Starbucks Corp. expects to continue raising prices in the coming months to combat squeezed profit from inflation and labor issues related to the COVID-19 pandemic.
Starbucks SBUX, +0.45% revealed a smaller holiday-season profit total than expected in an earnings report Tuesday afternoon, despite coming close to a quarterly sales record. Chief Executive Kevin Johnson noted in a statement that “the macro environment remains dynamic as we experienced higher-than-expected inflationary pressures, increased costs due to omicron and a tight labor market,” and drilled into specifics in a later conference call.
Johnson noted three big drivers of increased costs in the U.S.: Inflation, COVID-related pay to employees, and the costs of hiring and training new workers in a tight labor market. Starbucks is implementing raises and other incentives, which Johnson has previously said would amount to $1 billion.
As a result, Johnson said that Starbucks has raised prices twice in the past four months, and expects to do so again multiple times this year.
“[We have] already taken pricing actions this fiscal year, one in October 2021 and another in January 2022. And we have additional pricing actions planned through the balance of this year, which play an important role to mitigate cost pressures, including inflation, as we position our business for the future,” Johnson said. “There are many factors that contribute to our thoughtful pricing strategy, including the increasing US inflation rate currently running at 7% or perhaps greater, as well as wages, customer demand and other costs.”
Starbucks reported fiscal first-quarter earnings of $815.9 million, or 69 cents a share, on revenue of $8.05 billion, up from $6.75 billion a year ago and just shy of the fiscal-fourth quarter’s record total of $8.15 billion. After adjusting for restructuring, impairment and integration costs, the coffee chain reported earnings of 72 cents a share, up from 61 cents a share a year ago. Analysts on average expected Starbucks to report adjusted earnings of 80 cents a share on sales of $7.98 billion, according to FactSet.
Shares declined more than 4% in after-hours trading immediately following the release of the report, but bounced back to gains at one point during the conference call, before finally settling the session down about 1%. The brief rebound seemed timed to the financial forecast provided by Chief Financial Officer Rachel Ruggeri, who projected that Starbucks’ profit and margins would roar back in the second half of the company’s fiscal year, as price increases take hold and some of the pressures are expected to wane.
“We expect Q2 quarterly non-GAAP EPS and margin to be below prior-year levels, with significant improvement in Q3 coming from our margin-enhancement actions materializing,” Ruggeri said. “Q4 is then expected to show continued recovery but at a more gradual pace, inclusive of the summer step-up in wage investments, as we raise the U.S. average store hourly wage to $17.”
Specifically, Ruggeri said Starbucks executives expect that full-year adjusted earnings will rise 8% to 10% from a $3.10-a-share base, which would lead to guidance of $3.35 to $3.41 a share, not far off from previously issued annual guidance for $3.40 a share. She added that executives believe the coffee chain should be able to get back on a normalized track soon.
“Given the dynamic operating environment and the incremental cost pressures reflected in our fiscal ’22 guidance, we now expect year-on-year margin improvement in fiscal ’23 with a return to the long-term target of 18% to 19% in fiscal ’24,” Ruggeri said, while adding that earnings should return to double-digit growth rates in fiscal 2023 and beyond. “Of course, all of these estimates presume no new material business disruptions, whether from the pandemic or the broader economy.”
Starbucks stock has suffered recently, falling more than 15% in the first month of 2022, as the chain has struggled with declining visits amid the COVID-19 pandemic and faced problems attracting and retaining workers. Shares have treaded water overall in the past 12 months, thanks to the recent dip, gaining 0.2% in that time as the S&P 500 index SPX, +0.69% increased 19.7%.