Showing posts with label JMBA. Show all posts
Showing posts with label JMBA. Show all posts

Friday, August 8, 2008

Piper Jaffray

Jamba (JMBA) is trading at about a dollar right now. On May 30, 2007, the firm of Piper Jaffray initiated coverage on Jamba Inc. (NASDAQ: JMBA) with an Outperform and $12 price target. On July 17, 2008, Piper Jaffray downgraded the stock from a buy to neutral. On August 7, 2008, Piper Jaffray downgraded again to "sell."

Let's take a look at this again. Here is where JMBA was priced at each interval:

6/01/07: $10.03 (outperform)
7/17/08: $1.15 (neutral)
08/7/08: $0.96 (sell)

The geniuses at Piper Jaffray waited until the stock had gone from around 10 dollars a share to a dollar before downgrading it, and then had the audacity to downgrade again at $0.96 a share. Jamba is trading at slightly over a dollar on August 8, 2008.

Let me get this straight--these geniuses decide to initiate coverage, drop the ball entirely, and then someone probably pointed out, "Hey guys, you still have an outperform rating on a stock that has gone down about 80% since your recommendation...maybe you want to do something about this?" Then, oh yes, then, Piper Jaffray gets off its arse and starts downgrading like there's no tomorrow. Thanks, Piper Jaffray. Let me know your buy recommendations so I can consider a career in shorting.

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."

http://www.businessweek.com/the_thread/brandnewday/archives/2008/07/starbucks_vivan.html

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):

http://www.smsmallbiz.com/profiles/Jamba_Rebound_Faces_Hurdles.html

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 http://wallstreetwizards.org/) 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

Tuesday, May 27, 2008

Jamba Juice, Inc. (JMBA)

Jamba Juice, Inc. reported earnings today, or, perhaps more accurately, no earnings--it lost 0.21 cents a share in Q1. JMBA is currently selling below book value, but that may not necessarily indicate that it's a good value play. Its products appeal mainly in the summertime, and outside of the West Coast and the South, the weather isn't sufficiently warm to increase demand for cold fruit smoothies year-round. The breakfast shakes it introduced earlier this year were a good idea, but they haven't caught on like the Frappuccino. Perhaps due to the lack of advertising of its new products, same-store sales declined. Jamba continues to have one of my favorite drinks, the Matcha Green Tea Blast. The key for selling drinks seems to be to make them sweet with whipped cream and include chocolate. Jamba, unfortunately, doesn't really have too many chocolate drinks.

But the problem isn't with Jamba's products--its smoothies taste good, and its stores are packed when the weather is hot. Jamba's issue is that consumers think of the company only when the weather gets warm. In order to convince consumers that Jamba smoothies should be a daily addition to one's diet, Jamba needs to add drive-thrus or get locations that aren't in strip malls to encourage time-strapped workers to go to Jamba in the morning. (Do you know a lot of people who regularly go to suburban strip malls--where Jamba has many of its stores--in the morning? I certainly don't.) To give you an example, I work in downtown San Jose, and there are two Starbucks and one Peet's within walking distance, but no Jamba Juice store. If there was a Jamba nearby, I would go almost every single day. A Popeye's Chicken store is opening nearby my office--and still, no Jamba. Jamba's failure to seek out good locations is mind-boggling. By focusing on strip malls, Jamba is robbing itself and its shareholders of the lunchtime and business crowd. It's a very costly mistake, and many a store has gone out of business because it failed to properly choose its location.

In other news, Jamba announced a deal with Nestle today, which pumped its stock 13%, or thirty cents; however, this appears to be old news, as Jamba already announced this deal several months ago. Jamba's shareholder meeting is tomorrow at the Doubletree Hotel. I will try to attend, but may not be able to make it because the Long's Drugs shareholder meeting is on the same day.

My three worst trades, percentage-wise, have been JMBA, SPCHB, and PCYC. I'm losing around 1,600 dollars total on these three stocks and refuse to sell them because once a stock hits the single digits, I figure either it's going to go back up in five years or go bankrupt, and I usually pull the risk trigger and wait and see. I don't have much money in these stocks anymore--but I am still frustrated with Jamba's management because it fails to understand that location is at least half the game in the food business.

Wednesday, June 6, 2007

Jamba Juice, Shareholder Meeting

One of the benefits of living in California is that many popular companies are based in the Bay Area. I enjoy attending annual shareholder meetings, and the Peet's meeting this year was wonderful. While Peet's is based in Emeryville, CA, the meeting took place at the new roasting facility across the beautiful Oakland Bay. I spoke with the Chairman who told me about Peet's history (Peet's first store was in Berkeley, but Peet's was originally Starbucks and then sold the first few stores in Washington state to "some guy named Howard Schultz," as the Chairman explained, with a smile).

Jamba Juice's annual meeting--its very first one--also took place in Oakland, at the Marriott City Center near Chinatown. The Chairman was impressive to listen to, but the other speakers seemed more focused on marketing than the nuts and bolts of running a business. In an industry where location is everything, Peet's and Starbucks are snapping up almost all the great locations. For example, Peet's just opened new stores in Morgan Hill and downtown San Jose. Those could have been Jamba store locations. Unless Jamba intends on selling its product over the Internet or solely in stores, it needs to focus on locations and favorable lease terms to increase revenue. I was disappointed that the company does not purchase any futures contracts, but a corporate officer explained that the primary product they use was strawberries, and no futures market exists for that ingredient. He also explained to me that Jamba Juice tends to favor suburban locations rather than business-centric, downtown locations because suburbia offers seven-day-a-week foot traffic, whereas business districts are typically ghost towns on weekends.

Some other interesting notes: Jamba is focusing on opening kiosks in airports and perhaps also having drive-thrus. They seem to be shying away from a heavy physical presence, perhaps because of high rents--especially closer to the more residential areas in Washington and California, where strip mall rents are much higher than average. But why go public if the money raised will not be used to increase a physical presence? A private company can just as easily enter into partnerships and devise marketing plans.

The Chairman stated that he has received many offers to open stores internationally but he was being cautious about opening abroad because he wanted to carefully control the brand's image. Another speaker dropped an interesting tidbit about Jamba partnering with another major player to sell beverages in stores. If Jamba partners with Coca-Cola, which has been increasing its non-soda portfolio of assets, most recently with Caribou Coffee, then perhaps the stock will experience a short term boost.

Most disappointing was that Jamba did not offer any of their products at the meeting. For a first time meeting, however, perhaps Jamba did better than most would have.