Jamba Offers 38% Upside To The Investors

| About: Jamba, Inc. (JMBA)
This article is now exclusive for PRO subscribers.


Jamba’s latest quarter brought declining revenue as the company moves away to a franchise-based model.

The transition is going to benefit Jamba in the longer run since franchises offer less risk and a higher margin for growth.

Introduction of freshly-squeezed juice service to all stores will further increase comparable-sales growth rate by 300-400 bps.

Bright future prospects indicate a buy rating.

Jamba Inc (NASDAQ:JMBA) share value has gone up by nearly 10% in a year. The company owns and franchises food stores. It sells blended-to-order fruit smoothies, squeezed-to-order juices, and snacks. Although the present fundamentals, such as the return on equity and the net margin, are all below the industry's level, Jamba has a lot of growth to offer and I will be discussing this in the present article. But before we move forward, let's see how Jamba performed during its latest quarter.

Second Quarter

During the period, Jamba's revenue declined by 6.1% to $64.4 million on a year-over-year basis. The company also missed the analysts' estimate slightly by 9 bps. However, the decline could not be attributed to declining comparable sales rate or poor industry conditions. In fact, comparable-store sales growth rate was positive at 2.5%. The decrease in revenue primarily resulted from the reduction in the number of company-owned stores due to Jamba's refranchising strategy.

On the other hand, the total costs and the operating expenses went down by 6% to $57.6 million, primarily due to a decrease in commodity costs. This was partially offset by a shift in product mix, owing to the expansion of whole food blending and fresh-squeezed juice offerings. As a result, the company's operating margin improved by 60 bps to 10.3%. The net result was that Jamba delivered adjusted earnings of 44 cents per share, 22% higher than last year's quarter.

Currently, the company is in the transition phase from the existing company-owned store model to a franchise-based model. As a result, Jamba has been experiencing flat revenues, since the benefit from the emerging franchise model is being offset by the loss of direct revenues that were generated before the closure of company-owned stores. This revenue trend is expected to continue further in the near future as well. However, once the model is fully implemented, investors can expect revenue figures to rise again.

This is because the franchising model is a profitable venture to consider. Franchised stores posted comparable-store sales growth of 2% during the latest period, much higher than last year's growth rate of 1.2%. This implies an increment of more than 65% in the rate. If we consider the growth coming from company-operated stores, the rate increment was far less, that is, only 14%. And most of that increment was due to the higher average check received during the latest quarter.

In other words, franchising offers a larger growth prospect for the company than self-operated stores. The company is moving ahead successfully in establishing its franchise-based model. It is on the track to reach its target, of 60 to 80 store openings, for 2014. During the quarter, Jamba opened 13 domestic and six international franchise-operated stores. No new company-owned stores were added during the quarter. In fact, 16 stores were closed globally.

The franchise model will not only let Jamba extract higher revenue, but will also help in reducing its overall costs and risk. Though the company has no debt at present, a franchise-based model will relieve Jamba from taking on any debt for expansion purpose, since the invested money will come from the clients who want to buy a franchise. Not only this, the success of those restaurants and the risk of failure will be transferred to those clients, with Jamba only receiving a commission on the sales incurred.

Apart from the transition, Jamba is also leveraging a growing demand for its freshly-squeezed juices. During the quarter, the company expanded its juice offering to 120 company-owned stores and 256 franchise stores. This expansion is very likely to bring in additional revenue. This is because Jamba witnessed a 300-400-bps improvement in same-store sales when it ran the juice offering in its testing phase on pilot stores. The company plans to expand the offering company-wide by early 2015. It will also be installing around 1,000 JambaGO machines. JambaGO is a self-service machine that can be installed at cafeterias, schools and convenience stores.

The popularity of Jamba's products could be credited to the demand-creation initiatives taken by the company. While efforts are being made to promote the products, they also reveal how well the expansion will be taken up by the consumers. The company's new loyalty program, which allows users to earn discounts and rewards through mobile, has rocketed from 500,000 new members since the first quarter to 1 million in July.

Other than this, the ISIS mobile wallet has also been a great source of popularity for Jamba. Under the free smoothie and juice promotion, redemptions grew from 270,000 at the end of the first quarter to more than 700,000 by the end of the latest quarter. Advertising plays a key role in establishing a customer base which will last for a very long time. These triple-digit growth rates in sign ups and promotions convey that the expansion, that Jamba is carrying forward, will be a source of higher unit sales when the new offerings will be launched at the remaining stores.

Bottom Line

Temporary decline in revenue is not a major thing to worry about. The transition towards an asset-light model, with greater emphasis on franchised stores, will considerably lower the company's expenses in the long run. New product launch should be successful on the basis of the tests carried out. This should drive the future top-line growth for Jamba.

The company has also reached to a consulting and outsourcing agreement with Capgemini as part of a plan to cut 10-20% of its general and administrative expenses by the next year. The cumulative result should be a higher earnings figure. I can quantify Jamba's upside potential by using the industry's P/E ratio of 28.5x and consensus analyst EPS estimate of 71 cents for 2015. The stock's intrinsic value is calculated to be $20.2, which represents an upside potential of 38% to the current market price. Based on the present prospects, I give Jamba a strong buy rating.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.