Jamba's CEO Hosts Key Business Initiative Update Conference (Transcript)

Oct. 7.13 | About: Jamba, Inc. (JMBA)

Jamba, Inc. (NASDAQ:JMBA)

Key Business Initiative Update Conference Call

October 07, 2013 5:00 pm ET

Executives

James D. White - Chairman of the Board, Chief Executive Officer and President

Karen L. Luey - Chief Financial Officer, Principal Accounting Officer, Chief Administrative Officer, Executive Vice President and Secretary

Analysts

Reed Alan Anderson - Northland Capital Markets, Research Division

Anton Brenner - Roth Capital Partners, LLC, Research Division

Conrad Lyon - B. Riley Caris, Research Division

Kurt M. Frederick - Wedbush Securities Inc., Research Division

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Jamba, Inc. Key Business Initiative Update Conference Call. [Operator Instructions] I would like to remind all listeners that the call is being rebroadcast and recorded live over the Internet at jambajuice.com. The webcast is available on our website and a replay.

This conference call will include forward-looking statements within the meaning of securities law. These forward-looking statements will include things about the company's strategic priorities and certain statements of our expectation and plan. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from forward-looking statements that are contained in the company's filings with the SEC, including the Risk Factors section in our Form 8-K.

The company does not assume any obligation to publicly release any revision to the forward-looking statements discussed during the call. With that said, I would like to turn the call over to James White, Chairman, President and CEO. Please go ahead.

James D. White

Good afternoon, and thank you for joining us today. To support today's call, we've issued a press release and posted a few slides on the Jamba Investor site. As we signaled on our last conference call, we anticipated trends in Q3 to continue to be in line with those of Q2. At that time, I noted that the initial weeks of Q3 reflected the same challenging consumer and competitive environment of Q2.

In addition to those conditions continuing throughout the quarter, significantly cooler temperatures in several key markets during the July-August time frame adversely impacted our sales. We expect the operating environment to continue to be challenging for the foreseeable future.

Fortunately, as I noted, Jamba is well positioned to deal with what I believe is the new normal, where competition will continue to be intensified and consumer confidence constrained by the ongoing employment uncertainty and diminished discretionary spending, and over time, positive and negative weather impacts that offset it.

Our business model is solid, our strategies are on target and the strength of the Jamba brand continues to grow. We enjoy a very advantaged position and a very advantaged healthy beverage and food segment. And within this segment, we are the leaders in smoothie and now also a leader in premium juice, which is enjoying double-digit growth.

Our product innovation pipeline is critical to our leadership position as a healthy lifestyle brand as consumers continue to seek more nutritious food and beverage options. We have a broad-ranging set of actions and initiatives in place that will not only maintain our long-term growth trajectory but also we're now driving substantial increases compared to last year in operating margin, net income, and other important metrics.

Progress is continuing on all of our key growth initiatives that include the expansion of fresh juice platform, ongoing store refreshes and remodels and the growth of JambaGo and Smoothie Stations; superior marketing efforts that include increased media investments and exciting new loyalty program. We continue to open and are developing a deep pipeline of new stores in the U.S. and internationally.

The ISIS mobile wallet that enables payment via phone is now rolling out nationally to Jamba stores, and Jamba's new loyalty program partnering with Spendgo will follow in the first quarter of 2014, and the ongoing strengthening of our California development program, as well as the new phase of refranchising some company stores, will increase our ability to invest in accelerated growth option.

Importantly, the major cost improvement and productivity initiatives that I mentioned last quarter has now been fleshed out and will yield substantial savings in the range of 100 to 200 basis point improvement in operating margin. These savings will be realized in 2014, 2015 and beyond, and our partner in this effort is Deloitte who has an excellent track record of accomplishment in these areas.

One of the results of these actions is that we will build our supply chain into a global competitive advantage, leveraging new and existing relationship to drive greater efficiencies and effectiveness in sourcing and distribution. We will provide more detail on this initiative in the future.

But it's important to underscore that in our volatile, slower growth macro environment, which will likely continue for the foreseeable future, an ongoing focus on productivity and cost saving is as essential as our core competence in innovation and unmatched product quality. As we now look at the full year, the macro environment plus the weather impact mean that we are adjusting some of our annual targets.

At this time, our analysis indicates that consumer spending slowdown will reduce comp store sales comparisons by 3% to 4%. Current campaigns that did not have the same impact as the prior year represent 1% to 2%, and adverse weather will further reduce our same-store sales by 1% to 2%. Industry reports show retail sales are down, reflecting a downturn in consumer spending. Therefore, preliminary same-store sales results for Q3 reflect a decline in system sales of 3.4%, a decline in company store sales of 5.5% and a decline in franchise store sales of 1.3%.

Since it's rare that we adjust our estimates, let me give a little bit of background about our position on guidance. It has always been and will continue to be our intent to provide target ranges that are realistic, balanced and achievable. They're based on the best data we have at the time we make them. We provide our best estimates while acknowledging that we're dealing with uncertain and often volatile times, as is very evident throughout the QSR food service and retail sectors at this time.

As the year evolved, we provide information about the changes in our plans, the competitive environment, the macro consumer environment, as well as the effects of weather. When we have clarity on the impact of these elements, we adjust our annual target ranges and communicate with you.

So today, we are adjusting some annual target ranges and are also providing a preliminary look at 2014. Same-store sales of minus 5.5% in Q3 for company stores, flat on a year-to-date basis and therefore, we will not achieve our previously stated same-store sales target range. For the year, we now estimate a range of flat to plus 1%. And for 2014, we believe same-store sales growth will resume, and we're looking for annual increase of 2% to 4%.

As a result of lower same-store sales, we're also adjusting store-level margin for the year to 16% to 17%. Again, growth will resume in 2014 with a target range of 18% to 19%. Similarly, operating margin is being adjusted for 2013 to a range of 1% to 2%. For 2014, we're estimating a range of 2% to 3%.

The other annual targets are being maintained. Actually for JambaGo, the target is being increased, and we are disclosing today some significant news. As of yesterday, JambaGo express smoothie units are now opening in over 1,000 target cafés. This partnership represents the largest single expansion of JambaGo and will bring the total units to over 1,800.

And we are also adding some new dimensions to our projected growth. We previously said Jamba would operate in 5 to 7 international markets by 2015. We are now raising the number to 7 to 9 markets, and the total potential for international stores is being increased from 1,000 to 1,500. For 2014, we will add 1 to 2 new markets.

We have a robust development pipeline that will include 100 new California locations, continued entry into new markets and the expansion of Jamba drive-through locations, the first of which opened a week ago in Las Vegas. Growth for JambaGo will continue to accelerate, with up to 1,000 locations added in 2014 and premium juice locations will grow from 50 locations in 2013 to several hundred locations systemwide by the end of 2014, as well as a significantly expanded whole food blending and juice offering systemwide.

In summary, Jamba faces some challenges that we are exceptionally well positioned for today in the long term. There are very few companies that have Jamba's great strengths and advantages: a powerful iconic brand; superior innovative products and marketing; a powerful position in the on-trend, fast-growing healthy food and beverage and premium juice segments; growing international prospects; robust programs to provide ongoing cost and productivity improvements; and a strong and growing franchise network. We intend to take full advantage of these strengths throughout the balance of the year and for many more to come. I will now open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Reed Anderson with Northland Securities.

Reed Alan Anderson - Northland Capital Markets, Research Division

First question I guess is maybe if you could expand on the notion of competition or that the increased competition impact, because you kind of articulated some -- and specifically looking at the third quarter and the second half here, but you articulated specifically a couple of areas that impacted it, consumer slowdown, weather, et cetera. But competition seems to be something that is I don't know if it's not quite as easily defined, and also just in regard to that, are you talking about pricing? Are you talking about more locations? Just give me a sense of where you're seeing the pressure, if you would please.

James D. White

Great, thanks. As we look at this quarter in context, it would be really a couple key things that we'd point to. One is definitely the dampening impact of weather and we view that as a 1% to 2% impact. The other is the economy, so if you look at the industry benchmark, the Knapp-Track, and specifically if you look at the August time frame, there was about overall industry 300 to 400 basis point decline. We would've been impacted in that what would be an industry trend, and those are really the couple of big elements that would have impacted us for this current quarter in addition to lapping a much stronger promotional offering with our Dollar Days from a year ago linked to our campaign on our Fruit Refreshers. So we've lapped a much stronger promotional campaign from a year ago additionally.

Reed Alan Anderson - Northland Capital Markets, Research Division

Okay. But I mean, you cited competition in the press release, so is that -- was that not a factor then this quarter?

James D. White

Competition would be an ongoing kind of factor, and I'd describe it in a couple of ways. You've got lots of price promotion, pressure on the low end of this marketplace, and you've got a growing set of competitors locally on the more premium end of the marketplace, but the biggest factors would have been the economy and weather.

Reed Alan Anderson - Northland Capital Markets, Research Division

Okay. And then in terms of the timing here, I mean, you came on a couple of months ago, and you're still kind of stuck to the kind of full year expectations, and then this is a pretty sharp move in a different direction. So I guess you mentioned August. I mean, essentially then, when you reported second quarter, you must had 4 decent weeks and then it just sort of fell off a cliff in August and September. I mean, is that essentially what happened?

James D. White

Yes, we literally had -- this just was an elevated -- we had a big decline in the month of August, which would have been very consistent with the trends in the industry.

Reed Alan Anderson - Northland Capital Markets, Research Division

Okay. And then September would have been maybe not quite as bad but obviously was down?

James D. White

It was down.

Reed Alan Anderson - Northland Capital Markets, Research Division

Yes, okay. Were you -- I guess, shifting gears a little bit. I'm just -- were you going to give some more detailed economics on the JambaGo concept?

James D. White

We actually did, I think, in the slides that we reported. But the headline would be -- the big news is the expansion in the 1,000 target locations, and we provided a piece of that around the profitability on a per unit basis, and it would average on a net profit basis of about $2,000 per unit.

Reed Alan Anderson - Northland Capital Markets, Research Division

Okay, good, thanks, and then just one last one, maybe for whoever wants to answer, but I guess just the updated guidance. I mean, what does that imply then on a full year basis in terms of sales and EPS? Where does that kind of triangulate to if you dial in these lower comps? Where do you end up for the year?

James D. White

Karen, do you have that, or should we -- I think these numbers are so preliminary. We'd probably hesitate working that math. We'll be right back with you in 4 weeks.

Karen L. Luey

Yes, but I think the guidance that we've given around operating profit margin should be able to guide you there, Reed, from -- with your model.

Operator

[Operator Instructions] Our next question comes from the line of Tony Brenner with Roth Capital Partners.

Anton Brenner - Roth Capital Partners, LLC, Research Division

James, what macro assumptions are you making for 2014 to justify that positive turn in same-store sales?

James D. White

Really for us, we're assuming we'll face very similar marketplace conditions, but we're looking at the innovation pipeline that we're working against. We're looking at the overall work that we're doing from a loyalty perspective and some of the new tools that we're going to put in place next year. And that gives us a lot of confidence as we move into the next year.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. So there's no strengthening of consumer behavior assumed from...

James D. White

No, we're making an assumption that we're on a new normal, just much more difficult operating environment. And the winners and losers, We believe, were going to be separated on the strength of their own innovation and marketing capabilities.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. And my other question regards to juice store remodels. Could you update us on how many stores have been remodeled, and what kind of sales lift there is from that, if any?

James D. White

So as we sit today, there's about 50 locations that we have -- we expanded premium juice offering. 29 of those were recently completed during the month of September. We still continue to see about a 200 to 300 basis point lift. And just a bit of context, we had one of our earlier DMAs that we expanded juice into. And that would have been the only DMA that would have been positive for the third quarter. So we're very encouraged by that, and we see...

Anton Brenner - Roth Capital Partners, LLC, Research Division

So normally, when a restaurant chain or any food store chain remodels with a different interior look, they get an initial sales lift of at least that amount. Why having remodeled these stores, why do you attribute it all to the fact that you have juice?

James D. White

For us, it's certainly a combination but the premium juice for us, and as we look at the incrementality of what we've added into the mix and the importance of premium juice and our overall lineup of juice really look at the overall results, about 40% of the premium juice is incremental. And as we work the math, it gets us to about 2% to 3%, and a portion of that is certainly going to be the refresh remodel.

Operator

And our next question comes from the line of Conrad Lyon with B. Riley & Co.

Conrad Lyon - B. Riley Caris, Research Division

Question just about the dynamics of the comp, if you can. Can you talk about the incidence of, if you will, coupons, if you will, this quarter versus last quarter? Was there just that much more uses of coupons last year versus this year? Is that kind of the issue?

James D. White

No, I'd make 2 points. So as we look at the spending, and I'll break the marketing expenditures between discounts and pure media, we would have spent about 11% on the discount line this year. And Karen, you have to keep me honest. About 36% on what we would view as pure media or marketing and the number would have been relatively the same from a year ago, 11% and 39%. The things that would have been different, as you look at the 2 years in comparison, we had a much stronger platform that had our Fruit Refreshers, which were coconut water-based a year ago, so a much stronger product platform. And we also had our dollar days promotions a year ago, which were wildly successful. We matched those up with a product platform that would have been our strawberry platform, which would have been less attractive from a consumer perspective. And although we spent roughly the same on both the discount line and marketing, we would not have been as impactful with the promotions combined with the campaign that we ran this year.

Conrad Lyon - B. Riley Caris, Research Division

Okay. If I follow what you're saying here, you would just look more discount-oriented last year clearly, right?

James D. White

We're about the same...

Conrad Lyon - B. Riley Caris, Research Division

You were? Okay.

James D. White

Year-over-year. The only thing that I'd say is that we dropped in -- we actually came into this quarter assuming we'd be able to be less promotional. And we ended up adding promotions in versus going into the quarter more aggressively. Karen, would you add anything there? But the numbers are in balance or about the same.

Conrad Lyon - B. Riley Caris, Research Division

Okay. So now from what it sounds like now that you've learned this, I'm assuming you're going to adjust your marketing programs accordingly to try to revive the traffic going forward?

James D. White

Yes, you'll see us make adjustments early in, we already have, late in Q3 and you'll see us really bake the new learnings into the 2014 plans.

Conrad Lyon - B. Riley Caris, Research Division

Okay. Let me switch gears and just talk about the operational efficiency that you plan to put in place. Is that -- it sounds like part of it was supply chain. Is there anything at the store level perhaps being more efficient with blending or blenders or just faster throughput as well?

James D. White

You'll see us really tackle the entire cost structure, but we'll primarily focus on the direct and indirect spend areas. Many of those will impact our distribution and supply chain costs and input costs most immediately. But we're taking up a full look at the -- at all the costs.

Conrad Lyon - B. Riley Caris, Research Division

Okay. Will we see any change with the ingredients or quality or anything of that nature?

James D. White

You'd never see us change the quality of our ingredients.

Operator

[Operator Instructions] And our next question comes from the line of Kurt Frederick with Wedbush Securities.

Kurt M. Frederick - Wedbush Securities Inc., Research Division

Can I ask what's the number of store commitments that you currently have in place, like the 400 international, what's the domestic total?

James D. White

Over a 5- to 7-year time frame, it's about 225 would be the pipeline on our domestic development. Obviously, a big chunk of those commitments are the development agreements that we've signed in the California marketplace, so we've got a robust pipeline. So if you combine domestic and international, we've got a pipeline of store commitments that totals above 600.

Kurt M. Frederick - Wedbush Securities Inc., Research Division

Okay. And I just want to go jump back on the juice as well. You said several hundred by year end '14. I was wondering if you could talk a little bit about the mix between company-owned and franchise, and then just geographically if that's going to be still kind of focused in primarily or all in California if it's going to start spreading across the country?

James D. White

So 2 points. I think you'll see us build out the portfolio of premium juice stores in California would be the first point that I'd make. The 50 locations today primarily sit in northern and southern California. We've got franchise partners in Las Vegas and Florida that will open locations in this year. They moved that number up slightly. You'll see us early next year expand outside of California, both company and franchise. I'd call the numbers at roughly playing towards 100 additional stores, 50 to 100 stores on the company side and another 50 to 100 with the full -- fully expanded premium menu on the franchise side. But I think the most important point and the most significant work that we've done over the course of the last quarter is we think we've got a mechanism to expand fresh components of this juice program at a much lower cost to the full system by early next year.

Operator

Our next question comes from the line of Greg McKinley with Dougherty & Company.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

I guess the only other question that I had was your operating margin outlook for next year. Is that expansion just entirely driven by higher -- some sales improvements at the store level or are there specific costs that you think are being pulled out of the stores, which produce higher four-wall margins?

James D. White

A little bit of both, we'd say. We're going to get some leverage as we resume our same-store sales growth. The productivity initiatives that are happening will obviously touch the stores in the cost of goods line, and that will flow through.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

I mean, is the cost of goods, is that food waste control or it's more supply chain efficiencies?

James D. White

This is an end boat, but it's going to be more supply chain than anything.

Operator

[Operator Instructions] And our next question is a follow-up from Reed Anderson.

Reed Alan Anderson - Northland Capital Markets, Research Division

Just want to follow up, I did find the presentation, I apologize, I didn't have that when I spoke last. But I saw on the JambaGo, just to clarify, you're saying basically that each machine you net $2,000 per year. So you've got 1,800 machines at the end of this year times $2,000, essentially, you're looking at $3.5 million, $3.6 million in fiscal '14 essentially, that should fall through. Is that -- I mean, and I'm using round numbers and then obviously there's -- that's averages. But is that essentially the message?

James D. White

Yes.

Karen L. Luey

That's essentially it, Reed.

Reed Alan Anderson - Northland Capital Markets, Research Division

So really then, so if we look at where you're going to finish this year and where you'll probably finish next year, I mean, again using the guidance from operating margins, you could make the case that a lot of that is really driven by JambaGo?

James D. White

JambaGo will be an important part of what we'll deliver next year.

Operator

And I'm showing no further questions at this time.

James D. White

Thanks, everyone, for joining us on the call, and we'll see you in about 4 weeks for the official earnings call. Thanks.

Operator

Ladies and gentlemen, that does conclude the Jamba, Inc. Key Business Initiative Update Conference Call. We'd like to thank you for your participation. You may now disconnect.

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