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Starbucks Is Downgraded at Fitch With Outlook Negative

The ratings agency cites Starbucks' growing debt, the impact of Covid-19 and weak earnings.
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Starbucks  (SBUX) - Get Starbucks Corporation Report shares fell Monday after the coffee giant received a credit rating downgrade from Fitch Ratings to BBB (the second lowest investment-grade rating) from BBB+, with a negative outlook.

A negative outlook means a possible further downgrade. The ratings agency acted because of Starbucks’ proposal for $3 billion of unsecured notes, its recent poor earnings report and the impact of the coronavirus pandemic.

The new debt creates a “higher leverage profile” for Starbucks, Fitch analysts wrote in a report. “The new debt is projected to increase Starbucks' adjusted debt/EBITDAR by around a half a turn on an ongoing basis, though Fitch recognizes the company could use a portion of the proceeds to fund the maturities of $1.25 billion of debt that comes due in the company's fiscal 2021, mitigating the leveraging impact.”

Then there’s Covid-19. “The negative outlook reflects the significant business interruption from the coronavirus pandemic and the implications of a downturn in discretionary spending that Fitch expects could extend well into 2021,” the ratings agency said.

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As for earnings, Starbucks reported last week that net income fell to $328.4 million, or 28 cents a share, for the quarter ended March 29, from $663.2 million, or 53 cents, a year earlier.

“Starbucks' earnings for fiscal second quarter 2020 came in worse than expected,” Fitch said. “While same-store sales were better than Fitch's low expectations … EBIT was below expectations due to costs related to the pandemic.”

Starbucks shares recently traded at $72.04, down 2.37%, and have dropped 16% over the past three months.