|Shares Out. (in M):||17||P/E||0||0|
|Market Cap (in $M):||243||P/FCF||0||0|
|Net Debt (in $M):||-15||EBIT||0||0|
I like buying stocks when people are selling for non-fundamental reasons. I believe Jamba is a good opportunity to do just that. In the last couple weeks there have been two events that have caused shares of Jamba to (I believe) unfairly sell off. What happened?
First, a short selling outfit called thestreetsweeper posted one of these lamentably common hit-pieces on Jamba. The writeup was so bad I was at a loss for words. Half of it was factually incorrect while the other half was irrelevant. (The mental gymnastics that some of these shorts engage in in order to paint the target in the worst possible light is become Spaceballs-like. “In the 1980’s, the CFO’s dog-walker’s sister had an internship with Jeff Skilling’s friend’s uncle. The Enron parallels are scary!”) There were too many lies through omission to count. I am not sure what else to say other than it’s wrong and the writeup is terrible. It is little more than trolling.
Second, on Monday, Jamba announced they would have to delay their 10K because they had deficient internal controls with respect to “non-routine transactions.” What happened? In Q3 Jamba repurchased 23 stores in the Chicago area from one of its oldest franchisees. I’ve been told this franchisee was a bad guy and was basically going awol and things were getting bad. Jamba moved fast to buy the stores and implement fixes before matters spiraled out of control. In doing so, they neglected to get various 3rd party fairness and valuation opinions, and KPMG didn’t like that, which is why they haven’t yet signed off on the audit. At the end of the day, I believe the company was in a tight spot and made the right decision, and they are completely confident that the 10K will be filed within the next two weeks. Besides, after some basic blocking and tackling, management is going to sell these stores to another franchisee and they’re confident it’ll happen this year. It’s not a material amount of money.
Combined, these two non-events give investors itchy trigger fingers and tend to sway people towards putting in market-sell orders. The 10K delay on the heels of the streetsweeper dreck admittedly doesn’t “look” good, but that’s just giving us a better opportunity. Meanwhile, the outlook for Jamba is bright.
I'm going to assume you know what Jamba is; there are plenty of resources available in case you don't. Operations are fine, with positive (and accelerating) comps in each of the last five quarters and 2.8% ttm. Jamba has 868 stores, 263 of which are company owned. Company-owned auv’s are about $750k, and 4-wall margins are a little under 20% when normalized. It’s a seasonal business business and stores tend to perform better in warm weather locales.
The company has more-or-less committed to transforming into an all-franchise model, and they currently have a package of 114 stores for sale. The first round of bidding has concluded on the package and about a dozen parties submitted bids. They're making nice progress and a sale closing is expected by the end of Q2. Importantly, almost all of the company stores are in California, the chain’s home market and where most of the best performing stores are located. They have some stores in NYC and the midwest which are admittedly not performing well, but these stores are the minority, and besides, a number of the NYC stores are shutting down along with lease expirations and will actually be accretive to profit. After this package of 114 stores is closed, the company plans to immediately begin a sale process for the +100 remaining California stores (the first package is mostly northern CA while the second package is mostly southern CA).
It is a pretty simple exercise to figure out what Jamba can sell their stores for. AUV x stores x (ebit margin - royalty - g&a) x ebit multiple. I think they can sell all of the stores for about $80 million. Assume a 17.5% margin, 6% royalty, 1% g&a, and a 5x ebit multiple. Management forecasts it lower but I think they’re being conservative and results will surprise to the upside.
They have $15 million in cash, no debt, a $123 million NOL to shield asset proceeds, and a $25 million buyback currently in place ($9 million left but I assume another $15 million more). Add this up and I think the proforma cash (or whatever you want to call it) is about $80 million, which adjusting for the buyback makes it about $6/share in cash. I believe that all of the cash from store sales will be used to repurchase stock and/or pay dividends if the stock is too expensive (good problems). Management stated that a portion of the sales will be used to accelerate the buyback, but I honestly think it’ll be most of it, they won’t need the cash as a royalty model. Regardless, I think of the “adjusted cash” number being $90 million vs today’s market cap of $230 million.
Afterwards, apart from perhaps a few company stores used for development purposes, Jamba will be an all-royalty business. Based on systemwide sales and Jamba’s royalty rate of about 5.75%, I estimate Jamba will be generating about $43 million in revenue (there are some additional revenues from other products such as a few CPG items and self-serve machines). They should have a ~47% ebitda margin on that when they make it to the other side (based on existing cost cuts and some expenses that will travel) so I estimate about $20 million in ebitda. Royalty companies get big ebitda multiples since the free cash flow conversion is so high. Burger King, Tim Horton’s, Dunkin, Domino’s, Popeye’s, Sonic, have average ebitda multiples of 17x, with the lowest being 13.3x (Sonic). I’ll just use a 13x multiple because why not, valuing the proforma royalty business at $260 million, or $18/share. Add the aforementioned cash and Jamba is worth about $24/share. I’ll throw in one other metric that I admit is highly questionable but might be useful merely to point you in the right direction. If you look at ev/systemwide sales for the comp group, they average 1.1x, with the low (again) being Sonic at .55x. My $260 million valuation equates to .42x, and looking out a couple years, is .31x. I am not relying on this as a real measure of valuation, it’s just another one of those signs that maaaaybe this is undervalued. There is upside depending on buyback assumptions, better multiples for the store sales and royalty company, and an eventual sale. Additionally, the company is growing units by over 10% and comping in the 3-4% range. What if they got an industry-average multiple on the royalty business? Then it’s $30/share. What if you add the remainder of the NOL of ~$40 million? Or what if you look out a couple years and figure systemwide sales of $800 million? The it could be as high as $40/share. I’m not counting on any of that upside for now, I’ll just stick with $24/share and be happy with 70% upside and tons of cash and improving fundamentals on the downside.
How sure are we that management is actually going to do all this? In January, James Pappas from JCP Investors and Glenn Welling from Engaged Capital were named board members. I believe their gameplan is to ensure an acceleration to an all-franchise model. Furthermore, I would ascribe a better-than-average chance to the royalty company getting sold. Why? In the last year:
The Pantry - SOLD
Morgan’s Food - SOLD
AmREIT - SOLD
Volcano - SOLD
Silicon Image - SOLD
I believe many investors are highly biased against Jamba because of their own personal experiences with the brand. There are too many people in the investment world stuck in NYC, where I’m sure they’ve walked past a Jamba store 100 times and scratched their head about how this place is in business. I can attest I’ve spoken with several people about Jamba and they snobbishly dismiss the idea without doing so much as four seconds of work. I kind of like it this way, no one sees it coming. Add on the other two recent events and the market is giving you an opportunity right now.
This is my other idea submission since I’m voluntarily not counting my recent GGAC idea which ended up being unactionable.
Stuff, like, happens
|Entry||03/18/2015 04:28 PM|
1. The nicely positive comps you cite are really not positive on a gross profit basis and traffic was actually negative in 2014. As the company discussed on the last call mix shift towards higher ASP juices are the major driver behind the positive comp yet juice has way below comparable margins hence the 600bp deterioration in store level EBITDA margin seen in Q4. Traffic for the full year 2014 was in fact NEGATIVE 1.8% despite the introduction of the juice category which is supposedly an incremental customer who makes more frequent visits. Bottom line is margins are getting worse, not better.
2. Your cost cutting math is overzealous. The company noted in their recently filed NT-10K that they will report a material weakness related to partially to "an insufficient finance and accounting staff in part related to recent headcount initiatives." Remember, this is with ~$33m in G&A. The company guided to $30m in G&A in 2015 and in your target model (which by the way assumes very significant growth in system wide sales) you have cut G&A by an incremental $10m. Just for reference, small cap franshiser papa murphys spends over $30m per year in G&A on franchise royalties of ~40m, so why do you think JMBA can pursue much faster growth with a much lower G&A base?
3. You may dismiss the short report but take a look at the massive increase in franchise expenses buried in the other income line. Why is this happening?
4. Fundamentally I think that the flow through from franchising is not as high as you believe. Using your assumptions for $80m and 5x, (which buy the way are too high in my opinion) they are losing 16m in four wall profit and turning it into a $4m revenue stream on which they have a ~50% margin, so the amount of cost cutting they need to do to keep EBITDA flat is very high.
5. California Minimum wage hikes will lead to incremental labor expenses. Additionally, even if you give management credit for their ability to optimize margins in juice which they have not shown, new products will be a higher % of the mix and as a result I believe this will force additional deleverage on the P&L
|Subject||Re: Be Careful|
|Entry||03/18/2015 05:13 PM|
I would also be remiss not to point out that their company owned 4 wall EBITDA margins were 13% in 2014 and 16% in 2013 which is a far cry from 20% "normalized"
|Subject||Re: Re: Re: Be Careful|
|Entry||03/18/2015 06:06 PM|
Using the math you discussed, if they sell franchises for $80m @5x they lose $16m in 4 wall EBITDA; however, they do replace some of that with royalty revenues. Using an 18% margin that implies $88m in revenue sold, so they receive $5m in royalty revenue but the flow through on that is not 100%, its more like 50-60%. So for EBITDA to be flat they need to take out $13m in costs, yet their guidance is for a $3m non gaap reduction in G&A so how is it possible that they grow EBITDA in 2015 to hit their guidance? Even if they take the advertising fee and reduce internal S&M by that amount ($2m) that still leaves an $11m EBITDA shortfall for a company that generated $23m in EBITDA in 2014 and is expected to grow EBITDA to $28m in 2015. This just does not make sense to me
Additionally, I compared FRSH's G&A load to royalty revenue, with is similar to the royalty revenue you list in your target model. Another way to get to the same point is that to grow royalty revenue from $20m per year to $40m in your model you will need to open a lot more stores. Assuming management does add 500 stores domestically over next 5 years they will have as many stores as FRSH so dont think that the size argument holds
Finally, I find it odd that the company decided to disclose in the narrative of their form NT-10K that they have a material weakness partially related to headcount reductions. If this was not the truth why would they say it in the narrative section of an SEC filing? Why not say, "it was related to the treatment of purchase accounting etc."
|Entry||04/01/2015 06:53 PM|
Utah - was the market expect the franchising to happen so quickly? Certainly the $36mm of proceeds was within management guidance (not sure how much you think the other 14 stores are worth), but not sure if the timing matters. Thanks