Jamba's Liquidity Being Squeezed

As happens to many fast-growing restaurant chains, Jamba Inc. (JMBA - Snapshot Report) is suffering the affects of uncontrolled growth that has led to the opening of under-performing locations and a loss of focus on innovation and attention to current consumer trends. The consumer-led economic slump has exacerbated the company’s problems, with traffic and comps falling further. We rate the stock a Hold.

The management has formulated a turnaround plan that will curtail unit expansion until store level performance improves, cut 19 percent of non-store level personnel, close 10 underperforming stores, offer innovative menu, and build relevance and awareness through effective marketing.

Jamba’s turnaround efforts face strong headwinds from a cash-squeezed consumer and rising food costs. Traffic is falling as consumers grapple with rising gas prices and mortgage payments and the psychological blow of falling home values. California, one of the hardest-hit housing markets in the country, is home to 75 percent of the comp base. Exacerbating the effects of de-leverage on margins as sales decline are rising food costs, labor and store operating costs.

The company faces a severe cash flow shortage that poses a risk of bankruptcy, in our opinion. Although the management intends to dramatically slow its expansion plan until profitability recovers, it nevertheless plans to open 35-40 stores in 2008. This expansion will not only test the company's liquidity, but decrease already negative returns on invested capital. Our six- month target price is $1.25.

Read the full analyst report on JMBA