On Wednesday evening, Starbucks delivered an earnings report that energized the market. The world's largest coffee chain achieved a 4% increase in global comparable store sales for the first fiscal quarter of 2026, marking the second consecutive quarter of positive growth and surpassing even the most optimistic Wall Street forecasts. More notably, customer traffic in the US market turned positive for the first time in eight quarters, signaling that CEO Brian Niccol's "Back to Starbucks" transformation strategy is yielding tangible results. The key highlights of the earnings report are as follows:
Consolidated revenue for the first quarter increased by 6% to $9.9 billion, driven by a combination of a 3% growth in global transactions and a 1% increase in average ticket size. Despite robust sales growth, adjusted earnings per share (EPS) were $0.56, a 19% decline year-over-year, marking the sixth consecutive quarter of double-digit decreases. Significant labor investments and rising coffee costs continued to erode profit margins, with the GAAP operating margin for the first quarter contracting by 290 basis points to 9.0%. While issuing its fiscal 2026 guidance, the company projected global comparable store sales growth of at least 3% and anticipated a slight improvement in its operating margin.
Following the earnings release, Starbucks' stock price surged by 9% in pre-market trading. This performance not only validates the series of reform measures implemented by Niccol since taking over in 2024 but also has restored market confidence in the coffee giant, which operates over 41,000 stores globally.
The performance in the North American market was the standout highlight of the quarter. The region posted a 4% increase in comparable store sales, driven by a 3% growth in comparable transactions—the first positive growth in eight quarters, indicating a successful reversal of the previously declining traffic trend. The US market, Starbucks' most critical region, also achieved a 4% growth in comparable store sales. However, the deterioration in profitability cannot be overlooked. Revenue in the North American market grew by 3% to $7.3 billion, but operating profit plummeted by 27% to $867 million. The operating margin contracted sharply by 480 basis points to 11.9%, down from 16.7% in the same period last year. This was primarily attributed to substantial labor investments required for the "Back to Starbucks" strategy, alongside inflationary pressures from tariffs and rising coffee prices. The earnings report showed that store operating expenses as a percentage of company-operated store revenue increased from 54.3% to 57.0%. The North American market currently operates 18,360 stores, a 1% decrease compared to the prior year. The quarter saw a net addition of 49 stores, including the closure of 3 stores as part of a restructuring plan.
The international business maintained its growth momentum, with comparable store sales increasing by 5%, outperforming the North American market. Revenue in this region surged by 10% to $2.06 billion, while operating profit grew by 19% to $283 million. The operating margin expanded by 100 basis points to 13.7%, up from 12.7%. Performance in the Chinese market was particularly impressive, with comparable store sales growing by 7%, driven by a 5% increase in transactions and a 2% rise in average ticket size. This growth rate significantly outpaced the global average, indicating a recovery in Starbucks' competitiveness within this crucial market. The number of stores in China reached 8,011, a 4% increase year-over-year, accounting for nearly 20% of the global store total. It is important to note that the improvement in the International segment's profitability was partly aided by an accounting change. Due to the classification of its China retail business assets as held for sale, the associated depreciation and amortization expenses have ceased, which reduced store operating and depreciation/amortization costs. However, restructuring costs and rising coffee prices continued to pressure margins. The international segment saw a net addition of 79 stores during the quarter, but closed 162 stores as part of a restructuring plan, with 83 of those closures occurring in China.
The company announced a significant restructuring of its China business during the quarter. Last November, Starbucks reached an agreement with Boyu Capital to form a joint venture that will operate the China retail business. Boyu Capital will acquire up to a 60% stake, while Starbucks will retain a 40% interest and continue to own and license the brand and intellectual property. This transaction, expected to be completed in the spring subject to regulatory approvals, led Starbucks to classify the related assets and liabilities as held for sale. Consequently, the company stopped recording depreciation and amortization on certain long-lived assets, reducing depreciation, amortization, and store operating expenses, but also resulting in a significant increase in income tax expense. As of the end of the first fiscal quarter, held-for-sale assets on Starbucks' balance sheet amounted to $4.7 billion, with held-for-sale liabilities of $1.8 billion. This deal is viewed as a major milestone in Starbucks' ongoing transformation, aimed at accelerating its long-term growth in this key market.
The Channel Development business delivered a strong performance this quarter, with revenue soaring by 20% to $523 million, primarily benefiting from growth in the Global Coffee Alliance business and increased ready-to-drink product revenue. Operating profit increased by 4% to $216 million. However, the operating margin contracted significantly by 640 basis points to 41.3%, down from 47.7% in the prior year period. This was mainly due to changes in product mix and rising global product costs. Growth in revenue from the North American Coffee Partnership joint venture provided some offset to the profit pressure.
Despite strong sales growth, the decline in profitability remains Starbucks' core challenge. The GAAP operating margin for the first quarter contracted by 290 basis points to 9.0%, while the non-GAAP operating margin contracted by 180 basis points to 10.1%. This stemmed primarily from two pressures: First, a substantial increase in labor investments. To improve service quality and speed, Starbucks made significant investments in store staffing. Company-wide store operating expenses rose by 8.3% from $4.2 billion to $4.55 billion, increasing as a percentage of total revenue from 44.7% to 45.9%. Second, rising commodity costs. Soaring coffee prices and tariff impacts drove product and distribution costs up by 13.1% from $2.9 billion to $3.3 billion, increasing their share of total revenue from 30.8% to 33.0%. Anomalies also emerged in taxation. Due to the classification of the China retail business as held for sale and a change in indefinite reinvestment assertions, the effective tax rate skyrocketed to 61.7% from 23.6% last year. The non-GAAP effective tax rate also increased from 23.6% to 26.8%. Ultimately, GAAP earnings per share were $0.26, a sharp 62% decline year-over-year; non-GAAP earnings per share were $0.56, down 19% year-over-year, representing the sixth consecutive quarter of double-digit declines.
Starbucks issued its first full fiscal year guidance under Niccol's leadership, striking a cautiously optimistic tone. The company anticipates global and US comparable store sales growth of at least 3% for fiscal 2026, with consolidated revenue growing at a similar rate. The non-GAAP operating margin is expected to show a slight improvement compared to the prior year, and non-GAAP earnings per share are projected to be in the range of $2.15 to $2.40. Globally, the company plans a net increase of 600 to 650 new stores, encompassing both company-operated and licensed operations. It is important to note that this guidance assumes the China retail business remains under company operation for the second half of the fiscal year. Prior to the earnings release, Jefferies analyst Andy Barish noted that the company would need to sustain stronger traffic growth in the second half of fiscal 2026 to improve profitability and justify the "significant" investment costs. Currently, sales momentum is indeed accelerating, but translating that into sustainable profit growth remains the key challenge for management.
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