of foreign currency translation with successful holiday campaigns across all regions. Operating margins for the International segment was 14.3% in Q1, down 400 basis points from the prior year, mainly driven by deleverage in China, but partially offset by strong sales leverage across other global markets and the resulting business mix.”
Q1 Fiscal 2023 Highlights
- Global comparable store sales increased 5%, primarily driven by a 7% increase in average ticket, partially offset by a 2% decline in comparable transactions.
- North America and U.S. comparable store sales increased 10% driven by a 9% increase in average ticket and a 1% increase in comparable transactions.
- International comparable store sales decreased 13% driven by a 12% decline in comparable transactions and a 1% decline in average ticket.
- China comparable-store sales decreased 29% driven by a 28% decline in comparable transactions and a 1% decline in average ticket.
- Opened 459 stores, ending the period with 36,170 stores globally: 51% company-operated and 49% licensed.
- Stores in the U.S. and China comprised 61% of the company’s global portfolio, with 15,952 stores in the U.S. and 6,090 stores in China.
- Consolidated net revenues up 8%, to a record $8.7 billion, inclusive of approximately 3% unfavorable impact from foreign currency translation,
- Starbucks Rewards loyalty program 90-day active members in the U.S. increased to 30.4 million, up 15% year-over-year
Cherryh Cansler is VP of Editorial for Networld Media Group and senior editor of FastCasual.com. She has been covering the restaurant industry since 2012. Her byline has appeared in Forbes, The Kansas City Star and American Fitness magazine, among many others.