Jamba, Inc. Q3 2008 (Qtr End 10/07/08) Earnings Call Transcript

Jamba, Inc. (JMBA)

Q3 2008 Earnings Call

November 17, 2008 5:00 pm ET

Executives

Steven R. Berrard – President and Interim Chief Executive Officer

Karen L. Luey - Chief Financial Officer

Paul Coletta - Senior Vice President, Marketing and Brand Development of Jamba Juice

Greg Schwartz - Senior Vice President, Supply Chain

Analysts

Scott Maltz – Private Investor

Tom Schwartz - TAG

Burt McKay – BBS Capital Management

David Lavonski – Private Investor

George Furlough - Furlough Company

Ben Weinstein – [Murdah] Capital

Mitch Schiff - Private Investor

Presentation

Operator

Welcome to the Jamba’s third quarter 2008 earnings conference call. (Operator Instructions) I would now like to turn the conference over to the President and Interim CEO, Mr. Steve Berrard.

Steven R. Berrard

Thank you and good afternoon. Karen Luey, our Chief Financial Officer; Paul Coletta, our Chief Marketing and Brand officer; Thibault de Chatellus, our Senior Vice President of Global Franchise and Development; Steve Adkins, our Senior Vice President of Store Operations; Michael Fox, our Senior Vice President of HR, Administration, and General Counsel; and Greg Schwartz, our Senior Vice President of Supply Chain, will be joining me on the call.

During the today’s call we will discuss Jamba’s third quarter results, provide an update relative to some of the actions we discussed last quarter to improve Jamba’s performance.

I would like remind all listeners that this call is being broadcast and recorded live over the internet at www.jambajuice.com. The web cast is available on our web site and replay will be available via telephone until December 1, 2008.

This conference call will include forward-looking statements within the meanings of the securities law. These forward-looking statements will include projections, expectations of restaurant comparative sales trends, the number of stores we intend to open, and certain statements of our expectations and plans. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements that are contained in the company’s filings with the SEC including, the risk factor section of Jamba’s 2007 10-K.

With that said I will hand it over to Karen who will give you an overview of our financial results for the third quarter.

Karen L. Luey

First of all, our comments on the results will be brief, but all detailed information can be found in our 10-Q filed with the SEC later today as well as today’s press release.

Total revenues for the quarter increased 3.6% to $86.6 million and company store revenue increased 4.2% to $84.4 million for the third quarter as compared to the same prior-year quarter. The increases are primarily associated with the opening of 49 net new company stores and the acquisition of one store since Q3 of last year, offset by the decreased in company store comparable sales of negative 10.3%.

During the quarter we opened 4 new stores, bringing our total new stores opened to 35, which completes our new company store development for 2008.

Cost of sales increased 1.2% to $22.7 million for the third quarter as compared to the same prior-year quarter, due primarily to an increase in total store sales and the cost of juice concentrate, frozen fruit, and Smoothie additions, offset by a reduction in orange costs and the effect of several of several cost reduction initiatives.

As a percentage of company store revenue, these costs decreased to 26.9% in the third quarter compared to 27.7% in the same prior-year period.

Labor costs increased 9% to $28.1 million and as a percentage of company store revenue, labor expenses increased to 33.3% in the third quarter of fiscal 2008 compared to 31.8% in the same period last year. This increase as a percentage of company store revenue was primarily due to a combination of minimum wage increases in several states in which we operate, the expansion of store hours in conjunction with our Q1 breakfast launch, the lower than expected revenue from new stores, and the decrease in company store comparable sales.

Occupancy cost increased 16.9% to $10.7 million and as a percentage of company store revenue increased to 12.6% in the third quarter of fiscal 2008, compared to 11.3% in the same period of the prior year. This increase as a percentage of company store revenue was primarily due to the lower than expected revenues from new stores and the decrease in company store comparable sales.

Store operating expenses increased 16.7% to $10.7 million, and as a percentage of company store revenue increased to 12.7% for the third quarter of fiscal 2008, compared to 11.3% in the same period of the prior year. The increase as a percentage of company store revenues was primarily due to the lower than expected revenues from new stores and the decrease in company store comparable sales.

Depreciation and amortization increased 18.5% to $5.8 million for the third quarter and as a percentage of total revenue increased to 6.7% for the third quarter of fiscal 2008 compared to 5.9% in the same period of the prior year. The increase was due to the opening of 49 net new company stores and the acquisition of one franchise store since Q3 of last year, and the amortization related to the write-off of employment agreements for three former executives.

G&A increased 0.2% to $12.1 million for the quarter and as a percentage of total revenue decreased to 13.9% for the third quarter of fiscal 2008 compared to 14.5% for the same period of the prior year. This decrease as percentage of total revenue was attributable to cost reduction initiatives that began in May.

During the third quarter we recorded severance charges of $1.2 million. We also recorded stock-based compensation charges of $2.1 million related to the acceleration of certain stock options and equity awards to a former executive. Without these one-time charges, G&A as a percentage of total revenue would have been 10.1%.

Other operating expenses increased 15.5% to $1.7 million for the quarter and as a percentage of total revenue increased to 2% for the third quarter compared to 1.8% for the same period of the prior year. The increase was due to a $1.0 million write-off of loan at termination fees related to our former lender. Excluding the write-off of these fees, other operating expenses as a percentage of total revenue would have been 0.8%.

Interest income decreased by $700,000 as compared to the same period of the prior year due primarily to lower cash balances throughout the quarter and reduced interest rates.

Interest expense increased by $500,000 as compared to the same period of the prior year, due primarily to the interest expense related to our new financing arrangement with Victory Park Capital.

Other key items in the quarter included store pre-opening costs decrease as a result of opening fewer stores.

We recorded store impairment expense of $5.9 million for the quarter compared to $0.2 million for the same period of the prior year.

We had a loss from derivative liabilities of $500,000 as compared to a gain of $23.3 million from the prior year same quarter.

With that said, I will now turn it over to Steve.

Steven R. Berrard

It has been about 15 weeks since I became the Interim CEO. During this time our leadership team has performed a comprehensive review and evaluation of Jamba’s business in an effort to determine, as we go forward, the best strategic opportunities to leverage our brand and drive performance improvement, particularly while we navigate the tough current economic environment we have experienced and expect to continue to experience.

This review included a presentation to management by our five regional directors of operations and 55 district managers of the expected operating results for 2008 and 2009 budgets for each of our 520 company stores. It was encouraging to see the level and depth of talent Jamba has.

To set the stage for our future performance, we believe it would be helpful to summarize the performance issues experienced by the company during the past two years. Some of the more significant issues are: a 6% reduction in average unit volumes, from $746,000 in 2006 to $700,000 in 2008; a decline in store EBITDA margins from 20% in 2006 to 14.5% in 2008; a decline in store cash-on-cash returns from 41% in 2006 to 25% in 2008; and an increase in G&A from $34.0 million in 2006 to a $48.0 million run rate in quarter one of 2008.

We believe, based on our review and evaluation, that Jamba’s poor performance during the past two years was attributed to a high degree of inflexibility in regards to its business model, a lack of technological investment, limited cost control, inconsistent real estate site selection, aging stores without necessary refreshes, deterioration in the quality of customer service, abandonment of local store marketing programs, cannibalization of existing stores. We estimate that only 196, or only 37% of our 520 stores have not been cannibalized.

Increased competition. We estimate that there were more than 800 competitors operating within a two-mile radius of our company stores. Many of these low-volume locations have opened in the past two years and of course, we are experiencing a slowing economy.

Our outlook suggest there is little, if anything, we can do about the current state of the economy but there is much we can do to address and improve on our past performance and create value moving forward. By validating the factors that led to our poor performance, we have been able to develop a number of revenue cost and expense initiatives that address the specific issues relating to this performance.

These initiatives, which are currently underway, have been prioritized into 20 different programs, many of which we will discuss on today’s call. Our 2009 plan will be built on these 20 initiatives and the following attributes.

We are the category leader with an iconic brand and great potential to restore outstanding, stand-alone economics. We have a 36% awareness nationally and an 89% awareness in California.

Our current addressable market is over $2.3 billion and is projected to grow. This addressable market does not include the other product offerings that I will highlight later in this call.

We have 749 stores in operation with system-wide revenue of $450.0 million; $325.0 million of revenue from company-owned stores; as discussed in our third quarter 10-Q, strong store-level EBITDA of almost $43.0 million through the end of the third quarter; approximately $100.0 million annual customer visits; strong strategic partnerships with companies like Nestle and Nike; growth opportunities through franchising and licensing without significant capex; and 12,000 loyal, hardworking and dedicated employees.

As we discussed last quarter, our current strategy is focused on management of liquidity, changes in our business model, improving store performance and profitability, maximizing revenue opportunities from the Jamba brand, and reducing G&A. Today we will address our progress on each of these strategies.

In regard to our management of liquidity, as promised last quarter, we have aggressively managed our liquidity and during the quarter we completed a $25.0 million senior debt financing, which strengthens our financial flexibility, managed our working capital positions, completed all company store development and non-critical capital expenditures for 2008, and began to aggressively reduce both store level and G&A costs.

At the end of the third quarter we had over $32.0 million in cash and cash equivalents and before year end we expect to receive an additional $5.2 million IRS refund. Our 2009 capex plan is primarily discretionary and will be focused on store refurbishment and technological investments that will drive sales growth and help us operate more effectively and efficiently in the future.

As it relates to changes in our business model, base on our poor past performance we have re-evaluated our development strategy and have tightened our requirements for trade area selection. This includes following strict guidelines for site selection that leverages our past experience, market data, demographic and psychographic information and sophisticated revenue modeling.

Given the negative impact that cannibalization has had on our existing stores, we will be more selective in locations for new store development. Condition each market will have an optimal three-year development plan that meets our risk profile and will include all venues, traditional, grocery, and mall.

These requirements seem to be working. The last 17 stores opened in 2008, after applying some of the stricter site selection criteria, are on trend to achieve first-year AUVs that are 27% greater than those open in 2007 and are meeting our expectations.

Our research and planning shows that there are potential for at least 2,700 stores in the U.S. In order to expand our presence and tap into this potential market, we will aggressively press forward to reposition our business model with a greater emphasis on franchising. Our ultimate goal is to more evenly weight the store network between company and franchise stores.

We believe an aggressive franchise strategy will better position us growth in market share, reduce capital outlay, provide greater overall margins, allow us to open more store faster, increase brand presence, and increase customer frequency.

While the business environment remains challenging, we are encouraged by some of the initial interest we have seen since we announced our change in strategy. And despite the challenging environment, our 2009 plan for franchising will be to accelerate our focus on airports, transit hubs, super markets, and college campuses.

Our plan calls for opening 50 to 55 new franchise locations in 2009, of which 30 to 35 will be non-traditional. In order to more effectively serve these channels, we have developed a flexible kiosk format ranging from Smoothie only kiosks to a kiosk offering the full range of a traditional Jamba store.

Recent airport openings include Newark and JFK, which are performing well. We have an additional seven locations in our pipeline, including San Diego, Maui, Honolulu, JFK No. 2, Denver, Houston, and Chicago.

We will aggressively market 5 to 8 new territories for multi-unit development agreements. We will reduce our current store build-out cost from $415,000 to $325,000, while improving the store appearance and customer experience. This work is substantially complete.

We will continue to actively market 30 company stores for re-franchising. Current market conditions will limit our ability to complete these in a timely manner but we remain focused on this effort.

We intend to delay our international development until 2010. Given the recent world-wide economic events and our focus on the domestic opportunities and challenges ahead of us, we have decided to put our recently announced international transaction on hold for the time being.

In looking at improving store profitability and performance, our focus is on restoring 20% EBITDA store margins through cost and expense reductions, combined with programs to improve sales.

To date we have identified and begun to implement initiatives expected to generate over $25.0 million in store-level cost reductions for 2009. These initiatives include: $13.0 million in cost of goods sold; $6.0 million of store labor savings from operational simplification; better wage and benefit management; the implementation of our labor planning system, which we rolled out to all California locations by the end of 2008; $1.0 million [inaudible] savings in the effective store closures, $3.5 million in controllable and other store costs related to better cost controls; processes in the negotiation of service contracts; and $2.5 million reduction in brand marketing related expenses.

Many of these initiatives are what we would consider low-hanging fruit and have been implemented and the results will be fully felt in 2009 and beyond. Some of the more significant initiatives include get out of all distribution contracts; hard line on negotiating price reductions on existing contractions; implemented a program to eliminate waste on our original product size, generating $2.6 million in annual savings; reducing the frequency of store delivery; and reducing the amount of time that our store and regional personnel spend on administrative work.

During the year we announced plans to close a total of 31 under-performing stores locations. Through the third quarter we have closed nine of those under-performing stores and continue to work through closing the remaining 22.

While we were extremely disappointed with the third quarter sales results, we remain confident that the actions we are taking will drive improvement in 2009 and in particular, the second half of 2009.

Let me [inaudible] some of the actions we have taken since September: we have implemented a 2.6% price increase; we have been reviewing a number of proposed technology initiatives, which would promote efficiency and customer service, including a customer loyalty system to drive loyalty, increase frequency and market to last customers. We see this as an opportunity to create and maintain lasting customer relationships and manage contact with our customers; the installation of a self-service terminal to improve speed of service and customer satisfaction, increased sales and optimize labor.

We are beginning the process of revitalizing the look and feel or our older company stores to restore our brand dominance and reinforce the vibrant and fun environment that our stores have been known for. Test stores that have been refreshed in 2008 have outperformed system comps by 7%.

We expanded our breakfast offering and will launch hot oatmeal nationwide in January. We are pleased with our test results and believe oatmeal will strengthen our relationship with existing customers and attract new ones. Our product is outstanding and we believe it is the best quality, best tasting oatmeal in the market place today.

We began testing the sale of wraps, sandwiches, and salads in 14 stores in Southern California and Seattle. Our partner for this test is Organics To Go, a provider of great tasting organic and natural products. Our research has told us that 27% of customers eat food with our Smoothies today.

Currently we capture on 12% of those food transactions. These products represent a significant opportunity to generate incremental revenue as we believe we can increase our average check and drive incremental visits. The test is in its very early stages and so far we are very pleased with the results. Based on these initial results, we will expand testing in some additional stores.

We are reallocating marketing resources to the local communities and school areas where our stores are located. We believe the decision to abandon local store marketing in 2008 has had a significant impact on our store revenue performance. The level of competition from those 800 low AUV competitors within the two-mile trade areas around our stores is significant.

We are going to aggressively target regaining and adding market share. We feel that the current economic environment is an excellent time for an industry leader to aggressively seek market share as an avenue of growth.

We continue to reduce G&A. In addition to the cost savings, initiatives identified with at store level, we have shifted the company’s focus from the support center to the stores, thus eliminating positions and other costs that should generate an estimated $9.0 million annual general and administrative costs.

As we roll out technology enhancements over the next year, we expect this number to further decrease. We believe the actions we have taken to date put us on track to achieve our 2009 target for G&A expense.

As for maximizing revenue opportunities to extend the Jamba brand, we will continue to maximize the revenue by leveraging our brand in new and complimentary product categories.

While we don’t have any material new developments to discuss today, we continue to have discussions with potential licensing partners regarding fruit teas, fruit yogurt and parfaits, frozen Smoothie bars and sorbets, breakfast and energy bars, and packaged boosts.

Our goal is to have several additional licensing opportunities completed in 2009. We are also working on programs to develop products using our in-house product innovation team for direct distribution into target retailers.

Our ready-to-drink with Nestle continues to perform well and we look forward to working with them on some other exciting opportunities.

In regard to our 2009 outlook, which is subject to updating, re-evaluation, and changes in various factors affecting our business, we preliminarily see little or no change in revenue performance for the remainder of 2008 and little or no comp store growth for the first half of 2009 based on the current environment.

We believe, however, there are real opportunities to drive comps and unit volumes but our current view is that the headwinds will remain through the middle of 2009, if not longer.

Based on what we know today, we are updating our previous stated targets for 2009. In regards to revenue, we expect low single-digit growth, primarily driven by the 2.6% price increase taken in September. We believe our comps and revenue growth may be aided by our efforts to aggressively take market share from our competitors, the fact that we will lack sever cannibalization, our focus on improved customer service, and the expanded product offering and store refurbishing program I just spoke about.

We are cautiously optimistic that these actions may help to offset further negative effects on sales that the overall retail sector is experiencing due to the current economic environment.

As to 2009 costs and expenses, for the year we have targeted cost of sales at or below 26% of company store revenue, labor cost at or below 34% of company store revenue, other controllable and other store costs, at our below 3.5% of company store revenue, and G&A at 10%, pre-stock compensation expense and based on reductions already made and additional reductions to be made.

We plan minimal, if any, company store development and 50 or more franchise stores before any potential benefits of store openings by prospective new franchisees.

Achievement of these targets will begin to help restore our EBITDA margins and cash-on-cash returns to levels that we have enjoyed in years past, while solidifying our balance sheet. This will also enable the company to pursue attractive business opportunities as they arise.

Before I conclude, I want to thank each member of the Jamba team for their dedication and hard work. They are doing an exceptional job every day taking care of our customers. Remain confident that the actions that we are taking demonstrate Jamba can perform at a higher level than where it is today. Our brand, our team members, the customer base, and the stores are valuable assets that can be better leveraged to generate, improve financial performance, and shareholder value.

Thank you for your time today and I would now like to turn the call over to take any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Maltz – Private Investor.

Scott Maltz – Private Investor

I am a large shareholder and first of all want to applaud you and your team for the numerous actions you are taking, which seem to be, under the large part, appropriate.

One question I have. In your press release today it showed that the G&A for this quarter was about $12.0 million and in a prior quarter it was $10.0 million. Given the significant to reduce G&A, why was there a $2.0 million increase this quarter compared to last quarter?

Karen L. Luey

As I noted in the call earlier, we had two one-time charges that affected third quarter. There was a $1.2 million severance accrual that we made and there was also a $2.1 million stock-based compensation charge that affected Q3, for the acceleration of options and equity awarded to our former CEO.

Scott Maltz – Private Investor

So those two would bring the G&A from 12 down to something around 8?

Karen L. Luey

10.1% of total revenue.

Scott Maltz – Private Investor

What is the sequential decline in G&A? Once you back out those one-time charges?

Karen L. Luey

Once you back out those one-time charges it is about $9.0 million. A little bit less than $9.0 million.

Operator

Your next question comes from Tom Schwartz – TAG.

Tom Schwartz - TAG

Can you talk about in a consumer environment we are experiencing right now, you ran a promotion over the summer where you had a 16 oz. Smoothie at a lower price point. Can you talk about the possibility of adding additional products in the future at lower price points, for an opportunity for consumers to experience the Jamba brand?

Paul Coletta

I think we said on the last earnings call that affordability as emerged as one of our biggest challenges in 2008. But I also might add that as we are all aware it is also a challenge for all of our competitors. But we are responding. We have done three things in Q3 and I will talk about an additional one we are doing in Q4.

We did launch a $2.95 16-oz. value Smoothie, it was our Orange Refresher, and for the 10-week promotion, and this was billed as a limited time offering, we drove about 3.5% sales mix, which fell short of our goal. And we concluded that this promotion did not significantly pull in enough incremental transactions to trade off the down sale, the trade-down that we experienced from that. So in conclusion, we don’t really think that was a successful limited time offering and you probably won’t see us do something like that in the [future].

We also launched a bundled food. We offered consumers a $1.00 baked goods when they bundled it with any Smoothie. That we believe did very well for us and I can dig into that if you would like.

And we also had our loyalty card promotion where we encouraged customers to come in at least seven times over the ten-week period to receive a free Smoothie.

What we are doing in 2009, and we’re actually testing in market today, and I think this is a better way to get at the affordability issue, is not through discounting but offering a smaller size. So today we are testing a 12-oz. Smoothie in market that is priced under $3.00 that is showing some really encouraging results. Our research says that 47% of our customers have cut back on their visits and said they would visit more often if we offered a smaller size. So we think that that’s a big opportunity.

Operator

Your next question comes from Burt McKay – BBS Capital Management.

Burt McKay – BBS Capital Management

I’m just trying to clarify the G&A comments a little bit. So ex those two items it looks like the G&A for the third quarter was $8.8 million. And looking to your reported number in the second quarter I see the change was $9.8 million. Did that include stock-based compensation? If it did what is the delta there to be able to better compare second quarter and third quarter?

Karen L. Luey

Both quarters included stock-based compensation but there was an additional hit in Q3, stock-based compensation of $2.1 million for the acceleration of those options.

Burt McKay – BBS Capital Management

So if you ex the second quarter stock-based compensation what will the $9.8 million look like?

Karen L. Luey

You have to remember also in Q2 we had a severance-related charge as well.

Burt McKay – BBS Capital Management

I guess the better question, if you exclude everything. I’m just trying to get a better sense of a run rate like a normalized run rate which it seems to be $8.8 million in the third quarter. What was that number in the second quarter in light of the initiatives that you have been taking? I’m trying to see if the base line has been dropping or not, that is the purpose of my question.

Karen L. Luey

Our run rate for G&A is currently running at about $35.0 million, pre-stock option expense.

Burt McKay – BBS Capital Management

And then, getting back to your comments about $25.0 million of cost reduction, you talked about $13.0 million in cost of goods sold, which is a very significant number. It’s around probably 4% or 5% of revenues. Could you provide a little more detail, how much visibility you have there and what kind of confidence level you have to be able to achieve that in 2009?

Greg Schwartz

We are very confident. We have laid out an aggressive plan, project by project to attack our cost of goods. We have actually completed a number of great projects that include lowering our distribution costs. We have bid out a lot of our materials, packaging and so forth, so we are very confident. A lot of those projects we are in the process of implementing right now.

Burt McKay – BBS Capital Management

That should help your store level EBITDA number immensely if you can achieve that. And then, again, for your 2009 targets you mentioned G&A, the 10% of revenues. Is that ex stock-based compensation, or before stock-based compensation I should ask?

Steven R. Berrard

It does not include stock-based compensation.

Burt McKay – BBS Capital Management

And you did not mention occupancy. Is there a target for that?

Steven R. Berrard

There is and off the top of my head I don’t know what it is.

Burt McKay – BBS Capital Management

If you expect comps relatively stable for the full year, should we get some leverage because of some of the unprofitable stores working to be closed between now and the end of the year? Is that a fair assumption?

Steven R. Berrard

For 2009?

Burt McKay – BBS Capital Management

Yes.

Steven R. Berrard

Yes. I think right now as we look ahead a little bit, we don’t expect much for the rest of the year obviously. Since we’re comping off pretty easy comparative considering where our comps have been for 2008 and the fact that we have taken a number of stores out of the mix and the fact that we are cycling against a lot of cannibalization, and we have got pretty strong initiatives against, competition, I think for the year we will be positive comps. I think you will see it building towards the summer and the remainder of the second half. I think the first quarter will still see some ups and downs.

There are days in this quarter where it looks like we are marching on back strong, we’re excited, we can’t believe it and then we go—we went two days before the election and four days after where we thought the world was coming to an end.

And I think our confidence is that fact that we have a lot of inertia to go back against comps. I think we have done a very poor job as a company, when we talk about minus 7.2 or minus 10 for a quarter, what we really should do is analyze where that comes from. Cannibalization, I don’t know, at least in my experience over the years, I have never seen a company cannibalize as many stores and leave those stores in the comp base. So obviously there is a significant effect.

800 competitors in a two-mile radius around our 520 stores is a bit staggering in itself. And that doesn’t include QSRs. That or the ones and twos and threes and four franchise owners who have a couple of few stores. We think we will make up a lot of this malaise and if the market comes back I think we will see some pretty upside. So I guess the first half will be a bit flat, maybe a little down, maybe with an upside surprise.

Burt McKay – BBS Capital Management

And finally, just working off the numbers that you provided and the level of confidence for especially the cost of goods sold, which is the majority of co-savings. And I guess you identified a $9.0 million G&A reduction in 2009. I guess if you achieve your plans then the company should be cash flowing pretty good due to the fact that you’re not opening any stores and there is not going to be much of capital expenditures. Is that a fair statement?

Karen L. Luey

That is a fair statement.

And I would like to congratulate you for attacking these issues. I really like the actions that you are taking.

Operator

Your next question comes from David Lavonski – Private Investor.

David Lavonski – Private Investor

Other than the 31 stores that you announced to close in 2008, do you anticipate any additional stores in 2008?

Steven R. Berrard

No. what I would tell you is that of the 31 we probably have 20 additional stores that we have looked at. 10 of them, the leases will expire. We will let them expire in their normal course. And then there are another 10 that we are looking at to see what these operational improvements we are making will have an effect because we think to close them would probably be more expensive than to keep them open.

And the second issue is we are afraid that from a competitive standpoint where they are positioned, they may negatively impact our ability to control some of the market share if a competitor would move in.

David Lavonski – Private Investor

What is the average store sales, company wide, of the company owned stores?

Steven R. Berrard

$700,000 is what we talked about on the call today. Down from $746,000 two years ago.

Karen L. Luey

A comparable store. Not a newly ramping up store.

Operator

Your next question comes from George Furlough - Furlough Company.

George Furlough - Furlough Company

In the past few weeks there has been huge drop in gasoline prices, especially out here in California. Have you seen any uptick in business as a result of that?

Steven R. Berrard

We have seen some good days, we’ve seen some great days, and we’ve seen some lousy days. I suspect that will work its way through and cycle. When I first came here 15 weeks ago they made an analysis for me that said our comps were totally driven by gasoline prices and I wanted to kill myself right there. However, I do think we will start to see a little bit of benefit. The problem is how do you shakeout changing gas prices with people’s fear to go out and spend any money right now.

It certainly isn’t going to hurt us and it’s certainly not going to hurt us on the distribution, for sure.

Operator

Your next question comes from Ben Weinstein – [Murdah] Capital.

Ben Weinstein – [Murdah] Capital

I was curious what your maintenance capex is per store, what you’re expecting for next year?

Steven R. Berrard

We are predicting somewhere between $5,000 and $15,000 a store for a refurb. Some stores will be more, some will be less.

Ben Weinstein – [Murdah] Capital

As you input into your model your same store sales expectations for next year and your cost cuts, where do you see your cash troughing out at?

Steven R. Berrard

I’m not sure I understand the question.

Ben Weinstein – [Murdah] Capital

I’m expecting you to be cash flow negative for a period of time and I’m trying to understand where do you think that bottom level will be before the cash flow starts to kick in positive again?

Steven R. Berrard

We’re probably not going to give you that much detail as to where we think the cash balance will be but we start to become cash positive at the end of the second quarter.

Karen L. Luey

Second quarter. You know, our seasonality is that Q1 and Q4 are usually negative cash flow quarters. Q2 and Q3 are usually very positive cash flow quarters.

Ben Weinstein – [Murdah] Capital

And are there any covenants within the debt agreement that you are worried about piercing?

Karen L. Luey

No, if you read the agreement that is filed out there in the Edgar world, there are only two covenants that we have to meet. One if to have $3.0 million of cash held in the bank, which we have more than adequate. The other one is a trailing 13-period, sort of trailing 12 months, of store level EBITDA number of $35.0 million. And as Steve discussed in the call, through Q3 our store level EBITDA is running $43.0 million.

Operator

Your next question comes from Mitch Schiff - Private Investor.

Mitch Schiff - Private Investor

I am wondering, did you try selling any of these stores before you closed them, to franchisees or potential buyers?

Steven R. Berrard

We have only closed nine.

Mitch Schiff - Private Investor

Did you list them with business brokers?

Steven R. Berrard

We have marketed actively to a number of people. This environment right now, we haven’t had a lot of takers but we haven’t given up on the thought.

Mitch Schiff - Private Investor

You wouldn’t have to worry about competitors encroaching on your market share if they were in your own franchisee’s hands. Sometimes I wonder why don’t we franchise all the stores? At least we know we would be profitable for sure. I don’t think Ray Crock had it wrong. I would like you to really rethink this. As a shareholder, I want you to rethink about franchising 90% of these stores and rolling this concept out. You have a wonderful concept and it just makes me so sad to see that you try to run this like Starbucks.

Steven R. Berrard

With due respect, I respect what your thoughts are. If there were a lot of buyers out there for buying stores right now, we would probably be entertaining them. But the fact of the matter is the environment is not that great. We certainly have said in the second quarter and I think we have reiterated it now, we are willing to sell certain markets, however, we’re going to sell them at a price. We’re not going to give them away. And we still have enough earnings power out of the stores.

Our problem is not at the store level profitability. The problem has been the amount of overhead and maybe some of the poor site selections that we have had. But we’ve got markets here that have upward to almost 25% to 30% EBITDA margins. We are going to protect around those. And we’re going to deal with the markets that are not doing so well, find buyers that are willing.

Our franchisees have been offered the stores. To date they have not accepted the challenge of going out and borrowing a lot of money in this environment. A lot of them couldn’t get it if they wanted to and if they would like it, we would be glad to sell them. But we’re going to sell them at a price that is reasonable, not unreasonable.

Operator

At this time there are no further questions.

Steven R. Berrard

Thank you very much and we will go back to work and we will see you next quarter.

Operator

This concludes today’s conference call.

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