Starbucks had a good holiday. Customers visited the chain’s shops more often, leading to record revenue of $8.1 billion, driven largely by strong results in the U.S., where same-store sales rose 18% in the quarter ended Jan. 3, most of which came from higher transactions.
But the company also got a lump of coal in its stocking from the omicron variant. The new surge in COVID infections disrupted the company’s supply chain, kept workers home sick and led to higher costs for things like training. That put a lid on the company’s margins and kept Starbucks from getting the full benefit of its higher sales.
“While we’ve seen extraordinary top-line results, we also saw extraordinary cost pressures, which impacted margins,” CEO Kevin Johnson told investors on Tuesday.
Operating margins did increase to 14.6%, up from 13.5%. But they didn’t increase as much as expected and the company lowered its expectations for profits for the full year. Executives said that the impact from omicron is expected to lower margins by 200 basis points.
They also suggested that the impact from the variant worsened in January. Executives told investors that it could take until 2024 before the company can get back to its traditional profitability targets.
As a result, company executives said they plan to cut costs this year. With demand soaring, Johnson said Starbucks would cut some promotional and marketing spending. “We’re taking the necessary measures to reduce discretionary spending” and “tighten up” general and administrative spending, Johnson said.
Starbucks has raised prices in October and again in January to offset the higher costs. And the company said it has more price increases planned in the U.S. this year.
For the company, the results painted a complex picture. Sales and transactions hit record numbers during the holidays—transactions were up 12% in the U.S. last quarter. But the company often struggled to deal with demand because of worker and supply shortages—while higher costs ate into profits.
Starbucks hinted at these challenges last month when it delayed the expiration of loyalty “stars” earned by customers until April as it warned of sporadic store closures and supply issues.
John Culver, Starbucks chief operating officer, told investors that the company saw an impact on customer mobility in the last two to three weeks of the fourth quarter. In addition, there was “a similar surge” in the number of cases affecting the company’s workers, along with an increase in the number of people calling out sick.
But the surging variant also impacted the companies Starbucks uses to have food and supplies delivered to its restaurants. The company used the spot market to get its products more often as well as alternative delivery companies. But the result, Johnson said, was “a rapid increase in supply chain costs” during the quarter.
In addition, training costs increased as the company worked to get people to work in its shops. That also led to higher costs during the period.
“When the omicron surge began, inflationary costs and staffing challenges were amplified, well in excess of our expectations,” Johnson said.
The company expects many of these costs to continue this year, moderating this summer and into the fall.
Rachel Ruggeri, Starbucks CFO, said the company’s efforts to offset the higher costs “will take a little bit of time,” which could delay the company’s anticipated return to normal operating margins in the 18% to 19% range.
That could come sooner if the chain sees better sales, and Johnson noted that “demand for Starbucks” typically increases after every surge in COVID. “Sales, by and large, is going to be our continued opportunity for growth not only this year but into” 2023, Ruggeri said.
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