By Savyata Mishra

(Reuters) -Starbucks ( SBUX ) reported a higher than expected revenue rise for the third quarter, with improved demand in China, menu changes and investments in labor and store operations helping to offset slowing consumer spending in its domestic market.

The Seattle-based company's shares rose 4.1% in early European trading on Wednesday, tracking gains in extended U.S. trading on Tuesday.

After several quarters of falling sales, the coffee chain is in the midst of a "Back to Starbucks ( SBUX )" initiative - a major brand reset - under CEO Brian Niccol. Since taking the top job in August, Niccol has pushed for a simplified menu, freshly baked food, cups with handwritten messages and quicker service.

Niccol spoke expansively on Starbucks' ( SBUX ) turnaround efforts on Tuesday's post-earnings call, saying they were "ahead of expectations." He laid out examples of what was changing at stores and in customer experience. 

He said he wanted to change the "feel" of stores with "greater texture, warmth and layered design," and replace thousands of seats that were removed in recent years. By the end of 2026, at least 1,000 stores across North America will be upgraded, Niccol said.

Starbucks ( SBUX ) is also piloting a new, lower-cost "coffee house of the future" design, featuring 32 seats and a drive-thru opening in 2026, along with a small-format version debuting soon in New York City.

Niccol has pledged to increase investments in staffing in all 10,000-plus Starbucks ( SBUX )-owned U.S. stores by the end of the summer. The company said it would invest more than half a billion dollars of additional labor hours into its U.S. company-operated stores over the next year.

Starbucks' ( SBUX ) net revenue rose 3.8% to $9.46 billion, beating analysts' estimate of $9.31 billion, although its overall same-store sales fell 2% for the quarter ended June 29, its sixth straight quarterly contraction. Analysts on average had estimated a 1.19% dip, according to data compiled by LSEG.   

In its largest North America market, the drop in quarterly same-store sales was steady at 2%.

FRUGAL CONSUMERS 

In China, comparable-store sales increased 2%, compared with no growth in the second quarter. Intense competition from local rivals like Luckin Coffee and Cotti Coffee, and increasingly frugal consumers, prompted Starbucks ( SBUX ) to cut prices on selected iced drinks by an average of 5 yuan last month.

"The report came in less ... (bad) than expected, given some strength in China, but it remains a turnaround story," said Dave Wagner, portfolio manager at Aptus Capital Advisors. 

The company reported a profit of 50 cents per share on an adjusted basis, missing estimates of 65 cents.

That excluded an 11 cent per share hit, partly from a leadership meet in Las Vegas earlier this year, when the company flew and housed more than 14,000 store managers and leaders from across North America to hear from corporate executives about the "Back to Starbucks ( SBUX )" plan. Attendees were also treated to a private Bruno Mars concert.

Operating margin in the third quarter contracted 650 basis points to 10.1% from the prior year, owing to higher spending tied to the business turnaround, additional labor hours and the leadership meet.

"While there is still work to be done, the company's labor investments appear to be making a difference in peak-hour throughput," said R.J. Hottovy, head of analytical research at Placer.ai.

Starbucks ( SBUX ) has been exploring options such as strategic partnerships and joint ventures for its China business, which was valued at up to $10 billion, according to media reports earlier this month.

Executives said on Tuesday that the company had received significant interest from more than 20 parties and was evaluating its options as it aimed to retain a "meaningful stake" in the business.

(Reporting by Savyata Mishra in Bengaluru and Waylon Cunningham; Editing by Anil D'Silva and David Holmes)