in search of Value

Smoothie chain Jamba, Inc. (JMBA) lost $113 million in 2007 and an amazing $258 million for the twelve months ended October 7th, driving its market cap down to $36 million from over $500 million. Institutional investors have taken their losses and moved on.  Insiders and individual investors now own nearly 90% of the shares.  Mainstream sell-side analysts no longer cover the company because it is just too small – in terms of market cap – to matter to their clients.

Thus, it is likely that few people recognize that JMBA is profitable at the adjusted EBITDA level, and fewer still are likely to have gone through the exercise of translating management’s guidance into projections for 2008 and 2009.  This is just the sort of stock for a value investor who likes to do their own research and analysis.

The chart below shows adjusted EBITDA for 2007 and the latest 12 months ended October 2008, along with my forecasts for fiscal years 2008 and 2009 based on management’s publicly disclosed guidance.

Q4 Forecast

In Q4 of this year, store revenue is forecast down 5% versus last year to reflect double-digit negative comps, offset somewhat by sales from new stores.  Cost of sales is 27% versus management’s target of 26% for next year, due in part to the launch of oatmeal.  Labor is down slightly versus last year to reflect closed stores, offset by higher hourly rates.  Occupancy and store operating costs are down slightly from last year to reflect closed stores.  The resulting adjusted EBITDA loss is not far from the $12.18 million loss realized in Q4 ’07.

2009 Forecast

The 2009 forecast is based on the assumption that comp store sales are down 10-12% in Q1, down 8-10% in Q2, and flat during the second half of the year.  Costs and expenses are based on management’s guidance on the last earnings call.  If management can hit their targets for 2009, the company will generate nearly $20 million of cash flow – more than enough to meet its capital expenditure requirements.  Given the company’s cash balance of $28 million (excluding restricted cash) as of September 30th, management will have some cushion in the event that actual results do not meet these projections (although I expect this cushion to be reduced by losses in Q4 ’08 and Q1 ’09).

Summary

JMBA has taken numerous actions to reduce costs, which should bear fruit next year.  In 2009, the main challenge will be revenue growth.  The projections do not reflect any significant changes to the status quo.  We will not have real visibility into management’s plans to grow the company until we hear from new CEO James White (probably on the Q4 earnings call).

Even if one discounts management’s guidance, the company should be cash flow positive next year.  However, as management said in the last earnings call, JMBA is not expected to turn the corner until mid-year.

Due to the seasonality of the business, the soft retail environment and generally compressed consumer spending, I expect that Q4 ’08 and Q1 ’09 will show significant operating losses, which will limit upside potential in the stock in the short term and may take the price down.  As seasonal growth and a lower cost base begin to drive cash flow in late Q2 of next year, the stock price should begin to improve.  My current price target is $1.30 per share, although this is somewhat in flux until JMBA’s new CEO provides insight into how he views the business and what his plans are to grow and improve it.

(Disclosure: The author is long JMBA)