Jersey Mike's Subs Inc. 2026 Q3 Earnings Call

Thank you, operator, and good morning. By now everyone should have had access to our third quarter 2026 earnings release, which can be found at www.jerseymikes.com in the investor relations section. Our discussion today includes forward-looking statements. These statements are not guarantees of future performance and are subject to numerous risks and uncertainties that could cause our actual results to differ materially from what we currently expect. Our SEC filings describe various risks that could affect our future operating results and financial condition. We use certain non-GAAP financial measures that we believe can be useful in evaluating our performance. Presentation of such information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are contained in our earnings release.

Now I would like to turn it over to our CEO, Charlie Morrison.

Thank you, Corey. Good morning everyone, and welcome to our third quarter conference call. I will be providing an update on our progress against our growth strategy. Then Michelle will review our quarterly financial results and our outlook for 2026. Our third quarter same-store sales demonstrate continued progress against our long-term objective of achieving $2 million average unit volumes. Driven primarily by transaction growth, same-store sales grew 3%, accelerating from 2.3% in the second quarter. We continue to outperform the fast-casual segment this year, reflecting the strength of our brand and the value we deliver through the quality, portion, size, and service our customers count on. Our focus remains on building long-term sustainable traffic growth by giving a broader set of consumers compelling reasons to choose Jersey Mike's and to visit more often.

We believe that approach positions us well in an environment where consumers are increasingly deliberate about where they spend. We remain confident in our full-year outlook and committed to our long-term growth strategy of achieving $2 million average unit volumes while growing four-wall cash-on-cash returns for our franchise partners and expanding our footprint domestically and around the world. There are four key drivers to our AUV strategy, each centered around growing transactions. The first is broadening our customer base and driving more frequency amongst a broader set of consumers. Second, increasing sales for our digital and delivery channels. Next, leveraging menu innovation, and finally, never losing focus on continuing to make great subs each and every time. While the brand enjoys more than 90% awareness, we see a significant opportunity to convert that awareness into more new customers and driving more frequent visits.

We are seeing encouraging results from increasing our digital marketing spend from less than 1% of our media mix to approximately 20% this year. Year to date, purchase consideration has improved significantly among younger consumers in the 18 to 34-year-old range, as well as women and Hispanic consumers. Loyalty registrations are also up 21% year to date, far outpacing our rate of growth. While we have already shifted the spend to what we believe is an appropriate level, we are in the very early stages of optimizing our mix within channels and speaking to and acquiring a broader mix of consumers. We believe this provides a substantial opportunity to support traffic growth for years to come. Expanding our customer base works hand in hand with growing digital and delivery mix, channels that are particularly relevant to the younger consumers that we are targeting.

During the quarter, digital sales mix increased approximately 100 basis points to 43%, progressing towards our long-term target of 60%-70%. Separately, catering sales have increased 17% year to date, reflecting our focus on driving this high-margin channel and leveraging the morning day part to prepare large orders. We also see meaningful opportunity in first-party delivery for those sales that come direct through our channels. As we continue to capture data about our customers and build our first-party marketing capabilities, we expect to use more targeted engagement to drive adoption and repeat orders through our digital channel. Menu innovation gives existing customers another reason to visit and we believe has strong appeal to new customers to the brand. Our summer Chicken Salad limited time offer was highly successful in attracting new guests and helped drive our strong performance.

We recently relaunched Mike's Hot Italian, and it is generating similar sales mix as we experienced in the first quarter of this year. In October, we also introduced a new bundle featuring any mini sub and chips for a $7.99 price point. This Mini Bundle provides an accessible price point while delivering attractive food costs for our franchise owners. Two weeks into the promotion, we are pleased with the performance, and customers appreciate the value that it provides. Our pipeline of new products and attractive offers allow us to provide customers additional value while preserving our premium positioning, while not impacting our unit economics. Looking ahead, we anticipate two to three LTOs in 2027. Underpinning all of these efforts is our commitment to making great subs every time.

Customers come to Jersey Mike's for a true Jersey-style deli experience, where we slice our meats and cheese fresh in front of them and consistently deliver the personalized service they have come to know. Delivering that experience at every visit gives customers a reason to return and remains a core tenet to our strategy for continued transaction growth. Turning to development, in the third quarter, we opened 80 new stores, bringing year-to-date openings to 210, and ending the quarter with 3,456 stores across the system, representing approximately 9% net unit growth year-over-year. Importantly, we continue to expand while sustaining strong unit economics. Moreover, our 2026 openings are generating higher AUVs than our 2025 openings through the same point last year, and our new store openings continue to deliver strong cash-on-cash returns for our franchise owners. These strong economics continue to drive significant demand for new development.

As a reminder, we have line of sight to roughly five years of domestic development ahead. Turning to international development, we ended the quarter with 41 stores in Canada, including 20 new openings year to date. We also expect to open our first location in the U.K. over the next few weeks and are excited to bring Jersey Mike's across the pond. International expansion will become an increasingly important contributor to our growth story over time. We have identified a number of priority markets and expect to announce additional markets and international partners in the coming months. Our new market expansion will be highly disciplined, with a focus on selecting the right partner, establishing strong unit economics, and building brand awareness to support sustainable growth in each market.

Overall, we have high confidence that our runway for unit growth, both here in the U.S. and across the world, remains for many years to come. Overall, we believe the opportunity in front of us is substantial and truly unique in our space. Jersey Mike's has a proven model with compelling unit economics, substantial white space for global expansion, and meaningful opportunities to grow AUVs across the system. We are confident in our ability to execute our growth strategies and create significant long-term value for our franchise owners, team members, and our shareholders. Lastly, I'd like to thank our team members and franchise owners for their exceptional dedication to Jersey Mike's. Their commitment has been instrumental in building the success we enjoy today, and their continued focus and passion are what makes us so optimistic about the brand's future. With that, I'll turn it over to Michele.

Thanks, Charlie, and good morning, everyone. In the third quarter, we generated $1.2 billion of system-wide sales, an increase of 11% year-over-year, primarily reflecting 9% net unit growth and 3% same-store sales growth, which, as Charlie mentioned, was an acceleration from 2.3% in the second quarter, and importantly, led primarily by transaction growth. We're very pleased to be delivering positive transaction growth while traffic across the industry remains challenged. That growth reflects the success of our digital marketing initiatives, and we're still in the early innings. Total revenues grew 10% to $209 million, and adjusted EBITDA grew 20% to $125 million, both reflecting a 12% increase in royalties and other revenue. Adjusted EBITDA further benefited from our transition from the area director model to an internally staffed support model, which contributed $9 million year-over-year.

In the third quarter, advertising revenues exceeded advertising expenses by $11 million, compared to $8 million in the prior year third quarter. Moving down the income statement, adjusted net income was $74 million, and adjusted earnings per share were $0.23. These are new metrics being introduced this quarter and have not been presented for the prior year periods because our pre-IPO capital structure makes the comparison not meaningful. Adjusted net income reflects the same adjustments used in adjusted EBITDA, as well as the non-cash amortization of acquired intangibles. We are also applying a non-GAAP tax rate of 25% to derive adjusted net income, which we believe is representative of a normalized long-term tax rate for our business. That rate does not currently reflect the portion of realized tax savings we retain under the tax receivable agreement, which could provide a modest benefit and will continue to be refined over time.

Adjusted EPS further assumes the exchange of all outstanding common units for Class A common stock. We generated $170 million in free cash flow through the third quarter, which included $88 million in large special items, including area director buyouts. Further, at only $7 million year to date, CapEx as a percent of adjusted EBITDA is running at roughly 2%. Turning to the balance sheet, at the end of the quarter, we had approximately $1.5 billion of net debt, including $325 million of cash, and our net leverage ratio was 3.9 times. As announced today, our board of directors authorized a share repurchase plan of up to $100 million and a special cash dividend of $0.35 per Class A share to shareholders of record as of November 5th.