Following the footsteps of most of the industry behemoths, California-based Jamba Inc. (JMBA) recently unveiled a brand-new store format and design initiative. The latest arrangement will be implemented across the board to transform store layout and blueprint.

The new format will include limited menu Smoothie Stations, drive-thru's and juice bar concepts at Jamba stores. Along with the new concept stores and formats, Jamba's older outlets will also be remodeled over the next four years. The leading juice brand seeks to refresh 75 to 100 stores in 2013.

Jamba had introduced limited menu, smaller format Smoothie Stations, and the expanded juice bar concept in California in 2012. Jamba has always remained focused on expansion and expects accelerated growth in both existing core markets as well as new geographic areas.

For 2013, Jamba plans to open 60-80 new stores globally as well as open up to 1,000 JambaGO locations and 100 limited menu Smoothie Stations.  Among them, significant expansion projects are in the offing in California and New York.

Of late, restaurant companies are responding in a variety of ways to address the issue of heightened competition in a somewhat over-supplied domestic market. They began remodeling restaurants to lift guest satisfaction as well as rolling out new and smaller prototypes to reduce construction and occupancy costs and enhance return on capital.

Operators like McDonald's Corp. (MCD), The Wendy's Company (WEN) and Darden Restaurants Inc. (DRI) are continuously benefiting from the unit-refurbishment strategy. Wendy's benefited substantially from the re-imaging program undertaken in 2011 with an average sales increase of 25%. McDonald's had expected a comp lift of 5-6% in 2012 from a re-imaging program that cost roughly $600,000.

Remodeling has also gained momentum for Darden in the last couple of quarters across three of its concepts Red Lobster, LongHorn and Olive Garden. Among them, Red Lobster remodeled 148 units in fiscal 2012. After renovation, newer Red Lobster units kept generating same-restaurant sales growth of 5-6% and yielding higher return than cost of capital. LongHorn already completed its remodeling in the Ranch House image during the second quarter of fiscal 2012. Olive Garden is also undergoing extensive makeover.

After the overhaul, both new as well as refreshed stores of Jamba will sport a contemporary look featuring an open layout from restaurant through the kitchen, brighter lighting and colors, updated graphics and options for a variety of lounge areas. The new units will also use more environmentally friendly building materials.

Renovation work, however, hurts revenue in the near term when construction is on. We believe Jamba's free cash flow and earnings before interest, taxes, depreciation and amortization generation will likely be lower in the coming four years owing to the adoption of the massive remodeling program. But after the overhaul work, existing properties pay off more.

Jamba currently carries a Zacks Rank #5 (Strong Sell). Our long-term recommendation for the stock remains Underperform.
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Tickers in this Article: JMBA, MCD, DRI, WEN

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