Starbucks 10-Kyear ended 2026-09-27

Executive Summary

Starbucks sells coffee, beverages and food to consumers through company-operated and licensed coffeehouses, earning retail sales, royalties and packaged-product revenue. Its “Back to Starbucks” turnaround centers on better service, staffing and coffeehouse experiences, while the China business has shifted to a partner-led model. Customer traffic and operating profitability improved in FY2026, but earnings remained below FY2024 and benefited from a divestiture gain. The investment case rests on whether service improvements sustain customer demand and cover higher labor costs; management expects revenue growth to moderate as China’s ownership change and North American closures affect comparisons.

What's Happening in the Business

Starbucks is prioritizing the experience inside existing coffeehouses over rapid expansion. Its Green Apron Service rollout combines staffing, routines and technology to improve order flow while preserving time for coffee preparation and customer interaction. New Green, Gold and Reserve Rewards tiers launched in Q2. Management expects fewer North American company-operated openings in FY2027 while rebuilding development capabilities and applying stricter return criteria.

China’s ownership change reshaped the business. Boyu Capital acquired 60% of the retail operations, with Starbucks retaining 40%, brand ownership and licensing rights. The transfer moved 7,991 coffeehouses into the licensed network and reduced FY2026 company-operated International revenue by ≈$1.5B. Starbucks now receives royalties, product-sale revenue and its share of joint-venture income rather than consolidating store sales and expenses. Management expects lower reported revenue but higher operating margins; the partners’ long-term aspiration is up to 20,000 China locations.

Portfolio cleanup continued alongside the service investment. Starbucks closed 516 coffeehouses under two restructuring plans and reorganized support functions, including moving some functions to Nashville. Both plans and remaining closures are expected to finish in H1 FY2027. These actions remove underperforming assets but also constrain near-term revenue growth and create exit costs.

Key Financial Highlights

FY2026 ended 9/27/2026. Changes are Y/Y unless otherwise indicated.

• Customer demand: Company-operated comparable sales rose 6.2%, combining transactions +3.2% and average ticket +3.0%. North America’s comparable sales rose 6.6%, including transactions +3.6%; delivery, pricing, product mix and food purchases supported ticket growth.
• International profitability: The China model change contributed ≈330bp of margin improvement, and lower China operating and depreciation costs after held-for-sale classification contributed ≈200bp. Comparable sales increased 3.7%, so the margin improvement was not simply stronger store trading.
• Channel Development: Global Coffee Alliance revenue increased $266M, largely reflecting elevated coffee prices rather than solely higher consumer demand. Slower growth in North American Coffee Partnership income relative to segment revenue reduced margin by ≈170bp.
• Cost structure: General and administrative expense fell 9.3% to $2.37B, while restructuring and impairment expense fell 23% to $689M. Costs outside the reported segments produced a $1.97B operating loss, improved 4.1%; restructuring efficiencies were partly offset by performance compensation and China transition expenses.
• Taxes: The effective rate rose to 34.2% from 25.9%. Releasing assertions that foreign earnings would remain invested overseas generated $274M of discrete expense; the China transaction and retained interest added $200M of incremental tax expense.
• Cash and shareholder returns: OCF increased 5.1% to $4.99B, exceeding net earnings because of noncash expenses and working-capital movements; the divestiture gain was removed from OCF. Capital spending fell 45% to $1.26B, lifting FCF to $3.72B from $2.44B. Dividends were broadly unchanged at $2.8B; no shares were repurchased, and outstanding shares increased 0.3%.
• Commitments: Cash requirements due within one year totaled $4.67B, including $1.50B of debt principal, against $4.2B of cash and investments and an undrawn $3.0B revolving facility. Another $526M of operating leases had not commenced; management expects capital spending to rise in FY2027.

Risk Assessment

• North American dependence: This segment supplies 76% of revenue, making weaker U.S. discretionary spending, competition or customer resistance to pricing difficult for other markets to offset.
• Turnaround execution: Service investments and restructuring require spending before returns are assured, while closures and remodels can disrupt sales and further weak performance could trigger impairments.
• Partner dependence: China’s new structure and Channel Development’s reliance on Nestlé leave important growth engines dependent on partners Starbucks does not fully control.
• Coffee and labor exposure: Volatile arabica costs, limited hedging coverage and bargaining at union-represented U.S. coffeehouses could raise costs or disrupt service.
• Financial flexibility: A $7.67B shareholders’ deficit, substantial lease commitments and continuing dividends limit the cushion if operating cash generation weakens.

What to Watch

• Service-led recovery: North American transaction growth is now positive; sustained gains would validate Green Apron Service, while renewed traffic declines would challenge the turnaround.
• China partnership: Watch licensed revenue and joint-venture income as the partners pursue expansion; growth would validate the model, while weaker contributions would expose its dependence on Boyu’s execution.
• Restructuring completion: Management expects completion in H1 FY2027; success means lower recurring costs without renewed sales deterioration, rather than continuing closure charges.
• Reinvestment capacity: Capital spending is expected to rise after this year’s sharp reduction; sustained FCF would support reinvestment and dividends, while weaker cash generation could constrain both.