Starbucks (SBUX.US) held its fiscal third-quarter earnings call, reporting consolidated net revenue of $9.3 billion, a 1% decline year-over-year, primarily due to the transition of its China retail operations into a new joint venture licensing structure. Global comparable store sales grew 7.9% year-over-year, marking the fourth consecutive quarter of positive global comparable sales, with transaction volume increasing over 4%. Channel development net revenue reached $587.9 million, up 22% year-over-year, partly driven by coffee inflation. The company raised its fiscal 2026 guidance, expecting Q4 US comparable store growth of 6.5% or better, implying full-year fiscal 2026 US comparable store growth slightly above 6% and global comparable store growth near 6%. Full-year consolidated net revenue is expected to be flat to slightly up year-over-year, reflecting the impact of the new China structure. The consolidated operating margin guidance was raised to above 11%, and earnings per share guidance was raised to a range of $2.55 to $2.65. The full-year net new store opening target of 600 to 650 remains unchanged, primarily driven by international operations. While North American performance is improving, the company has increased visibility on underperforming stores, which may lead to some closures. The effective tax rate for Q4 is expected to return to a normal level of around 25%.
Regarding margin and cost structure, Q3 margin expansion was primarily driven by sales leverage, supported by cost savings, easing inflation, and a refund from reciprocal tariffs. The refund received in the quarter largely offset tariffs incurred during the first three quarters of fiscal 2026, making the year-to-date metric more representative. The product and distribution costs as a percentage of net revenue were 30.3% for the quarter, while the year-to-date figure of 32.3% is a more normalized cost of goods sold reference point. In terms of balance sheet and shareholder returns, the company used a portion of the proceeds from the China transaction to repay approximately $1.8 billion in debt, reducing its leverage ratio to 2.9 times. This supports its investment-grade credit profile and enhances financial flexibility, allowing continued investment in the business, maintenance of a competitive dividend, and creation of long-term shareholder value. Starting this quarter, China retail operations are deconsolidated and reported under the licensing business. The company's 40% economic interest in the joint venture is reflected as income from equity method investments, which is the primary driver of year-over-year changes in the international segment's reporting. For modeling purposes, net revenue attributable to China in the Q3 international segment profit and loss was $53 million, with an operating margin exceeding 100%, reflecting the margin-accretive nature of this structure. As the joint venture moves past the transition period and scales, economic benefits from China are expected to accumulate gradually. The long-term store target for China is up to 20,000 stores.
Current Sales Momentum and Future Growth
When asked about the sustainability of the current comparable store sales momentum and the long-term plan for 3% annual growth, management attributed the momentum to better operational practices. The Green Apron Service model, with improved staffing and daily routines, provides a better experience for all customers. There is still significant room to increase transaction volume in both the morning and afternoon dayparts. Innovation across beverages, food, and merchandise is also a key driver, and the team is just beginning to tap into this potential. Customer feedback is positive, and there is further opportunity to innovate through digital platforms, menu development, and marketing.
Daypart Performance and Store Throughput
Regarding performance across the morning and afternoon dayparts, the Back to Starbucks strategy has focused on winning the morning daypart first, then creating the afternoon daypart. The morning daypart is the biggest winner in absolute transaction volume, and while the afternoon daypart has not yet reached the same growth level, the company is focused on improving the product mix and operational processes for the afternoon. The strategy is being executed as planned, with good progress across all channels and dayparts, though the largest gains are still in the morning, which was the biggest bottleneck. Refreshers performed very well in Q3, providing a strong platform for the afternoon daypart, as many customers choose caffeine-free options. Caffeinated and energy versions of Refreshers are also gaining traction in the morning, and with the matcha menu and new food items like wraps being tested, the afternoon daypart expansion is becoming more complete.
Competitive Landscape in Coffee Category
When asked about the competitive dynamics in the coffee category, management expressed enthusiasm about the business momentum. Even as the quarter concluded, the business was accelerating, and positive changes are occurring within Starbucks' own business and the broader coffee category.
Store Development Strategy and Closures
Regarding the decision to slow store openings and increase closures of underperforming stores, management explained that the company's store development strategy two to three years ago was not ideal, with some difficult renovations or stores in poor locations. As the business improves, underperforming stores become more apparent. The company's approach is to fix these existing stores first and build a pipeline of new stores in the right locations. The strength of the category and Starbucks' business means future store openings will be high-quality, resulting in a more solid position for the brand.
Differentiation of Refreshers Platform
When asked about the differentiation of the Refreshers platform amid increasing competition, management highlighted that Starbucks is the original creator of the Refreshers category. The platform is differentiated by its handcrafted nature, flavor profiles, and customization options. The team has successfully re-energized the platform, seeing strong customer resonance across different dayparts and age groups. The company is testing new versions like spritzers and blended versions, with the core differentiation being the handcrafted artistry and customization. The platform has continued to perform well despite competitive activity, and the company believes it can capture more than its fair share of the market by executing well.
Competition in New Markets
When asked about the competitive landscape as the company enters new markets with existing coffee specialty brands, management noted a clear trend towards cold beverages. Cold beverages are made with coffee and espresso, maintaining the customization customers expect. The Refreshers business also plays a key role across the morning and afternoon dayparts and will be a powerful tool as the afternoon daypart is developed. Competition in this space is intensifying, but management is satisfied with the company's current position and excited about upcoming innovations.
Impact of Uplift Store Remodels
Regarding the impact of Uplift store remodels on US performance, management stated that the remodels are performing exceptionally well, generating positive responses across all dayparts and channels. Customers visiting mobile order and pay stores experience a better standard. The remodels are driving transaction volume and positive brand perception. The company is accelerating the Uplift program to bring all stores up to Starbucks' standard. The cumulative number of remodeled stores completed last quarter was over 300, and this quarter, over 650 were completed. The sample is still early, but there is a positive halo effect across all store types, channels, dayparts, and city tiers. Brand health metrics are at five-year highs. The investment return on remodels is good, with an average investment of about $150,000 per store and a high rate of return. The remodels are completed overnight without closing stores.
Characteristics of Potential Store Closures
When asked about the characteristics of stores that may be closed, management stated that criteria include store performance, location, and the condition of the property asset. The decision is based on whether the store is a correct representation of the Starbucks brand and whether its economics are at the level the brand deserves. If not, the company is honest about it and will fix the problem, potentially building a new Starbucks in the same trade area.
Performance Gap Between Company-Operated and Licensed Stores
Regarding the performance gap between company-operated and licensed stores in North America, management noted that licensed stores also performed well in the quarter, driven by travel. The licensed business is introducing the same management rigor as company-operated stores, with the "grow" reporting system adapted for the licensed model and specific expectations for the Starbucks experience. The goal is to ensure a consistent Starbucks experience across both store types. Licensed stores have shown good comparable store performance, and company-operated stores are also making progress, with the focus on ensuring no difference in the customer experience.
Contribution of Store-Level Initiatives
When asked about the contribution of initiatives like extended hours, store closures, and delivery to Q3 comparable store sales, management stated that the impact of extended hours was very limited. Of the 7.9% comparable store sales growth, about half or slightly less than half came from sales transfer from closed stores and delivery growth, with the remainder from store performance improvements, menu, and innovation. The contribution from extended hours was only a few basis points.
Tariff Refunds and Q4 Guidance
Regarding the expectation of tariff refunds in Q4, management stated that the operating margin expansion in the quarter held even without the tariff refund. The correct way to view cost of goods sold is through the year-to-date performance, as it largely offsets the tariff increases and subsequent refunds. The company believes it has received all the refunds it is entitled to, making the year-to-date performance a good anchor.
Labor Hours and the Green Apron Service Model
When asked about labor hours and the Green Apron Service model, management stated that store operators are doing a good job managing labor to provide a great experience for the volume of business. There is room for further growth in both the morning and afternoon dayparts, with the potential for more efficiency gains during the morning peak. The team is managing labor well, not setting a ceiling on growth. There is further growth potential in the morning, drive-thru, and mobile order and pay across both dayparts, as different store groups have demonstrated what is possible.
24-Hour Operating Model
When asked about the 24-hour operating model, management clarified that it refers to a supply chain goal of building a system that can pull inventory and replenish stores within 24 hours. The goal is to minimize stockouts, reduce backroom space, and have the right inventory in the right place at the right time. While some stores are open 24 hours, that is not the primary focus; the focus is on supply chain efficiency.
Marketing Spend and Efficiency
Regarding marketing spend, management stated that the team is doing a good job with the budget, which is currently slightly above 2% of sales. The company has not set a cap on this spending, nor has it seen diminishing marginal returns. The team is focused on investing in areas that drive transactions, the brand, loyalty, and customer awareness. The brand communication is at one of its best phases in a long time. The marketing budget will increase as the business grows, with a focus on return on investment.
Digital Menu Board Adoption and Impact
When asked about the penetration of digital menu boards and their impact on the afternoon daypart, management stated that by September, approximately 80% to 90% of stores are expected to have them. The company is currently using the digital menu boards to switch content by daypart, which is effective in developing the afternoon daypart by better showcasing and recommending products. The team is continuing to optimize the use of digital menu boards for daypart communication. Every Uplift store also gets digital menu boards, and the marketing team is leveraging the technology to adjust content by time of day.
Store Remodel Capacity and Future Plans
When asked about the capacity for store remodels and the timeline for covering the entire system, management stated that the goal is to complete the remodels as quickly as possible while balancing speed with other investment priorities. There will be a significant ramp-up in remodels from fiscal 2026 to fiscal 2027, with continued acceleration afterward. The company is building more remodel capacity than this year and will continue to scale up, ensuring that quality is not sacrificed for speed. The remodels are performing well, and the company wants to complete them in a reasonable timeframe.