A Tastier Quarter for Jerry’s Deli

Jerry’s Famous Deli Inc. is again serving up profits, but it’s not clear that returns are on the menu for investors.

The Studio City-based chain of 11 restaurants went back into the black in 1999’s first quarter after a dismal 1998, leading company founder and chairman Isaac Starkman to declare that the worst is over.

“Jerry’s is looking to the future, not only with diners, but on Wall Street,” Starkman said.

The company reported net income of $513,000 on record revenue of $19.6 million in the period ended March 31, compared with profit of $185,000 on revenue of $14.3 million in the 1998 period.

But despite the stronger quarter, there are still signs of trouble. Jerry’s shuttered its Old Pasadena location on May 2, and same-store sales in Jerry’s other Southern California restaurants in the first quarter were still down from year-ago levels.

Known for its extensive menu, Jerry’s Famous Deli went public at $6 a share in September 1995. The stock topped $10 a share by August 1996, fueled by talk of acquisitions. But instead, profit stalled, culminating in a small loss on $66.6 million in sales last year.

That gave Wall Street indigestion, and the stock has been struggling ever since. On Tuesday, Jerry’s shares fell 9 cents to close at $1.28 in Nasdaq trading.

Starkman, 61, said that an improved profit picture and a recently expanded stock-buyback program are expected to hike shareholder value. As for the food, Jerry’s is highlighting lighter fare, such as salads, to keep up with changing tastes.

“We have implemented a lot of new programs, improved the food--although it was always very good--improved customer relations,” said Starkman, who opened the first Jerry’s Famous Deli in 1978. “Our same-store sales are improving in most locations. I won’t make a projection, but I expect this year to be better than last year.”

But Starkman, who owns 45% of the company’s stock, also said the chain goes through seasonal fluctuations, and the second and third quarters probably will not be as robust as the first quarter.

Starkman conceded that the recipe for making Jerry’s Famous Deli’s original public investors whole is elusive--let alone matching the bull market run of the last four years.

“I would like to get the stock back to what investors paid for it. That is my aim. We will try our best to get back to $6 [the IPO price], but I am not sure how the market will react to us,” Starkman said.

In any event, the road back to investor wholeness promises to be one without quick fixes.

Despite hiring San Francisco-based investment banker Banc of America Securities last year, no sale of the chain or management buyout is being worked on, he said.

“We have nothing on the board in terms of acquisitions,” Starkman said. “We are opening up new places, but at a much much slower and deliberate pace.”

Comparisons between Starkman’s chain and its cross-town rival, Calabasas-based Cheesecake Factory Inc. restaurant chain, illustrate the tough job faced by Starkman.

Cheesecake Factory, about four times the size of Jerry’s Famous Deli, is followed by 16 analysts on Wall Street. Jerry’s is followed by none, because its underwriter and sole source of coverage, Los Angeles-based Boston Group brokerage, went under last year.

Cheesecake Factory’s profit has roughly doubled in the last five years, while Jerry’s Famous Deli slid into red ink. Accordingly, Cheesecake Factory has a market capitalization of nearly $550 million, while Starkman’s enterprise is barely worth $18 million on Wall Street.

The tiny market cap makes a stock recovery for the deli chain doubly difficult--it is simply too small for the vast majority of mutual funds, money managers and other institutions to invest in, said Bill Mason, Pepperdine professor and investment manager for Cullen Fortier Asset Management Co. in Woodland Hills.

And, of course, the restaurant industry is famous for its sizzling competition, said Dennis Forst, hospitality industry expert and managing director at McDonalds Investment Inc. in Century City.

“This is an easy industry to get into,” Forst said. “But it is an industry where your quality of service, food and management have to be good, or you will flounder. The public knows what it likes to eat.”

Jerry’s Famous Deli also owns Solley’s Delicatessen & Bakery, Wolfie Cohen’s Rascal House, and the Epicure Market in Florida.

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Not-So-Famous Stock

Jerry’s Famous Deli, which went public in 1995 at $6 a share, posted a stronger first quarter this year than it did last year. Stock prices, monthly closes and latest:

Aug. 31, 1996: $10.13

Tuesday: $1.28

Source: Bridge