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Jamba (NASDAQ:JMBA)

Q2 2012 Earnings Call

August 01, 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

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

Chris Krueger - Northland Capital Markets, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Jamba, Inc. Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to 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 second quarter financial results. James will follow with an update on our BLEND Plan 2.0 initiative 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 August 22, 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, and certain statements of our expectation 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 revision 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, welcome to our second quarter call. On our last earnings call, I said that increases in our same-store sales were continuing in the start of our second quarter. For the second quarter though, same-store sales gains position Jamba as a leader in our peer group, with year-to-date performance that led us to increase our guidance for 2012. So we have some good results to review today. I'll highlight some of the quarterly accomplishments and then expand on a few of them later.

Our same-store sales now have been positive for 7 consecutive quarters for company-owned stores and 2 full years for our franchise stores. The increases in Q2 were 5.1% for company stores, 6.4% for franchise units. Systemwide, the increase was 5.7%. Both improved traffic and higher average check drove the increases in all day parts. The store profitability improved by 270 basis points to 24.3%. Our balance sheet remains strong with 0 debt and almost $29 million in cash. All strategic initiatives in our BLEND Plan 2.0 are in place and helping accelerate our growth.

Product and menu innovation move forward significantly around our expanded Make It Light, line-up of lower calorie smoothies, the return of our better-for-you Fruit Refresher beverages made with whole fruit and coconut water, featuring a summertime watermelon flavor and our expanded offering of fresh juice blends. We have 130 locations served by JambaGo units at the end of the second quarter. We're now accelerating this initiative and plan 400 to 500 by year end. Our milestone partnership with the National Dairy Council resulted in a fruit and dairy beverage for K-12 schools that combines the benefits of fat-free milk with real fruit and a naturally sweetened great-tasting smoothie.

Our target for JambaGo now has moved up to 1,500 by the end of 2013. Our international units have reached 30 and are on track to reach our annual target of 10 to 15 locations. Our CPG platform is now strengthened with our acquisition of the intellectual property and planned relaunch of Jamba Energy and the opportunistic expansion of Talbott Teas. CPG revenue is on track to reach around $3 million this year. Our unrelenting focus on taking cost 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. 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 August 2, 2012, will only include comparisons against prior-year GAAP results. The pro forma results compare the 13-week quarter of 2012 to the comparable 13-week period in 2011. A supplemental schedule was provided in today's press release. I will focus most of my comments on the pro forma comparison. We continue to make progress on strengthening the financial health of our company especially in our core restaurant business and it is reflected in our second quarter results. Our quarter-over-quarter comparisons on both the GAAP and pro forma basis reflects significant improvement in comparable same-store sales, total revenue, 4-wall store margins, adjusted operating profit, and we continue to improve on our bottom-line results.

Our restaurant business is strengthening and it's reflected in our improved of 4-wall store results which includes Company Store revenue less total Company Store expenses of cost of sales, labor, occupancy and other store operating expenses. Our store level profitability on a pro forma basis improved by $2.1 million to $15.1 million or 24.2% of Company Store revenue for the second quarter of 2012. That's compared to $13 million or 21.5% of Company Store revenue from the prior year. The 270 basis point improvement in 4-wall store margin is attributable to our company same-store sales increase of 5.1% and the continued disciplined focus on all expenses.

And as a result of our strong performance by our company and franchise stores, our pro forma adjusted operating profit improved by 280 basis points or $2.5 million to $18.6 million or 28.2% of total revenue from $16.1 million or 25.4% of total revenue in the prior-year same quarter. We feel confident that the full year guidance of adjusted operating profit of 20% to 23% is achievable.

Net income for the second quarter on a pro forma basis improved by $1 million to $4.6 million or $0.05 per diluted share. Total revenue for the second quarter increased 3.7% to $66 million and Company Store revenue increased 3.2% to $62.5 million as compared to the prior-year pro forma quarter. Across our entire system, we showed increases in comparable store sales for the second quarter. Our company comparable store sales increased 5.1% and franchise comparable store sales increased 6.4%. The results of our company comparable store sales increase included a 90-basis point increase in traffic and a 420-basis point increase due to average check.

We continue to accelerate the strategy to expand our menu to create more products that are relevant and habitual to our consumer. During the quarter, we introduced our Make It Light platform which includes 10 classic smoothie flavors with 1/3 less calories in addition to our new juice blend lineup. We've continued to reflect positive same-store sales in all 4 day parts and our attachment rate for beverage with another item was approximately 20% for the second quarter of 2012.

Our franchise and other revenue for the second quarter increased by 13.2% to $3.5 million compared to $3.1 million from the pro forma prior-year quarter. The increase was attributable to royalties related to the increase in franchise comparable store sales and the number of franchise stores. Our CPG revenue was $300,000 for the quarter and we remain on track to achieve our annual guidance of $3 million in CPG revenue.

The outstanding performance for the first half of the year in driving same-store sales and adjusted operating profit, while successfully keeping G&A in line with our budget, resulted in a performance compensation accrual in the second quarter of $2 million. Similar to the last year, our performance compensation plan divides the year into half. This accrual aligns with the overall company budget and our full year guidance for G&A is unchanged.

As we strengthened our overall business, we also began to accelerate our growth initiative by strategically investing in infrastructure and research and development of new opportunities. With the school season about to begin, we deployed additional resources to be able to capture the opportunities with our JambaGo platform. Our presence at the school Nutrition Association in mid-July garnered significant interest and we will have at least 400 to 500 locations by the end of this year.

In the prior-year same quarter, under a similar performance compensation plan, the targets were not achieved, therefore the accrual recorded was $300,000. Compared to the prior year, our base G&A excluding the compensation accrual was slightly better than the prior-year same quarter. For the full year, our effective tax rate is 6.5%, and we continue to have a full valuation allowance against our deferred tax assets.

Our cumulative federal net operating loss at the end of the quarter was $116 million. We can and will utilize our tax NOLs to offset federal and state income taxes. Although we are forecasting to be an Alternative Minimum Tax position, where full NOLs cannot be utilized. Of the $450,000 tax adjustment recorded in the second quarter, about half related to the reversal of the tax benefit recognized in the first quarter.

Our balance sheet remains strong with almost $29 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 investments 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 did use it to collateralize several letters of credit that were formerly collateralized by cash.

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

James D. White

Thanks, Karen. Let me start by saying that our new BLEND Plan 2.0 strategic initiatives are demonstrating their power. As I've mentioned, our strong performance in Q1 and Q2 led us to raise our guidance for the year. We now anticipate same-store sales of 4% to 6%, up from 3% to 5%; and an increase in our adjusted operating profit to 20% to 23%, up from 19% to 22%.

We feel very good about this progress and about our initiatives that 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 global retail growth through new and existing formats; building CPG as a global platform in relevant Jamba categories; and pursuing new ways to reduce cost and increase productivity.

Since these strategies extend the plan that guided us for the last 3 years, we did move quickly from development to marketing with several efforts. As I noted, our lower calorie Make It Light smoothies now offer all 10 of our classic smoothies with 1/3 fewer calories, less sugar and lower carbohydrates. Our Fruit Refreshers with coconut water and whole fruit are a great way to quench thirst, provide hydration and get essential vitamin C. Watermelon is a new summer flavor for our Refreshers, as well as our Yogurt platform. And our fresh juice blends offer fresh squeezed juices with at least 2 full servings of fruit or vegetables in 16 ounces. And there will be more innovative products with good-for-you benefits coming.

During the quarter, we launched the Jamba Healthy Living Council. This advisory team of renowned nutrition and dietary experts will develop nutrition outreach materials and provide input on new menu concepts and healthy choice options for the evolving Jamba product line. Importantly, they will be major contributors in Jamba's effort to fight against obesity and foster healthy active lifestyles. Supporting this effort will be a number of summer promotions highlighted by a summer sweepstakes that offers the chance to join Venus Williams at a major tennis event as the grand prize. We are also deepening the nutritional expertise available to consumers with our unique MBA program, our Masters of Blending Arts. This program advances knowledge of Jamba team members in product nutrition, the benefits of juice and juicing and their expertise in creating custom beverages.

The focus of our Associates and across-the-board initiative, we've developed new systems improved productivity in our stores and labor cost as a percent of sales continue to decrease. We have increased our efforts with innovative technology like PayPal, Google Wallet and Isis. We have significantly improved our customer engagement programs to assure top consumer service and satisfaction and we're encouraging all Associates to become active and engaged in our community efforts that foster active healthy lifestyles.

One of our related efforts is participation in the National 2012 Summer Jobs Plus campaign, a nationwide effort led by President Obama and the Department of Labor to curb youth unemployment. This summer, we're hiring 2,500 youngsters so they can gain the skills and work experience that will help them get started with their careers. Reaching youngsters is also an important aspect of our JambaGo express units that we're placing in K-12 schools. We deployed 130 units by the end of Q2. During the year, our accelerated schedule calls for the deployment of 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 JambaGo represents a win-win-win, it provides great tasting smoothies that children love, a wonderful healthy alternative to fight obesity and a good investment for Jamba. During the quarter, we initiated a collaborative effort with the National Dairy Council to create an entirely new beverage that we announced just last month. It uses our fruit expertise and the Dairy Council's knowledge to combine fat-free milk with nutrient-rich fruit for a naturally sweetened smoothie that's receiving high marks from nutritionists. This innovative product will be added to the JambaGo platform and over time, to our stores and the CPG channels. In addition to schools, JambaGo will also be installed in convenience stores, colleges, entertainment centers and other locations. We now think the number of JambaGo installations could reach 1,500 by the end of 2013.

In addition to new formats, we continue to accelerate our retail growth with the addition of 3 traditional and 4 nontraditional stores in the U.S. Internationally, we added 4 stores in Canada, 1 in South Korea and another in the Philippines. Our international growth has been remarkable, going from 0 to 30 stores in 1.5 years. For 2012, we're on target to open up the 15 units internationally and 40 to 50 in the U.S. We recently signed 8 new franchise development agreements that will broaden our presence in the central and eastern regions of the U.S., adding a total of 32 stores over the next 5 to 7 years.

Beyond our retail growth, we also continue to sharpen our marketing efforts which are doing a better job of focusing on driving traffic, building loyalty and making our brand more relevant to more people. Our revamped menu offerings are supporting food combinations and pairings. These ongoing efforts will be a key contributor to our accelerated growth. We're looking forward to the national relaunch of our All Natural Energy Drink, the expansion of SKUs and our recently acquired premium line of Talbott Tea and CPG revenue increases across the board.

So Q2 was strong and we see good progress ahead. As a result, we did raise our guidance during the quarter. We now expect to deliver positive company comparable store sales of 4% to 6%; achieve adjusted operating profit margins of 20% to 23%; develop 40 to 50 new stores in the U.S. and build up to 15 new stores internationally, plus 400 to 500 JambaGo units; maintain general and administrative expenses flat in dollars with fiscal 2011, excluding performance compensation; and deliver CPG licensing revenue of approximately $3 million. As I said, I'm very pleased with Jamba's results and achievements.

We continue to create new ways to build on our heritage and transform Jamba into a leading, global, healthy lifestyle brand. We have an exceptional brand franchise, focused strategy and talented and disciplined organization. And as I always say, promises made will be kept.

Before I conclude, I'd like to welcome our new partners in the U.S. and around the world to the Jamba family. I also would like to thank 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 that we can open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Peter Mahon with Dougherty and Company.

Peter Mahon - Dougherty & Company LLC, Research Division

Just a couple of follow-up questions. You maintained your guidance of opening somewhere between 55 and 65 stores in the year. Do you have a lot of confidence that the franchisees are going to be able to get hit that target because we're a little under the halfway mark so far for Q2?

James D. White

We're actually very confident with the pipeline that we are looking into for the back half of the year. We clearly believe we'll, in the U.S., finish in the 40 to 50 range and we'll exceed the low end of our guidance internationally of 10 and be much closer to 15 for the year. So we're actually very confident with our view in the pipeline.

Peter Mahon - Dougherty & Company LLC, Research Division

Got it. Great, thank you. And is the majority of that going to be in franchisee? I mean, are you thinking well under 5 company-owned locations?

James D. White

It will be even less. It will be closer to 1 than 5.

Peter Mahon - Dougherty & Company LLC, Research Division

Got it, okay. And then you also reiterated your target of hitting $3 million in CPG revenue. We've had about 600,000 so far this year. What's really -- what gives you confidence in -- that the spigot's going to turn on, whether it be Q3 or Q4, to hit that target? I mean, it just seems like we've been kind of at this level for multiple quarters and what's going to take us to the next level?

James D. White

I'd make 3 points. Much of our CPG business is seasonal, much like the company businesses. You'll see a pickup as we get to the back portion of the year that would mirror in lots of ways the seasonality of the company business. The second is we're just completing the transaction to acquire the IP back on the Energy Drinks and you'll see us relaunch that business and expand towards the West Coast in the fall and then we are building distribution daily on our Talbott Teas acquisition. So we're actually confident that we get to -- right at the target for the year on CPG.

Peter Mahon - Dougherty & Company LLC, Research Division

Got it, okay, great. And just 1 or 2 more from me. You guys have obviously done an excellent job on your cost control, labor and cost of sales specifically have been better than planned. Do you feel that we've got more levers to pull or do you think we've kind of maybe reached kind of the -- our peak efficiency specifically as it relates to cost of sales and labor pieces of the puzzle?

James D. White

I'd make a couple of points as it relates to the cost of goods line. We are very comfortable with the target we laid out for the year which is in the 24% to 25% range, including the pressures that we see across the range of commodities. We're comfortable that we will deliver within plan from that perspective. From a labor perspective, as you recall we started to make significant progress towards the end of Q2 a year ago and for the back half. So we'll have a little bit tougher comparisons. But as we've talked about, we think there is another 100 to 200 basis points that we will continue to work to take out of the labor line and we're building capabilities to really manage labor to get it to the right place at the right time. So we're very confident with the targets that we've laid out from a labor perspective as well.

Peter Mahon - Dougherty & Company LLC, Research Division

Okay, great. And then finally, you -- James, you've kind of rolled out a number of products in the retail line and we've seen a really nice pick-up in average check size. Is there any particular one of those products that you've really seen resonate well with the customer that you can really point to driving the average check needle?

James D. White

There would be 2 areas that I point to. The Steel Cut Oatmeal platform that we launched 3 years ago, hands-down has been the most important launch over the course of last 3.5 years and has done 2 or 3 things for us. One, it really bolstered the very important breakfast day part for the company. That customer is a very habitual customer that will come back on a more routine basis. So that drives much greater frequency. It builds also additional credentials for Jamba in the health and wellness space. The other area that we're particularly proud of is all the innovation around our core smoothie offerings, which started about 18 months ago. And really is not one item, but it's a series of items that are better for you starting with our all-fruit smoothies. We've added fruit and vegetable smoothies. Recently, we've added pro- and prebiotic in a blend format. And then, not a smoothie but the work that we've started to do around juice and juicing is showing some really exciting positive trends as we move into the year.

Operator

Your next question comes from the line of Conrad Lyon with B. Riley and Company.

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

Let's see, a few questions here. James, let me ask you to touch on the labor. You just mentioned about saving 100 to 200 basis points out of labor. Where are you on that and is there a time frame for that?

James D. White

Really, as we look at the full year if we compare 2012 to '11, what we wanted to be able to do for the full year is take 100 to 200 basis point out of the labor line and we're making good progress quarter-over-quarter. Likely beating that through the first half of the year but again, to set the context, we've got much tougher comparisons because we started to make significant improvements against our labor deployment in the second half of last year. Karen, would you add to anything?

Karen L. Luey

Conrad, what I would add to that is, I think in prior calls, we put a stick in the sand there that said our labor was going to be between 29 and 30 for the entire year and we are tracking pretty close to being around that range.

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

Fair enough. Got you. All right. CPG, doors. Can you update us where you are on doors out there?

James D. White

We're about at 35,000 points of retail distribution. What we pointed everybody to for the full year is 50 and we think with all the initiatives that are in the works that we approach the 50,000 benchmark that we threw out at the beginning of the year with the relaunch of Energy and some of the other things we have going on.

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

So question here on the JambaGo. I know you got -- you already said that it won't have much of an impact this year but I think you said you're up to 130 units now. There's got to be something trickling in. Is it -- can you talk about economics here? Is there something we can kind of hang our hat on yet or is it still too early?

James D. White

I think that the couple of numbers that I point you to in this year is from the last call, Karen called out a benchmark of about $700,000 in revenue which is small at this point. But I think the more important number is, we believe we'll have 400 to 500 units seeded at the end of this year, so we'll have the benefit of those 400 to 500 units for the full year. And I think the third and probably most important number, which I think gives a little bit of hint to our confidence, we believe we'll finish 2013 at approaching 1,500 locations, by the end of that year. We'll do a more comprehensive update on the Q3 call embedded in our outlook for the year. And we'll spend a little bit more time walking through how to think about JambaGo on a go-forward basis.

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

Got you. Question just in general from -- just anecdotally. As the JambaGo rolls out, do you see it kind of snowballing? Is there sort of this sentiment that, hey, this is really a cool thing, good thing for schools and word is just getting out there. Is there a sense to that?

James D. White

Really, the big coming-out party for Jamba was at the School Nutrition Association Conference last month, and we would've been really one of the stars of that show. We announced our relationship with the National Dairy Council at that meeting and the fruit combined with a dairy component smoothies/shake, that means additional guidance, was a hit with the school nutrition directors at that conference.

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

Okay. Last question, don't know if you have this, but you mentioned Oatmeal as being a nice driver. Do you have that as a percent of sales?

James D. White

We haven't disclosed that as a percent of sales.

Operator

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

Chris Krueger - Northland Capital Markets, Research Division

Most of my questions have been answered but just on the same-store sales trends throughout the quarter, I don't need specific month-by-month. In general though, were they fairly consistent? Did they accelerate, decelerate. I'm just trying to get a sense of how it may be trending into the third quarter as well. I know we've had a significant heat wave in various parts of the country especially in July. So any commentary on that it will be appreciated.

James D. White

Really for us the trends were relatively balanced ranging from about 3 4 to 4 3 across the 3 periods, the 3 months that would have made up that quarter. So it would've been pretty balanced. If the question you're alluding to is the reports of the toughening of the environment or the change in the consumer, we expect some of that is happening. But that's built into our plans. The other point that I'd make, again on this call we confirmed our outlook for the full year at 4% to 6%. And I think what we would say is you'll see us finish the full year towards the higher end of that range.

Operator

And at this time, I would like to turn the conference back over to Mr. White for closing comments.

James D. White

Thanks. We are thrilled about the performance of the company for Q2 and the first half and we look forward to providing our 2013 outlook with you all on the Q3 call. Thanks for joining us.

Operator

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation. And at this time, you may now disconnect.

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