Starbucks reported record sales in the first quarter of fiscal year 2023, but missed analyst expectations as a result of inflation and global conditions, particularly in China.
According to results released Thursday, in the 13-week quarter that ended Jan. 1, Starbucks sales increased 8% from a year earlier to $8.71 billion, short of analyst expectations of $8.79 billion. Starbucks also missed on earnings per share, reporting 75 cents, compared with an expected 77 cents.
The Seattle-based coffee giant reported growth in North America, with a 10% increase in sales compared with the same period a year earlier. But it saw a plunge in revenues in the international segment primarily “because of the continued effect of the COVID-19 pandemic in China and unfavorable foreign exchange rates.”
“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,” said interim CEO Howard Schultz.
In China, store sales decreased 29%. Starbucks expects results in China to improve in the second half of this year.
Similar to the previous quarter, margins decreased 20 basis points compared with the previous year because of investments in store workers’ wages and benefits, inflation and a slowdown of sales in China, according to Starbucks.
Starbucks shares fell 1.75% after trading hours.
Analysts expect 2023 to be challenging for restaurants, which includes Starbucks. In a research note to clients, Morningstar analyst Sean Dunlop wrote that sales have held up “strikingly well” with consumers still going to Starbucks despite inflation’s impact on their wallets. But, he wrote, “restaurants can’t get away with 8%-9% price increases again.”
Starbucks was expecting inflation to slow in the quarter, but it didn’t, said Michael Conway, Starbucks group president of international and channel development.
While Starbucks increased prices this year, Chief Financial Officer Rachel Ruggeri said inflationary pressures are decreasing. She said she doesn’t expect price increases in the second half of 2023.
“Despite economic headwinds, we’re still poised for growth,” Schultz said.
Starbucks opened 459 new stores worldwide in the first quarter. The U.S. and China make up 61% of the company’s global store portfolio, Starbucks reported.
Last September, Starbucks unveiled a $450 million plan to change the company, dubbed the “Reinvention” plan. The plan includes opening more drive-thru-only stores and a lower forecast for cafe-only store openings. In total, the company expects to open 2,000 new U.S. stores between 2023 and 2025.
The Reinvention plan also increased worker retention and new equipment rollout in the quarter, said Ruggeri.
Thursday’s earnings call with investors was Schultz’s last as interim CEO.
Incoming CEO Laxman Narasimhan will take over the reins of the company in April, as Schultz, who returned for a stint as the top executive for the third time in April 2022, will remain on the board to ensure a smooth transition. Narasimhan, former CEO of consumer goods multinational Reckitt, is slated to have a seat on the board.
“I could not be more confident Lax is the right CEO at the right time for Starbucks,” Schultz told investors.
Narasimhan will take over at a time when Starbucks is grappling with unionization, labor complaints and low worker morale.
Out of its U.S. portfolio of 9,000 stores, 276 Starbucks stores have officially unionized, in a process that often brought a wave of clashes between workers and Starbucks. The National Labor Relations Board has received 498 unfair labor practices complaints against Starbucks, and the company filed 80 against the union. The NLRB has made rulings on some of the complaints nationwide, including complaints filed by the union on behalf of Seattle’s Reserve Roastery on Capitol Hill.
On Wednesday, an NLRB judge ruled that Starbucks broke labor law at the Reserve Roastery store by making “various threats to employees during a union election drive, and by holding captive audience meetings with employees to discourage union activity.”
Starbucks denies the allegations.
Amid worker clashes, Starbucks also has been facing an overall morale decline among employees. In a recent internal survey seen by The Seattle Times, employee sentiment regarding top leadership as well as company values and ethics was at a historic low. At the same time, employees reported historic highs regarding productivity combined with team and management. Survey results were released October last year.
Last month, Starbucks took employees by surprise by announcing a tighter return-to-office hybrid policy, in which they would have to work in-person at least three days a week instead of one day a week. Among Schultz’s reasons for the new policy was keeping Starbucks’ culture intact. He warned that the lack of human connection as a result of remote work could put the brand “into peril.”
The mandate applies to employees who are within commuting distance of Starbucks regional offices, including the 3,750 people at the Sodo headquarters. Commuting distance, according to an internal memo reviewed by The Seattle Times, is less than 60 miles or 90 minutes from a regional office. The mandate went into effect on Jan. 30.
Starbucks’ annual shareholders meeting will take place March 23. Shareholders will vote on items including electing eight directors and approving executive compensation.
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