Capital Markets

No Latte for Moody’s

The ratings service places Starbucks senior unsecured debt under review for a possible downgrade.
Stephen TaubJuly 3, 2008

Starbucks has lost a little of its caffeine charge — certainly in the estimation of Moody’s Investors Service.

One day after the coffee-house chain announced it would close 600 underperforming stores, Moody’s placed the Baa1 senior unsecured rating for Starbucks on review for possible downgrade.

Moody’s, which did affirm the company’s Prime-2 short-term rating for commercial paper, said the review for possible downgrade was prompted by the closure announcement. That was part of Starbucks’s plan to reduce new store growth in fiscal 2009, as the chain noted a substantial downturn in traffic in its U.S. stores.

“The review for downgrade reflects Moody’s concern that a persistently weak economic and consumer environment will continue to negatively impact Starbucks operating performance and same-store sales at least over the intermediate term,” it added.

Moody’s said affirmation of the Prime-2 short-term rating for commercial paper reflects that in the event the long-term ratings are downgraded, the rating agency does not anticipate it would result in more than a one-notch decline from current rating levels. It also noted that as part of Starbucks’s announced actions, the company will incur a pretax charge of between $328 million and $348 million for asset write-downs and lease-termination costs, of which about $100 million will be a net cash outflow.

The review will focus on Starbucks’s expected operating performance, liquidity, and debt-protection metrics, which continue to be negatively affected by a persistently weak economic and consumer environment, all of which are not likely to abate in the intermediate term, said Moody’s.

Starbucks said the majority of the store closures are scheduled to occur during the remainder of fiscal 2008 and the first half of fiscal 2009.