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Jamba, Inc. (NASDAQ:JMBA)

Q3 2009 Earnings Call

November 12, 2009 11:00 am ET

Executives

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

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

Analysts

Scott Van Winkle – Canaccord Adams

Russell [Inaudible] – Park West Asset Management

Operator

Welcome to Jamba, Inc.’s third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host, Karen Luey, Senior Vice President and Chief Financial Officer. Please go ahead, Ma’am.

Karen Luey

Thank you operator. With me on today’s call is James D. White, our President and CEO. During today’s call I will review our third quarter results and James will follow with an update on our 2009 blend plan which was released earlier this year and then we will take Q&A. I would like to remind all listeners that this call is being broadcast and recorded live over the Internet at Jamba.com. The webcast is available on our website and replay will be available via telephone until December 3, 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 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 10Q. 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 White

Thank you Karen and welcome to all of you. I would characterize our third quarter performance as one of significant and ongoing progress despite rising unemployment and slow economic recovery.

We remain on track for continued improvement this year and even greater gains as we look to 2010. I am confident we have the right strategy to take our company successfully into the future and we have a committed and focused team fully capable of delivering on the plan. Our plans for 2010 will optimize the disciplined approach to expense management that we laid the foundation for in 2009. We will drive additional store-level cost savings. We will enhance our overhead structures to support or changing business model and we will implement new programs that will help restore our overall profitability.

Our performance in the third quarter adds to my confidence about our future. We posted improvements at the store level as well as on a consolidated EBITDA basis reflecting the impact of our expense management and cost reduction programs. Importantly our comp store sales were better than expected with an over 800 basis point sequential improvement over Q2 2009 and we made strong progress against our blend plan priorities on several fronts.

We expanded some component of food to an additional 150 of our locations system-wide in Q3 and the stores with food are showing more improvement on average than our non-food stores. We opened a number of new franchise stores and completed the sale of eight company-owned stores. We continued to expand the reach and build the equity of the Jamba brand by advancing several licensing deals. We also created and launched a comprehensive, multifaceted marketing campaign that will enable us to engage over 30 million consumers; a Feel Good campaign.

So while we continue to be challenged by high unemployment levels and slow economic recovery we also are making good gains in achieving solid progress in key areas of our blend plan priorities. After Karen walks you through the Q3 financials I will come back and add some detail to this overview.

Karen Luey

Thank you James. Our comments today together with the information provided in today’s press release and our 10-Q filing should be utilized together to provide you the most comprehensive understanding of our financial results.

Like our previous two quarters I am pleased to be able to report that we have posted another quarter of positive consolidated EBITDA during fiscal 2009 with an increase this quarter of $5.3 million over the same period last year. On a year-to-date basis we are $12.2 million better than the prior year. As important, we are also reporting net income of $2.8 million or $0.04 in earnings per share for this quarter. We attribute this to better sales performance for the quarter and the continued diligence in managing costs and expenses as you have seen us do throughout fiscal 2009.

As to preferred stock dividend, our net income available to common stockholders was $2.1 million a $14.5 million improvement over last year’s same period loss of $12.4 million. The net income available to common stock holders for the third quarter of 2009 included non-cash impairment charges of $0.5 million related to long-lived assets. The net loss for the same quarter of the prior year included a non-cash store impairment charge of $5.9 million and a non-cash loss of $0.5 million related to derivative liabilities.

As James has mentioned our entire organization has engaged in driving forward to ensure we achieve our blend plan objectives. We will continue to push aggressively ahead to find ways to continuously improve our top line performance and overall results. Although we continue to make progress in all areas, we do want to caution you that the economic conditions remain a challenge.

Total revenue for the third quarter decreased 8.2% to $79 million and company store revenue decreased 8.2% to $77.5 million as compared to the same prior-year quarter. Comparable store sales decreased 5.3% for the quarter which was over 800 basis points better than our second quarter of 2009. We had some component of food in approximately 218 company stores for the entire quarter which was a significant driver in our comparable store sales performance and during the third quarter we introduced food to an additional 109 company-owned stores.

Our average check increased by approximately 940 basis points due to the addition of food and the price increase that was taken during late 2008 and early 2009. Weather contributed approximately 70 basis points. We will continue to drive trial and awareness of our food offerings and expect over time food will be 10-15% of our total mix.

During the quarter we opened one new company store and closed three company stores at natural lease expiration. We opened 10 new franchise locations. This brings our store count at the close of the quarter to 742 stores with 488 company-owned stores and 254 franchise locations.

Our store level EBITDA margin for the quarter was 20.1%, a 410 basis point improvement over the same quarter of 2008 which continues to be driven by our disciplined focus on the management of cost of sales and labor expenses. Our store level EBITDA for the quarter increased by $2.1 million to $15.1 million as compared to $13.8 million for the same quarter of 2008. On a year-to-date basis our store level EBITDA margin was 18.5%, a 350 basis point improvement over the same period last year.

As we committed to you at the beginning of the year we continue to see improvement in our cost of sales. Our cost of sales for the quarter decreased 15.2% to $19.3 million compared to $22.7 million for the same prior-year quarter. This was achieved primarily through our cost saving initiatives that we started in late 2008 including reduction in waste. As a percentage of company store revenues these costs decreased to 24.9% in the third quarter compared to 26.9% in the same prior-year period as a result of the cost saving initiatives, a shift in product mix and price increases taken during 2008 and 2009, partially offset by an increase in cost of sales related to our food offerings.

Labor costs decreased 16% to $23.6 million and as a percentage of company store revenue decreased to 30.5% in the third quarter of fiscal 2009 compared to 33.3% in the same period last year. The decrease as a percentage of company store revenue is due primarily to the continuous optimization of our labor, adjustments to bonuses and food offerings which require less labor partially offset by the decrease in comparable store sales.

Occupancy costs decreased 4.7% to $10.2 million and as a percentage of company store revenue increased to 13.1% in the third quarter of fiscal 2009 compared to 12.6% in the same period of the prior year. This increase as a percentage of company store revenue was primarily due to the de-leverage impact of fixed costs over lower sales.

As we discussed in prior calls we have made progress in our rent concessions which have been offset by increases in other occupancy costs. Store operating expenses decreased 6.4% to $10 million and as a percentage of company store revenue increased to 12.9% compared to 12.7% for the same period of the prior year. Starting in Q4 we start to lap the benefits of all the cost saving initiatives and the implementation of controls that have been completed in late 2008.

For the third quarter of 2009 marketing expense was $1.9 million, a reduction of 13.1% over the prior year. Depreciation and amortization decreased 32.4% to $3.9 million for the third quarter and as a percentage of total revenue decreased to 5% compared to 6.8% in the same period of the prior year. The decrease in depreciation expense was due to the decrease in the total number of stores open and the non-cash impairment charges recorded during 2008 and 2009.

We reduced G&A by 26.8% for the quarter to $8.8 million and as a percent of total revenue G&A decreased to 11.2 % for the third quarter of fiscal 2009, a 280 basis point improvement over the prior year. Excluding one-time severance related charges taken during the prior and current year quarters our G&A would have been flat to prior-year. As with store operating expenses we are starting to lap the G&A benefits that were undertaken in the prior year. We continue to track to our goal of $35 million of G&A excluding the impact of share based compensation.

During the third quarter interest expense decreased to $0.3 million from $0.5 million in the same period of the prior year. During the second quarter of fiscal 2009 we paid off our senior note which we entered into during the third quarter of 2008 leaving us with an improved balance sheet that has no debt. Other key items include a decrease in other operating costs of $1.3 million primarily attributable to a decrease in store closures, lease termination and pre-opening expenses. We recorded non-cash impairment expenses related to store impairment of $0.5 million for the quarter compared to $5.9 million for the same period of the prior year. We had no gain or loss on derivatives as the underlying warrants expired in June 2009 as compared to a non-cash loss from derivative liabilities of $0.5 million for the prior-year same quarter.

For the third quarter our tax rate is a benefit of 21.8% due to a reduction in reserves. We continue to have a full valuation allowance against our deferred tax assets. We do not expect to be a cash tax payer for the foreseeable future as we have net operating losses to be carried forward.

I would like to give you some metrics on our current liquidity position. At the end of the third quarter we had over $29.4 million in cash and cash equivalents, no debt on the books and our restricted cash balance was $2.7 million. Our capital expenditures for the year are now estimated at between $11-12 million and have been primarily used for our food rollouts and to upgrade our information technology systems. Based on our 2010 outlook we expect to be able to fund our 2010 liquidity needs through existing cash balances and cash from operations.

Our focus going forward will remain on diligent management of our cost and expense structure and execution of our blend plan growth initiatives with the goal of driving top line results and continuous improvements in overall performance. With that said, I will turn it back to James.

James White

Thanks Karen. As indicated in my opening comments our 2009 blend plan strategy hasn’t eliminated the full impact of the tough economic operating environment but they are mitigating the negatives and providing a solid foundation for a turnaround and transformation.

Key drivers of our revitalization are unchanged; a disciplined effort on expense reduction and store level cost savings, a commitment to a customer-first, operationally focused service culture system-wide, implementation of retail food capability across day parts, development and execution of a multi-category consumer products licensing platform, a solid franchise development program to grow our brand presence both domestically and internationally.

Karen has pointed out the progress we have made on cost management and productivity gains. The key metrics show improvement and we will continue drive hard on those improvements throughout Q4. I would like to spend the balance of the call providing additional context on our results for Q3, our progress against the blend plan and some updates on recent company initiatives and then finally I will provide an outlook for 2010.

I will start with our customer first initiative where we continued to make progress in the third quarter. Since implementing our mystery shop program in Q1 of 2009 we strengthened our culture of service. We have achieved over a 400 basis point improvement over our initial Q1 score. We recently have completed system-wide training on our customer excellence program and that has really fired up our teams and should result in future gains. Our goal is to deliver wow service every time system-wide and we think we are well on our way.

Moving on to food, we are pleased with the progress on food. We have launched some component of our food program in 377 stores system-wide. The consumer response has been incredibly positive. 95% of those who have purchased food have indicated they would purchase another food item they have not yet tried. Food, as I stated earlier, is the key enabler of our new business model. Our successful implementation of food demonstrates our operational capacity to expand menu offerings. Our attachment rate on food is in the 6-8% range and we expect that number to grow as we continue to enhance our food platform with additional better for you offerings while strengthening our [communication].

The success of food to date is an indication of the high level of consumer acceptance and support for extending the Jamba brand. Later this winter we will introduce and expand on our hot oatmeal platform offering new holiday oatmeal toppings. As I mentioned on our last call we launched our hot beverage pilot in October and we are now up to 40 units. We believe that hot beverages will work in two important ways. They will help address seasonality by helping drive customer traffic year-round and they pair incredibly well with our existing food offerings like oatmeal.

Our product development strategy for hot beverages is focused on delivering unique, compelling customer experiences that we believe will break through in the highly competitive hot beverage category. We will have four hot blended beverages and six varieties of teas made from the highest quality ingredients. To sum up, food is an exciting and promising area for Jamba. As I said earlier, it is a transformative enabler to Jamba’s success and an important part of our broader strategy to become the premiere healthy lifestyle brand. We are fully committed to the success of this program.

Let’s move now to franchising. Since we announced our blend program in January we have focused on driving franchise development and we are making good progress. We have completed the sale of 27 company-owned stores including the sale of eight company stores in California to one of our former co-founders which is a testament to her belief in the strength of our brand. We expect to meet our re-franchise target to complete the sale of up to 150 company-owned stores by the close of 2010.

We have also expanded our brand presence across the country with the opening of 22 franchise stores year-to-date including three additional airport locations, 10 new campus locations and nine traditional stores. Several franchise partners have decided to defer their current store openings until 2010 so we are currently on target to open 25 franchise locations and two company-owned stores by year-end. We have also experienced solid growth as we plan for additional franchise growth in 2010 including the expansion of one international market.

Overall we believe the franchise development strategy will position Jamba for better growth, increase overall brand presence and market share and provide us with greater overall margins by reducing our capital outlays.

Our brand extension through licensing is accelerating. Our Costco gift card pack launched in warehouses in October of 2009 with expanded approximately to 120 Costco warehouse locations to 200 outlets and it is performing better than anticipated. We expect our Better for You frozen novelties and our frozen smoothie kits to launch early in 2010.

Our Think Wow toy, Jamba branded blender for kids will also be available at retail before year-end supported by full media and product launch campaigns. We also announced two additional license agreements. One with Headline Entertainment to sell Jamba branded apparel online as well as in our Jamba store locations and other mass and specialty and upscale retailers and with Johnvince Foods to sell Jamba branded trail mix. Both will be in the market early in 2010.

We like licensing as a platform. It provides the opportunity for consumers to engage with our brand beyond the in-store experience. It has the potential for significant growth and we are continuing to explore a number of other opportunities.

There are two additional programs I am excited to share with you. I think they both represent milestones in Jamba’s brand history. The first is our Feel Good campaign. This is the most comprehensive customer-facing campaign ever launched by Jamba. It includes the deployment of over 30 million coupons with at least $1 in redeemable value giving us over 30 million opportunities to engage new and existing customers. We will introduce them to the brand and the products and drive trial awareness of our food and beverage offerings.

The campaign has already delivered a steady stream of surprises that have delighted our customers. There have been free subway rides in New York City, free cable car rides in San Francisco and in keeping with our overall green initiative the planting of 20,000 trees across five boroughs in New York City and we sponsored the 2009 Women’s Conference in California serving up lunch to over 1,300 guests and our fruit infused teas to over 5,000. There are more consumer engagement opportunities planned for the remainder of 2009 including the announcement of three $10,000 sweepstakes winners.

We have leveraged our Jambassador, the popular banana man, to deliver goodwill and feel good moments on behalf of Jamba. We are also using social media like Facebook, Twitter and You Tube plus street teams, in-store promotional materials and our JambaJuice.com website and our own team members.

We know from past experience that the Jamba brand responds especially well to aggressive marketing efforts and the Feel Good campaign is right on target with the mood of the time and the value needs of our customers. In short, it is a large, well integrated and multifaceted campaign using the right vehicles to reach current and prospective customers. We expect it to drive trial awareness and build loyalty for the brand.

The second update is the recent announcement of our relationship with the National Parent Teacher Association. The partnership with the National PTA allows us to reach over 10,000 schools and significantly increase our ability to touch the lives of many children, parents, teachers and other advocates for children in a very positive way deploying our long-term commitment to help crate healthy schools and healthy communities. We will be launching several initiatives with the National PTA including a special fund raising partnership, a school lunch program, a specially developed PTA Smoothie, in addition to providing a matching contribution to the PTA’s November Healthy Lifestyle Awards program. The partnership is a wonderful fit for the Jamba brand and our teams are very excited to be part of this program and we expect this to be a long-standing mutually beneficial relationship.

In spite of the challenging economic operating environment we are pleased with the progress we have made against our blend plan to date. We have delivered quarterly improvement to our consolidated EBITDA line, store level margins and cost of goods. We have strengthened our balance sheet, overall paying off all long-term debt. We have successfully launched our food platforms with oatmeal at more than 600 units, food at more than half of our stores. We have launched a pilot of our hot beverages in over 40 stores. We have significantly advanced our licensing initiative and we will roll out several of our licensing products nationally in 2010.

We have expanded our brand presence through franchising and have significantly moved the ball forward on our re-franchising effort with the sale of 27 stores to date. We are developing a core competency in our cost and expense management areas and we will take out $25 million in store level cost structure and another $13 million in G&A as promised. This diligence will become a core part of our Jamba business management approach.

Moving into 2010 we anticipate a challenging operating environment with some economic recovery across the year. In 2010 we expect to deliver positive comparable store sales. We will further reduce G&A by 10-12% excluding share based compensation. We will deliver consolidated EBITDA in the 5-7% range, deliver store-level EBITDA of 15-17%. We will add 30-50 franchise stores and expand into one international market in 2010. We will execute additional licensing agreements in relevant categories and complete the re-franchising of up to 150 company owned stores that we began in 2009.

We will continue to work to improve top line sales and build a sustainable business model for growth. At Jamba we believe that a promise made must be kept and I assure you we will deliver on our promises. We have the right team in place. We have the right strategies in place. We are executing with focus, diligence and a commitment to excellence. We will transform and grow Jamba in 2010.

Before I conclude I wanted to welcome our new franchise partners into the Jamba system. We are very glad you are onboard. Now I will turn the call back over to the operator and open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Scott Van Winkle – Canaccord Adams.

Scott Van Winkle – Canaccord Adams

Just a quick question. I haven’t dove into the numbers in great detail so pardon any ignorance. When you talk about turning positive comparable store sales, what drives to that conclusion for next year? Are you taking the test results for rolling out food and hot beverages and saying this is going to be the impact on a larger store base when they are introduced? Is that the primary difference or are you looking at comparisons? Do you have projections coming from franchise operators? I’m wondering how you build that.

James White

I would make a couple of points. Certainly the initiatives we have launched around food especially as we look across the year where we had no food a year ago that gives us a lot of confidence. That is one point I would make. Just a little bit of history. We launched oatmeal system-wide in January a year ago. We didn’t launch the food platform broadly until June of this past year so we will have half a year with food in at least half of our system where we didn’t have it a year ago. We are even more encouraged with the results that we have had with our food program and that is the reason we have significantly expanded the food platform moving forward.

The other thing we are excited about, really more details to come on this, we have launched an operational test on hot beverages in about 40 stores and in three markets at this point. There is more to come on hot beverages for next year. We are very confident we will move to positive comps next year.

Scott Van Winkle – Canaccord Adams

The re-franchising model that you are deploying, is there any simple math when you have something that kind of changes the structure of the balance sheet and P&L it is always easiest to break it down if we move one store this is what happens. Is there any way to kind of think about what the economic impact…it certainly looks to be a positive trend on things like return on invested capital and such. I’m just wondering if there is a simple way to kind of boil down how significant that is for the company.

James White

I think there are a couple of capture points I would leave you with. We talk often about there being potential of 2,700 profitable Jamba units in the U.S. marketplace. First and foremost in terms of our move to a franchise oriented model is we think it unlocks the potential for us to grow. That is the first point. The second point is it significantly takes risk out of the company’s business model and really stabilizes we think our overall earnings flow on a go-forward basis. The most important point relates to the growth. We sit in 22 states today. This is a national brand and this really gives us the potential to accelerate our growth going forward. Karen is there anything you would add?

Karen Luey

The only thing I would add on the financial piece I think I know what you are trying to do with your model. That net impact for 2010 on the consolidated EBITDA line would probably be somewhere between neutral or slightly positive once you factor in the…

Scott Van Winkle – Canaccord Adams

You cut off when you said neutral to slightly positive to the EBIT line.

Karen Luey

Yes, when we look at it holistically because we can’t project what the timing is of closing those deals but when we look at it holistically for full year 2010 the net impact to consolidated EBITDA is either net neutral or slightly positive.

Scott Van Winkle – Canaccord Adams

James, you were at a conference a couple of months ago and you had what I will call a wheel of fortune of initiatives. I didn’t really keep track of all the ones you talked about relative to kind of the bigger plan. Has anything been added or subtracted from there that you see the plan going on? Any changes to the initial ideas?

James White

You are referring to our consumer goods licensing platform. We have actually accelerated our work since your conference a few months ago. We have added to our partnerships recently announced deals with Johnvince Foods for Jamba branded trail mix and Headline Entertainment for Jamba set of lifestyle product apparel. So again we are continuing to make good progress. We like licensing. We like this as a platform to extend the brand.

A couple of other updates I would make, you will find the Jamba branded kids blender that we have talked about in Toys R Us stores. We will be there nationally. It is online with Toys R Us. We are excited about that item really introducing a whole new generation of consumers to the Jamba brand and the healthy lifestyle. You can expect from us early in 2010 the rollout of our novelty products in our partnership with Oregon Ice Cream and the Jamba smoothie kits with The Inventure Group roll out also early in 2010 and we are on track to continue making progress on ready-to-drink beverages some time in 2010 with Nestle.

Operator

The next question comes from the line of Russell [Inaudible] – Park West Asset Management.

Russell [Inaudible] – Park West Asset Management

Maybe I am misunderstanding what you mean by store-level EBITDA. How you are defining it. Is the difference between store-level EBITDA and consolidated EBITDA just G&A?

Karen Luey

That is correct.

Russell [Inaudible] – Park West Asset Management

So your guidance implies sort of 10% G&A costs as a percent of sales?

Karen Luey

For 2010?

Russell [Inaudible] – Park West Asset Management

Right.

Karen Luey

That is correct.

Russell [Inaudible] – Park West Asset Management

We sort of have a sense of what your overall G&A costs are going to be next year, probably in the 33 range. Is that right?

Karen Luey

As James alluded to, taking costs out of the system will be one of the core competencies that we build here at Jamba. We are clearly tracking to our stated goal of $35 million of G&A costs excluding share based compensation for 2009. If you can extrapolate from that and take the 10-12% decrease from that $35 million that will get you in a range for your model.

Russell [Inaudible] – Park West Asset Management

So let’s just say you do 32. If G&A is 10% of sales that means you are going to do $320 million of sales?

James White

We are going to let you do that math. We tried to really lay out a set of metrics that will give good guidance at least based on how we are looking at 2010 for now.

Operator

Mr. White there are no further questions at this time. Please continue with any closing remarks you may have.

James White

We will just say thanks. We look forward to spending time with you again next quarter. We are delighted with our results for the quarter. We continue to make progress in terms of the turnaround and transformation of the company and we will see you next year for our Q4 call. Thank you.

Operator

Ladies and gentlemen this does conclude the Jamba, Inc. third quarter 2009 earnings conference call. Thank you for your participation. You may now disconnect.

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Source: Jamba, Inc. Q3 2009 (Qtr End 10/06/09) Earnings Call Transcript
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