Starbucks profits exceed expectations due to China’s recovery, but shares drop due to weak guidance.

Starbucks Beats Wall Street Estimates with Strong Recovery in China

By Deborah Mary Sophia and Hilary Russ

(Reuters) – Starbucks Corp has beaten Wall Street estimates for quarterly profits, powered by a sharp recovery in business in China. Despite this, shares fell about 6% in after-hours trading after the company did not lift its 2023 guidance.

With most of China’s COVID-19 curbs now scrapped, consumer mobility and spending in the region bounced back sharply in March. Even so, some analysts had expected China sales to remain in the red after tumbling 29% the previous quarter. Instead, the world’s largest coffeehouse chain posted a 3% rise in China comparable sales in its second quarter ended April 2, helping boost international sales 7%, more than double the 2.94% increase of the average analyst’s estimate, according to Refinitiv data.

While the China recovery was better than the company expected, growth in average weekly sales there will be at a more moderate pace in the second half, Chief Financial Officer Rachel Ruggeri said during an earnings call.

Starbucks Continues to Grow Globally

• Globally, Seattle-based Starbucks’ comparable sales climbed 11%, trouncing analysts’ expectation of a 7.36% rise.
• Customers visited more often and spent more per trip, according to the earnings release.
• Excluding one-time items, Starbucks earned 74 cents per share, beating estimates of 65 cents.
• Starbucks, whose customers are typically younger, wealthier and relatively unfazed by inflation, has doubled down on its cold and customizable beverages, boosting traffic in the U.S. and driving a 12% jump in comparable store sales in its North American market.
• The chain also keeps adding customers to its rewards program, which now has 30.8 million active members in the United States, up 15% over this time last year, according to its earnings release.
• And it is building more cafes, adding 100 net new stores in North America and more than 360 internationally.

Restaurant shares broadly have outperformed the S&P 500 Index this year, and McDonald’s Corp and others reported a strong quarter. Some Starbucks investors may have taken profits after Starbucks’ stock jumped 16% in the past five weeks with “a pretty big run” into the earnings report, Edward Jones analyst Brian Yarbrough noted.

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