Starbucks earnings disappoint as U.S. boycott, ‘cautious’ China weaken sales

Starbucks on Tuesday reported quarterly earnings and revenue that missed Wall Street’s expectations as both domestic and international sales fell short of estimates.

CEO Laxman Narasimhan said on the company’s conference call that the chain faced “headwinds,” including a boycott in the U.S. and increased discounting by rivals in China. The company lowered its full-year revenue outlook as a result.

Shares initially fell in extended trading but recovered, rising about 3%.

Here’s what the company reported for its fiscal first quarter compared to what Wall Street was expecting, based on a survey of analysts by LSEG, formerly known as Refinitiv:

• Earnings per share: 90 cents, adjusted vs. 93 cents expected.
• Revenue: $9.43 billion vs. $9.59 billion expected.

The coffee giant reported fiscal first-quarter net income of $1.02 billion, or 90 cents per share, up from $855.2 million, or 74 cents per share, a year earlier.

Excluding restructuring costs and other items, Starbucks earned 90 cents per share.

Net sales rose 8% to $9.43 billion. Global same-store sales increased 5%, falling short of StreetAccount estimates of 7.2%.

In North America, same-store sales also rose 5%, driven largely by customers spending more on their drinks and food.

But Narasimhan said U.S. traffic lagged, starting in mid-November. He cited what he called “misperceptions” about the company’s position on the Israel-Hamas war, and said the decline in sales largely came from customers who only visited occasionally.

The controversy kicked off when Starbucks Workers United, which represents hundreds of the chain’s unionized cafes, posted in support of Palestinians, leading to backlash from conservatives. Starbucks sought to distance itself from the tweet, which the union deleted, and sued Workers United for trademark infringement.

Narasimhan also wrote a letter to workers in December, condemning misinformation and seeking to extricate Starbucks from the controversy.

The chain’s most loyal customers have stood by Starbucks, Narasimhan said. Starbucks is seeking to bring back other customers by targeting them with promotions through its loyalty program and new Valentine’s Day drinks.

Starbucks’ fiscal first quarter also encompasses the all-important holiday season. The chain usually nets billions of dollars in gift card sales, plus higher traffic fueled by its seasonal drink offerings and thirsty shoppers. Narasimhan said consumers loaded $3.6 billion onto gift cards this quarter, breaking the chain’s record.

Outside of Starbucks’ home market, the coffee chain reported international same-store sales growth of 7%, missing expectations of 13.2%. Narasimhan said sales at locations in the Middle East also fell due to the war.

China, the company’s second-largest market, reported same-store sales growth of 10%. However, the average ticket at its Chinese stores fell 9%. Chinese consumers are “more cautious,” according to Narasimhan.

The chain has seen increased competition from lower-priced rivals such as Luckin Coffee, which have won over consumers as China’s economic recovery continues to lag.

Starbucks executives said the challenges it faced this quarter are “transitory,” but damaging enough that the company revised its full-year sales outlook. Chief Financial Officer Rachel Ruggeri also said January’s sales have been softer than expected.

For fiscal 2024, the company now anticipates revenue growth of 7% to 10%, down from its prior forecast of 10% to 12%. Starbucks also lowered its global same-store sales outlook to a range of 4% to 6%, from its previous range of 5% to 7%.

The company reiterated its full-year forecast of earnings per share growth of 15% to 20%.