in search of Value

Jamba Inc. (JMBA) announced its first quarter 2009 results, and issued its 10-Q, after the market’s close yesterday. Management has made solid progress on its “BLEND” plan to reduce costs, expand its in-store food offerings, license the brand for packaged food items, and shift its mix of company-owned versus franchised stores. Sales were in-line with expectations.  Costs were better than expected.

The headline same-store sales number of -13.8% was consistent with my March 27th forecast, and with management’s prior guidance, after adjusting for a reduction in store hours. It was somewhat disappointing to hear that there was no positive trend toward the end of the quarter.

The good news was on the cost side, with COGS significantly lower than I had anticipated. The company appears to be making good progress on its goal of reducing store-level costs by $25 million annually (in 2009, with more reductions in 2010). Management expects positive free cash flow in 2009 after capital expenditures.

Given the first quarter results, I plan to reduce my sales forecast for the rest of the year, but increase projected EBITDA and cash levels significantly:

• For Q2, I expect to reduce my sales forecast by about $4 million, to $86 million (mainly to account for the shorter store hours), but increase store level EBITDA by roughly $1 million, to just under $20 million, and increase total adjusted EBITDA by roughly $0.5 million, to $11 million.
• For 2009, I expect to revise my sales forecast to $300-$305 million from $317 (assuming 50 more stores refranchised in H2); to revise store-level EBITDA to $48-$50 million from $42.5 million; and to revise total adjusted EBITDA to $13-$15 million from $7.6 million. These figures do not include any impact from the potential sale of development agreements in connection with the company’s refranchising efforts.
• I now expect non-restricted cash – before the impact of any refranchising – to be approximately $26 million at the end of Q2, $29 million at the end of Q3, and $20 million at year-end. Management has consistently exceeded my expectations for cash balances, so these figures may be conservative.

Of course, Jamba cannot cost-cut its way to success. To increase sales, the company needs to expand its menu, and the company was very bullish on its early results. Oatmeal has performed beyond management’s expectations, and the limited test of salads, sandwiches, wraps and cold teas went well enough that they plan to expand the test into 200 stores this summer. (I would not be surprised to hear about soups and other items as we move into fall.)

CEO James White said on the call that he thought it would not be unreasonable for food to be 20% of Jamba’s sales mix at some point. This makes sense, given that food is 17% of sales at Starbucks stores. I estimate that food is roughly 5-6% of Jamba’s sales today, so an increase to 20% would drive an increase of over 15% in same-store sales (since food not only adds incremental sales, but also increases store traffic, helping to drive blended beverage sales as well). This is roughly double the 6-9% increase in same-store sales that I had previously estimated for food (but consistent with my longer term expectations).

Revising Price Target Upward

Given my new estimates of 2009 store-level EBITDA and adjusted EBITDA, I am increasing my near-term share price target to $1.50 from $0.95. I am targeting $1.75 per share in the second half of 2009. The $1.50 price target implies an enterprise value of approximately 6.5x 2009 forecast EBITDA. The $1.75 price target implies an enterprise value of approximately 7.5x 2009 forecast EBITDA.  I would expect this discount versus comparable company multiples to persist until the company’s menu expansion efforts begin to translate into improvements in same-store sales.

Catalysts for share appreciation include: meaningful Q2 profits; positive results from the 200-store expanded food test; significant additional brand licensing deals; the refranchising of a considerable number of stores (for a reasonable amount of cash); and a comprehensive balance sheet fix. The company stated on the earnings call that it is still exploring options for the latter. Positive surprises on any of these fronts could generate upside for the stock beyond my price targets.

Disclosure: (Author is long JMBA)