Rumors of Jamba Juice's Demise Greatly Overstated

Jamba Juice (JMBA) is a BUY, especially for a private equity group with a longer-term view than the public markets, or for Starbucks (SBUX) or another industry buyer that can help develop the long-term opportunity in this space.  Jamba Juice certainly has its challenges, but for somebody that understands these challenges, a price of about $1.00 per share represents the opportunity to own a top “healthy lifestyle” brand, and the leader in the made-to-order smoothie market, for under 2x store-level cash flow (and a very attractive pro forma EBITDA multiple, as described below).

Why do I care about Jamba? I am a former director of Robeks, a 150-store premium smoothie franchise system, and I have a stake in the success of Robeks, and thus the success of the whole category, so of course I care about the category leader, Jamba Juice (yes, I’m also long JMBA stock).  From my due diligence before leading my former employer’s investment in Robeks, and my experience as a Robeks director, I have learned a lot about the smoothie category, and am in a unique position to evaluate Jamba.  First, let’s recap briefly what Jamba Juice is, then let’s take a look at the numbers.  Next, we’ll look at some of the big picture challenges facing the company.  At the end of this piece, I’ll give my views on what Jamba’s management should do to ensure that the company has an enduring reason for being.

Category Leader in Made-to-Order Smoothies

Jamba is the category-defining leader in made-to-order smoothies - more than 3x the size of its closest competitors: Smoothie King and Freshens. This is thanks in large part to average unit revenues that are far above industry norms.  Jamba had 736 locations as of July 15, 2008 (518 company-owned), and $317 million in revenue for the year ended 1/1/08.   System-wide revenue is about $450 million.

Healthy Lifestyle Brand

While Jamba stores often do not have the seating capacity and café ambiance of a Starbucks, the chain comes the closest to delivering a Starbucks-like experience - but with a “healthy lifestyle” positioning.  The company delivers a consistent, premium, fun and healthy product and in-store experience for its customers.  An increasing focus on healthy living is here to stay, and Jamba can be a leader.

To be successful, Jamba needs to make the smoothie the centerpiece of its healthy lifestyle strategy, and position the smoothie as a healthy alternative to a meal, rather than a healthy alternative to a milkshake.  As a meal substitute, a $6 smoothie is a good value; as a treat, a $6 smoothie is an overpriced indulgence and the first thing to go when consumers are saving their pennies.  Jamba is ahead of the pack in recognizing this, but has a long way to go in executing it (more on this later).

Jamba by the Numbers

Here is my calculation of JMBA’s enterprise value at $1.00 per share (amounts in thousands): *

click to enlarge

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* Since the bulk of its employee options are way underwater, I assume that 2.6 million shares (5% of the total) eventually will be issued so as not to lose key employees (just a SWAG).  On 9/11/08, Jamba issued 2MM common shares to affiliates of Victory Park Management (”VPM”) in connection with the issuance of $25MM in senior notes to VPM.  Rather than adding this to outstanding shares for valuation purposes, I view this as a $3MM liability, since the shares are subject to a put-call arrangement at $1.50/share.  The $10MM reserve is a big SWAG.

By my math, at $1.00 per share, the company trades at 1.6x store-level EBITDA, 4.0x my estimate of run-rate EBITDA, and 2.9x my estimate of pro-forma run-rate EBITDA reflecting all of management’s planned cost cuts.  Imagine how accretive this would be for Starbucks, which trades at 9x EBITDA! (For comparison, BWLD trades at 13x EBITDA, PEET trades at 12.5x EBITDA, KONA and PFCB at 6.8x EBITDA).

Below is my estimate of Jamba’s normalized EBITDA (1).

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(1) Figures are from the company’s latest 10-K and 10-Q.  The pro forma cost cut figure is from the company’s 8/28/08 earnings call, a transcript of which can be found at Seeking Alpha.  On the call, management said that $9MM of a planned $15MM in annualized cost cuts had already been implemented. (2) Includes charges for trademark impairment, store impairment, lease termination, asset disposal, and equity loss on JVs. (3) Figure for FYE 1/08 is “store-level operating income” as reported in the company’s 3/13/08 earnings release.

I can see why the stock has been trashed.  How often do you see an operating loss equal to a company’s revenue?  But I assume that many can look past the intangibles write-offs and focus on EBITDA.  Unfortunately, LTM pro forma normalized EBITDA is still negative!  But at least the red is coming from 2007; 2008’s figure is $8.5MM.  Back-of-the-envelope, I estimate run-rate EBITDA to be $15MM, or just under 2x normalized EBITDA for YTD 7/08.  (This estimate assumes that continuing negative same-store traffic offsets any short-term boost from the company’s deal with Nestle for bottled smoothies - which looks promising).  To get pro-forma post-expense-cut EBITDA, I add another $6MM - the difference between management’s planned $15MM of expense cuts and the $9MM of cuts made to date - to get $21MM of EBITDA.  Today’s enterprise value is 2.9x this figure.  Yes, there is a leap of faith in the $21MM number, but there is no leap of faith in the $37MM of store-level cash flow.

Competition, and Execution Risk

Of course, 3x EBITDA or 1.6x store-level cash flow is only a good deal if one thinks there is a growth story here.  Restarting growth is subject to big competitive and execution risks. The market has definitely become more competitive.  The company and investors are concerned about the wave of new competition from QSRs and coffee chains, including Jack-in-the-Box, Taco Bell, McDonald’s, Dunkin’ Donuts, Starbucks and more.  Seeing this competition invites a long-standing question for the smoothie category: do smoothies really deserve their own store or are they just a product line for another store concept? The answer may be that a basic smoothie is more of a product line, no more deserving of it’s own store than a milkshake.

Smoothie shop chains have all struggled with the fact that while some customers will have a smoothie for breakfast or a light lunch, most people seem to view smoothies as an a between-meal snack, treat or pick-me-up.  In order to get enough traffic to drive sustainable store-level cash flow, and level-out seasonality, many stores have resorted to selling other traditional food items, such as salads, sandwiches, soups, baked goods and coffee.

This is the wrong strategy. As smoothie shops begin to offer the same food items as QSRs and coffee shops, they expose themselves to competition as QSRs and coffee shops offer smoothies.  If a smoothie shop brings in more traditional mealtime food for those day parts, they reinforce the notion that a smoothie is not a meal.  Instead, they need to evolve the smoothie product and experience so that customers recognize that it can be a healthy meal-in-a-cup rather than just a treat.  Any additional food items should really be unique, not things offered at Jack-in-the-Box.

If fresh smoothie chains don’t move in this direction, the QSRs and coffee chains will eat their lunch, or perhaps I should say drink their smoothies….  It’s a lot easier for a QSR or quick-casual chain with an already successful business model to add smoothies than for a smoothie chain to fix its business model by inventing a whole QSR or quick casual business.  Frequent smoothie drinkers, even in fitness-crazed California, generally say that a smoothie is a smoothie is a smoothie.  And, sweet flavors sell well.  The QSRs are leveraging this and will take a chunk of the market for sweet, treat-like smoothies.

This will put some smoothie chains out of business, but Jamba has a chance to thrive as a destination for healthy, on-the-go meals or mini-meals that are NOT traditional QSR fare.  After experimenting with soups and other more traditional meal items over many years, Jamba finally seems to get this.  Recently, they introduced breakfast smoothies, which, while not executed as well as they could be, represent a move in the right direction (smoothie-as-a-meal).  With their new menus, they also introduced a “Functionals” line of pre-boosted smoothies grouped by functional benefit.  These are positive steps, but the next CEO of Jamba will need to take this much further, or see much more of Jamba’s business go to the burger and coffee chains.

Starbucks apparently sees it the same way, and has put a health and nutrition spin on its smoothie offering rather than competing directly with treat-like smoothies from QSRs.  They call their offering a “Vivano” rather than a smoothie, and incorporate whey protein (instead of just offering it as a “boost”) to make it more of a meal replacement.  Unfortunately for them, they have not quite gotten the taste thing figured out yet.  Jamba should be able to beat Starbucks in both health and taste.

The Bottom Line

Jamba has a big execution challenge ahead of it - made worse by the fact that they don’t have a permanent CEO!  Given the huge amount of uncertainty right now, a price of $1.00 is not unreasonable, but once a permanent CEO is hired, I would value the business closer to 6x pro forma run-rate EBITDA, or 3x store-level EBITDA, which is about $2.00 per share.  This would still be a discount to the public comparables because of the fundamental issue that they have never been able to get to a stable, proven, optimized business model that can simply be “stamped out” in new stores.  Instead, they still need to figure out exactly how to be the “healthy lifestyle” chain they say they want to be. Until they get a new CEO, it will be hard to handicap their ability to pull this off.  But Jamba is the best positioned of all the smoothie chains to succeed with this strategy.  They have built a very strong brand, which already stands for the things the company wants to be.  My guess is that the answers are already somewhere in Jamba’s product development pipeline and that the company just needs the leadership to execute them.  Once Jamba can point to a clear vision for how they create a compelling value proposition for the consumer and a sustainable business model, I would value the business at closer to the comps, which would equate to about $3.00 a share.

At any valuation, Jamba really should not be a public company.  It’s too small and has too much left to figure out.  Instead of spending close to $7 million on accounting and legal fees (not all, but much of which is a cost of being public), the company should reinvest this in growth.  A smart acquirer like a Starbucks, or a PE firm with the right in-house talent pool, could get to $3.00 a share of value quickly, so they would be well rewarded for purchasing Jamba at even a 100% premium to today’s price.

PS - My 2 Cents on What Jamba Should Do

1. Make the breakfast smoothies easier to eat.  The current breakfast options are served with a straw that is too narrow, and a spoon.  Who wants to eat a smoothie with a spoon?!  One needs to be able to finish their smoothie while driving and not get in an accident.  Breakfast smoothies are a great opportunity to demonstrate that one can indeed have a smoothie for a meal, but you need to deliver or you’ve done more harm than good.

2. Add more high-protein smoothie options, and use more ingredients that promote satiety, such as natural inulin and fruit fibers, so that people feel full and satisfied after a smoothie to the same extent that they would after a more traditional meal.  These should be positioned on the menu as meals.

3. Offer coffee smoothies, and maybe even coffee.  A process exists for retaining more of the natural antioxidants of coffee after the roasting process.  Jamba could serve a proprietary, organic, high-antioxidant coffee and stay true to its brand image.

4. Add more proprietary savory food items.  The proprietary food needs to taste better!  As long as there are some healthy hooks, such as omega-3 fats, heart-healthy amounts of fiber, or high antioxidant levels, it should do well.  Consumers love to rationalize that something that tastes decadent is actually good for them.  And, at least in moderation, it can actually be true!

5. Get some meal-replacement items into the Nestle line-up.  Right now, the bottled product takes the brand in too much of the sweet, treat direction.

Disclosure: Long JMBA

Comments

[ponto:]

A fresh smoothie with protein is a meal-- adding the protein is key. The in store experience is seeing the fruit ingredients processed from raw to finished product and knowing your contents without reading a label on a bottle.

2008 Sep 26 11:24 AM

[livesinhiscar:]

I agree, a smoothie never cuts is as a meal for me either.
I've tried that.
It runs through your system quickly and you are hungry soon after.

2008 Sep 26 12:14 PM

[abc-123:]

i would love to see them partner up with someone like weight watchers. i think it would be a great marketing move. i would also like to see some television advertising (besides the RTD) to promote said partnership and show how their product is better/healthier than anything SBUX, Jack, T-belll, etc tries to come up with. They also need to come up with something warm for the winter months, particularly in Chicago and NYC. I believe JMBA understands that the smoothie is and shall be the centerpiece of their business but i think it's foolish if they don't leverage their brand to add other healthy non-smoothie menu options to get more out of the consumer's wallet with each visit. Consumers go to Taco Bell to get quick/cheap mexican food, when TB offers (bad) smoothies some customers will choose to buy. Consumers go to JMBA to get smoothies, if they see other good/healthy non-smoothie products they will buy those. Smart menu expansion is a tried and true method for growing comps.

2008 Sep 26 02:19 PM

[singh:]

maybe they can add weight losssmoothies it'll be HUGE like ZTM ingredient

2008 Sep 27 11:15 AM

[PeteK:]

For a dollar a share, its worth a buy.
With more promotions, it will be a hit.

2008 Sep 28 02:38 AM

[Harmonious:]

AND FRANCHISE THOSE STORES!! RAY KROC HAD IT RIGHT!

2008 Sep 28 03:33 PM

[Harmonious:]

KEEP NO MORE THAN 10% as Company owned Stores, and roll it out worldwide!

2008 Sep 28 03:34 PM

[Michael Dem...:]

The difference between Ray Kroc and Starbucks is...McDonald's owned the underlying real estate. Jamba leases its stores. Simply refranchising everything doesn't solve the operational issues that need to be addressed. Great write-up John. I appreciated your thoughts on meal replacement vs. snacks. Jamba really needs to re-think its food offerings and make them fit the healthy lifestyle. Pretzels and bread are simply an additional carb. In my opinion, they should partner with a brand like Kashi and introduce a whole grain product -- then sell a smoothie + a kashi treat as a meal deal. Or maybe a smoothie and two hard boiled eggs as a meal deal. This combination should be a functional meal replacement that caters to healthy people who don't want to add additional refined carbs in addition to a smoothie. I think they are doing so well with their no sugar added line b/c healthy people, who go to Jamba, know that sugar and lots of carbs are bad for you, unless it is pure fruit/veggies.

2008 Sep 29 09:57 AM

[KnowsJamba:]

I am a former very senior officer who grew this brand early on. Let me point out a few facts -
1. Sugar hit does not last more than 3 hours. After having it for lunch for three years, I can assure you that it is NOT a meal.
2. Mastication feel is important for meal replacement. Jambolas (1998) and JambaBreads failed to achieve that.
3. Soup (1999) with steam heaters was tried but did not work. Too nutritious but did not taste good. Not enough fat.
I do not see a way for an independent smoothie chain to make it long term. Time to partner with somebody real. Not like the old partnership with Howard Schultz of SBUX or John Mackey of Whole Foods. That was a joke.

2008 Oct 03 01:56 AM

[knows Smoot...:]

Regarding the recommendations for Jamba -- there is a Smoothie chain already accomplished at 3 of the 5 items listed. The focus should be on the word ACCOMPLISHED. Its name is Smoothie King. Very big in Floriday, Not big in California but it does have a presence. I am interested if Jamba is recession proof - if California hits 9% unemployment how do the numbers change? Given CA is Jamba's home and primary market. For a private venture capital firm won't there be a lot better and more "sure things" than Jamba at $3 a share? Where will the capital for expansion come from? At what interest rates?

2008 Oct 04 06:18 PM

[Jambasinking:]

Jamba Juice is dying. Dump the stock immediately. If you don't trust that statement, try walking into any Jamba Juice store at traditional lunch rush time. 1 in 10 stores will actually have customers. This company has made some very stupid moves and has now placed itself into a freshly painted corner. No CEO, no positive cash flow, no major traditional marketing, they reported a Q2 2008 loss of 89 million, last years profit was at -200 million, and they are cannibalizing their own product by offering it bottled in every grocery store possible.

This stock is currently bouncing from 50 cents to 65 cents. SELL SELL SELL. I give it four to six months until bankruptcy, and I doubt any other QSR will buy them knowing how bad a stand alone smoothie chain idea is. Too little profit, and too much overhead. Bad management and incorporation has doomed this company. Sell NOW!!

2008 Oct 06 07:39 PM

[Jambvestor:]

The price of virtually every commodity is coming down signficantly. What does this do for Jamba over the next 3-6 months?

2008 Oct 13 01:22 AM

[steelblue:]

Your proclamation that JJ is 3x the size of privately held Smoothie King early in your review is inaccurate. In fact, with JMBA's recent regression, they are falling back towards SKFI rapidly. JMBA is less than twice the size of the entire Smoothie King enterprise, when you consider franchisee activity.

The two companies do not compare well, as SKFI is entirely a franchise operation, while JMBA is mostly corporate, with a few franchisees through acquisition of smaller chains and some co-branding efforts with Safeway and others. But JMBA remains overwhelmingly corporate owned.

But the main reason that JMBA is NOT positioned to succeed is that they fail to deliver the best product in their niche - several competitors have superior products, and they fail to deliver the promise of healthier food choices - again, some competitors actually deliver the healthier choices that JMBA only promises. Although, from a pure marketing standpoint, they are clearly the industry leader. How long will the buying public be fooled by JMBA's product?

Feb 05 08:59 PM