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Beverage restaurant chain Starbucks (NASDAQ:SBUX) reported its Q1 2016 earnings yesterday (Jan 21), after market close. Its earnings per share came in at $0.46, exceeding analysts’ estimates of $0.45 per share. This represents a 15% increase over the $0.40 per share registered last year, when factoring out an extraordinary gain related to the acquisition of ownership interest in Starbucks Japan. Is Starbucks stock a buy after the latest earnings update?

Strong holiday performance

Holiday controversy over a neutral red cup didn’t hurt Starbucks the least bit. The second line item of Starbucks’ most recent earnings announcement began with “Strong Holiday Performance Drives 9% Comp Growth in the U.S. and Americas”. I conjectured in my Starbucks’ earnings preview that the controversy actually served as a draw. It’s difficult to tell whether or not negative discourse about the cup added to Starbucks’ sales, but it certainly didn’t hurt either.

Customers spending more

As further evidence of Starbucks’ brand strength, the report gave indication that customers are coming back in droves and spending more at the company’s established locations. Making purchases easier via mobile and digital pay increased the convenience for customers to go in and buy products. Rewarding customer loyalty also served as a catalyst for purchases. The earnings announcement indicated a “Record $1.9 billion load on Starbucks Cards in the U.S. and Canada”.

Same store sales increased 8%, representing an impressive feat for an established but growing multinational company. Customer transactions increased 4% on a consolidated basis, while ticket transactions increased 4%. It’s always a good sign to see customers return to established locations.

Other surprises in Starbucks Q1 2016 Earnings

I anticipated a stronger performance in Starbucks’ China/Asia Pacific Segment. However, the Americas actually came out on top with 9% same stores sales growth and 4% growth in transactions. The average ticket size in the region grew by 5%. Economic slowdown in China served as a deterrent to consumers in the China/Asia Pacific region where same store sales increased 5%. Transactions also expanded 4%, while the average ticket only increased by 2% in that region.

Looking ahead at FY 2016

Starbucks’ management gave the investing public many reasons for hope in its latest earnings announcement. The company plans to add 1,800 locations in FY 2016, representing an 8% increase over the previous year. Half of those locations will be in the China/Asia Pacific region, while 39% of those locations will open in the Americas.

Company management expects 12% YoY growth in FY 2016 revenue. Of course, one huge potential downfall to these lofty predictions lies in the outcome of the Chinese economy. Starbucks’ stock price could fall sharply if growth in the Chinese GDP falls more than expected. Starbucks also expects GAAP EPS in the range of $1.84 to $1.86 per share, which which was below analyst consensus estimates.

Conclusion

Starbucks trades at a lofty P/E ratio of 31 versus 19 for the S&P 500, as per Morningstar. This means that sour sentiment in the overall market combined with a dim outlook on Starbucks’ short term future may cause the stock price to correct. Long-term investors may want to take advantage of any correction. Starbucks sells a quality product with a strong brand and has eyes for the future, serving as a recipe for potential fundamental growth and subsequent growth in Starbucks stock price. Investors can also enjoy a 1.4% dividend yield.