Jamba Juice: Potent Hype, Bitter Aftertaste

by Melissa Davis - 2/9/2015 11:06:21 AM

Maybe Jamba Juice (Nasdaq: JMBA) investors should have gulped down a bunch of carrot-infused smoothies before they ever started drinking the company’s Kool-Aid. With a little sharper vision, they might have seen right through some of the more obvious hype surrounding the company’s new “asset-light” strategy and noticed at least a few of the overlooked realities that make its celebrated plan seem like such an unhealthy idea.

Wait until they discover the bitter ingredients that Jamba has decided to include in its half-baked recipe for success. Before they reward Jamba with any more applause for the steps that it has taken to transform the company into a leaner – and ultimately more profitable – smoothie chain, they better make sure that they can stomach the danger posed by the bitter surprises listed below:

·      For starters, Jamba has effectively diluted the cost reductions that it has rushed to celebrate by quietly recording a mountain of buried expenses that makes its reported savings look wildly overblown.

·      Jamba has also chosen to later revise those overlooked expenses for no obvious reason, taking liberties that make the company look as if it has literally engaged in cooking its books.

·      In yet another move that seems to make little sense (unless the company simply hopes to prop up its share price), Jamba has decided to sell more than 100 of its top-performing stores and then use the proceeds to purchase its own stockat a much steeper multiple of earnings – instead.

·      By “refranchising” those valuable stores, Jamba actually stands to raise far less money than wishful bulls like to think, while sacrificing most of the generous revenue and EBITDA (earnings before interest, taxes, depreciation and amortization) currently generated by those busy locations.

·      Even with the possible (if not likely) benefit of one-time gains from asset sales, Jamba expects its future EBITDA to fall 30% below outdated Wall Street estimates that analysts continue to maintain in spite of the much lower forecast presented by the company itself.

·      In a failed effort to boost customer traffic that has already led to a horrific quarterly miss – and threatens to remain a lingering drag on its future results – Jamba has introduced lower-margin products (such as fresh juices) that have simply cannibalized smoothie sales and obliterated its profit margins instead.

·      Finally, Jamba has spent years relying on a CFO previously employed by a pair of companies that seemed almost cursed with bad luck -- one of them already bankrupt and the other severely wounded -- after they left her in charge of keeping track of their own books.

Nevertheless, Jamba currently hovers within easy reach of a 20-month high that fails to reflect most (if not all) of those largely overlooked risks. Jamba has gained so much ground over the past couple of months, in fact, that its stock now trades 30% above the price that it fetched right after the company reported a massive profit shortfall that investors soon managed to somehow forgive and forget.

At its current price of $16.36 a share, Jamba arguably looks expensive by even generous Wall Street standards. The stock has flown right past the price targets set by some of the bullish analysts who actually recommend the highflying shares. Keep in mind that they used overblown EBITDA projections to calculate those lofty targets, too.

So don’t blame us if Jamba undergoes a sharp correction pretty soon. Investors deserve to know the bitter truth. We just want to show them the difference between juicy hype and cold reality.

Jamba declined to answer questions for this story.

 

Diluted Savings: Reading between the “Other Operating, Net” Line

Hype: Jamba has clearly established that it can deliver the kind of savings necessary to achieve its ambitious goal of driving its costs 20% below previous (2013) spending levels. The company managed to reduce its expenses by $1.5 million during the first half of 2014 alone, paving the way for the firm to deliver much deeper cuts – totaling up to $2 million a quarter – as the year drew to a close

Reality: Barely half of the savings that Jamba reported last year actually dropped to the bottom line. While Jamba likes to brag about its declining G&A (general and administrative) expenses, the company never bothers to mention the soaring costs that it has practically buried in its “other operating, net” line item – a handy catchall that also includes convenient offsetting gains – when it discusses all of the money that it has supposedly managed to save.

For some inexplicable reason, Jamba recorded a massive jump in “franchise expense” during the first nine months of last year – up a whopping 145%, or $835,500, to $1.41 million -- even though the company reported a fairly negligible 5% increase in franchise locations over the course of that same time period.

If Jamba can somehow explain that gigantic disparity, it sure blew the perfect chance. Blaming its silence on “quiet period” restrictions largely designed to prevent early leaks about pending financial results, Jamba refused to answer questions about the soaring (and, in some cases, conflicting) franchise expenses that the company has already recorded in its books. Given the situation, we cannot help ourselves from wondering about a rather obvious – albeit ominous – possibility: Maybe Jamba shifted expenses that it had previously treated as normal overhead into a far less visible category instead.

By adjusting its G&A expenses to reflect those hidden costs, Jamba would see much of its celebrated savings instantly disappear. Take a look at the helpful chart presented below, featuring numbers extracted directly from the company’s last three quarterly reports and corresponding earnings releases, for a vivid illustration of the striking difference that simple change would make.

 

Time Period

Q1 2013

Q2 2013

Q3 2013

First Nine Months of 2013

Q1 2014

Q2 2014

Q3 2014

First Nine Months of 2014

Franchise Expense

$287K

$272K

$17K

$576K

$352K

$436K

$623K

$1.41M

Y/Y $ Increase

 

 

 

 

$65K

$164K

$606K

$835K

Y/Y % Increase

 

 

 

 

22.6%

60.3%

3,565%

145%

Franchise Locations

521

534

562

562

591

599

590

590

Y/Y % Increase

 

 

 

 

13.4%

12.2%

5.0%

5.0%

G&A Expense

$9.2M

$10.2M

$8.4M

$27.8M

$8.4M

$9.3M*

$8.3M *

$26.0M

Y/Y $ Decrease

N/A

$600K

$1.3M

$1.3M

$800K

$900K

$100K

$1.8M

% Offset by rise in Franchise Expense

 

 

 

 

8.13%

18.2%

606%

46.4%

* These totals exclude overhead expenses that the company has portrayed as temporary in nature.

 

Jamba has apparently decided that it can go back in time and save itself a lot of money on those hidden expenses, too. A full year after the fact, Jamba slashed the franchise expense that it had previously reported for one quarter in 2013 – literally cutting the original number in half – with little more than a seemingly random stroke of the pen.

Let’s just hope that management wasn’t thinking about those widely overlooked expenses as a source of G&A savings when it carried out the following exchange.

Analyst: “Within G&A, what are the areas where you see opportunity?”

CEO James White: “We expect to be able to update you in a couple of months here in terms of the specifics. But we’ve got very significant pieces of work that have been underway that you’ll see us start to take action on over time as we move through the strategy.”

CFO Karen Luey: “Added to that … would be the reduction you currently have seen in G&A on a year-to-date basis. We’ve been able to take $1.5 million out of our G&A in 2014 to the second quarter. So we’re going to continue along those lines as well.”

 

Asset Sales/Stock Buyback: Doing the Math to Expose a Lousy Trade

Hype: Jamba can maximize its future returns by selling its company-owned stores to franchisees and then using the proceeds to invest more heavily in its publicly traded stock instead.

Reality: If Jamba actually follows through with that misguided plan, the company will essentially wind up selling its most valuable locations for a few times their annual EBITDA and then paying roughly 18 times projected 2015 EBITDA for stock in a broader chain of stores that mostly underperform the busy outlets that it just sold.

Jamba cannot reasonably expect to sell those 114 stores based upon their current earnings power, either, since franchisees must cover all sorts of expenses (for royalty fees, marketing costs, etc.) that will automatically slash the profitability of those locations as soon as they change hands. Once Jamba makes allowances for those extra costs and assigns a reasonable multiple to the leftover EBITDA that remains, the company will be lucky to collect $20 million for all of those valuable assets – or less than one-third of the generous estimates calculated by hopeful investors using inflated profits in their formula.

Feel free to double-check our math using the two handy charts presented below. We relied on numbers presented in the company's own regulatory filings to arrive at those eye-opening results. 

 

Bull Case (Based upon company-owned store margins)

Number of Stores

114

Total Revenue

$85.5 Million

Average Revenue Per Store

$750,000

Four-Wall Margin (2013)

17.0%

Total Four-Wall EBITDA

$14.5 Million

Multiple

4.5 x EBITDA

Total Proceeds

$65.4 Million

 

Realistic Case (Based upon franchise-level store margins)

Total Revenue

$85.5 Million

Base Four-Wall Margin

15.0%

Minus Royalty Fees

- 5.0%

Minus Corporate Marketing Dues

- 2.0%

Minus Local Marketing Costs

- 1.5%

Minus Franchise G&A Expenses

- 1.5%

Adjusted Four-Wall Margin

5.0%

Four-Wall EBITDA

$4.28 Million

Multiple

4.5 x EBITDA

Total Proceeds

$19.3 Million

 

Contrary to popular belief, Jamba will also remain on the hook for incremental costs associated with those stores even after franchisees assume control of those locations, too. While bulls like to think that Jamba enjoys 100% margins on franchise-based revenue, the company itself has clearly indicated that it expects a whole lot less. Since the midpoint of its future guidance anticipates a $5 million reduction in G&A and a mere $2 million boost in EBITDA, the company has basically implied that only 40% of the projected savings that it hopes to realize by refranchising its stores will actually fall to the bottom line.

If anything, however, Jamba seems more likely to weather a steep decline in its future EBITDA instead. By refranchising those 114 California stores, its own financial results indicate, Jamba will not only trade an estimated $85.5 million worth of revenue for roughly $4.3 million in future royalty payments, but the company will also turn a valuable $14.5 million EBITDA stream into a meager $2.6 million contribution that’s 80% below the level that it should enjoy right now.

Talk about the exact opposite of a compelling business proposition. What on earth was Jamba even thinking (or, better yet, drinking) when it decided to pursue such a regrettable plan?

Never mind. As it turns out, Jamba happened to discuss its motivation at the first possible chance, so we might as well let the company go ahead and speak for itself.

Analyst: “The California stores, are they kind of average California stores?”

CEO James White: “These are fantastic stores in California, but all the stores in California largely are great performers for the company. The thought process is we’re really moving ourselves to be more of a franchise/asset-light model, so that’s the basis for the move on the refranchising initiative.”

CFO Karen Luey: Plus, “as we execute upon our refranchising initiative, we expect to evaluate increasing the amount of our (stock) repurchase program with additional cash proceeds.”

CEO James White: “We have significant liquidity and believe that this is both prudent use of our capital and a way to reward shareholders who continue to believe in the story.”

 

Weak Guidance: Confessing to Bulls Who Turn a Deaf Ear

Hype: Even after Jamba sells all of those valuable stores, the company can still generate enough EBITDA to meet lofty Wall Street estimates. Jamba remains on track to deliver almost $18 million worth of EBITDA this year, with that number soaring toward $24 million the year after that.

Reality: Jamba recently issued new guidance that makes those targets seem like an incredible stretch. Since Jamba expects to generate between $15 million and $17 million worth of EBITDA this year, the company would fall short of Wall Street targets even if it delivered results at the high end of that range. Jamba then hopes to modestly increase its EBITDA to somewhere between $17 million and $19 million the following year, with the midpoint of its range falling some 30% below current Wall Street estimates. Keep in mind that Jamba may have very well included one-time gains that the company expects to realize on asset sales in its projections, too.

After all, when Jamba hosted its most recent conference call, the company at least hinted at that possibility whether it actually meant to show its hand or not.

Analyst: “Most of the 114 stores that you intend to refranchise are going to be in California, which are your highest-margin stores … Refranchising those will help your percentage margin. But at least incrementally, before there is an incremental build-out by new franchises, won’t that hurt your absolute profits?”

CFO Karen Luey: “Even if I strip out what I’m estimating for the overall gain for those stores, our overall profitability goes up, (because) we’ve got 100 to 125 new store locations that we’re planning for 2015.”

 

Menu Change: Opening the Door for Lasting Margin Pressure

Hype: Thanks to the widespread rollout of freshly squeezed juices and new energy bowls, Jamba now features a much broader menu that will allow the company to supplement its core smoothie sales by driving additional customers into its stores. While Jamba naturally spent a lot of extra money to launch such a major growth initiative, the company can expect its financial results to normalize now that it has moved past that temporary drag.

Reality: Following the company-wide introduction of those new products in the third quarter of last year, Jamba actually weathered a decline in customer traffic and simply wound up cannibalizing high-margin smoothie sales instead. Slammed by higher costs and weaker margins that literally hammered its bottom line, Jamba reported horrible third-quarter results that – with its profits falling 90% short of the consensus estimate – missed Wall Street targets by a mile.

Although Jamba tried to blame that setback on temporary growing pains, the company cannot expect its hammered margins to automatically recover from the heavy damage caused by a permanent change to its menu. Just ask some of the bullish analysts who promptly forgave Jamba for blindsiding them with its pathetic third-quarter results. Even they felt dubious enough to at least question whether Jamba could fully rebound from that lingering pressure any time soon.

For its part, Jamba never even saw that train wreck coming in the first place. After all, when Jamba discussed the initial launch of its new juice initiative during its second-quarter conference call, the company predicted a relatively smooth ride.

Analyst: “Operationally, wow do you feel like the stores handled it? Do you feel like you’ve worked out any bumps in the road in terms of whether it’s customer service times or spoilage cost with the fresh produce or any extra labor needed to support that product?”

CEO James White: “Yes. I think the deliberate pace with which we launched the platform over time has allowed us to really refine the various executional elements of the program, from waste to ordering to putting the fresh supply chain in place. (It’s) early innings. We’re a couple of months into the platform being broadly expanded, but we’re seeing good, steady progress, and we’re excited about how the organization is executing.”

Analyst: “And in your comments, you said you thought (juice sales would be) 60% to 70% incremental, which I’m interpreting as a new transaction as opposed to trading from a smoothie to a juice sale. That seems higher than maybe what your commentary has been in the past. Is that survey-based … somehow measuring a greater degree of incrementality than what you’ve previously attributed?”

CEO James White: “As we continue to refine the set of our best practices and the more we get outside of the four walls of our shops, from a marketing perspective, we’re seeing this juice platform in the consumer to be either a different consumer or a different occasion or both.”

Look how much that story changed by the time that the company updated the market just a few months later.

CFO Karen Luey: “Our four-wall store performance was impacted by the top-line increase of juice sales, which due to extensive trial and awareness-driving tactics, cannibalized smoothie sales … We took advantage of the high consumer demand and significantly accelerated the rollout of both juice and Energy Bowl platforms, and as a result, Q3 reflects increased labor and cost of goods sold. Labor increased 250 basis points due to the juice and Energy Bowl product platforms, which required additional labor for production, training and marketing initiatives and managing customer throughput and service times.”

CEO James White: “We’ve taken two of the more complicated products that we’ve launched in the company’s history – albeit two of the more attractive propositions from a consumer perspective – and they’ve disrupted the production flow. We’re in the process today of reengineering the flow … so we can get back to a more normalized speed of service.”

Analyst: “The shift to a juice emphasis or a juice blend works very well if you get incremental traffic since it’s a lower-margin product … But looking at a year ago, it was an extremely weak quarter in terms of four-wall sales, and it doesn’t look like you’re generating any incremental traffic … Assuming everything else is equal – which it always is – for each incremental unit of juice versus smoothie that you sell, what kind of a traffic offset do you need? In other words, if your juice goes from 7% to 10% of sales, let’s say, what kind of a traffic builder do you need assuming no price increase to offset that?”

CEO James White: “I don’t know that I have the answer to that question, but we’ll work on that for the next call … To put a sharper point on some of the in-store activities that we’ve stopped, we were sampling even in stores that we had rolled juice out in a year ago. That was an error. We moved away from those activities, and now we’re seeing most of our activities be out of store, making sure that the juice sales that we garner are more incremental … In some cases, our franchise partners have been a little bit smarter than we have been. So some of the in-store things that we would have executed on juice, they didn’t, which was an advantage … We’re learning from some of that experience.”

 

Senior Management: Letting the Record Speak for Itself

Of all the secrets to reveal, Jamba sure chose a peculiar one.

By admitting that mere franchisees somehow knew better than the actual corporate executives of the company, the CEO hardly bolstered confidence in his own senior management team. Since Jamba has chosen to take its chances on such a risky strategy, the company really needs extraordinary leaders – if not outright miracle workers – right now, too. After all, Jamba sure would hate to meet the same kind of fate visited upon other companies that previously employed one of the highest-ranking officers in the smoothie chain’s executive suite.

The very executive in charge of overseeing Jamba’s financial statements – and therefore likely well aware of (if not totally responsible for) the suspicious franchise expenses that the company has bookedCFO Karen Luey spent most of her career serving as the controller of the ill-fated Sharper Image chain. Already in serious trouble by the time that Luey ended her 15-year tenure at the doomed company, historical media coverage reveals, Sharper Image continued to rapidly deteriorate over the next couple of years before finally putting itself out of misery by filing for bankruptcy and ultimately shutting down all of its stores.

Following a brief, 16-month stint as the controller of fading LeapFrog (NYSE: LF) – a former highflier by then past its prime and since pounded to multi-year lows – Luey landed a job as the controller of Jamba itself and soon went on to score a big promotion right after her former employer, Sharper Image, gave up all hope and pulled the plug at the end of a torturous death spiral. Elevated to her current post by former Jamba Chairman Steven Barrard – now tarnished after serving as the leader of notorious Swisher Hygiene (Nasdaq: SWSH) when that company made a mess of its own books – Luey would later credit Barrard for convincing her to take new chances and expand outside of her normal comfort zone.

“I was afraid I couldn’t be the leader that the organization needed,” Luey confessed a few years ago. “But I realized you don’t say no to a personality like that. (Now), I wouldn’t change it for the world, because it has taken me places I never thought I would be … I would never have known what I was capable of.”

The CEO who now runs the show – and joins Luey in attesting to the accuracy of the books that she keeps – has long since won over the daring CFO, too.

“We were just starting a turnaround with a rookie CEO, a rookie CFO, and we didn’t have a strategic plan yet,” Luey recalled. But “now, we have an incredible trust between us. We both have each other’s backs.” 

 

* Important Disclosure: The owners of TheStreetSweeper established a short position in Jamba (Nasdaq: JMBA) and stand to profit on any future declines in the company's stock price. As a matter of policy, however, TheStreetSweeper prohibits members of its editorial staff -- including the reporter who prepared this investigative report -- from taking financial positions in any of the companies that they cover. To contact Melissa Davis, the senior editor of TheStreetSweeper and the author of this story, please send an email to [email protected].

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