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Jamba, Inc. (NASDAQ:JMBA)

Q1 2009 Earnings Call

May 28, 2009 5:00 pm ET

Executives

Karen L. Luey – Chief Financial Officer & Senior Vice President

James D. White – President, Chief Executive Officer & Director

Analysts

Jeff Farmer – Jefferies & Company

Robert Wheeler – Piper Jaffray

[Burke McKay – DBS Capital Management]

Christopher Donnelly – Pacific Rock Capital

Operator

Welcome to today’s Jamba first quarter 2009 earnings conference call. As a reminder, today’s call is being recorded. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions to participate will be given at that time. I would now like to turn the call over to Karen Luey, Chief Financial Officer.

Karen L. Luey

With me on today’s call is James D. White, our President and CEO. During today’s call I will review our first quarter results and James will follow with an update on our 2009 blend plan which was released earlier this year and then we’ll take Q&A. I would like to remind all listeners that this call is being broadcast and recorded live over the Internet at JambaJuice.com. The webcast is available on our website and replay will be available via telephone until June 11, 2009.

This conference call will include forward-looking statements within the meaning of the securities law. These forward-looking statements will include discussions about the company’s strategic priorities, compliance with our debt covenants 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 in our most recent Form 10K.

The company does not assume any obligation to publically release any revisions to forward-looking statements discussed during the call. With that said, I would like to turn it over to James.

James D. White

I’m excited to update you on our first quarter performance and our progress against the strategic priorities that we outlined for the future. As we anticipated the macroeconomic climate continues to be challenging. As a result we experienced consumer trends during Q1 that were consistent with Q4 yet, in the face of those challenges we made solid progress on each of our strategic priorities with gains during the quarter relating to our franchising and refranchising which will accelerate the repositioning of our business.

The successful roll out of a portion of our food strategy and licensing agreements for the Jamba brand and consumer products. More importantly, we continue to make good progress on the expense side of the equation. Our expense reduction plans and also on preserving and protecting our overall liquidity. As you would expect, we continue to explore a variety of options to improve our overall capital structure.

With that brief overview, I’ll turn the call over to Karen who will walk through our Q1 financials.

Karen L. Luey

Our comments today together with information provided in today’s press release and our 10Q filing which will occur during this call should be utilized together to provide you the most comprehensive understanding of our financial results. I’d like to remind everyone on the call that for fiscal 2009 our first quarter is 16 weeks long. Total revenue for the first quarter decreased 12.5% to $88.9 million and company store revenue decreased 11.8% to $87 million as compared to the same prior year quarter.

Comparable store sales decreased 13.8% for the quarter and as you may recall, during the fourth quarter of 2008 we reduced the number of hours that our stores were opened which had a negative impact of approximately two to three percentage points on our comparable store sales results. However, these were non-productive hours and the net result was slightly better store profitability. During the quarter we did not open any new stores and we sold 10 stores in Arizona to an existing franchise as part of our refranchising program that we discussed late last year.

We also closed two company stores which were one underperforming store and one store that closed at its natural lease expiration. Our franchisees opened six locations and closed one. This brings our store count to 732 stores with 499 company owned stores and 233 franchise locations as of April 21, 2009. Our store level EBTIDA for the quarter improved by $2.2 million to $12.2 million or 13.7% of total revenue as compared to $10 million or 9.8% of total revenue for the same quarter of 2008.

This was achieved through the substantial work we have done on all cost saving initiatives in spite of the headwinds that we continue to face with respect to comparable store sales. Cost of sales decreased 19.6% to $21.2 million for the first quarter as compared to the same prior year quarter. This was due primarily to the decrease in revenue and to the cost saving initiatives that have been implemented during late 2008 and during the first quarter of 2009.

These initiatives included the reduction of waste, changing the focus from additive boost to the nutritional benefits already contained within our products and current reformulations of several of our juice blends. As a percentage of company store revenue, these costs decreased to 24.4% in the first quarter compared to 26.7% in the same prior year period. Labor costs decreased 16% to $31.9 million and as a percentage of company store revenue, labor expenses decreased to 36.7% in the first quarter of fiscal 2009 compared to 38.5% in the same period last year.

The decrease is due primarily to the decrease in revenue, to better labor management and to the optimization of our labor scheduling throughout the roll out of [Chronos] that was completed in early 2009. We saw approximately a 1.3% savings due to cost saving initiatives which includes the [Chronos] roll out and 3.1% due to better labor management. These were partially offset by the deleveraged impact of our fixed costs.

Occupancy costs increased 2.8% to $13.7 million and as a percentage of company store revenue increased to 15.8% in the first quarter of fiscal 2009 compared to 13.6% in the same period of the prior year. This increase as a percentage of company store revenue was primarily due to the deleveraged impact of fixed costs over lower sales. While we continue to make progress on our lease negotiations this has been adversely impacted by increases in other occupancy costs.

Store operating expenses decreased 28.8% to $9.8 million and as a percentage of company store revenue decreased to 11.3% for the first quarter of fiscal 2009 compared to 14% in the same period of the prior year. We are starting to see the benefits of all the cost saving initiatives and the implementation of controls that have been completed since late 2008. Through better controls and negotiation we were able to reduce expenses in repairs and maintenance, credit card fees, cleaning supplies, back office expenses and printing. And, as we have discussed during our past calls, we have reduced our marketing spend to focus less on brand marketing and more on local marketing initiatives targeting the two mile radius around our store locations.

Depreciation and amortization decreased 21.8% to $6.1 million for the first quarter and as a percentage of total revenues decreased to 6.9% for the first quarter of fiscal 2009 compared to 7.7% in the same period of the prior year. The decrease in depreciation expense was due to the decrease in total number of stores open and a non-cash impairment charges recorded during 2008 and the first quarter of 2009.

G&A decreased 23.4% to $11.7 million for the quarter and as a percentage of total revenues decreased to 13.2% for the first quarter of fiscal 2009 compared to 15.1% for the same period of the prior year. This decrease was attributable to our efforts to right size our organization and our continuing efforts to bring G&A spending in line with industry standards which we started in the second quarter of 2008.

The decrease was primarily related to payroll and travel related costs. During the first quarter interest expense increased to $1.7 million from $.1 million as compared to the same period of the prior year due to the financing we completed in September, 2008. Other key items included a decrease in store pre-opening costs which is included in other operating expense on the face of the income statement of $1.1 million as a result of not opening any stores during the quarter.

We recorded non-cash store impairment expense of $3 million for the quarter compared to $4 million for the same period of the prior year. We had a non-cash gain from derivative liabilities of $.2 million as compared to a gain of $5.6 million in the prior year’s same quarter. We have taken a charge during the first quarter for expected lease termination and closure expenses of $.3 million and we will continue to monitor and evaluate ongoing store performance on a quarterly basis.

For the first quarter our tax rate is .17% as we took a full valuation allowance on our deferred tax assets during the second quarter of 2008. This compared to a tax benefit of $7.4 million recorded during the same period of the prior year. At the end of the first quarter, we had over $26.2 million in cash, cash equivalent and restricted cash. Our restricted cash balance was $7.7 million. We received our IRS refund of $5.2 million during the quarter.

At the end of the first quarter of 2009 we remain in compliance with our two financial covenants which are a minimum of $3 million cash in the bank and a trailing 13 period of store level EBITDA of $35 million. Based on what we know today and our 2009 plan we expect to remain in compliance with our covenant. Our 2009 cap ex plan continues to be primarily discretionary and we’ll be focused on initiatives to drive sales including the capital needs required to build a robust food platform and to deliver exceptional customer service.

With that, I’ll turn it back to James.

James D. White

Our on our earnings call in March I update you on our 2009 blend plan which you’ll recall had several key elements: reduce costs and expenses; a customer first operationally focused service culture; increase food and day part offerings; development of retail licensing initiatives; refranchising of company owned stores; and the growth of our franchising in traditional as well as high potential non-traditional locations.

Karen has detailed the progress we have made in the critical areas of managing expenses and improving our operational excellence. Gains in these areas are essential to maintaining a sustainable growth oriented business model. We must have a cost structure that is right sized for our revenue. We must eliminate all unnecessary costs that stand in the way of profitable growth and we must do this with no compromise to quality or other attributes that define Jamba Juice with our consumers. So, efforts in these areas are a top priority and will continue to receive very focused attention.

I’d like to spend some time on the other areas that are essential for Jamba’s transformation: accelerating revenue growth; and a strengthen brand equity performance. First, the area of focus on our food strategy, as indicated in March we have a comprehensive food strategy that will drive new customers in to our stores while also increasing frequency with our base. In short, we believe food makes sense and has excellent prospects for Jamba. Our research shows that 27% of our customers eat food with their smoothies and they’d welcome high quality health foods offered at Jamba locations. In fact, when asked many of them have wondered what’s taken us so long.

In Q1 we introduced act one of our food offering. We launched great tasting oatmeal products nationwide and the results thus far have exceeded our projections. Oatmeal sales are strong, they show that we can attract new customers while also increasing frequency with our base. So, we are pleased to have more food initiatives in the wings. During Q1 we concluded phase I tests in six stores of our comprehensive food strategy offering. This test included wraps, sandwiches, salads and cold teas.

The results were so positive and encouraging that we will continue to extend this test to over 200 stores in California during the second quarter. I look forward to updating you on our progress as this initiative expands. As I’ve said, we believe the launch of a comprehensive food strategy will unleash the power of the Jamba brand and deliver a fun, healthy on the go food solution that transforms our business model and company.

The second area I wanted to update is no our licensing growth platform. Again, our research shows that the Jamba brand is expandable. Consumers look upon Jamba as offering products that embody great taste, fun and healthy products. For them the Jamba brand means something unique, something made with them in mind, something that represents an active, healthy lifestyle. We have something very special on which to build an entire portfolio of consumer products and we have several significant developments that underscore our confidence.

During the first quarter we agreed with Nestle to move forward with the relaunch of several new ready to drink beverage concepts. I’m excited about this portfolio of products which will demonstrate that extending our brand in to consumer products is achievable with exceptional results. Also, this month we announced the licensing agreement with Oregon Ice Cream to launch an innovative, better for you Jamba frozen novelties that will create an attractive new segment.

To help foster the Jamba loyalty with the youngsters we are teaming up with Think Wow Toys to develop a Jamba branded kids blender that children can use to make their own smoothies at home. As you can see there is create untapped potential to extend the Jamba branded products in to the retail market so stay tuned.

The third area we are focused on is franchise development where we have made excellent progress since our last call. First, we refranchised a total of 10 stores in the first quarter to an existing franchisee. Those are the 10 stores in Arizona we announced in March 2009. Secondly, we added six new franchise stores including four non-traditional stores. This brings our total number of franchise stores to 233. Lastly, we’re working with a specialist firm in the franchising industry, the Praetorian Group to accelerate our refranchising initiative and will balance our store portfolio.

We plan to resize our operations to approximately 300 company owned stores in core markets including California. We expect to complete Phase I of this program by late 2009 and in total by the end of 2010 depending on of course market and other conditions we believe this refranchising strategy will position Jamba for better growth in market share, reduce capital outlay, provide a greater overall margin and brand presence for the company. In brief, it will help us grow.

Our current research shows a potential for at least 2,700 profitable stores in the US. With this program we can realize that potential faster than we ever could through a heavy reliance on company owned store development. Working with the Praetorian Group we will target multiunit franchise partners who we believe will fit well with our company.

With that review of our strategic priorities let me say a few words about Jamba Juice fans. We know that Jamba consumers are extremely loyal and have lower levels of price resistance for quality products and those feelings were captured in results that were released just last month by one of the sector’s foremost researchers. The research showed that Jamba’s preference with consumers escalated sharply from a year ago catapulting us from a ranking of 58 to 28. According to the report this jump makes Jamba an important force among quick service restaurants nationwide.

To wrap things up, we are very excited about the future of Jamba and continue to feel that we are well on our way to achieving our goals but we continue to be realistic. We know that the turnaround will take some time especially during these difficult economic times. With that said, I want to reiterate we have clear strategies and priorities that are easily defined and measured. We will reduce expense to drive out $25 million in store level costs, we are enhancing our customer first operationally focused service culture, we are increasing food across day parts and will expand food in the upcoming months in to over 200 stores in California, we are growing our franchising in non-traditional venues and we are demonstrating significant progress in our retail licensing initiatives.

Before I conclude I want to thank our general managers and our franchise partners who are central to the turnaround of our company. I’d also like to thank the stockholders that attended our annual meeting earlier this month. The meeting provided a nice opportunity to review our progress and accomplishments to date and to discuss the challenges that lay ahead.

Thank you for your time today and I will now turn the call over to the operator. With that, we’ll take questions if you have questions for Karen or myself.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeff Farmer – Jefferies & Company.

Jeff Farmer – Jefferies & Company

I wanted to touch first on the refranchising, what cash flow multiple did you receive on the sale of the Arizona units? And, what do you expect to see on future sales?

James D. White

That’s information we wouldn’t disclose publically for strategic reasons.

Jeff Farmer – Jefferies & Company

Than as it relates to today’s refranchising announcement, do you expect to see more of these five and 10 unit deals or is there an expectation that a larger area developer could step up and maybe take out a much bigger chunk of the 150 units you’re planning to refranchise?

James D. White

Jeff I’d make a couple of points, in terms of today’s announcement we look at that as a clear opportunity to accelerate the repositioning of our business in total so that will be the first point that I would make. It allows us to resize the core set of company stores to right at about 300 and as we announced today, we will refranchise up to about 150 units and really those commitments will consist of really two critical components, multiunit packages so in the five to 10 range is our focus. We’re open to larger deals if we’ve got the right kind of partners out there.

Then, the final point I’d make, all of these agreements will have additional development opportunities connected to them. So, we’re excited about today’s announcement. It really positions this company to grow moving forward. The other really side benefits of this announcement is it will allow us to pay down debt and actually more efficiently allocate company resources both financial and operational.

Jeff Farmer – Jefferies & Company

Then shifting gears on you to the new food news, what’s your food attachment rate right now and has it changed since you introduced oatmeal earlier this year?

James D. White

So we’d make a couple of points, we’ve been incredibly excited with the launch of oatmeal and it had really a couple of different aspects one, was the overall improvement in our breakfast day part was significant and I think for most of us at the company we were impressed with the results to date with oatmeal. It actually beat any of our internal projections and gave us great confidence to move forward on the current plan. That would be the first point that I’d make. As we’ve run a series of several other tests, we’ve seen our attachment rate picking up pretty steadily. Especially the grab and go that we tested here in the Bay Area.

Jeff Farmer – Jefferies & Company

I guess understanding that you don’t want to get overly specific on the sales mix part of it, in those units that you have tested the grab and go stuff, again from a wraps and salads perspective can you see in your mind sort of longer term, 10%, 15%, 20% food mix in these stores? Do the test markets illustrate for you that type of potential is out there?

James D. White

Again, the tests that we ran, the most recent test would have been an operational test but, we believe that food will play a significant role for us here at Jamba. I don’t think that 20% target for the overall mix longer term would be out of the question because we actually believe this will be transformative for both our business model and company.

Jeff Farmer – Jefferies & Company

Final sort of question on the cost line, you made it clear over the last couple of quarters that you’ve been targeting this $25 million in cost cuts. I just wanted to be clear, that’s for 2009? And, if that is the case, do you potentially see a second wave of cost cuts that might be available to you as you move forward?

James D. White

The answer is the $25 million that we talk about in terms of our store level cost structure we are on track, if not slightly ahead of taking out that $25 million. As a part of the culture we’re building here, we will continue to find opportunities to take costs out and we think we’ve got a list of opportunity that will follow what has already been identified so this will become a critical capability in this organization moving forward.

Karen L. Luey

Jeff, I guess it just doesn’t stop at 2009.

Jeff Farmer – Jefferies & Company

Final question Karen, while I’ve got you, as it relates to food costs obviously the guidance is at or below 26%. You hit 24.4% this first quarter, is there any reason to believe that you couldn’t potentially hold that number in that mid 24% range as we move forward?

Karen L. Luey

Jeff, we’re going to stick to our original guidance and our original guidance for the year we’re planning on cogs being about 26% of revenue.

Operator

Your next question comes from Robert Wheeler – Piper Jaffray.

Robert Wheeler – Piper Jaffray

Just a couple of questions for you guys, first of all have you guys noticed any regional improvements specifically in California during the first quarter did it sequentially get any better, worse or just any kind of commentary you could add on regional same store sales?

Karen L. Luey

What I would say on that is we didn’t see it get any worse in California. We think it’s probably the same trend that we’ve been seeing since late last year 2008.

Robert Wheeler – Piper Jaffray

Then did same store sales get any better sequentially during the quarter or was [inaudible] versus that?

James D. White

Again, our results were about Q4 to Q1.

Robert Wheeler – Piper Jaffray

So it was pretty level throughout?

Karen L. Luey

Yes.

Robert Wheeler – Piper Jaffray

Then with another round of minimum wage hikes coming this summer, do you guys anticipate this having any affect on your labor line for the second half of this year and in to FY ’10?

Karen L. Luey

Rob, we’ve already taken that in to consideration when we gave guidance this year. We still expect our labor to come in at the 34%.

Robert Wheeler – Piper Jaffray

Then with the refranchising effort, I know that you guys have had the success with refranchising already but have you run in to or do you anticipate running in to any problems with franchisees gaining access to credit in this tighter credit market?

James D. White

Again, if you take a look at the details around today’s announcement, the reason we focused on multiunit packages in the range of five to 10 it really gives us the opportunity to find franchise partners that would be SBA eligible. So, we actually think that’s an absolute sweet spot for us in the marketplace and gives us significant confidence around the plan.

Operator

Your next question comes from [Burke McKay – DBS Capital Management].

[Burke McKay – DBS Capital Management]

As a follow up to Jeff’s question, looking at your Q in the first quarter there’s a line item for $300,000 for the proceeds from the sale of stores, can you talk about that what that number is?

Karen L. Luey

Proceeds from the sale of stores?

[Burke McKay – DBS Capital Management]

Yes.

Karen L. Luey

I’m looking at my 10Q.

[Burke McKay – DBS Capital Management]

This is the Q that you filed date April 21, 2009. I’m looking at the cash flow statement and there’s a line in the activities and it’s proceeds from sale of stores and it’s $300,000. So, what I’m trying to clarify if that’s the amount that you got for the 10 Arizona stores that you sold.

Karen L. Luey

The Arizona store sale was actually broken up in to two component pieces, once was the cash proceeds from the sale and that was about $300,000.

Operator

Your next question comes from Christopher Donnelly – Pacific Rock Capital.

Christopher Donnelly – Pacific Rock Capital

I just have a couple of points of clarification, in regards to the comps for the first quarter being down 13.8% comping against an -4.2% from last year on a two year basis down -18%. If we take that same analysis for the fourth quarter at -15.3% I just want to understand that the deceleration between the fourth quarter and the first quarter is simply from the hours being cut in regards to store openings, is that correct? Would that be the comp differential?

James D. White

Karen will handle that portion of the question and I’ve got a comment.

Karen L. Luey

So Chris we made that change late in 2008 so I would say that there was probably maybe a half or a quarter of that 3% impact that was recorded in 2008. So, I would say then that most of the differential between Q4 and Q1 would be due to the reduction in store hours.

Christopher Donnelly – Pacific Rock Capital

So just to reinforce the point, there’s not a deceleration in the pace of business, it’s mostly around the store hours, correct?

Karen L. Luey

That’s what we’re seeing.

James D. White

The point I’d make is we actually as we move to the second half of the year we actually had easier comps moving forward so we actually anticipate that we will build momentum as we move across the year.

Christopher Donnelly – Pacific Rock Capital

Just so I understand it, in terms of the comp reductions that you’ve highlighted for fiscal ’09 can you just help us understand, if you could just break it out real quickly how much we’re taking in the first quarter and how much more we can expect through the balance of the year.

Karen L. Luey

Chris, I think we probably took about $4 million out of the costs with respect to store level expenses. Then, with respect to G&A we probably took another about $4 million out of the G&A lines.

Christopher Donnelly – Pacific Rock Capital

So the pace of expense reduction should be accelerating as we go through the year?

Karen L. Luey

I believe that’s correct. I think in Q1 we saw some of the deleverage impact of some of our fixed costs and some of the expenses for Q1 and a sales ramp up in Q2 and Q3 I think we see a larger covering of those fixed costs.

Christopher Donnelly – Pacific Rock Capital

Just so I understand, with the cost reductions that you guys are doing can you help us understand in regards to cash flow from operations and free cash flow when you think that the business can start to generate positive cash flow?

Karen L. Luey

Chris, I think we’re going to start to generate positive cash flow in Q2.

Christopher Donnelly – Pacific Rock Capital

Then continuing through the balance of the year?

Karen L. Luey

Well, if you look historically you will see that Q4 is really one of our lowest quarters and so historically I believe Q4 has run negative cash flow for that particular quarter.

Christopher Donnelly – Pacific Rock Capital

In regards to cap ex, $1.8 million it looks like for the quarter can you kind of give us some sense, I know it’s relatively discretionary at this point but can you put a dollar amount on cap ex for ’09?

Karen L. Luey

What we said in the liquidity section of our 10Q is our budget right now calls for up to $13 million in cap ex. Most of that is discretionary.

Christopher Donnelly – Pacific Rock Capital

So under that mindset do you think it’s reasonable that throughout this year that for the full balance of the year that we’re going to be able to generate positive free cash flow?

Karen L. Luey

Yes, I think if you take in to the expectations the outlook that we gave at the end of the year in conjunction with the $13 million of expected cap ex spend that will probably amount to positive cash flow for the year.

Operator

There are no further questions at this time. Mr. White I’ll turn things back to you for any additional or closing remarks.

James D. White

We’d like to thank everyone for joining us on the Q1 earnings call. Again, we’re incredibly excited about the progress we’re making against the strategic priorities that we’ve outlined and look forward to spending time on the Q2 call. Thanks.

Operator

That does conclude today’s conference. Thank you for your participation.

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