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VALLEY BUSINESS | THE FOOD GAME: 3 TALES OF DINING
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Jerry's Investors Hunger for Profits

Restaurants: Valley-based deli chain is recovering from disastrous 1998, but analysts say long-term prospects for growth are lean.

May 25, 1999|BENJAMIN MARK COLE | SPECIAL TO THE TIMES

STUDIO CITY — Jerry's Famous Deli Inc. is again cooking up profits, but it's not clear that returns are on the menu for investors.

The chain of 11 restaurants went back to black in 1999's first quarter after a dismal 1998, leading company founder and Chairman Isaac Starkman to declare the worst is over.

"Jerry's is looking to the future, not only with diners but on Wall Street," Starkman said.

The Studio City-based company reported net income of $513,000 on record revenues of $19.6 million in the period ended March 31, compared with profits of $185,000 on revenues of $14.3 million in the year-earlier period.

Despite the turnaround quarter, there are still signs of trouble. Jerry's shuttered its Old Pasadena outlet May 2, and same-store sales in Jerry's Southern California restaurants in the first quarter are 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 boiled over $10 a share by August 1996, fueled by talk of acquisitions, openings, and frothy profits. But instead, the chain's profits stalled, culminating in a small loss on $66.6 million in sales in 1998.

That gave Wall Street indigestion; the deli sank to penny stock status on the Nasdaq last year, though it has revived somewhat in 1999 and closed Monday at $1.28.

Starkman, 61, said an improved profit picture and a recently expanded stock buy-back program are the ingredients expected to hike shareholder value. As for the food, Jerry's is highlighting more light fare, such as salads, to keep up with changing diner tastes.

"We have implemented a lot of new programs, improved the food--although it was always very good--[and] improved customer relations," said Starkman, who started 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 were not likely to be as robust as the first quarter. As a consequence, earnings per share in 1999 in the ballpark of 10 cents can be expected, Starkman said. In the chain's best year, 1995, it earned 8 cents per share.

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For investors, that's good news, but hardly dessert: Even if Wall Street were to forgive past sins, and grant to Jerry's Famous Deli a market average price-earnings ratio of 25, the stock would only reach $2.50 a share--less than half the company's IPO price. 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, but I am not sure how the market will react to us. I wish they would treat us like an Internet stock," Starkman said. "If Wall Street says we are worth 30 times earnings, then the stock goes to $3."

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

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Despite hiring San Francisco-based investment bankers Montgomery Securities (now Banc of America Securities) last year, no sale of the chain, or management buyout, is being worked on, he added.

"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."

The company is forging ahead on a $2 million stock buy-back program, which at current prices should decrease shares outstanding by about 12%.

A comparison between Starkman's chain and its cross-town rival, the Calabasas-based Cheesecake Factory Inc. restaurant chain, illustrates the tough job Starkman faces.

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, since its underwriter and sole source of research coverage, Los Angeles-based The Boston Group brokerage, went belly-up last year.

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

The minuscule 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 University professor and investment manager for the Cullen, Fortier Asset Management Co. in Woodland Hills.

Even small mutual funds today have $1 billion or more under management. To perform due diligence research on a microcap stock such as Jerry's and then invest only a few million doesn't make sense, Mason said.

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