Starbucks Corp has recorded a rise in quarterly sales and forecast fourth-quarter sales above Wall Street estimates, despite headwinds in China as travel restrictions related to COVID-19 loom longer than expected.
The coffee chain forecast comparable sales for its current quarter to grow 18% to 21%, expecting strength in the Americas. Analysts on average expect growth of 17.5%, according to IBES data from Refinitiv.
But the Delta variant of COVID-19 has triggered a surge of new COVID-19 cases and the reinstatement of mask rules in some places.
The United States said on Monday July 26 that it will not lift existing travel restrictions.
In the third quarter that ended on June 27, sales rose 19% in China - Starbucks' biggest growth market - despite a resurgence of COVID-19 in the south, Belinda Wong, chief executive officer of Starbucks China, said on a call with analysts.
Starbucks lowered its fiscal 2021 forecast for China sales growth to 18-20% from 27-32%, and it dropped its international sales forecast to 15-17% from 25-30%.
The company's previous guidance for China had "assumed a shorter time frame for the lifting of travel restrictions and also less of the uncertainties that we have faced in the market," Wong said of the revision.
The volatility is "only temporary" and the company is on track to add more than 600 net new stores in China this fiscal year, she said.
In the United States, the easing of COVID-19 restrictions on travel and restaurant capacity as well as reopening of some offices have boosted sales at Starbucks and other big US restaurants, including Chipotle Mexican Grill and Domino's Pizza.
Starbucks' US quarterly sales soared 83% over the previous year - in part as urban areas recovered with people returning to businesses - and 10% above pre-COVID-19 pandemic levels two years ago.
Those results helped lift global sales 73%, compared to estimates of 69.4% growth.
The company has also been pushing its digital business - its rewards program grew 48% to 24.2 million members - and new beverages, including three flavours of ready-to-drink coffee.
Its cold drinks also grew to 74% of beverage sales during the quarter.
Excluding certain items, Starbucks earned $1.01 per share, compared with a loss of 46 cents a year earlier. That exceeded analysts' estimates of 78 cents a share.
Exiting Joint Venture In South Korea
In other Starbucks news, Starbucks is exiting its $2 billion worth joint venture in South Korea by selling stakes to local partner E-Mart Inc and Singapore sovereign wealth fund GIC, as it looks to invest more in fast-growing international markets.
E-Mart, one of the largest retailers in South Korea with over 160 stores and the owner of half of the JV, will buy an additional 17.5% stake in Starbucks Coffee Korea for $411 million, it said in a filing on Tuesday. It will continue to operate the Starbucks stores.
GIC will own the remaining 32.5%. This suggests a $2.35 billion valuation for the entire business, and that GIC will pay more than $700 million for its stake, according to Reuters calculations. GIC declined to comment on the deal value.
South Korea is Starbucks' fifth-largest market with more than 1,500 stores across 78 cities, but analysts said that the country offers little growth opportunity for the world's largest coffee chain due to its mature and saturated market.
"South Korea...would not be a market for major growth in the coming years. It's better for them to sell their stake use the capital and proceeds to invest in faster growth markets like China," China Market Research Group analyst Shaun Rein said.
The US company has in recent years been expanding globally especially in China as its largest market - the United States - saturates and grapples with stiff competition. Sales from China in its latest second-quarter report nearly doubled.
"Using the sale of its South Korean operations will equip it with more cash that it can deploy to China," Rein said.
With Starbucks Coffee Korea's operating profit surging nearly three-quarters to 45.4 billion won ($39.5 million) in January-March, the company said that the region will continue to be an important market for Starbucks.
"Part of our success in South Korea - and in many of our international markets - is due to our expertise and judgment in knowing when to rely on local partners to continue to build the business," Michael Conway, Starbucks' group president for international and channel development, said in a statement. E-Mart and its parent Shinsegae Group have leveraged a pandemic-led disruption in the Asian e-commerce industry to buy up some businesses, including eBay's South Korean unit for $3 billion.
A Shinsegae spokesperson said Starbucks Coffee Korea will continue to be in a licensing agreement with Starbucks, as it has been when it was a joint venture between Starbucks and Shinsegae Group.
Starbucks said that the deal is expected to be completed over the next 90 days.
Nestlé Partnership Extension
Starbucks is also extending its partnership with food giant Nestlé to launch ready-to-drink coffee beverages in markets across south-east Asia, Oceania and Latin America, the two partners said.
Nestlé and Starbucks signed a global licensing deal in 2018 that granted Nestlé the perpetual rights to market Starbucks packaged coffee and food service products globally. The initial agreement excluded goods sold in Starbucks coffee shops and ready-to-drink products.
"With our expansion plans into ready-to-drink coffee, Nestlé will continue to build on its global leadership in coffee and will benefit from new growth opportunities in a segment that is developing rapidly and attracting new and younger consumers," David Rennie, head of Nestlé coffee brands, said in the statement late on Monday.
Under the extended partnership, Nestlé and Starbucks will roll out products like Starbucks Frappuccino and Doubleshot to select markets in Southeast Asia, Oceania and Latin America from next year and also develop new products, the two partners said.
Nestlé's sales of Starbucks products reached 2.7 billion Swiss francs ($2.95 billion) last year.