Moody's Upgrades Starbucks' (SBUX) Senior Unsecured Ratings to 'A2' Following Completion of Review; Outlook Stable

Moody's Investors Service upgraded Starbucks Corporation's (Nasdaq: SBUX) ("Starbucks") senior unsecured ratings to A2 from A3, short-term commercial paper rating to Prime-1 from Prime-2, and senior unsecured shelf to (P)A2 from (P)A3. The rating outlook is stable. This concludes Moody's review that was initiated on June 16, 2015.

RATINGS RATIONALE

"The upgrade reflects Moody's view that Starbucks measured growth strategy, product pipeline, digital initiatives and balanced financial policy will continue to drive operating earnings, credit metrics, liquidity and scale that is more reflective of an A2 rating" stated Moody's Senior Credit Officer Bill Fahy. Starbucks various product offerings and digital initiatives have driven strong operating metrics and earnings which along with a reduction in adjusted debt levels due to changes in Moody's approach for capitalizing operating leases has resulted in significantly stronger credit metrics. As of the LTM period ending June 28, 2015, leverage was approximately 1.6 times, interest coverage was around 14 times and retained cash flow to debt was about 35%. The updated approach for standard adjustments for operating leases is explained in the cross-sector rating methodology Financial Statement Adjustments in the Analysis of Non-Financial Corporations, published on June 15, 2015.

The A2 senior unsecured rating reflects Starbucks global brand strength, dominant position in the US specialty coffee segment, global diversification, significant scale, and balanced financial policy. The ratings are also driven by Starbucks strong and consistent operating trends driven in-part by new product offerings, greater day part diversity, well accepted loyalty program and ecommerce initiatives that have resulted in strong credit metrics and excellent liquidity. The ratings also consider the negative impact that soft consumer spending, heightened competition, and cost pressures -- particularly labor -- could potentially have on earnings and debt protection metrics. The ratings also reflect the limited scope and concept concentration which is focused towards a single product -- coffee.

The stable outlook reflects Moody's view that a steady pipeline of new innovative products, enhanced digital initiatives, an engaged employee base and disciplined restaurant growth both in the U.S. and internationally should continue to strengthen the Starbucks brand and drive further improvement in earnings, cash flows, and debt protection metrics. The outlook also incorporates Moody's view that management will balance returns to shareholders in a manner that preserves credit metrics and liquidity appropriate for the A2 rating.

An upgrade would require maintaining solid operating performance, particularly positive traffic and average ticket, as well as greater scale and revenue diversity in regards to regions and products that continues to strengthen the Starbucks brand. In regards to debt protection metrics an upgrade would also require debt to EBITDA of around 1.5 times and retained cash flow to debt above 40% on a sustained basis. An upgrade would also require management's firm commitment to a balanced financial policy that is consistent with a higher rating and maintaining excellent liquidity.

Factors that could result in a downgrade include a deterioration in Starbucks operating performance that results in debt to EBITDA above 2.0 times, EBIT coverage of interest falling below 9.0 times or if retained cash flow to debt fell below 30% on a sustained basis.

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