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Originally published July 21, 2010 at 6:08 PM | Page modified July 22, 2010 at 10:48 AM

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Starbucks results get a big lift from revamped Frappuccinos

Sugary iced drinks helped boost Starbucks' U.S. sales growth to heights not seen in more than four years.

Seattle Times business reporter

Maybe it was the sweltering weather that everyone outside the Northwest experienced.

Or maybe it was the new recipe Starbucks introduced.

Possibly it was the marketing campaign around how customizable the new drinks are.

Whatever propelled customers toward Starbucks Frappuccinos, the sugary iced drinks helped boost U.S. sales growth to heights not seen in more than four years. They also helped lift profits 37 percent to $207.9 million, or 27 cents a share, for the third fiscal quarter ended June 27.

Along with the quarterly results it reported Wednesday, the company also announced a 3-cent increase to its quarterly dividend, which debuted at 10 cents a share in April.

Still, the stock price slipped 46 cents to $24.71 in after-hours trading after the results, perhaps because of slightly disappointing profit guidance for the fiscal year that begins in October.

The stock had dipped 60 cents to $25.17 in regular trading on Wednesday.

Wall Street had projected fiscal 2011 profits of $1.41 a share, and Starbucks said it expects profits to be $1.36 to $1.41.

"Even though they may be guiding lower, they're probably managing expectations," said R.J. Hottovy, an analyst with the investment-research firm Morningstar. "They'll probably find a way to come in on the high end or exceed the guidance."

Sales at Starbucks stores open more than a year — which is the vast majority, now that it has thrown the brakes on expansion — rose 9 percent in April, May and June.

International stores were up just 6 percent, while the much larger U.S. store base saw a 9 percent leap.

Frappuccinos and Vivannos, both "blended beverages," were responsible for about 2 percentage points of the U.S. gain, according to CEO Howard Schultz.

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"Beyond that, the campaign's halo effect on the brand helped drive increased sales of bottled Frappuccino for the first time in over two years," he said.

Starbucks' costs in the third quarter rose about 6 percent, partly because it is spending more on marketing campaigns, including the new Frappuccino launch in May.

The milk-shakelike drinks, some of which do not include coffee, bring Starbucks more than $2 billion a year in sales, about 20 percent of its total revenue each year.

But Frappuccino sales peaked in 2006, prompting the new recipe and customization campaign.

This year, Starbucks will spend about 2.5 percent of its sales dollars on marketing, up from less than 2 percent.

Most restaurant chains its size spend 3 percent or more, said Sharon Zackfia, an analyst at William Blair & Co.

"Whether it's causal or correlation, I don't know, but traffic (into stores) has been improving during the time they've had a bigger marketing spend," she said.

After years of battling rising dairy costs, Starbucks now says that escalating coffee prices will take a 4-cent bite out of earnings in fiscal 2011.

Because it has long-term contracts with coffee growers, the chain has been shielded from recent coffee-price spikes caused by dwindling inventories of coffee worldwide.

Now the high prices are catching up with Starbucks.

Zackfia said it's a manageable issue.

"I worry much more about things like labor and health care," she said.

Melissa Allison: 206-464-3312 or mallison@seattletimes.com

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