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Jamba (NASDAQ:JMBA)

Q3 2011 Earnings Call

November 09, 2011 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 and Senior Vice President

Analysts

Peter Mahon - Dougherty & Company LLC, Research Division

Chris Krueger - Northland Securities Inc., Research Division

Conrad Lyon - B. Riley & Co., LLC, Research Division

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Jamba Inc. Third Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, November 9, 2011. And at this time, I'd 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 D. White, our Chairman, President and CEO. During today's call, I will review our third quarter financial results. James will follow with an update on our 2011 progress against plan and set our 2012 high level guidance. We will then open up the call for 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 November 30, 2011.

This conference call will include forward-looking statements within the meanings of the securities law. These forward-looking statements will include statements 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 the forward-looking statements that are contained in the 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 revisions to the forward-looking statements discussed during the call.

With that said, I would like to turn it over to James.

James D. White

Thank you, Karen. Welcome to our third quarter call. The solid results delivered to date leave us well-positioned to continue growth through the end of the year. Q3 had several accomplishments that I will highlight briefly and cover later in more detail. Importantly, comparable store sales for our company-owned stores increased for the fourth consecutive quarter, improving by 3.3%. Comparable store sales were also positive for our franchise stores for the fifth consecutive quarter. System-wide comparable store sales were up 3.7%, and we had positive comps in all 4 day parts driven by product innovation in the breakfast and evening day parts.

Our financials strengthened. Net income was $4.1 million or $0.05 diluted earnings per share. Our total cash balance remained strong at $26.2 million and we have no debt on the books. We accelerated our global franchise growth with the recent opening of our ninth Jamba location in South Korea. Subsequent to our quarter close, we opened our first store in Canada and expect our first store in the Philippines to open shortly. Domestically, we also made progress opening 13 stores. We also signed our 10th consumer goods agreement with a new partner, which will add a new product line to our current portfolio of licensed products. I will return to provide additional perspective on our accomplishments, our outlook for the balance of the year and our initial guidance for 2012.

Now I'll ask Karen to review our financials.

Karen L. Luey

Thank you, James. On a GAAP basis, our results for the third quarter of 2011 reflected significant improvement over the prior year period. Our net income was $4.1 million or $0.05 diluted earnings per share compared to a net loss of $0.8 million or $0.02 diluted loss per share for the third quarter of 2010. The improvement is primarily related to positive company comparable store sales of 3.3%, an increase in franchise comparable store sales of 4.2%, continued margin improvement in our four-wall company store base and a decrease in general and administrative expenses. System-wide comparable store sales were 3.7%.

We are beginning to see the benefits of the shift in our business model that we started 24 months ago with our re-franchising initiative. This has placed us on-track for growth and profitability. One area of focus has been on driving more profitable transactions to our stores. The results of our company comparable store sales increase of 3.3% for the quarter includes a 540 basis point increase due to average check, resulting from the price increase taken in the beginning of the second quarter, increased attachment and more efficient promotional discounting. Company comps also included an overall 210 basis point decrease in traffic. But excluding the deep discounted traffic driving initiatives from the prior year, our traffic would have been about flat for the third quarter of 2011.

Our Smoothie product innovation that started early this year, with the introduction of the Probiotic Yogurt Smoothie, Fruit & Veggie Smoothie and Coconut Water Fruit Refresher platform, contributed to our company comparable store sales improvement. And the recent products in our latest menu expansion, including Breakfast Wraps and Frozen Yogurt, have continued to grow our morning and evening day parts. As in second quarter, we saw comparable store sales increases in all 4 day parts including the dinner day part, where we are seeing the biggest impact from our Frozen Yogurt platform. Our attachment rate for a beverage with another item was approximately 20% for the third quarter of 2011, and we continue to make significant progress toward our goal of a 30% attachment rate.

Our franchise and other revenue increased by 37.3% to $3 million compared to $2.2 million from the same prior year quarter. The increase was attributable to 3 main factors: royalties related to the increase in the number of franchise stores and increased in franchise comparable store sales; the number of new franchise locations open during the quarter; and also to revenue recognized from our consumer packaged goods licensing agreement. Our CPG licensing revenue grew to $280,000 from $126,000 a year ago. The number of retail stores in which Jamba-branded consumer products are sold increased to approximately 28,000 at the end of the quarter from about 10,000 at the end of fiscal 2010.

We continue to make significant progress in improving our four-wall store margins, which include company store revenue less total company store expenses of cost of sales, labor, occupancy and other store operating expenses. Our four-wall store margin improved by 540 basis points to 22.9% from 17.5% from the same prior year period, primarily due to reduced company store expenses.

We continue to see cost and supply pressures on the commodity side but have been able to mitigate these by leveraging strong supplier relationship and the implementation of cost-saving initiatives. During the quarter, we received credits from suppliers. Excluding those credits, cost of sales would've been 22.3%. Labor was also a significant contributor to the improvement in four-wall store margins due to increased labor efficiencies, wage management and leverage from our comparable store sales increase.

General and administrative expenses decreased 8.5% to $7.4 million and as a percent of revenue, increased to 13% compared to 12.2% in the same period of the prior year. The decrease in dollars is attributed to lower professional fees and lower payroll costs. The rate increase was due to the reduction in company-owned stores as a result of our re-franchise initiative.

Our cumulative federal net operating loss at the end of the quarter was $98 million and we do not expect to be a federal taxpayer this year. Our balance sheet remained strong with $26.2 million in cash, cash equivalent and restricted cash and no debt at the end of the quarter. Our capital expenditures for the quarter was $2.7 million related to a new company-owned store capital, maintenance capital, revenue driving initiative and investments in our information technology platform.

Unlike the prior year, we shifted the majority of the capital spend for company-owned stores to the front half of the year in order to ensure that we captured the summer season. We opened 2 company-owned locations in California during the quarter, bringing our year-to-date and final total to 9. At the end of the quarter, we had 168,389 convertible shares outstanding.

With that said, I'd like to turn the call back to James.

James D. White

Thank you, Karen. As a reminder, our strategic priorities remain focused on the transformation of our brand into a leading healthy, active lifestyle brand with strategically aligned initiatives aimed at reducing costs and expenses, ensuring a customer-first service culture, improving our menu offering across day parts, accelerating the development of our franchise system and building a robust portfolio of consumer products through a licensing platform.

We're continuing to make excellent progress on delivering great service. For example, our new customer engagement system, which provides daily customer feedback, has enabled us to make immediate service improvements. As a result, our overall satisfaction scores improved by almost 100 basis points during the past quarter.

Moving on, our efforts to improve our menu across all day parts, much of our menu expansion and innovation during the quarter was focused on breakfast and evening day parts. Our Breakfast Wraps, which expanded into 270 company stores in May, continued to receive a very positive consumer response, and we will further expand this product platform into several more stores in 2012. Our breakfast comp sales are also strengthening, reflecting the emphasis we've placed on the product innovation for this day part. Our Whirl'ns Frozen Yogurt was expanded to an additional 27 stores in Northern California in August, making it available in 157 company stores across the California market. We will continue to expand this platform to additional stores in 2012.

Since marketing is such an important part of our growth strategy, we're also stepping up all aspects of our marketing. We are raising both our internal and external resources to a new level of excellence. We're deploying film marketing resources to provide us with added local impact, and we are accelerating our efforts on social media and in all the digital channels to assure full connectivity, interaction and engagement with our consumers. Our campaign, Team Up for a Healthy America, highlights Jamba's position as a healthy active lifestyle brand while addressing the issue of reducing childhood obesity. It's a multifaceted program that unites us with many of our key partners to undertake a very important socially responsible initiative.

Let's move now to store expansion via franchise system, which accelerates our growth, improves our overall margin and reduces our capital requirements. During Q3, we opened our ninth store in South Korea and have plans to open 4 to 5 additional locations by year end. Subsequent to the quarter close, we also opened our first franchise store in Canada on October 28 and expect to open our first franchise store in the Philippines within days.

We're making excellent international progress. In total, these agreements represent 320 international stores in the pipeline that will open over the next 10 years. Domestic expansion is also a priority. We opened 11 franchise locations and 2 company-owned stores in Q3. In 2012, we will continue to focus on expansion and expect to sign franchise agreements that will expand our brand presence in 2 to 3 new markets in the U.S.

Importantly, we began testing JambaGo, our newest growth concept that provides an express service with a limited menu of our most popular smoothies. Initial consumer response has been very positive. This format allows us to rapidly expand our presence through multi-unit launches in locations such as K-12 schools, college campuses and other similar venues. It gives us an easy and simple way to deliver our healthier beverage option and introduce our brand to thousands of new consumers.

Another significant area of Jamba's transformation is our brand extension through consumer products. This initiative broadens our opportunity to engage consumers beyond the in-store experience. Our efforts in those of our licensees have been nothing short of outstanding. The revenue stream currently generated is still small but growing. And in 2012, we expect to deliver licensing revenue of approximately $3 million. During the third quarter, Jamba-branded consumer products moved into 3,000 additional points of distribution in a broad range of grocery, natural food, club, mass and other retail channels across all 50 states, bringing our total distribution to roughly 28,000 points.

We also signed a licensing agreement with Bare Fruit LLC to develop and launch a new line of Jamba-branded all-natural, bake-dried, 100% fruit chip snacks. This newest addition to our portfolio of consumer products will be available in 3 great-tasting flavors and is expected to launch in grocery, convenience and other retail outlets by year's end. This licensing deal represents our 10th agreement since announcing our strategy to develop a multi-category portfolio of Jamba-branded consumer products.

The Jamba-branded line that has shown the greatest retail acceptance is the Jamba At-Home Smoothie Kits. Inventure Foods continues to invest significantly in support of this product line. They launched their fourth flavor, Caribbean Passion, earlier this year and just added another new product to the line of Orange Dream Machine, which will begin shipping to stores during their fourth quarter.

At-Home Smoothie Kits are a relatively new category for supermarkets and the category continues to grow. And our progress in this area will continue. We're pursuing agreements with potential licensees in additional categories and expect more announcements in the coming months.

To wrap up, based on our results to date, we are reiterating our guidance for 2011. We expect to achieve positive comparable store sales for the year of 2% to 4% and operating profit margin of 18% to 20%. We expect to open up to 80 units globally, including JambaGo. We will maintain G&A expenses in dollars consistent with 2010 levels, excluding litigation charges and onetime expenses.

For 2012, we see further progress. Our initial forecast is for comp store sales growth of 3% to 4%, adjusted operating profit margins of 19% to 22%. We plan to develop 40 to 50 new stores in the U.S. plus 10 to 15 new stores in international locations, all excluding JambaGo units. G&A will be flat with 2011, excluding performance compensation and CPG licensing revenue of approximately $3 million.

As I said in our earnings release, I'm pleased with Jamba's results and achievements, which are transforming Jamba into a leading health and wellness brand. We believe we have established a winning business model and a roadmap that will continue to drive accelerated growth.

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 the Jamba team members and franchise operators across the system for their continued effort and commitment to transforming our brand and delivering outstanding service to 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 is from the line of Peter Mahon with Dougherty & Company.

Peter Mahon - Dougherty & Company LLC, Research Division

Just a couple follow-ups. First of all, you guys instituted a menu price increase in May of this year. I wanted to just get an idea of how that will impact the January quarter comp and whether you guys are planning or have thought about additional price increases to combat rising commodity costs.

James D. White

Karen, can you answer the first part of the question? I'll answer the second.

Karen L. Luey

Sure. So Peter, the price increase for quarter 4 will have about a 380 basis point impact comp. That was similar to what we took in Q3, and you'll see that anniversary-ing off through Q1 where we anniversary against it in Q2 of '12.

James D. White

And Peter, as it relates to 2012, as we look at the operating environment, it continues to be challenging. But I think, as you're aware, we put in place earlier this year in addition to the menu pricing action, we've got a series of cost-savings initiatives, including the rationalization of our distribution network, which has been underway for some time. You'll see us continue to make more progress there. And we've got a series of other initiatives that we think, at least for now, will allow us to avoid any pricing actions at this point, and we're pretty comfortable with our cost of goods line being in the 24% to 25% range as it was this year.

Peter Mahon - Dougherty & Company LLC, Research Division

Okay, great. And then kind of on the cost side again, really nice job controlling labor costs. Just wanted to get an idea of what you did there to control that cost, and secondly, if you think that kind of savings is sustainable for the foreseeable future.

James D. White

We think the 100 to 150 basis point improvement that we've shown in Q3 is something that we expect to be able to play out into the future. We've been very focused on leveraging the technology or labor scheduling system, and we've just significantly improved from an execution perspective. But also, we get the advantage of higher sales, so we're leveraging our fixed costs pretty aggressively as well. Karen, anything that you add?

Karen L. Luey

Yes. So Peter, I think what James is referring to, the 150 basis points was the performance portion of our labor improvement. Overall, our labor improvement was about 400 basis points of which about 250 of that was related to the leverage in the sales growth.

Peter Mahon - Dougherty & Company LLC, Research Division

Okay, perfect, great. And then, James, maybe you could give us a little bit more color on the CPG channel. We did $300,000 in the quarter and you're planning to do, I know, close to $3 million in 2012. What gives you the confidence that your product offering is really going to resonate with the customer and you're going to be able to experience the kind of growth that you're hoping for?

James D. White

I guess there's a couple things. We've got obviously great performance with the Smoothie Kits and the team from Inventure. That's been nothing short of outstanding and I think is another proof point of the strength of the brand. As we look across the portfolio, we continue to build distribution broadly. We ended last year with about 10,000 points of retail distribution. We will finish this year with almost 30,000 points of retail distribution. So we'll have the benefit of triple the distribution going into 2012. We also have more partners that we expect to announce as we move through the next several months. So we're actually very confident with the current portfolio partners and products, and we will continue to build distribution. So we're comfortable that we will be in the range of tripling the CPG revenue in 2012.

Operator

Our next question comes from the line of Chris Krueger with Northland Capital Markets.

Chris Krueger - Northland Securities Inc., Research Division

I know you guys gave -- you've reiterated your full year guidance for this year, but I was wondering if you could just give us a little update on how the almost first half of the fourth quarter has been for same-store sales.

James D. White

We described comps as being within the range that we've provided all year in that 2% to 4% range. We're pretty comfortable that we will deliver in that range for this quarter as well.

Chris Krueger - Northland Securities Inc., Research Division

Okay. On the commodity picture, if you're looking ahead to 2012, does your initial goal or guidance include or assume a similar type of commodity pressure type of year as you're experiencing right now?

James D. White

It might be slightly more severe, but we have across this year upped our cost-savings initiatives, and we expect to be able to offset a lot of the headwinds that we'd see. And we'll have some early benefit in the year from the pricing action that we took earlier this year.

Karen L. Luey

And we still feel very -- Chris, we feel very comfortable that our cost range for '12 will be in the 24% to 25% range as we suggested it would be in '11.

Chris Krueger - Northland Securities Inc., Research Division

I'm sorry, you said that the range is 20...

Karen L. Luey

24% to 25%.

Chris Krueger - Northland Securities Inc., Research Division

24% to 25%, okay.

Karen L. Luey

Yes for FY '12.

Chris Krueger - Northland Securities Inc., Research Division

And given pretty good feedback on your Inventure Smoothie initiative. How -- can you talk at all about Nestlé and what's been going on there? I didn't really hear you present on that.

James D. White

We continue to feel very good about the work that Nestlé is doing in the Northeast with the energy drinks. We think you'll see more from Nestlé in the Northeast next year, and then you'll see us expand from that base moving forward. But we're very pleased with the early feedback that we're receiving from consumers in the Northeast with Nestlé.

Operator

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

Conrad Lyon - B. Riley & Co., LLC, Research Division

I just want to talk a little bit about just the dynamics of your same-store sales in the store and give an update on what's selling. And can you talk about the mix of, say, smoothies or non-smoothie items that helped, say, drive the comp this quarter?

James D. White

Conrad, I'll give kind of the overview and I'll have Karen to really break apart some of the critical areas where we think we're winning. The first place that we're very excited about is our core Smoothie offering. Karen, on the call, talked about the innovation that we've delivered from a menu perspective on our core Smoothie. So that is really the anchor of the performance improvement that we're seeing. The complement to that is the work that we've done, both on the breakfast part of our menu and the evening part of our menu, with the Breakfast Wrap launches and everything that we've invested in that breakfast day part and the launch of our Frozen Yogurt in about 150-plus units at this point. Our Whirl'ns launch has given us a pretty balanced performance. We were positive for the second consecutive quarter in every single day part. Karen, any additional detail there?

Karen L. Luey

Yes. So Conrad, in addition to that, obviously, Smoothies still make up the majority portion of our same-store sales mix. But with the introduction of all the other menu expansion items, I think we're creeping up to be more of a 10% range for all items excluding Smoothies.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. Question about the same-store sales guidance. I ask this a lot. I remember when you initiated your same-store guidance for fiscal '11, the 2% to 4%. To me, I was impressed because it was positive, it was aggressive and you're delivering. I'm going to ask the same question with the fiscal '12 same-store sales guidance. To me, it's impressive and it's nice to see. My question is what gives you the confidence to deliver that? Is it the menu price increases, the mix, product mix?

James D. White

I guess I'd make 2 points. Over the course of the last 3 years that this management team has been in place, we've delivered on every single commitment. So that's the first point that I'd make. But if you go deeper, as the menu innovation that we continue to be very confident and you'll see more of the same as we move to next year, you will see us continue to refine our overall marketing. We think we've done a very good job of balancing our price and promotional activities with the marketing spend. You saw us bring down dramatically our price promotion over the course of the last couple of quarters, and we've balanced that with incremental investments on the marketing side. So we're very confident there, and you will see us continue to refine our work in that space. And we are continuing to become more relevant to more consumers. So we're, on all fronts, very confident.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. Question about the competitiveness of the space. I've seen -- certainly seen more non-smoothie operators try to get in the space and you've probably seen other guys trying to get in there. How do you feel about that? Is that necessarily problematic? Or is it a verification that you're in the right space and that the pie is getting bigger? Just curious to see your thoughts are on that.

James D. White

Well, we think the category is certainly growing. We think there is a significant consumer opportunity in the better-for-you space. We've been the leader in this space for a long time. And with the acceleration of our innovation around our core smoothies, we're actually very confident that even as you have some of the larger players enter this space, they'll be training consumers to find the Jamba's more premium offering over time. So we're very confident with what we've seen. We've had the likes of McDonald's and Starbucks enter this space over the last several years, and we've only strengthened our position in the marketplace over time.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. Different question regarding the CPG platform. We know the Inventure Group products are working very well. Are there other products out there that you feel very good are seeing strong results with as well?

James D. White

We're excited about the early results that we've seen from the fruit cups and the team from Sundia. That's been a big win for us. Really early innings because they just launched in the second half of this year. We also love the preliminary feedback that we're receiving from consumers on the trail mix. The yogurt bars are award-winning. We just need to continue to see a distribution build on that offering, and then the Nestlé product has been solid and building momentum. So we're really across the board, very excited about the consumer goods portfolio.

Conrad Lyon - B. Riley & Co., LLC, Research Division

Okay. And this will be my last question regarding the CPG. So -- and next year, as you're with your $3 million expectation, is that necessarily more product within these categories? Are we going to see more categories added to the distribution channel?

James D. White

Well, it's an and both. You'll see partners like Inventure add either extensions to existing categories or add categories, and you will also see us sign and announce additional partners, so it will be an and both.

Operator

Thank you, Mr. White. At this time, there are no further questions. Sir, I'd like to turn the conference back over to you for any closing remarks.

James D. White

We say thanks. We look forward to visiting with everyone for Q4 and year end. And again, the point I'd leave you with is, over the course of the last 3 years, this management team has delivered on every commitment that we've promised, and we expect to continue that into 2012. Thank you.

Operator

Thank you, sir. Ladies and gentlemen, this does conclude the Jamba Inc. Third Quarter 2011 Earnings Conference Call. Thank you very much for your participation. You may now disconnect.

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