Q4 2010 Earnings Call
March 10, 2011 5:00 pm ET
Karen Luey - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
James White - Chairman of the Board, Chief Executive Officer and President
Kurt Frederick - Wedbush Securities Inc.
Conrad Lyon - B. Riley & Co., LLC
Peter Mahon - Dougherty & Company LLC
Good evening, ladies and gentlemen. Thank you for standing by. Welcome to the Jamba Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Ms. Karen Luey, Senior Vice President and Chief Financial Officer. Please go ahead, ma'am.
Thank you, operator. Good afternoon. With me on today's call is James D. White, our Chairman, President and CEO. During today's call, I will review our fourth quarter financial results. James will follow with a business update and a review of our guidance, and then we will take questions.
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 the replay will be available via telephone until March 24, 2011.
This conference call will include forward-looking statements within the meanings 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 filing with the SEC, including the Risk Factors section in our Form 10-K. The company does not assume any obligation to publicly release any revisions to forward-looking statements discussed during the call.
With that said, I would like to turn it over to James.
Thank you, Karen. Welcome. I'm pleased to say that 2010 was a transformative year for Jamba. We made significant progress in the delivery of our BLEND Plan. We achieved our comp store sales goal and returned to positive comps in Q4. We introduced new menu items that expanded our day-part offerings and drove traffic into our stores. We completed our refranchising initiative with the sale of 132 company stores. We signed an agreement to take Jamba into our first international market, South Korea, and we grew our consumer products by adding five new license agreements and commercializing four product lines.
We continue to implement a disciplined cost-control environment and have moved to an asset-light business model. We maintain our position as the leader in the smoothie category and one of the most widely recognized health-and-wellness brands. This recognition by consumers is a key element in establishing Jamba as a leading healthy, active lifestyle brand.
We also made significant gains in our transition to a franchise-focused operation. We not only completed the refranchising of 132 stores, we also signed a deal that we expect to close in early 2011 for the sale of 41 additional stores. And we put in place several initiatives to deliver our number one priority, improving comparable store sales.
In the fourth quarter, same-store sales increased 20 basis points, resulting in our first positive quarter of company-owned comp store sales since 2007, and representing sequential comparable store sales improvement in six of the last seven quarters. We are also seeing improved comp store sales in Q1 of 2011. The hard work of the past two years is paying off, in particular, for our shareholders, with our stock appreciating 38% in 2010 on top of stock appreciation 270% in 2009. We expect our momentum to continue to accelerate even through 2011.
With that brief overview, I'll now ask Karen to take us through the financials. I will return to provide highlights of our critical 2010 accomplishment and share more about the key initiatives that will drive our continued success in 2011.
Thank you, James. For 2010, we have substantially accomplished our financial goals that we outlined a year ago. Our company comparable store sales results for the year was a decrease of 2.3%. Store level margin, as defined by the company, was about 15% and, excluding one-time adjustments and stock-based compensation, we reduced general and administrative expenses by almost 8%.
As you are aware, our 2010 outlook calls for company comparable store sales of flat to minus 3%, store level margins of 15% to 17% and a reduction in general and administrative expenses of 8% to 10%. As we near the completion of the refranchise initiative, which accelerated our growth and business shift to a less capital-intensive and asset-light model, we realized that comparisons to prior years are a challenge. From the income statement perspective, it has impacted our revenue, general and administrative expense and net loss lines and from the balance sheet, it has increased cash.
On our earnings release, we have included a summary that identifies the impact on those areas through the end of fiscal 2010. In addition, this will positively impact future development, as we have commitments to build 32 locations in the markets that are sold. We have also added $18.2 million in cash to our balance sheet. And as we have discussed in the past, we have redeployed this cash to accelerate our growth and advance our BLEND Plan initiative.
Net loss for the fourth quarter was $12.2 million, compared to a net loss of $11.4 million for the prior-year same quarter. Included in the loss for the fourth quarter of 2010 were charges of $3.7 million related to impairment, lease termination, and store closure costs and bonus expense, compared to $1.9 million for the same expense line in the fourth quarter of 2009.
And on a full year basis, the net loss was $16.7 million for fiscal 2010, compared to a net loss of $23.9 million for fiscal 2009. Included in the full year loss for fiscal 2010 were charges of $10.9 million related to impairment, lease termination and foreclosure costs, nonrecurring fees and bonus expense, compared to $13.9 million for the same expense lines for fiscal 2009.
Total revenue for the fourth quarter decreased 16.9% to $42.1 million, and the company store revenue decreased 19.4% to $39.8 million as compared to the prior year's same quarter. Of the company store revenue decrease of $9.6 million, $8.3 million is related to the refranchise initiative.
Our fourth quarter comparable store sales increased 20 basis points and reflects sequential comparable store sales increases in six of the last seven quarters. The results of our comparable store sales for the quarter include a 150 basis point increase due to average ticket, a 50 basis point increase related to weather, partially offset by a 180 basis point decrease due to traffic.
Our attachment rate for our beverage was another item, was 23% for the fourth quarter of 2010, an improvement of almost 300 basis points from the prior-year quarter. We continue to make significant progress toward our goal of a 30% attachment rate. For fiscal 2010, our comparable store sales reflected a decrease of 2.3%.
Our comparable store sales in California, where approximately 83% of our company store base is located, was essentially flat, while all other states were at an increase of 2%. As James mentioned on a trend basis, it looks like we will have another positive company comparable store sales increase for the first quarter of 2011.
Our franchise and other revenue increased by 90% to $2.2 million, compared to $1.2 million from the same prior year quarter. The increase was attributable to royalties related to the increase in the number of franchise stores, initial franchise fees for the opening of 11 locations and revenue recognized from our Consumer Packaged Goods licensing agreement. Although CPG licensing revenue for the fourth quarter was not a significant amount, for the full year, it was approximately $400,000. We expect this revenue to triple in 2011.
At the close of 2010, we had achieved distribution into 10,000 retail locations. Our goal for 2011 is to be in at least 30,000 points of retail distribution. James will cover more detail on our consumer products later in the call, and we expect over time this high-margin business line will become a significant contributor to our profitability.
During the quarter, we refranchised 17 stores and opened 11 new franchise locations, four in traditional and seven in non-traditional venues. We also took the opportunity to close 10 company stores, which resulted in a charge of $1.8 million during the quarter. Our store count at the close of the year was 351 company-owned stores, 392 franchise locations. We have an asset purchase agreement for our final refranchise package of 41 stores, which we expect to close in early 2011.
Our cost of sales for the fourth quarter decreased 22.1% year-over-year to $10 million, due primarily to the decrease in the number of company-owned stores. As a percentage of company store revenues, these costs decreased to 25.2% from 26% due to cost-saving initiatives. We do see some pressures ahead on the commodity side, especially with fuel, dairy and juices. With what we know today, we don't believe that it will significantly impact our guidance for 2011.
Our labor costs decreased by 16.4% year-over-year to $16.4 million due primarily to the reduced number of company-owned stores. Labor costs as a percentage of revenue increased to 41.2%, compared to 39.8% in the same period last year, due primarily to bonuses that were earned based upon our fourth quarter sales results.
Store operating expenses decreased 11.2% year-over-year to $8 million, and as a percentage of company store revenue, increased to 20.2% compared to 18.3% for the same period of the prior year. The decrease was due to reduced number of company-owned stores, offset by marketing expenses, which increased 15.1% to $1.8 million or 4.5% of company store revenue, up from 3.2% in the fourth quarter of 2009.
General and administrative expenses increased by 7.7% to $8.9 million, and as a percentage of revenue, increased to 21.2%, compared to 16.4% in the same period of the prior year. The increase is due primarily to bonuses recorded for the achievement of our strategic goals.
For the full year, our effective tax rate is 1%, and we continue to have a full valuation allowance against our deferred tax assets. Our cumulative federal net operating loss at the end of fiscal 2010 was $98 million, and we will not be a federal taxpayer this year.
Our balance sheet remains strong with $30.8 million in cash, cash equivalents and restricted cash, and no debt at the end of the quarter. Our capital expenditures for the quarter were $1.9 million related to maintenance capital and investment in our information technology platform.
That said, I would like to now turn the call back to James.
Thanks, Karen. As I said before, promises made by this management team will be kept. During 2010, we made excellent progress against our BLEND Plan, substantially completing all of our critical priorities for the year. As a reminder, these priorities were focused on reducing costs and expenses; ensuring our customer first operationally focused service culture; expanding our menu across day parts, accelerating the development of our franchise system, including the completion of our refranchising initiative; and building a robust portfolio of consumer products through our licensing initiative.
As Karen has indicated, we are sharply focused on managing costs, reducing expenses and improving productivity. And those efforts will continue. Let me briefly highlight some of the key accomplishments for 2010, which include: Quarterly comparable store sales improvement in six of the last quarters on a sequential basis, including positive comp store sales in Q4; we completed a refranchising initiative; we achieved franchise growth with the opening of 31 new stores; we expanded into our first international market, South Korea; we launched four new product lines, achieving over 10,000 points of retail distribution; we successfully expanded our menu offerings to include Grab-n-Go items, hot beverages, new snacks and baked goods, new entrée and smoothie offerings and the successful test of frozen yogurt, and a new breakfast platform. For 2011, we expect more transformative growth.
We will accelerate the development of our franchise in non-traditional stores. Prior to the end of the year, we signed a purchase agreement to refranchise 41 stores in the Chicago Midwest market, which is expected to close in early 2011. With the execution of this transaction, we will have completed the sale of 173 stores, exceeding our goal of refranchising up to 150 stores.
In January of this year, we also announced the opening of our first international Jamba location in South Korea in the Incheon International Airport, which is already exceeding expectations. We are very excited about this first location, because an international airport gives us high visibility to a large number of diverse travelers to and from Korea, many who will be experiencing Jamba for the first time. We expect to open an even larger flagship store during the second quarter, and we'll continue to work with SPC's management team to give international consumers an opportunity to experience Jamba.
In addition to the store openings, we are excited to have a celebrity spokesperson for Jamba in South Korea, Olympic gold medal swimmer Tae-Hwan Park. We will continue to expand internationally and expect to report the opening of an additional international market in 2011. We expect continued momentum in our franchise development efforts, including traditional and non-traditional store openings and expect to open between 50 to 70 new franchise locations during 2011.
We will build our licensing growth platform. At the close of 2010, we had completed nine license agreements and commercialized four of those agreements. By Q2 of 2011, we expect all products to be commercialized and at retail.
Through our agreement with Nestlé USA, Nestlé will introduce a line of Jamba-branded, all-natural, fruit-based energy drinks, starting in the northeast. Nestlé will support the introduction of this product line with a campaign that includes TV, radio, sampling and media, to include billboards, bus routes, PR, online, social media and in-store.
Through our agreement with One Natural Experience, One will introduce a line of coconut water fruit juice beverages, distributed through the Pepsi bottling system. Through our agreement with Zola, we will introduce a line of functional daily Brazilian Superfruit shots. Through our agreement with Johnvince Food, we will introduce a line of all-natural boosted trail mix products, and with Sundia Corporation, a line of functionally boosted fruit cups. All of these Jamba-branded products should be available in select Jamba stores and retail outlets by late May.
Jamba-branded frozen novelty bars continue to do well, and we are proud to announce this past month that three of those products were recognized by Parents Magazine as one of the top 25 healthy snacks for kids. Our licensed partner, Inventure Foods, announced plans last month to roll out Jamba-branded smoothie kits nationally in 2011. The retail and consumer acceptance of the smoothie kits has exceeded expectations, and the partnership with Inventure is nothing short of outstanding. With new distribution, we'll add to the nearly 7,000 retail stores already selling Jamba All Natural Smoothies kits.
We continue to seek opportunities to expand the Jamba brand and maximize revenue by leveraging the branded new and complementary CPG categories. We expect to further expand the availability of our existing products into more than 30,000 points of retail distribution in 2011. We will expand our beverage and food portfolio menu offerings across day parts.
The early path of our Whirl'ns Frozen Yogurt and our new breakfast platforms have both proved very successful, and we will accelerate the rollout of those two platforms in 2011. We have revitalized our snack and baked goods, and we'll continue to innovate and expand this line of products that nicely complement our existing beverage and smoothie offerings.
We are also excited to announce the launch of three new trend-forward smoothies, our new fruit and veggie smoothies. It will provide a full serving of vegetables in a delicious fruitful smoothie and at least three full servings of fruit and vegetable in a 16-ounce serving. With three nutritious and great-tasting flavors, our fruit and veggie smoothies provide consumers another reason to visit Jamba more often. The new offering will also accelerate our important K-12 school lunch program, which number over 250 K-12 school locations representing 45 school districts in California. Jamba is becoming an important solution provider as schools look for healthier food and beverage solutions for students.
We will reduce expenses and improve productivity. Earlier this year, we also announced a supply chain distribution alliance with SYGMA, a national food service distribution company owned by Sysco Corporation. This alliance will enable us to consolidate distribution channels and achieve greater efficiency in our overall supply chain. With this alliance, we'll additionally position Jamba to achieve faster expansion of services into existing and new geographic locations, which will be critical as we expand the brand into new markets and new territories.
The Jamba brand has never been stronger, and it continues to strengthen. Our brand scorecard shows Jamba is now more relevant for consumers, with significant improvement in several key areas. We are the top-of-mind smoothie company and number one smoothie chain. Additionally, we continue to be highly recognized as a brand that offers healthy food and beverage solutions. We also received national recognition as the top consumer choice among fast food consumers within the smoothie and frozen yogurt category. The strength of our brand fuels our optimism about the future and the progress we are making in our turnaround and transformation.
I'd like to reiterate our 2011 outlook, which is to deliver positive comparable store sales in the range of 2% to 4%, deliver operating profit margin of 18% to 20%, develop 50 to 70 locations in traditional and non-traditional expressed formats, maintain G&A levels at flat to 2010 levels in dollars, excluding onetime charges.
In conclusion, I'm very proud of our accomplishments for 2010, which we achieved despite the tough operating environment. And I'm very pleased with our strong start to 2011, highlighted by positive comp store sales through the first 10 weeks of 2011. As I said earlier, we've made good progress during the past two years. Our actions and achievements are not just turning around the company, we are transforming Jamba.
We are establishing a business model, an organization and a roadmap that will drive accelerated growth well into the future. Before I conclude, I'd like to welcome our new franchise partners to the Jamba system. I would also like to thank the Jamba team members across the system for their continuing efforts and commitment to transforming our brand and delivering outstanding service to our customers. I will now turn the call back to the operator and open up for questions.
[Operator Instructions] And our first question is from the line of Peter Mahon with Dougherty & Company.
Peter Mahon - Dougherty & Company LLC
I just had a couple of questions. First of all, I just wanted to get to your thoughts on your view of license revenue in 2011. What kind of momentum you think you're going to get as you start rolling out these products into the retail chains and whatnot?
Yes. Thanks for the question, Peter. I think what we said is we expect our license revenue to triple for 2011. And for 2010, that number was about $400,000 for the full year of '10.
Peter Mahon - Dougherty & Company LLC
And then in terms of the number of stores you plan on opening on a company and franchise basis, what would that be?
Again, the store opening plan for this year is 50 to 70, and that will be a combination -- it will be primarily franchise units, and it will be a combination of traditional units, non-traditional units, and we're doing some development work with an express unit.
Peter Mahon - Dougherty & Company LLC
And then what is your CapEx expectation for the year?
I think we're expecting our CapEx to be in the $9 million to $10 million range, Peter, and that will include the few company-owned stores that we're committed to opening in 2011 in select markets here in California.
And our next question is from the line of Conrad Lyon with B. Riley & Co.
Conrad Lyon - B. Riley & Co., LLC
A question about G&A. It's good to see you get the sales and it's good to see you're getting compensated for it, but is there an opportunity to get G&A at a lower level on a historical basis and still compensate people on a go-forward basis?
We feel like the G&A level, if we take out all the onetime charges from 2010, is a good run rate for the company as we drive to grow this business. What we've said all along is '10 would be a year of transition. And as we make it through the first couple of quarters of this year, you'll see this business start to accelerate. So we think the G&A levels that we've guided towards are appropriate.
Conrad Lyon - B. Riley & Co., LLC
Okay. Let me delve -- maybe you can give this one to Karen. You mentioned you're seeing some freight cost pressure, but it won't be too bad in '11. Is that because of the ability to have -- the use of ICR-type foods [ph], the frozen food, perhaps, stockpile things or is it just because of the agreement with your provider?
Conrad, I think it's a couple of things. In the areas where we're seeing pressure today, which are the juice area, the dairy area and more particularly, fuel, fuel I think is going to be our biggest challenge right now, with the unrest that we're seeing in other parts of the world. So that's going to be our biggest challenge. We've done a lot of work. Our supply chain team's done a lot of work in the juice and the other commodities area. We've been able to have our juice contracts covered up until our summer season. So it's going to take us through our peak season. So we feel that we're able to mitigate any kind of increases that we're going to see in the juice area until after summer. And then a couple of years ago, we developed recipes that have flexible juice formula, so we can trade off some of the juice blends for other juice blends, in case one of the prices were higher than the other. And with respect to dairy, I think, again, our supply chain team's done a great job in getting contractors that have better quality ingredients and reformulating some of our products and the ingredients so that we can stabilize and hold our prices pretty consistent.
And Conrad, with all that said, you'll see us continue to watch commodities closely, and we'll be proactive in protecting our margins going forward.
[Operator Instructions] And our next question is from the line of Kurt Frederick with Wedbush Securities.
Kurt Frederick - Wedbush Securities Inc.
I was just wondering, in the first quarter here, with -- there's kind of been a lot of bad weather across the U.S. I'm just wondering how that impacted you versus a year ago, when we had kind of a similar situation.
Really, for us, as we look at our business through the first 10 weeks, as I said earlier, we've had positive comps and we've got really strong positive comp results across every one of our larger markets.
Kurt Frederick - Wedbush Securities Inc.
Don't you think it's -- the weather had been less of an impact this year then or is it...
I think it's a combination of we're much stronger than we were a year ago. We've, in particular, driven up the attachment Karen talked about in almost 300 or 400 basis point improvement of attachment of a beverage, whether hot or cold to a food item. So I think that's one of the critical leading indicators for us, and we've got particular strength in California that we're excited about.
And there are no further questions at this time. I would now like to turn the call back over to Mr. White for closing remarks.
Thanks. We're excited about the first quarter of this year. As we laid out the guidance for 2011, we're very confident and have never been more confident in both the turnaround and transformation of this brand. So we look forward to talking to everyone on the Q1 call and thanks.
Ladies and gentlemen, this concludes the Jamba Fourth Quarter 2010 Earnings Conference Call. Thank you for your participation. You may now disconnect.
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