Starbucks Actions Severe Enough to Spur Credit Rating Activity (SBUX)

Standard & Poor’s (via its Ratings Services) has placed its corporate credit ratings on Starbucks Corp. (NASDAQ: SBUX) on CreditWatch with negative implications.  This pertains to the corporate ratings including the ‘BBB+’ long-term corporate credit and ‘A-2’ short-term ratings.

This move on CreditWatch come after word that it will close approximately 600 underperforming company owned stores in the U.S.  S&P noted that this is far more than the 100 store closures previously announced.

The credit action is also based on the internal cost estimates of between $328 million and $348 million, with cash charges of about $100 million on an after-tax basis.

S&P also noted the slower growth of U.S. stores to less than 200 in 2009 as the reason for CreditWatch.  It is important that S&P said in its release that it does not expect credit metrics to change significantly due to the charges….

But S&P did also say it would reassess Starbucks’ business risk profile in light of lower consumer spending, revised growth plans, and increased competition.

Before this ratings action we had seen Starbucks shares trading up close to 3%, but shares are now only up 0.3% at $15.67 on light to normal trading volume.

Those old analogies of "how can a coffee company trade with a P/E ratio north of 50?" are now no longer looking just pessimistic and nay-saying.  They are starting to look like an omen.

Jon C. Ogg
July 2, 2008