Jamba Juice: 'From Smoothie Company to Lifestyle Brand'

Includes: JMBA, MCD, PEP
by: Alex Morris

Jamba Juice (NASDAQ:JMBA) is a company with a lot going on in the pipeline right now (see earnings results here and earnings call transcript here). A look at the one year chart says something that I think correlates with the story: there is a lot of uncertainty about what will happen with this business looking forward. As noted by Monish Pabrai in “The Dhandho Investor”, we are in search of the low-risk, high-uncertainty combination, which gives us our most sought after coin-toss odds. Before we can consider looking at risk, we first need to understand the direction that the company is heading in.

After James White joined the company as CEO in November 2008, things started changing quickly at JMBA; the culmination of this change is the BLEND plan. As noted in the 10-K, “The BLEND Plan is the Company’s strategic plan to transform the Jamba Juice brand from a made-to-order smoothie company to a healthy, active lifestyle brand.” As noted by Mr. White on the call, the plans priorities:

are focused on reducing cost and expenses, ensuring a customer-first operationally-focused service culture, increasing food and day part offerings, accelerating the development of our franchise system, including the completion of our refranchising initiatives, and building a licensing growth platform.

For people interested in how this transformation has been made over the past two years, let’s look at how they have implemented the key changes as a means of building long term shareholder value.

One big change, as noted in BLEND, is the shift to franchised locations. At the end of 2008, the company had 729 Jamba Juice locations, 511 of which were company owned, and 218 that were franchised. This has been a top priority for management this year, and the company has refranchised 116 locations since the inception of the program through Q3 2010. As noted by CFO Karen Luey on the call, the company expects to reach a 60-40 franchised to company owned mix by the end of the year, as well as the addition of 50-70 units in 2011, 80% of which will be franchised. This also includes two international franchising agreements, which are setup for a potential 200 stores in South Korea over the next 10 years and 125 in Canada. Mrs. Luey said that this transition has taken risk out of our business model, increased cash on the balance sheet, and allowed reinvestment in the business, all of which move JMBA in the right direction towards reaching the BLEND goals. While this change has significantly affected the income statement, I’m going to avoid the financials for the time being, and instead focus on the change from a smoothie company to lifestyle brand in this article.

Another important part of the shift is turning Jamba Juice into a brand, through which the company can develop CPG’s. As noted by Mr. White on the call,

We renewed our relationship with Nestlé USA to develop an exciting line of all-natural fruit-based beverages in the fast-growing energy drinks segment (currently $8.5 billion in sales). We announced three other license agreements for branded Jamba consumer products, bringing our total to nine.

The Nestle (OTCPK:NSRGY) relationship is a revival of a licensing agreement between the two companies that was inked in December 2007, but suspended a year later when Nestle voluntarily stopped shipment of the Jamba RTD beverages due to production issues. Jamba Juice has also teamed up with PepsiCo (NYSE:PEP) to launch a line of coconut water fruit juice blends, and with a couple smaller companies to launch products like smoothie kits and fruit cup shots. Management provided insight on their view of the future in this business segment, saying

we expect our consumer packaged goods licensing income stream to contribute 5% to 10% of our overall consolidated EBITDA results for the full year. Overtime, this high margin segment will become a significant contributor to our profitability.

The other most notable change in Jamba Juice’s business model is the push into complementary product categories. The thing about smoothies is that they don’t sell too well under certain conditions; for example, when it is the heart of winter and it’s snowing outside. In the beverage category, the company has moved to fill this void, and currently offers made-to-order organic hot coffee and organic hot tea offerings in more than half their stores. On top of that, the oatmeal platform is offered in over 600 stores (according to Mr. White, “arguably the best in the marketplace”), and some component of Grab-n-Go (which includes wraps, salads, sandwiches, and flatbreads) is offered in over 300 units. Along with those new additions, the company has continued to extend their original product line by introducing five new smoothies in the last six months (two coffee, three Superfruit), which have gained “excellent consumer acceptance”. The company commented on the move by McDonald’s (NYSE:MCD) in the category, saying that strong promotion by MCD since inception has negatively impacted comparable sales, but that in the long term they still believe it will drive sales across the category, from which they will see a positive impact.

Collectively, the work behind the changes at Jamba Juice appears to be a daunting task. Despite the difficulty, Mr. White closed the Q3 call with a vote of confidence, saying “If you look at all the promises the management team has made, we will deliver within range of our Q2 adjusted guidance against every element of the plan.” Be on the lookout for a comprehensive analysis of the financial statements and valuation so we can intelligently contemplate opening a position in JMBA.

Disclosure: Long PEP, no other positions