Jamba Juice (NASDAQ: JMBA) is in the final stages of a sweeping business transformation from a traditional smoothie shop operator to an asset light, franchised based model. The plan was set into motion by recently departed CEO James White who started with the company in December 2008. Under White's leadership, the percentage of Jamba's stores that are franchised increased from 30% to nearly 90%, yet the market has not seemed to recognize the efficiencies likely to occur as the result of Jamba's new model. In addition, Jamba has taken significant strides to promote its brand to customers which should foster loyalty and create a stickier customer base.
The Power of the Franchise Based Model
The efficiencies of Jamba's asset light franchise model are twofold. First, Jamba is placing most of the risk of running a business in the hands of the franchisee. The company does not have to pay employees, rent, or upkeep each store; instead they receive a royalty and marketing fee on sales. Mr. Franchisee does all the work, takes all the risk and hopefully earns profits. Either way, franchisor makes 7.5% to 10% royalty on all sales. Moreover, because each franchisee is taking nearly all the business risk, he or she is much more likely to run his or her store more effectively because he/she has an "ownership mentality" or "skin in the game" because their hard earned capital is at stake. Under the new franchise model, there is a direct alignment of interests between franchisees (management) and shareholders. Under Jamba's old company owned model, there was higher likelihood that managers would not fulfill their fiduciary duty to the shareholders. Under the old model, store managers are more likely to receive fixed salaries and the outcome of the stores' operations often times has no impact on their net worth. The franchise model ensures management is acting in the best interest of shareholders because the franchisee's net worth is often directly correlated with the outcome of their store.
Promoting the Jamba Brand and Fostering Brand Loyalty
Jamba has taken significant steps over the last two years to build brand awareness and customer loyalty including:
- Creating a "Jamba Insiders" loyalty program that surpassed one million customers in July 2014.
- A"Free Juice Give-Away" event in August 2014 with almost a half-million free samples of juice distributed in 3 hours.
- Promoting JambaGO (a portable smoothie station) that caters to K - 12 schools, college campuses, and other non-traditional locations such as airports and fosters Jamba brand loyalty from a young age.
- Accelerating the expansion of freshly-squeezed juices, blended with nutritious whole foods such as kale, ginger, cucumbers, oranges and chia seeds.
- Becoming the leading retailer of made-to-order, freshly-squeezed juice with availability in over 500 Jamba stores across the U.S.
- Improving childhood nutrition and fitness by providing all-fruit smoothies to schools with its JambaGo® units and supporting nutrition and fitness education through its "Team Up For a Healthy America" program.
- Leveraging influencers and cultural icons like YouTube fitness entrepreneur Cassie Ho and tennis star Venus Williams to encourage Millennials to include Jamba in their daily diets.
Source: Jamba Inc. 2014 10-K
Valuing the Franchise Model
Below are income and cash flow projections for Jamba Juice assuming the company is able to transition to 100% franchised stores by the end of 2016 or 2017. The projection does not account for the costs likely to result with the refranchising of its remaining stores and the operating costs, if its remaining store-operated shops are not refranchised. The analysis should provide a reasonable estimate, if Jamba becomes a pure franchise based business.
If management's guidance holds true, then free cash flow should roughly match net income over the long term. Management has guided for free cash flow to hover between 90-110% of net income and long-term EBITDA margins between 30-40% as illustrated below.
Note 1: Cost of sales, labor, occupancy, operating costs, and asset disposal gains are estimated using rough run-rate projections based on the 9-month period ending Sept. 30th, 2015.
Note 2: Long-term other operating expenses are estimated to be $10-$20 million and long-term depreciation and amortization figures are based on Q32015 run-rate
Below are management's projections. The above income and cash flow projections come pretty close to management's guidance and should provide a reasonable idea of what Jamba's financials would look like over the long run if the company goes to a 100% franchise model.
Valuation
Four publicly traded comps that offer something similar to Jamba such as smoothies, frozen yogurts, or bagels and oatmeal are Starbucks (NASDAQ: SBUX), McDonald's (NYSE: MCD), Krispy Kreme (NYSE: KKD), and Dunkin' Donuts (NASDAQ: DNKN). The median EV/EBITDA multiple for these four companies is about 15. If you slap a 15x multiplier on Jamba's 2016 upper end EBITDA guidance of ~$20 million, the implied equity value for Jamba is ~ $22 per share or a little more than 60% upside from current levels.
Note: Jamba Inc. currently has no debt. These figures are meant to be estimates and could change significantly depending on company performance and if the company takes on debt.
Conclusion
Jamba's transformation is nearly complete. The company is close to having 90% franchise stores and the inherent efficiencies and alignment of interest between shareholders and management should bode well for Jamba investors over the long term. Jamba is focused on building its brand image and fostering consumer loyalty. Jamba has opportunities to expand its international footprint as it currently only has 70 international franchisees. As of December 30, 2014, Jamba had five master developers with commitments to open an aggregate of 435 stores internationally, with 200 planned during the next three to four years. Moreover, consumer preferences are trending to healthier options and Jamba is making all the right moves to promote its healthy brand and culture. The company is in the process of buying back $25 million in stock and is focused on continued cost reductions. According to last year's annual report, Jamba "entered into an agreement with a third party service provider of consulting, technology and outsourcing services designed to improve workflow efficiencies while reducing costs. At the end of 2014 we also announced the implementation of a workforce reduction of approximately 11% of our employees at our support center, including three of our Senior Vice Presidents." About 30% of Jamba's share float is sold short and any positive developments could cause a nasty short squeeze. Jamba is set to report earnings in the next week or two and there is an activist investor who has significant influence and should continue to push for value creation for Jamba shareholders. The efficiency of the franchise model is the engine of Jamba's core operations which will likely provide Jamba investors with solid returns for the long term.
Other Sources:
Jargon, J. (2015, Oct 02). Business news: Jamba launches search for CEO - chain of juice cafes expects 90% of stores to be franchisee-run by the end of the year. Wall Street Journal Retrieved from here.
Nick Clayton
Long-term buy and hold investor aiming to uncover stocks that are more likely to outperform the market indexes over the long-term. My investing philosophy is to ignore the market noise and focus on finding quality stocks early in the game. Stocks with a large addressable market and massive upside in the years ahead. I typically will concentrate my investments in the best ideas.I only write and invest in ideas that I extensively research and have a strong understanding of how their business operates.My investment framework centers around these five main principles:1) Founder - led companies whose executive team owns a significant percentage of stock.2) Undervalued not by traditional valuation metrics but undervalued in relation to the total addressable market opportunity.3) Companies that have a great culture and maximize long-term value for their employees, customers, and investors.4) Stocks that are hyper focused on providing the absolute best product offering and experiences for their customers.5) Understandable product offering and something that will likely still be around 30 - 50 years from now.Thank you to all the readers and followers and I wish you a profitable investing journey.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JMBA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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