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Jamba Inc. (JMBA - Snapshot Report) reported third quarter 2011 adjusted earnings of 5 cents per share, surpassing the Zacks Consensus Estimate of 3 cents. On a reported basis, the company also recorded approximately 5 cents in earnings per share showing an improvement from the prior-year loss of 2 cents. The company benefited from the efficiencies in its cost structure, which offset the decline in revenue.

The top line of the company continues to struggle, with consolidated revenues falling 13.6% year over year to $57.1 million. The revenues declined primarily due to lower company-owned store sales as a result of the refranchising initiative, partially compensated by system-wide comparable restaurant sales (comps) growth of 3.7%. In the year-ago quarter, system-wide comps had declined 1.7%.

The price hike in the beginning of the second quarter, increased attachment and efficient promotional discounting resulted in comps growth. Fruit & Veggie Smoothie, coconut water fruit refreshers, hot breakfast wraps, and frozen yogurt were some items which contributed to comparable-store sales.

Inside the Headline Numbers

Sales at company-operated restaurants were down 15.3% year over year at $54.2 million due to a reduction in the number of restaurants in operation. However, franchise and other revenues increased 36.9% year over year to $3.00 million, fueled by an increase in the number of franchise stores.

Jamba, the leading restaurant retailer of food and beverage offerings, experienced positive company-owned comparable store sales for the fourth consecutive quarter since 2007, increasing 3.3% in the reported quarter from a negative 2.7% in the year-ago quarter. Same-restaurant sales at franchise stores grew 4.2% versus flat sales in the year-ago quarter.

During the quarter, Jamba witnessed a steep decline in its cost structure. On a year-over-year basis, cost of sales plunged 21.3% to $11.8 million, labor costs decreased 25.9% to $14.6 million, occupancy costs declined 20.9% to $6.8 million and store-operating expenses fell 9.6% to $8.5 million. Depreciation and amortization as well as general and administrative expenses also dropped 9.7% and 8.6% to $2.8 million and $7.4 million, respectively. This resulted in Jamba’s non-GAAP adjusted operating profit margin increment of 670 basis points to 26.9% in the quarter.

Store Update                

During the third quarter, 38 stores were opened, among which 9 were company operated and rest were franchised. A total of 19 stores were closed, of which 8 were company owned. As many as 42 stores were refranchised in the quarter. This brought the total number of stores to 762, of which 452 were franchised and 310 were company owned.

For 2011, the company expects to open up to 80 units. For 2012, Jamba plans to set up 40-50 new stores in U.S. locations and 10-15 new stores internationally.

Financial Position

The company ended the quarter with cash and cash equivalents (excluding $1.4 million of restricted cash) of $24.8 million and total liability of $61.3 million.

Outlook

Based in Emeryville, California, the company continues to expect comparable store sales in the range of 2-4% for fiscal 2011 and adjusted operating margin in the range of 18−20%. For fiscal 2012, Jamba sees company-owned comparable store sales growth of 3-4% and adjusted operating margin to reach even a higher range of 19-22%.

Our Take                                                                   

Jamba is turning around at a slow but steady pace. Apart from the domestic market, Jamba is in an expansion spree overseas. The countries that Jamba is currently eyeing are Korea, the Philippines and Canada.

The company is also on track to innovate a new beverage line and a value-based menu offering. Its recent deal with Bare Fruit LLC to produce three varieties of fruit chip snacks will hit the market by the end of this year. Company-owned comps were also positive across all four day-parts in the third quarter. Cost containment effort also augurs well for its earnings.

However, the company’s revenue is still lagging, indicating that Jamba still has a long way to go. Additionally, Jamba competes with the sector behemoth McDonald's Inc. (MCD - Analyst Report) in the smoothies segment. McCafe Real Fruit Smoothies and Frappes as well as McDonald's value-based offerings have a strong presence in the U.S. market. Another sector biggie Starbucks Corp. (SBUX - Analyst Report) is also stepping beyond coffee and venturing into the Juice market through its recent acquisition of Evolution Fresh.

Jamba currently retains a Zacks #3 Rank which translates into short-term Hold rating. But we are maintaining our long-term Outperform recommendation on the stock.

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