JMBA - Jamba Juice

[prunes]

I'm wondering whether any of our turnaround experts have been looking at JMBA. I haven't followed the company especially closely. Clearly the company got itself into trouble.

 

http://media.corporate-ir.net/media_files/irol/19/192409/JMBAAnalystPresentationMarch3-8-12.PDF

 

Slide 10 of this presentation is interesting. It looks like the new CEO has done a good job of improving comps and getting expenses in line.

 

The company also seems to have some interesting plans for future revenue growth: trying to expand its menu for later in the day, the Jamba to go kiosk concept, licensing its brand to consumer products companies.

[hyten1]

i personal don't like the long term prospect of jamba to many well establish players that can satisfy their customers (starbucks, dunkin donuts, mcdonalds etc)

 

but honestly i have not look into it in great detail, but from a quick glance at their financials and with what i stated above I decided to pass.

 

i could be wrong short and long term

 

 

[paologorgo]

I'm wondering whether any of our turnaround experts have been looking at JMBA. I haven't followed the company especially closely. Clearly the company got itself into trouble.

 

http://media.corporate-ir.net/media_files/irol/19/192409/JMBAAnalystPresentationMarch3-8-12.PDF

 

Slide 10 of this presentation is interesting. It looks like the new CEO has done a good job of improving comps and getting expenses in line.

 

The company also seems to have some interesting plans for future revenue growth: trying to expand its menu for later in the day, the Jamba to go kiosk concept, licensing its brand to consumer products companies.

 

it's an interesting turn around story, which might be close to the inflection point.

 

Adam Muller has some interesting commentary, on the positive side, at Seeking Alpha (assuming you haven't seen it, yet):

 

http://seekingalpha.com/article/290973-jamba-could-become-something-big

 

http://seekingalpha.com/article/288126-jamba-juice-successfully-executes-turnaround-plan-operational-inflection-point-is-here

 

 

[MYDemaray]

Disclaimer, I haven't looked at JMBA in over a year.  However, I used to own and walked away after I heard White's turnaround plan.  The reason is because the company was engaged in re-franchising which, while providing higher ROIC and an immediate cash boost, also created very negative operating leverage since I believed that the company would not be able to shed fixed costs in a commensurate fashion with their revenue declines.  Their franchise revenue has a higher operating margin to be sure, but the SG&A was not going to get cut quickly enough in my estimation to make the franchising effort a net positive. 

[prunes]

operating margin 20.2% vs 14% last year

Q1 SSS up 12.7%

 

disclosure: no position

[negative alpha]

http://www.aboveaverageodds.com/2013/03/26/introducing-above-average-odds-investings-portfolio-ops/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+aboveaverageodds+%28Above+Average+Odds+Investing%29&utm_content=Google+Reader

 

Above Average Odds has just started a newsletter. One of the firms covered is Jamba. It's a quality write up.

 

I just finished watching the embedded video of CEO James White and can't help but think of the book the Outsiders and wonder if this could be interesting.

[DCG]

Seems like virtually anyone with a few blenders and fruit can enter this market.

[MYDemaray]

Seems like virtually anyone with a few blenders and fruit can enter this market.

 

Same with cheeseburgers.  I think the thing that keeps people coming back to JMBA or MCD is met expectations (brand = a promise kept).  No position.

[premfan]

Seems like virtually anyone with a few blenders and fruit can enter this market.

Right. I dont think there is any addictive quality to juice. I dont see any impluse buys  for people buying juice. I read the newsletter which was good. I do think its silly to try and compare jamba juice to a young mcdonalds which the newsletter indirectly and directly does. What makes a franchise great in any industry is what it represents to its customers.

 

Starbucks=  A place where you can relax and get work done. An immediate between home and work

Chiptole= Healthy  fast food. The anti mcdonalds.

Whole foods= Connecting the community together to create change. The healthy living hub.

 

I dont think jamba juice represents anything. Its just juice. Marketers and smart business people for many years  are trying to push juice on the consumers. Its just not that interesting and most importantly its not addictive enough.

 

[ItsAValueTrap]

Chiptole= Healthy  fast food. The anti mcdonalds.

Didn't CMG spin off from McDonald's?  Also, I'd point out that mcDonald's has been trying to have healthy items on its menu like its salads and subs/sandwiches.  It's just that most people prefer to eat unhealthy food.

 

2- In the long run, restaurants are a business where a minority of companies will make almost all the money.  Starbucks, CMG, and McD's in my opinion are in that minority.

 

I feel like Jamba Juice is in the majority... though I definitely haven't been following it.

 

3- I think Ray Kroc's book is pretty helpful in understanding the restaurant business.

[premfan]

Chiptole= Healthy  fast food. The anti mcdonalds.

Didn't CMG spin off from McDonald's?  Also, I'd point out that mcDonald's has been trying to have healthy items on its menu like its salads and subs/sandwiches.  It's just that most people prefer to eat unhealthy food.

 

2- In the long run, restaurants are a business where a minority of companies will make almost all the money.  Starbucks, CMG, and McD's in my opinion are in that minority.

 

I feel like Jamba Juice is in the majority... though I definitely haven't been following it.

 

3- I think Ray Kroc's book is pretty helpful in understanding the restaurant business.

 

i dont have a position in nathans famous but, its the same business model as what jamba is trying to do. Its the best in class hot dog joint. And most importantly it represents freedom and the fourth of july. Thats what  i'm talking about. Jamba juice to be good or great has to represent something more than juice.

[AAOI]

Chiptole= Healthy  fast food. The anti mcdonalds.

Didn't CMG spin off from McDonald's?  Also, I'd point out that mcDonald's has been trying to have healthy items on its menu like its salads and subs/sandwiches.  It's just that most people prefer to eat unhealthy food.

 

2- In the long run, restaurants are a business where a minority of companies will make almost all the money.  Starbucks, CMG, and McD's in my opinion are in that minority.

 

I feel like Jamba Juice is in the majority... though I definitely haven't been following it.

 

3- I think Ray Kroc's book is pretty helpful in understanding the restaurant business.

 

i dont have a position in nathans famous but, its the same business model as what jamba is trying to do. Its the best in class hot dog joint. And most importantly it represents freedom and the fourth of july. Thats what  i'm talking about. Jamba juice to be good or great has to represent something more than juice.

 

Premfan, itsavaluetrap...

 

Curious to whether you guys been to a Jamba recently or done some real work on the name? If not, take a deeper look.

 

One suggestion on where to start, take a look at its market share within its niche, compare that to all other QSR's in terms of share and then ask yourself whether this is a durable niche. Might also want to dig into the company's partners, specifically the quality of its international multi unit franchisors and its CPG partners. Than ask yourself to what extent they can leverage those relationships and measure that effect on the bottom line. Negative NWC business models and rapid capital efficient growth prospects are a beautiful thing (lol).

 

Regarding the McDonald's analogy, clearly it only goes as far as it goes but the two situations are absolutely analogous in critical ways. To act like you can't see the numerous meaningful parallels is kind of silly.

 

AAOI 

[AAOI]

One more thing, forget about the upside. Does it seem rational to you guys that your purchasing this business at a discount to the replacement cost of its company owned store count?

 

These are high quality assets that generate cash on cash returns in the mid twenties on average. If that wasn't ridiculous enough your getting the rest of the royalty revenue streams for free which is absolutely unsustainable. Once the company's fixed cost operating leverage starts to kick (read right about now) it should start to get fun ;).

 

Even more insane, if they were to sell down the company owned portion at replacement cost and bring the mix to say 10:90, consider for a moment that they would generate almost as much cash as the entire present enterprise value and of course you'd still have the NPV of a higher margin annuity like revenue stream from those locations after the sale. Imagine what would happen if they did a leveraged recap at that point.

 

Point being the downside protection here is as tremendous as its high margin/high growth potential, a true wonderful business at a cigar butt price. Hard not to love that risk/reward.

 

 

[ItsAValueTrap]

Curious to whether you guys been to a Jamba recently or done some real work on the name?

No.  I really have no idea what Jamba is about, never read its financials, and have never tasted their product!  Haha.

 

I'll take a look.

[premfan]

One more thing, forget about the upside. Does it seem rational to you guys that your purchasing this business at a discount to the replacement cost of its company owned store count?

 

These are high quality assets that generate cash on cash returns in the mid twenties on average. If that wasn't ridiculous enough your getting the rest of the royalty revenue streams for free which is absolutely unsustainable. Once the company's fixed cost operating leverage starts to kick (read right about now) it should start to get fun ;).

 

Even more insane, if they were to sell down the company owned portion at replacement cost and bring the mix to say 10:90, consider for a moment that they would generate almost as much cash as the entire present enterprise value and of course you'd still have the NPV of a higher margin annuity like revenue stream from those locations after the sale. Imagine what would happen if they did a leveraged recap at that point.

 

Point being the downside protection here is as tremendous as its high margin/high growth potential, a true wonderful business at a cigar butt price. Hard not to love that risk/reward.

 

Hey all good points and it looks like you got the quantitative stuff figured out. I think the juice market is highly overrated though. I been to jamba juice and I don't like the value proposition. I own a breville juicer and make 16oz's a day of cucumber, celery, ginger, lime, and lemon ( its awesome!). Its all qualitative stuff so its all subjective and no point talking about it.

[AAOI]

Curious to whether you guys been to a Jamba recently or done some real work on the name?

No.  I really have no idea what Jamba is about, never read its financials, and have never tasted their product!  Haha.

 

I'll take a look.

 

Ha! Fair enough man, let me know if you dig in.

[AAOI]

One more thing, forget about the upside. Does it seem rational to you guys that your purchasing this business at a discount to the replacement cost of its company owned store count?

 

These are high quality assets that generate cash on cash returns in the mid twenties on average. If that wasn't ridiculous enough your getting the rest of the royalty revenue streams for free which is absolutely unsustainable. Once the company's fixed cost operating leverage starts to kick (read right about now) it should start to get fun ;).

 

Even more insane, if they were to sell down the company owned portion at replacement cost and bring the mix to say 10:90, consider for a moment that they would generate almost as much cash as the entire present enterprise value and of course you'd still have the NPV of a higher margin annuity like revenue stream from those locations after the sale. Imagine what would happen if they did a leveraged recap at that point.

 

Point being the downside protection here is as tremendous as its high margin/high growth potential, a true wonderful business at a cigar butt price. Hard not to love that risk/reward.

 

Hey all good points and it looks like you got the quantitative stuff figured out. I think the juice market is highly overrated though. I been to jamba juice and I don't like the value proposition. I own a breville juicer and make 16oz's a day of cucumber, celery, ginger, lime, and lemon ( its awesome!). Its all qualitative stuff so its all subjective and no point talking about it.

 

Thanks and fair enough. I'll have to take a look at those Breville Juicers...

[myvalueedge]

AAOI,

 

Many thanks for your thoughts and excellent writeup at Portfolio Ops.  I value your website and wish your new venture with Portfolio Ops works out well (disclosure: long Sandstorm M&E).  I did my due diligence on JMBA after your writeup.  I'm very impressed with James White and how he has gone about transforming JMBA and leveraging the brand. 

 

I am not an investor in JMBA at the moment at around $200M EV.  I think corporate spend is too high (I understand leveraging the fixed cost base now for further growth).  The CPG growth is a bit slow.  JambaGO is great for brand recognition, but not too beneficial to the bottom line.  A large increase in CAPEX with remodeling 100 stores (as soon as the company rebounds to profitability).

 

The international strategy seems to have been methodically planned with establishing partnerships with excellent operators.  I think JMBA will grow if managed correctly in the capable hands of James White through international, CA expansion, and CPG. 

 

The future is too uncertain for me to get in at $2.80/share.  At under $2/share I would take a decent size position. 

[ItsAValueTrap]

2006 interview with the CEO of a competing chain (Booster Juice):

http://www.canadianbusiness.com/business-strategy/smoothie-chain-booster-juice-finds-expanding-globally-is-not-always-smooth/

 

I figure it gives some background on the industry.

[nkp007]

I've spent a lot of time / research on this idea and I like it in that the downside is probably limited.

 

I just can't figure out where any substantial increase in cash flow is going to come from, though. Licensing revenues, though growing, don't look like they'll be too substantial. And the real money is in owning the stores (as well as the real risks). Franchising revenues are still small in comparison, though I accept that those margins are much higher.

 

Essentially, you need about $22 million in net income just to make this trade at 10x earnings at the current price.

 

This is a fun investment and I bought a small amount of shares, but I can't find the asymmetric cash flow.

[ItsAValueTrap]

Overall, I think the biggest factor to Jamba Juice is management.  Anybody can open a juice shop (Jamba Juice was inspired by another juice shop).  The difference is how well the company is run.

 

I just don't know how to judge how good Jamba Juice's CEO is.

 

I do disagree with his strategy of expanding internationally.  International expansions are really, really hard for food businesses.  Big successful restaurant chains fail in international expansions all the time.  Or if you look at Booster Juice, it seems to have failed in the US and other countries (it used to have a lot more locations in the US and Middle East). 

 

*Other sectors don't have as many problems with international expansions.  Because the culture in US and Canada is pretty similar, software and movies are products that expand easily between the two countries.  American movie companies consider Canada to be domestic.

 

2- I dislike the fact that he doesn't own a lot of stock and takes a relatively large salary while Jamba Juice hasn't been profitable.

 

I dislike that Jamba Juice has been selling franchises internationally while they haven't been profitable.  That's just me.  I see something wrong with selling a franchise to somebody even though the franchise is likely to fail.  A franchise doesn't make sense unless you are solidly profitable in the US.  On the other hand, I could see how this is defensible.  Jamba Juice is usually considered to have a better product than Booster/Jugo and some of these franchisees are sophisticated and should know what they are doing.

 

Once the company's fixed cost operating leverage starts to kick (read right about now) it should start to get fun ;).

Fixed cost leverage is a tailwind, but there are headwinds to bigger size.

 

It's hard to duplicate a restaurant/food business.  I believe the most important factors are good managers and good locations.  The former can be really hard to find and the latter is something that you can screw up.

 

Jamba Juice shrinking its store count (in its "getting back to breakeven" phase) is a sign that fixed cost leverage didn't really work out for them.

 

---

In general, the food business is really, really tough.  Jamba is a good example as it lost a lot of money.

[AAOI]

AAOI,

 

Many thanks for your thoughts and excellent writeup at Portfolio Ops.  I value your website and wish your new venture with Portfolio Ops works out well (disclosure: long Sandstorm M&E).  I did my due diligence on JMBA after your writeup.  I'm very impressed with James White and how he has gone about transforming JMBA and leveraging the brand. 

 

I am not an investor in JMBA at the moment at around $200M EV.  I think corporate spend is too high (I understand leveraging the fixed cost base now for further growth).  The CPG growth is a bit slow.  JambaGO is great for brand recognition, but not too beneficial to the bottom line.  A large increase in CAPEX with remodeling 100 stores (as soon as the company rebounds to profitability).

 

The international strategy seems to have been methodically planned with establishing partnerships with excellent operators.  I think JMBA will grow if managed correctly in the capable hands of James White through international, CA expansion, and CPG. 

 

The future is too uncertain for me to get in at $2.80/share.  At under $2/share I would take a decent size position.

 

 

Myvalueedge,

 

Thanks for the kind words and the thoughtful remarks, much appreciated.

 

As far as the elevated G&A, personally I'm happy it is what it is as imo a large part of the reason for the mispricing in the first place is a direct function of this.

 

Remember that…

 

(1) the company has a fair amount of flexibility to manage the issue as much of it could be chopped away by selling off company owned units, which for what its worth I'd prefer, at least once they've benefitted from the sizable value up-lift (in terms of sales, unit operating margins, etc) from the planned capex associated with the new juice platform (at least until the mix is closer to 10:90 in terms of company owned vs. franchised units)

 

(2) Because of that, I actually view it as a positive, as the dynamic has temporarily masked the qualitative transformation the company has undertaken and therefore the overall quality of the business. I'm sure you get point two, but point one isn't as obvious so I figured it was worth pointing out.

 

Basically the way I look at it is if for some reason the requisite top line growth doesn't materialize (very very very unlikely imo), I'm comforted by the fact that a high fixed level of costs is not a structural issue but a function of deliberate choice...so remember that if necessary this biz could transform into a largely variable cost model in a pretty short period of time. From a pure bargain hunters point of view then, the unusually high level of G&A is a good thing in the above key respects.

 

That and over time G&A as a % of sales should continue to shrink due to both rapid growth at very high incremental margins as well as due to an ongoing mix shift. Long-term management wants to get closer towards something in the 10 to 20% range as far as company owned units, so I hear you but one way or another the issue will take care of itself. 

 

The other attractive element of the high SG&A equation, which again I'm sure your aware of is that assuming the company continues to ramp and execute as I expect, the level of fixed cost operating leverage as it scales should be simply stunning. Indeed, exponential compounding in per share cash flow will likely catch the market by surprise, which should drive substantial multiple expansion as better than expected results completely reset sentiment towards the business and hence the expectations built into the stock. Add in a more liquid stock that’s recently become “investable” to a much larger set of institutions due to the oncoming 1:5 reverse split and I find it really hard to not love the set up here.

 

While I obviously need to keep most of this stuff for subs, a couple of more basic thoughts...

 

First I totally disagree that CPG growth is slow either historically or looking out over the next couple of years given the exponential increases in its points of distribution. Same with JambaGO. So I’m curious to why you say that, especially given we aren’t even close to a fraction of a fraction of the total addressable market. Even more importantly to consider is that these are negative NWC segments where almost every dollar of sales falls directly to the bottom line so it wont take long before exponentially growing revenues at damn near 100% margins starts to impact things in a VERY big way.

 

Second, the roic on the few stores in California where this capex spend has already been implemented has been huge, that said, its too early to derive any solid conclusions at this point, at least until this capex has been deployed into enough locations where arriving at an average ROIC is meaningful. Conceptually though I think there are many reasons to believe that the sales and margin uplift associated with this initiative will remain more than satisfactory. Time will tell.

 

Last but not least, at $2.80 your getting the owned stores that generate very attractive ROIC's at a discount and again, all the rest for free. That's just NUTS all things considered. Really the only time I can remember seeing anything like this was when Chipotle traded at a similar valuation in the depths of '09 in like the mid twenties. And again, remember the cost structure flexibility embedded in the model so in the incredibly likely event that the growth isn't realized it won't take much to pull a couple of levers and wa la, its all of a sudden not only stupid cheap relative to its high quality tangible asset base but stupid cheap relative to its various high margin annuity like cash flow streams.

 

I guess at the end of the day I just don't see how one can effectively argue that the present valuation isn't unsustainably cheap in light of the businesses qualitative characteristics or put another way, why buying in at ~$2.00 and not 2.80 makes sense as it seems largely a distinction without a difference (and to be clear I'm just thinking out loud so none of this is pointed directly at you).

 

What I mean by that is sure, one is obviously much cheaper, and of course all things equal, cheaper is always better. Granting that point I still feel like its kind of like saying one likes Coke at 4x normalized earnings but not at 6x? Meaning if a business like coke is stupid cheap at both prices its a buy either way. Perhaps you establish a healthy position at 6x and back up the truck when it gets to 4x but ultimately the situations are similar in terms of the overall risk/reward equation. So deciding not to buy at 6x because you want it at 4x seems self defeating in that if you've been given the chance to get it at either price your one amazingly lucky guy and likely to make good money pretty much whatever the future brings. That's what its all about is it not?

 

Anyway, rationally a business like that should trade at say 12-15x at a minimum, so in my mind sucking your thumb over two ridiculously cheap valuations when your talking about a wonderful business misses the forest through the trees. With Jamba, I just think the price implied expectations are not at all indicative of underlying economic reality, its just that simple, and that seems true whether your talking about JMBA at $2 or $2.8. Especially because the margin of safety is derived from the same thing, namely the discount to high quality, readily saleable tangible asset value. Or the fact that one isn't paying up for growth in either scenarios.

 

Great comments though, I just have a hard time understanding the bear case on this one and I’ve heard pretty much every bear argument imaginable from both a qualitative and quantitative perspective and imho both can be shredded to pieces with relative ease once you’ve done the work and fully discerned the issues. Perhaps I’ll be proven wrong, I just don’t see it.

 

AAOI

 

[AAOI]

2006 interview with the CEO of a competing chain (Booster Juice):

http://www.canadianbusiness.com/business-strategy/smoothie-chain-booster-juice-finds-expanding-globally-is-not-always-smooth/

 

I figure it gives some background on the industry.

 

See the thing is this isn't anything close to a pure play smoothie company anymore so anyone that looks at it as such is missing 90% of the story.

 

Btw, I meant to attach this to the last post but here is Loyd Khaner's presentation on JMBA from the value investing congress last October. Fwiw, I think its excellent and slide 28 in particular is just AMAZING. When you can answer all of the questions from this slide, then I think you have an idea of the true risk/reward, otherwise I think ones just walking in the dark.

 

Khaner-VIC-Presentations.pdf

[AAOI]

I've spent a lot of time / research on this idea and I like it in that the downside is probably limited.

 

I just can't figure out where any substantial increase in cash flow is going to come from, though. Licensing revenues, though growing, don't look like they'll be too substantial. And the real money is in owning the stores (as well as the real risks). Franchising revenues are still small in comparison, though I accept that those margins are much higher.

 

Essentially, you need about $22 million in net income just to make this trade at 10x earnings at the current price.

 

This is a fun investment and I bought a small amount of shares, but I can't find the asymmetric cash flow.

 

npk007,

 

Agree that the downside protection is rock solid, but I'm at a loss for where your coming from when you say that the licensing and royalty streams don't look to be substantial given they should be at or around $24m come year end and essentially 100% of these revenues falls directly to the bottom line. Of that $24m, roughly $8m is growing exponentially, with the rest clicking along at double digits.

 

In terms of the asymmetry from a cash flow perspective, its rather easy to see JMBA hitting ~$60m in pre tax cash flow within a few years, which considering were talking about an EV of ~$180m (that's of the top of my head, didn't check the stock price today) I'd say that's pretty damn asymmetric no? 3x? Good lord! It should trade at a multiple 5x that amount in a rational world.

 

Anyhow, focus on cash flow not earnings and if your using a model for your estimates, let me know the inputs, I'd be glad to walk you through the numbers if your interested.

 

Best,

 

AAOI 

[AAOI]

Once the company's fixed cost operating leverage starts to kick (read right about now) it should start to get fun ;).

Fixed cost leverage is a tailwind, but there are headwinds to bigger size.

 

It's hard to duplicate a restaurant/food business.  I believe the most important factors are good managers and good locations.  The former can be really hard to find and the latter is something that you can screw up.

 

Jamba Juice shrinking its store count (in its "getting back to breakeven" phase) is a sign that fixed cost leverage didn't really work out for them.

 

Itsavaluetrap,

 

Not sure where your coming from here given the tailwinds and the cash on cash returns of the units, and the idea that this is a concept along the lines of say Boston Market or any of the other lame concepts where the underlying economics of the stores were terrible is just not even close to correct (the chain is absolutely durable in the sense that matters). Not to mention the quality of the international multi unit franchisees (in terms of international expansion) who know there markets extremely well (this is obvious when you dig into each of them). So not only do I think continued growth in total units is not going to be an issue, I'd actually argue managements goals in terms of growth and total units at maturity are completely sandbagged, which is obvious in my mind when you've looked at the total addressable market as it pertains to each segment and the overall value proposition to potential franchisees.

 

Regarding the fixed cost leverage, I'm not going to get into it at the moment because I'm about to head out the door, but realize that you can't view this opportunity through the rearview without making all types of analytical errors. The comment that "fixed cost leverage didn't really work out for them" literally makes zero sense when the issue is looked at in proper context. 

 

In terms of the restaurant business being a tough one I generally agree but clearly some concepts underlying economics, demand characteristics etc. etc. are vastly better than others so I don't think its helpful to make generalizations on that front. If your thinking about the effects of cost (food) inflation I should probably also mention that's actually a tailwind for Jamba. It's perverse I know, but food inflation forces price increases by franchisees to maintain there margins, which naturally disproportionately accrues to JMBA given there agreements are based on a % of sales. So if food inflation is a worry for you vis a vi restaurants in general, then assuming its manageable (read not hyper-inflationary) that should make you even more bullish on JMBA's prospects. Something to keep in mind.

 

AAOI

 

AAOI