A Brief History
Just a few short years ago, Jamba teetered on the verge of bankruptcy. In an apparent attempt to become the "Starbucks (SBUX) of smoothies," Jamba embarked on an aggressive expansion plan, opening company-owned stores at a furious pace. However, over time it became apparent that many of these stores were in poor locations and often too close together, thus cannibalizing each other's sales. Several bad years culminated in a loss of $149 million in 2008. Not all of this was cash; approximately $122 million of that number was related to trademark and goodwill impairment, costs associated with the closure of underperforming stores, and impairment charges related to other assets. Nevertheless, simply to keep the doors open, the company was forced to take out a $25 million revolving line of credit with a floating interest rate of at least 12.5%.
On November 17, 2008, Jamba hired a new CEO, James White. White's background included stints at Safeway, The Gillette Company, and Nestle-Purina. At Safeway, he had built the O Organic line of products. Under White's direction, the company issued a $35 million offering of preferred stock. These shares carry a dividend of 8% and each share is convertible into 100 shares of common stock at $1.15 per share. Funds from this offering were used to pay off the onerous line of credit as well as establish working capital. This action effectively diluted Jamba's common stock, but simultaneously provided the company with both some breathing room to restructure as well as lower interest/dividend expense.
Next, the company began what was essentially a three-pronged growth strategy. First, expanding their menu. Second, starting to develop a line of CPG offerings with various partners. Third, expanding their store count via franchising as opposed to company-owned stores. This included both refranchising certain existing stores as well as signing agreements for new stores. While this started domestically, Jamba also began international expansion on June 7, 2010, when they announced a partnership with the SPC group to open stores in South Korea. Later, agreements were also signed for the Philippines and Canada.
Two other items from 2012 are of note. First, the company purchased Talbott Teas. Secondly, they initiated the buildout of a new JambaGo concept. Essentially, these are units that can be placed in schools, sporting venues and other locations and dispense pre-blended smoothies as well as other Jamba-branded items.
In the fours years since that $149 million loss in 2008, Jamba has come a long way. Here are some highlights from 2012 as discussed on the earnings call:
- First, and very key, Jamba reported an operating profit of $.3 million in 2012. While the amount itself could be considered negligible, it is significant because it becomes the first yearly profit since the turnaround began.
- Over 400 JambaGo locations were in operation as of the end of 2012.
- Revenue from Jamba's CPG items grew from $1.1 million in 2011 to $2.1 million in 2012.
- Jamba generated $17.6 million in cash from operations, and ended the year with more than $31 million in cash and no debt.
- Same-store sales increased 5.1% for the year for both company-owned stores and franchise units.
- Adjusted operating profit (Revenue minus cost of sales, labor, occupancy and store operating expenses) came in at $52.4 million, a $7.3 million improvement over 2011.
- Store level margin improved to 18%.
2013 Plans and Projections
During the call, the following key future plans and projections were shared:
- Jamba plans to add an additional 1,000 JambaGo locations during 2013.
- Guidance for 2013 CapEx is in the range of $9 - 10 million. This includes plans to open 5 - 10 new company stores and a physical refresh of approximately 100 existing locations. It is expected that approximately 75 of these will be completed in the first half of the year. This store refresh program will include some limited menu smoothie stations, drive-thrus and juice bars.
- As mentioned above, Jamba issued 304,348 preferred shares back in 2009. As of the earnings call, only 41,109 preferred shares remain outstanding. Based on that share count, Jamba's future annual dividends will be in the $400,000 range.
- An agreement to develop Jamba stores in Mexico was announced. Under this agreement, 80 stores will be opened over the next 10 years. Additionally, Jamba's partners in South Korea, the Philippines and Canada expect to open 280 stores over the next 8 years.
- The launch of Jamba Kids Meals. These have been developed in partnership with dietary and fitness experts, and are based on the USDA's MyPlate dietary guidelines. Smoothies offered have no added sugar and are made only from food, vegetable and juice.
- With respect to guidance; Jamba expects same-store sales growth of 4-6%, store-level margins of 20% (as compared to 18% in 2012), income from operation of 2.5% - 3% of revenue, CPG revenue of $4 to $5 million, 60 to 80 new U.S. and international locations, and 1,000 additional JambaGo locations.
In response to analyst questions, Jamba also offered the following comments:
- The refreshed stores are already showing good potential. For example, in the refreshed Santa Monica store, sales of fresh juice quadrupled, jumping from 3% of total store revenues to 12%.
- They will be developing further value items. White talked about a limited line of smoothies that could be offered at about the $2.50 price point.
- They are excited about the possibilities for fresh juice. They are targeting the refresh first to company stores, and look to implement this in franchise locations starting in 2014.
Summary and Opinion
For a shareholder with a long-term perspective, I believe Jamba presents an attractive opportunity. Here are a few reasons why.
First, their opportunities for organic growth are solid. In particular, I like the potential offered by close to 1,500 JambaGo units being in operation by the end of 2013. Many of the units already in operation are in K-12 schools, as part of a concerted effort by Jamba to offer healthier alternatives for children. This builds brand recognition for the next generation of potential Jamba consumers as well as their parents even today. Further, with respect to CPG, Jamba had actually forecasted a revenue number of $3 million for 2012 and they actually came in at $2.1 million. On the earnings call, it was explained that this shortfall was due to a timing issue, and that CPG revenue for 2013 should come it at the high range of their $4-5 million guidance as a result.
Second, let's talk about the status of the preferred shares. While Jamba achieved an operating profit of $.3 million for 2012, they paid approximately $2.2 million in dividends on the preferred shares. However, as announced on the call, only 41,109 preferred shares remain unconverted, and the future annual dividend expense on those remaining shares will only be approximately $400,000, a drop of $1.8 million.
However, there is a provision with respect to the preferred shares that could soon drop this number to zero. At this point in time, if Jamba's common stock maintains a price of $2.875 or more for a period defined as "any 20 of the 30 preceding days and . . . for a period of 10 trading days thereafter," Jamba has the right to require conversion of all remaining shares of preferred stock. Clearly, with the stock price sitting at $2.99 as I write this article, it is possible that this could happen in the very near future. Such action would dilute the common shares slightly, but simultaneously wipe out all dividend payments.
Third, I feel that they are a potential candidate for a buyout. Peet's Coffee, a company not much larger than Jamba, was recently taken private for approximately $1 billion. Starbucks purchased Teavana for $620 million. With approximately 87 million shares when fully diluted, Jamba's market cap at $2.99 per share would be approximately $260 million.
Further, I believe that Jamba's G&A expenses are too high as a percentage of revenue. In 2012, total revenue was $228,789 and G&A expense was $40,771 (all dollars in 000s). That means that G&A expenses are currently consuming 17.8% of all revenue. As a comparison, in 2011, the last year they were a public company, Peet's Coffee's G&A expense was approximately 7% of total revenues. Were Jamba to be bought out, and that G&A expense folded into a larger organization, it appears that perhaps as much as $20 million could immediately flow to the bottom line. My belief is that the value in Jamba will ultimately be unlocked one way or another; either by the current management team growing revenues to bring those G&A numbers more inline or through a buyout.
In summary, I believe Jamba offers attractive value to a patient investor at this price.