Sunday, August 3, 2008

Jamba Juice, Revisited

I own some Jamba Juice (JMBA) shares and averaged down, recently at 97 cents. My cost basis isn't high enough to make me worried, but I wonder if JMBA at under a dollar a share is worth a look. The company releases earnings on August 21, 2008, and for the past month, has been pulling out all the stops in getting traffic into its stores. It simplified its menu design, introduced brand-new breakfast items like granola poppers, and introduced a lower-priced orange refresher with the entertaining repartee, "Where's the Fruit?"

Here's the case for Jamba:

First, Jamba's stock price is below its book value.

Second, traffic has increased as a result of the marketing blitz. I have personally noticed traffic increase in its stores, at least in the Bay Area.

Third, competition is sparse. Starbucks' new drinks taste terrible. BusinessWeek's David Kiley agrees with me--he said one drink had a "chemical taste."

The better competition is from Jack-in-the-Box's smoothies, which actually taste good but probably have no nutritional value (too much sugar).

Fourth, the prices for oranges has decreased. Jamba spends a lot of money of strawberries and oranges. With the recent good weather, Jamba's costs should decrease.

Fifth, most of us in California have had a very hot summer. Hot weather helps Jamba's business for obvious reasons.

The case against Jamba:

1. Service is slow. No matter how many songs their workers sing in the stores, Starbucks makes a drink faster. I see lines all the time at Jamba. This means traffic has increased, but their service model needs to be changed to improve efficiency. There is no reason people should be waiting 6 minutes or more for a drink. Also, I never get a receipt at Jamba unless I ask for one. This means customers and employees have no record of what they ordered, making some fraud inevitable. I saw someone recently tell an employee he ordered a pretzel. No one had any records. She had to give it to him. That situation also slowed down service for other people.

2. Jamba continues to be lackluster in finding good locations. A frozen yogurt place just opened up in downtown San Jose next to a new Popeye's. Both places probably got money from the city's redevelopment department. Why didn't Jamba get one of those locations? I am willing to bet Jamba doesn't even know a Redevelopment Agency exists in San Jose. This is Jamba's main problem--in food services, location is everything because if consumers can't easily get to you, they will just go across the street to someone else.

3. Jamba may be losing money on its orange refresher. To compete with Starbucks, Jamba introduced a new drink costing $2.95. If someone only orders that drink, Jamba may not benefit from all the increased traffic. (From what I saw, however, people were ordering many different drinks.)

4. Management continues to be non-responsive. I sent a detailed letter to Jamba's management several months ago after their annual meeting. I did not receive even an acknowledgment they received it. I understand that Jamba cannot respond to every inquiry, but a postcard confirming receipt of detailed letters might be a good idea.

5. Jamba has not used the futures market to lock in fruit prices. With orange prices being relatively low right now, Jamba is foolish not to consider using orange futures.

6. As far as I know, Jamba's warrants haven't expired yet. Explore previous Jamba posts for more on this issue.

7. If Jamba's stock price stays below a dollar for a certain period of time, it may be pink-listed or taken off the NASDAQ. That would make its shares harder to trade.

What's my conclusion? Skip the Vegas trip and put your play money on Jamba--if earnings disappoint on August 21, 2008, only then will I give up on Jamba.

Note: the Wall Street Journal's Richard Gibson had an excellent article on Jamba (April 2008):

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