SEATTLE — Cold beverages are white hot at Starbucks, contributing to strong sales even as the number of total transactions remains down from pre-pandemic levels.
“Customer demand for specifically customized cold coffee beverages, a category Starbucks single-handedly created and is now expanding around the world, is so strong that cold beverages now account for roughly 75% of our total beverage sales in US company-operated stores,” said Howard D. Schultz, founder and interim chief executive officer of Seattle-based Starbucks Corp., during an Aug. 2 earnings call. “Customers are increasingly customizing their cold beverages by adding modifiers that enable the creation of a virtually unlimited range of taste, flavor and color profiles and then sharing their unique cold beverage creations with the world through social media. Starbucks’ unique ability to deliver handcrafted, customized cold beverages that satisfy customer desires and different need states while creating opportunities for customers’ self-expression deepens our connection to customers, sets us apart from any other industry participant and provides us with a significant ongoing competitive advantage in the marketplace.”
The company’s shaken iced espresso drinks that debuted last year are “resonating so wildly with our Gen Z customers that it has already become the fastest-growing product category in our US company-operated stores, growing 50% year-over-year, more than doubling year-to-date and importantly creating new customer occasions in the midday and afternoon dayparts,” Mr. Schultz said, noting the item is among the best-selling iced coffee beverages in China after just two months in the market and despite mobility restrictions there.
“The premium customized cold coffee opportunity ahead for Starbucks all around the world is simply enormous,” he added.
Net earnings attributable to Starbucks in the third quarter ended July 3 was $912.9 million, equal to 79¢ per share on the common stock, down 21% from $1.2 billion, or 97¢ per share, in the prior -year period. Higher product and distribution costs, store operating expenses and other operating expenses compared with the year-ago quarter weighed on earnings.
Net revenues totaled $8.2 billion, up 8.7% from $7.5 billion in the year-ago quarter.
Global comparable store sales increased 3%, reflecting a 6% increase in average ticket and a 3% decline in comparable transactions.
North America segment operating income ticked up 2% to $1.3 billion, while operating margin contracted due to higher commodity and supply chain costs driven by ongoing inflationary pressures, as well as increased investments in employee wages and other benefits, partially offset by menu price increases. In an effort to curb a unionization push, Starbucks previously announced it would invest $1 billion in its employees and stores in fiscal 2022. The investment includes increased pay, expanded benefits and additional training for baristas.
Net revenues in the North America segment grew 13% to $6.1 billion. North America comparable store sales grew 9%, which reflected an 8% increase in average ticket and a 1% increase in comparable transactions.
“New items, including our lime-frosted coconut bar, and staples, such as the grilled cheese sandwich, both performed well,” said Rachel Ruggeri, executive vice president and chief financial officer. “Our creative innovation approach has led to successful beverage and food pairings, fueling food attach and driving daypart growth. While transactions remained below pre-pandemic levels, average weekly sales and unique customer counts reached record levels in the quarter, demonstrating that the Starbucks brand is reaching more customers than ever, and customers are highly engaged when they frequent our stores.”
International operating income plunged 59% to $135.3 million, reflecting higher commodity and supply chain costs, lower government subsidies and investments in wage increases. Net revenues for the International segment decreased 6% to $1.6 billion. Excluding China, where comparable store sales swooned by 44% in the quarter due to pandemic-driven mobility restrictions and limited store operations, International segment revenue grew 33%.
“We saw strong sales growth across every major market in the segment outside of China and increased our net new store count by 8% over the last 12 months,” Ms. Ruggeri said. “The growth was partially offset by an 18% decline in comparable store sales, reflecting the severe impacts of COVID lockdowns across China.”
Channel Development segment operating income fell 11% to $191.7 million, due to lapping Global Coffee Alliance transition related activities and a decline in North American Coffee Partnership joint venture income as a result of inflationary pressures and business mix shift. The segment’s net revenues grew 16% to $479.7 million, driven by growth in the Global Coffee Alliance and ready-to-drink businesses.
“Channel development continues to play an essential role in amplifying and diversifying the Starbucks presence around the world and creating new occasions,” Ms. Ruggeri said. “Starbucks remains the market leader in both the total US at-home coffee and ready-to-drink categories.”
Management did not provide full-year guidance but shared insights regarding the fourth quarter. Executives expect margin and earnings per share to be lower than in the third quarter with a later-than-expected recovery in China, unusual items in the third quarter that benefited results, and increased investments in employee wages, equipment upgrades and other strategic initiatives.“While we are sensitive to the impact inflation and economic uncertainty are having on consumers, it's critically important that you all understand we are not currently seeing any measurable reduction in customer spending or any evidence of customers trading down, reflecting the strength of the Starbucks brand, deep customer engagement and loyalty, pricing power and the premium nature of our beverage and food offerings,” Mr. Schultz said.