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Starbucks rallies after Chinese sales growth fuels optimism

July 27, 2017 GMT

Starbucks Corp.’s sales surged in China last quarter, helping validate the company’s wager that it can turn the country into its biggest growth engine.

Tea remains more popular than coffee in China, but Starbucks is making inroads. Same-store sales — a key benchmark — rose 7 percent in the country. That helped send the shares up as much as 5.9 percent in late trading on Thursday.

The results followed Starbucks’ agreement to buy out its East China joint venture for $1.3 billion, the biggest deal in the company’s history. The move allows it to take full control of 1,300 cafes in the world’s most populous country, where it sees a nascent coffee culture becoming a huge market.

“The growth opportunity in China is unparalleled,” Kevin Johnson, the company’s chief executive officer, said in an interview.

Starbucks shares rose as high as $62.99 in extended trading. The stock had gained 7.2 percent this year through Thursday’s close.

The company reported an overall same-store sales increase of 4 percent in the third quarter, which ended July 2. That missed the 4.8 percent estimate of analysts. The company also announced plans to shutter its Teavana chain, a move that will eliminate 3,300 jobs.

Starbucks currently operates about 2,800 locations in China, with plans to hit 5,000 by 2021. And the business there will eventually be bigger that its operation in the U.S., Johnson said.

Starbucks’ same-store sales have risen for seven straight years, but slowing growth has put Johnson under pressure. The former technology executive, who took over from longtime CEO Howard Schultz in April, also has been contending with other headaches.

The company’s popular mobile app has created traffic jams at its cafes, with customers bunching up in pickup areas. Johnson said on Thursday that Starbucks has added “digital order managers” to 1,000 stores and has improved its ability to quickly serve customers who order and pay through their phones.

The sales gain in the U.S. was 5 percent, which Johnson said was fueled in part by customers ordering more food. The coffee purveyor has been making a push to sell more edibles for years, with meals and snacks now accounting for about 21 percent of U.S. sales. But the effort has been marked by stumbles, including menu misfires and complaints that food was too pricey or the portions were too small. The growth in food sales in primarily coming at lunch, Johnson said.

As Starbucks focuses on improving its digital app and selling more food, the company is stepping back from its tea business. The company said it will shutter all 379 of its Teavana retail stores, with the majority closing by next spring.

Starbucks bought the Teavana brand in 2012 for about $620 million, betting that it could find growth with the tea chain’s locations in malls. But as Americans feverishly embrace e-commerce, and visit fewer shopping centers, the business has struggled. Starbucks now sells Teavana-branded products in its cafes, a business that generates about $1.6 billion a year in sales, according to Johnson.

“We have not been immune to the macro trend of declining mall traffic,” Johnson said. “It was time for us to acknowledge that.”