Starbucks SBUX Q3 FY2026 Earnings: Revenue Down 1.4%, Profit Up 87% - The China Sale Explained
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The Hook
Starbucks $SBUX reported net earnings of $1,045.3 million for the quarter ended June 28, 2026, up 87.2% from a year earlier. Over the same three months, revenue fell 1.4%. Those two numbers look like a contradiction, and they read like one in every headline.
They are not a contradiction. They are one transaction seen from two sides. On March 30, 2026 - the first day of the quarter - Starbucks closed the sale of a 60% interest in its retail operations in China to Boyu Capital. The deal produced a $536.3 million pre-tax gain, which is most of the profit jump. It also removed $776 million of company-operated store revenue from the quarter, which is nearly six times the entire $133.3 million decline in the top line.
Take the transaction out of both lines and the quarter the 10-Q actually describes comes into view: global comparable store sales up 7.9%, North America revenue up 6.8%, consolidated operating margin up 60 basis points to 10.5% - and that margin was struck after $302.6 million of restructuring and impairment charges, against $20.8 million a year ago. The reported revenue line understates this business. The reported profit line overstates it. Neither one is about coffee.
Company Snapshot
Starbucks Corporation operates and licenses coffeehouses worldwide across three reportable segments: North America, International, and Channel Development, plus Corporate and Other. This analysis covers the Form 10-Q for the third quarter of fiscal 2026 (the 13 weeks ended June 28, 2026), filed July 29, 2026 under accession 0000829224-26-000130, compared against the quarter ended June 29, 2025.
The quarter is the first reported under a materially different shape. As of June 28, 2026 the company had 41,304 stores open worldwide against 41,097 a year earlier - essentially flat. But 7,991 of those stores changed hands during the quarter. Starbucks retained a 40% interest in the China joint venture, carried at $1.2 billion and accounted for under the equity method, and continues to own and license the brand and intellectual property to it.
The Financial Story
The revenue decline is mechanical, and the filing says so. Management's own bridge for the company-operated store line reads: minus $776 million from the conversion of Starbucks retail operations in China to the licensed joint venture model, minus $52 million from currency, plus $524 million from a 7.9% increase in comparable store sales. That nets to a $306.4 million decline in company-operated revenue. Licensed store revenue then added $95 million (including $53 million of product sales and royalties from the new China joint venture itself) and other revenue added $78 million, driven by a $89 million increase in the Global Coffee Alliance. Total: down $133.3 million. Remove China and the top line grew.
The segment table shows where the business actually is. International revenue fell 34.2% because that is where the 7,991 stores lived. North America and Channel Development both grew, and both grew their operating income faster than their revenue.
| Segment | Revenue Q3 FY26 | vs Q3 FY25 | Operating income Q3 FY26 | vs Q3 FY25 |
|---|---|---|---|---|
| North America | $7,395.1M | +6.8% | $1,008.9M | +9.8% |
| International | $1,322.6M | -34.2% | $252.8M | -7.3% |
| Channel Development | $587.9M | +21.5% | $306.2M | +40.2% |
| Corporate and Other | $17.1M | -50.4% | -$587.5M | worse by $113.3M |
| Total | $9,322.7M | -1.4% | $980.4M | +4.8% |
Now the profit line, in three honest versions. Reported pre-tax earnings of $1,419.3 million against $818.9 million is a 73.3% increase, and it is inflated by the gain. Strip the $536.3 million out and pre-tax earnings grew 7.8%, which is the number a skeptic would stop at. But that 7.8% is struck after restructuring and impairments that rose by $281.8 million year over year - $217.4 million of it a write-down of store and non-retail facility assets tied to the Starbucks Reserve and Roastery reassessment, plus $72.6 million of partner severance. Add that swing back and the underlying comparison is 41.2%.
| Pre-tax earnings | Q3 FY2026 | Q3 FY2025 | Change |
|---|---|---|---|
| As reported | $1,419.3M | $818.9M | +73.3% |
| Less the divestiture gain | $883.0M | $818.9M | +7.8% |
| Also adding back restructuring | $1,185.6M | $839.7M | +41.2% |
The gain is smaller than it looks, and it is not finished. The $536.3 million is already net of $282.8 million of cumulative translation adjustment losses and $99.7 million of net investment hedge losses recycled out of accumulated other comprehensive income. It also carries a tax bill: the filing puts total incremental income tax expense associated with the gain at roughly $198.6 million, of which $147.8 million was recognized in the third quarter, with the remainder expected in the fourth. So the gain's after-tax contribution to the quarter was closer to $388.5 million, Starbucks recognized another $44.1 million of transaction costs inside operating expenses, and roughly $50.8 million of tax on this deal is still to come.
Two of the quarter's best margin numbers are also partly mechanical. International's operating margin expanded 550 basis points to 19.1%, of which roughly 800 basis points came from the China conversion itself - a licensed model books royalties instead of store revenue and store costs. And Channel Development's margin expanded 700 basis points to 52.1%, of which roughly 1,370 basis points came from tariff impacts including refunds. That is a windfall, not a run rate. What is not mechanical is North America: revenue up 6.8%, operating income up 9.8%, comparable store sales up 8.1% on a 4.5% increase in transactions. People are walking in more often, and that is the hardest number in this filing to fake.
The balance sheet is where the cash went. Starbucks received total consideration of $3.1 billion on a roughly $4 billion enterprise value for the China business, and in May 2026 used the proceeds to complete cash tender offers repurchasing about $1.3 billion aggregate principal of its senior notes across five series. Long-term debt fell to $11,780.2 million from $14,575.9 million at the fiscal 2025 year end, down 19.2%, and total liabilities fell by $4.1 billion. There was no share repurchase activity at all in the quarter. Stockholders' equity remains at negative $7,674.3 million, a legacy of a decade of buybacks, but it improved by $783 million during the quarter.
Valuation - What It Is Worth As a Normal Business
Where it trades. Starbucks closed at $104.14 on July 29, 2026 for a market capitalization of about $118.7 billion, on a forward price to earnings ratio near 39.5 and an EV/EBITDA multiple near 26.9 (stockanalysis.com and GuruFocus, July 2026). The dividend is $2.48 annualized, a yield of about 2.3%. Trailing twelve month free cash flow through March 2026 was roughly $2.73 billion (GuruFocus). The company reported adjusted earnings per share of $0.85 against a $0.67 consensus and revenue of $9.32 billion against $9.16 billion expected, raised full-year guidance, and the stock rose about 8.6% on the print. Analyst median target across 15 estimates over the prior six months was $110, with at least one raised to $120 after the report.
Scenario valuation. From the filing: total debt of $13,278.6 million against $3,449.8 million of cash and restricted cash and $160.5 million of short-term investments gives net debt of about $9.67 billion, on 1,143.8 million diluted shares. Annualizing the first clean post-China quarter puts the revenue base near $37.3 billion. Below is a perpetuity-growth free cash flow model on stated assumptions - this is an implied-value range under those assumptions, not a price target and not investment advice.
| Case | Steady-state FCF | Terminal growth | WACC | Implied value per share |
|---|---|---|---|---|
| Bear | $2.7B | 2.0% | 7.5% | $35 |
| Base | $3.9B | 3.0% | 7.5% | $70 |
| Bull | $5.0B | 3.5% | 7.0% | $121 |
The bear case simply extends today's trailing free cash flow forever. The base case assumes the Back to Starbucks investment cycle ends and free cash flow recovers roughly 45% off the trailing figure. The bull case assumes a 14% operating margin on a licensed-heavier mix plus disciplined capital spending.
Re-rating on normalized earnings. Take the annualized $37.3 billion revenue base at a 14% operating margin (the quarter's own margin excluding restructuring was 13.8%), less about $400 million of net interest on the reduced debt load, taxed at 26%: normalized earnings of roughly $3.12 per share. Today's $104.14 is 33.4 times that. At 25 times the implied value is $78; at 30 times, $94; at 35 times, $109; at 40 times, $125.
What the price implies. Run the base-case discount rate and growth backwards from today's $128.8 billion enterprise value and the market is underwriting about $5.6 billion of steady-state free cash flow. That is roughly double the trailing figure. The turnaround in this quarter is real and the operating numbers are better than either headline suggests - but at $104 the market has already bought the recovery in full and then some.
Risks
The visible ones sit inside the transaction. Roughly $50.8 million of tax on the divestiture gain has yet to be recognized, and it lands in the fourth quarter. China is now a single equity-method line rather than a revenue and cost stream, so the market that Starbucks calls a critical growth market disappears from the income statement except as one number, and the retained 40% stake is carried at $1.2 billion after the joint venture raised its own debt in the transaction - a leveraged position in a market Starbucks no longer controls. Restructuring is not finished either: $234.8 million of restructuring liabilities remained on the books at quarter end, and the fiscal 2026 plan covering the global support organization and the Reserve and Roastery reassessment was announced during this very quarter.
The less visible risk is that one quarter is not a trend. For the first three quarters of fiscal 2026, North America operating income is still down 10% year over year at $2,555.8 million against $2,848.3 million, with margin contracting 210 basis points, driven by the labor investments behind Back to Starbucks. Store operating expenses as a percentage of company-operated revenue still rose 30 basis points in the quarter. And the tariff refunds that supplied roughly 1,370 basis points of Channel Development's margin expansion will not repeat. Starbucks also disclosed no material change to the risk factors in its most recent 10-K.
The Bottom Line
The framework here is simple: read the two headline numbers as one event, then look at what is left. What is left is a coffee business with comparable store sales up 7.9% globally and 8.1% in North America, transactions up rather than just ticket, a top line that grew everywhere except the segment it sold, and $2.8 billion less long-term debt. It is also a company that took $302.6 million of restructuring charges in a single quarter, has one more tax payment on the sale to book, and now reports its largest growth market as a single equity-method line. What to watch next quarter: whether North America comparable transactions stay positive without the tariff refunds and the divestiture gain, and what the China joint venture contributes as one line instead of eight thousand stores.
Every figure above is drawn from Starbucks' Form 10-Q for the quarter ended June 28, 2026, except the market data and consensus figures, which are attributed inline. Implied values are modeled under stated assumptions. This is not investment advice and contains no price targets.
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