10-Q: Starbucks Q1 Earnings Hit by China JV, Restructuring Costs

Starbucks reports a significant drop in Q1 net earnings to $293.3 million, impacted by a China joint venture and restructuring charges, despite revenue growth.

Summary

• Consolidated net revenues increased 5.5% to $9.915.1 billion for the quarter ended December 28, 2025, compared to $9.397.8 billion in the prior year.
• Global comparable store sales increased 4%, driven by a 4% increase in the U.S. market and a 5% increase internationally.
• Net earnings attributable to Starbucks significantly decreased to $293.3 million ($0.26 diluted EPS) from $780.8 million ($0.69 diluted EPS) in the prior year.
• Consolidated operating margin contracted 290 basis points to 9.0%, primarily due to labor investments in support of the 'Back to Starbucks' strategy and inflationary pressures, largely from elevated coffee pricing and tariffs.
• Restructuring and impairments totaled $88.1 million, associated with the closure of 165 coffeehouses and simplification of the support organization.
• The effective tax rate increased to 61.7% from 23.6%, primarily due to a $266 million discrete impact from changes in indefinite reinvestment assertions as a result of classifying Starbucks retail operations in China as held for sale.
• Starbucks entered an agreement to form a joint venture with Boyu Capital to operate its retail business in China, with Boyu Capital acquiring up to a 60% interest based on an enterprise value of approximately $4 billion.
• Cash provided by operating activities decreased to $1.6 billion from $2.1 billion in the prior year, mainly due to lower net earnings and changes in accounts payable, partially offset by deferred income taxes.

Sentiment

Score: 3

Explanation: While revenue growth and comparable store sales were positive, the significant decline in net earnings and diluted EPS, coupled with a sharp contraction in operating margin and a very high effective tax rate due to the China JV, indicates a challenging quarter. The restructuring costs and inflationary pressures further weigh on profitability.

Positives

• Consolidated net revenues increased 5.5% to $9.915.1 billion.
• Global comparable store sales increased 4%, with U.S. up 4% and International up 5%.
• U.S. comparable transactions increased 3%, and average ticket increased 1%.
• International operating income increased 19% to $283 million, with operating margin expanding 100 basis points to 13.7%.
• Channel Development net revenues increased 20% to $522.7 million, primarily due to the Global Coffee Alliance.
• Cash and cash equivalents increased to $3.413.4 billion as of December 28, 2025, from $3.219.8 billion as of September 28, 2025.
• Reduced depreciation and amortization and store operating expenses resulted from classifying Starbucks retail operations in China as held for sale.

Negatives

• Net earnings attributable to Starbucks decreased significantly to $293.3 million from $780.8 million in the prior year.
• Diluted earnings per share decreased to $0.26 from $0.69.
• Consolidated operating margin contracted 290 basis points to 9.0%.
• Product and distribution costs as a percentage of total net revenues increased 220 basis points due to inflationary pressures, primarily from elevated coffee pricing and tariffs.
• Store operating expenses as a percentage of company-operated stores revenue increased 160 basis points, primarily due to labor investments.
• The effective tax rate surged to 61.7% from 23.6%, mainly due to a $266 million discrete tax expense related to changes in indefinite reinvestment assertions for the China joint venture.
• Restructuring and impairments of $88.1 million were recorded, including costs associated with 165 store closures.
• North America operating income decreased 27% to $867 million, with operating margin contracting 480 basis points to 11.9%.
• Cash provided by operating activities decreased to $1.6 billion from $2.1 billion.
• Interest income and other, net, decreased $14.8 million, primarily due to unfavorable investment performance and non-core investment impairments.
• Interest expense increased $11.8 million, primarily due to a higher debt balance and higher interest rates on refinanced long-term debt.

Risks

• Ability to preserve, grow, and leverage brands.
• Costs and risks associated with business opportunities, expansions, initiatives, strategies, investments, and plans, including the 'Back to Starbucks' strategy and restructuring plan.
• Costs and risks associated with strategic changes to ownership and operating structure, including acquisitions, divestitures, other strategic transactions, or entry into joint ventures, such as the planned joint venture for Starbucks retail operations in China.
• Evolving consumer preferences, demand, consumption, or spending behavior, reduction in discretionary spending, and price increases, and the ability to anticipate or react to these changes.
• The ability of business partners, suppliers, and third-party providers to fulfill their responsibilities and commitments, and reliance on certain key business partners and suppliers.
• Potential negative effects of food or beverage safety incidents or product recalls.
• Ability to open new stores and efficiently maintain the attractiveness of existing stores and manage related costs.
• Heavy reliance on the financial performance of the North America operating segment and dependence on the performance and growth of certain international markets.
• Inherent risks of operating a global business, including changing conditions in markets, local factors affecting store openings, protectionist trade or foreign investment policies (e.g., tariffs, import/export regulations), economic or trade sanctions, compliance with local laws and other regulations, and local labor policies and conditions (including labor strikes and work stoppages).
• Higher costs, lower quality, or unavailability of coffee, dairy, cocoa, energy, water, raw materials, or product ingredients and related volatility.
• The ability of the supply chain to meet current or future business needs and the ability to scale and improve forecasting, planning, production, and logistics management.
• The potential impact on the supply chain and operations of adverse weather conditions, natural disasters, or significant increases in logistics costs.
• A worsening in the terms and conditions upon which the company engages with manufacturers and source suppliers.
• The impact of unfavorable macroeconomic conditions and other factors, including economic slowdowns or recessions, rising real estate costs, supply chain disruptions, climate change and extreme weather events, inflation and interest rate fluctuations, government shutdowns, labor unrest, geopolitical instability, disruptions in credit markets, and foreign currency exchange rate volatility.
• Failure to meet market expectations for financial performance or any announced guidance and the impact thereof.
• Failure to attract or retain key executive or partner talent.
• Changes in the availability and cost of labor, including any union organizing efforts and responses to such efforts.
• The impact of, and the ability to respond to, substantial competition from new entrants, consolidations by competitors, and other competitive activities (e.g., pricing actions, marketing, category expansion, product introductions, or entry/expansion in geographic markets).
• Evolving corporate governance and public disclosure regulations and expectations.
• The potential impact of activist shareholder actions or tactics.
• Failure to comply with applicable laws and complex and changing legal and regulatory requirements, including in privacy and data protection.
• The impact or likelihood of significant legal disputes and proceedings or government investigations.
• The unauthorized access, use, theft, or destruction of data, or of proprietary or confidential information and the impact thereof.
• Potential negative effects of, and the ability to respond to, a material failure, inadequacy, or interruption of information technology systems or those of third-party business partners or service providers, or failure to comply with data protection laws.
• Ability to adequately protect intellectual property or adequately ensure that the company is not infringing the intellectual property of others.

Future Outlook

The company expects to continue refining and executing its 'Back to Starbucks' initiatives to maintain topline momentum and build sales leverage, while investing in cafes, customer experience, digital experiences, supply chain, and technological efficiencies. Macroeconomic pressures, including tariffs and elevated coffee pricing, are anticipated to alleviate in the second half of the fiscal year. The joint venture with Boyu Capital in China is expected to close by early calendar year 2026, leading to reduced depreciation, amortization, and store operating expenses until closing. Post-closing, the company will transition to recording its share of income from the joint venture. Proceeds from the transaction are planned for debt reduction to strengthen the balance sheet and enhance financial flexibility. While strategic investments are being made to improve operating foundations, sustainable earnings growth is expected to take time to materialize.

Management Comments

• "Starbucks results for the first quarter of fiscal 2026 showed continued progress and momentum on key Back to Starbucks initiatives, as demonstrated through meaningful revenue growth."
• "These investments included implementing the Green Apron Service standard to improve the coffeehouse experience, engaging consumer marketing, and on-trend menu innovation, all of which deliver greater connection and value for customers."
• "With a healthier base of coffeehouses, we expect meaningful opportunity for disciplined growth."
• "We anticipate that these actions, along with our simplified broader support organization, will allow us to restructure, redeploy, and refocus our resources on priorities that we believe will deliver long-term sustainable business growth."
• "We currently plan to use our transaction proceeds for debt reduction, strengthening our balance sheet and allowing us to execute our long-term growth strategy with greater financial flexibility."
• "While we believe we are making the right strategic investments to improve our operating foundations, these investments will take time to flow through to sustainable earnings growth, and we will continue to test, learn, and refine our approach to deliver the best of Starbucks to drive durable, profitable, long-term growth."

Industry Context

The company's performance reflects broader industry trends, including persistent inflationary pressures on commodities like coffee and labor costs, which are impacting profitability across the retail and food service sectors. The 'Back to Starbucks' strategy, focusing on enhancing the in-store experience and digital engagement, is a common response to evolving consumer habits and increased competition. The formation of a joint venture for China retail operations with Boyu Capital is a strategic move to navigate the complexities and accelerate growth in a key international market, a common approach for global brands seeking local expertise and risk sharing in large, dynamic economies.

Comparison to Industry Standards

• The 4% global comparable store sales growth is a positive indicator of customer engagement, but the significant operating margin contraction to 9.0% suggests that revenue growth is currently coming at a higher cost, which may be below profitability benchmarks for leading quick-service restaurant chains.
• The strategic shift to a joint venture model in China, with Boyu Capital acquiring a majority stake, aligns with common practices for Western companies seeking to optimize operations and growth in the unique Chinese market, similar to how other global brands have localized their strategies.
• The substantial increase in the effective tax rate to 61.7% due to a one-time charge related to the China JV is an idiosyncratic event, not directly comparable to industry operating tax rates, but highlights the financial implications of major strategic restructuring.

Legal Proceedings

• Involved in various legal proceedings arising in the ordinary course of business, including litigation matters associated with labor union organizing efforts and certain employment litigation cases that have been certified as class or collective actions.
• Also involved in routine liability claims arising from alleged customer injuries, shareholder-related actions, and consumer fraud claims.
• Management believes the risk of a material adverse effect on consolidated financial position, results of operations, or cash flows associated with these litigation matters is remote.

Related Party Transactions

• The Nestlé Global Coffee Alliance, from which the company receives product sales and royalty revenues, is a significant partnership.
• The newly formed joint venture with Boyu Capital for China retail operations will result in Boyu Capital acquiring up to a 60% interest, making it a related party (equity method investee) upon closing.

Stakeholder Impact

• Shareholders: Significant decrease in net earnings and EPS, coupled with operating margin contraction and a high effective tax rate, will negatively impact short-term shareholder returns. The quarterly dividend of $0.62 per share was maintained.
• Employees (Partners): Labor investments are being made as part of the 'Back to Starbucks' strategy. However, the restructuring plan involved a reduction in the support partner workforce and 165 store closures, leading to severance costs. New career opportunities are anticipated with the China joint venture.
• Customers: The 'Back to Starbucks' strategy aims to revitalize coffeehouses, enhance the customer experience (e.g., Green Apron Service standard), and introduce on-trend menu innovation. Store closures may impact convenience for some customers.
• Suppliers: Inflationary pressures, particularly on coffee and other commodities, and tariffs are impacting product and distribution costs.
• Creditors: Proceeds from the China joint venture are planned for debt reduction, which is expected to strengthen the balance sheet. The company remains in compliance with all applicable debt covenants.

Next Steps

• Refine and execute 'Back to Starbucks' initiatives to maintain topline momentum and build sales leverage.
• Invest in cafes, customer experience, digital experiences, supply chain, and technological efficiencies.
• Complete the restructuring plan and remaining store closures within fiscal year 2026.
• Work with Boyu Capital to expand into more cities across China.
• Close the joint venture transaction with Boyu Capital by early calendar year 2026.
• Use transaction proceeds for debt reduction to strengthen the balance sheet.
• Monitor macroeconomic pressures for alleviation in the second half of the fiscal year.
• Pay quarterly cash dividend of $0.62 per share on February 27, 2026.

Key Dates

Recommendation

The quarter's financial results show significant headwinds, particularly the sharp decline in net earnings and operating margin, exacerbated by restructuring costs and a one-time tax charge related to the China joint venture. While revenue growth and comparable store sales are positive, the profitability challenges are substantial. The strategic divestiture in China and the 'Back to Starbucks' initiatives are long-term plays aimed at future growth and efficiency, but their immediate impact is negative. An investor should hold to observe the execution and impact of these strategic shifts and the alleviation of macroeconomic pressures in the coming quarters before making a definitive buy or sell decision. The long-term potential in China and the brand strength are still present, but the short-term financial performance is concerning.

Keywords

Starbucks, SBUX, Earnings, Quarterly Report, 10-Q, Financial Results, China Joint Venture, Boyu Capital, Restructuring, Coffee, Retail, Comparable Store Sales, Operating Margin, Inflation, Labor Costs, SEC Filing