Thursday, May 29, 2008

Jamba, Inc. Shareholder's Meeting, May 28, 2008

Jamba Juice's (JMBA) shareholder meeting took place near the beautiful Berkeley marina at the Doubletree Hotel (Berkeley Marina). I attended Jamba's first ever meeting last year, and the same issues concern me today that concerned me then. See

Jamba Juice Shareholder Meeting (2007)

In that earlier post, I talked about futures contracts (for oranges), as well as a possible partnership with a major company. As we know, Jamba now partners with Nestle to produce read-made beverages sold in stores. As for future contracts, well, the CFO is opposed to it for reasons I think are illogical. At the same time, with all commodity prices being so high now, perhaps futures contracts are not currently a great idea. It's a CFO's job to monitor futures markets to increase price stability of key ingredients, and it deeply disappointed me to hear him almost reject outright the possibility of using futures contracts.

But back to the present. In contrast to last year, Jamba offered its products to shareholders at the meeting. It more than made up for last year. This year, shareholders got to sample the new ready-made juicies and smoothies, as well as "granola poppers," a yogurt-like smoothie with granola on top. At the end of the meeting, Jamba caps were given out, with a coupon for a free smoothie in the in-seam of the cap's tongue (a nice touch). I suppose when your stock goes from $10 dollars a share to around $2.50, public relations feels the need to upgrade the shareholder experience. Some may say that's pandering, but I am all for it. Despite my losses in this stock, I actually came out of the meeting with my bloodlust for management somewhat satiated. The fact that I had to cross the beautiful S.F.-Oakland Bay Bridge and spend some time near the water in Berkeley might have had something to do with the soothing feeling as well.

First, let's talk about the new products. Nestle's alliance with Jamba has produced two kinds of drinks: juicies and smoothies. Juicies are basically a little silkier (in Jamba-speak, "refreshing"), while smoothies are more filling (in Jamba-speak, "nourishing"). This is because smoothies use some low-fat milk, while juicies use some non-fat milk. On the smoothie side, Jamba had "strawberries wild" and "banana berry" flavors, and on the juicie side, "very berry" and "mango orange peach. " I liked the juicies better--they were more refreshing.

Attending the meeting were about 25 people, mostly management, and an African-American team of teenagers called "The Wall Street Wizards." (Se Mr. Thomason, the founder of the program, was there and ran a tight, professional ship. One of his students fell asleep during one presentation (no one seemed to notice except Mr. Thomason), and he asked a classmate to wake up the student. His students seemed to have quite a bit of fun and asked several intelligent questions, including one about hedging (apparently a high school student and I can figure out that hedging could be an important tool for this business, but not Jamba's CFO, Donald Breen. But to be fair, most formally educated economists agree that hedging does create more volatility in earnings).

Paul Clayton, President and CEO, and Paul Colletta, Marketing and Brand Development, had presentations. Mr. Coletta is the person responsible for changing the cluttered Jamba menu into the easy-to-peruse current menu--probably the single best accomplishment to date in terms of Jamba's consumer-friendliness. I would get headaches reading the old menu, trying to decide what to order.

Mr. Clayton is a consummate professional. I am happy he is the CEO of this company, and he truly seems to care about the company and consumers.

The meeting started inauspiciously when a shareholder asked why there weren't any female directors on the Board. Ouch. I hadn't realized there were no female directors on the Board, but having no female directors is not a good sign for a California company trying to appeal to progressive types. In all fairness, Apple, Inc. had the same complaint two years ago, and finally put Susan Decker on its Board. Steve Jobs responded at the time that women were smarter than men and thus didn't want the liability of being on a Board, so it was harder to find them. Mr. Clayton could have used a play from Mr. Jobs' book. For the time being, Mr. Jobs is correct--other than Susan Decker--a person who I respect a great deal and who adds instant credibility to any company that is lucky enough to hire her--there isn't a ready pool of female candidates to choose from in terms of Board participation. Jamba should start looking for female directors--it would add a nice boost to their image if by 2010, their Board was 1/2 female.

The formal part of the presentation included a comment that approximately 36 million shares were present out of the 52 million outstanding shares. This is a small company, in other words.

CEO Clayton's presentation was done by slides, along with extensive comments assisting the audience in understanding the material. First, probably due to more stores opened, Jamba's revenue has been increasing every year since 2003. Jamba is also into a joint venture with a Hawaiian company that is doing well, but Jamba owns only a 5% stake. Any good news, though, is nice at this point for suffering shareholders.

CEO Clayton's presentation included a detailed chart showing why margins, and therefore profits, had declined. Here is a breakdown of the basic margins in 2007:

COGS (ingredients, cups, etc.) = 27.5%
Labor (increases in minimum wage, worker's comp insurance, etc.) = 33.5%
Occupancy (rent, lease obligations, etc.) = 12.2%
Other (mainly marketing) = 13.2%
Profit Margins = 13.6% (last year = 18.6%--substantial decrease)

If you did the math, you'll see that 1% is somehow lost in these numbers, probably due to some rounding off. In any case, as a result of the increase in overhead, cash flow decreased from 18.6% to 13.5%. The main culprits were minimum wage increases (including an even higher local minimum wage in S.F.) and new store leases.

The rest of the slides focused on Jamba's brand name recognition. The MTO (made to order) market is a 2.29 billion dollar market. Jamba has a 19% market share in this market, with the next individual competitor, Freshens, being at only 6%. The category of "Other," or mom and pop stores and Hobee's, equaled 70% of the market share, which shows that Jamba doesn't have a high market penetration and will keep improving its market share. The ready to drink market--which Jamba is now entering--is only a 655 million dollar market, with Odwalla (owned by Coke) being the market leader. Nestle obviously wants a share of this increasing market and that's why it has partnered with Jamba.

Unfortunately for Jamba, outside of California, DQ/Orange Julius dominates in the public perception of MTO smoothies. Next in line, nationally, are Sonic and Starbucks. In California, however, Jamba is the leader with 86% brand name recognition (only 33% outside of California).

Jamba seems to be focusing on opening new stores in airports, colleges, and grocery stores.

Paul Coletta, Sr. VP of Brand Development, did the next presentation. He indicated he wanted to improve frequency of store visits and sales. His slide had a term, "J6 Store experience," which he did not explain. Mr. Coletta said that Jamba is a "healthy living company," with no high fructose corn syrup and no trans fat in any of its products. The healthy living pillars Jamba abides by include an all natural, balanced life and an emphasis on the goodness of whole fruit.

With respect to its athletic, balanced life image, Jamba is partnering with Nike in running events. I don't see any significant revenue from this alliance, however--it's more of an advertising move.

Mr. Coletta mentioned that he wanted to "innovate beyond the smoothie" into teas, juices, and meals in a blender. He said that advertising strategy had been flipped from in-the-store marketing to "sampling," which is giving away free samples to the public. Now, most of Jamba's "communication strategy" was marketing, which included billboards (I saw a huge Jamba wall-billboard in S.F. after the meeting--it was very well-placed--you can't miss it if you're driving down a particular highway exit in S.F.) and radio ads (Mr. Coletta indicated he wasn't too bullish on this method), in addition to sampling.

Jamba wants to become a "part of pop culture." What Mr. Coletta really means is that becoming a part of pop culture gets a company free advertising. For example, Campbell's Soup didn't have to pay anything to Mr. Warhol for its famous pictures. He ran a video showing some tv ads, including a hilarious SNL skit starring Keira Knightley as an energetic, enthusiastic employee who couldn't stop moving. Only when a customer, Amy Poehler, said she didn't want a free boost did the employee stop moving, even calling over other employees. (Ms. Poehler eventually changed her mind and did get the free boost.) Letterman is a fan of Jamba Juice and has incorporated some skits in his Late Show using Jamba Juice. A montage of stars caught with Jamba Juice products in their hands was shown, mainly from Hollywood-type and "People" magazines. One piece of bad news is that some of the images were taken from last year's meeting, but there were plenty of new images.

Mr. Coletta mentioned that Jamba had been featured in the new film, "Baby Mama."

A gentleman from the Wall Street Wizard group asked about hedging. The CEO deferred to the CFO, who talked about how Jamba had contracted with a blueberry grower to get a consistent supply of blueberries. The CFO said that there was a "force majeure" clause in contracts relating to seasonal fruit contracts, so it was hard to hedge, and he preferred a "contracted price" directly with a supplier. I call tomfoolery on this answer. Southwest Airlines did a great job hedging its exposure to the volatile commodities market, and Peet's also uses futures contracts for its coffee and tea. As I indicated last year and again this year, had Jamba bought futures contracts for oranges, it would have avoided the debacle of January 2007 and onward, where it passed on the cost of higher orange prices to its consumers in the form of a 50+ cent increase. I can't tell you how unprofessional Jamba's stores felt in the past when I went there and was told if I wanted a drink with oranges, I had to pay more. The CFO wasn't done, however. In response to my question, "Wouldn't Jamba have avoided the debacle of January 2007 if it had hedged?," he actually said that Jamba would experience "more volatility" if it engaged in futures contracts because if the prices decreased, it would have to mark-to-market the contracts. This response upset me so much, I almost began to personally blame the CFO for the decrease in Jamba's stock price. I said it was the CFO's job to ensure a steady and stable business environment if possible, and if Jamba had a major ingredient like oranges it needed, the natural course would be to selectively use the futures market and then hedge further by contracting with local suppliers or even owning suppliers of fruits outright. The idea that futures contracts cause "more volatility" for a business seems just plain wrong [but see the comments section--an intelligent writer indicates that using futures would indeed increase volatility in a mark-to-market scenario with respect to earnings. I now understand the CFO was technically correct. I maintain that guaranteeing an actual delivery and price of a hedged product would increase stability, because it is easier to plan ahead when you lock in a major cost of doing business over the next 9 to 12 months. In this case, JMBA probably believes it can always get its ingredients somewhere, at some price, and won't ever be faced with an actual shortage of a fruit to the point where actual delivery on a futures contract becomes necessary. It must also believe that even higher prices of oranges will not disrupt its business, profits, or image, which is the sticking point between Jamba and myself]. Even if the price of the contracts decreased, many shareholders might consider that an acceptable risk because of the importance of delivery of an essential ingredient. In fairness, most of the fruit ingredients Jamba uses heavily don't seem to have an American futures market, like strawberries (Spain does have a futures market in strawberries, however). Still, it boggles my mind that Jamba's management hasn't explored all possible hedging strategies in depth. If it doesn't think that the orange price increase it passed on to consumers before hurt its image, Jamba is out-of-touch. There just isn't a culture of fear at the company, and that's a strange thing when the stock price is around 2 dollars a share.

The CEO took over the rest of the Q&A session. He said that Nestle was the one spending the money on advertising the new ready-made drinks. In response to another question, the CEO indicated that Jamba hadn't put more stores in the South because the key metric was "average unit sales," and most Southern cities didn't have the required "density" (of population) to make it a profitable venture. He expanded by saying that average unit sales were better in smaller cities, like Seattle, and even Chicago took some time to ramp up sales. He said the lower average unit sales were in Texas, a large state. This emphasis on finding the highest average unit means that the CEO is looking to expand not just in warm climates, but in areas where he believes consumers are "early adaptors," a neat phrase. He basically means he wants people who are fitness conscious and willing to try new things--which means that he will look to expand in cities with a high young population, which will also produce teenage employees willing to work for minimum wage. It's a smart move, but it still doesn't explain why Jamba only has 28 (twenty eight) stores in the entire state of Florida. That failure to expand in Florida is one indicator that Jamba just isn't focusing enough on location as a key metric in opening stores. A shareholder pointed out that Jamba had a store in Idaho, but no stores in several Southern states, where it was warmer. The CEO said that the "seasonality curve is the same," and referred back to his density (of population) issue. He said that he wants to open stores in D.C. Anyone who has spent a summer in D.C. knows that Jamba is correct in wanting to open stores there.

I asked about the impact of the outstanding warrants (derivative liabilities) on the diluted earnings per share, and whether they had any impact if the stock price stayed below 6 dollars a share. (See page 25-26 of the 10K.) The CFO said that it was better to view the warrants as increasing or decreasing revenue. As I understood his response, for every dollar reduction in the stock price, Jamba loses 17 million dollars; for every dollar increase in the stock price, Jamba gains 17 million dollars. You can see the problem when Jamba stock has decreased from $10 to $2.50 over the past year.

I asked why Jamba had bought back 34 stores from its franchisees (see page 34 of the annual report). The CEO said that he had expected same store sales to increase and had he known that profit margins would deteriorate, he may not have made the same decision. He said that "2008 is going to be a bumpy year" as Jamba tries to drive down costs and increase foot traffic in its stores. That's not something a shareholder wants to hear, but he gets points for being honest. He said Jamba would be focusing on improving margins to "drive top line sales." With 99 new stores, which will probably take about two to three years to recoup their investment and bring steady income, Jamba has quite a bit on its plate and seems to be re-trenching.

Someone asked whether Jamba wanted to expand internationally. The CEO answered that he had a staff of one person doing due diligence on international expansion. He prefaced that comment by joking that it was fun to imagine us going into different countries and planting our flag, sticking out his chest, but that other considerations warranted more due diligence. He got a laugh from that animated response.

I said that Jamba wasn't focusing enough on location, and that while I enjoyed Mr. Coletta's presentation (it was much better than last year's), a store could have the best product, but would go out of business if it didn't have a good location. I said Jamba might go bankrupt if it didn't focus on location over brand recognition. Here is my highlight of the meeting--the CEO said, "I promise you we are not going out of business." Shareholders, take note--Mr. Paul Clayton has put his own personal reputation on the line. I hope it works out.

Mr. Coletta took the last few questions. He said that Jamba needed to stay below 5 dollars for products--the consumer resistance point is five dollars. He was open to introducing hot products, and he was testing them, but they had to be complementary to the Jamba experience. In response to a question that Jamba stores were packed in the summertime, but dead in the winter, Mr. Coletta said that he understood that, and he was planning on 1) year round drinks (like the "Coldbuster," which had less of a seasonality problem), 2) hot (drinks and food); and 3) meals.

The CEO was friendly to me after the meeting, despite my tough questions. It looks like Jamba needs to focus more on the details, like location and menu items, rather than brand recognition, but overall, at $2.50 a share, it might be a value play. I do not plan on adding any new shares. Peet's just came out today with an email coupon advertising its new Berry Pomegranate Tea Freddo. It looks scrumptious. While Jamba is sitting on its hands and thinking about what new drinks to serve, and whether it should diversify its menu into hot and cold drinks, its competitors are adapting more rapidly to the market. You can have all the brand recognition in the world, but at the end of the day, what counts is your product and your ability to get that product into customers' hands.

You can write to Jamba's Board of Directors at the following address:

Board of Directors (or Chairperson)
c/o Corporate Secretary
Jamba, Inc.
6475 Christie Avenue, Suite 150
Emeryville, CA 94608


Unknown said...

Thanks for the report - excellent.

You are correct on many of your points, particularly the speed (or lack thereof) from management in bringing new products to the market. It is costing this company dearly.

One thing that Jamba management is actually CORRECT ON (and as a painful shareholder I HATE to admit it), is in there refusal to hedge their commodity costs through future contracts. If you read a simple corporate finance book, you'd know that as a shareholder, it is MUCH cheaper for YOU to go out and hedge yourself against this through diversifying your portfolio, than having management constantly attempt to hedge their costs.

Yes, this hasn't worked out over the last year. But over the long haul, you can expect that these costs will even out - so as a shareholder you should be happy with them not hedging. And yes, having to MTM their futures contracts WILL increase the volatility of both their earnings and their cash flows.

Great job again, thanks for the report.

Anonymous said...

Great posts!!! Will you be attending the Jamba Inc. 2009 investor meeting at their headquarters in Emeryville on May 8th? If so, will you be writing about it? Unfortunately, I won't be able to attend. I think they have some interesting plans now with new management and their steel-cut oatmeal seems to be popular. Cheers!