Important notes:

Negative Y/Y revenue growth was due to closing on its majority stake sale of its China business. They “remain confident” in the new strategy’s ability to “reinvigorate sustainable growth” in that important market.

They recognize significantly lower revenue under the new joint venture (JV) structure than they did pre-transaction. This is why international revenue growth was -34% Y/Y. When Y/Y comparisons normalize, growth will too. China contributed $53M in revenue compared to $790M Y/Y. Excluding this, revenue grew by a little over 6% Y/Y, which is in line with the segment comp store sales growth result. Japan was cited as an international standout, with successful 30th anniversary promotions helping drive more traffic growth (alongside easier Y/Y comparisons).

More Y/Y Comp Store Sales (CSS) Growth Data:

A lot to unpack for operating margins this quarter. The 430 bps of Y/Y EBIT leverage was mainly due to better comp store sales momentum, ongoing cost savings initiatives and better overall operations. Within this, North American EBIT margin expanded by 280 bps Y/Y, marking the first time this margin has improved in over 2 years. Importantly, tariff refunds also significantly helped both of these metrics. Encouragingly, even without the single-quarter boost, overall and North American EBIT margins would have both expanded by 100+ bps Y/Y. Starbucks received tariff refunds during Q3 that were roughly similar to the combined costs it paid over Q1 and Q2. For this reason, they asked investors to focus on year-to-date profitability as a better core operating gauge. Operating margin year-to-date is 11.2% vs. 10.1% over the first 3 quarters of its fiscal 2025. Notably, leadership does not expect any material refunds going forward.

International EBIT margin expanded by a whopping 550 bps Y/Y, but there was a non-structural tailwind here too. While the sale of its China business means lower revenue, the remaining revenue in the business carries an operating margin north of 100%. That greatly helps the overall segment's profitability.

For net income, a 21.8% tax rate compared to 31.4% Y/Y. Alongside stronger sales trends and EBIT margin progress, this helped drive 70% Y/Y EPS growth.

SBUX trades for 34x EPS. EPS is expected to grow by 20% in each of the next 2 years.

Back to Starbucks Progress Report:

As the financial trends depicted above indicate, SBUX’s turnaround plan is working very well. Niccol is righting this ship just like he did with Chipotle, and is doing so with durable fixes that generate sustained value. This isn’t being driven by irrational discounting or one-off events like in the company’s past. This is happening based on a greatly improved customer service and go-to-market engine. And just like leadership told us to expect, the improving demand trends we’ve now seen for a few quarters are starting to translate to better bottom line strength as well.

What’s Working Better – Operations:

The company’s Green Apron Service initiative is delivering ongoing store service improvements a year after launching. They’ve made employee expectations and guardrails for grading work crystal clear while offering cash incentives for effective execution. They’ve also gotten a lot better at setting workers up for success with better labor capacity and lower turnover. Specifically, the percentage of managers in the USA with 2+ years of experience rose by 7 points Y/Y, helping brand affinity, consideration and purchase intent rise to 5 year highs. While Niccol’s decisions over the first several quarters of his tenure led to severe financial statement pressure, they were the right moves and needed changes considering the poor leadership that came before him. The value of these strategic pivots is now becoming crystal clear and I think that will simply become more true with time.

The company is also increasingly lacing technology into operational workflows to improve outcomes for all stakeholders. Their Smart Queue system is helping SBUX reach “target service times across every access point” as of this past quarter. That’s despite accelerating delivery growth adding to store complexity and rising CSS growth overall as well. For some more evidence of these fixes bearing fruit, food availability rate is nearly 99% vs. 89% Y/Y, helping boost attach rates and overall ticket size for the quarter. This is not possible without material improvements to the supply chain that Niccol has spearheaded since taking over. They’re working at extending supply chain servicing to a 24-hour operating clock to help augment inventory practices and boost availability rates even more.

What’s Working Better – Products and Marketing:

The Starbucks Refreshers generated 10%+ Y/Y growth with the various flavors and caffeine customization all resonating with customers. They were asked about all the competitors getting into the space, and view that as a net positive that will drive more awareness for the market share leader (Starbucks). This quarter certainly provides solid evidence for that being the case. In the coming months, the company will also begin testing sparkling versions of these drinks, offering new variations and personalization without introducing too much menu complexity.

On the marketing side, SBUX has gotten better and more intentional with inserting itself in global culture and conversation. They’ve made their presence at large events like Coachella a lot more prominent and have also done more in podcast sponsorships and other channels as well. While the company focused more so on loyalty members and promoting items to them, they lost touch with the public over the last couple years and trends worsened as a result. It’s good to see them prioritizing all customer cohorts more meaningfully.

And while that’s true, the loyalty program still does remain a highly valuable and large focus area. Membership again ticked up sequentially from 35.6M to 35.8M, with overall engagement patterns consistently trending above leadership expectations. Perks like exclusive access to s’mores coffee products and free modifications every Monday are helping drive buzz, and the company has many more ideas for keeping this momentum rolling.

Stores:

As part of the company’s renewed focus on operational excellence and good customer service, they continue to uplift or revamp more stores across the USA. They’ve already reached their FY 2026 target of 1,000 stores a quarter early, and are doing these without any store disruption and for just $150K/unit. That is leaps and bounds more efficient than store remodels under the old team. So far, the stores that have gotten these upgrades are all enjoying sizable transaction lifts across all day parts and customer segments. Considering this, SBUX is accelerating uplift plans to 1,500 units by the end of next quarter, rather than 1,000.

Separately, SBUX is evolving its approach to store openings for now. They’ve gotten more advanced at opening models in international markets that financially perform well. They’ve also gotten more sophisticated in identifying low performing stores in the USA, which has meant realizing more units just aren’t doing well enough. This combination is leading to the composition of store openings shifting a bit more noticeably to international markets over the coming quarters. They still reiterated total unit growth expectations for 2026, but something to keep in mind.

More:

This was a very good quarter. Everything Niccol is doing in North America is working. He has turned a terrible situation into a company showing signs of real life and attractive financial trends. He has materially improved the overall customer experience, and better demand is following suit like it always does. At 34x forward earnings, I like risk/reward better for other names. But still, I do have a great deal of respect for this leadership team and think the company is on strong footing once more. It’s just already getting credit for that in the forward multiple.

News this week broke from SoFi IR that the company plans to settle 2026 convertible notes in cash. This eliminates potential 2% dilution and is good news. At the same time, it’s not shocking given lack of conversion incentive for note holders with the share price where it is. The plan was always to pay off the total principal in cash. They were only going to pay potentially large conversion premiums in stock if the share price was high enough to create that excess amount owed. Because the share price is low, they don’t need to.

Regardless of this being their stated strategy, they still had the right to deviate from it and pay the actual principal off in shares too. If liquidity wasn’t strong enough or the balance sheet needed more help, that could have happened. It’s fortunately in great shape. Them sticking to their plan is a good sign of leadership’s perceived strong capital position, and, when looking at capital ratios and credit health, it’s hard to argue. They also told us no more dilution/capital raises last quarter so I would have been disappointed if a dilution event came right after that forecast.

In summary, good dilution news but mainly because of share price and a little bit because they are more than financially strong enough to keep their promise. Not as big or positive as maybe some on social media are translating it as and more context was needed. But a positive nonetheless.

The company came out with a new filing today talking about 27.4% daily active user growth on a Y/Y basis. This marks a 6 point acceleration compared to last quarter. It’s a great piece of news and an important step towards earning back my trust as a potential investor in the future. It shows their pivot is beginning to work… and if daily active user growth accelerates, I am confident that bookings and revenue growth acceleration will follow suit. This is not enough to make me bullish again or buy shares, especially given my limited cash position. Still, it does make me incrementally more positive on the name and I think bulls should be very pleased with today’s news.