Jamba Inc. (JMBA) has traditionally been a restaurant retailer serving smoothies and some snacks. The company was hit hard by the recession as its aggressive growth caught up with it. Comparable company store sales declined during the crisis and JMBA underwent a management shake-up.
The new CEO, James White, has revamped the business plan and the company is now focused on being a healthy active lifestyle brand. He has implemented a turnaround that focused on franchise store growth, cost controls and the development of a consumer product platform through licensing deals with leaders in the consumer product space. The market is not fully recognizing the enormous transformation at JMBA.
JMBA shares trade at a meaningful discount to my estimate of a conservatively calculated intrinsic value ($2.60) around 25% higher than the current share price.
Turnaround Initiatives Completed or In-Progress
Company vs. Franchise Stores
New management has focused the company on growing through a franchisee model rather than through company owned stores. The number of company owned stores has declined from 511 in 2008 to 307 in 2011, while franchise store count has gone from 218 in 2008 to 443 in 2011.
Management announced a goal of refranchising 150 company owned stores when it took over and ended up refranchising over 170 stores. While JMBA may show lower top-line growth numbers due to the shift to a franchise model, I believe that the franchise model is vastly superior to the company-store model for a high-growth, top-of-mind healthy brand like JMBA. Franchisees tend to be much better at operations than the food company itself as has been witnessed at Subway, Domino's, and Dunkin Donuts. JMBA expects to have an additional 40 to 50 stores open by the end of the year in the United States.
Management announced early-on that one of the key areas they will target will be costs. They have delivered. By shedding company stores, management has been able to build a tighter network of stores and take advantage of economies. In the most recent quarter, the company's cost of sales and labor equaled 54% of sales. For comparison purposes, in 2008 these expenses totaled 60% of sales. Despite the cost-cutting, comparable store sales have grown for six straight quarters. Menu expansion has also resulted in increased sales in all parts of the day and increased footfalls.
For 2011, the company's stores earned $33.6 million (note - this excludes non-store level expenses). Adjusted operating margin was approximately 20% for the last quarter. Management has said there is more room to cut costs and continues to focus on this area. JMBA recently increased guidance for the year, and now expects adjusted operating profit to be 20%-23% and to grow comparable store sales by about 4%-6% this year.
My valuation model projects sales to increase at 5% this year and 3% going forward. I also project adjusted operating profits at 19% despite guidance being higher.
In addition to the franchising and cost initiative, JMBA has signed agreements to grow internationally in South Korea, Canada and Philippines. The company currently has 25 international locations with an additional 15 locations expected to be open by year end. The South Korea agreement - 200 stores in 10 years - is the largest franchising agreement announced by any restaurant operator in two years. Jamba's partner in South Korea operates Dunkin Donuts brands franchisees too. Partners in Canada and Philippines are of a similar caliber. The company is focusing on 10 priority markets but has not disclosed any other agreements yet.
Consumer Product Platform
The most exciting development at JMBA has been the development of the consumer product licensing platform. JMBA regularly ranks among the top five food or beverage brands in surveys on the healthy-for-you segment. In California, surveys show awareness for Jamba Juice is higher than Starbucks (SBUX) in some markets. To leverage this brand equity, management has entered into licensing agreements to produce and sell consumer products like at home smoothie kits, energy drinks, frozen yogurt, coconut water and energy bars. In total, the company has commercialized 10 product lines and expanded distribution to over 35,000 points of sale and expects to be at 50,000 points of distribution by year-end.
The licensing deals are high-margin flow-through sales for JMBA. The company earns between 3% and 9% in royalties on these deals. In 2011, consumer products recorded $1.1m in licensing revenue. It expects this business to grow rapidly over the next three years. For 2012, the company has projected $3M of royalty revenue increasing to a goal of $20M in royalty revenue on $1bn in product sales by 2015. I project consumer products to deliver only $8M in royalties in 2015.
One of the more innovative proposals that management recently announced was the launch of the JambaGo concept. These are small format versions of JMBA stores where customers can buy a few readymade products at kiosks. Management expects to have about 400 to 500 of these units by year-end. The stores will be located primarily in K-12 schools and also in convenience stores (currently running a pilot with Hess) and other locations (food courts, special event venues). JambaGo revenue for 2012 is expected to be only $700,000. JMBA has described this model as similar to the razor and blade model where the real value is in refilling these kiosks on a repeat business basis. While the kiosk model is very exciting and innovative, the model is still unproven. Consequently, I do not project any revenue or profits from this format.
I believe Jamba Juice management to be absolutely top of the line. Mr. James White and his team have delivered on every projection they have made since taking over. In fact, management has made delivering on promises a central tenet of the turnaround. Every presentation ends with the words "Promises made will be kept" and so far this has held true. The company was honest about the challenges it faced in 2009 and has consistently under-promised and over-delivered on targets throughout the turnaround. The team has been very innovative in leveraging the Jamba brand whether it is with licensing deals or the new JambaGo format. I believe that if management delivers on its latest set of promises, my valuation will prove materially conservative. Management departure on the other hand would materially alter the thesis.
A concern here is that management is very well paid for a company of this size. Management does have options linked to improving performance too.
Debt and Liquidity
The company has no debt and carries a cash balance of approximately $19 million as of quarter end. In addition, the company has an undrawn credit line for $6M. I do not expect liquidity to be a concern in the near future.
- Competition - JMBA has faced increased competition in the last couple of years with Starbucks and McDonald's (MCD) entering the smoothie market. Starbucks recently announced the opening of the Evolution Juice Bar chain. McDonald's entered the smoothie business over a year ago and Jamba has enjoyed growth in comparable store sales every quarter since that date. Starbucks CEO Howard Schultz was an early investor in Jamba Juice and may prove to be a tougher competitor than a fast-food chain not known for healthy good for you products.
- Store Concentration - While JMBA continues to expand the number of stores and into new territories, California remains its largest market with over 50% of stores. Economic conditions in the state have an outsized effect on Jamba's financials.
- Turnaround Risk - The company is undergoing a turnaround and has not yet shown net profits. This investment thus carries considerable risk of a sharp drop in stock prices should anything go even slightly off-plan.
JMBA's current price represents an attractive opportunity for investors to profit from management's turnaround. Achieved and continued increases in comparable store sales coupled with cost controls present downside protection. Franchise store growth, CPG royalty revenue and JambaGo format sales present opportunities for the company to beat estimates and a re-evaluation of the stock price.