Key Points:
- CEO Brian Niccol’s Back-to-Starbucks program continues to move the business in a favorable direction, with sales and margin rates, guidance, and re-investment all climbing again.
- A lot of press and investor attention on Starbucks and the category with ample “fear” that Starbucks is being encroached upon by Dutch Bros, 7 Brew, and the other kiosk operators. Starbuck’s FQ3 results and our analysis demonstrate that there is little encroachment because the kiosk segment is contributing new occasions and growing the pie, versus being an offering that is seeking to take share.
Readers will recall our view that the out-of-home coffee category is bifurcating into handcrafted, cozy-comfy coffee-house experiences, where one lingers longer, and drive-through kiosks. With that, Starbucks chose to go “Back to Starbucks,” investing in service, store standards, product, and emotion. Well, Starbucks is back financially, with FQ3 showing monster US comp-sales of +7.9% (+4.2% transactions / +3.6% ticket), well above consensus (+6.3%) (but in-line with Advan’s observed traffic* / ticket of +3.9% / +3.8%). Earnings were well ahead, and guidance was raised. Management was very complimentary on the store upgrades / remodels (into comfy places) and is accelerating the program. We see supporting evidence of longer-lingers as visit times also increased (+2.4%). (We caught the cozy-comfy turn early; see our piece from March ’25 here.)
Per the acceleration of remodels, CEO Brian Niccol said, “In Q3, we surpassed 1,000 total uplifts across North America, reaching our fiscal 2026 goal ahead of plan. Early data from uplifted coffee houses show transaction lift across access points, dayparts, formats and customer segments. In short, we like what we're seeing, and they're proving to be a strong brand halo. That's why we're accelerating our pace with the intention of completing at least 1,500 uplifts by fiscal year-end 2026 and accelerating further in fiscal 2027.”
In terms of US expansion, CFO Cathy Smith said, “And in North America, while overall performance has strengthened, we are gaining deeper visibility into some underperforming coffee houses, which could result in some closures. As always, we will continue to assess our North America portfolio to ensure we have a healthy foundation of coffee houses on which to build for the future, a future which we believe has a long runway of new coffee house growth in both North America and around the world.” i.e. more consideration is happening.
Per consideration, Starbucks has discussed its aspiration to drive higher penetration in the Southeast. Thus far this year, that’s yet to be acted upon. Texas has received the most new locations (+29), taking the count to 1487, or about half as many as California (3047). Texas is also a very popular state for the Kiosk brands, Dutch Bros (229 + 4 YTD) and 7 Brew (115 +33YTD). Yet, despite all the fill-in aggregate, traffic growth for the three in Texas is still higher, and within that, Starbucks* gained +3.6% in Q2 (on a per-store basis), Dutch Bros, +4% (per kiosk), and 7 Brew, -5% per kiosk (a per-location average figure). 7- Brew was +0.3% on a comp-basis (per Claude+ADVAN), which is less than we expected and much less than Dutch Bros TX’ comp of +5%. As we’ve argued, we see the kiosk segment as contributing to occasions and growing the pie, versus an offering that is taking share and the “incumbent’s slice.” The analysis here and Starbucks’ strong quarterly results again support our view.
