Jamba (JMBA) is one of the largest smoothie and healthy fast-serve chains in the
Massive growth potential
Undoubtedly, US consumers seem to be turning towards more health-conscious offerings and lifestyles, as evident from the big booms in running and yoga (NKE, LULU), as well as superior performance from healthy fast-food chains like Panera (PNRA) and Chipotle (CMG). Even McDonald’s (MCD) has stepped up to the plate with better tasting salads and brand-new smoothie offerings.
We think Jamba could stand to benefit from these new trends. Though best known for their smoothies that vary in actual healthfulness, Jamba also sells random energy bars, sandwiches, and flatbread. More recently, the company introduced oatmeal and some hot tea offerings to expand its market reach. With same store sales up the last three quarters, we think these new offerings are resonating with consumers, and bringing in a different crowd that might not purchase items from Jamba Juice otherwise.
Though same store sales have steadily increased, we still think the company finds itself in a tenuous position. It doesn’t quite offer the same full-meal menu as Panera or Chipotle, which means they must rely on people snacking or using them as meal replacements. We feel this market has been particularly crushed by high unemployment and wage stagnation, as even the health conscious would rather snack on 27 cent bananas, or run to McDonald’s for a smoothie that will likely cost substantially less ($3-$4 vs. $5-$7). It’s harder for a splurge item like an expensive smoothie to thrive when there isn’t a lot of money for splurging. Unless there’s an exponential jump in employment, we do not see same store sales growth exceeding 4-5% over the next few years.
Jamba is also exploring new mediums of delivering its branded products to customers. We could see ready-to-drink products and blends that could be sold through different channels and retailers. However, we don’t think this is material to the business at this time.
Recent restructuring should accelerate growth, possibly at a cost
In 2010, the company announced a restructuring that essentially refranchises corporately owned stores in order to free-up capital for growth initiatives and increased profitability. The structure works out with the corporate entity getting between 5.5%-6% of net sales, with other small percentages that go to general marketing and advertising initiatives.
We think this shift in the business model will lead to faster store growth; however, we see some risks inherent in this strategy. One could be a disincentive to start Jamba Juices. For some smaller markets, it may not even be worth it for a franchisee to have 6% of revenue go to Jamba, Inc, which could hurt overall brand awareness. Additionally, we think allowing franchisees to run Jamba Juice operations is a risky strategy. There could be a huge variance in the quality, cleanliness, and effectiveness of the individual stores, and we’ve noticed that McDonald’s locations, for instance, can be completely and utterly different. However, corporate locations generally have good quality customer service and a high standard for cleanliness. Inconsistency in the product and customer experience is a large risk for all chains, but we think it’s heightened when dealing with franchises rather than company-owned stores.
On the flip side, these franchisees could know their marketplaces better and possibly provide their customers with an even better experience than a regional manager could. However, given these risks, and the position of Jamba Juice products, we think it’s best to avoid this company, which could end up being worthless if macroeconomic growth doesn’t accelerate. Yet, with $26.2 million in cash and no debt, Jamba has a cash-cushion and option value, which gives it time to get its business plan/operations in order. Nonetheless, we think there are much more compelling opportunities out there than this smoothie maker.