Cosi Inc. (NASDAQ:COSI) has had a troubled history since its IPO in 2002. Shares of the casual restaurant chain went public at $30 and since then it has been mostly downhill. Today the stock trades at 50 cents. It has gone through several management teams and in late 2013, there were strong indications that it might go out of business.
Back then it appeared that no one knew how to make Cosi profitable. The restaurant chain, which specializes in soups, salads, and made-to-order flatbread pizza and sandwiches, has never had a profitable year since going public and has accumulated $309 million in losses in the past 14 years.
These days, however, Cosi's fortunes are beginning to look brighter. A new management group led by chain restaurant veteran RJ Dourney is showing signs that Cosi can be profitable.
With a strategy that includes a new operations system, revamped menu, cost-cutting, and closing unprofitable locations, the improvements are starting to show up in Cosi's financial results.
For the third quarter ending Sept. 28, sales have jumped to $23 million YoY from $18.5 million and losses during the same period have declined to $3.9 million from $4.1 million.
More recently, Cosi reported that same-store sales for the four-week period ending Dec. 28, 2015, have increased YoY 2.1% system-wide, reflecting a 3.1% jump for franchise-owned and 1.7% for company-owned restaurants.
Cosi currently operates 78 company-owned and 31 franchise-owned restaurants in fifteen states, the District of Columbia, Costa Rica and the United Arab Emirates.
The turnaround plan includes closing poorly performing company-owned locations while putting more emphasis on opening more franchise restaurants both in the U.S. and in Central and South America, according to company officials at Cosi's third quarter earnings conference call.
During the conference call, Dourney said Cosi will be profitable for the first time this year. He said Cosi will be "positive EBITDA by mid-2016."
Dourney has 30+ years of restaurant experience and has served in executive roles at Chili's Grill and Bar (NYSE:EAT) and Applebee's Neighborhood Bar & Grill (NYSE:DIN). He has also been COO at Au Bon Pain, a privately-held restaurant/bakery chain with 300 locations throughout the world.
In 2005, Dourney founded Hearthstone Associates, a Cosi franchisee starting with three locations in downtown Boston. Hearthstone has since grown to 13 Cosi locations in the Boston area. At the same time that Hearthstone was expanding its profitable stores, top executives at Cosi corporate, then headquartered outside Chicago, were struggling to figure out how to make the chain profitable.
After posting another year of losses in 2013, Dourney took over as CEO in March 2014. He was the logical choice as the largest Cosi franchisee with a record of operating profitable restaurants. One of his first moves was to move the headquarters to Boston and start cutting costs and put a proven operating model in place.
As part of the agreement with Dourney becoming CEO, the Hearthstone locations became a subsidiary of Cosi Inc. in April 2015.
At the Southwest IDEAS Investor conference in November, Cosi CFO Miguel Rossi-Donovan explained that the strategy is to take the "Hearthstone model" that Dourney and his team had used successfully at his Cosi franchise locations for the past 8 years and put it to work throughout the Cosi chain.
He added that the chain plans to grow by opening more franchise locations rather than company-owned restaurants which require a lot of capital that the company does not have.
During the past 12 months, Dourney, Rossi-Donovan and other executives and directors appear to be so confident with the turnaround plan that they have purchased 4.3 million shares, according to NASDAQ filings. Unfortunately for them, these purchases were made while the stock was trading above $1, double the current share price.
At its current 47 cent share price, Cosi is a micro cap stock with a market value of $21 million.
It should be noted that this stock is still highly speculative. As previously mentioned, Cosi, as a public company, has never had a profitable year. More than one management team has failed to put the company in the black.
Another negative is with its stock currently trading below $1, Cosi could be delisted. NASDAQ requires a minimum closing price of $1. If the price closes below $1 for 30 consecutive days it is put under review and could be delisted. The stock dipped below $1 in October and has not returned to that level since then.
On the positive side, NASDAQ has given Cosi a 180 day extension or until May 16, 2016, for the stock to return to the $1 level.
Cosi also competes in the competitive casual dining category and is often compared to the highly successful and much larger Panera Bread Co. (NASDAQ:PNRA). Panera is the category leader with 1,800 locations and in 2014 posted $2.5 billion in sales and a net income of $179 million.
I believe Cosi provides an unique opportunity for investors willing to take a risk. I live near three Cosi locations and have been a frequent customer for years. I have noticed the improvements to the menu and decor during the past year. The food tastes great, the employees look happy and the restaurants are busy.
This management team appears to be on the right track and if the turnaround continues and Cosi can post quarterly profits in 2016 and demonstrate that it can be constantly profitable, I think the stock has the potential to more than double its current price in the next 12 - 24 months.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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