Starbucks Earnings: What's Brewing This Quarter?

Starbucks (SBUX -1.02%) will release its quarterly report on Thursday, and investors have become hesitatnt about the coffee giant's prospects for the near future. With competition from home brewers by Green Mountain Coffee Roasters (GMCR.DL) as well as increasingly aggressive moves from Krispy Kreme (KKD) and Dunkin' Brands (DNKN) to capitalize on the popularity of premium coffee, Starbucks needs to reestablish itself as the preeminent coffee king in order to sustain what has become a fairly lofty valuation.

Source: Wikimedia Commons.

Starbucks has come a long way in the past five years, when recession-related worries somehow convinced investors that customers might disappear forever. The strength of Starbucks' recovery has put those concerns to rest, but even with ambitious growth initiatives around the world, the coffee company still has to work hard to find more ways to boost revenue and profits going forward. Can it overcome its competitors and thrive around the world? Let's take an early look at what's been happening with Starbucks over the past quarter and what we're likely to see in its report.

Stats on Starbucks

Source: Yahoo! Finance.

Can Starbucks' earnings perk up this quarter?
In recent months, analysts have gotten a bit less excited about the prospects for Starbucks' earnings, cutting a nickel per share from their estimates for the current quarter as part of a smaller downgrade for fiscal 2014. The stock has topped out and started to give back ground, falling 2% since mid-October.

Starbucks' September-quarter results gave investors good news on the growth front, with same-store sales growing 7% globally and 8% in the key North American segment. Overall, revenue climbed 13%, boosting earnings by 37% and establishing a continued upward trajectory for the coffee giant. International expansion has remained a key aspect of Starbucks' growth, with the company having just opened its 1,000th location in China. Yet investors weren't happy with its guidance for the full 2014 year, which came in between 1% and 5% below what they had expected to see.

To grow earnings faster, Starbucks will have to overcome competition. Dunkin' Brands expects to boost its store count in the U.S. to almost 14,000 in the coming two decades, posing the threat of oversaturation for customers for whom brand loyalty isn't of paramount importance. Krispy Kreme has mounted an impressive comeback, even though its own pessimistic guidance back in December sent shares skidding from explosive gains earlier in 2013. Still, Starbucks has increasingly turned to licensed locations in areas like shopping malls and airports in order to boost its own growth without the full expense of opening a company-owned location.

Source: Starbucks.

Starbucks is also working to boost sales of its VIA instant line, launching new latte offerings in an effort to cater to the home market. The strategy is interesting in light of the success of Green Mountain's Keurig home-brewing systems, but it indicates that Starbucks thinks there's more to be gained from offering quick-brew coffee in a different format rather than focusing solely on its own Verismo brewer line.

Yet Starbucks has struggled to go beyond its premium beverages to boost sales of food items. Despite huge efforts to roll out more appealing baked goods from its La Boulange acquisition, revenue from food remains at less than a fifth of Starbucks' total sales. That leaves it vulnerable to food-based competition from Krispy Kreme and Dunkin', both of which have brands tied more to their food products than their coffee.

Moreover, Starbucks got hit with an unusual major legal expense, losing an arbitration proceeding that will force it to pay $2.76 billion in damages and interest to Mondelez International (MDLZ -0.71%) as a result of its having terminated its supply contract to put Starbucks coffee in grocery stores. The resulting restatement will affect its previous-quarter results rather than the quarter it's about to report on, but the financial hit will still be meaningful for Starbucks.

In the Starbucks earnings report, watch to see how CEO Howard Schultz responds to all the crosscurrents hitting the business lately. With so much at stake at this critical juncture, Starbucks needs to reassure investors that it still has further room to grow even amid cutthroat competition.

Click here to add Starbucks to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.