Jama Juice (JMBA: Current price: $2.30), is a well-known operator of fruit smoothie stores in the US. The stock has cratered since going public some time ago via a SPAC.
What Has Changed Here?
JMBA hired a new CEO, James White, back in December 2008. Since then the company has embarked on a significant new corporate direction, which entails two main strategies: A shift in focus to franchised-owned stores as opposed to company-owned stores and a move to license the Jamba brand for a broad array of new retail products. There are, of course, other changes that White has made, but I think that franchising and licensing are the two most important ones, as far as the stock is concerned.
As for the franchise initiative, as of December 29, 2009, there were 739 Jamba Juice locations consisting of 478 Company Stores and 261 Franchise Stores operating in 22 states and the Bahamas. But, as of October 5, 2010, there were 742 locations consisting of 378 Company Stores and 364 Franchise Stores. I believe that the goal of the company is for a majority of sales to come from franchisees in 2011. On the licensing side of the business, it is best to review the company’s news releases this year (http://ir.jambajuice.com/phoenix.zhtml?c=192409&p=irol-news&nyo=0) to get a feel for the type of licensing deals JMBA is pursuing.
What Will Happen Here?
Of course as the transition to franchising is underway, total revenues suffers as the company trades retail sales at Company Stores for royalties and franchise fees. However, at some point, the revenue decline will reverse and growth will return as the transition is completed. I believe that as the company’s transition to a franchise and licensing company is finally complete in the next two to three quarters, revenues will start to climb again, and profits will increase substantially given the higher margins associated with franchising and licensing. As the financial comparisons improve, more investors will take notice and the stock will appreciate.
Risk/Reward
Truth be told, I am a bit too lazy to work out all the numbers for JMBA. A key to remember is that JMBA has about $24 million left in Series B Redeemable Preferred Stock, which are convertible at the election of the holders, at any time, into shares of Common Stock at an initial conversion price of $1.15 per share. So in effect, if my math is correct, the total shares outstanding for JMBA is really a bit over 80 million, instead of the 60 million or so they currently report. At 80 million shares the current market cap is $265 million, or around a $230 million enterprise value. That’s set against around $270 million in LTM sales. Cheap? Not necessarily based on the numbers alone. But, it really depends on what one thinks of the intangible value here, i.e. the brand, and the prospects for growth both in terms of franchising, licensing etc. I happen to be a big believer in the potential here, so I think the valuation is quite low relative to the future prospects, even if I can’t, or don’t have the patience, to fully quantify it. At the same time the risk is low, since the company has ample financial resources and is already well ahead in its financial turnaround.
Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in JMBA. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.
JMBA’s earnings report showed continued progress in the company’s transformation to a franchise operation.
Notably, the company’s franchise base was 76% of total stores as of 4/2011, compared to 39% only a year ago. As mentioned previously, JMBA’s move to a franchise-type business, will have significant positive effects on the company’s financial results in future years, which are not yet reflected in the stock price.
However, since the franchise initiative was only completed this past quarter, the company continues to suffer from poor comparisons in prior years, when it recognized sales of company-owned stores.
As mentioned in the 10-Q:
My expectation is that the downward trend in sales should reverse itself next quarter, or the quarter thereafter. And in any case, in a year from now, as the number of franchises grows and sales trends remain positive (this quarter franchises comps were +4.1%), the company will begin to have very favorable financial comparisons and growth will resume.
As regards to capitalization, on the conference call the company mentioned that taking into account the convertible preferreds, the total diluted share count at this point would be around 86 million. At a $2.30 stock price, this gives the company an enterprise value of around $180 million (please note, my original write up has an incorrect EV calculation).