Jamba Juice feels investors’ heavy hand
A trio of healthy lifestyle young men started Jamba Juice by opening a single smoothie shop in California in 1991 that they called Juice Club. They began franchising, and in 1997 changed their company’s name to Jamba Juice. In 2000 Jamba Juice acquired rival Zuka Juice and in 2003 was acquired itself. The new owners took the company public in 2006 as JMBA, at a price of about $50 a share. Once the recession hit, Jamba Juice’s stock price melted to a low of $2.15 in 2009 and has traded in the $11 to $16 range ever since. As you might expect, JMBA investors are not happy, and in July 2014, the largest shareholder, Engaged Capital, in Newport Beach, California, called on the parent company to slash costs and close unprofitable stores. This mandate explains much of what’s going on within the company’s 2016 FDD.
Almost all of Jamba Juice’s management team has been replaced recently. CEO David Pace, for example, joined the company in March 2016.
Jamba Juice is offering incentives to drive franchise growth, including a 50 percent reduction of its initial fee for franchisees that open stores before the end of the year.
Franchisees must purchaåse Jamba Juice products, but the only revenue the company earned from the sale of products or services in 2015 is $300,000 for help desk support. The company also received about $7.5 million in vendor rebates last year, or about 4.6% of its total revenue.
As we will see in Item 21, Jamba Juice has an extremely low franchisee turnover rate. Senior VP of Development Dale Goss says that’s due to the company’s franchisee recruiting process and training program. Goss, who is one of the few executives with longevity, said, “We do not use franchise brokers and have very strict criteria for the franchisee candidates we recruit. We don’t want any surprises.” Training for new managing owners begins with 40 hours of online immersion in Jamba Juice’s store operations and 97 hours of on-the-job training in a training store.
To present average net sales figures, Jamba Juice separates its franchisees into East and West Coast locations. The company started in California and 45% of its current 748 domestic franchisees are located there. Average net sales for traditional franchise owners are, in fact, a third higher on the West Coast, but sales for non-traditional stores are higher on the East Coast, because they are fewer and in the best locations, Goss said.
This item shows expenses for company stores only “because that’s the best data we have available,” Goss said. Company stores pay the same marketing fees as franchisees, but pay no royalties. The financial performance representation contains a highly unusual mea culpa for the low cash flow margins of some company stores, blaming them on the recession and “less than optimal site selection,” the FDD states. A strategic priority since 2015 “is the continued discipline of expense reductions for company-owned stores.”
Veteran franchise reporter Julie Bennett examines a franchisor’s financial disclosure documents, and writes about strengths and potential red flags. Reach Julie at email@example.com.
The fastest way to reduce expenses at corporate-owned stores is to sell them to franchisees. In 2014 Jamba Juice launched what it calls an asset-light strategy, selling 193 stores to franchisees. The refranchising program, however, did not stick franchisees with those less than optimal sites. Goss said, “We were very diligent in how we analyzed each transaction.” If rent on a corporate location was too high, for example, corporate agreed to subsidize it until the lease expires, he said. Instead of selling unprofitable stores in New York and Chicago to franchisees, corporate simply closed them. In part because of the sale of all those corporate stores, plus zero terminations in 2015, its franchise turnover rate was an incredibly low 0.27%.
The cost-cutting and refranchising programs are paying off, at least in the company’s financial statements. In 2014, Jamba Inc. lost $3.6 million; in 2015 its net income was $9.4 million. Jamba collected about $50 million from the sale of stores to franchisees, but spent over $26 million on store closing costs, lease terminations and other expenses. Goss pointed me to Jamba Juice’s August 5, 2016, earnings call. In it, CEO David Pace announced the company is moving from the Bay Area this fall to the less expensive Dallas suburb of Frisco. Same-store sales are up 4.2%, but Jamba Inc. lost money in the second quarter of 2016. And despite all the efforts to shore up investors, Jamba Juice’s stock price fell under $11 this August.