Heard on the Street: China's Starbucks Gets Bitter Reaction to Weak Results -- WSJ

Dow Jones07-31

By Spencer Jakab

A gigantic coffee chain released some disappointing quarterly results yesterday and its shares fell in response.

No, this isn't about Starbucks, which reported earnings late Tuesday. Its shares rose about 4% in early trading as investors were relieved the report wasn't worse. With its stock down 21% year-to-date through Tuesday, some clearly saw a buying opportunity, much as with McDonald's a day earlier. The chain that disappointed was Luckin Coffee, with most of its stores in China.

Luckin is big and growing much more quickly than Starbucks. Last week it opened a store in Beijing that put it over the 20,000-mark, up from 8,214 at the start of last year. But that growth from it and many other local and international chains has saturated the Chinese market for now.

Same-store sales at self-operated branches fell by a painful 21% in the latest quarter. Starbucks, which has bet big on China and boasts more than 7,300 stores there, wasn't much better, with comparable sales dropping 14% in China, due to both lower checks and fewer visits. While earnings per share fell 6.1% from a year earlier at Starbucks, the equivalent drop at Luckin, in yuan terms, was about twice as much.

The reaction to Luckin's results is more of what you would expect: Its American Depositary Shares fell 6.5% Tuesday and added slightly to that drop Wednesday morning.

China's middle class may well develop a takeout-coffee habit to rival America one day. Meanwhile, land grabs are expensive. Starbucks put a hopeful spin on the lousy results and its investors seem to agree for now.

But if they see the mug as half-full in the Middle Kingdom, then why not respond better to the company that is taking a bigger financial hit for much faster growth? Three years ago, the two companies had about the same store count in China. By the end of this year, Luckin will have about three times as many.

One group of investors is wrong and should expect tears in their coffee.

This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).

(END) Dow Jones Newswires

July 31, 2024 11:38 ET (15:38 GMT)

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Heard on the Street: China's Starbucks Gets Bitter Reaction to Weak Results -- WSJ

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