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.

click to enlarge

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: long JMBA.

Comments

[spincus614:]

Mr. Appel- I don't see how you can be right, especially now that the Nestle deal is (at least temporarily) kaput. Did you know about the production problems and shutdown when you wrote your this posting? If not, how does the suspension of the Nestle program affect your analysis?

2008 Dec 19 09:50 AM

[John Appel:]

The suspension of the Nestle licensing deal does not affect my analysis. The forecasts did not include any material revenue from the Nestle relationship. -JA




On Dec 19 09:50 AM spincus614 wrote:

> Mr. Appel- I don't see how you can be right, especially now that
> the Nestle deal is (at least temporarily) kaput. Did you know about
> the production problems and shutdown when you wrote your this posting?
> If not, how does the suspension of the Nestle program affect your
> analysis?

2008 Dec 19 10:45 AM

[User 322816:]

one other positive is the ~$5M tax refund which is expected before year-end (i believe) per Berrard on the earnings call. i'm curious about this nestle announcement...invento... issues??..reaally? maybe the new ceo, (being an alleged consumer brand guru) didn't like the strategy and/or the terms of the deal with nestle and wanted out.

2008 Dec 19 01:32 PM

[Jambasinking:]

My analysis: Jamba is soon to be bankrupt and all investors should bail out now. They have already began closing their stores in earnest, trying to salvage something, but the core problem has always been the top management's love of wasteful spending. Even with a new CEO (who happens to have never even been a CEO before) this company's prospects look terrible. Huge consistent losses, wastful spending, tons of ideas and new innovations scraped because they were unpopular, and super costly breakfast launch that failed....all of this adds up to a company made of idiots who don't know what they are doing.

It is my sincere suspision that the author of this article is actually a PR attempt from Jamba to gain momentum for itself. Many times in earlier articles, several people would all say how they've lost so much money in this stock, and ONE person would step in and defend the company and talk about all its upsides without addressing the issues all the other people made. The person's words were written so well and overly positive that you could tell that this was a person on the inside and possibly a marketing ploy to send out SOME positive news. After reading and re-reading this article, I assume this person is also a Jamba insider, paid to present a case that Jamba is not yet finished.

Nice try...but after watching a $10 drop in this stock down to 50 cents a share, I think people are smart enough to kiss Jamba good-bye and watch as they end up closing everything. Based on all their previous decisions as a company, this ship has no where to go but down.

2008 Dec 24 02:04 PM

[vin2ride:]

Jambasinking, please disclose that you are indeed a shorting Jamba.


On Dec 24 02:04 PM Jambasinking wrote:

> My analysis: Jamba is soon to be bankrupt and all investors should
> bail out now. They have already began closing their stores in earnest,
> trying to salvage something, but the core problem has always been
> the top management's love of wasteful spending. Even with a new CEO
> (who happens to have never even been a CEO before) this company's
> prospects look terrible. Huge consistent losses, wastful spending,
> tons of ideas and new innovations scraped because they were unpopular,
> and super costly breakfast launch that failed....all of this adds
> up to a company made of idiots who don't know what they are doing.
>
>
> It is my sincere suspision that the author of this article is actually
> a PR attempt from Jamba to gain momentum for itself. Many times in
> earlier articles, several people would all say how they've lost so
> much money in this stock, and ONE person would step in and defend
> the company and talk about all its upsides without addressing the
> issues all the other people made. The person's words were written
> so well and overly positive that you could tell that this was a person
> on the inside and possibly a marketing ploy to send out SOME positive
> news. After reading and re-reading this article, I assume this person
> is also a Jamba insider, paid to present a case that Jamba is not
> yet finished.
>
> Nice try...but after watching a $10 drop in this stock down to 50
> cents a share, I think people are smart enough to kiss Jamba good-bye
> and watch as they end up closing everything. Based on all their previous
> decisions as a company, this ship has no where to go but down.

Jan 03 02:11 AM

[vin2ride:]

JMBA's penny-stock status obviously points to its potential cashflow problems. Their negative 2007 income prevented access to a Wells Fargo $25M creditline. Thus they took on a higher cost $25M note last year. They have $28M left in 3Q08 after burning through $1.7M. Even so, the article is correct in pointing out positive the mid-2009 revenue projection.

IMO, the break up with Nestle is good for the brand and store profits, something the new CEO, James White, a branding guru from Safeway understands. Another positive, the company has licensing agreements for onsite kiosks with traffic generators including Safeway, Vons, Target, Whole Foods, and Pavillions. The turn around plan is emphasizing growth at airports, college campus and these non-traditional store locations. In addition to geographic growth, there is also potential for success in the healthy quick-breakfast sector with their brand and conscientious customer base.

Bottomline, this IS a risky play with the potential for multi-bagger returns if new management is successful with the turn-around (pathetic previous management got them into this hole).



On Jan 03 02:11 AM User 271292 wrote:

> Jambasinking, please disclose that you are indeed a shorting Jamba.
>

Jan 03 02:52 AM

[Jambasinking:]

I am in no way affiliated with Jamba and do not currently own their stock directly or indirectly.

I am actually a former employee from middle management who was suckered into buying a great deal of stock before losing almost everything I had invested. I was a fool, and listened to those above as they put a super positive spin on a sinking company.

Jan 04 03:21 AM

[rlxdoc:]

Your Q4 forecast is based off of an 11 week period in 2007. I believe that this year's Q4 should be approximately 7-8% higher in sales. This modeling error follows through to 2009 also. Your comp assumption seems a little low. The two year comp stack is -3.3% (in Q3) which implies -4% in Q4 and mid single declines in Q1 & Q2. The oatmeal should help sales (and visits?) although not do much for profits.

I heard Mr. White speak recently and he appears competent and capable. Still this is a longish play. I get to a forecast of $1.30 in mid-2010.

Jan 16 05:46 PM