Jamba F3Q07 (Qtr End 10/16/07) Earnings Call Transcript

Jamba, Inc. (JMBA)

F3Q07 Earnings Call

November 20, 2007 5:00 pm ET

Executives

Donald D. Breen - Chief Financial Officer, Senior Vice President

Paul E. Clayton - President, Chief Executive Officer

Analysts

Nicole Miller - Piper Jaffray

Jeffrey Farmer - CIBC World Markets

Brian Moore - Wedbush Morgan

Jaison Blair - Rochdale Securities

Roger Fax - Société Générale

Presentation

Operator

Good day, everyone and welcome to today’s Jamba Inc. third quarter 2007 earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Don Breen. Please go ahead, sir.

Donald D. Breen

Great. Thank you and good afternoon, everybody. I am Don Breen, Senior Vice President and CFO of Jamba Juice. Joining me today is Paul Clayton, our CEO.

During today’s call, Paul will review Jamba's accomplishments and provide some color on a variety of our initiatives and I’ll review our third quarter financial performance.

I would like to remind all listeners that this call is being broadcast live over the Internet at www.jambajuice.com. A replay will be available via telephone through 12:00 a.m. December 4th, and please see our website for phone number and details.

This conference call will include forward-looking statements within the meaning of the securities laws. These forward-looking statements will include projections, expectations of restaurants, comparative same-store sales trends, the number of stores, and certain expense items and other statements of our expectations and plans.

These forward-looking statements are subject to risk 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 10-K for 2006 and third quarter 10-Q, which we expect to file this week.

With that out of the way, I would like to hand it over to Paul to walk us through Jamba's vision and execution.

Paul E. Clayton

Thank you, Don. Good afternoon, everybody. Today I want to talk abut the past year at Jamba, having transitioned from being a private company to a public company, how that’s impacted our business and how we expect to move forward at this point.

Jamba continues to make the transition from a private company to a public company with a capital structure that has acted as a catalyst for accelerated growth strategy. Our optimism was and continues to be based on the fact that one, Jamba has a strong and appealing brand that lends itself to a significant growth opportunities; two, that Jamba is a category defining leader in made-to-order healthy blended beverages, juices, and good-for-your snacks; three, Jamba's mature store unit economics are strong; and four, that we have a deep and experienced leadership team.

Over the course of the year, as we have implemented our growth plan, we almost immediately began to encounter some unexpected but not necessarily surprising headwinds, including softening traffic trends in California, inconsistent new store performance, and cost increases ranging from the California citrus freeze, minimum wage hikes, fuel, and other commodity cost increases.

I want to take just a moment to address these issues in more depth. Over the years, Jamba has been able to consistently expand its reach, largely as a result of Jamba's brand strength, the brands increasing mainstream appeal and the emergence of consumer trends in healthy living and nutrition.

As Jamba has expanded its reach, the fact remains that our user base is largely a combination of: one, extremely loyal, high frequency customers who get the concept and everything it stands for; and two, newer, light users who have not fully incorporated Jamba into their lifestyles.

This represents both the opportunity and the risk for Jamba. We believe we have a significant opportunity to take many of these light users on the Jamba journey, an easy, fun, convenient path to healthy living.

Jamba brand’s strength and appeal still provide the means to increase user frequency. To do this, we will continue to one, enhance and increase relevance through product innovation, marketing communication and store design, and two, increase accessibility by making it easier for our customers to enjoy Jamba with new stores, a new menu board, improved throughput and ready-to-drink Jamba for customers unable to visit our stores.

As you can see from the comparable store performance breakdown in today’s press release, not all markets are created equal. As we continue to transform Jamba into the leading blender of fruit and other healthy ingredients, we are facing the same macroeconomic pressures that others are experiencing, particularly in California.

Transaction counts have been negative in California since the first quarter, and comparable sales and transaction counts are strong outside of California.

We will open between 95 and 100 company-owned stores this year, a new record for Jamba. As we have shown in our company presentations, our stores have historically opened with a wide disparity in first year sales from a low of approximately $300,000 to over $1 million.

We have also shown that even when a store opens with lower sales, sales ramp to profitable levels over time. During Jamba's history, it hasn’t been uncommon to see stores open at $350,000 and then ramp to $700,000 and even higher over five years. The challenge has always been that in order to achieve superior cash-on-cash returns, we need stores to either start stronger, ramp faster, or both.

Our thinking was that as we further penetrated new markets, awareness would build and this higher awareness would translate into higher trial usage and therefore first year sales. Where we have a more concentrated development approach, we are seeing stronger new store openings, which confirms our belief that new store performance is a function of both awareness and visit frequency.

After opening 68 new stores through the end of the third quarter, we are seeing the same variability in first year sales that we have seen in the past. In certain more broadly defined markets like the state of Florida, where we still lack store concentration, we haven’t been able to build awareness and therefore sales have opened at lower-than-expected levels.

We remain confident, however, that these stores will ramp as all our other stores have in the past.

We, like many other food retailer restaurant concepts, have been challenged with higher commodity and labor costs. In January, we took a price increase of approximately 3% to offset anticipated increases in the minimum wage. Despite these pressures, the operations team did a good job of containing wage rate hikes and controlling hours during the year.

In late January, the citrus crop in California froze. We acted quickly to implement an additional yet temporary [ber] charge to protect profitability, though not enough to maintain margins.

Early in the third quarter, we converted the [ber] charge to a permanent price increase as the cost of oranges and orange juice remained substantially higher than expected. Overall, when fully implemented, we took about a 5.5% price increase.

More recently, we have seen cost increases in fuel, fruit, concentrates, and dairy, which have also had an impact on COGS. We believe the COGS environment will remain challenging in 2008.

As part of our plan to address COGS and sourcing, in July we hired Greg Schwartz as head of supply chain management. He brings over 20 years of experience from Kraft, Safeway and Wal-Mart to Jamba. In his short time with Jamba, he has worked on a new orange juice contract and a new distribution agreement that will produce savings for the company in 2008 and beyond, so his experience and focus of optimizing total value are already having an impact.

Jamba's unit economic profile for mature stores remained strong. We are focused on programs that will transition our light users into more frequent customers, build on our brand awareness, and make our unit economics even more compelling.

The good news is that all initiatives are on schedule. In fact, as a quick review, in 2007 we repositioned Jamba Light as a line of smoothies under 200 calories; we refreshed our all-fruit line of no sugar added, non-dairy blended beverages with new flavors, including Pomegranate Paradise, which is one of the most successful new product introductions in Jamba's history; we launched a functional beverage platform with new blended beverages in boost; we put into pilot a cold blended breakfast featuring new, innovative granola toppers and chunky smoothies, and the early results on our breakfast trials in New York and L.A. have been encouraging.

In the coming year, we expect to finalize plans for the Jamba ready-to-drink program. In fact, we should have a more definitive announcement by the end of this calendar year. We expect to roll out cold breakfast system wide in the first quarter 2008. The roll out will incorporate the learnings from the breakfast pilot featuring new products, including juicies, granola toppers, and the cult favorite chunky smoothie, as well as a complete refresh of our entire baked goods selection.

After nine weeks of testing, we have seen an improvement in breakfast day part comparable gross sales and breakfast as a percentage of sales has increased in these markets between 1.5% and 2.5%. Research also validates strong interest in Jamba for breakfast and strong interest in these products in particular.

In the coming year, we also expect to begin piloting hot breakfast in one store in the coming weeks and then expand into a broader test in the first quarter of 2008. We also expect to roll out new menu boards in advance of the breakfast launch in the first quarter, making it easier and more enjoyable for our customers to understand our menu, our product platforms, and the associated health benefits. We also expect to open a modified new store design by the end of this calendar year and the store design modifications are around color, lighting, and enhanced freshness cubes.

The macro environment issues are likely to continue, at least through the first part of 2008. As a consequence, we believe a more conservative approach is necessary and as such, we will moderate new company store growth to somewhere between 55 and 65 stores in 2008, focusing on filling out our existing markets as we have seen demonstrable benefits from this strategy in the past.

We still believe new store sales are a function of awareness and frequency, which means we need to focus on building market hubs in early adopter high frequency trade areas with sufficient densities and then build out the spokes from these hubs.

While the decision to moderate growth will allow us to fine-tune our development strategy, it will also help us to focus on our strategy to increase frequency and grow transactions, while at the same time improve store level and company profitability.

It is our firm view that strong store level economics need to be at the foundation of profitable growth. To this point, we’ve taken actions that will put Jamba into a better position to withstand current economic pressures and achieve our long range growth objectives.

Specifically, we will continue to maintain our intense focus on transaction growth and the implementation of our frequency strategy. This remains our number one priority.

Number two, we will moderate new company store growth for 2008 to ensure stronger first year sales performance and a much more conservative financial risk profile, and three, we will evaluate G&A spending to reflect this moderation in growth and a more conservative financial approach and our desire to leverage G&A.

These measures do not in any diminish the strength of the Jamba brand or our desire to be the world’s leading blender of fruit and other healthy ingredients, or our commitment to build a highly valuable business. In my opinion, these actions reflect the long-term best interests of our shareholders and I am confident we have an experienced leadership team to meet the challenges and achieve our goals.

And with that, I will turn it over to Don who will take you through the financial performance in more detail.

Donald D. Breen

Thanks, Paul. As many of you know, comparative prior year information in our 10-Q does not include the operating results of Jamba Juice Company. To facilitate more relevant operating company comparisons, we’ve included, as we have in the past, pro forma operating results of Jamba Juice Company in the tables attached to our earnings release.

My comments on this quarter’s operating performance will be compared to those pro forma prior year results.

For the first quarter on a pro forma basis, total revenue was $83.6 million, up 24% from the $67.4 million last quarter. That was driven by 25% growth in revenue from company stores. Franchise revenue was down approximately $100,000 as the company has reacquired 41 stores from franchisees during the past year.

The increased revenue from company-owned stores was primarily driven by new store openings and our previous price increase, which was 5.4% for the quarter.

System-wide comparable sales were 3.3% for the 12 week period. This compares to last year when system comparable store sales were a negative 2.4%.

Company-owned comp store sales were 3.8% during the period compared to a negative 3.6 for the company-owned stores last year.

And like many other concepts, we have seen some economic challenges in California. In order to provide additional insight into our store performance, we’ve provided a table in our press release showing this year’s quarterly comp numbers for our established market in California, as well as our emerging non-California market stores. As a reminder, California now represents approximately 74% of company comp store sales base.

Third quarter comparable store sales for California company stores were 1.2%. Our comps were positive in Q3 in California but clearly when backing out the 5.4% effective price increase during the quarter, we still did experience a decline in traffic.

Comp store sales and traffic are positive outside of California and increased 12.3%. Now these are very strong numbers and were aided by some warm weather this fall.

Jamba opened 24 new company owned stores in the third quarter compared to nine new company stores in the third quarter of last year. And year-to-date, we’ve opened 68 company-owned stores. We continue to open stores in our core and emerging markets to establish greater penetration while mitigating our reliance on California. Year-to-date, 41 of the 68 new stores were outside of California.

Our average unit volume of stores open at least two years continues to increase. At the end of quarter three, company AUV was now 782,000 compared with 774,000 at the end of both quarter two of this year as well as quarter three of a year ago.

Although our established store AUV numbers continue to increase and our emerging markets are showing very good comp store sales performance, newer stores are opening at levels below our expectations.

Our average estimate of first-year sales for all the new stores that have opened are at a projected $572,000.

On the franchising front, Jamba acquired 22 stores from franchisees in the fourth quarter in a deal with our partners, Sanders Liquid Sunshine and Vegas Liquid Sunshine. These stores are primarily located in northern California and Nevada.

Franchisees opened nine new stores during the quarter and 22 year-to-date. So far, five franchisee stores have closed, one whole foods, one store we did not acquire from Sanders Liquid Sunshine, two at the end of their franchise agreement, and one in Hawaii.

The company has also closed two stores, one whole foods and one in Beverly Hills at the end of its lease where we just could not justify paying the excessive rent increase that was being asked.

Jamba store operating profit for the quarter increased to $14.8 million from $13.7 million, primarily driven by increased sales from new and acquired stores, and acquired stores added approximately $2.7 million in additional sales versus the same quarter last year.

Cost of sales were $22.5 million for the quarter, or 27.7% of company store revenue. This was compared to 25.5% in the third quarter last year. The 2.2% difference year over year is approximately 2.3% due to higher commodities, largely oranges, fruit, fruit juice and dairy costs, offset by 1.3% improvement from our price increase. We also incurred 0.6% higher costs from the effect of discounting and 0.7% higher cost due to the mix of some higher cost smoothies.

Labor costs for the quarter were $25.8 million, or 31.8% of company-owned store revenue, a slight up-tick compared to 31.2 in the third quarter of last year. Our price increase offset seven-tenths due to higher wages. The 60 basis point increase was primarily a result of the higher discounts and bonus for stores outside of California.

Occupancy costs were $8.8 million or 10.8% of company store revenue compared to 10.6% from the prior year, and this increase can be attributed to the 80 stores the company has opened since the third quarter of last year.

Store operating expense was $9.2 million, or 11.4% of company-store revenue compared to 11.5% in the prior year, as higher marketing and repair costs were offset by lower equipment operating expenses.

Our G&A expenses were $11.1 million, or 13.2% of revenue compared to approximately 12.6% in the prior year. The company incurred approximately $1.8 million in costs associated with being public, including audit, legal, board compensation, and consulting fees that would not have been incurred in the prior year.

Store opening expense or pre-opening expense increased to $1.4 million from approximately $0.5 million last year, and this is associated with the increase as we opened 24 stores this quarter versus nine in the prior year.

Other operating expenses were $1.2 million or 1.4% of total revenue compared to 2.8 in the prior year, and the operating costs decline of approximately $0.5 million due to lower franchise support expense and increased Jamba card breakage, and that helped offset other operating cost expenses.

Our net income for the quarter was $22.4 million, which does include a pretax non-cash gain of $23.3 million related to the charge to the fair value of the derivative liabilities and that derivative liability will remain to the warrants issued according to the public offering of [SACI]. We are still required to recognize the gain of loss from derivatives and that will not go away until the warrants are no longer outstanding.

The $23.3 million gain represents an unrealized gain due to that change in that fair market value described in our footnotes.

As of the end of the quarter, we had approximately $49 million of cash and restricted cash with no long-term debt. We continue to fund new store growth out of cash resources and as of today, we have approximately $40 million of cash including restricted cash, and we expect to be able to fund 2008 stores out of existing cash resources and cash from operations. I am also working with several banks and expect to have a credit line in place by early 2008.

I have a few housekeeping items to discuss before I turn the call back over to Paul. First, as a reminder, the fourth quarter is a 12-week operating -- or the third quarter was a was a 12-week operating quarter ending October 16th. Next quarter is an 11-week operating period that ends January 1, 2008. Going forward, our fourth quarter will be a more traditional 12-week period ending on the Tuesday closest to calendar year-end, and this year that happens to be January 1, 2008.

I also would like to quickly mention the effect of the California wildfires on our Southern California business. Overall, the wildfires had a minimal effect on our business as a whole. Our stores were not in the direct path of any of the wildfires and no physical damage was done to any of our stores. We did close 14 stores briefly, primarily as a precaution for Jamba team members and the community around those stores. We lost a total of 31.5 store operating days due to the closures. A total of 39 stores were located either directly or in the affected area or in the vicinity of the fires, and for the two-week period around the fires, sales lost due to interruption in that area is estimated to be less than $75,000.

With that, I would now like to turn the call back over to Paul for some closing remarks.

Paul E. Clayton

Thanks, Don. I would like to say how proud I am of how the Jamba team came together to help out in the face of the fires in Southern California. The team provided needed refreshment to first responders and also to victims of the fires in a timely and selfless manner. Many of our own team members were impacted by the fires and others jumped in to help them out to ensure the safety of our customers.

Before we turn it over to Q&A, I want to emphasize that Jamba is committed to building a strong business that will create long-term shareholder value. Business conditions under which we operate have changed rather dramatically since we developed our growth plans in early 2007. As you can imagine, as we reviewed our 2008 growth plan, we recognized we had to adjust our growth levers to address these new market realities.

Other than that, our growth strategies are essentially the same. Number one, we are expanding our product offering within the stores. Today we’ve announced our system-wide rollout of breakfast in the first quarter of 2008. Number two, we are growing our store base in traditional and non-traditional formats, and increasing the number of stores outside of California to diversify our geographic footprint. And number three, we are expanding our reach beyond the four walls of the Jamba store. We will shortly announce our partner and product rollout timing for our ready-to-drink product, which will provide 24/7 access to the Jamba brand for those people who want Jamba experience but can’t always get to a Jamba Juice store.

We understand and share our shareholders’ frustrations regarding equity price volatility and thus we think our plan for 2008 will be to balance growth initiatives with driving economic returns. I want to be clear -- our stores have good unit economics; we just believe we can make them better and we are therefore moderating growth until we see improvements that justify a more rapid rate of growth.

Thank you for your time today. I would like to now turn the call over to the operator so that we can take any questions you might have. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Nicole Miller with Piper Jaffray.

Nicole Miller - Piper Jaffray

Thanks. Good afternoon. What were the unit level economic assumptions going into this year? So basically for the new stores you were opening, what were the assumptions, where did they end up, and what do you need to see in terms of average unit volumes to reaccelerate development? What’s the hurdle rate?

Donald D. Breen

I think what I reported is our average unit volumes were $572,000 so far year-to-date. That is not meeting our estimated hurdle rate. It’s consistent with our past history. We’ve had, as Paul indicated, stores that open between $300,000 and $1 million in new stores.

I think it’s that AUV which is modestly below our expectations, along with the fact that we have seen margin compression during the course of this year that was not contemplated earlier in this year. We have absorbed about 2%, 2.3% of COGS improvement due to commodities. That’s been offset by about 1.3% price. We’ve also seen increases due to discounting and product mix shifts.

And so it’s the combination of those two items that have caused us to be a little bit more conservative.

Nicole Miller - Piper Jaffray

On the average unit volume side, what are the initiatives designed to drive that, and off that 572?

Paul E. Clayton

I think the initiatives center around our, first of all, our frequency strategy to increase relevance. And I talked a lot about that in my opening comments. I think it starts with product innovation. We’ve been focused on repositioning Jamba Light as a line of smoothies under 200 calories. We’ve refreshed our all-fruit program, which is a non-added sugar, non-dairy line and it was very successful this spring and early summer.

We’ve relaunched functional smoothies and now we are going to put breakfast on the menu in the first quarter 2008.

In addition to that, we are looking at ways in which to create relevant marketing communication, both in terms of the messaging and in our ability to deliver the message outside of the four walls, and we are also looking at making our brand more accessible by making it easier for our customers to enjoy Jamba.

So things like more stores in concentrated areas so that we improve the convenience and access of Jamba. It includes things like the new menu board which will roll out in the first quarter, to make it easier for our customers to sort through our product offerings, understand how to use us better and what the associated benefits are. And then the other piece of the accessibility puzzle is to make sure that our customers can access the brand outside of four walls through ready-to-drink.

Nicole Miller - Piper Jaffray

I guess what I’m trying to reconcile is it sounds like you are happy with those initiatives to date. It sounds like new average unit volumes are opening within historical ranges, so either the question is why were the assumptions so aggressive, or what makes you uncomfortable about your past that doesn’t translate to the future? Are you just being conservative?

Paul E. Clayton

Well, I think we were really looking for a little bit more consistency in our new store sales under the assumption that as we were building in existing markets, that we would increase awareness and that increased awareness would then translate into sales.

Where we have focused our development in concentrated areas, we’ve seen those trends develop but in the state of Florida, where we have yet to drive that kind of awareness, we haven’t seen the performance in first year sales. What that says to me is that we’ve got to get even more concentrated within the state of Florida and focus on specific markets and specific areas so that we can drive that awareness and therefore drive first year sales.

Nicole Miller - Piper Jaffray

And that sounds extremely logical. I mean, I think we’ve seen that across a number of different branded emerging concepts, so looking --

Paul E. Clayton

I think the other thing that I would like to say is that when we started 2007, we didn’t expect some of the economic headwinds to have an impact on our store level profitability. So when we started the year, we didn’t expect the citrus freeze. We did anticipate, however, the minimum wage and we accounted for that initial price increase. As you all know, we had to take additional price first in the form of a [ber] charge and then we made that permanent and it might stand to reason that the aggressive pricing posture that we’ve taken this year has had an impact on particularly the light user in economically challenged markets.

In addition to that, we made some conscious decisions to invest more in marketing, whether it’s the marketing expense itself, which is a point higher in 2007 than it was in 2006. We also made a conscious decision to focus on the functional platform, which carries with it a higher cost of goods sold. The performance of the functional platform exceeded our expectations from a product mix standpoint, so it put a little bit more pressure on the P&L than we expected.

And then you add on the performance, the inconsistent performance, particularly in emerging markets at our new stores, we see pressure on our unit economics and our view is that in today’s economic environment, we’ve got to be a little bit more conservative in our approach to ensure that we have a strong foundation for future growth.

Nicole Miller - Piper Jaffray

Just one last quick question, or one-and-a-half quick questions; what markets will you be going in with these 55 to 65 stores? Maybe the better question is what markets are you not now going into? And one of the goals was to offset seasonality by growing outside of California. How will you offset seasonality now that you are really just going to grow in existing markets?

Paul E. Clayton

The one thing that this moderated growth allows us to do is really to scrub our pipeline and get very clear around where we want to build our stores. Our priority will be to continue to build in existing markets, both in California and in the markets outside of California. We are not contemplating new markets but we are focused on our existing markets and, more particularly, on building this concentration of stores. So there isn’t one market that we are currently in that we are not contemplating growing.

Nicole Miller - Piper Jaffray

And then my last question and I’ll hop off, what are the current same-store sales, given that we’re at least I think about halfway through or so the current fourth quarter?

Paul E. Clayton

I knew you would ask that question and all I’ll say is what I always say, and that is our comp sales are within our historical ranges. They go up and down.

Nicole Miller - Piper Jaffray

Fair enough. Thanks so much.

Operator

Thank you. We’ll go next to Jeff Farmer with CIBC World Markets.

Jeffrey Farmer - CIBC World Markets

Great. Thank you and good afternoon. I just wanted to quickly reconcile something. You are seeing soft sales in markets where you lack brand awareness, but in California where obviously you have the greatest brand recognition, you are putting some of your softer same-store sales results. How should we think about reconciling that?

Paul E. Clayton

The softness in our view has everything to do with economic pressures. The cost of a gallon of gasoline is approaching $4. The sub-prime mortgage challenges that we are seeing are affecting Southern California and if you look at the markets that have been affected by the housing issue, we see a direct correlation to our comp sales and we also understand, from looking at other concepts that they are seeing the same kind of trends.

So it’s our view that it’s the economic pressures that are driving the softness in California and outside of California, I think we are seeing a new brand emerge and awareness, converting into trial and usage.

Jeffrey Farmer - CIBC World Markets

And then switching gears on you, on the ready-to-drink smoothie offering, can you give us a sense of how big that market is or what you think it could potentially be?

Paul E. Clayton

I would like to hold off for just a couple more weeks and then we’ll tell you everything.

Jeffrey Farmer - CIBC World Markets

Okay, fair enough. And then, again switching gears on you, you introduced the all-fruit line I think early 2006. It quickly grew to I think almost 20% of your sales mix, but your comps for the most part remain flat in ’06, implying that really all-fruit was just really a popular alternative as opposed to a traffic driver. I’m just curious if your early read on the chunky smoothie and granola toppers has been similar.

Paul E. Clayton

We’re seeing comparable day part growth, so in other words we are seeing increased sales and transaction at the breakfast day part as a result of our breakfast offerings. What I can’t honestly tell you because it’s tough to isolate is whether or not we are cannibalizing other day parts. But we feel good given our early read on the test results and in combination with results that we are seeing in our marketing research and the feedback that we are getting from our store teams regarding customer acceptance of these products.

I would say to you also it’s really tough in this business to really isolate what is specifically the impact of some of the aggressive pricing that we’ve taken, some of the impact of the macro-economic issues, particularly against the light user who views Jamba as the more discretionary occasion, as well as impact of weather and then the impact of our marketing programs. It gets really challenging to isolate that.

I would like to look at all-fruit and say honestly we didn’t see a direct correlation to increases in transactions but the fact that it mixed in a very short period of time at around 20% and that the Pomegranate Paradise was one of the most successful mixing products in our history indicates to me that we are relevant with the consumer.

So I would like to think that as soon as some of these environmental issues abate, that we are going to see transactions grow and frequency grow.

Jeffrey Farmer - CIBC World Markets

Okay, and I should know this but the price point and margin on the chunky smoothie and granola toppers relative to the existing offerings, where is that?

Donald D. Breen

Chunky smoothies are going to be about where our total consolidated cost of goods sold is now. It is a little bit more expensive than straight smoothies but is around the same as our total consolidated cost of goods sold.

Jeffrey Farmer - CIBC World Markets

Okay, and then final question for me, just the buy one, get one free redemptions, total redemptions in the 3Q, what that number was and then I guess just a clarity whether or not you charged that cost back to your advertising costs, or it just gets absorbed in your food cost line?

Donald D. Breen

It gets absorbed in our food cost line.

Jeffrey Farmer - CIBC World Markets

Okay, and the total redemptions for the quarter? Last quarter you had 300-and-something thousand.

Donald D. Breen

I don’t know if I actually have the number of redemptions.

Jeffrey Farmer - CIBC World Markets

A ballpark, more or less than the 2Q?

Donald D. Breen

Probably a little bit less.

Jeffrey Farmer - CIBC World Markets

Okay. Thank you, guys.

Operator

Thank you. Next we’ll go to Brian Moore with Wedbush Morgan.

Brian Moore - Wedbush Morgan

Good afternoon. A question on -- I guess first, how many leases or LOIs have you signed for ’08? And then how many stores are going to be opening inside versus outside of California?

Paul E. Clayton

I would tell you that our pipeline is in good shape for 2008. I am not going to tell you how many leases precisely but we’re in good shape and I think directionally, you can continue to expect that we are going to build slightly more stores outside of California than inside of California.

Brian Moore - Wedbush Morgan

Okay, and then also on the geographies and thinking about Florida, it would seem to have less perhaps flagship locations than other cities where you’ve opened. Could you talk about site selection or opportunities in new markets? As well as I guess the availability of I guess human capital, GMs in the pipeline, et cetera?

Paul E. Clayton

I think from a human capital, we’re in good shape. I mean, we have enough people to source the sites, to build the stores, to staff the stores because we’ve been gearing up for that.

With regard to site selection process, I think the thing that we are a little bit more sensitive to is that as we charged ahead in the state of Florida, we had very ambitious goals for developing a significant number of stores in the entire state, so we are looking at developing in South Florida, in Tampa, in Jacksonville, and potentially Orlando.

As we started to build stores, the feedback was that the stores were opening a little bit slower than we had expected and you combine that with now the research that we have round usage behavior of our customer base, we’ve come to the conclusion that as we open stores in mainstream locations where co-tenancy is very good, where we have a good combination of big box and small box retailers, the traffic counts and densities are good, we don’t have enough potential early adopters and heavy users. So I call those the mainstream sites.

So if you combine that in a market like Jacksonville where we have low awareness and low frequency, and it stands to reason that we are probably going to open a little bit slower. So the course correction that we are taking is to make sure that we are developing stores in tightly concentrated areas so that we can build awareness and translate the awareness into trial and usage and therefore first year sales, but we are also going to try to build these hubs in what we are calling early adopter areas, or where we have a customer base that is more naturally inclined to higher frequency levels, so that we can start stronger and then as we build awareness, then the spoke stores also begin to grow in sales and hopefully accelerate the process that way.

We are going to continue to focus on South Florida. We will continue to build stores in Jacksonville and Tampa, but we are going to stay focused on building concentrations in those markets.

Brian Moore - Wedbush Morgan

Okay, and I guess the second question on the hot breakfast test, where we do stand on the commercialization of that? I think you mentioned one store but is it a pilot or is it a system-wide rollout in Q108?

Paul E. Clayton

We will have it hopefully in one store before the end of this calendar year, so that we work out some operational kinks. I’ll tell you, we’ve learned a lot with the cold blended beverage program in the 50-store tests so I’m glad we did it. We will then expand from that one store to an expanded test, much like the cola blended beverages in the first quarter of 2008 and then, depending on how it works, we’ll take it from there.

Brian Moore - Wedbush Morgan

Okay, and then in terms of -- I guess given your comment about an aggressive pricing posture, perhaps higher -- let me just ask the question about maybe more relevant bundling as part of the refreshed bakery program. Do you plan to bundle a smoothie product with food in ’08?

Paul E. Clayton

Our plans do include bundling but we need the new menu board in there to do it effectively, and we need a refreshed baked goods offering so that we can do that proudly, so both are on the agenda for the first quarter.

Brian Moore - Wedbush Morgan

Is that menu board something we’ve seen in Chicago, or could you talk about the results of the menu board test?

Paul E. Clayton

It’s a variation of what you’ve seen in Chicago, so it’s several iterations forward. Again, every iteration is designed to make it simpler and clearer for our customers, therefore making our brand and our product platforms more accessible.

Brian Moore - Wedbush Morgan

Final question; as you talked about increased focus on profitability, I guess at the store level, how does the reduction in unit growth play into the EBITDA goal, double-digit EBITDA margins and in terms of the timing as well?

Donald D. Breen

Well, I think one of the things that helps -- I mean, our goal is still and we will commit to continuing to leverage our G&A, so there are two focal points: one, to continue to increase our store level margins. I think by focusing our development, we will see that and then we will continue to see leveraging of our G&A.

Our goal is still to get to that double-digit consolidated EBITDA margin. We will have to take a good hard look at where we are spending.

Paul E. Clayton

I think the way to look at it is that we will leverage G&A. We’ve committed to that. Obviously with more moderate growth, we’re going to temper the growth in our G&A spending but the real leverage and the real ability to get to a double-digit EBITDA margin is predicated on our ability to have strong unit economics, and I think that starts first and foremost with making sure that we’ve got good top line sales growth.

Donald D. Breen

And we have to have a very strong foundation, because in order to do that -- and that’s first and foremost in what we are trying to do, is to make sure that our foundation is strong so that it is all based on unit level economics.

Brian Moore - Wedbush Morgan

Let me ask one final question on the education of Jamba as a healthful brand. It seems like in a number of discussions we’ve had with customers that have left the brand it’s because they perceive the brand as being relatively high in calories or sugar. Where do we stand on the marketing message, the education? How would you measure success year-to-date and what might we see in ’08 to fully educate consumers on what you are really offering?

Paul E. Clayton

Our focus will be on launching breakfast to make sure that our customers understand it’s a healthier alternative than what’s on the marketplace. Again, I keep looking at the menu board as a way to better position our platforms, so our platforms of Jamba Light will be positioned as under 200 calories; our all-fruit platform is going to be positioned as no sugar added and non-dairy. Our functional lineup is positioned as additional benefits beyond just simply three to five services of fruit.

So my hope and desire is that through the menu board and additional marketing communication, things like the website that we are going to get greater focus and clarity on the positioning of these platforms.

Brian Moore - Wedbush Morgan

Great. Thank you.

Operator

Thank you. Next we’ll go to Jaison Blair with Rochdale Securities.

Jaison Blair - Rochdale Securities

Good afternoon. Don, did I just hear you say that slowing growth would help you reach the double-digit EBITDA consolidated EBITDA margin?

Donald D. Breen

Ultimately it will by having -- because it needs to be based in strong unit level economics, so making sure that we’ve got that as a foundation, Jaison, ultimately will help us reach our profitability goals.

Jaison Blair - Rochdale Securities

I guess the challenge I have with that is we talk about the strong foundation you need and how you -- over and over and over we hear we need more stores, and more concentrated store markets, more highly concentrated stores, increased awareness to lead the higher sales in emerging markets.

I guess the challenge that I have is your leveraging G&A really seemed to me to be predicated on rapid store growth and now that you’ve drastically reduced your store growth rate, it seems as though there’s kind of a message mismatch there.

Paul E. Clayton

I think the key word there is balance. I think if we were seeing more traction in comp sales and transaction growth and therefore leveraging our store unit economics, we would continue to move forward as aggressively as we had originally communicated. But we haven’t seen that traction yet and I think the initiatives that we are putting in place are the right initiatives and my expectation is that we are going to see that traction. But we also know that we are in a tougher macroeconomic period right now and I think it’s just a more prudent way to go forward to make sure that we give ourselves the opportunity to drive those top line sales would then translate into stronger unit economics, but then truthfully get the leverage that we are looking for.

Jaison Blair - Rochdale Securities

You spoke previously about how we should expect leverage of G&A in ’08. I think the street consensus now is about a $0.05 loss for ’08. My guess is near-term, the impact of slowing growth would be that we would expect a greater-than-expected loss next year.

Donald D. Breen

I think at this point, we are not going to provide specific --

Jaison Blair - Rochdale Securities

But would that be logical?

Donald D. Breen

It would be logical. I mean, I would expect us near term to continue to have some momentum from A, the 95 to 100 stores that we are developing this year. Next year, frankly new stores are not that incremental to profitability, so the real impact comes in the second year afterwards.

Jaison Blair - Rochdale Securities

Right.

Paul E. Clayton

I’m not sure I understand the question completely, Jaison, but it doesn’t make sense to me that if we are moderating growth, that our profitability would decline next year. It would stand to reason that if we are getting more focused and we’re moderating growth to some degree, then profitability should go up versus --

Jaison Blair - Rochdale Securities

But if your G&A is 13% of revenue, do you really need growth in those emerging markets to leverage that big number?

Paul E. Clayton

Yeah, but we made a lot of investments at the core and the infrastructure here in California, particularly around becoming a public company. And even with a moderated growth, we are going to be able to leverage that G&A.

Jaison Blair - Rochdale Securities

But even last year, it was over 12%.

Paul E. Clayton

Yeah, but I’m pretty confident that we’re going to leverage G&A next year.

Jaison Blair - Rochdale Securities

Okay, that would be great. And I guess the 20-plus stores that you are building into Q4, when do you pay for them?

Donald D. Breen

Typically we start paying for them during the construction process and then it’s usually about a two-month process or some from that point forward.

Jaison Blair - Rochdale Securities

So have you already paid for the stores you are going to open in Q4, or is there --

Donald D. Breen

We’ve made deposits, usually initial payments that are first draws, but that typically does not get done until -- and final payments are not made until we go through and do our [punch list] checks.

Jaison Blair - Rochdale Securities

So if we assume still you had 75% of the costs associated with those stores, that’s probably what, another $6 million or something like that?

Donald D. Breen

I don’t have the number off the top of my head, Jaison.

Jaison Blair - Rochdale Securities

So if we assume you are going to lose, I don’t know, $0.10 to $0.15 in the fourth quarter, which is let’s say what, $6 million or $8 million, you are going to have another $6 million of costs associated with new stores in the fourth quarter, and then ’08, if we expect another let’s say $0.05 to $0.10 loss and another 60 stores, I mean, I calculate that by the end of ’08, your cash balance is close to zero.

Donald D. Breen

I think we’re going to moderate our growth. As we said, we’ll have moderation and leverage and as I indicated before, with the reduction in the costs, with the moderation of our development, we should have existing cash resources and cash from operations should be able to fund that growth.

As I said, in addition, I am in negotiations with several banks to have a letter of credit available and expect to have that in early 2008.

Jaison Blair - Rochdale Securities

But it wouldn’t be illogical to assume that you would be close to a zero cash balance at the end of --

Paul E. Clayton

Well, we don’t want to get that close, Jaison, because at the beginning of the year, we assumed that, rightly or wrongly, that we would be in a position to exercise or call those warrants, which was going to be an extra influx of capital. Given where the stock price is today, that’s a longer reach and so therefore, our view of the 2008, we need to be able to fund our growth through our cash balances, cash generated from operations, and still have a cushion to get through to 2009 in a comfortable way. And that is really part of the intent with our 2008 plan.

Jaison Blair - Rochdale Securities

Okay, well, that’s very helpful. I appreciate it and good luck.

Operator

Thank you. We’ll go next to Roger [Fax] with Société Générale.

Roger Fax - Société Générale

Great. Thanks, guys. I just want to go back again to the moderated store growth plan. Just so I understand what was just said, are you expecting to see some leverage potentially next year, mostly due to a smaller amount of new store opening costs and couple that with what we hope are stronger AUVs due to your store initiatives, breakfast, et cetera?

Paul E. Clayton

Essentially that’s true but I think that’s there more leverage than we are giving ourselves credit for, with regard to overall G&A. We’ve spent quite a bit of G&A this year in getting this company up to speed in terms of becoming a good public company, but also in preparing ourselves for future growth. And my view is that the infrastructure that we’ve put in place, much of it was one-time in nature and therefore there is leverage to be gained next year, regardless of what the rate of growth is. So in addition to that, then we will have fewer pre-opening or new store opening costs.

And then the big leverage, in my view, comes from growing top line sales and growing them at a rate faster than costs are escalating.

Roger Fax - Société Générale

And if things turn around, or if the macro environment changes, can we expect to ramp up further than what this new plan calls for?

Paul E. Clayton

If we see real traction in our transactions, then I think you should and can expect that.

Roger Fax - Société Générale

And how much of something like that would be predicated upon having solid financing in place?

Paul E. Clayton

Well, at the end of the day, I think the most important thing is to make sure that we can demonstrate that our store economics are getting stronger, because I think ultimately that’s going to determine whether or not we can get the financing in place. But let me reiterate that our financing is in place in 2008 and we are trying to make sure that it’s comfortable or there is enough cushion without tapping into debt to get us into 2009.

Roger Fax - Société Générale

Okay, and going back -- so I can change topics for a second, on the AUV for the first year stores, you said it was about 570 per store. Do you have a breakdown of what was non-California versus California on that?

Donald D. Breen

We do but I think that this is an overall last year number and what I could say is that our California stores have opened up, within the range of our history.

Paul E. Clayton

So in other words, California stores open higher and non-California stores on average open lower to get us to the average of 572.

Roger Fax - Société Générale

Okay, and was the bulk of the non-California that was below, was that Florida or was it system-wide non-California?

Paul E. Clayton

We have individual stores in different markets where they are below the average, but where we have the lion’s share of our challenges are in Florida.

Roger Fax - Société Générale

Okay, and if I can just ask a question on the cold breakfast rollout, I don’t know if you had mentioned it prior but is there a way to know if you were seeing transaction or in-store increases in number of purchases, or was the positive figures from that due to people trading up from a lower price item and have a higher priced breakfast smoothie?

Paul E. Clayton

We believe that we are selling more units at breakfast in all our test markets. Here is the challenge that we have; in New York, our sales have been very strong, as you have heard from Don, our non-California comp sales this quarter were over 12%. Some of that honestly is driven by weather and so for us to isolate what was weather driven and what was breakfast driven is tough.

Conversely, in Southern California, where we are feeling the economic pressures the most, our customer transactions are negative but yet we’re seeing a growth in the breakfast day part. So it’s hard for me to isolate, but to answer your question that the growth in comp sales was coming from increased transactions and incremental units.

Roger Fax - Société Générale

Okay, that’s helpful, and just a quick housekeeping; what was the actual CapEx spend in the quarter?

Donald D. Breen

Actual CapEx spend for the quarter -- I don’t have the quarter, but --

Roger Fax - Société Générale

Year-to-date is fine.

Donald D. Breen

Year-to-date CapEx was $38.6 million, and that does not include the acquisitions.

Roger Fax - Société Générale

Okay, great. Thank you, guys.

Operator

Thank you. And that does conclude today’s Q&A portion. At this time, I would like to turn the call back over to Mr. Paul Clayton for any additional or closing comments.

Paul E. Clayton

I would just like to thank everybody for taking time on Thanksgiving week to participate in this call. I just want to reiterate that we have a very clear plan in terms of what we want to accomplish in 2008. It’s about strengthening our unit economics and it starts with the implementation of our plan to drive top line sales growth, and making sure that we get those first year sales volumes.

So I appreciate everybody taking the time. Happy Thanksgiving and we look forward to talking to you more about Jamba in the future.

Operator

That does conclude today’s conference. You may disconnect your lines at this time.

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