SEATTLE Starbucks Corp.’s credit rating was downgraded late Wednesday by ratings agency Moody’s Investor Services because of the coffeehouse company’s weaker performance and increased competitive pressures.
New York-based Moody’s lowered the rating of Starbucks’ $550 million senior unsecured notes one notch to Baa3, from Baa2. It also lowered the company’s short-term commercial paper rating. A general Baa rating is one that holds “moderate credit risk,” according to Moody’s, and the number 3 is a modifier that further analyzes a company’s standing, indicating “ranking in the lower end” of those with Baa ratings.
“The downgrade reflects management’s challenge of refocusing the business without significantly damaging the Starbucks brand, as well as weaker-than-anticipated operating performance that has resulted in debt protection measures that are more representative of a Baa3 senior unsecured rating,” Moody’s senior analyst Bill Fahy said in a report.
The downgrade also reflected Moody’s stance that continued weakness in consumer spending and increasing competitive pressures would limit Starbucks’ ability to significantly improve operating performance over the intermediate term. Quick-service chains McDonald’s and Dunkin’ Donuts have worked to heavily promote new premium coffees that some have said specifically target the Starbucks customer.
In response to the ratings downgrade, Starbucks issued a statement outlining its financial performance, which included the generation of $715 million in cash from operations and about $479 million in free cash flow for the first six months of its September-ending fiscal year. The company also noted that it had reduced short-term borrowings by $487 million, to $226 million, and that it expects to “substantially reduce” the outstanding balance during the remainder of the calendar year.
“Starbucks remains in a very solid financial position,” Troy Alstead, Starbucks’ executive vice president, chief financial officer and chief administrative officer, said in a statement. “The company continues to generate strong operating cash flow and maintain strong liquidity.”
The Seattle-based coffee company, which operates or licenses about 16,000 locations worldwide, has struggled for the past few quarters against slowed customer traffic and heavy charges for restructuring efforts that included the closure of more than 800 stores and employee layoffs. Last month Starbucks reported a 77-percent decrease in earnings for the quarter ended March 29, and a same-store sales decline of 8 percent.
The chain has been working to build consumer traffic with various menu-pricing strategies, including breakfast pairings for $4, as well as beefed up marketing campaigns.
Contact Sarah Lockyer at [email protected].