Making a profit in the restaurant business is tough. Of the
153 companies listed in the industry on Yahoo Finance, only 90
Even the success stories have to contend with razor-thin
margins and net profits averaging just a dime for every dollar of
sales. If you can build a name, though, that strong brand
identity can mean a lifetime of stable earnings and consistent
High barriers to entry, like the marketing dollars it takes to
build those brands, make newcomers rare and opportunities to
invest before a company has been proven even rarer.
That's why this company's bad news may just turn out to be
good news for investors.
This brand has been around since 1990 but only really gained
widespread recognition since its IPO and expansion in 2005. When
the brand took off, it became the strongest in its category.
Shares are up more than 570% since the 2009 low and could have a
lot further to go, judging by management's strong expansion
Wish you had gotten in on that kind of growth before the price
took off? You may get another chance soon.
California Votes To Increase ItsMinimum Wage
In California, a bill signed into law last month will raise the
state's minimum wage from $8 to $9 next year and to $10 an hour
This would not be a problem for most large, publicly traded
restaurant chains with diversified sales across the United
States, but this particular company has its corporate office and
more than 95% of its company-owned stores in the state.
With labor being the single biggest cost to a restaurant's
Jamba Juice (Nasdaq: JMBA)
-- with 4,300 employees in California -- could be hit
disproportionately by the Sunshine State's increase. California
last raised the minimum wage in 2008, by $0.50 to $8 an hour.
That year, Jamba Juice saw its labor costs surge by 17.1% over
the previous year. Labor as a percentage of store revenue
increased from 33.5% to 36%.
Shares of Jamba Juice are up more than 570% since
the 2009 low and could have a lot further to go, judging
by management's strong expansion plans.
While the company has been shifting to a franchise model over
the past few years and company-owned stores in California only
account for 35% of its total restaurants, the increase in costs
could be significant over the next year. Jamba Juice's California
employees currently make an average of $8.30 per hour.
Labor costs of $63 million equaled 30% of total company store
revenue in 2012, and revenue at company-owned stores increased
just 0.1% to $215.1 million. Company stores account for 94% of
The company was just able to turn a net profit of $302,000 in
2012, though preferred dividends moved overall earnings to a
negative $0.03 per share.
Expectations are high and call for a rebound in earnings to
$0.36 in FY2013 and $0.66 in FY2014. For the company to post
expected earnings off of sales growth expectations of just 4.2%,
management would have to perform miracles in margin improvement.
I have similar expectations for sales growth, but margins will
probably remain weak and could get worse as labor costs jump in
This could bring earnings back to a loss, and investors might
lose interest in a company that has had trouble making money in
the past. I would look for the price to dip to around $11 a share
on a surprisingly weak earnings report over the next three
quarters, almost 20% down from the current price.
Strong Brand And Franchise Model
So that's the bad news. The good news is that this pullback may
give long-term investors another opportunity to get into a
best-in-class brand at a cheaper price.
Jamba Juice is the No. 1-selling smoothie brand in the nation
and was the top-of-mind smoothie brand in a 2012 Ipsos survey.
The company has more than 100 million annual visitors and 1.6
million fans on
Facebook (Nasdaq: FB)
. That kind of brand identity is worth big money and could even
set the company up as a takeover target if shares get too
CEO James White turned the company around in 2009 with a menu
expansion and the new franchisee model. Revenue growth may be
weak as the company transitions to franchise royalty payments,
but the profit outlook should improve and free cash flow should
grow. Profit margins at the stores have almost doubled from 2008
to 20% this year, and net income turned positive for the first
time in 2012.
The company is seeing significant growth in its new JambaGo
self-service stands, especially in schools that are looking to
add healthy alternatives for their students. Plans are also being
made to leverage the brand into packaged goods for sale in
Risks to Consider:
If you're interested in JMBA, don't wait for too much of a
drop past my $11 target. The company has a strong brand in the
juice and healthy alternatives market with a good domestic and
Action to Take -->
Avoid shares of Jamba Juice for now on problems in its core
market. Revenue growth has been sluggish, and rising labor costs
could mean drastically missing expectations. The company has a
strong brand and may be a good long-term pick on a cheaper
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