On Thursday, just before the holiday weekend, the sandwich chain Jersey Mike’s filed its IPO documents, promising one of the biggest initial public offerings the restaurant industry has seen, certainly in terms of valuation.
In the process, it will give the public markets a crucial dose of growth. While there are certainly a few growth chains on the public markets, like Cava, Shake Shack, Wingstop and Chipotle, most publicly traded chains are legacy brands or companies that struggle to match expectations.
But Jersey Mike’s is not without its flaws. The company has a lot of debt. And that debt is at least due in part to dividends paid to its relatively new private-equity owner.
First, let’s discuss the good. Jersey Mike’s has been easily the top-performing sandwich chain in recent years and there’s no reason to think it won’t continue.
The company has generated 20 straight years of same-store sales growth. Those same-store sales are up 50% since 2020. A typical Jersey Mike’s restaurant now makes nearly three times the annual revenue of a typical Subway, and at least $300,000 more per year than any of its largest rivals.
Franchisees, who are making a lot of money out of those stores, are building more of them. The chain has at least 267 restaurants per year for the past three years. And it has opened 47 locations so far this year. It has only recently jumped into international development, but the person leading its first major foray outside of North America is none other than Peter Cancro, the chain’s founder and the man who built the chain over 50 years.
The combination of unit growth and strong average-unit volumes have helped the chain grow sales by 90% over the past five years, earning itself an $8 billion buyout just as its much larger rival was sold for $9.6 billion, which included an earnout provision.
Lat year, the company generated $59 million in net income on $696 million in revenue. Its adjusted EBITDA margin, or earnings before interest, taxes, depreciation and amortization, was 45% of revenue in the first three months of this year, according to the company’s filing.
Jersey Mike’s has undergone an extensive number of changes in recent years, however. It went a half a century with one owner and one CEO. And then in one fell swoop it changed both of them, which on its own is a ton of change. That kind of change is the most dangerous situation a company can go through.
Charlie Morrison, Jersey Mike’s new CEO, has experience in taking over highly-regarded brands and taking them public. And he has vowed, both in Jersey Mike’s regulatory filing and in his public comments, that he plans no changes to the way the company does business.
Going public, of course, is its own animal. A company that for decades was privately-held and could invest for the long-term will now have to submit quarterly earnings reports while its top executives go before analysts and ask tough questions.
What happens if the company wants to fund remodels by franchisees, as Cancro once did—a decision he credits for generating much of the chain’s sales growth in recent years? Good luck with that.
There is also the debt. Jersey Mike’s has $2.1 billion in debt, including $760 million taken out earlier this year in the form of a whole business securitization. Some of that debt was used to pay a dividend to the company’s owners. Jersey Mike’s plans to use at least some of the funds it raises with the IPO to pay down that debt.
That of course is not all that unusual these days, when just about every franchise business and a lot of others use securitization financing. Debt-funded dividends are a fact of life in franchising and Jersey Mike’s did it long before private equity showed up.
And the reality is, Jersey Mike’s has been a strong performing restaurant chain for a long time, one with plenty of white space both in the U.S. and internationally. And public company investors will get an opportunity to bet on that growth.