JMBA - Jamba Juice

[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.

 

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

 

Thanks for your response. How do you see the licensing and royalty revenues going to $24mm by year end (from $14mm in 2012)?

[hyten1]

AAOI,

 

i just started to look at jmba, please bare with me regarding my igorance

 

in summary:

- jmba screw up in the past (for varies reason, high cost, too many employee, etc.)

- jame white was bought in to clean up and right the ship

- it seem like james white has done that and stabilize jmba

- the big plan is expand like crazy

 

my question is what can jmba earn right now if they were not to expand like crazy, what is the steady state?

 

i don't even want to think about the what if (expansion)  until we see that jmba are very profitable and it trading at a deep discount to the profitability.

 

hy

[ItsAValueTrap]

If your thinking about the effects of cost (food) inflation I should probably also mention that's actually a tailwind for Jamba.

I'm not worried about food inflation.  But I think it would be a headwind for Jamba if it were to happen.

 

2- A franchise is basically financial engineering.  You carve up the revenues of the operating business.  The franchisee pays a small portion of the local shop's revenue to Jamba Juice.  Jamba provides various services to the franchisee and has to pay for its head office expenses.  Unscrupulous chains can extract more revenue from the franchisee if the franchisee is forced to buy from certain suppliers at inflated prices.  (I doubt that Jamba is doing this.)

If Jamba were to increase the price that franchisees pay, it may not necessarily be a sustainable business model.  You might guess that franchisees will push back.

 

Let's suppose that food inflation hurts Jamba's profitability.  So, there would be less earnings for the underlying business to distribute between franchisees and Jamba.  I suppose that Jamba could increase its cut of the smaller profits... but this wouldn't really be sustainable.

 

2b- The real world is a little messier.  A franchise is more than just financial engineering (e.g. it has more implications than splitting a business up into equity and debt).  Because a franchise owner has skin in the game, he/she is typically much more motivated than somebody that Jamba hires to run a store.  (Though I am guessing that staff employees can be motivated by linking their pay to performance.)

 

Some franchise chains exploit hopeful wannabee entrepreneurs.  They can make money even if the franchisee doesn't.

 

The interests of the chain aren't always aligned with the franchisee, and the interests of the franchisees aren't always aligned with each other.  There are a lot of expensive legal battles and other conflicts that can occur between the franchise owner and franchisee.  Ray Kroc talks about this in his book.

 

Franchising is indirectly a way of raising capital.  It kind of leverages the parent company without putting it at risk... so the financial types drool over the high returns on capital.

 

See's Candies does not do franchising at all.  Buffett and Munger talk about this I believe.

 

There's a lot of uncertainty on this topic.  I think this is why there are superstars in the food business... it's hard to figure out the correct answers to many questions in the business.  And the correct answer for one business may not apply to another.  Read Ray Kroc and Starbucks' CEO's books.  These guys are the smartest in the business and even they are wrong a lot of the time.  Armchair theories are wrong a lot of the time.

[ItsAValueTrap]

Basically... I'm just going to stay away from things I'm not comfortable with.  I have no idea how well Jamba will do in the future.  I'd rather stick with the 1-foot hurdle.

 

A- Are they the #1 or #2 player in their niche?

B- Do they have a track record of high returns on capital?

(C- Is the valuation reasonable?)

 

The answer to A is probably yes, the answer to B is no.  So I'm not going to swing at this pitch.

If the answer to A and B are yes, then I would predict that the company will continue to crush its niche for years to come.  McDonald's, KFC in China, and Starbucks are going to do that.

[ratiman]

Jamba won't ever pay any taxes, right? The real benefit of refranchising is that Jamba can begin to use its huge nols. And when those are exhausted, it will be for sale and an acquirer will pay a nice premium. So Jamba will never pay taxes, as far as I can see. Shouldn't that be figured into the valuation? I see Jamba valued on ebitda multiples but unlike Dunkin or Dominoes, Jamba won't pay taxes on that ebitda.

 

Jamba is close to turning itself from a business with a history of negative surprises into a high quality franchisor with stable cash flows that are untaxed. That seems like something that deserves a premium valuation.

[SI]

Anyone's interest piqued by its $123mn mkt cap and $115mn EV?

 

Company has franchised 90%+, still growing their store base, falling SGA, activists on their board, new mgmt and has decided to not put any leverage on the business which was understandable 2 years ago before they relocated to TX to lower costs and refranchised. If it is just a mgmt company with ebitda slated to grow this year to $14mn(on falling SGA) from $10mn last year it seems like the type of business that could handle some leverage. Assuming the company uses just its net cash, the cash flow generated in 2017 and some leverage, we believe they could take down 40% of their shares outstanding at today’s share price. 

 

[atbed]

Anyone's interest piqued by its $123mn mkt cap and $115mn EV?

 

Company has franchised 90%+, still growing their store base, falling SGA, activists on their board, new mgmt and has decided to not put any leverage on the business which was understandable 2 years ago before they relocated to TX to lower costs and refranchised. If it is just a mgmt company with ebitda slated to grow this year to $14mn(on falling SGA) from $10mn last year it seems like the type of business that could handle some leverage. Assuming the company uses just its net cash, the cash flow generated in 2017 and some leverage, we believe they could take down 40% of their shares outstanding at today’s share price.

 

This company has disappointed investors for years now. Their poor SSS certainly adds fuel to this fire. Throw in poor execution and you've had downward guidance revisions.

 

That said, this is way cheaper than the highly-franchised restaurant peer group. Good unit growth and no debt are arguments that it should trade at a premium. But I think SSS need to turn around and they need to deliver positive net income before anyone pays up for this concept.

[KJP]

Anyone's interest piqued by its $123mn mkt cap and $115mn EV?

 

Company has franchised 90%+, still growing their store base, falling SGA, activists on their board, new mgmt and has decided to not put any leverage on the business which was understandable 2 years ago before they relocated to TX to lower costs and refranchised. If it is just a mgmt company with ebitda slated to grow this year to $14mn(on falling SGA) from $10mn last year it seems like the type of business that could handle some leverage. Assuming the company uses just its net cash, the cash flow generated in 2017 and some leverage, we believe they could take down 40% of their shares outstanding at today’s share price.

 

You're using the midpoint of the 2017 "Non-GAAP Adjusted EBITDA" guidance for your $14 million EBITDA figure, correct?  That guidance excludes stock comp, right?  What is their annual stock comp?

 

Also, there are still ~70 company-owned stores, right?  What is the maintenance CapEx associated with those or is the plan to sell/franchise all of them? 

 

 

[SI]

SBC: $3.8mn in 16, sellside estimating $4mn go fwd.

 

The company has talked openly about getting out of Chicago which is a nice chunk of the 8% of company owned stores but will they hang on to a few %, I cannot say.

 

I wasn't sure anyone would be interested but here is a bit longer of a write-up I did. The short interest here is also huge, so please feel free to fwd this write-up to Apollo.

 

We have long watched Jamba Inc (JMBA) as the company’s healthy products drove store expansion that pushed the stock over $60 as the concept began spreading beyond California. The company expanded too far and too fast which hurt their unit profitability. Our interest today is piqued by its $8.15 share price which implies $123mn mkt cap and $115mn EV.

After the fall, the company embarked on a cost cutting program and taking the keys back from underperforming franchisees(we think of them as the snowbelt but they are found in many places where the density was there but the weather was not) while also narrowing their company owned stores over the past few years. Importantly management was also replaced. With transition to asset-lite model essentially complete, JMBA’s future will be driven by performance of remaining co-owned store portfolio (>8%) and franchise growth and profitability.

We are encouraged by new management (CEO: SBUX, PEP, YUM, CFO: EAT, COO:SBUX) but we find the company's activist shareholders as more important here. With 2 large shareholders as members of the board with previous industry experience selling companies, we believe they are limiting our agency risk. We also think strong oversight is going to directly cap costs.

The goal from one of the activist had been to halve the SG&A and in order to facilitate it the company recently moved to a Dallas suburb from Berkeley, CA. This should help diversify the store base into the south as 70% of stores are in California but it will also change the costs and culture. Of the 120 employees, about a dozen were willing to relocate. This has caused the company to delay its 10K which the company said in March was targeting a month type delay. Given this is now largely a management company and not an operating company, the company should have seen the majority of any disruption behind them from a move announced May 2016 and completed in October 2016.

This focus on costs we believe will be rewarded as the company has recently guided to sg&a falling to a $20mn run rate by year-end.  One more point on the activists, one of them, Glenn Welling of Engaged Capital, has increased their stake to 18% of shares by buying 18 of 19 business days in February at $9.20-$9.80 which was a big average down from his original cost base which we calculated was ~$13. Given where the business(and the stock) is at, its leadership and its cost structure -  we believe the company will now follow his lead.

If it is just a mgmt company with ebitda slated to grow this year to $14mn (on falling SGA) from $10mn last year it seems like the type of business that could handle some leverage. Assuming the company uses just its net cash, the cash flow generated in 2017 and some leverage (~2x net debt/ebitda), they could take down 40% of their shares outstanding at today’s share price.  If mgmt/board does not lever up this annuity stream, we think someone else will do it for them with the stock trading at just 8.2x March’s ebitda guide with strong forward visibility on costs and 850 unit store base rising by a net 30/year.

In terms of the way one board member was looking at fair value. Glenn Welling had this to say to Value Investor Insight(http://www.valueinvestorinsight.com/pdfs/2016TrialMay.PDF) on compensation and target. “The new CEO’s compensation is structured similarly to what private-equity owners typically put in place. He has a salary and a cash bonus based on sales growth and profitability, but the majority of his pay is long-term compensation in the form of restricted stock that is performance vested. The first tranche of restricted stock vests if the share price is $19.50 in three years, the second if it hits $24, and the third if it hits $28.50. So he only starts to be paid really well if the shares are at least 70% higher than today’s level. It’s not a coincidence that those shareprice targets are what we consider reasonable if the company’s stated goals for same-store sales growth, store growth and expense reduction are met. We’re still in the transition period, but highly franchised models – with the right concept, of course – can create a lot of value.”

 

[atbed]

SBC: $3.8mn in 16, sellside estimating $4mn go fwd.

 

The company has talked openly about getting out of Chicago which is a nice chunk of the 8% of company owned stores but will they hang on to a few %, I cannot say.

 

I wasn't sure anyone would be interested but here is a bit longer of a write-up I did. The short interest he is also huge, so please feel free to fwd this write-up to Apollo.

 

We have long watched Jamba Inc (JMBA) as the company’s healthy products drove store expansion that pushed the stock over $60 as the concept began spreading beyond California. The company expanded too far and too fast which hurt their unit profitability. Our interest today is piqued by its $8.15 share price which implies $123mn mkt cap and $115mn EV.

After the fall, the company embarked on a cost cutting program and taking the keys back from underperforming franchisees(we think of them as the snowbelt but they are found in many places where the density was there but the weather was not) while also narrowing their company owned stores over the past few years. Importantly management was also replaced. With transition to asset-lite model essentially complete, JMBA’s future will be driven by performance of remaining co-owned store portfolio (>8%) and franchise growth and profitability.

We are encouraged by new management (CEO: SBUX, PEP, YUM, CFO: EAT, COO:SBUX) but we find the company's activist shareholders as more important here. With 2 large shareholders as members of the board with previous industry experience selling companies, we believe they are limiting our agency risk. We also think strong oversight is going to directly cap costs.

The goal from one of the activist had been to halve the SG&A and in order to facilitate it the company recently moved to a Dallas suburb from Berkeley, CA. This should help diversify the store base into the south as 70% of stores are in California but it will also change the costs and culture. Of the 120 employees, about a dozen were willing to relocate. This has caused the company to delay its 10K which the company said in March was targeting a month type delay. Given this is now largely a management company and not an operating company, the company should have seen the majority of any disruption behind them from a move announced May 2016 and completed in October 2016.

This focus on costs we believe will be rewarded as the company has recently guided to sg&a falling to a $20mn run rate by year-end.  One more point on the activists, one of them, Glenn Welling of Engaged Capital, has increased their stake to 18% of shares by buying 18 of 19 business days in February at $9.20-$9.80 which was a big average down from his original cost base which we calculated was ~$13. Given where the business(and the stock) is at, its leadership and its cost structure -  we believe the company will now follow his lead.

If it is just a mgmt company with ebitda slated to grow this year to $14mn (on falling SGA) from $10mn last year it seems like the type of business that could handle some leverage. Assuming the company uses just its net cash, the cash flow generated in 2017 and some leverage (~2x net debt/ebitda), they could take down 40% of their shares outstanding at today’s share price.  If mgmt/board does not lever up this annuity stream, we think someone else will do it for them with the stock trading at just 8.2x March’s ebitda guide with strong forward visibility on costs and 850 unit store base rising by a net 30/year.

In terms of the way one board member was looking at fair value. Glenn Welling had this to say to Value Investor Insight(http://www.valueinvestorinsight.com/pdfs/2016TrialMay.PDF) on compensation and target. “The new CEO’s compensation is structured similarly to what private-equity owners typically put in place. He has a salary and a cash bonus based on sales growth and profitability, but the majority of his pay is long-term compensation in the form of restricted stock that is performance vested. The first tranche of restricted stock vests if the share price is $19.50 in three years, the second if it hits $24, and the third if it hits $28.50. So he only starts to be paid really well if the shares are at least 70% higher than today’s level. It’s not a coincidence that those shareprice targets are what we consider reasonable if the company’s stated goals for same-store sales growth, store growth and expense reduction are met. We’re still in the transition period, but highly franchised models – with the right concept, of course – can create a lot of value.”

 

Thanks for sharing

 

I believe the restructuring also hurt SSS growth. There was a big drop off in product innovation during 2016. So I'm excited to see what the new CMO (from ZOES) can do in 2017. I think there is considerable SSS upside.

 

If they get the supply chain savings that they talk about, unit growth could surprise to the upside. Shareholders could get a strong growth algorithm, especially when you factor in the share repurchases that you talk about.

 

[awindenberger]

Interesting idea. Has the management team given any indication that they are actually planning to start buying back shares?

[atbed]

Interesting idea. Has the management team given any indication that they are actually planning to start buying back shares?

 

"On August 4, 2016, the Company announced that its Board of Directors has approved the terms of a share repurchase plan. Pursuant to the program, the Company is authorized to repurchase up to $20.0 million of its common stock subject to available cash resources over the next two-year period."

 

https://www.sec.gov/Archives/edgar/data/1316898/000114420416132122/v450759_10q.htm

[Spekulatius]

Of the 120 employees, about a dozen were willing to relocate

 

Seems risky to invest in a company that loses 90% of their employees in one scoop. Basically, this company is going to be totally degutted. I know everyone is replaceable, but if you replace everyone at once, well....

I have seen some corporate relocations in my career where the vast majority of the employees was not willing to relocate with the company and the track record is not good. A lot of these business don't exist any more; the business went to zero, before the costs did.

[John Hjorth]

Of the 120 employees, about a dozen were willing to relocate

 

Seems risky to invest in a company that loses 90% of their employees in one scoop. Basically, this company is going to be totally degutted. I know everyone is replaceable, but if you replace everyone at once, well....

I have seen some corporate relocations in my career where the vast majority of the employees was not willing to relocate with the company and the track record is not good. A lot of these business don't exist any more; the business went to zero, before the costs did.

 

+1! - It is so true!

 

It might be relocations, turnarounds, that do not turn etc.

 

The value of the people working in a company is not booked anywhere in the balance sheet, it's all expensed in the P&L. However, the buttom line in the P&L tells something about what the people working in the company can accomplish under the ruling circumstances for the company.

[atbed]

Of the 120 employees, about a dozen were willing to relocate

 

Seems risky to invest in a company that loses 90% of their employees in one scoop. Basically, this company is going to be totally degutted. I know everyone is replaceable, but if you replace everyone at once, well....

I have seen some corporate relocations in my career where the vast majority of the employees was not willing to relocate with the company and the track record is not good. A lot of these business don't exist any more; the business went to zero, before the costs did.

 

For some additional background, they moved their corporate office from Emeryville, CA (c. Oakland) to Frisco, TX. They also cut corporate employees to around 90. I believe pay is also lower since the cost of living is considerably lower. I think it's understandable that many did not want to make the move. It's a lot to ask.

 

Given the franchise business model, restructuring is less risky. Afterall, the franchisees are responsible for the stores. These guys are just following in 3Gs footsteps.

 

Good book on zero-based budgeting:

https://www.amazon.com/Double-Your-Profits-Months-Less/dp/088730740X/ref=sr_1_1?ie=UTF8&qid=1492640206&sr=8-1&keywords=how+to+double+your+profits+in+six+months

 

 

[TheAiGuy]

This looks a lot like a company a private equity shop buys, levers up, sells to another PE shop and goes bankrupt.

 

This company has negative operating cash flow, a sh**ty product, no valuable assets to speak of, and can't file its 10k because 90% of its employees left during a transfer from CA to TX.

 

There was ~$14M in cash on the balance sheet as of the last 10Q. Given a ~$2M/Quarter burn rate, I would pay approximately $5M for this business, or roughly 4% of its current market cap, and even then, maybe.

[TheAiGuy]

This looks a lot like a company a private equity shop buys, levers up, sells to another PE shop and goes bankrupt.

 

This company has negative operating cash flow, a sh**ty product, no valuable assets to speak of, and can't file its 10k because 90% of its employees left during a transfer from CA to TX.

 

There was ~$14M in cash on the balance sheet as of the last 10Q. Given a ~$2M/Quarter burn rate, I would pay approximately $5M for this business, or roughly 4% of its current market cap, and even then, maybe.

 

Edit:

 

$5M might be too much to pay. $1M? You could probably pay out more than that in a single dividend, so.... maybe? Who am I kidding, this is a zero.

[SI]

Don't worry, i do not have any pull with apollo.

 

I think those cash burn figures were part of the problem but without an operating  company you get less operating leverage whether it is down or up and with a 14mn midpoint less 4mn in stock comp, i think you have something a bit more interesting. Your point on the ability to lever up is important but although private equity clearly would want to lever it up well beyond my assumed 2x, 2x plus net cash and 2017 ebitda is 40% of the sharecount so clearly the illustration proves its point if you don't want to go that far but more aggressive assumptions on debt would be possible on private ownership and get you to some truly astronomical buyback assumptions.

[TheAiGuy]

Don't worry, i do not have any pull with apollo.

 

I think those cash burn figures were part of the problem but without an operating  company (...) get you to some truly astronomical buyback assumptions.

 

I don't understand, don't they have to generate cash or sell some sort of valuable asset to be worth anything?

 

Without revenue growth -- and to be clear, fewer dollars will be spend on Jamba juice in 2017 than in 2016 -- this company will go under. Even without interest bearing debt, they have working capital demands and creditors, and the company is loosing money hand over fist.

[atbed]

Don't worry, i do not have any pull with apollo.

 

I think those cash burn figures were part of the problem but without an operating  company (...) get you to some truly astronomical buyback assumptions.

 

don't they have to generate cash

 

 

I believe they are on the cusp of generating significant cash flow. 2017 EPS estimates look very beatable. The G&A savings should kick in and non-gaap should converge with gaap, so cash flow should step up. They think they can improve restaurant margins by 200-300 bps. I actually believe the savings could skew higher. There could be significant COGS and labor savings. The Chicago stores did not generate any EBITDA, but JambaGo is a 1.2M profit headwind.

 

This thing gets really interesting if they can generate +5% SSS or more...

 

[TheAiGuy]

 

don't they have to generate cash

 

 

They might be on the cusp of doing just that. I believe EPS estimates for 2017 looks very beatable. The G&A savings should kick in and non-gaap should converge with gaap, so cash flow should step up. They think they can improve restaurant margins by 200-300 bps. I actually believe the savings could skew higher. There could be significant COGS and labor savings. The Chicago stores did not generate any EBITDA, but JambaGo is a 1.2M profit headwind.

 

This thing gets really interesting if they can generate +5% SSS or more...

 

If anyone has dug into the "other operating, net" line, I would be eager to compare notes.

 

 

You're talking about operating improvements, which, fine, I'll grant you for the sake of argument. The problem with the company is revenue, namely that its shrinking, and there is evidence the company is mismanaged, namely letting 90% of the staff go and failing to file the 10k on time. What makes you think revenue won't continue to shrink?

 

This seems apropos:

http://deadcompanieswalking.tumblr.com/post/159787857857/a-short-guide-to-short-selling

 

[SI]

AiGuy

 

As they reported a few weeks ago. For 2016, for stores open a year comp sales for the year fell 0.2% with net store openings in last year and this year, no? Are you saying that the store sales of JMBA are down and that's a problem b/c they are franchising their store base?

 

What am I missing?

SI

 

 

[KJP]

 

The problem with the company is revenue, namely that its shrinking,

 

Other posters have touched on it above, but what does revenue shrinkage really mean in the context of franchising company-owned stores?  More precisely, what do you mean by "revenue . . . shrinking."

[TheAiGuy]

 

The problem with the company is revenue, namely that its shrinking,

 

Other posters have touched on it above, but what does revenue shrinkage really mean in the context of franchising company-owned stores?  More precisely, what do you mean by "revenue . . . shrinking."

 

Big picture -- fewer people are buying Jamba Juice each year. You can keep franchisees operating with low ROCs, but if franchisees are actually loosing money, they will go out of business, and it will be hard to sell more franchises. Moving from a company owned model to a franchise model is shuffling deck chairs if no one wants to buy Jamaba Juice, and it looks like more and more people are deciding they don't.

 

 

[TheAiGuy]

AiGuy

 

As they reported a few weeks ago. For 2016, for stores open a year comp sales for the year fell 0.2% with net store openings in last year and this year, no? Are you saying that the store sales of JMBA are down and that's a problem b/c they are franchising their store base?

 

What am I missing?

SI

 

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