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Jamba (NASDAQ:JMBA)

Q1 2012 Earnings Call

May 07, 2012 5:00 pm ET

Executives

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

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

Analysts

Peter Mahon - Dougherty & Company LLC, Research Division

Chris Krueger - Northland Securities Inc., Research Division

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

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

Operator

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Jamba Inc. First Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Monday, May 7, 2012, and I'd now like to turn the conference over to Ms. Karen Luey, Executive Vice President and 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 first quarter financial results. James will follow with an update on BLEND Plan 2.0 initiatives and accomplishments. 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 a replay will be available via telephone until May 28, 2012.

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, 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 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'd like to turn it over to James.

James D. White

Thank you, Karen, and welcome to our first quarter call. On our last earnings call, I said the strong same-store sales trend that marked the end of 2011 was continuing in the early weeks of 2012. And as you can see from our 12.7% increase in company-owned store sales and 11.6% increase system-wide, the positive trend actually accelerated through the quarter, so we are off to a great start.

I'll highlight some of our quarterly accomplishments and then expand on a few of them later. Our same-store sales have now been positive for 6 consecutive quarters for company-owned stores and 7 for franchise stores. Both improved traffic and higher average check drove these increases in all day parts. Store profitability improved by more than 1,000 basis points during the quarter, versus a year ago. Our balance sheet remained strong with 0 debt and $19 million in cash. All of our strategic initiatives in our BLEND Plan 2.0 that we unveiled last year are being initiated to accelerate our growth. Product and menu innovation is accelerating around fresh juice blends and better-for-you smoothies, like our fruit and vegetable offerings. Our JambaGo express units are being installed, and we are planning 400 to 500 installations by year end. We added 6 international units in Q1 and will double our international stores to more than 40 during 2012. We acquired the premium boutique company, Talbott Teas, a lifestyle specialty brand that fits well with our brand positioning as a leading health and wellness company, and our CPG revenues are growing with a very strong showing in the Inventure Foods line. CPG royalties are on track to reach around $3 million this year. Our unrelenting focus on taking costs out of the system and managing our cost structure continue to yield excellent results. With that overview, I'll now ask Karen to take us through the financials.

Karen L. Luey

Thank you, James. Before I review our highlights for the first quarter of fiscal 2012, I'd like to remind you that we switched the dates of our quarter end to more conform with the calendar quarter end. The press release that was issued today has comparisons against prior-year GAAP results and prior-year pro forma results. The 10-Q, which will be filed on or around May 8, 2012, will only include comparisons against prior-year GAAP results. And today, I'll focus most of my comments on the pro forma comparisons.

We continue to make progress on strengthening the financial health of our business, and it's reflected in our first quarter results. Quarter-over-quarter comparisons on a GAAP and pro forma basis reflects significant improvement in comparable same-store sales and total revenue, 4-wall store margins, adjusted operating profit, and we continue to improve on our bottom line results.

On a pro forma basis, for the first 13 weeks in 2012 compared to the first 13 weeks in 2011, we reduced our net loss from $7.7 million to $1.5 million or $0.03 loss per share, a reduction of more than 76% due to the increase in revenue and continued operational efficiencies in overall store operating expenses, primarily labor. Our 4-wall store margins improved to 15.4% from 4.8%, and our adjusted operating profit increased by $6 million to $10.7 million in the first quarter of 2012 from $4.7 million in the first quarter of 2011. Total pro forma revenue for the first quarter increased 4.9% to $53 million, and company store revenue increased 3.7% to $50 million as compared to the prior-year same quarter. Across our entire system, we showed increases in comparable store sales for the first quarter. Our company comparable store sales increased 12.7%, and franchise comparable store sales increased 10.5%. And for the second consecutive quarter, we are reflecting an increase in traffic. The results of our company comparable store sales increase of 12.7% for the quarter includes an 880-basis point increase in traffic, and a 390-basis point increase due to average check. The increase in traffic consists of approximately 510 basis points related to the weather impact and 370 basis points related to more frequent and repeat business.

The increase in traffic continues to be achieved through our menu expansion, and our plan to become more relevant and a habitual location to consumers. Several good examples of this are the introduction of oatmeal and breakfast wraps to drive the most habitual day part of, breakfast. In addition, the introduction of our Fit 'n Fruitful meal replacement smoothie early in 2012, along with the Probiotic Yogurt and Fruit & Veggie Smoothies, which were introduced in 2011, are driving repeat customers and traffic into our store locations.

We continue to reflect positive same-store sales growth in all 4 day parts. Our attachment rate for a beverage with another item was approximately 20% for the first quarter of 2012.

On a pro forma basis, our franchise and other revenue for the first quarter increased by 29.7% to $3 million compared to $2.3 million from the same prior-year quarter. The increase was attributable to royalties related to the increase in number of franchise stores, increase in franchise comparable store sales and the increase in our consumer packaged goods license revenue. Our CPG revenue was $300,000 compared to $170,000 from the prior-year same quarter. The number of retail stores in which Jamba-branded consumer products are sold increased to approximately 35,000 at the end of the quarter, and we remain on track to achieve our annual guidance of $3 million in CPG revenue.

We continue to make significant progress in improving our 4-wall store margin, which includes company revenue less total company store expenses of cost of sales, labor, occupancy and other store operating expense. Our store profitability on a pro forma basis improved by $5.4 million to $7.7 million for the first quarter of 2012 compared to $2.3 million from the prior year. And as a result of the strong performance by our stores and increased franchise revenue, our adjusted operating profit improved to $10.7 million from $4.7 million in the same comparable quarter.

Now let me discuss general and administrative costs for the first quarter. On a pro forma basis, general and administrative costs were slightly higher than the prior-year same quarter by about $200,000. This was due primarily to an increase in noncash, stock-based compensation expense.

For the full year, our effective tax rate is a benefit of 13.7%, and we continue to have a full valuation allowance against our deferred tax assets. Our Q1 to [ph] federal net operating loss at the end of the quarter was $116 million, and we do not expect to be a taxpayer this year. Our balance sheet remains strong with $19.3 million in cash and cash equivalents and no debt at the end of the quarter. Our capital expenditures for the quarter were $900,000 related to maintenance capital, revenue-driving initiatives and investment in our information-technology platforms. There was no activity under the redeemable preferred stock, and the outstanding convertible shares at the end of the quarter remains the same at 168,389 convertible shares. Although we did not draw on the senior revolving credit line, we used it to collateralize several Letters of Credit that were formerly collateralized by cash.

So let me take a minute to discuss our thoughts on JambaGo revenue. As we have said previously, the revenue which came from JambaGo will not be significant for 2012. We have plans to open 400 to 500 locations during the year, resulting in a revenue estimate of approximately $700,000. And as we gather additional information regarding the flow of cash [ph], we will provide updates on future earnings call. With that said, I'd like to turn the call back to James.

James D. White

Thanks, Karen. I said at the start of our new BLEND Plan 2.0, strategic initiatives are being initiated. While I won't detail these plans, I did want to note that they focus on 5 areas for accelerated, sustainable growth: making Jamba a top-of-mind healthy food and beverage brand; embodying a healthy active lifestyle in our stores and throughout our entire enterprise; accelerating the global retail growth through new and existing formats; building a global CPG platform in Jamba-relevant categories; and finally, pursuing new ways to reduce cost and increase productivity.

Since these strategies are an extension of the plans that have guided us over the last 3 years, we were able to move several initiatives from development to market last quarter. For example, our 3 new fresh squeezed juice blends affirm our legacy of providing consumers with all-natural, great-tasting products that inspire and simplify healthy living. Each of our juice blends is squeezed to order for optimum fresh and nutritious drinks that provide at least 2 servings of fruits and/or vegetables. They're an easy, tasty way to get more fruit and vegetable nutrients into the diet. And this is just Phase 1 of our fresh juice initiative.

Concurrent with our Store of the Future work, we will be adding new juice bar concepts in units in San Francisco, New York, Los Angeles and Seattle, and we are looking for bolt-on acquisitions to expand our fresh juice offerings. We're also focused on deepening the nutritional expertise available to our consumers with the launch of our unique MBA program, our Master of Blending Arts. This program will advance the knowledge of the Jamba team members in product nutrition, the benefits of juice and juicing and their expertise in creating custom beverages.

The focus of our associates is an across-the-board, all-encompassing initiative to really significantly improve our culture for building custom beverages and really having our entire organization embody our aspiration to build a great, healthy lifestyle company. We've deployed systems and improved productivity in our stores. Labor, as a percent of sales, continues to decrease from 36% in 2008 to 31.6% last year. We have increased our efforts with innovative technology to assure top consumer service and satisfaction, and we're encouraging all of our associates to become active and engaged in our local communities in an effort to foster more healthy active lifestyles with our campaign, "Live Fruitfully."

One of our related efforts is the participation in the National 2012 Summer Jobs Plus Campaign, a nationwide effort of President Obama and the Department of Labor to curb youth unemployment. Summer is our busy season and with our expansion into new markets, Jamba has pledged to hire 2,500 youngsters so they can gain the skills and work experience that will help them get started with their careers. Supporting youngsters also is an important aspect of our JambaGo express units that we'll be placing in K-12 schools.

During the year, we will have install 400 to 500 JambaGos that will provide a healthy alternative for schools seeking solutions to combat the epidemic of juvenile obesity throughout the country. We believe that JambaGo represents a win-win-win, that provides great-tasting smoothies that children love, a wonderful healthy alternative to fight obesity and a good investment for Jamba.

In addition to schools, JambaGo will also be installed in convenience stores, colleges, entertainment systems and other locations. If successful, we think the number of JambaGo installations could exceed 1,000 over time. In describing the JambaGo business model, I've harkened back to my days at Gillette in likening the JambaGo installations and refills to the razor and blade model. When I came to Jamba, I was hoping to find something that would provide us with this very successful model and JambaGo does it.

In addition to new formats, we also continue to sharpen our marketing efforts, which we're doing a better job of focusing on driving traffic, building loyalty and making our brand more relevant to more people. This ongoing effort will be a key contributor to our accelerated growth. So Q1 was strong, and we see good progress ahead. So we are again affirming our guidance for the year. We expect to deliver positive company-owned comparable store sales in the 3% to 4% range, achieve adjusted operating profit margins of 20% to 22%, develop 40 to 50 new stores in the U.S., 10 to 15 new stores internationally, plus our JambaGo units. We'll maintain general and administrative expenses flat in dollars with fiscal 2011, excluding performance compensation, and we will deliver CPG licensing revenues of approximately $3 million.

As I said, I'm very pleased with Jamba's results and achievements, and we continue to create new ways to build on our heritage and transform Jamba into a leading active, healthy lifestyle brand. We have an exceptional brand franchise, a focused strategy, a talented and very disciplined organization. And as I always say, promises made will be kept.

Before I conclude, I would like to welcome our new partners in the U.S. and from around the world to the Jamba family. I also would like to thank the Jamba team members and franchise operators across the system for their continuing efforts to build our company and deliver outstanding service to our customers. I will now turn the call over to the operator so we can open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Peter Mahon with Dougherty & Company.

Peter Mahon - Dougherty & Company LLC, Research Division

The first one I had has to do with just your comp store guidance versus kind of how you started the year. One, and it kind of implies a more severe slowdown in the back half of the year than I would have thought based on how you started. Has something changed even through the first few weeks of Q2 here? Or is there something looming in the back half of the year that gives you a little less confidence in that comp store sale number?

James D. White

Peter, we'd say we're very confident in the plan that we entered the year with. We've got off to a strong start in Q1, but it's early in the year and we would never revise our earnings but were actually very bullish on our plans. And to be clear, we've got positive comparable store sales as we play through the early part of Q2.

Peter Mahon - Dougherty & Company LLC, Research Division

Okay, great. Got it. So it's more of a timing issue opposed to guys seeing a fundamental change in kind of the marketplace right now?

James D. White

We absolutely don't see a fundamental change. We are bullish on the strategy.

Peter Mahon - Dougherty & Company LLC, Research Division

Okay, great. And James, you talked about CPG or license or I should say, license revenue reaching about $3 million for the year. Is the JambaGo revenue are going to be tied into that number or -- and then a follow-up to that is, doing about $300,000 in Q1, do you guys -- what do you see on the horizon that gives you a lot of confidence in reaching that $3 million mark? Is it the JambaGo or is it something else that you guys see?

James D. White

So the first one I'd make, Peter, is that JambaGo was a standalone division for us and a standalone growth stream into the company, and Karen laid out what can be expected there and that's in addition to CPG. The CPG business is built on the expectation that we will accelerate distribution. We'll go from the current 35,000 or so points of retail distribution to about 50,000 by year end. And we also have other things in the pipeline that will build on that platform moving forward. The Q1 performance is a doubling of CPG revenue versus a year ago, and you'll see that accelerate over the balance of the year. So again, we're very comfortable with the expectations that, we call it, for $3 million and royalty revenues on CPG.

Operator

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

Chris Krueger - Northland Securities Inc., Research Division

Looking at International business, has that pipeline changed at all? And are there -- do you have expectations to add more partners in new countries this year?

James D. White

So I'll start with your second question first. We do expect to add a partner to our new markets in 2012 as we've talked about late last year, and we are exactly on plan for international. We finished last year with roughly 20 units, and we expect to double that and get close to about 40 units for the full year. And as I said previously, we expect to double our presence internationally for the foreseeable future. And so from 20, to 40, to 80, to 160 so that will grow nicely over time and it'll be a combination of us building out the 3 existing markets and adding new markets to the mix that will grow moving forward. We think the full potential is at least 1,000 units. And as a reminder, we've got a pipeline of 320 units across South Korea, which is 200 units, the Philippines, which is 40 units and Canada which has 80 units today.

Chris Krueger - Northland Securities Inc., Research Division

All right. A couple of weeks ago, you announced changes to your energy drink ownership, I guess, of the patents and all that. Can you just go over to your plan for the energy drink? How would you look at that?

James D. White

I think you should -- and really as a broader strategy from a CPG perspective. And what we always said is, once we got through the turnaround for the company that you would see us leverage joint ventures, you'd see us leverage some straight ownership where we find the right co-packer or co-manufacturer and would lead the go-to-market strategy ourselves. This is the case where we found an opportunity and reached agreement with Nestlé to buy back our IP. And you'll see us accelerate our energy drink business in a couple of ways. One, you'll see us expand out of the Northeast and you will see us take really full control for the P&L of that business, which ultimately will allow us to control how we expand that business, but longer term, it will also give us a greater share of the profit pool moving forward. So we're bullish on the category both for the size of the category and really, the uniqueness of the Jamba energy proposition, which we think stands uniquely in a better for use space and a really good [ph] category.

Operator

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

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

First question, a macro question, whenever you see the type of same store sales [indiscernible] you put up, a question comes out is, do you think you're getting the market share or is the pie increasing or a combination of both, can you speak to the -- what you think is going on in there?

James D. White

We think there are 2 things in the macro environment as it relates to Jamba. One, we think the demand is increasing for better-for-you products, so we think we sit in a sweet spot in the industry. As the consumer is getting healthier, there is a high interest in innovative, relevant, better-for-you products so we think we'd benefit there. And I think importantly, we significantly accelerated our innovation agenda over the course of the last 2 or 3 years. Karen mentioned that we have intentionally built products that we view as more relevant from a consumer perspective like our Steel Cut Oatmeal platform. We've added innovative items in our smoothie lineup and our fresh juices, and we think all those things position us to be a lot more relevant. The better-for-you consumer, and we've created products that have a more habitual, more loyal nature to the products and that was the big driver in our traffic the last couple of quarters.

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

Follow on, a little bit more getting into details here in this the quarter. It looks like you are more efficient with promoting than the prior year meaning that, I think, if I remember correctly, you had a [indiscernible] that was more across the board on menu and this year was a bit more concentrated. If that's truly the case, did you find that being a little bit more efficient and incremental to margins?

James D. White

We've been very surgical since the middle of last year from a promotional perspective. We've been far less promotional. You'll see us stay and in that kind of mode. We're really surgical in terms of promotion and discounting. One of the things in this quarter that was really effective was the sweepstakes that we've launched, which was really helpful to drive traffic really across the system and we, system wide, had just really balanced performance. If you look at the overall comp store sales for the system at plus 11.6%, we had every one of our top franchise partners that have positive same-store sales for the quarter and then the traffic increases speak for themselves.

Operator

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

Peter Mahon - Dougherty & Company LLC, Research Division

Just one follow-up question. In terms of just expense control. Obviously, Q1 was a good momentum from that perspective. Do you feel like there are additional levers you can pull to leverage those costs even further, especially like fiscal operating line. Is that actually, I think, the only one that actually increased year-over-year on percentage of revenues? Do you guys still feel that there's room from that perspective?

James D. White

You'll see us continue to make progress on the labor line in particular, and we continue to manage the cost of goods line. Therefore, you'll see us continue to improve that margin performance from a four-wall perspective.

Operator

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

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

Just had a question on the JambaGo. First is, I'm just wondering how many units were open at the end of the quarter, and then maybe just talk a little bit about the initial results and how things are going?

James D. White

Karen, can you answer the units that were open at the quarter close?

Karen L. Luey

Sure, Kurt. We had about somewhere between 88 to 90 units open at the end of the quarter close, and those were primarily in the K-12 schools today.

James D. White

And what we expect to have, Kurt, is 400 to 500 units. So by the time we finish up the year, for us this is really our initial pilot year with this idea. It holds great promise. We've seen significant momentum-building in schools in terms of the demand for these units, and we're learning as we go but we've been very pleased with the early results. And Karen, would you reiterate the guidance that we've given in terms of the results we expect in 2012?

Karen L. Luey

Yes. Kirk, as you know, we're just starting to build the foundation for JambaGo and as such, we've estimated that revenue stream as we build will result in about a $700,000 JambaGo revenue for 2012. That will help us stepladder in 2013 results with a foundation of somewhere between 400 and 500 units to start off 2013 with.

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

Okay. Then unrelated, just on the raw material cost, just wondering what you're seeing there. And if there's any interest still kind of going through to the process of, like reformulating stuff to get around anything that's kind of higher cost related to it?

James D. White

Really for us, we continue to focus on ways to take out cost and manage expenses with discipline, especially in the supply chain and cost of goods area. But we're still good with our guidance that we've provided for the year to be in the 24% to 25% range. And we'll beat it if we can, but we're very comfortable with the numbers that was laid out after the year there.

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

Just one final, I guess, on the new products that you come out with. How are they priced as far as profit margins? Are they generally -- do you take into account, put them at a higher margin?

James D. White

It really depends on the item. Overall, we're looking to add things that are accretive from a business and margin perspective. The better-for-you items are going to be at the higher end of our smoothie portfolio. And obviously, the more fresh juices that we'd sell, the more profitability we drive overall. But most importantly, the items that we're adding are just far more relevant to consumers so we're getting the traffic increases from the repeat visits.

Operator

And I show no further questions in queue at, this, time. Management, please continue with closing remarks.

James D. White

So in closing, we had a fantastic quarter. We had same-store sales that were at the top of this industry's performance, and I'm pleased to be able to stand before you and say that we expect strong performance in Q2. And we are excited about the momentum-building from a consumer perspective around the better-for-you products and we think Jamba is one of the clearer ways to play the healthy lifestyle momentum that is happening. So thanks and we look forward to seeing you in the second quarter.

Operator

Ladies and gentlemen, that concludes our call this afternoon. We thank you very much for your participation. You may now disconnect.

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