Starbucks chases ‘third place’ revival as margins sag under cost of reset

Turnaround shows up in traffic, not yet in earnings

Starbucks entered 2026 with an unusually stark contrast on its income statement: the best customer traffic trends in years, set against shrinking margins and double‑digit EPS declines. That tension – investing heavily today in order to repair the brand’s foundations – dominated the company’s first‑quarter fiscal 2026 presentation.

Chief executive Brian Niccol framed Q1 as proof that his “Back to Starbucks” turnaround is now visible in the numbers. Global revenue grew 5% to $9.9bn, with comparable store sales accelerating to 4%. Crucially for a chain that had been nursing traffic declines, that comp was powered by transactions rather than price. Across North America and in the US specifically, company‑operated comp sales rose 4%, with transactions up 3% and average ticket up just 1%.

For investors, that is the kind of quality growth Starbucks promised when Niccol arrived: fill the stores first, then worry about monetisation. Yet the cost of that strategy is already biting. Consolidated operating margin slipped to 10.1%, down 180 basis points year on year, while EPS fell 19% to $0.56, even after stripping out restructuring and other items.

CFO Catherine Smith was explicit that the P&L would lag the revenue line for a while longer. The company is absorbing labour and operating investments linked to the Back to Starbucks programme at the same time as it battles tariffs and elevated coffee prices. About a third of North America’s 420 basis point margin contraction in Q1, she said, came from product and distribution cost inflation, led by those external pressures. The rest is self‑inflicted, in the service of service.

Traffic returns as service and brand work in tandem

Operationally, the fulcrum of the turnaround remains the Green Apron service model. The initiative, which resets staffing, deployment and service standards in US company‑operated stores, has now had its first full quarter embedded in the system – and management is treating the results as validation.

In the US, transactions at company‑operated stores grew year‑on‑year for the first time in eight quarters, with growth across all dayparts. Niccol emphasised the morning, a daypart he has repeatedly targeted as the brand’s primary battleground. With larger rosters and new standards, throughput at peak improved enough that both café and drive‑through service times came in below the company’s four‑minute target, even as traffic rose.

Customer feedback appears to be moving in the same direction. Starbucks is seeing more positive comments, fewer complaints, and rising scores on connection and convenience. Supply chain fixes and simplification have helped in‑stock levels, while “order to mobile” – long a source of friction – is now being described as both accurate and on time.

One of the more telling metrics was the behaviour of Starbucks Rewards members, the engine of the brand’s digital ecosystem. Ninety‑day active Rewards customers hit a record 35.5m, up 3% year on year. Rewards transactions grew for the first time in eight quarters; more strikingly, non‑Rewards transactions grew even faster. This was the first quarter since 2022 – “nearly four years ago,” Niccol noted – in which both cohorts grew at the same time.

That rebalancing matters. For much of the past few years, Starbucks had been growing its most loyal customers while quietly losing light and infrequent users. Niccol, who has seen the dangers of such a skew elsewhere in the restaurant world, has pushed for more “broad” brand marketing, less reliance on discounts, and cleaner, more culturally tuned menu innovation. The holiday quarter provided a first test: the company delivered a record revenue holiday launch week in its US company‑operated business on the back of a refreshed festive menu, buzzy “barista mug” merchandise, and more visible campaigns.

Brand measures, which Starbucks tracks obsessively, have started to edge higher. Visit consideration and first‑choice rankings improved, connection scores rose as customers reported more effort from baristas to know them, and perceptions of taste, healthfulness and value remained strong even as average ticket grew. For a business that trades as much on emotion as on caffeine, those are critical intangible indicators.

Technology and store formats as the next levers

Underlying the service and throughput push is a quiet technological re‑architecture. Starbucks has now fully rolled out its Green Dot Assist tool across North America, an AI‑driven knowledge system baristas can use in real time to look up beverage builds, troubleshoot operations or adjust labour deployment. Niccol positioned it as a foundation layer for further AI experiments that can remove friction for staff and free them to focus on “craft and connection”.

At headquarters level, the company has also hired a new chief technology officer in Anand Rerudharajan, a 19‑year Amazon veteran most recently overseeing worldwide grocery technology. Starbucks is betting that bringing in that kind of operational tech experience – in an era where mobile ordering, digital menu boards and AI scheduling are increasingly standard across quick‑service chains – can deliver a “step‑change” in its platforms.

On the physical side, the group’s “coffeehouse uplift” programme points to a broader attempt to reclaim the “third place” positioning that once differentiated Starbucks from drive‑through rivals. Around 200 cafés, mostly in Southern California and New York, have been refreshed, with a target of more than 1,000 by the end of 2026. Even in stores not yet fully upgraded, Niccol said, the company has been quietly putting seats back in. The logic is behavioural as much as aesthetic: busy, inhabited cafés signal vibrancy to drive‑through and mobile customers as much as to those who linger.

Starbucks is also rethinking its new‑build formats. The CEO teased a family of more cost‑efficient prototypes – labelled “Ristretto” in tall, grande and “Pico” forms – designed to flex across sites while supporting the full ecosystem of café, drive‑through and mobile order pickup. Investing in “coffeehouse coaches” – essentially assistant managers – is meant to ensure that store openings no longer destabilise the existing fleet by draining experienced labour.

International: China deal reshapes the P&L

Beyond North America, the international business showed the kind of growth profile investors have come to expect. Segment revenue rose 10% to $2.1bn; comp sales climbed 5%, driven by transactions across nine of Starbucks’ ten largest markets.

China, long a source of volatility and competitive anxiety, was singled out as a bright spot. Comparable store sales there accelerated to 7%, with transactions up 5%. Management credited product innovation, targeted marketing and sustained delivery growth.

Yet the most consequential China development is not in the comp line but in the ownership structure. In November, Starbucks announced a deal with Boyu Capital to convert its China retail operations into a joint venture. Boyu is set to take up to a 60% stake; Starbucks will retain 40%, while continuing to own and license the brand and intellectual property to the JV.

The shift is already altering the accounts. In Q1, Starbucks reclassified the assets and liabilities of its China retail arm as held for sale. That forced it to stop depreciating property, plant and equipment and amortising right‑of‑use assets, reducing depreciation and amortisation and store operating expenses. Since December, Smith said, the company has been recognising roughly $39m less in monthly expenses than it would have prior to the announcement, a dynamic likely to persist until the transaction closes, expected in the spring.

Post‑closing, Starbucks will deconsolidate the China retail operations, converting roughly 8,000 company‑operated stores into licensed units in its international segment. Financially, revenue and reported comps will step down, but profitability should lift: the group will capture royalties and product sales, with its 40% share of JV earnings – including proportionate gross profit from those revenues – booked as income from equity investees. On an annualised basis, Starbucks estimates the new structure could be about 40 basis points accretive to consolidated operating margins, albeit with a $0.02–$0.03 dilutive impact on EPS versus current guidance, depending on timing and use of proceeds.

For now, the company’s fiscal 2026 guidance assumes “business as usual” China operations to give what Smith called the cleanest read on the underlying business. But for investors trying to model Starbucks’ longer‑term earnings power, the China JV marks a structural shift: less top‑line scale, more margin density, and a different mix of risk between the US balance sheet and a local partner.

International expansion elsewhere continues at pace. Starbucks opened 79 net new international coffeehouses in Q1, with 130 net new licensed stores offset by 51 net closures in company‑operated markets. India passed the 500‑store mark; management flagged expansion into six new Latin American and Caribbean cities and plans to surpass 1,000 stores in Mexico this year.

Guidance: modest comps, margin rebuild in the back half

Against that operational backdrop, Starbucks’ fiscal 2026 guidance is deliberately modest on revenue and deliberately cautious on profit. The company is guiding to “3% or better” global comp sales growth, with the US expected to match that level, and total consolidated revenue growth broadly in line with comps. The dampener on the revenue outlook is portfolio repositioning at the end of fiscal 2025, which is anticipated to offset the contribution from net new stores.

On unit growth, the development engine is revving again. Starbucks plans 600–650 net new coffeehouses in FY26, including 150–175 net new US company‑operated stores, a slight decline in North America licensed units, and 450–500 net new international stores, around half of which will be in China. Niccol talked of “thousands” of viable sites in both the US and abroad, hinting that the growth rate could quicken beyond 2026 once people and prototype issues are fully resolved.

Margin guidance is more nuanced. Smith expects consolidated operating margins to “grow slightly” year on year, with improvements weighted to the second half. Q2 is typically the lowest‑margin quarter seasonally, and this year it will also bear the brunt of peak coffee and tariff pressure. Starbucks anticipates some relief on both cost fronts in the back half, alongside the anniversarying of the big Green Apron service investments by Q4 and the gradual materialisation of a $2bn cost‑savings programme launched in 2025.

That programme, spanning G&A, procurement, supply chain and technology‑driven efficiencies, is meant to offset at least part of the structural uptick in labour and operating expenses baked into the Back to Starbucks strategy. Smith stressed that this was “not about broad‑based cost‑cutting” but rather about freeing up funds to reinvest in what matters to customers and staff. Even so, consolidated G&A is already moving in the right direction, down 7% year on year in Q1, with management expecting fiscal 2026 G&A dollars to run below fiscal 2023 levels.

EPS guidance for the year has been set at $2.15–$2.40, a wide range by Starbucks’ historic standards. The spread reflects several moving parts: uncertainty over the precise timing and accounting of the China JV; the extent and pace of cost inflation roll‑off; and management’s desire for “strategic flexibility” to lean into further investments if the top line continues to respond.

In framing the range, Niccol was blunt about what will separate the top from the bottom: sustained comp momentum. Maintaining transaction‑led growth, underpinned by service, marketing, menu innovation and digital engagement, is the primary lever for hitting the upper end, with cost discipline and easing input pressures providing the operating leverage.

A turnaround still in early innings

Listening to Starbucks’ presentation, one could almost hear the company trying to recalibrate its narrative for investors. The glory days of high‑teens EPS growth built on price and unit expansion are gone, at least for now. In their place is a more prosaic, operationally dense story: of labour models, AI knowledge bases, café chairs returned and holiday mugs designed to light up social feeds.

Niccol sought to wrap that complexity in a simple arc. “We started the fiscal year strong with a focus on disciplined execution at scale,” he said. “As a result … our turnaround plan is coming to life in the way we envisioned. First, turnaround the top line, and then earnings growth will follow.”

The risk is obvious: that the period between those two phases drags on longer than shareholders’ patience. The first quarter of 2026 shows that Starbucks can once again pull people through its doors and drive‑through lanes in greater numbers, without buying them with discounts. The next few quarters will test whether it can translate that renewed affection into the kind of margin and earnings profile that justifies the capital being poured into its service model, technology stack and global footprint.