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Why Starbucks Stock Sank Today

By Joe Tenebruso – Oct 29, 2021 at 4:08PM

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Rising labor costs could dent the coffee titan's profits.

What happened

Shares of Starbucks (SBUX -2.97%) fell on Friday after the global coffeehouse chain warned of cost pressures and a slowdown in its most important growth market.

As of 3:15 p.m. EDT, Starbucks' stock was down more than 7%. 

So what

Starbucks' U.S. comparable-store sales jumped 22% in its fiscal 2021 fourth quarter, as people returned to its cafes once social distancing requirements eased. The company's comps in China, however, fell 7%, due in part to a reemergence of COVID-19 in the country.

"At its peak in mid-August, approximately 80% of our stores in China were impacted by the pandemic with some stores fully closed or operating at different levels of elevated public health protocols, such as mobile ordering only, limited seating, or health stations," CEO Kevin Johnson said in a press release.

A person is hanging a "closed" sign on a door.

Image source: Getty Images.

Still, new store openings combined with a 17% increase in global comps to drive Starbucks' adjusted revenue higher by 22%, to $8.1 billion. Its adjusted earnings per share, in turn, nearly doubled from its pandemic lows to $1.

Now what

Starbucks expects its revenue to grow to as much as 13.4% to $33 billion in fiscal 2022, as it ramps up store openings in international markets. However, the coffee giant also intends to increase wages for its employees by up to 10% to better compete in a tightening labor market.

"Today we announce we will be doubling-down on our investments in our partners, the heartbeat of our company," Johnson said. "We know that when we exceed the expectations of our people, they in turn exceed the expectations of our customers -- which creates value for all of our stakeholders -- our partners, our customers, our communities, and our shareholders."

Those investments, however, will weigh on Starbucks' near-term profits. Management warned that the company's operating margin is likely to be roughly 17% in fiscal 2022, below its long-term goal of 18% to 19%. 

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends the following options: short October 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.

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