Starbucks efficiency gains bolster profit as China, US drag sales

By Juveria Tabassum and Waylon Cunningham

(Reuters) -Starbucks' store operation improvements helped the coffee chain meet Wall Street expectations for quarterly profit, even as its global sales declined on persistent weakness in consumer spending in its top markets of U.S. and China. The company's shares, down 22% this year, were up 5% in extended trading after executives reaffirmed its annual forecasts.

Starbucks this year rolled out its Siren System plan, which included updating its equipment to increase the pace of service at its stores, as the company turns to discounts and promotions to appeal to cost-conscious consumers. The system was deployed across its U.S. company operated stores in the reported quarter, and Starbucks plans to have the equipment, such as a refit to its espresso machines, in less than 10% of its global stores by the end of year. "We are focused on what we can control in a consumer environment that can be best described as complex," CEO Laxman Narasimhan said on a post-earnings call. Starbucks' operating margin fell 70 basis points in the third quarter, a sequentially smaller drop. Profit of 93 cents per share was in line with LSEG estimates.

"Quite possibly, investors are viewing this as not as bad as was feared potentially. We're kind of impressed that they were able to open 526 new stores in the quarter," said Greg Halter, director of research at Carnegie Investment Counsel.

U.S. fast-food chains have rolled out limited deals and offers to bring back to stores thrifty consumers increasingly looking to cook at home in the face of sticky inflation.

Known for its pricey lattes, Starbucks spent the summer offering uncharacteristic deals including bundled menus such as a coffee or tea paired with a butter croissant for $5 in June, as well as 50% off deals on Fridays in May.

In China, the company grappled with weak consumer spending and stiff competition from local coffee chains such as Luckin' Coffee in a weak macroeconomic environment.

Still, same-store sales tumbled 14% in China, following an 11% drop in the second quarter. Sales in international markets also missed expectations, echoing results from McDonald's and Domino's.

Starbucks continued to face weakness in the Middle East, South Asia and some parts of Europe as a result of boycotts related to the war in Gaza.

The Seattle-based company reaffirmed its global and U.S. comparable sales in range of a low single-digit decline to flat, and annual profit in the range of flat to low-single digits.

The coffee chain also confirmed on a post-earnings call that Elliott Investment Management was a shareholder and talks with the activist investor had been "constructive".

(Reporting by Juveria Tabassum and Waylon Cunningham; Editing by Sriraj Kalluvila)