Jamba Inc.: Q1 First Impressions

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)

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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.

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[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.