Photo/Illutration The Starbucks logo is seen on a storefront, Friday, Oct. 14, 2022. (AP Photo)

Starbucks reported lower-than-expected sales in its fiscal first quarter, with COVID store shutdowns in China overshadowing stronger results elsewhere.

Global same-store sales--or sales at stores open at least a year--were up 5% in the October-December period, but that was partly due to higher prices. Store transactions were down 2%. Analysts polled by FactSet had forecast a 6.7% increase in same-store sales.

During a conference call with investors, Starbucks’ interim CEO Howard Schultz said China’s decision to end its zero-COVID policy in December caused a spike in infections that closed nearly 30% of Starbucks’ 6,000 stores at its peak. Same-store sales plunged 29%.

But Schultz said Starbucks remains optimistic about China, its second-largest market outside the U.S. As of this week, all of Starbucks’ stores in China are open without restrictions for the first time since March 2020. Schultz said the company remains on track to have 9,000 stores in China by the end of 2025.

In the U.S., same-store sales were up 10% as customers spent more per order. And Starbucks noted that its Holiday Red Cup day in November was its highest single sales day of all time despite strikes at more than 100 U.S. stores by employees who are pressing to unionize. But overall U.S. transactions rose just 1%, and Starbucks said transactions per store remain below pre-COVID levels.

Schultz said the quarter was softer for overall retail, which impacted customer traffic. U.S. retail sales slowed more than expected during the holiday season as higher borrowing costs and higher inflation made shoppers pull back.

But he said consumers didn’t seem to be shying away from the store due to price increases. Starbucks raised its prices around 6% in 2022 but said those increases will moderate this year as U.S. inflationary pressures recede.

“We don’t see ourselves in a situation where we need to discount heavily and we don’t see a situation where our customers are trading down,” Schultz said.

Chief Financial Officer Rachel Ruggeri said an ongoing revamp designed to improve U.S. store efficiency could help boost U.S. traffic. The company plans to invest $450 million this year in store improvements, including new warming ovens and workstations that make it simpler to assemble drinks. Employees have been struggling with rising demand for customizable cold drinks in store kitchens designed for simpler hot drinks.

The store revamp is also an attempt to boost employee morale as Starbucks tries to head off a growing unionization movement. At least 274 of Starbucks’ 9,000 company-owned U.S. stores have voted to unionize since 2021.

Starbucks’ revenue rose 8% to a record $8.7 billion, but that also fell short of analysts’ expectation of $8.79 billion. Earnings of 74 cents per share were also lower than the 77 cents analysts had forecast.

Starbucks shares fell nearly 3% in after-market trading.

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