Credit rating agency Moody's Investors Service on Wednesday downgraded its rating on Starbucks Corp.'s (SBUX) $550 million senior unsecured notes to Baa3 from Baa2, taking into account the challenges lying ahead for the company. Moody's also lowered the company's short-term commercial paper rating to Prime-3 from Prime-2.
In his investor note, Bill Fahy, a senior analyst at Moody's said that the "downgrade reflects Starbucks challenge of refocusing the business without significantly damaging its 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."
The analyst added that continued weakness in consumer spending and increasing competitive pressures will limit Starbucks' ability to materially improve operating performance over the intermediate term.
However, Moody's maintained Starbucks' outlook at stable saying that the company's various strategic initiatives should limit a material deterioration in its brand equity.
Responding to Moody's downgrade of its credit ratings, Starbucks said that it remains in a very solid financial shape and is well positioned for sustainable and profitable growth.
Starbucks noted that for the first six months of fiscal year 2009, it generated $715 million in cash from operations and approximately $479 million in free cash flow. The company said that it reduced its short-term borrowings by $487 million to $226 million during the same period and expects to substantially reduce the outstanding balance during the remainder of the calendar year.
The specialty coffee retailer said that it expects to deliver operating cash flow in excess of $1 billion in fiscal 2009, continuing the trend that has been in each of the past three years. The company said its focus on cost savings has been paying off as can be seen from the $120 million of permanent cost savings delivered in Q2, following the $75 million produced in Q1. Starbucks expects to deliver approximately $150 million of permanent cost savings in Q3 and $175 million in Q4, for a total cost reduction exceeding $500 million in fiscal 2009.
SBUX has been trading in the range of $12.74-$13.16 over the last twelve months. The stock closed Wednesday's regular trading session at $12.75, down 3.26% on a volume of 11.52 million shares.
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