Roth Capital Partners re-initiates coverage on Cosi Inc (NASDAQ:COSI)


Equity Analyst Anton Brenner of Investment Research Firm Roth Capital Partners issued a research report and buy rating on Cosi Inc (NASDAQ:COSI) titled ”COSI: Finally, A Turnaround Nears” On September 28 with a $2.60 price target.

Mr. Brenner stated ”Cosi, one of the earliest fast casual restaurant concepts, has never been profitable over its 19-year existence. R.J. Dourney, who operated a successful and profitable Cosi franchise, was named CEO last year and his restaurants have been acquired by Cosi. A number of operational changes, store refreshes and menu revisions are being implemented and initial results have been positive. We look for Cosi to become EBITDA positive by Q4 and to attain positive EPS in 1H 2016.”

He goes on to say that ”Corporate EBITDA should become positive by Q4 2015 and we look forpositive EPS beginning in Q2 2016. We anticipate that EPS, estimated at ($0.27) in 2015, will increase to $0.05 in 2016 and to $0.13 in 2017. We are initiating coverage of Cosi with a Buy rating and a 12-month price target of $2.60.

Cosi Inc (NASDAQ:COSI) bills itself as a national fast casual restaurant chain that has developed featured foods built around a secret, generations-old recipe for crackly crust flatbread. This artisan bread is freshly baked in front of customers throughout the day in open-flame stone-hearth ovens prominently located in each of the restaurants. Così’s warm and urbane atmosphere is geared towards its sophisticated, upscale, urban and suburban guests. There are currently 79 Company-owned and 31 franchise restaurants operating in sixteen states, the District of Columbia, Costa Rica and the United Arab Emirates. The Così vision is to become America’s favorite fast casual restaurant by providing customers authentic, innovative, savory food while remaining an affordable luxury.

The Così® menu features Così® sandwiches, freshly-tossed salads, bowls, breakfast wraps, melts, soups, Squagels®, flatbread pizzas, S’mores, snacks and other desserts, and a wide range of coffee and coffee-based drinks and other specialty beverages. Così® restaurants are designed to be welcoming and comfortable with an eclectic environment. Così’s sights, sounds, and spaces create a tasteful, relaxed ambience that provides a fresh and new dining experience.

According to Equity Analyst Anton Brenner the problem in a nutshell, (is that) Cosi’s average unit volume is too low and its costs, especially occupancy expense, are too high. Consequently, four-wall restaurant EBITDA margins have not reached double digits since 2008 (margins were -2.6% in 2014). Restaurant level profits consistently have been insufficient to cover corporate overhead, and Cosi has remained unprofitable.

The ongoing decline in same-store sales coinciding with escalating rents in many urban markets contributed to profit margin erosion. Cosi’s average unit volume of ~$1.2MM is approximately the same as a dozen years ago, implying a sharp decline in customer traffic. Inefficient store operating procedures are largely responsible for the low sales levels. Long lines, especially at peak lunch periods, deterred customers and sharply reduced throughput. In some restaurants it might take 20 minutes to order and be served, a prohibitive delay for a mostly take-out fast casual venue.

On September 9 COSI announced that estimated system-wide comparable restaurant sales for the 2015 Period 8, as measured for restaurants in operation for more than 15 months, recorded an aggregate increase of 1.0% as compared to the 2014 Period 8. Comparable restaurant sales for 2015 Period 8 are reflective of the holiday shift, year over year, and we expect that impact to be offset in 2015 Period 9. The breakdown in estimated comparable restaurant sales between Company-owned and franchise-owned restaurants are as follows:

Cosi’s President and CEO, RJ Dourney said “I am confident in the progress we are making moving Cosi forward. The forward movement with our menu, the operations of our restaurants and the economic model are all positive. There are multiple initiatives in progress that I believe will make a significant financial impact,” Dourney went on to say.

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