Jamba, Inc. (JMBA)

F2Q08 Earnings Call

August 28, 2008 5:00 pm ET

Executives

Steven R. Berrard - Chief Executive Officer and President

Karen L. Luey - Chief Financial Officer

Paul Coletta - Senior Vice President - Marketing and Brand Development of Jamba Juice

Analysts

Jeffrey Farmer - Jefferies & Co.

Mike Sullivan - Resource International

Ben Ratner - Private Investor

Ron Chez - Private Investor

Presentation

Operator

Welcome to the second quarter Jamba Juice earnings conference call. (Operator Instructions). I will now turn the presentation over to your host for today’s call Steven Berrard.

Steven Berrard

Today joining me is Karen Luey our Chief Financial Officer and Paul Coletta, Jamba’s Chief Marketing and Brand officer who will be joining me on the call. During the call today we will discuss Jamba’s second quarter results, touch on some areas we have identified that need to be addressed and discuss the actions we are taking and initiatives we will be pursuing to drive improved performance.

I would like remind all listeners that this call is being broadcast and recorded live over the internet at www.jamba.com. The web cast is available on our web site and replay will be available via telephone until September 10, 2008.

This conference call will include forward-looking statements within the meaning of the securities law. These forward-looking statements will include projections, expectations of restaurant comparative store results, the number of stores we intend to open and certain statements of our expectations and plans. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements that are contained in the company’s filings with the SEC including the risk factor section of Jamba’s 2007 10-K.

With that said I will hand it over to Karen who will give you an overview of our financial results for the second quarter.

Karen Luey

First of all our comments on the results will be brief, but all detailed information can be found in our 10-Q filed with the SEC tomorrow and in today’s press release.

As previously reported, total revenue increased 10% to $98.6 million and company store revenue increased 11.7% to $96.3 million for the second quarter. The increases are primarily associated with the opening of 69 net new company stores and the acquisition of 22 stores from franchisees offset by the decrease in company store comparable sales of -7.3%.

Comp store sales increased 7.1% to $25.3 million for the second quarter due primarily to the increase in total revenues, an increase of $2.7 million in dairy, juice concentrate, frozen food and smoothie additions offset by a reduction of $1 million in orange juice, orange costs, and other cost savings initiatives entered into during the year.

As a percentage of company store revenues the costs decreased to 26.3% in the second quarter compared to 27.4% in the prior year period.

Labor costs increased 18.7% to $31.4 million. As a percentage of company store revenue labor expenses increased to 32.6% in the second quarter of fiscal 2008 compared to 30.7% in the same period of the prior year. This increase as a percent of company store revenue was primarily due to a combination of minimum wage increases in several states in which we operate, particularly California, and the decrease in company stores comparable sales.

Occupancy costs increased 22.9% to $10.6 million and as a percent of company store revenue increased to 11% in the second quarter of fiscal 2008 compared to 10% in the same period of the prior year. This increase as a percentage of company store revenue was primarily due to the decrease in company store comparable sales.

Store operating expenses decreased 1% to $10.8 million and as a percentage of company store revenues decreased to 11.2% for the second quarter of fiscal 2008 compared to 12.6% in the same period of the prior year. This decrease was primarily due to our cost saving initiatives which we entered into during this year.

Depreciation and amortization increased 41.6% to $5.7 million for the second quarter and as a percent of total revenue increased to 5.8% for the second quarter of 2008 compared to 4.5% in the same period of the prior year. This was due to the opening of new stores and the acquired franchise stores since the end of the second quarter of 2007.

G&A decreased 6.1% to $9.9 million for the quarter and as a percentage of total revenues decreased to 10% for the second quarter of fiscal 2008 compared to 11.7% for the same period of the prior year. This decrease as a percentage of total revenue was attributable to a $0.3 million decrease in stock based compensation costs as well as the benefit of cost saving initiatives that began in May 2008 offset by a one time restructuring charge of $0.6 million related to the severance costs from the previously announced closed stores reduction.

Some other key items that happened during the quarter were store pre-opening costs decrease as a result of opening fewer stores. We had store impairment expense of $3.3 million for the quarter compared to $0.1 million for the same period of the prior year. Store lease termination and closure costs were $2.2 million for the quarter, which are related primarily to the stores planned to be closed under the restructuring plan announced last quarter.

Trademark impairment expense was $82.6 million which was $49.7 million net of the associated tax benefit for the quarter which is all non-cash and was primarily based on the decline in the market value of the company. Gain from derivative liabilities increased to $2.5 million for the quarter compared to $0.3 million last year. We also took evaluation allowance against our deferred tax assets during the quarter of $32.2 million.

With that said I will now turn it over to Steve.

Steven Berrard

During my first three weeks here our leadership team has reviewed Jamba’s business plan in an effort to refocus on the best strategic opportunities to leverage our brand and drive performance improvement while we navigate the current environment.

As I look at where we are today and our outlook over the next 6 to 12 months, we realize we can’t do anything about the current state of the economy and therefore we are razor focused on the things we can control like our business initiatives to drive sales and reduce our costs.

Our leadership review has reminded us that despite the performance issues we have experienced and the current unfavorable economic environment, Jamba has some very strong attributes. Consider, over 700 stores in operation; system wide revenue of $450 million of which $325 million is generated from company stores; approximately $100 million customer visits; an iconic brand that in itself can provide outstanding stand alone economics through licensing and brand extensions; strong store level EBITDA, almost $30 million for the first half of 2008 and over $45 million for the full year 2007; a strong balance sheet with no bank debt; strong strategic partnerships with companies like Nestle, Nike, Whole Foods and Safeway; and over 12,000 loyal, hard working, and dedicated employees. It is these valuable assets that will help drive our future success and it is why we believe so strongly in the future of Jamba.

While I said two weeks ago there were no quick fixes, there are some short-term actions we have already taken or initiated and there are others we have identified and are in the process of implementing.

Our plan going forward assumes little or no change in revenue performance for the remainder of 2008 and little or no comp store growth for the first half of 2009. We know there are real opportunities to drive comps and unit volumes, but our current view is that the headwinds will remain through the middle of 2009 if not longer and as such our strategy is focused on changes in our business model; maximizing revenue opportunities from the Jamba brand; improved store performance and profitability; reduced G&A; and management of liquidity.

The beginning point of our strategy is to further maximize our store level cash flow which is strong despite the significant top line headwinds. Store level EBITDA for the second quarter actually increased to $19.9 million compared to $19.3 million a year ago and was $29 million year-to-date in 2008 versus $33.3 million for the same period a year ago.

In order to improve overall financial performance we expect to make changes in our business model going forward. Those changes will include store growth through focusing on franchising. We currently plan to refranchise about 30 company stores that currently operate in markets where we have both company and franchise stores. These stores have been offered to our existing franchisees and discussions have begun with a number of them. Those that are not required by existing franchisees will be offered to new franchisees.

We plan to accelerate non-traditional store growth with an emphasis on airports and college campuses. There are currently more than 40 locations scheduled to be opened by existing franchisees in 2009. We plan to begin marketing the sale of new territories under multi-unit development agreements to experienced and qualified franchisees and have targeted Washington DC, Philadelphia, various areas outside New York City, Boston and North Carolina as markets of great interest.

We also plan to develop international expansion on a measured pace. This began with the signing this week of a non-binding letter of intent with an international franchise partner for the development of a minimum of 80 stores. The goal is to open the first store in the second quarter of 2009.

We believe an aggressive franchising strategy will better position us for future growth in several important respects, including a significant reduction in capital outlay; higher margins and a reduction in the quarter-to-quarter volatility of cash flow; better optimization of company support and infrastructure; improve supply chain efficiencies; and the ability to open more stores faster thus increasing brand presence, customer frequency and combating competition. Our goal will be to more evenly weigh the store network between company and franchise stores.

Our plan for maximizing revenue potential from the Jamba brand includes seeking additional opportunities to leverage the brand in new and complimentary product categories and distribution channels based on our initial experience with Nestle relationship, which is off to a strong start.

Today we issued a press release that discusses the early success of our ready to drink beverage which launched in May to eight western US states. Since the launch we have captured a significant share of the premium juice segment, exceeding initial expectations. While it is still early, we are thrilled at the success we are having. Nestle continues to support the launch with a significant product sampling, online activity, consumer outreach, public relations and in-store promotions. In addition television ads began airing in June in both San Francisco and Portland. You can review these commercials on our web site. We think this demonstrates the power and the strength of the Jamba brand outside the four walls at our retail stores.

The other additional licensing opportunities currently being developed include fruit tea, yoghurt and parfaits, frozen smoothie bars, breakfast energy bars, packaged boosts. We intend to work closely with Nestle to expand our relationship and also seek other strategic licensing partnerships.

From a store performance perspective, we are taking a number of aggressive steps to improve financial results. We have initiated steps to reduce store level and related corporate expenses by $15 million while we work diligently to drive sales performance.

Within our store infrastructure we have identified an additional 20 stores that we intend to close. This effort should eliminate the drag of unprofitable stores from future results.

We are also seeking to renegotiate a significant number of leases on existing stores with landlords. Efforts are underway to reduce store construction costs to under $350,000.00 per unit versus the current $415,000. This effort should be completed by year-end.

From an operating perspective we are in the process of cutting certain store hours like early morning and late evening to eliminate uneconomical store operating hours. Some stores have opened to early or stay open too late without generating appropriate returns for those store hours. This initiative will begin in September.

We are now testing an improved schedule in labor management systems. If testing proves successful, we will move forward to have all company stores fully operational on the system by the end of the first quarter of 2009. We are also implementing effective size and price combinations to improve cost of sales while maintaining customer satisfaction. This effort should also be launched late in the third or early fourth quarter.

Yesterday we further reduced our headquarters support center workforce by eliminating a number of positions and other costs that should generate additional savings of $3 million. These actions, combined with the reductions made in May 2008, have resulted in an estimated $9 million in annual cost savings. We will continue to review all aspects of our operations to ensure our resources are effectively and efficiently being utilized while at the same time identifying reductions in spending not aligned with our current goals and objectives. We plan to aggressively invest in technology to further reduce costs.

As we study sales performance in light of the challenging economic environment we expect to remain aggressive with various initiatives including implementation of a modest 1% price increase effective early September to help offset some of the cost increases we have experienced: a greater emphasis on customer service by eliminating many of the administrative tasks that currently burden store managers, this process is currently underway; revitalizing the look and feel of our older company stores to restore our brand dominance and reinforce the vibrant and fun environment that our stores have been know for; we have identified the first group of stores that we intend to refurbish; allocating marketing resources to local communities where our stores are located to ensure the customer knows what the Jamba experience is; continue to roll out customer loyalty initiatives; continue to promote and expand our breakfast offering. We believe these products strengthen our relationship with customers striving for a healthy lifestyle. Not only do we believe our breakfast offerings will attract new customers, but they also strongly differentiate our product offering from the competitor.

We are also taking a much closer look at our product offering in the store, with an eye on making improvements in food. Based on the complaints and the comments we know there is substantial room for improvement. We are taking a fresh look at short and longer-term opportunities to test additional offerings, including products developed by outside parties. We will aggressively test to find a better solution.

We continue to focus on managing our general administrative expenses. On a going forward basis we are targeting G&A expense to be less than 9% of total revenue before stock compensation expense. We are also going to aggressively manage our liquidity and strengthen our capital structure. For the balance of 2008 we have substantially completed company store development.

In 2009 we expect little new company store activity except where favorable development opportunities are presented to us. The sale of company owned stores to existing or new franchisees will generate capital and we are aggressively improving the management of our working capital, including improving our inventory management, cash management, accounts receivable collections, and payables management.

Lastly, due to the financial covenant restrictions of our revolving credit facility, we sought and obtained a commitment letter for a $15 million, two year, senior note credit facility, which can be expanded to $25 million under certain conditions. While this is expected to be more expensive than our revolving credit facility, it gives us substantial, immediate, financial flexibility.

All of our plans haven’t been finalized, but based on the various initiatives and tasks discussed we are targeting the following for 2009: Low single digit revenue growth primarily driven by price; which seek additional opportunities to leverage the Jamba brand and new and complimentary product categories and distribution channels; minimal company owned store development; opening 40 or more franchise stores before any benefit of store openings by perspective new franchisees; cost of sales at or below 26% of company store revenue; labor costs at or below 33% of company store revenue and further reductions in G&A with a target to achieve below 9% per-stock compensation expenses.

Achievement of these targets will begin to help restore our EBITDA margins and cash on cash returns to levels that we enjoyed in past years, while solidifying our balance sheet. This will also enable the company to pursue attractive business opportunities as they arise.

Before I conclude, I want to emphasize that we intend to continue to devote resources to ensure the unique Jamba culture that manifests itself in team members executing at the highest levels while expecting their passion for the brand is not lost in these challenging times. I thank them for all their dedication and hard work and we intend to let the local communities where our Jamba Juice stores are located know that the Jamba experience is what separates Jamba Juice from our competitors.

As I said earlier there are no quick fixes. However, I am confident that the actions that I have described today demonstrate Jamba can perform at a higher level than where it is today. I want to reemphasize the brand, the customer base, and the stores are valuable assets that can be better leveraged to generate improved financial performance and shareholder value.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeffrey Farmer of Jefferies & Co.

Jeffrey Farmer - Jefferies & Co.

Can you touch on the common characteristics of the, it looks like 30 units or so that have been selected for closure in terms of location, where they stood in their lease terms and cash flow margins?

Steven Berrard

We won’t describe specifically where they are located. Generally the stores were chosen for age, effective cannibalization, EBITDA losses, or unfavorable leases that we otherwise can’t negotiate or cannot renew.

Jeffrey Farmer - Jefferies & Co.

Of the 518 company units at the end of the second quarter, can you just give us a ballpark number of approximately how many of those units you think are cash flow negative right now?

Steven Berrard

Probably, well you have to exclude stores that have been opened for the first year, year and a half, so probably about 50 or 60 and we pretty much have a plan for each of those, either with better labor improvement, some concessions from the landlord, reduction of operating hours, and so we are pretty comfortable. We have a good analysis of our stores and actually we are pretty pleased with the composite of what we have.

Jeffrey Farmer - Jefferies & Co.

You highlighted a bunch of low hanging cost initiatives that seem like pretty common sense type stuff, especially in, again, specifically the reworking of the leased terms, adjusting the store hours, managing the labor scheduling, food costs management. Why do you think, looking back, that a lot of this stuff couldn’t have been done 12 to 18 months ago?

Steven Berrard

I think in fairness to the management team and it’s leadership, if you look at what’s happened to Jamba in the last years and again you have to balance this with a bit of now I’ve been here for three weeks and I am able to see at a lower level of detail than I did as a board member and a chairman. I think the fact that the company went out and with all of our concurrence, tried to open 100 stores a year and at the same time try to introduce a significant number of new products, product extensions, ideas that had been worked on and were never really implemented because maybe capital constraints or whatever the reason, those two factors coming together at the same time, opening two stores a week, introducing new products, to a workforce that if you really sit back and think about it they are minimum wage, young adults, who are expected to memorize anywhere from 50 to 100 formulations on the fly and deal at retail across the counter with customers.

I think basically if we would have sat back and maybe evaluated that a little differently, and I’m still sitting here so I can take responsibility for that, we probably would have not rolled out as many stores, or we wouldn’t have rolled out as many products, or we would have done it in a better sequencing than we did.

On the other hand we learned something by it and I think the products that we’ve introduced over time will pay the dividends. I think we lost a little bit. I also think that when people look at Jamba and they say transaction decline, the category is getting old and worn, really what I think is happened is our customer service levels are not what they once were. Because I think we have put so much pressure in the store to base on tasks that need to be done, I think our stores don’t look as good as they once did and those two things I think we need to get to right away.

Jeffrey Farmer - Jefferies & Co.

In terms of refranchising can you give us a ballpark as to what type of cash flow multiple you might be expecting to get on some of these units?

Steven Berrard

Well I would think that any where from three, four, five times depending on the location and where they are at and how they are doing.

Operator

Your next question comes from Mike Sullivan of Resource International.

Mike Sullivan - Resource International

Do you have any plans to move into the Chinese market?

Steven Berrard

We are talking to partners in various markets up to and including that one, but there are no immediate plans.

Operator

Your next question comes from Ben Ratner - Private Investor.

Ben Ratner - Private Investor

Can you please comment on your liquidity position currently and how you expect that to change over the next several months?

Steven Berrard

Now that we have a credit facility plus the cash we have in the bank, we are good liquidity wise.

Ben Ratner - Private Investor

Can you provide the number?

Steven Berrard

Sure, we are probably $14 million or so in cash on hand, no borrowings and the facility gives us an immediate $15 million access. Additionally we have some significant working capital items that come due including a $5 million tax refund and when our store development is finished for the year, we have one store left to finish. We have some small amount to pay on that, but we basically our payables are in good shape and we are ready to move forward.

Ben Ratner - Private Investor

How long do you expect to be free cash flow negative for in terms of months?

Steven Berrard

I would expect that in 2009 we should start to see positive cash flow.

Ben Ratner - Private Investor

On the leases that you have which are uneconomical, can you kind of help us understand what the economics are in breaking the leases and what potential liability there may be to the extent you decide to close stores and have to break additional leases?

Karen Luey

We are expecting that number to be not materially different than what we estimated for the charge that we took in Q2.

Ben Ratner - Private Investor

In terms of the store base, you said 50 to 60 stores were cash flow negative. How unprofitable does a store need to be for you to continue to run it? Are there any stores that are currently slightly free cash flow positive, but are very, very low margin that you would intend to close as well?

Steven Berrard

Certainly in the space of 518 stores you have a whole variety of stores, some very, very good and some that are marginal and some that need to be closed, but this is a company that has been evaluating store closures since the early part of the year and now it is 30 and we are content with those 30 and the 20 that we talked about closing, we are going to work our way through. The rest of them are either too new and are still in their ramp up period or there are reasons to keep the stores open because of marketing position or competitive advantage.

Operator

Your next question comes from Ron Chez - Private Investor.

Ron Chez - Private Investor

Would you discuss how you are doing right now with non-traditional locations, either airports or universities?

Steven Berrard

Doing, meaning what?

Ron Chez - Private Investor

How are those stores doing against what your expectations were?

Steven Berrard

They are doing better than our expectations, which is also the reason why we would like to push that initiative a little faster and a little harder.

Ron Chez - Private Investor

And what did you say with regard to the pipeline, there were 40 of those in the pipeline?

Steven Berrard

There are more in the pipeline, but we are very comfortable with 40 of them, but we would expect the number to be much greater than that.

Ron Chez - Private Investor

What is the cost to Jamba Juice to open these stores?

Steven Berrard

Nothing, no cost, nothing.

Ron Chez - Private Investor

How do you plan to do a better job taking advantage of the connection that you have to good health that I think you have done in the past from a marketing standpoint.

Paul Coletta

I think it takes; you are familiar with our breakfast offering. I can talk a little bit about that. That has been a success.

Ron Chez - Private Investor

It is a terrific product I think.

Paul Coletta

The early success, we launched that in February and the bottom line on it is it’s done very, very well. It has exceeded expectations, but those results have not been enough to offset the negative transaction trends and lift our full day comp sales, but when you look at that day part comp alone, we are comping up about 11/2%.

The other thing I can point to is we piloted a meals program that was positioned as a healthy off site e-cup [ph] in Hawaii. We have had that program in for about a year and that’s generating positive full day comps in that market, so we are looking at aggressively expanding that system wide in 2009.

So I continue to believe in the meals platform as we hit this economic headwind and more discretionary purchases are getting impacted, I think for us to build meals that are more relevant to consumers and have more frequency is the right thing to do. That is just one big initiative we are going to continue to push into 2009.

Ron Chez - Private Investor

You are also going to look at better product in the store compared to what’s there right now?

Paul Coletta

Yes, that has been a low priority, honestly. The merchandise in the store has been a low priority, but I do believe that that’s something we have to get our arms around and I’m not sure that the right answer is for us to go in and design these products as maybe contract with a third party and put something together, so stay tuned there.

The other thing I would add is I think one of our most differentiated and the best proof point we have for healthy living is our all fruit line, which continues to be a very significant part of our mix. I think the thing there, we need to start talking about more out of store is the fact that it has no sugar added, it’s all natural, five servings of fruit. It is the most differentiated product we have on the menu today, especially as we start to see smoothie offerings from QSR, so we need to get out there with that differentiated platform in a bigger way.

Ron Chez - Private Investor

Amidst all the cost cutting are you going to, Steve and Paul, look for additional ways to invest in marketing?

Steven Berrard

It’s pretty funny, a marketing guy would probably tell you yes, lots and lots and lots and I would suggest that we certainly are a company that has a brand that needs to be marketed. The question really is where we should put our emphasis based on what we know today. In this environment it’s really tough to figure out what marketing spend would be effective, but as we get into ’09 I think we’re going to move a little more marketing into the field, get a little more tactical around the stores.

I think we tried some things last year to promote the introduction of products. I think if there is a set of customers that we probably haven’t touched often enough, it is the people who have never come to a Jamba, so I think we are probably going to try to reach out to that group in a little bit more significant way.

Ron Chez - Private Investor

Your list of plans is a good one; you’ll have to work hard at the implementation huh?

Steven Berrard

There is no doubt. I guess the best thing about the initiatives that have taken place, most of them we’ve already started, so obviously talk is cheap. You’ll be able to measure the effectiveness of them when we come around to the fourth quarter, in the early first quarter, but there is a lot of opportunity and now that we are kind of stabilizing the growth mode a little bit, we have a chance to really take a hard look at everything that we’re doing and I would say that the management here knows what needs to be done, it’s just a question now of going out and doing it.

Paul Coletta

The other thing I would add to Steve’s comments is don’t forget, we have this marketing partnership with Nestle. They are putting a significant amount of marketing dollars, I have said it before, this year alone they will spend more than we do on marketing the Jamba brand, definitely with a healthy living message and then next year that is projected to increase substantially.

Ron Chez - Private Investor

Do you have other product opportunities with Nestle specifically?

Paul Coletta

We are exploring, as our primary food and beverage partner today we are exploring other categories.

Steven Berrard

And Ron, if you think about it, you’ve been around a long time, so you know the company well, but if you really think about Jamba, I think we need to look at it in a different light. It is really three different businesses. There are at least three opportunities where we can generate significant profitability i.e. shareholder value.

The licensing of that brand could be, in itself, a significant profit contributor. There is no lack of large consumer branded companies that are knocking on the door every day here trying to do something with us. We have been a bit reluctant in the past to deal with some of that and for a lot of reasons, none of which are terribly important today, but that in it self could be a significant contributor to earnings in it self.

We have the franchising opportunity; there is no lack of people who would like to open up a Jamba store. Now we have got to make sure we pick the right partner in the right markets and do that with some due care, but that in itself is a freestanding profitable endeavor and then we’ve got our stores. Frankly, our stores make a lot of money. The problem that we’ve had is we haven’t been able to rationalize any of it to where it really counts and that’s the bottom line and I think most of these initiatives today, which as one analyst said “no big deal, no surprise, what took you so long”. We could debate what took so long and why it wasn’t done, but the fact is now it is. [Interposing]

Ron Chez - Private Investor

I was just going to say as a percentage of sales you spend too much on G&A.

Steven Berrard

There’s no doubt about it.

Ron Chez - Private Investor

Speaking of that, what is your compensation as interim CEO?

Steven Berrard

My wife sends me a $500.00 allowance from home every week. There is no compensation.

Ron Chez - Private Investor

Do you spend it all in the same place?

Steven Berrard

I’ve been buying Jamba juices to make sure I help same store sales.

Operator

Your last question is a follow up from Mike Sullivan of Resource International.

Mike Sullivan - Resource International

Touching base on the merchandising, what percentage of sales are you taking for merchandising right now and what profit margin does your merchandising compare to lets say drinks?

Steven Berrard

If you are talking about the store merchandise, you are not talking about the baked goods and that sort of thing; you’re talking about the [interposing].

Mike Sullivan - Resource International

Store merchandise yes and what not.

Steven Berrard

It is less than 1% and we don’t disclose the margins on categories, but it is safe to say it’s significantly less than our smoothies.

Mike Sullivan - Resource International

With your partnership with Nestle, using their international presence, are you using that to help branch out in the international market?

Steven Berrard

At this point we really focused our endeavors here domestically. I think there is so much opportunity here right now that we don’t want to let that get away from us. I think if we demonstrate to Nestle that we’re a worthy partner, I think they’ll provide us whatever opportunities that exist outside the United States if and when we’re ready and they are too.

Steven Berrard

Thank you very much everyone. I think the proof is always in what we do from here and so I think we’ll continue to put our heads down and work towards getting these things done and get back to you as needs and events arise. Thank you very much.

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