Jamba Juice: Not the Rights Offering I was Looking For….

Jamba Juice announced last week that it has adopted a “poison pill” in the form of a Stock Purchase Rights Plan [1].  However, the rights plan I would like to see would have nothing to do with takeover defenses.  Instead, it would address a more fundamental issue: the company’s need for cash.  The depressed valuation that motivated the poison pill reflects investors’ fear that the company is headed for bankruptcy.   Jamba needs an immediate balance sheet fix, to restore investor confidence and ensure the company’s long-term survival.  This should be funded by equity, not by debt, and not by selling stores for pennies on the dollar to franchisees that are smart enough to recognize a bargain.  A rights offering would be the fairest and most effective way to achieve this.

If the company’s stores were in good shape and the business model worked well, the solution would be easy: cut costs and new store development to generate cash and just ride out the next couple of years.

Unfortunately, Jamba cannot afford to do this.  The stores need investment (I was probably $10 million light in my previous analysis), and the concept needs to be evolved so that it is not just viewed as an expensive treat.  Thus, Jamba needs to spend to survive.  This is a terrible place for a company to be today, but I am afraid this is the reality for Jamba.

The $25 million credit facility does not solve the company’s problems.  The market is smart enough to know that if debt is used to fund spending in excess of cash flow, it can make things worse, not better.

To attract cash investment, the company also needs to address its other problem: lack of a permanent CEO and a well-defined plan for success.  Jamba has described some of management’s priorities, but no plan will be taken seriously unless presented by the CEO who will execute it.

Here is my proposal:

  • Step one: Hire a new CEO with the right credentials and a convincing plan, or have Jamba’s Chairman and Interim CEO, Steven Berrard, step up to guide the company through the next few years.  Steven is a very smart and capable leader, having been CEO of both AutoNation and Blockbuster.  Either way, this needs to happen immediately.
  • Step two: Reverse split, say 1-for-10.  This gets the stock price well above $1 per share, removing the threat of a delisting, and making the stock acceptable to analysts and investors who have policies against penny stocks.
  • Step three: Rights offering giving shareholders the right to participate pro rata in an equity offering big enough to instill confidence among shareholders and enable management to execute its plan – say, $15-20 million.

The company’s current plan, to raise cash by “refranchising” is neither adequate nor fair.  Selling company-owned stores to selected franchisees can be just as dilutive as an equity offering, but does not give shareholders the ability to make themselves whole through a new investment.  In each case, Jamba obtains cash by selling a piece of the company at today’s depressed values.  With refranchising, the company sells a piece of itself to a select group of insiders: franchisees.  With a rights offering, the company offers the piece pro rata to each of its shareholders.  Those shareholders who participate in the offering are not diluted.

Even if one could argue that refranchising some stores made strategic sense, now is not a good time.  It is extremely difficult today for franchisees to obtain debt financing to purchase stores. Those stores that are sold are likely to go at a deep discount.  The franchisees that can afford to buy company-owned stores now are probably parsimonious operators, who, especially in these times, would not buy unless they got a bargain.  Their gain is the shareholders’ loss.

As for the stock split, it is clear that company fundamentals will not push the stock comfortably and consistently above $1.00 per share for a long time.  Jamba’s board seems to admit this in the “Summary of Terms of Rights Agreement,” which states: “$7.00 … is the amount that in the judgment of the Board of Directors represents the long-term value of one share of Common Stock over the [10 year] term of the Rights Agreement.”  If one takes a potential value in 10 years of $7.00 per share and discounts it at a reasonable rate of return for a security with this level of risk, they get a present value that is not out of line with today’s share price.  At the traditional private equity return goal of 35%, the present value is $0.35 per share.  At a rate of 25%, the present value is $0.75.  At a rate of 15%, the present value is $1.73.

A natural question is, “what happens if the company throws a party and nobody shows up?”  Jamba can do several things to ensure that a rights offering is adequately subscribed.  First, it must make the price attractive, which can include attaching warrants for additional shares.  It can also have the offering underwritten.

When a company’s stock is under pressure, a rights offering is often the most effective means of raising equity.  It is also the fairest.  I hope Jamba does something soon.


[1] Some form of “shark repellent” seems warranted, given that the market now values Jamba at less than 1x store-level EBITDA.  However, with a 15% trigger, the Rights Plan seems to be as much about deterring activist investors from shaking things up as about deterring a hostile takeover.

Jamba Juice: Work in Process, but Rumors of Its Demise Greatly Overstated….

Jamba Juice is a BUY, especially for a private equity group with a longer-term view than the public markets, or for Starbucks or another industry buyer that can help develop the long-term opportunity in this space.  Jamba Juice certainly has its challenges, but for somebody that understands these challenges, a price of about $1.00 per share represents the opportunity to own a top “healthy lifestyle” brand, and the leader in the made-to-order smoothie market, for under 2x store-level cash flow (and a very attractive pro forma EBITDA multiple, as described below).

Why do I care about Jamba? I am a former director of Robeks, a 150-store premium smoothie franchise system, and I have a stake in the success of Robeks, and thus the success of the whole category, so of course I care about the category leader, Jamba Juice (yes, I’m also long JMBA stock).  From my due diligence before leading my former employer’s investment in Robeks, and my experience as a Robeks director, I have learned a lot about the smoothie category, and am in a unique position to evaluate Jamba.  First, let’s recap briefly what Jamba Juice is, then let’s take a look at the numbers.  Next, we’ll look at some of the big picture challenges facing the company.  At the end of this piece, I’ll give my views on what Jamba’s management should do to ensure that the company has an enduring reason for being.

Category Leader in Made-to-Order Smoothies

Jamba is the category-defining leader in made-to-order smoothies – more than 3x the size of its closest competitors: Smoothie King and Freshens. This is thanks in large part to average unit revenues that are far above industry norms.  Jamba had 736 locations as of July 15, 2008 (518 company-owned), and $317 million in revenue for the year ended 1/1/08.   System-wide revenue is about $450 million.

Healthy Lifestyle Brand

While Jamba stores often do not have the seating capacity and café ambiance of a Starbucks, the chain comes the closest to delivering a Starbucks-like experience – but with a “healthy lifestyle” positioning.  The company delivers a consistent, premium, fun and healthy product and in-store experience for its customers.  An increasing focus on healthy living is here to stay, and Jamba can be a leader.

To be successful, Jamba needs to make the smoothie the centerpiece of its healthy lifestyle strategy, and position the smoothie as a healthy alternative to a meal, rather than a healthy alternative to a milkshake.  As a meal substitute, a $6 smoothie is a good value; as a treat, a $6 smoothie is an overpriced indulgence and the first thing to go when consumers are saving their pennies.  Jamba is ahead of the pack in recognizing this, but has a long way to go in executing it (more on this later).

Jamba by the Numbers

Here is my calculation of JMBA’s enterprise value at $1.00 per share (amounts in thousands): *

* Since the bulk of its employee options are way underwater, I assume that 2.6 million shares (5% of the total) eventually will be issued so as not to lose key employees (just a SWAG).  On 9/11/08, Jamba issued 2MM common shares to affiliates of Victory Park Management (“VPM”) in connection with the issuance of $25MM in senior notes to VPM.  Rather than adding this to outstanding shares for valuation purposes, I view this as a $3MM liability, since the shares are subject to a put-call arrangement at $1.50/share.  The $10MM reserve is a big SWAG.

By my math, at $1.00 per share, the company trades at 1.6x store-level EBITDA, 4.0x my estimate of run-rate EBITDA, and 2.9x my estimate of pro-forma run-rate EBITDA reflecting all of management’s planned cost cuts.  Imagine how accretive this would be for Starbucks, which trades at 9x EBITDA! (For comparison, BWLD trades at 13x EBITDA, PEET trades at 12.5x EBITDA, KONA and PFCB at 6.8x EBITDA).

Below is my estimate of Jamba’s normalized EBITDA (1).

(1) Figures are from the company’s latest 10-K and 10-Q.  The pro forma cost cut figure is from the company’s 8/28/08 earnings call, a transcript of which can be found at Seeking Alpha.  On the call, management said that $9MM of a planned $15MM in annualized cost cuts had already been implemented. (2) Includes charges for trademark impairment, store impairment, lease termination, asset disposal, and equity loss on JVs. (3) Figure for FYE 1/08 is “store-level operating income” as reported in the company’s 3/13/08 earnings release.

I can see why the stock has been trashed.  How often do you see an operating loss equal to a company’s revenue?  But I assume that many can look past the intangibles write-offs and focus on EBITDA.  Unfortunately, LTM pro forma normalized EBITDA is still negative!  But at least the red is coming from 2007; 2008’s figure is $8.5MM.  Back-of-the-envelope, I estimate run-rate EBITDA to be $15MM, or just under 2x normalized EBITDA for YTD 7/08.  (This estimate assumes that continuing negative same-store traffic offsets any short-term boost from the company’s deal with Nestle for bottled smoothies – which looks promising).  To get pro-forma post-expense-cut EBITDA, I add another $6MM – the difference between management’s planned $15MM of expense cuts and the $9MM of cuts made to date – to get $21MM of EBITDA.  Today’s enterprise value is 2.9x this figure.  Yes, there is a leap of faith in the $21MM number, but there is no leap of faith in the $37MM of store-level cash flow.

Competition, and Execution Risk

Of course, 3x EBITDA or 1.6x store-level cash flow is only a good deal if one thinks there is a growth story here.  Restarting growth is subject to big competitive and execution risks. The market has definitely become more competitive.  The company and investors are concerned about the wave of new competition from QSRs and coffee chains, including Jack-in-the-Box, Taco Bell, McDonald’s, Dunkin’ Donuts, Starbucks and more.  Seeing this competition invites a long-standing question for the smoothie category: do smoothies really deserve their own store or are they just a product line for another store concept? The answer may be that a basic smoothie is more of a product line, no more deserving of it’s own store than a milkshake.

Smoothie shop chains have all struggled with the fact that while some customers will have a smoothie for breakfast or a light lunch, most people seem to view smoothies as an a between-meal snack, treat or pick-me-up.  In order to get enough traffic to drive sustainable store-level cash flow, and level-out seasonality, many stores have resorted to selling other traditional food items, such as salads, sandwiches, soups, baked goods and coffee.

This is the wrong strategy. As smoothie shops begin to offer the same food items as QSRs and coffee shops, they expose themselves to competition as QSRs and coffee shops offer smoothies.  If a smoothie shop brings in more traditional mealtime food for those day parts, they reinforce the notion that a smoothie is not a meal.  Instead, they need to evolve the smoothie product and experience so that customers recognize that it can be a healthy meal-in-a-cup rather than just a treat.  Any additional food items should really be unique, not things offered at Jack-in-the-Box.

If fresh smoothie chains don’t move in this direction, the QSRs and coffee chains will eat their lunch, or perhaps I should say drink their smoothies….  It’s a lot easier for a QSR or quick-casual chain with an already successful business model to add smoothies than for a smoothie chain to fix its business model by inventing a whole QSR or quick casual business.  Frequent smoothie drinkers, even in fitness-crazed California, generally say that a smoothie is a smoothie is a smoothie.  And, sweet flavors sell well.  The QSRs are leveraging this and will take a chunk of the market for sweet, treat-like smoothies.

This will put some smoothie chains out of business, but Jamba has a chance to thrive as a destination for healthy, on-the-go meals or mini-meals that are NOT traditional QSR fare.  After experimenting with soups and other more traditional meal items over many years, Jamba finally seems to get this.  Recently, they introduced breakfast smoothies, which, while not executed as well as they could be, represent a move in the right direction (smoothie-as-a-meal).  With their new menus, they also introduced a “Functionals” line of pre-boosted smoothies grouped by functional benefit.  These are positive steps, but the next CEO of Jamba will need to take this much further, or see much more of Jamba’s business go to the burger and coffee chains.

Starbucks apparently sees it the same way, and has put a health and nutrition spin on its smoothie offering rather than competing directly with treat-like smoothies from QSRs.  They call their offering a “Vivano” rather than a smoothie, and incorporate whey protein (instead of just offering it as a “boost”) to make it more of a meal replacement.  Unfortunately for them, they have not quite gotten the taste thing figured out yet.  Jamba should be able to beat Starbucks in both health and taste.

The Bottom Line

Jamba has a big execution challenge ahead of it – made worse by the fact that they don’t have a permanent CEO!  Given the huge amount of uncertainty right now, a price of $1.00 is not unreasonable, but once a permanent CEO is hired, I would value the business closer to 6x pro forma run-rate EBITDA, or 3x store-level EBITDA, which is about $2.00 per share.  This would still be a discount to the public comparables because of the fundamental issue that they have never been able to get to a stable, proven, optimized business model that can simply be “stamped out” in new stores.  Instead, they still need to figure out exactly how to be the “healthy lifestyle” chain they say they want to be. Until they get a new CEO, it will be hard to handicap their ability to pull this off.  But Jamba is the best positioned of all the smoothie chains to succeed with this strategy.  They have built a very strong brand, which already stands for the things the company wants to be.  My guess is that the answers are already somewhere in Jamba’s product development pipeline and that the company just needs the leadership to execute them.  Once Jamba can point to a clear vision for how they create a compelling value proposition for the consumer and a sustainable business model, I would value the business at closer to the comps, which would equate to about $3.00 a share.

At any valuation, Jamba really should not be a public company.  It’s too small and has too much left to figure out.  Instead of spending close to $7 million on accounting and legal fees (not all, but much of which is a cost of being public), the company should reinvest this in growth.  A smart acquirer like a Starbucks, or a PE firm with the right in-house talent pool, could get to $3.00 a share of value quickly, so they would be well rewarded for purchasing Jamba at even a 100% premium to today’s price.

PS – My 2 Cents on What Jamba Should Do

1. Make the breakfast smoothies easier to eat.  The current breakfast options are served with a straw that is too narrow, and a spoon.  Who wants to eat a smoothie with a spoon?!  One needs to be able to finish their smoothie while driving and not get in an accident.  Breakfast smoothies are a great opportunity to demonstrate that one can indeed have a smoothie for a meal, but you need to deliver or you’ve done more harm than good.

2. Add more high-protein smoothie options, and use more ingredients that promote satiety, such as natural inulin and fruit fibers, so that people feel full and satisfied after a smoothie to the same extent that they would after a more traditional meal.  These should be positioned on the menu as meals.

3. Offer coffee smoothies, and maybe even coffee.  A process exists for retaining more of the natural antioxidants of coffee after the roasting process.  Jamba could serve a proprietary, organic, high-antioxidant coffee and stay true to its brand image.

4. Add more proprietary savory food items.  The proprietary food needs to taste better!  As long as there are some healthy hooks, such as omega-3 fats, heart-healthy amounts of fiber, or high antioxidant levels, it should do well.  Consumers love to rationalize that something that tastes decadent is actually good for them.  And, at least in moderation, it can actually be true!

5. Get some meal-replacement items into the Nestle line-up.  Right now, the bottled product takes the brand in too much of the sweet, treat direction.

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