Jamba's New CEO Providing 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. Below is an abbreviated version of my latest analysis of JMBA. A more detailed version is available at JohnAppel.com.

Current Valuation & Consensus View

A 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.

JMBA’s business model may have been untenable a year ago. However, over the last several months, the company has reduced its costs (store labor and SG&A in particular), which should enable the company to generate cash flow at today’s lower AUVs (average unit volumes).

Meanwhile, the company’s new CEO, James White, is accelerating JMBA’s transition from a smoothie shop chain to a healthy lifestyle brand. Soon, blended drinks will shift from being the main focus to being a component of an expanded menu. This menu will be designed to deliver what today’s consumer wants – great tasting, healthy, convenient, fun food at an affordable price.

I believe that with reduced costs, the store model now works reasonably well for mult-unit operators of traditional locations, and for operators of high-traffic “non-traditional” locations such as airports. As the company expands its menu and AUVs grow, the store economics should work better and attract more new franchisee capital (store model estimates are in the expanded analysis).

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 a 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.

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.

Quarterly projections are shown below:

Price Targets and Potential 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).

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.

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.

Short covering could accelerate any price appreciation. 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).

Disclosure: The author is long JMBA

Comments

[Michael Dem...:]

Thanks for the update John.

Mar 30 07:25 AM

[John Appel:]

Somebody asked me if my price targets reflect my view of the company’s “fundamental” or M&A value. The answer is a definite “no.” In an M&A transaction, I would think the company would fetch closer to 4x store-level cash flow, or 7x contribution margin, each of which implies about $3.00 per share today (and hopefully a lot more in a few years).

Mar 30 04:56 PM

[Stone Fox C...:]

Great info. Haven't followed JMBA too close of late. Its been a value play for a very long time so its difficult to get excited that gains will actually happen. The new CEO seemed to finally get JMBA on a path too profitibility. They've had a great concept but lousy execution. With CA showing signs of bottoming in the housing market, JMBA could become one of the best ways to play that turnaround. As CA goes so goes JMBA. Would like to see some details on competition wiped out in this recession. The retailers still standing should benefit from less competition and lower rents.

Apr 01 04:00 PM

[Mexx:]

Thanks for the analysis and update on JMBA.

The next 12 months are make or break for JMBA. Aside from good execution from its new management, the company will need all the stars aligned to its favor including:

> Stability in the CA economy (i.e., job market and house prices stabilize).
> A hot summer in CA
> Commodity prices remain at current levels and raw materials do not spike
> Gas prices stay the same
> SBUX, MCD and Dunkin fail miserably at their smoothie attempts.
> Travel picks up

I've come to realize that JMBA's survival not only depends on their ability to execute but on the above strong external foces to be continually aligned on its favor for a sustainable period of time. It is a tough bet.

JMBA remains a speculative play, only put your Vegas money on this one.

Apr 10 08:41 AM

[Paul Meyer ...:]

I see JMBA as a Warren Buffett play. As mentioned above value and potential continual growth if the company gets its finances together. The way I look at it living in Hawaii Jamba Juice is the #1 health-drink chain where EVERYONE goes and is constantly busy doing business. Since Hawaii is a healthy lifestyle area Jamba fits right in for the customers. When I first started following this company it only had around 400 stores. It seems cheap at $1 for the overage "image" and "quality" the company represents. It's brand is worth more then $1/Share price in my opinion. I don't currently own shares, but trade options on it when the stock moves. Another company I've been following which is much smaller but still has such an excellent "brand and reputation" is Spicey Pickle (SPKL). I think the price is similar and it is starting to buy up other sweet brands converting them into Spicey Picke franchises.

I'm neither a shareholder of either stocks, but I believe in them confidently.

-Paul Meyer

May 28 08:22 PM

[John Gordon:]

JMBA has a long way to go, and franchising non-core markets
may not be the best strategy for this economy. While the company has noted that the stores have positive contribution margins, that might not be enough to counter lower G&A leverage and higher credit costs that franchisees traditionally suffer.

JMBA new product related, I have been watching a test store in San Diego near the office, that is selling the test sandwiches/wraps/salads. The sandwiches, salads and wraps are of reasonable value and flavor profile, good POP and are selling. However, due to the price (about $5.50) and the price of the regular smoothie (about $3.95), the existing $2 instant discount efforts will need to continue. $7 at JMBA for lunch is about the same as many of the casual dining operators, right now.

John A. Gordon
Pacific Management Consulting group
pacificmanagementconsu...

Chain Restaurant Earnings and Economics Experts

Jun 30 11:23 PM