FILE PHOTO: Starbucks cups are pictured on a counter in the Manhattan borough of New York City, New York, U.S., February 16, 2022. REUTERS/Carlo Allegri/File Photo

By Juveria Tabassum and Waylon Cunningham

(Reuters) -Starbucks posted its first quarter of gains in comparable sales after nearly a year and a half on Wednesday, led by international markets, but margins took a hit from the surging coffee bean cost.

Growth still eluded the company's largest market, the U.S., as consumers watched their budgets and cut back on Starbucks coffees that have gotten pricier due to rising costs of the commodity.

CEO Brian Niccol said Starbucks would be judicious with price increases next year and that he did not expect any broad menu price hikes.

The results follow several quarters of falling sales that prompted Starbucks to hire Niccol in August last year. Since taking the top job, Niccol has embarked on a "Back to Starbucks" brand reset: he has closed hundreds of stores and has tried to simplify the menu and speed up service.

He told analysts on Wednesday the quarter "marks a turn" for the coffee chain's U.S. operations.

But higher coffee bean costs will be a challenge for at least the next two quarters, executives said.

Global prices for raw arabica beans have jumped more than a fifth this year following a 70% surge in 2024, hit by supply snags due to geopolitical volatility, including U.S. President Donald Trump's 50% tariffs on top grower Brazil, as well as climate issues.

That, along with hefty duties on imported goods and the cost of the revamp, squeezed Starbucks' margins.

Keurig Dr Pepper, which is buying Dutch coffee company JDE Peet's, said on Monday that inflation in green coffee, as well as tariffs, would weigh on its fourth quarter.

"Their (Starbucks) cost structure — with rent, labor, and coffee — is challenging. There are so many competitors, whether in coffee or other caffeinated drinks, that they don't have the pricing power they used to. At least management is realistic about the challenges ahead of them," said Brian Jacobsen, chief economist at Annex Wealth Management.

Starbucks' global comparable sales rose 1%, but in the United States, comparable sales were flat and comparable store visits fell.

International same-store sales rose 3% in the quarter, handily beating estimates of a 1.61% rise.

U.S. consumers are increasingly watchful about spending on dining out, as economic uncertainty and inflation squeeze budgets. Burrito chain Chipotle Mexican Grill cut its annual targets for the third time this year, and said households earning below $100,000 have pulled back sharply.

"Turnarounds are difficult to forecast, and while we have good reason to believe that our U.S. company-operated comparable sales should build through the year, we know recoveries are not linear," CFO Cathy Smith said on a post-earnings call.

Restaurant industry consultant John Gordon said his takeaway from the results is that Starbucks' recovery will take "a lot longer" than Wall Street expected, given the contraction in operating margin.

Starbucks' shares edged lower in extended trading after its fourth-quarter earnings of 52 cents a share missed estimates of 56 cents, according to data compiled by LSEG. Its operating income margin fell to 2.9%, down from 14.4% a year ago.

RESTRUCTURING CONTINUES

The company expanded its restructuring efforts in September to close about 600 underperforming stores, including its flagship, unionized Seattle roastery.

Starbucks also plans to invest more than half a billion dollars of additional labor hours into its U.S. company-operated stores over the next year.

The company expects to provide a financial outlook at an investor event in January. Starbucks suspended guidance shortly after Niccol took the helm.

In China, where Starbucks is nearing a sale of a majority stake in its business, comparable sales rose 2% after a return to growth in the metric last quarter.

It has lowered prices for non-coffee products in China — its second-largest market — and has been trying to offer more customization and local flavors.

The company is also in a stalemate with the union representing baristas at about 550 stores in the U.S. Both sides blame the other for ending talks late last year and say they are ready to return to discussions.

(Reporting by Juveria Tabassum in Bengaluru and Waylon Cunningham in New York; Editing by Anil D'Silva, Richard Chang and Alan Barona)