Starbucks (SBUX 0.33%) reported fiscal 2022 first-quarter results on Tuesday, Feb. 1. The company revealed that customer demand is booming, but that it has difficulty fulfilling that demand.
The rise of the omicron variant of the coronavirus is creating a surge of infections. Existing staff at Starbucks are calling out sick more often, making it harder for the company to attract new workers. What follows is a closer look at Starbucks' Q1 results.
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Rising costs take a sip out of Starbucks profits
As the world enters the third year of the pandemic, it still plays a prominent role in people's lives. Starbucks' comparable-store sales, which exclude the impact of new store openings and closings, tell the story. In the U.S., where government policy toward new waves of COVID-19 has been more measured, comp sales growth was 18% year over year in its first quarter ended Jan. 2. Meanwhile, in China where the government has a zero-tolerance policy against COVID-19, comps sales decreased by 14%. That was a meaningful headwind for Starbucks in Q1 as China is its second-largest market with 5,557 restaurants.
Still, the robust growth in the rest of its markets propelled the company to overall comp sales growth of 13%. "Although demand was strong, this pandemic has not been linear, and the macro environment remains dynamic as we experienced higher-than-expected inflationary pressures, increased costs due to Omicron, and a tight labor market," said Starbucks CEO Kevin Johnson. "We remain focused on actions that drive both top and bottom-line growth, including industry-leading investments to attract, train and retain the best talent for our stores as customer occasions increase."
Interestingly, while year-over-year revenue rose by $1.3 billion for Starbucks in Q1, operating income grew by only $264 million. Total operating expenses increased by $994 million as Starbucks was hit with many rising costs, including employee wages, supply chain challenges, new staff training, and onboarding. Management does not expect the elevated costs to subside in Q2 as the prevalence of the omicron variant continues to wreak havoc on its operations.
The company has taken steps to alleviate the headwinds from these pressures. Starbucks has implemented two rounds of price increases, one in October and another in January. The good news for shareholders is that management says customers have not pulled back on spending in a meaningful way due to price increases, demonstrating that Starbucks maintains pricing power.
Further, the company is modifying store operations to accommodate staffing shortages and rising labor costs. In some cases, Starbucks is reducing store hours; in others, it reduces service options to drive-thru only or mobile pickup only.
What this could mean for Starbucks shareholders
As of this writing on the day following Starbucks' report, the stock is down 1.3%. The weight of the bad news concerning rising costs and labor shortages looks to be greater than the weight of the good news regarding customer demand.
Regardless of the market's reaction to the report, it is impressive that the company has implemented not one but two price hikes and that customer demand remains resilient. It demonstrates consumer affinity for Starbucks coffee, a feature shareholders can benefit from for the long term.
