Jamba Still Needs To Prove Itself

| About: Jamba, Inc. (JMBA)
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Jamba's move towards the franchise business model is a step in the right direction.

The company will benefit from such a move although there might be some glitches.

Jamba still needs to show consistent profitability and margin improvements to be considered a good investment.

Jamba, Inc. (NASDAQ:JMBA) is an established juice and beverage brand in a rather fragmented but competitive juice market. It has its heritage in juicing and blending from the day it opened its doors in the 1990s. Since then, the company has expanded via hundreds of stores both on domestic and international fronts.

Over the recent past, Jamba has been converting its company-owned stores to franchise based ones, thus shifting towards what one would call an asset light business model. Jamba closed Q4, with 748 franchise operated stores, 70 company owned stores, and 75 international franchise based stores. Jamba has almost completed realigning its business towards a predominantly franchise model. But is this shift showing desirable results?

Jamba's fourth quarter and financial year 2015 results saw almost 26% lower revenues compared to same period last year. But net income was in the black with a profit of $9.42 million as against a loss of $3.63 million last year. While lower overall operating costs were a welcome change, one-time gains of $21.6 million on asset disposals had its influence on the bottom line as well. Around 179 company-owned stores were sold in the fourth quarter under the franchise model.

While the transition has suppressed revenues by 55.5% to $19.5 million from $43.9 million on y-o-y basis, royalties for the quarter increased by 52.4% from the same period last year. The company also earned on a one-time basis $53.1 million from the sale of 179 stores.

So how does the franchise model help Jamba?

Hmm. Well, there comes a point of time when certain businesses find it difficult to grow beyond a certain point. These can be due to a variety of reasons of which capital constraints and managerial constraints are predominant ones. Don't get me wrong here, I'm not accusing Jamba of managerial inefficiency. Having said that, no matter how skilled or how good a management's intentions may be, businesses that increase in size and complexity are inherently harder to manage, control and maintain. In such cases, the best course of action would be to delegate authority and responsibility. Now even that has its limitations because not only do you have a larger and more complex business to look over, you have the additional burden of higher managerial costs. Let's face it, skilled managers are hard to find and hard to retain. So the best solution (in Jamba's case) is to just sell the business units (stores) and operate on a predominantly franchise model.

Now when the company does that, it saves money on many of the overhead costs. Rentals, employee salaries, bonuses and other administrative costs all but vanish. Instead of directly benefiting from sales, royalties are charged to each franchise outlet for the use of the company's brand, its line of products, its store design and layout schemes.

Furthermore, and more importantly, the asset-light approach gives Jamba much more headroom for expansion activities in future while it continues to earn a decent amount of revenue via royalties from its franchise network.

Improving customer experience

Jamba has come a long way from being just a neighborhood run-of-the-mill juice bar chain. In November last year, the company announced that it would open a one of a kind concept store that would include an interactive bar area with a wifi-enabled space for customers. The store would also boast a modernized test kitchen along with other innovative concepts that would be given a pilot run to test customer feedback before being implemented in other stores. The test kitchen allows Jamba to try new offerings with real time feedback from customers who visit the store. This greatly helps Jamba in product development and understanding consumer behavior.

Another important step taken by the company recently was the launch of its Mobile Order Ahead App for customers to 'Skip the Line' and order directly from their smartphones.

According to Julie S Washington, Jamba's chief marketing and innovation officer, "Mobile has become a part of doing business that guests expect from Jamba, and the mobile app will provide us with additional data about app users and their purchase behaviour which will enable us to provide more targeted messaging and drive increased revenue".

Jamba over the years has made sure that it appeals to the health conscious consumer with a wide variety of healthy juice blends, beverages and smoothies. The company offers cold pressed juices without using heat to retain the maximum nutrients in the blend. Organic or non-GMO produce is also used in the manufacture of these juices.

As soon as the fourth quarter earnings were reported, the stock reacted in a negative way and the share price declined by 0.40% the very next day. But after a few trading days the stock has recovered to some extent above $12.

Take Away

We still need to see how well the asset-light franchise model will work for Jamba. In such a business model, there will be significant challenges to manage the brand and the quality of food, as there might be diminished vigilance on quality compared to company owned stores.

Jamba has certainly positioned itself for continued expansion both on the domestic front as well as in overseas markets. But despite Jamba's efforts, I remain a skeptic. Its still too early to jump to conclusions about the effectiveness of Jamba's strategy. While the $40 million worth of stock repurchases might inspire some bit of confidence in the scrip. I would still like to see more consistency in profitability and improving margins before I put any of my money on Jamba.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.