Lloyd Khaner is the general partner of Khaner Capital, a long/short value-focused hedge fund. At the 8th Annual Value Investing Congress yesterday, Khaner pitched his latest turnaround idea, Jamba, Inc. (NASDAQ:JMBA). Jamba, Inc. owns and franchises Jamba Juice stores.
Jamba’s product is great tasting and moderately healthy, but the company is more than just a juice store, as it also sells both snacks and food. Key food costs for the company are fruits like blueberries and strawberries. Khaner views this as an edge over restaurant competitors who are dealing with inflated corn, beef, and chicken costs.
The company also has a number of other growth initiatives. Jamba’s self-serve unit, Jamba Go, plans to have 400-500 units in public schools across the U.S. by the end of this year, with currently only 90 Jamba Go units open. Jamba also launched ‘at home’ smoothies a couple months ago. The other growth opportunity Jamba is working on is a consumer packaged goods platform allowing Jamba to sell products to retailers.
The next stage of growth is to target 3,700 units worldwide with 70% franchised; as well as, expanding Jamba Go units into hospitals and other venues, with 1,500 total units in the market by the end of 2013.
Key issues for the company a couple years ago were poor management and overexpansion. Since then, the company has a new management team with turnaround experience. Overexpansion worries included the use of short-term debt to fund the company; Jamba has since eliminated its long-term debt and built cash on hand of over $28 million.
Competition includes big name fast food chain McDonald’s Corporation (NYSE:MCD), who entered the smoothie market earlier this year. Also, coffee giant Starbucks Corporation (NASDAQ:SBUX) bought Evolution Fresh last year, which propelled it into the smoothie market. Starbucks recently announced plans to open a California facility that will increase its production and distribution capacity for its Evolution Fresh brand. Starbucks paid $30 million for the company and plans to offer Evolution Fresh juices in its shops and through other retail stores. The new facility will allow the Starbucks to roll out Evolution Fresh products on the West Coast and support eastward expansion.
Earlier this year, McDonald’s announced it was going to add smoothies to its menu, although they are puree-based. McDonald’s is not expected to take too much of a share from the real-fruit smoothie market that Jamba currently operates in. McDonald’s vast offerings give it little specialty, such as that of Jamba. However, the company has locations all over the world and can easily gain market share in locations where there is no Jamba Juice locations. Khaner noted that comps and traffic have been positive despite McDonald’s entering the smoothie segment.
The big plus with McDonald’s and Starbucks entering the market serves as free advertisement for the entire industry. Jamba does not spend a lot on marketing, but in 2013 the company is expected to roll out a more aggressive strategy.
Other companies offering smoothies include Dunkin Brands Group Inc (NASDAQ:DNKN) and Burger King Worldwide Inc (NYSE:BKW). Burger King completed an overhaul of its menu earlier this year, adding a variety of drink products. Much like McDonald’s, Burger King has a vast menu offering and is known for fast food. As a result, we do not see a large number of customers trading in the higher quality smoothies for lower-end competitors. The threat that Burger King and McDonald’s pose is being low-cost leaders, allowing them the ability to offer their smoothies much cheaper, to the point that quality is less of a factor.
Dunkin started offering smoothies in 2006, and has started a recent expansion plan to gain visibility in the Western part of the country. Dunkin is up only 3% since its mid-2011 IPO, but still has strong expected growth. The company trades at a P/E of 57, driven by its expansion prospects, particularly abroad.
Like Khaner, we believe that Jamba continues to have the best prospects in the smoothie market and is an interesting turnaround opportunity. It appears that notable investor Chuck Royce agrees. Royce owned 2.8 million shares at the end of 2Q—this was over 4% of Royce’s 13F portfolio. Khaner views Jamba as a 3-year turnaround, with valuation metrics on the high side given the company has been under-earning recently. In 2015, Khaner projects EPS of $0.50 with a 15x multiple, for a $7.00 stock price by the middle part of this decade.