Jersey Mike’s Profit Falls a Third in First Public Quarter, But It’s Not All Bad

Jersey Mike's, a fast casual sandwich chain, saw a decline in profits during its first public quarter, although revenue and sales remained strong. Revenue increased by 10% to $208 million, while systemwide sales reached $1.21 billion. The company guided for profitability ahead of Wall Street expectations, with 83 new stores bringing the total to 3,378 locations.

Charlie Morrison reported continued traffic growth in the third quarter, attributing the same-store sales increase to more customers entering rather than paying higher prices. About half of the fast casual industry currently engages in the pricing strategy, aiming to avoid scrutiny on transaction counts.

The profit drop came from an $104 million interest expense last year, which surged to $30 million in a single quarter. The buyout through private equity firm Blackstone resulted in additional accounting costs, including a $96 million depreciation charge due to purchase accounting rules. While the business model showed potential, the earnings report painted a less favorable picture, with Adjusted EBITDA margin rising from 35% to 47% due to reduced founder spending.

Founder Peter Cancro's discretionary spending amounted to $263 million in 2024, compared to $653 million in revenue, equating to roughly 40% of the revenue funding personal expenses. Additionally, the founder purchased a $41 million aircraft, which was transferred to him upon closing.

Despite these financial concerns, the underlying business appears robust. Approximately 590 individuals own around 3,230 Jersey Mike's franchises, with each store requiring about $515,000 to build and generating $224,000 annually in cash flow, resulting in a better-than-40% cash-on-cash return. Most of the pipeline for the 1,600-store chain consists of existing franchise owners expanding their business.

Wall Street analysts will likely focus on managing interest expenses in the coming quarters, while franchisees will continue to generate revenue.