The coronavirus pandemic is disrupting supply chains worldwide. Workers infected with COVID-19 are calling out sick and creating labor shortages at factories, ports, and trucking companies. Meanwhile, demand for products and services remains elevated as consumer balance sheets have improved during the pandemic.
The combination of several rounds of fiscal stimulus and lowered production is causing demand to outpace supply. The age-old relationship everyone learned in their first economics class is holding: with supply decreasing and demand increasing, prices are going up. The outcome is likely to hurt these two growth stocks in 2022.
Inflation is biting into profits at these two growth companies. Image source: Getty Images.
1. Starbucks is increasing wages to attract workers
Starbucks (SBUX +0.91%) was devastated at the pandemic onset when it had to shut its coffee shops to in-person consumption. Folks who wanted to enjoy Starbucks had to find one of its drive-thru locations or pick up their orders to take home.
Thankfully, several effective vaccines against COVID-19 have been developed, and governments worldwide are removing business restrictions. The reopening trend has allowed Starbucks to welcome guests again in some locations, and customer demand is surging. Indeed, in Starbucks' most recent quarter ended Oct. 3, revenue increased by 31%.
All that being said, the current phase of the pandemic is creating new challenges for Starbucks. The company is finding it difficult to hire enough staff to operate stores, since fewer people are willing to work at the prevailing wages with a potentially deadly virus in circulation. To entice workers to join the company, Starbucks is raising wages. In all, Starbucks management expects rising wages to hurt operating profit margin by 400 basis points. Additionally, other inflationary factors could hit the company for 200 basis points on top of the wage expense in 2022.
2. Inflation is hitting Chewy on several fronts
Unlike Starbucks, online pet retailer Chewy (CHWY +0.59%) thrived at the pandemic onset. Folks looking to avoid shopping in person increasingly went to Chewy.com for their pets' needs. As a result, sales and customer acquisition surged for Chewy. However, similar to Starbucks, Chewy is grappling with a bout of rising costs as economies are reopening.
In calendar 2022, management expects to pay higher prices for shipping, wages, and products. What's more, even though Chewy spent an extra $30 million on wages, benefits, and recruiting in its third quarter ended Sept. 30, the company is still well short of having sufficient staff to run its fulfillment centers. That could mean more wage increases will be necessary to attract enough workers.
As far as shipping expenses, in Q3, Chewy paid three times the typical rate for inbound shipment. Finally, not only is the rate of inflation increasing on the products Chewy sells, but the increases are flowing to a more extensive assortment of inventory.
It's impressive Chewy increased gross profit margin by 90 basis points in Q3 despite the rising costs. Still, as inflation continues ticking up, Chewy's profit margins will be under pressure in 2022.
