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Cosi Inc. Message Board

  • Stock_of_the_Month Stock_of_the_Month May 3, 2005 3:30 PM Flag

    Company-owned vs. Franchised

    Just keep in mind that Cosi's last 5-year projection was for 101 new *Company-owned* units. And another 384 *Franchised* units. (A total of 485 new units.)

    Cosi will make less on the Franchised units, although the margins are quite nice. So, revenue/earning multiples need to take into account the two different business models -- a restaurant business and a franchise business.

    I don't think using a multiple of restaurant revenue for franchise units is fair.


    Another point on new units... Management projected 21 new units this year on their March call, six weeks ago. And they noted that most units will be open in the last half of the year. So, I'm not entirely worried right now. A little worried, yes.

    Of the 21 units, 10 are to be Company-owned, and 11 are Franchised units. I think they can make the 21 number, but they need to execute flawlessly to do so. They projected that 2 franchise units will be opened in Q2, so expect to see a press release on the first of these 2 units any day now. Also, keep in mind that they had commitments for 29 new franchises as of March 2005. It's the calm before the storm of new unit openings.

    I've begged friends to buy this stock. It's fairly valued in terms of the existing units, and the entire upside is like getting an amazing long-term call option for free.

    I've never been more bullish on the company and the stock. I hope it falls to $3 so I can by some more. Seriously.

    It irks me that some people still are stuck on the old Cosi story with old management. You buy a stock based on future expectations. The Cosi product is incredible. I love bringing friends from out of town to one of the local Cosi's... They love the bread, and they all agree that a Cosi franchise would do well in their suburban towns.

    I think Cosi is fairly valued at the price of their sandwich and chips, and we have at least $2 of upside through the end of the year.

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    • Excellents points and my sentiment is on par with yours.

      Regarding the franchise v company-owned profitability, well, I don't think that as much of a concern or difference as you. Depending on the buy-in and payouts, franchises can sometimes be more profitable. Too, franchise results often exceed company-owned restaurants.

      Case in point is Applebees. Great company, menu, and management. Its franchise operate more efficiently than do its company-owned restaurants (see same store sales comps).

      What's great about franchising is that the risk is shared with other investors. Called them 'direct' investors, if you will, as they are a source of capital. Cosi does not have the base to growth soley on its own; franchising provides that growth and the capital needed to grow. The majority of restaurants grow in this manner. And there even publicly traded companies that do nothing much franchise a portfolio of restaurant concepts.

      What we have here is an established and working concept that was unfortunately managed poorly by its founders. Kudos to them for taking the risking and getting Cosi running, but like many entrepreneurs, they lack the management expertise to provide the consistent and predictable growth the public investing market demands. And Cosi's co-founders shot themselves in the foot right in the first quarter after its IPO. Talk about killing credibility.

      Today's management is spot on, in my view. Maybe too too methodical and maybe too too cautious. That perhaps explains the initial slow rollout of franchise and company-owned stores. Investors, like me and you, are griping about that -- backend loaded growth in '05 rather than spread over the four quarters. That's leaving a cap between the turnaround and growth phases and is pause to the stock, in my opinion.

      Wall Street analysts I've spoken to have been eyeing Cosi and have been waiting for management to establish the growth phase before they risk initiating coverage. With other restaurants in their emerging growth phases -- Panera, Buffalo Wild Wings, Red Robin Gourmet -- analyst can at least guage the growth matrices. Such is not the case for Cosi yet.

      I'm sure management is well aware of this. Established store openings trend needs to be in place before the top investment houses pick up coverage. When this happens, and provided that Cosi is executing well, the stock might be in demand. In turn, that might result in a higher stock price. And since common stock and market valuation is another form of currency, and thus capital, Cosi would have even more wiggle room to seek additional capital to fuel company-owned store openings.


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