Tuesday, June 4, 2013

Weighing Jamba's Potential

Founded in 1990, Jamba Juice Company (NASDAQ: JMBA) is a leading restaurant retailer of better-for-you food and beverage offerings, including great tasting fruit smoothies, fresh squeezed juices, Iced Tea Infusions, Hot Blend organic tea lattes, hot teas, oatmeal, wraps, salads, sandwiches, and a variety of baked goods and snacks.
Shares of Jamba Juice have soared over 38% this year on renewed investor confidence and bold expansion plans. In this article I would like to highlight some of the recent positives, as well as bring attention to future headwinds.
Growth Potential
Primarily a West Coast player, management feels the company is ready for a North American expansion primarily through franchising agreements. At this point the company has saturated its largest market, California. In the near future the company plans to add roughly 125 new locations, but has made it clear that California development is almost over. Over the next few years, all eyes will be watching to see if it can be successful in eastern markets.
To that end, in this month's presentation the company updated its growth goals substantially. The company plans to add over 400 new locations domestically and about 600 locations internationally in the years ahead. Jamba is banking heavily on Mexico, the fourth largest market outside of the U.S., to fuel international growth rates. The company announced a franchise agreement for the development of 80 Jamba stores over the next 10 years in Mexico.
Menu Growth
At first just a juice company, Jamba has drastically expanded its menu offerings to include more breakfast, lunch, and snack items. To compete with companies like Dunkin' Brands (NASDAQ: DNKN) and Starbucks (NASDAQ: SBUX) , the company must be innovative and be willing to take risks. It is too soon to tell if the new menu offerings will be well received, but the line of sandwiches does look promising. If successful, these add-on items will increase margins drastically, as generally add-on snack items carry high margins. Jamba is trying to emulate Dunkin' Brands and Starbucks, as these companies see margins as high as 75% on many of their food items. The key to growing this product segment will be menu pairing--Jamba should seek to pair its top selling drink offerings with its new food offerings in an effort to push consumers into trying the new products.
Dunkin' specifically has created a deep portfolio of over 100 breakfast offerings set to be released over the next couple years. Last year, Dunkin' released 70 new products to market, which have been received well by consumers and aided in growing ticket sales. Additionally, by offering a menu of items, Dunkin' has managed to draw customers continuously throughout the day helping comparable store sales over the last quarter. Starbucks, through its acquisitions of Teavana, Evolution Fresh, and La Boulange, has purchased a variety innovative offerings. Starbucks has already started rolling out its La Boulange products through many Bay Area locations and will begin a full scale launch during the remainder of this year. Additionally, Starbucks has the option to compete directly with Jamba should the company leverage its infrastructure to grow the Evolution Fresh brand.
Poor Man's Growth
Cash-strapped, Jamba Juice is looking to grow without breaking the bank. Management has placed a renewed focus on the franchising model and plans to drastically increase the number of franchised locations. The company can't sustain growth rates with only company-owned store growth, mainly because the company can't afford the capital expenditures necessary. Dunkin' Brands, almost a 100% franchised company, has proven that the franchise model can be very profitable and cost efficient. Jamba is set to take in 5%-6% of franchisee revenues, which could added up quickly following an expansion. The company also plans to drastically expand the number of JambaGo locations.
This year alone, the company plans to add 1,000 of these new low-cost locations. Roughly 80% of the JambaGo locations are in schools throughout the country, which will provide Jamba a consistent flow of traffic to these locations. Similar to the razor/blade business model, JambaGo will provide the company with sustained, low cost revenues.
Risks
  • Low amounts of cash on hand, which may hinder growth
  • Cold climates may create difficult seasonality should the company expand to the east
  • Future domestic and international markets may already be saturated with Starbucks and Dunkin' Donuts
  • Both Starbucks and Dunkin' Donuts are entering Jamba's core juice business
  • Menu offerings may prove unsuccessful
Conslusion
Jamba Juice has bold expansion plans and significant growth potential. The company needs to focus on expanding its menu offerings to drive higher margins for franchisees. Going forward, the company also needs to place the majority of its focus on low cost growth opportunities.

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