Investing.com -- On April 30, 2025, Moody’s Ratings announced a change in Starbucks Corporation (NASDAQ: SBUX )’s outlook from stable to negative. Despite this, all ratings for the company, including the Baa1 senior unsecured notes ratings and Prime-2 commercial paper program rating, have been affirmed by the agency.

The change in Starbucks’ outlook is due to weakening profitability and credit metrics, a result of sales deleveraging and increased labor investments. These factors are part of Starbucks’ "Back to Starbucks" reinvention plan. Although the company showed sequential improvement in comparable store sales, the profitability has declined significantly. This has led to a rise in Moody’s adjusted debt/EBITDA to around 3.2x from approximately 2.9x as of fiscal September 2024.

Starbucks’ reinvention strategies are expected to increase costs in the near term. Implemented in a challenging consumer spending environment, these strategies could further risk near-term deterioration before the full implementation of the reinvention plan and subsequent recovery of performance.

The Baa1 senior unsecured notes ratings of Starbucks benefit from the company’s global brand strength, dominant position in the US specialty coffee segment, global diversification, and significant scale. The company’s innovative product offerings, diverse daily operations, popular loyalty program, and digital initiatives have historically resulted in strong and consistent operating earnings.

The ratings also reflect Starbucks’ good liquidity, which supports it in managing the current difficult global operating environment and near term debt maturities. Moody’s believes Starbucks will maintain a conservative financial policy regarding capital allocation. Despite expected earnings declines and rising leverage over the next twelve months, the company is anticipated to maintain its commitment to reduce leverage below its target. Consequently, share repurchases are expected to remain suspended for the rest of fiscal 2025.

However, Starbucks faces challenges such as heightened competition in key markets, ongoing cost pressures related to labor and commodities, and margin pressures due to increased investments as part of its reinvention plan. Increasing uncertainty about consumer willingness and ability to spend on food away from home amid rising living costs also remains a key concern.

According to Moody’s, a ratings downgrade could occur if Starbucks experiences a prolonged weakening of comparable sales or earnings, or if financial policies become more aggressive, leading to a sustained deterioration in credit metrics. A deterioration in liquidity, such as negative free cash flow or a failure to address near term maturities in a timely manner, could also lead to a downgrade.

An upgrade in ratings could occur if Starbucks maintains positive same store sales, particularly from customer traffic, that drives strong earnings and liquidity and a financial policy committed to stronger credit metrics. For an upgrade, Starbucks would need to achieve and sustain Moody’s-adjusted debt/EBITDA of under 2.5x and retained cash flow/debt above 25%.

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