Starbucks Shares Rise as U.S. Sales Offset Inflation, China Woes

(Bloomberg) -- Starbucks Corp.'s U.S. operations beat expectations in the coffee chain's latest quarter, giving interim Chief Executive Officer Howard Schultz a welcome development even as he contends with high inflation and Chinese Covid measures that hurt performance there.

Robust demand pushed the key gauge of U.S. comparable sales to 12%, higher than analysts' average estimates. Customer purchases rose during the quarter, which ended April 3, and the average amount per transaction also increased.

All eyes are on Schultz, who returned to the top role last month amid stubborn inflation and an expanding union push that has turned increasingly bitter. In the earnings release, Schultz said the company is “single-mindedly focused on enhancing our core U.S. business.”

The stock rose 4.9% in extended trading at 5:35 p.m. in New York.

Separately, Starbucks announced a new round of measures to boost pay and improve training, including setting an Aug. 1 deadline for the company's previously announced move to raise its average wage to $17 an hour. The coffee chain is giving its tenured workers an additional pay bump and will introduce a system that lets customers paying with debit and credit cards give tips.

Training, Equipment

The moves, which include additional training and equipment upgrades, will total $1 billion, Starbucks said in a statement following the earnings release. The company is also rolling out an app to handle the company's communications with U.S. employees.

Schultz said these changes will let workers handle rising demand and “deliver increased profitability -- while also delivering an elevated experience to our customers and reducing strain on our partners.”

It's part of the company's strategy to increase morale among its workforce -- and blunt a labor drive in which dozens of stores have voted to unionize. “The union contract will not even come close to what Starbucks offers you,” Schultz said on the earnings call.

Addressing the planned duration of his tenure, the interim CEO said the company plans to name its next leader in the fall and he'll stay to help with the transition, handing over the CEO role in the first calendar quarter of 2023. Schultz plans to remain on the board after that.

Global Sales

Globally, comparable sales rose 7%, the company reported. Analysts had estimated 7.5%, according to data compiled by Bloomberg.

Click here for TOPLive blog on Starbucks results

The coffee company said it's facing inflationary pressures -- a reference to the higher commodities and energy costs that have roiled the world. Operating margin of 12.4% in the quarter missed projections, while earnings of 58 cents a share also trailed analysts' estimate of 60 cents.

The company says its margin pressure was partially offset by menu price hikes in North America in the quarter.

Starbucks also cited “mobility restrictions and lockdowns in China,” where Starbucks has rapidly expanded. In that key market, comparable sales plunged 23%.

Brian Yarbrough, an analyst with Edward Jones, said U.S. and international markets outside of China performed well.

“The biggest detractor to the overall results remain China, which will probably continue to weigh on results for at least the next several quarters,” Yarbrough said in an email. While there's little Starbucks can do for now, he still sees China as a “solid long-term growth story with very high returns, but the near term will remain choppy.”