Starbucks Earnings: Q3 Hit by Lower Traffic, But Turnaround Gains Momentum
- Hardik Shah
- Jul 29
- 4 min read
TLDR
• Revenue Strength: Consolidated revenue rose 4% YoY to $9.5B, led by store expansion and growth in international markets.
• Margin Trends: Operating margin contracted 680bps due to inflation and labor investments tied to turnaround efforts.
• Forward Outlook: Leadership remains confident in the "Back to Starbucks" plan, signaling 2026 as the inflection year with major innovation and margin recovery expected.
Business Overview
Starbucks Corporation (Nasdaq: SBUX) is the world’s largest specialty coffee retailer with over 41,000 stores globally. Its operations span company-operated and licensed stores, with dominant footprints in the U.S. and China (17,230 and 7,828 stores respectively). Starbucks operates across three core segments: North America, International, and Channel Development (consumer packaged goods and ready-to-drink beverages sold through retail partners).
Starbucks Earnings Q3'25
Revenue & Sales Performance:
Consolidated revenue rose 4% YoY to $9.5B, driven by net new store growth (+308) and favorable FX impact.
Comparable store sales fell 2% globally, with a 3% transaction drop partly offset by 1% higher average ticket.
U.S. comps declined 2%, while China returned to growth (+2% comps), led by a 6% rise in transactions.
Profitability & Margins:
GAAP operating margin fell 680bps to 9.9%; non-GAAP margin was 10.1%, pressured by inflation and strategic investments (notably the Leadership Experience 2025 event and additional labor hours).
GAAP EPS was $0.49, down 47% YoY; non-GAAP EPS at $0.50, down 46%.
Margins were especially hit in North America (operating margin down from 21.0% to 13.3%).
Segment Performance Snapshot:
North America: Revenue +2%; comps -2%; margin contraction due to higher labor, inflation.
International: Revenue +9%; comps flat; China +2% comps, U.K. and Mexico also showed strength.
Channel Development: Revenue +10%, led by Global Coffee Alliance; margin compressed due to JV income declines and product cost inflation.
Forward Guidance
Management Outlook:
While Starbucks has not reinstated formal guidance, CFO Cathy Smith noted Q4 will be shaped by “uncertain consumer environment” and normalizing ticket growth. Still, 2026 is expected to be the “breakout” year as transformation efforts scale.
Risks & Opportunities:
Opportunities: Green Apron Service, digital innovation, revamped loyalty program, and product launches (like Protein Cold Foam and Clover Vertica brews).
Risks: Macroeconomic headwinds, tariff exposure, inflationary pressures, and operational complexity in global markets.
Operational Performance
The quarter saw accelerated rollout of operational reforms:
Green Apron Service, Starbucks’ largest-ever investment in operating standards, enters full-scale U.S. rollout in mid-August. Pilots showed improved service times and rising comps.
SmartQ, an AI-driven order sequencing engine, cut café order wait times by double digits and improved drive-thru throughput.
Expanded labor investments ($500M+ over next year) aimed at improving consistency and service delivery.
Market Insights
Retail coffee demand remains resilient in international markets, with China posting a third consecutive quarter of growth, supported by lower pricing, customization, and delivery strength.
Starbucks also reported traction in non-traditional channels:
Delivery business grew transactions by over 25% YoY.
College and university channels posted double-digit comp growth.
In contrast, U.S. retail traffic remains under pressure, particularly among price-sensitive cohorts.
Consumer Behavior & Sentiment
Signs of improving sentiment include:
Customer connection scores and Gen Z value perception hit near two-year highs.
Non-rewards customers grew transactions YoY for the first time since the pandemic recovery.
Loyalty base remains robust at 34M 90-day active users, with growth in full-price, non-discounted transactions.
“Customer complaints are down, customer value perception is up, and our speed, hospitality, and accuracy scores are improving.” - Brian Niccol, CEO
Strategic Initiatives
Innovation Pipeline for 2026: Launching Protein Cold Foam, a 15g no-sugar modifier, and a new Clover Vertica brew format.
Store Portfolio Uplift: $150K upgrades across 1,000 stores by end of 2026; new formats with 30% lower build cost being tested.
Digital Overhaul: A revamped mobile app and loyalty program enhancements coming in early 2026.
Global Expansion: Strong growth in Mexico, the U.K., and EMEA. Starbucks is evaluating strategic partnerships in China, aiming to retain a meaningful stake while accelerating growth.
Capital Allocation
Dividend: Declared $0.61 per share, marking the 61st consecutive quarterly dividend.
Buybacks: No new buyback authorizations disclosed this quarter.
Debt: $1.75B bond issuance completed in May to support refinancing and general corporate use.
The Bottom Line
Despite near-term margin and EPS headwinds, Starbucks is laying a stronger foundation through sweeping operational reforms and a pivot toward innovation-led growth. Investors should monitor:
The impact of Green Apron Service and SmartQ on transaction comps.
Execution of the 2026 innovation roadmap across product, digital, and loyalty.
Signs of stabilization in U.S. traffic and margin expansion.
With the groundwork in place and a reaffirmed Investor Day set for early 2026, Starbucks aims to not just return to pre-COVID margins but surpass them. As CEO Brian Niccol emphasized:
“We’re not just getting back to Starbucks—we’re building a better Starbucks.”
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