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)

Copyright © 2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.

Jamba Inc. – New CEO Gives Company a Boost

The market’s valuation of Jamba Inc. (JMBA) seems to reflect a consensus view that this chain of 729 smoothie stores will not survive.  After a review of JMBA’s fourth quarter and full-year 2008 results, and several calls with management, I disagree. I predict that this company will not only survive but thrive.

The company still faces extremely weak retail sales traffic, and a consumer that is cutting back on discretionary, premium-priced items.  However, the company’s new CEO, James White, has a good understanding of what it takes to succeed in this environment, and is quickly reorienting the company’s offerings to deliver what today’s consumer wants – healthy, convenient, fun food at an affordable price.  His vision and passion, combined with intense focus and a sense of urgency, are exactly what the company needs right now.

In the analysis below, I discuss (click to skip to section):

  1. Current Valuation and Consensus View
  2. New CEO: Focused and Results-Oriented
  3. Strategy and Execution
  4. Risks and Opportunities
  5. Financial Projections
  6. Potential Future Valuation and Catalysts

Current Valuation & Consensus View

jmba-value-jpg3A recent share price of $0.47 implies an enterprise value (equity + debt – unrestricted cash) of $25 million – approximately 0.6x store-level EBITDA and about 3.3x adjusted EBITDA, based on my 2009 forecast.  For comparison, PEET trades at about 7.9x EBITDA, and SBUX trades at approximately 7.6x EBITDA.  QSR concepts SONC and JACK trade at about 6.7x EBITDA.

The common viewpoint seems to be that: (a) JMBA’s business model is not viable, and (b) the company will run out of money before management has time to figure things out.

In 2006 and 2007, the business model was indeed broken outside of California, and deteriorating in California.  A smoothie may provide a boost of energy, but it is not a cup of coffee.  Coffee drinking is a habit, often repeated several times a day.  Even regular smoothie drinkers are unlikely to average one per day, let alone several.  Yet prior management acted as if a smoothie could replace coffee and JMBA could be the next Starbucks.  They opened stores too close to each other, and in suboptimal locations.  New stores outside of California had AUVs well under $600,000 and even CA store AUVs were dropping (especially for stores not included in comp store figures at the time), but JMBA’s cost structure, at both the store level and at corporate, was geared toward a system with $800,000 to $1 million AUVs.  Cash flow margins for stores outside of CA were in the single digits.  California store margins were still over 20% for seasoned stores, but newer store margins were only in the teens.  New stores in general were not even getting close to management’s target of 20% store-level EBITDA and 40% cash-on-cash returns.  Meanwhile, comp stores in 2006 and 2007 were flat.

This broken business model and a flawed growth strategy – along with the purchase of stores from franchisees – caused JMBA to blow through its $100 million in post-IPO cash reserves and get in trouble, or at least too close for comfort, with its banks.  This forced the company into an extremely costly debt financing – with $25 million coming due in less than 18 months.

Looking back over the last year, what we see is a company that:

  • Is suffering double-digit declines in comp store sales because it sells the sort of expensive indulgence on which consumers are cutting back;
  • Has not been able to articulate a strategy to fix the store-level business model;
  • Cannot afford to build new stores;
  • Might not have a profitable enough business model to attract new franchisees; and
  • Has less unrestricted cash on hand than necessary to repay its debt, and no proven ability to generate cash from operations.

Yes; this is pretty scary stuff.  However, over the last several months, the company has reduced its costs, store labor and SG&A in particular, and closed a number of underperforming stores.  Under James White, who joined JMBA last November, the company has developed a more focused strategic plan, and will further reduce costs while growing its product offering and franchise system.  The combination of a store model that now works better at lower AUVs, and an increase in AUVs through menu expansion, should be effective.  The picture looking ahead shows promise.

New CEO: Focused and Results-Oriented

JMBA’s new CEO, James White, is an experienced brand builder, product developer, and foodservice operator.  He came from Safeway, where he ran an $8 billion retail brand P&L, which included responsibility for brand strategy, R&D, product development, and manufacturing (prior experience includes Gillette, Purina and Minute Maid). He built the “O Organics” line of products for Safeway, through which he developed an extensive rolodex of organic food contract manufacturers.  The line was so successful that Safeway began offering it to other grocery retailers last fall.  He also knows multi-unit foodservice.  Safeway’s in-store foodservice business – essentially a restaurant chain within a grocery store chain – is bigger than Quiznos.

He sees that the brand equity of Jamba Juice is more in the “Jamba” than the “Juice” and that Jamba can grow to be a leading healthy lifestyle brand with broad application and appeal.  But he is not letting these big ideas distract him from the necessary task of creating the maximum positive impact in the least amount of time.  To this end, he has the team focused mainly on four key initiatives:  retail food, franchising, wholesale food/licensing, and local store marketing.

Strategy and Execution

Retail Food – JMBA wants to build a retail food capability across all four day parts (breakfast, lunch, afternoon, and dinner).  Oatmeal has exceeded management’s expectations.  In the coming months, the company will begin rolling out items for other day parts, likely focusing on high-traffic metro area stores where oatmeal has had the greatest uptake.  The company is focused on food items that, like its smoothies and now its oatmeal, are superior to the offerings of competitors, have high margins, are relatively simple to execute in the stores, and are consistent with the Jamba brand’s promise of great tasting, healthy, convenient, fun, on-the-go foods.

I estimate that breakfast and lunch could add $45,000 to $75,000 of annual sales per store ($30-50k of food sales plus an additional $15-25k of blended drink sales from the incremental customer base).  Since food will probably not work equally well in all locations, I would assume that perhaps 75% of stores benefit.  Thus, the overall impact on company-wide same-store sales would be in the range of 6-9%.  I expect minimal impact in the first half of 2009, and very little impact until 2010.

Franchising – JMBA has halted new company-owned store development for now, focusing its current efforts on improving the performance of its existing stores and growing its franchise system.  As of December 31, 2008, 511 stores (70%) were company-owned and 218 (30%) were franchisee-owned.  The company is now targeting something closer to a 50/50 mix. As part of this effort, JMBA is seeking to “refranchise,” or sell back, certain stores to franchisees (so far, ~30 stores have been identified for refranchising, of which the first 10 were sold this month).  For new franchised locations, JMBA is increasing its focus on “non-traditional” locations such as airports, which have been very successful to date.  This shift to a more balanced company-owned/franchised mix will help preserve capital, and lead to higher overall profit margins.

I made some rough estimates of the economics of a new store for each of three types of locations: suburban strip centers, urban metro areas, and airports.  The figures show that the economics of airport locations probably work very well today, which explains why JMBA is focusing on these now.  The suburban and urban metro “traditional” stores are probably adequate for an existing franchisee who can share some labor among stores, but probably fall slightly short of the return required to attract significant numbers of new franchisees.  With food, these locations should provide sufficient returns for a robust franchising model (once franchise capital is generally available again).

jmba-store-model

Wholesale Food/Licensing – White wants to capitalize on one of the things prior management did well: build a strong brand.  JMBA has now hired a senior executive, Susan Shields, to lead a branded CPG effort.  It is focused on licensing, but could include products that are contract manufactured for, and sold by, JMBA or through a JV.  The company has had discussions with potential partners regarding fruit teas, fruit yogurt and parfaits, frozen smoothie bars and sorbets, breakfast and energy bars and packaged boosts.

A successful offering in any one of these packaged food categories could be a $50-$100+ million business, so it is conceivable that a wholesale food effort could deliver $3-5 million per year, or more, of incremental cash flow.  Also, while Nestlé has shelved the licensed RTD smoothie line launched last year, JMBA’s 2008 10-K states, “We believe Nestlé is fully committed to re-launching a Jamba ready-to-drink beverage proposition.”

Local Store Marketing – The company believes that it can reduce spending on traditional advertising and marketing, and more efficiently build store traffic by focusing on “owning the two-mile radius” around each of its stores.  This effort includes off-premise sales such as at schools, and community and sporting events.  It also includes store-level sales incentives, and a greater emphasis on working with non-profit groups for fundraising.

In the short term, this will probably only serve to reduce the decline in same-store sales.  Assuming that retail sales are only just now beginning to bottom-out, without a food program and any enhanced efforts to drive traffic, same-store sales would be negative at least through year-end.  A successful local marketing program should mitigate the decline this year and help drive positive comps next year.

This seems like a lot for a small company to accomplish at once, but according to management, the team is actually focused on doing fewer things, but doing them better, and with a stronger sense of responsibility and accountability.  For example, in the past, development of new food items and licensing opportunities were projects added to somebody’s “normal” work schedule.  Now these initiatives are being driven by people who’s jobs are at stake if these initiatives are not successful.  My sense is that this greater focus and accountability has created a sense of urgency, and a level of positive energy at the “support center” (i.e., corporate office), that has not existed in years.

Risks and Opportunities

A lot could still go wrong, and, as shown in my financial projections, management does not have a lot of cushion.  Some of the many risks to a turnaround include:

  • Higher unemployment rates expected this year could potentially drive overall retail sales and consumer spending significantly lower.
  • The roll-out of lunch items into certain retail stores, which should kick off this spring, might not go smoothly.  Management is making decisions quickly and will recalibrate in the field if/as necessary.
  • Competitors could respond to the food launch with enhanced promotions and other tactics.
  • Costs for fruits, juice concentrates, dairy and other food ingredients are volatile and could spike up due to demand or supply shocks.
  • Weather could have a negative impact on sales and food costs.
  • Gas prices could have a negative impact on sales and food costs.

Of course, there are many other risks, from food-borne illnesses to increased labor and benefits costs.  One can pick up the latest 10-K for the usual laundry list.

However, I believe that with its new leadership, this team can navigate through the current economic environment and execute a successful turnaround.  The current store-level business model works better than one might think, and the strategic shift from a smoothie chain to healthy lifestyle brand will add to both sales and profits.  At a minimum, things should get better.  If management delivers completely on both the tactical turnaround and the strategic changes, the growth will be dramatic:  The strategic shift will not only add to the sales and profits of existing stores, but also (a) substantially increase the number of potential retail sites, and (b) create significant interest in the franchise community.

Financial Projections

Below is a summary of the company’s financial performance in 2007 and 2008, as well as a forecast for 2009.  In the first table, I show annual sales dropping 7.5% to $317 million in 2009.  I assume that food costs average 26.5% of sales versus management’s target of 26%, and labor costs average 36% of sales versus a target of 34%.  The second table shows the 2009 quarterly forecast, and assumptions for same-store sales.  It also shows the resulting trailing 12-month store-level EBITDA and projected unrestricted cash levels.

Same-store sales are modeled assuming two-year cumulative comps, before any impact of new food items and other initiatives, down 15% in Q1’09, and down 14% for the rest of the year.  The new retail food initiative is assumed to add just slightly to comp stores later in ’09.  No sales are included for wholesale/licensed food.  Store growth assumes no new company-owned stores and 50 new franchised locations, per management’s guidance.  The pro forma impact of refranchising 10 Arizona stores is included, but no additional store sales are included.  There is no specific impact for local store marketing, although one could assume this is reflected in the 1-point improvement in compound comps after Q1’09.

These projections show JMBA with a seasonal loss in Q1 but significant positive cash flow in Q2 and Q3 this year.  Store-level EBITDA remains comfortably above the $35 million covenant level.  Unrestricted cash rises to roughly the amount of the company’s outstanding debt in Q3 of this year, then falls to $14.7 million in Q4 after seasonal losses.  Even if comps are roughly 5% down in 2010, the company should still generate enough additional cash to repay the debt when it comes due in September 2010 (although it would be tight).  Successful implementation of the company’s current growth initiatives should provide substantial upside beyond this scenario.

jmba-projection-is-jpg

Quarterly projections are shown below:

jmba-projection-qtr-jpg

Potential Future Valuation and Catalysts

It will be hard to get excited about Q1 results, but a performance in Q2 like that projected above should demonstrate that the company is on the road to recovery.  This could be a catalyst for a significant improvement in the company’s valuation.  Growth in enterprise value to 1.2x ’09 projected store-level EBITDA, or 6.7x ’09 projected EBITDA, would bring the equity market cap to $55 million, or $0.95 per share.  This is my six-month price target. My 12-month target is $1.30 per share (unchanged from December).

Short covering could accelerate this adjustment.  At current prices, there is very little volume.  With short interest of 2.3 million shares as of 3/31/09, “days to cover” was over 31 (see chart here).

An increase in market cap could create an virtuous upward cycle.  Currently, investors who want to own less than 5% of the company are capped at an investment of just over $1 million, which is just not meaningful for many institutional investors.  As JMBA’s valuation improves, the stock will become more relevant.

Another potential catalyst would be coverage by a major sell-side analyst.  Recent investments in JMBA by PE group CIC Advantage and value fund manager Royce & Associates may help renew interest in the analyst community.  A restaurant industry analyst from Piper Jaffray was on the last earnings call.  I would not be surprised to see them pick up coverage again once the company demonstrates more progress on its turnaround.

(Disclosure: The author is long JMBA)

Copyright © 2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.
www.aptacapital.com John Appel

Jamba Juice Should Bear Fruit by Mid-2009

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.

jmba-numbers2jpg1

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)

Copyright © 2008-2009 by John G. Appel. All rights reserved. You may link to any Content on this website. You may not republish, upload, post, transmit or distribute any Content without prior written permission. If you are interested in reprinting, republishing or distributing Content, please contact John Appel via the e-mail address shown on this website to obtain written consent. Modification of Content or use of Content for any purpose other than your own personal, noncommercial use is a violation of our copyright and other proprietary rights, and can subject you to legal liability. Disclaimer: This website is provided for informational purposes only. Nothing on this website is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. Terms of Use: By using the site, you agree to abide by the Terms of Use, which includes further copyright information and disclaimers.