Earnings Preview: Starbucks 2Q Profits Up After Falling Costs and Expansion

Starbucks Corporation (Nasdaq: SBUX) is expected to report a higher second quarter profit as the company's expansion efforts and growing line of products, as well as the diminishing cost of coffee, continue to add revenue sources for the company.

The Seattle, Wash., company will report results of the three months ended March 31 on Thursday after the markets close.

Analysts polled by Reuters expect Starbucks to report earnings of 39 cents per share, up 14.7 percent from 34 cents per share a year earlier. Revenue is forecast at $3.18 billion, up 13.9 percent from $2.79 billion a year earlier.

Comparable-store sales, which are reported quarterly, increased 9 percent in the first quarter. The results led Starbucks to boost its guidance for fiscal 2012 for earnings per share to $1.82.

The company spent the better part of the quarter introducing new products and continuing global expansion. That, combined with low costs, helped the company's outlook, according to Bank of America Merrill Lynch analyst Joseph T. Buckley.

Starbucks' base earnings power has been redefined higher by substantial cost savings that should be sustainable, he wrote in a recent note.

On Feb. 15, the coffee chain announced the opening of licensed stores in the majority of Target's 135 Canadian locations.

Starbucks also announced a partnership with India's Tata Global Beverages, creating TATA Starbucks Ltd. The joint venture will operate Starbucks cafes across India, beginning with stores in Delhi and Mumbai this year.

The coffee giant also made inroads in Costa Rica, announcing in January the opening of its first store there this May. It also continued to expand in China and the Asia-Pacific region. Starbucks on average opened one new store in China every four days in 2011.

Analysts expect the overseas investment to pay off during the fiscal 2012 second quarter with a sales increase of 17 percent in the China and Asia pacific region driving overall revenue increases, Buckley said in his note.

About half of the company's coffee needs for next year have been locked in at favorable levels versus FY 2012, he said. With these dynamics, we believe an important question will be to what extent the company re-invests in the business, especially internationally.

The company also announced an alliance with Green Mountain Coffee Roasters Inc. (Nasdaq: GMCR), which will call for Starbucks to manufacture Vue packs for use in GMCR's Keurig Brewer.

Most notably, the Seattle-based company made China a top priority, declaring on April 1 that the world's second largest economy will be its second largest market by 2014.

We continue to see strong growth in China giving us even greater confidence in achieving our goal of building China as our largest market, outside of the U.S., by 2014, said John Culver, president, Starbucks China and Asia Pacific, in a statement.

While we have an ambitious plan to accelerate our pace of growth, we will make sure we are growing the brand in a holistic way; delivering the highest quality espresso, locally-relevant products and store design innovations, as well as elevating the special connection we have with our customers and the local communities where we do business.

The company did endure negative attention in the second quarter when it was discovered that crushed insects were used as a dye for its trademark Frappuccino, among other products. The company announced on April 19 the phase-out of the use of ground up cochineal insects to make food dyes.

Starbucks' shares rose 28 percent during the quarter, hitting a high of $56.26 on March 27, ending the three-month period up.

Shares rose $1.37, or 2.36 percent, to $59.42 in Wednesday afternoon trading.