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Jamba (NASDAQ:JMBA)

Q4 2013 Earnings Call

March 06, 2014 5:00 pm ET

Executives

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

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

Analysts

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

Anton Brenner - Roth Capital Partners, LLC, Research Division

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

Operator

Good day, ladies and gentlemen. Welcome to the Jamba, Inc. Fourth Quarter 2013 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Karen Luey, Executive Vice President, Chief Financial Officer. Please go ahead.

Karen L. Luey

Thank you, operator, and good afternoon. With me on today's call is James C. White, our President, Chairman and CEO. During today's call, I will review our fourth quarter financial results. James will follow with an update on our BLEND Plan initiative and our 2014 outlook. We will then open up the call for questions.

I would like to remind all listeners that the call is being broadcast and recorded live over the Internet at jambajuice.com. The webcast is available on our website, and a replay will be available via telephone until March 27, 2014.

This conference call will include forward-looking statements within the meanings of the securities law. These forward-looking statements will include things about the company's strategic priorities and certain statements of our expectation and plans. Forward-looking statements are subject to risks and uncertainties that could cause our results to differ materially from the forward-looking statements that are contained in our company's filings with the SEC, including the Risk Factors section in our Form 10-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'd like to turn it over to James.

James D. White

Thank you, Karen. Welcome to our call. I'm very pleased with our fourth quarter results and our overall performance for 2013. It was a challenging but successful time in which we delivered a third year of same-store sales increases for our company unit and a second consecutive year of profitability. Following atypical results in Q3, our renewed momentum in Q4 underscores the strengthening of our key growth drivers and makes us confident we can deliver accelerated profitable growth for years to come. And as our yearly outlook indicate, we feel very good about 2014. I'll highlight some of our accomplishments and then expand on a few of them later.

Net income for the year was $2.1 million, a sixfold increase over the prior year net income. Company-owned comparable store sales increased 3.4% in Q4, which resulted in an annual increase of 0.5%. Premium Juice drove important growth in the 64 units that were refreshed with an on-trend Whole Food Blending and Juicing platform. This sets the stage for accelerated expansion of the platform this year. JambaGO moved to a new level, with the addition of more than 1,000 units at Target stores, in their cafes, bringing our total to 1,800-plus by year-end. In addition to the 69 Jamba units opened globally, we also signed agreements to enter Mexico and the Middle East, with plans for a total of 160 stores in 10 years. Our strengthening marketing initiatives resulted in increased brand awareness, the highest levels in the company's history. High-profile partnerships with Disney and ISIS were an important part of the marketing mix and progress on our systemic productivity and cost savings efforts have identified important opportunities that will yield excellent results in 2014. I'll return to provide additional perspective on our results, our strategic initiatives and our outlook for 2014. Now, I'll ask Karen to review our financials.

Karen L. Luey

Thank you, James. Our performance in the fourth quarter of fiscal 2013 rebounded from the challenges that we saw in the third quarter, although we continued to face a difficult economic environment, as well as weather challenges outside of California during the fourth quarter. Net loss for the fourth quarter was $5.7 million, an improvement of $1.2 million over the prior year. Loss per diluted share was $0.33, compared to a loss of $0.45 per diluted share for the prior year same quarter. Total revenue for the fourth quarter was $44.1 million, flat to the prior year. And company store revenue decreased 1% year-over-year to $40.3 million, due to the refranchise of 31 stores under our California development plan, offset by an increase in same-store sales. Under our California development plan, franchisees have the obligation to develop up to 70 additional stores in their territories. System-wide same-store sales were 0.3% for the fourth quarter, driven by a company store increase of 3.4%, offset by franchise store decrease of 2.1%. Of the company store increase, average ticket was higher by 490 basis points and traffic decreased by 150 basis points. One of the contributors to the decrease in traffic was the significant weather challenges that were experienced in the Midwest and East Coast. This trend has continued into the first quarter. For context, our stores based in California reflected a same-store sales increase of 4.2% for the quarter, which was made up of 500 basis points of increased average ticket and 80 basis points of decreased traffic. Our attachment rate for the quarter was 21%.

For the full year, which was our third year of positive same-store sales, we reported system-wide same-store sales of 0.5%, which includes an average ticket increase of 240 basis points and a traffic decrease of 190 basis points.

Our franchise and other revenue for the fourth quarter increased by 7.8% to $3.7 million, compared to $3.4 million from the same prior year quarter. This was attributable to royalties related to the increase in the number of global franchise stores opened throughout fiscal 2013 and an increase in CPG and JambaGO revenue of 14% to $0.9 million. The increase was partially offset by the decline in franchise same-store sales of 2.1%. Our store 4-wall margin for the fourth quarter was 3.6%, compared to 5.3% in the prior year. The decrease was primarily due to the fees incurred for our supply chain optimization project, which will benefit the company in mid- to late 2014 and will result in an increase in operating margin this year of 100 to 200 basis points. General and administrative expenses for the quarter decreased by $1.7 million as a result of the reduction in performance-based compensation.

The fourth quarter reflects a tax benefit of $0.6 million and our effective tax rate for the full year was an expense of approximately 2.6%. The components of our tax expense are state Alternative Minimum Tax and foreign withholding taxes. We continue to have a full valuation allowance against our deferred tax assets. Our cumulative federal net operating loss at the end of fiscal 2013 was approximately $115 million. Our balance sheet remained strong, with over $32 million in cash and cash equivalents and no debt at the end of the quarter.

In 2013, we generated $10.5 million in cash from operations and reinvested $14.7 million back into the business, primarily related to the rollout of our Whole Food Nutrition and Juice platform. We incurred capital cost to refresh over 60 locations to include the new look and feel of the store, and more importantly, the elements needed to offer our hand-crafted, made-to-order fresh juice. We also started to work on many of the locations that will have this platform in 2014.

For the fourth quarter, our capital expenditures were $1.8 million related to maintenance capital, investments made under our store refresh program and investments in our information technology platform and strategic marketing initiatives. For the full year, our net income before dividends reflected a $1.8 million improvement over prior year's result of a $0.3 million net income, as we continue to grow and shift our business model to an asset-light franchise model. On a earnings per share basis, income per diluted share for fiscal 2013 was $0.09, compared to a $0.13 loss per diluted share in fiscal 2012. Our guidance for capital expenditures in 2014 is currently a range of $12 million to $13 million, which includes the refresh of up to 150 company store locations during the year, maintenance capital and information technology investments. We are estimating an effective tax rate of 5% to 6%, which includes the impact of state Alternative Minimum Tax. With that said, I will now turn the call back to James.

James D. White

Thank you, Karen. Throughout 2013, we focused on achieving the strategic priorities of our BLEND Plan 3.0 that yielded excellent results for the year, and we will build on that momentum to achieve even stronger results in 2014. As I mentioned, our focus on brand building and innovation will center on our Premium Juice and Whole Food Blending platform that was introduced in 64 units system-wide. For 2014, we will aggressively expand our Premium Juice platform. By year end, we will have refreshed and added the platform to more than 500 locations, making Jamba the leading premium juice retailer, more than 4x our nearest competitor. Supporting this expansion will be a robust, fully integrated marketing plan that will utilize social media, blogs, public relations, radio, in-store merchandise and special events and fully leverage our Healthy Living Council, which includes nutrition experts, athletes, trainers and celebrities. Clearly, we believe Premium Juice and Whole Food Blending will define Jamba in the future. It brings us back to our Juice Club roots and plays to our strengths of unrivaled knowledge and mastery of blending fruits and vegetables. Our belief is based on both research and experience.

Let me give you some color. In January, we introduced our Kale-ribbean Breeze Smoothies as a part of our Whole Food Nutrition smoothie lineup, which is a blend of mangoes, kale, Greek yogurt and chia seeds. The demand for Kale-ribbean Breeze significantly exceeded our expectations, so we have great confidence in the power of this platform. Expansion of our retail footprint is another strategic priority. Our efforts to accelerate our global retail growth will have many dimensions, including our 2014 plan to open 60 to 80 new U.S. and international locations. Certainly, international growth will continue. Last year, we opened 15 international stores in South Korea, Canada and the Philippines. As I noted, early last year, we signed a master franchise agreement to add 80 stores in Mexico over the next 10 years. Our more recent agreement with Foodmark, a subsidiary of one of the largest retail and hospitality groups in the Middle East, will add 80 units throughout the Middle East, starting with an initial store this year in Dubai. Beyond the agreements, we're also actively assessing other markets and believe over time there's a potential for 1,500 units internationally. Several of our growth drivers were realigned last year into our New Ventures group that will harness the synergies of these businesses, allocate resources among them and set priorities for their ongoing accelerated profitable growth. Within this group is JambaGO, which last year more than doubled in size, with the addition of more than 1,000 installations in Target cafés. This year, New Ventures will focus on improving the sales and profitability of JambaGO and also on adding up to another 1,000 locations. It's an aggressive goal, but we feel it's doable. New Ventures also will build our consumer products platform with new products and new partners in relevant channels and market. There are excellent licensing opportunities in several large product categories for a brand as strong and iconic as Jamba.

Our final strategic priority focuses on aligning and strengthening our leadership capacity to drive our strategic objectives, improving productivity and profitability, increasing Jamba's outreach and impact on local communities and building a highly engaged culture that embodies the Jamba values. In addition to organizing our New Ventures group last year, we also delayered and restructured our store operations organization to improve our overall ability to execute with excellence. For 2014, we will continue to drive store level profitability to improve returns from company and franchise stores. Our major cost and productivity program, which is designed to drive down costs in our supply chain, will yield 100 to 200 basis points of savings. These savings will start to be realized this year. Our attention also is focused on refining our labor deployment and development tools to ensure efficient service for customers. Well as I indicated, we feel very good about 2014. I will say that same-store sales were slightly positive for the first 2 months of the current quarter, and as a result, we are affirming our guidance for 2014, which is to deliver positive company-owned comparable same-store sales of 2% to 4%, deliver store level margins of 18% to 19%, achieve income from operations of 2% to 3% and add 1,000 -- up to 1,000 JambaGO sites. I'm very confident about Jamba's future. We have great strengths and advantages: An iconic brand; superior innovative products and marketing; a powerful position in the on-trend, fast-growing Premium Juice segment and our Whole Food Blending and Juice platform leadership; growing international prospects; robust programs to provide ongoing cost and productivity improvements; and a strong and growing franchise network; management talent and organization strength. We intend to take full advantage of these strengths and positions as we continue to build Jamba into a leading globally recognized healthy lifestyle brand. Before I conclude, I'd like to welcome our new partners in the U.S. and around the world to the Jamba family. I would also like to thank all of the Jamba team members and franchise operators across the system for their continuing efforts and commitment to build our company and deliver outstanding service our customers. I will now turn the call back to the operator so that we can open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Scott Van Winkle with Canaccord Genuity.

Unknown Analyst

It's Mark Siegel[ph] for Scott. Wanted to ask you about your thoughts about the current drought in California and what your thoughts are on any impact, that is, at least, to the front half of the year.

James D. White

As we look at the drought in California, we look at commodities like strawberries, our IQF strawberries and peaches, we think there is a low impact as we look at 2014, on a commodity like strawberries. We may see more impact as we look at 2015. Most of the strawberry sills in California are watered in or well position. And as we look at a commodity, again, like IQF peaches, again, similarly there will be an 2015 impact there, kind of same reasons, through the first half of the year. Could be some impact back half of 2014 on a commodity like IQF peaches.

Unknown Analyst

Okay. That's helpful. And then I guess my last one, I think if I heard you right, you said 500 system-wide locations for the new juice bar by the end of the year and if I did hear that right, it sounds like that's a meaningful acceleration from the prior plans. What's leading that acceleration, are the new units just performing much stronger than you thought?

James D. White

So 2 points. One, the expansion of our Premium Juice platform is a reflection of the confidence that we have in the platform and the position that we have in the marketplace. We have about 60-plus units through the end of the year and we like the performance that we see out of those locations.

Unknown Analyst

Okay. And are you still seeing, I guess, you had talked about the lift of several hundred basis points on the comp and over 50% incrementality on that new business. I'm assuming with the acceleration, those metrics are holding up nicely?

James D. White

Yes, that's spot on. So those numbers we're seeing consistently happen across the places where we've expanded the new offering.

Operator

And our next question comes from the line of Greg McKinley of Dougherty & Company.

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

Wonder if you could talk a little bit about your confidence in your store margin outlook. You're guiding to 18% to 19% for '14. In '13, it was, I think, 16.2%. And so what gives you the confidence for that 200 to 300 basis points pickup, especially given what seems to be maybe a little rising food input cost. And I don't know if that was due to some of the cost studies that you've undertaken, but those were up around 200 basis points year-over-year in Q4. So can you just give us some color on the outlook for store margins?

James D. White

Yes, I'd make 3 points, Greg. I think we're actually very confident on the margin guidance that we've provided, driven by, firstly, sharpened focus on how we manage pricing and promotion and kind of the discount lines. So we'll be far more surgical, much more analytical, we're going into all the choices that we made. The example of some of the analytics and the learnings inform the performance that we had in the fourth quarter. The second point that I'd make around the confidence from a margin perspective is the work that we've done around the product portfolio and the acceleration that we expect to see in traffic. We're very confident in the 2% to 4% increase on the top line, which will give us some leverage and we've got great discipline against the labor line. And the final point I'd make, and we've talked about this previously, is the cost and productivity work that we've done on, which we expect will yield 100 to 200 basis points. So the combination of those events gives us a lot of confidence on the overall margin performance. And just as a bit of context, we had 18% margins in 2012, as just a bit of context. So we've got a lot of confidence as we refine our business model and sharpen our analytic discipline.

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

And James, so when you talk about productivity in the stores, is that store operating expenses and labor, or is that really just store OpEx?

James D. White

It would be both, a combination of both.

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

And maybe just clarify, why were food COGS up meaningfully in Q4?

Karen L. Luey

Greg, the increase in Q4 COGS was primarily due to the fees that were incurred for our supply chain optimization project. We incurred those onetime costs in Q4 so that we can get the benefit of all of the cost savings numbers in the middle to late 2014.

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

And like what kind of costs would those have been as it relates to food cost for optimization?

Karen L. Luey

They were the fees related to our optimization project, yes.

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

And it was part -- then it was recorded as cost of sales, okay.

Karen L. Luey

Correct.

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

All right. And then maybe just real quickly going back to the prior question around your Whole Food Blending. Of those 64 stores at the end of the year, how many of them were company-owned versus franchise? And then could you give us the same split out for how you envision the 500?

James D. White

Really, every one of those locations, except for one, would have been company-owned and you'll see really significant franchise participation, almost on a 50-50 basis, with the expansion. And I think that's -- the other point I'd make is this will be the most significantly aligned expansion we've had, at least in my tenure at Jamba, with the completion of 500 of these expanded Juice platform stores by the year.

Operator

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

Anton Brenner - Roth Capital Partners, LLC, Research Division

I've got a question regarding the same-store sales and particularly the makeup of that 490 basis point ticket increase. How much of that was in the fourth quarter? How much of that was price and how much product mix?

Karen L. Luey

It was probably, Tony, I don't have the exact numbers in front of me, but there was probably a little bit related to price. I'm going to say maybe about 1/3 of it was related to price and the remainder was related to product mix.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Specifically Juice?

Karen L. Luey

I think just across the portfolio.

James D. White

Because Juice would be too small to move the whole portfolio.

Anton Brenner - Roth Capital Partners, LLC, Research Division

And then in California, traffic was down, I think you said 80 basis points in the fourth quarter. I mean, I've got some dead brain cells, but I think I recall that last year in the fourth quarter the weather in California was pretty terrible, almost for the whole period. And in the recent fourth quarter, it was pretty nice. So I'm wondering what else, even with a good weather comparison, contributed to that lower traffic in that market.

James D. White

Yes, I think it would be just a mixed bag. I mean, the fourth quarter would have been choppy as well, even in California. It would have been awful east of the Rockies, in markets like Chicago and New York, but California would have been choppy, with some good weather to close out.

Anton Brenner - Roth Capital Partners, LLC, Research Division

Okay. So it's really other factors with consumer competition and same things that were affecting comps in previous quarters?

James D. White

Yes, the only point I'd make is we had comps that were 3.4%, which would have been well ahead most of the folks in the industry. If you look at the folks that are reporting that Q4, you're not seeing many as positive as Jamba, with like kinds of businesses.

Operator

And our next question comes from the line of Kurt Frederick with Wedbush Securities.

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

Just a couple of quick ones on, I guess one is on the labor cost. It looks like this quarter they were down year-over-year. Last quarter, they were up. I was just wondering kind of what happened in that line item?

Karen L. Luey

So as a percent of sales, Kurt, labor was almost right in line with last year's same quarter. And then for -- with respect to a dollar decrease on the labor line, yes, we refranchised 31 stores throughout the year, so the decrease in the dollars for fourth quarter was due to the refranchise initiative to develop the state of California multiplely [ph].

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

Okay. And just in general, on the new products that rolled out, just kind of like margin impact. Just looking at, I think the Premium Juice, the Whole Food Nutrition line, the Wellness Bowls, it seems like they were a little bit higher price point, just wondering what the margin impact is going to be overall from those launches?

James D. White

I think as we look at it, you're going to have higher cost of goods, but most of those products are going all be a little bit more habitual from a consumer perspective, so it washes out. And then we're going to leverage the fixed infrastructure, is the way I think we would have you to think about it.

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

Okay. So it's not going to be so much a margin play as it is going to be traffic and leverage on that.

James D. White

It's absolutely a traffic play.

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

Okay. And then just one final one. I think in your prepared comments you mentioned the same-store sales so far this year were up slightly. I guess Q4 was up 0.3%. Are you kind of saying that it's similar to what you saw in Q4 or it's picked up from Q4?

James D. White

Yes, really, the point I'd make is kind of weather-wise, bumpy first couple periods or months to the quarter, kind of in balance, we're slightly up. And have had the drought in California, which some of that weather has been to the positive, but we've also had a year's worth of rain the last week in the state. So in balance, we're flat to slightly up, but we're cautiously optimistic about the quarter and very confident about the full year.

Operator

And we have a follow-up question from the line of Greg McKinley with Dougherty & Company.

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

Just some questions on JambaGO. I think you had mentioned that there was about $900,000 of license and JambaGO revenues in the quarter. Can you give us a sense for how much of that was specific to JambaGO?

James D. White

We really don't break that number apart.

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

Okay. Are you feeling -- well, maybe if you could just give us a little color how the rollout with Target went, in terms of just operationally getting the kiosks into service, what your observations have been around utilization levels versus your original expectations and then how we should think about what's going to drive that additional 1,000 units this year. Is it going to be a large number of small deployments, a small number of large ones there or how would you characterize that?

James D. White

Yes, so broadly, as I look at the Target execution and really, JambaGO overall, we're actually very pleased with the rollout in Q4 with Target. I think the folks at Target would be very pleased with the Jamba addition to their cafés. We're encouraged with the possibilities of that as we look at 2014. And as we think about JambaGO moving forward, we will always continue to have a focus around schools, both colleges and universities, and K-12 schools, which is our original focus of probably close to 1/3 of the opportunities are there, and I think you will see us deliver maybe not at the size of a Target, but 2 or 3 large-scale kind of opportunity partners that we are in well underway with discussions around implement of JambaGo, but we are confident that there's potential of up to 1,000 additional locations in 2014.

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

Okay. And then regarding your outlook for 60 to 80 stores, is that entirely franchised or will there be any company-owned development this year?

James D. White

No planned company development. And again, that 60 to 80 is on a global basis.

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

Yes. Okay. And then I guess the last question I had, as you go through your cost review, both from a corporate and store standpoint, are there -- the company is sort of morphing from a capital-intensive to a light-capital model, where you're licensing and you're emphasizing franchising. What kind of costs at corporate does that allow you to reduce and how should we think of your G&A outlook for 2014, given the fact I think you said it was lower in '13, maybe due to the absence of some incentive bonus accruals. How should we think of that for '14?

James D. White

Yes, so the way you think about it, in total it will be flat on an absolute dollar basis, but the way to think about that is we expect to deliver our targets and we expect to pay a bonus. So think about us as being down from a G&A perspective, including the bonus. Karen, I don't know if you want to put any more color on that.

Karen L. Luey

Just clarifying that $37 million flat, Greg, would include any kind of performance payout in that number.

Operator

Ladies and gentlemen, I'm showing no more questions at this time. This does conclude the Jamba, Inc. Fourth Quarter 2013 Earnings Conference Call. You may now disconnect.

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