Jamba Inc. (JMBA) reported third quarter 2010 loss of 2 cents per share, which missed the Zacks Consensus Estimate of earnings 4 cents as well prior-year quarter earnings of 4 cents per share. The company reported loss as a result of decline in top line along with the charges incurred for closing restaurants and refranchising company-owned stores.

The top line of the company continues to struggle, as consolidated revenues fell 16.3% year over year to $66.1 million, which was slightly below the Zacks Consensus Estimate of $67.0 million. The revenue declined due to sluggish same store sales and lower operating income at company-owned restaurants.

Sales at company-operated restaurants were down 17.5% year over year to $63.9 million, due to a reduction in the number of restaurants in operation at the end of the quarter compared with the prior-year quarter. However, Franchise and other revenues grew 44.7% to $2.2 million, fueled by increase in the number of franchise stores.

Jamba experienced a drop in its company-owned comparable store sales, which declined to 2.7% in the reported quarter, compared with 5.3% in the year-ago quarter.

Cost of sales declined 22.0% year over year to $15.0 million, labor costs dipped 16.7% to $19.7 million, occupancy costs fell 18.8% to $8.6 million and store-operating expenses plunged 5.7% to $9.5 million. Depreciation and amortization expenses fell 21.8% to $3.1 million and general and administrative expenses decreased 8.5% to 8.1 million.

Consolidated adjusted EBITDA inched up 2.1% year over year to $4.8 million.  However, adjusted EBITDA margin improved 50 bps to 7.6%. Adjusted Store level EBITDA declined 4.7% to $12.9 million.

Store Update

During the third quarter, only 7 franchise stores were opened. Thus, at the end of the quarter, the company had total 742 stores, of which 378 are franchise stores and 364 are company-owned stores.

Financial Position

The balance sheet of the company is solid with cash and cash equivalents of $36.2 million and no debt at the end of quarter. During the quarter, shareholders’ equity came at $16.2 million.

Outlook

Based in Emeryville, California, the company expects comparable store sales in the range of negative 3% to flat in fiscal 2010 and store level EBITDA margins in the range of 15%−17%. For fiscal 2011, the company expects comparable store sales in the range of positive 2% to 4%.

Our Take

Jamba’s transition to a more franchise-centric model should reduce its capital employed and stabilize cash flow generation. Currently, 49.0% of total units are company-owned. Jamba expects to launch 30 to 50 new franchise units in fiscal year 2010.

Management also plans to refranchise up to 150 stores by the end of the year. After achieving this target, the company will have approximately 60% franchised and 40% company-owned stores.

The company is also expanding itself both domestically and internationally.  During the quarter, Jamba, the leading restaurant retailer of food and beverage offerings inked an agreement to develop 13 new stores in Boston, Massachusetts, New Orleans, Louisiana and South Bend, Indiana markets. This marked the first new domestic market for the company in four years.

In order to expand internationally, the company signed two deals. Jamba signed a huge international agreement to develop up to 200 stores over the next 10 years in South Korea. The first Jamba store in Korea is slated for an early 2011 launch. Additionally, the company also signed a deal with International Franchise Inc to develop 125 stores over a 10-year period in Canada.

Along with expansion, the company is taking initiatives such as new and value based menu offer to drive traffic. Jamba also teamed up with Nestlé USA, to develop a new ready-to-drink beverage line.

The company reported disappointing third quarter results, and though it is taking all the measures to overcome the challenges, JAMBA has a long way to go. The Zacks Consensus Estimates are a loss of 18 cents, 22 cents and 1 cents for fourth quarter, fiscal 2010 and fiscal 2011, respectively.

 
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