Cosi Inc. (COSI), operator of 124 fast casual restaurants in 16 states, the District of Columbia, the United Arab Emirates and Costa Rica, is a prime example of a speculative turnaround company that has limited downside risk and massive upside potential. The company exhibits many characteristics of a speculative turnaround. The company's share price is sitting at $2.37, within 25% of its 52-week low, signaling that there is plenty of room to climb. Cosi's new President and CEO Stephen Edwards is quickly implementing a strategy focused on turning Cosi into a profitable company that can compete among the likes of Panera Bread (PNRA) and other fast casual eateries. And to top it off, Cosi has seen massive insider buying over the past three months from insider Lloyd I Miller III, who owns more than 10% of the company. All of these factors make this company a strong buy for the speculative investor who has a stomach for risk.
New Management Means New Beginnings This Time Around
Stephen Edwards was appointed to serve as President and CEO of Cosi in June of 2013, marking yet another management shakeup for this company. Stephen Edwards replaced Carin Stutz, who became the CEO of Cosi in 2011. Edwards is the fourth CEO since 2011. One need only look at the company's stock price to see how poorly it has treated investors over the past few years.
The chart is horrible, and for good reason. The company has managed to squeeze out only two profitable quarters since its inception in 1996, and the multiple management shakeups and short-lived CEOs raise the question if this company is even capable of being profitable.
I believe, and hope, that Stephen Edwards is different from the previous CEOs. For starters, Edwards has directly addressed the core issue that is preventing Cosi from being profitable, customer service. Cosi offered a unique dining experience when I first visited its Westchester County location back in 2003. I was only twelve years old, but I remember it distinctly. The interior was sleek, the menu was modern, and it offered DIY S'mores for desert. S'mores! However, sadly, the entire experience was muted by the terrible service that my party received. I have not eaten at a Cosi since. And though I realize this was more than ten years ago, and I was quite young, one poor experience can drive away customers for good, and the current CEO realizes that. Edwards summed it up quite well during the latest conference call, when the company logged a $2.1 million quarterly loss.
"People love our sandwiches, they love our salads. We hear it time and time again, it's never a complaint - a complaint is because someone was rude to me, my sandwich or my salad was incomplete in the ingredients that it was supposed to have... or I got the wrong order or it took me 20 minutes to get my order when there was nobody else in the store."
Edwards is committed to retraining employees and directing a bulk of the company's resources toward improving customer service. Edwards later said, "Class A hospitality and service experience is what we're really focused on." It is encouraging to see that the new CEO is tackling this core problem head on, and not just focusing on cost cutting efforts like previous CEOs. Labor is now Cosi's biggest cost, which will help improve restaurants that were understaffed, and hopefully include wage increases to boost the morale and environment for Cosi employees. This article helps illustrate Cosi's poor scoring on Glassdoor, and the low satisfaction among employees. With the single biggest cost attributed to labor, it seems that Cosi is finally reaching an inflection point and will be able to address issues of profitability in the near future.
While Edwards is focusing mostly on service, the company is also taking the right steps toward profitability. The company continues to close or sell company owned restaurants that are not profitable or have severely declined since opening. The company has targeted restaurants that are on a watch list for the cut. This shows that the company is serious about returning to profitability and cutting costs. This is more effective than cutting costs by under staffing restaurants like previous CEOs, which would then lead to poor customer service.
Cosi is also in the midst of opening new restaurants in areas where it sees strong potential for profitability and growth. Recent location openings include one at Fordham University in The Bronx, one at Temple University in Philadelphia, one at a town center in Columbus, Ohio, and a second location will be opening in Costa Rica. These recent summer additions are encouraging to investors and helps illustrate that there is potential for organic growth within this company.
This Insider Is Screaming Buy, Buy, Buy
Lloyd I. Miller III is an independent investor and insider of Cosi who owns 10% of the company. Miller has been buying shares of Cosi in the open market as recently as Friday, September 6th. Miller has bought nearly 500,000 shares of Cosi since this past June after Edwards took the helm as CEO, and the prices have ranged from $2.00 to $2.25. Miller clearly sees tremendous value in this restaurant company, and now is a good time to get in at similar prices.
Cosi is in a clear upward trend since sharply dropping to a low of just under $2.00 in June of 2013. The company's recent price move toward the end of Monday's close helped the price jump above its trend line, which may set up for the company to test the $2.50 level. The price is sitting above both its 20-day and 50-day moving average, and is 12% below its 200-day moving average. The price has been stuck in a box since June, and may continue to trade in a range below the $2.70s until their next earnings report in November. A breakout seems imminent. (click to enlarge)
Cosi has been a laggard in the restaurant industry for years, and has rarely experienced profitable quarters. With sharp declining revenues, terrible customer service ratings and constant management shakeups, there is plenty of risk associated with this stock. But where there's risk, there's reward, and potentially a lot of it. Cosi's current market cap of $40 million doesn't seem to reflect the full value of the company, which owns and operates 74 restaurants and franchises 50 restaurants. With strong insider buying, a new CEO who is committed to solving the company's core problems, and new restaurant openings in several densely populated locations, it seems like now is prime time to invest in this turnaround company before the ship sails back above to the $3.00 level.