Starbucks' (SBUX -1.00%) management still sees strong growth ahead for 2022, but its earnings expectations aren't as robust.
The coffee titan's fiscal 2022 Q1 earnings report (released on Feb. 1) noted that demand was "incredible" at stores and through mobile ordering and delivery. But that surge was offset by soaring costs related to the pandemic, inflation, and labor shortages.
Let's take a look at five standout metrics from the restaurant chain's Q1 announcement.
1. Starbucks' quarterly revenue was $8.1 billion
Sales trends stayed strong, with revenue rising 19% to $8.1 billion. The U.S. market was the biggest winner, as comparable-store sales jumped 18%. That surge was powered by a whopping 12% spike in customer traffic, but also by 6% higher order sizes.
"This holiday quarter delivered strong revenue growth," CEO Kevin Johnson said in a press release, "highlighted by incredible consumer demand."
2. China sales were down 14%
Globally, customer traffic was up 10%, and average spending rose 3%. Those gains came despite a weak international segment that was dragged down by falling sales in China. The country's "zero COVID" policy reduced operating hours across Starbucks' footprint, leading to a 14% comps decline.
Management is as excited as ever about the potential in China, though, which just surpassed 5,500 stores. "We are playing the long game as we navigate a dynamic environment," Johnson told investors in a conference call.
3. Operating expenses jumped 17%
Starbucks' profitability took a hit in Q1 thanks to the combination of inflation, which is boosting costs by 7% or more; pandemic costs, including sick leave pay; and supply chain challenges. The chain is also struggling to keep its stores fully staffed at a time when the service industry is losing employees. "The battle for talent is notable," Johnson said.
Starbucks is responding by raising wages, spending more on training, and hiring at a faster pace than usual. These moves should allow it to continue leading the industry in metrics like turnover and customer satisfaction. But they'll pressure earnings through the rest of 2022. Management also blamed these shifts for the surprisingly weak profit performance this quarter.
4. Sales outlook is $33 billion
Starbucks executives affirmed their initial 2022 outlook that calls for comps to rise in the high single-digit range as revenue hits $33 billion. Faster growth in markets like the U.S. is helping offset the temporary demand slump in China due to COVID-19 restrictions.
The company has many growth avenues to lean on, including its dominant mobile ordering and drive-thru offerings, as well as soaring engagement in its loyalty program.
5. Operating margin is predicted to be 17% of sales
On the downside, management lowered expectations around profitability and earnings. Operating margin should fall to below 17% of sales, compared to over 18% in fiscal 2021, in fact. Executives say profitability will take a big hit in the current quarter, before price increases and cost cuts take wider effect in the second half of the year. "With inflation at its highest level in decades," CFO Rachel Ruggeri said, "we believe it is prudent to revise both our ... operating margin and EPS guidance at this time."
The slight profit downgrade shouldn't worry investors, since it is likely temporary. The bigger risk is whether price increases hurt demand and threaten the expected profitability rebound in the second half of 2022.
We'll know more about how consumers are responding to those increases after the coffee giant's next earnings report in late April.