What happened
Shares of Starbucks (SBUX 0.47%) fell on Monday, as investors wrestled with the ramifications of China's health and economic policies on the coffeehouse leader's growth prospects. By the close of trading, Starbucks' stock price was down 5.5% after falling as much as 7% earlier in the day.
So what
COVID-related lockdowns in China have taken a heavy toll on Starbucks' sales and profits. The restaurant chain's comparable store sales plunged 44% in China in its fiscal third quarter ended July 3. That contributed to a 4-percentage-point decline in Starbucks' overall operating margin, to 15.9%, and a nearly 19% drop in earnings per share, to $0.79.
Chinese President Xi Jinping is a proponent of the country's "zero-COVID" policy. The controversial measures include locking down major cities and forcing millions of people to remain indoors, even as other governments work to reopen their economies.
Over the weekend, Xi was named to a third term as general secretary. The news sparked concern among investors that Xi's COVID strategy and sometimes restrictive economic policies would continue unabated in the months and years ahead.
Now what
China is Starbucks' largest market outside of the U.S. -- and its biggest opportunity for continued expansion. The company has more than 6,000 restaurants in China, with 1,000 in Shanghai alone. That compares to over 15,000 in the U.S. With its domestic operations approaching saturation, China is set to be the primary driver of Starbucks' store count expansion -- as well as its sales and profits -- in the coming decade.
So, although Xi's policies could crimp its near-term results, Starbucks' long-term growth prospects in the world's most populous nation remain attractive.
