Starbucks (SBUX 1.00%) announced its fiscal 2022 first-quarter financial results on Feb. 1. While year-over-year revenue growth of 19.3% exceeded Wall Street's expectations, adjusted earnings per share (EPS) of $0.72 fell short. Furthermore, certain aspects of full-year guidance were lowered in response to today's challenging economic environment.
The business was negatively affected by the pandemic with temporary store closures across its global footprint creating a difficult situation for management to navigate. Even this top restaurant stock and powerful consumer brand isn't immune to the broader issues that are currently plaguing the economy.
Let's take a closer look.
Image source: Getty Images.
A serious labor shortage
Starbucks is a truly global business, which makes it particularly vulnerable to the pandemic and its varying impact in different markets. In the most recent quarter, same-store sales (or comps) in the U.S. jumped 18% compared to the prior-year period. But in China, Starbucks' second largest market, comps decreased 14%. The country's zero-COVID policy led to store closures and lower transaction counts.
Unsurprisingly, the biggest factors causing Starbucks to miss earnings estimates in the latest quarter, as well as to reduce full-year 2022 margin and EPS guidance, are soaring inflation, supply-chain issues, and labor shortages. These problems are hitting companies in nearly every sector, but they are especially damaging for a restaurant business. In Starbucks' case, finding enough workers is a major concern right now.
"While Starbucks has always been committed to attracting and retaining the best partners with our differentiated pay and benefits package, we too experienced staffing issues," CEO Kevin Johnson pointed out on the fiscal Q1 2022 earnings call. "In response to this challenge and as an employer of choice, we hired an increasing number of new partners into our business this past quarter, which rapidly increased our training costs well above historic levels."
There were also staffing shortages at Starbucks' third-party, supply-chain partners. This resulted in heightened distribution and transportation costs. And as a result of elevated expenses, management is forecasting an EPS decline of 4% to 6% in fiscal 2022 from last year. Cost pressures aren't expected to subside anytime soon.
To combat this adverse situation, executives are planning more price hikes this year. The company already raised prices in October 2021 and in January of this year, so the risk of driving customers away to cheaper offerings by competitors is a real one. However, Starbucks has cemented itself as a premium brand that people are willing to pay up for, and so it should be able to pass on at least some of the higher costs to its consumers.
Leaning into technology
Management did reiterate its fiscal 2022 revenue outlook of between $32.5 billion and $33 billion, indicating that consumer demand for Starbucks is still strong. Comps are expected to rise in the high single-digit range as well.
And although China is currently experiencing declining sales, the nation just passed the 5,500-store mark with 197 net new locations opened in just the past quarter. There are now nearly 18 million active Rewards members in the country, who represented 75% of sales. So despite the recent business weakness, the leadership team is still optimistic. "Our opportunity for growth in China remains as compelling as ever," Johnson said.
Turning to the U.S., there are now 26.4 million active Rewards members, up 21% from a year ago. What stood out in the most recent quarter was that both comparable transactions (up 12%) and the average ticket size (up 6%) showed solid gains. Not only are customers visiting more often, but they're spending more each time.
It's extremely encouraging to see the strength of Starbucks' digital offering on display in the U.S. and China. The current economic environment -- notably, rising inflation, supply-chain problems, and labor shortages -- is obviously out of the company's control. But because Starbucks is able to lean into its technological capabilities and maintain communication with consumers, it can serve them in ways that are most convenient for them.
Therefore, I have no doubts that Starbucks will be able to strongly navigate the rest of fiscal 2022 and beyond.
