Starbucks (SBUX) Earnings Call: Growth Returns, Margins Lag

Starbucks ((SBUX)) has held its Q1 earnings call. Read on for the main highlights of the call.

Starbucks Earnings Call Signals Turnaround Momentum Despite Margin Squeeze

Starbucks’ latest earnings call balanced cautious realism with growing optimism. Management highlighted an encouraging rebound in sales and customer traffic, particularly in international markets and within its Rewards ecosystem, underscoring that the turnaround strategy is gaining traction. At the same time, the company was transparent about near-term profitability pressure, with margins and EPS under strain from inflation, prior investment spend, and accounting changes tied to its China business. Overall, the tone was that of a business rebuilding earnings power on top of a strengthening revenue base, with clearer visibility toward improvement in the back half of the fiscal year.

Revenue Growth and Comparable Sales Acceleration

Global revenue rose 5% year-over-year to $9.9 billion in Q1 FY26, as comparable store sales growth accelerated to 4%. The performance shows that underlying demand is improving rather than stalling, with higher sales coming from both increased transactions and modest ticket growth. For investors, this signals that Starbucks is regaining top-line momentum after a choppy period, laying a stronger foundation for future earnings once cost pressures ease.

North America and U.S. Transaction Momentum

North America revenue increased 3% to $7.3 billion, driven by a 4% rise in U.S. company-operated comparable sales. Notably, U.S. transactions grew 3%, and average ticket rose 1%, marking the first quarter in eight where U.S. company-operated transaction comps increased year over year. This return to positive traffic is a key milestone for the brand’s recovery in its largest market and suggests that recent menu, service, and promotional initiatives are resonating with consumers despite a cautious spending backdrop.

Record Starbucks Rewards Engagement

Starbucks Rewards continued to be a major growth engine, with 90-day active members reaching a record 35.5 million, up 3% from a year ago. Rewards transactions grew year over year for the first time in eight quarters, and, importantly, both rewards and non-rewards transactions increased for the first time since 2022. This broad-based engagement indicates that Starbucks is not only deepening loyalty among its most valuable customers but also successfully re-attracting occasional guests, which should support more stable, recurring revenue.

International Strength, Led by China

International markets were a standout, with revenue climbing 10% to $2.1 billion and comps increasing in nine of Starbucks’ ten largest international markets. China, a critical growth region, delivered 7% comparable sales growth and roughly 5% higher transactions, its third straight quarter of positive comp performance. This improvement in China provides a counterweight to domestic margin pressures and reinforces the company’s long-term international growth story, even as the ownership structure of its China business evolves.

Channel Development and Ready-to-Drink Momentum

Channel Development, which includes packaged coffee and ready-to-drink (RTD) products, posted a robust 19% year-over-year increase in net revenues. Growth was fueled by the Global Coffee Alliance and strong demand in the RTD segment, helped by the launch of multi-serve refreshers concentrate. These results show that Starbucks’ brand power continues to extend beyond its retail stores, giving the company additional revenue streams and exposure to at-home and on-the-go consumption trends.

Net New Stores and Global Development

Store growth continued at a measured but steady pace, with 128 net new coffeehouses opened globally in Q1. North America added 49 net new locations, bringing the regional total to 18,360, while international markets opened 79 net new stores. India surpassed 500 stores, and Mexico is on track to exceed 1,000 this year, underscoring Starbucks’ ability to tap into fast-growing emerging markets. This disciplined expansion supports long-term sales growth without overwhelming current profitability.

Operational Improvements and Service Initiatives

Starbucks emphasized operational upgrades under its Green Apron service standards, with 650 pilot stores outperforming the broader fleet by roughly 200 basis points in comparable sales. Peak café and drive-through service times now come in below four minutes, demonstrating tangible gains in throughput and customer experience. Around 200 café uplift projects have already been completed, with more than 1,000 planned by the end of 2026, suggesting that operational efficiencies and better in-store execution should increasingly support both sales and, over time, margins.

Cost and Organizational Actions

The company is actively tackling its cost base, reporting a 7% reduction in consolidated G&A in Q1 as earlier streamlining measures begin to show results. Management has identified an approximately $2 billion cost-reduction program to be executed over the next couple of years. For shareholders, these efforts signal a serious push to restore margin health and protect earnings, especially important in the face of commodity inflation and ongoing strategic investments.

Operating Margin Contraction

Despite solid revenue growth, profitability came under pressure. Consolidated operating margin fell 180 basis points to 10.1%, with North America particularly challenged—its operating margin declined by about 420 basis points. The company cited the annualization of prior “Back to Starbucks” investments and higher product and distribution costs as key drivers. While management framed these pressures as partly transitory, the current margin reset is a central concern for investors watching how quickly Starbucks can convert revenue gains into profit recovery.

Earnings Per Share Decline

Earnings per share for Q1 came in at $0.56, down 19% year-over-year, reflecting both the compressed operating margins and the ongoing cost of strategic investments. The decline underscores that Starbucks is still in the investment phase of its turnaround, with earnings temporarily lagging behind the strengthening revenue picture. Management’s commentary pointed to the back half of the year as the period when these investments are expected to begin paying off more visibly in the P&L.

Product and Distribution Inflation Headwinds

Inflation in products and distribution remained a significant drag, accounting for roughly one-third of the North America margin contraction. Tariff-related costs and elevated coffee prices were key contributors. Starbucks expects these inflationary pressures to peak in the second quarter and then ease in the latter half of the fiscal year. If this timeline holds, it should provide natural relief to margins and enhance the impact of the company’s internal cost-saving initiatives.

Licensed Portfolio and Channel Weakness

Not all channels participated equally in the recovery. Revenue from the U.S. licensed store portfolio declined in Q1, driven mainly by ongoing softness in grocery and retail environments. This weakness was only partially offset by growth in other licensed channels, such as business, college, and healthcare locations. The performance highlights that Starbucks’ exposure beyond its company-operated stores can be a mixed bag, with some partners and channels slower to rebound than others.

China Transaction and Accounting Transition

Starbucks’ agreement to create a joint venture for its China retail operations with Boyu Capital is already affecting reported results. With Starbucks planning to retain a 40% stake and Boyu to own up to 60%, China assets have been classified as held for sale, eliminating about $39 million per month in depreciation and amortization from the income statement since December. This shift introduces near-term variability and will likely reduce consolidated revenues and reported comps once the business is deconsolidated, even though the underlying operations remain strategically important and could support higher consolidated margins over time.

Higher Effective Tax Rate

The company’s effective tax rate climbed to 26.8% in Q1, mainly due to lapping favorable one-time tax items from the prior year. While not operational in nature, the higher tax rate adds another layer of pressure to net income and EPS. Investors should be aware that some of the year-over-year earnings decline reflects this tax normalization rather than a deterioration in the core business.

Forward-Looking Guidance and Outlook

Looking ahead to fiscal 2026, Starbucks guided to at least 3% global comparable store sales growth, with U.S. comps also at 3% or better. Consolidated net revenue is expected to rise roughly in line with those comp trends, and operating margins are forecast to be slightly higher year-over-year, with improvement skewed toward the back half as Q2 remains seasonally and operationally the lowest-margin quarter. The company plans to add 600–650 net new stores, including 150–175 U.S. company-operated locations, a modest decline in North America licensed units, and 450–500 international openings, nearly half in China. Management expects coffee and tariff cost pressures to peak in Q2 and then ease, while consolidated G&A dollars run below FY2023 levels. EPS is projected in the $2.15–$2.40 range, with the China joint venture likely trimming reported revenue and comps but modestly boosting consolidated margins and being slightly dilutive to EPS on an annualized basis.

In closing, Starbucks’ earnings call painted the picture of a company with its growth engine back in gear but still working through a period of compressed profitability. Stronger global comps, a revived U.S. transaction trend, record Rewards engagement, and robust international and channel development performance suggest the brand’s demand fundamentals remain solid. Against this, investors must weigh near-term margin pressure, softer licensed channels, and the accounting noise from the China JV. Management’s message was that the heavy lifting on investment and cost actions is underway, setting the stage for improved margins and earnings as fiscal 2026 progresses, making Starbucks a name to watch for those betting on a consumer and cost recovery story.