Are Cosi and Jamba Juice Going Extinct?

Negative cash flow and a threadbare balance sheet makes survival challenging for some restaurant operators.

As the recession deepens, cash flow tumbles and credit tightens, the restaurant industry is right-sizing excess capacity that was added to satiate shareholders' thirst for growth.

Virtually every operator has closed under-performing restaurants built in sub-par locations -- as competition for the "A" spots intensified -- while they dramatically scaled back expansion plans.

Some restaurant chains -- those that rapidly expanded despite sub-par profitability -- face extinction. Cosi, Inc. (COSI) and Jamba, Inc. (JMBA) are 2 such examples.

Years of operating losses have drained Cosi's cash reserves, casting substantial doubt on its ability to survive the worst recession in decades. The bakery-café chain has generated negative free cash flow every year since going public in 2002, leaving few resources to fall back on.

Although Cosi has made moderate strides in its plan to return to profitability, it lacks the lean cost structure (G&A is twice the industry average) and solid cash position necessary to withstand what could be several quarters of sharply falling same-restaurant sales (down 6.2% in 4Q08) before the economy improves.

Likewise, Jamba is suffering from the effects of uncontrolled growth that has led to under-performing locations being opened and a loss of attention to innovation. Although management has formulated a turnaround plan that includes innovating new menu offerings, it would take a long time for new day-parts, such as breakfast or lunch, to become meaningful contributors -- as they have at Starbucks (SBUX) -- and beverage sales alone cannot support the stores. A costly $25 million cash infusion should buy it some time, but not much, as consumers cut spending and cash flow falls.

In contrast, bakery café operator (and Cosi competitor) Panera Bread (PNRA) is well-situated to weather recession-induced shrinking same-store sales, with a debt-free balance sheet, adequate free cash flow and a track record of profitability. Post-recession, well-positioned restaurant chains, such as Panera, will benefit from shrinking industry capacity and less competition for the "A" locations so crucial to high returns. But trading at 17 times 2009 estimated earnings, the risk/reward in Panera shares is not favorable at a time of declining customer traffic and no visibility to improvement.

Comments

[John Gordon:]

One common denominator is that both chain concepts noted have a somewhat narrow dayparts focus--snacks/off peak period for Jamba or Breakfast/lunch for Cosi, and that they weren't known as a value leader.

Restaurant theory is that you must have success in a vibrant two or three dayparts in the daily business cycle to make proforma sales goals: breakfast, lunch, dinner, overnight. Some now add a fifth daypart, snack/off peak.

John A. Gordon
Pacific Management Consulting Group
pacificmanagementconsu...

We are: an analytically focused restaurant management consultancy

Mar 13 09:50 AM

[vin2ride:]

Jamba still has many profitable stores. If they focus on store closings rather than menu expansion, they should be able to weather the recession.

Mar 14 10:32 AM

[mr freddo:]

Thanks for the insight on these two companies. As a former bakery owner I can tell you that it is very difficult to turn a profit in a bakery cafe. You need A sites to drive volume. A lesser site will not perform well. Bakeries thrive on foot traffic and have much higher food costs than a Starbucks.

Mar 16 03:51 AM

[wholesalecd:]

I don't see Jamba surviving the economic storm. At least not benefiting shareholders. Jamba is a niche market that tailors to select few that think drinking sugar filled drinks is actually healthy.

Even Jamba offering breakfast isn't enough to stimulate business. Too many breakfast choices out there.

Mar 16 01:52 PM

[Stone Fox C...:]

JMBA has been very mis managed from a fiscal standpoint. They've always had a superior product with huge demand. They often have long lines at stores in places like CA. Unfortunately management had the bizarre idea of building stores so close together in CA that it cannabilized existing stores. Also a lack of focus on profits destroyed this store. They also seemed to think they need to grow x more stores and then they'd be profitable. Very dangerous concept.

Great concept, horrible management.

Mar 19 07:01 PM