Starbucks suspends its outlook as Covid lockdowns hammer sales in China

Starbucks on Tuesday suspended its outlook for fiscal 2022 as Covid lockdowns in China weighed on international sales.

Still, strong demand in the U.S. offset sharp declines from China, helping the company’s quarterly revenue top Wall Street’s estimates.

Shares rose 5% on the report in extended trading.

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

• Earnings per share: 59 cents adjusted, meeting expectations
• Revenue: $7.64 billion vs. $7.6 billion expected

The coffee giant reported fiscal second-quarter net income attributable to Starbucks of $674.5 million, or 58 cents per share, up from $659.4 million, or 56 cents per share, a year earlier.

Excluding items, Starbucks earned 59 cents per share, in line with estimates from analysts surveyed by Refinitiv.

Net sales rose 14.5% to $7.64 billion, topping expectations of $7.6 billion. Global same-store sales increased 7% in the quarter, fueled by strong growth in the United States.

U.S. same-store sales climbed 12%, as customers spent more per order and visited more often. Active membership of Starbucks’ loyalty program jumped 17% to 26.7 million customers.

While demand for its coffee stays strong in the U.S., the company’s baristas have been unionizing in the hopes of earning better pay and working conditions. About 50 company-owned locations have voted in favor of unionizing in the last six months. Since Howard Schultz returned as interim CEO in early April, he has paused stock buybacks and embarked on a listening campaign with baristas nationwide to curb the growing union push.

As the company seeks to curb the union push, Schultz announced $1 billion in investments for fiscal 2022 on wage hikes, improved training and store innovation during fiscal 2022. However, the coffee giant will not offer the enhanced benefits to workers at the cafes that have voted to unionize. Such changes at unionized stores would have to come through bargaining, Starbucks said.

“The union contract will not even come close to what Starbucks offers,” Schultz told analysts on the company’s conference call.

Outside the U.S., it was a grim quarter for Starbucks. International same-store sales shrank 8%, dragged down by sharp declines in China, the company’s second-largest market. Chinese same-store sales sank 23% in the quarter as the country reimposed lockdowns after Covid outbreaks. Executives said 72% of the Chinese cities where it has cafes experienced outbreaks of the omicron variant during the quarter.

Roughly a third of Starbucks’ stores in China are temporarily closed or only accepting mobile order and pay or delivery orders.

“We expect an even greater impact on our [third-quarter] results due to the timing of the Shanghai lockdown and the further resurgence of the virus in other cities, including Beijing,” said Belinda Wong, chair of Starbucks China.

Citing China’s lockdowns, inflation and investments in its stores and employees, Starbucks suspended its fiscal 2022 forecast. Last quarter, it said it expects GAAP earnings per share to fall by a range of 4% to 6% and adjusted earnings per share to rise by 8% to 10% during the fiscal year.

Starbucks opened 313 net new locations in the quarter.

The company also announced it is moving up its investor day from December to September and shifting its location from New York City to Seattle.

Read the full earnings report here.