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Cosi Beats by a Penny

Zacks Equity Research

After missing the Zacks Consensus Estimate in the last three quarters, Cosi Inc.’s (COSI) first quarter 2012 loss of 2 cents per share was ahead of the Zacks Consensus Estimate by a penny. Reported results also improved from the year-ago loss of 4 cents per share. The better-than-expected results were driven by strong top-line growth and margin expansion.

Total revenue, which comprises company-operated restaurant sales and franchise fees and royalties, grew 4.1% year over year to $24.7 million on higher comparable restaurants sales (comps) and a leap day in February.

Company-owned sales increased 4.0% to $23.9 million on the back of comps growth, offset somewhat by a decline in sales due to closure of units. Franchise fees and royalty revenues increased 6.8% to $0.8 million, benefiting from higher comps.

System-wide comparable store sales grew 7.5% from the year-ago quarter. Comps improvement was driven by new initiatives and shift of year-over-year holiday week in the early quarter. Comps at company-owned restaurants climbed 6.2% thanks to traffic growth of 5.9% and an increase of 0.3% in average check. Comps at franchised restaurants were considerably up at 9.5%.

Based in Deerfield, Illinois, the company’s restaurant operating loss in the quarter narrowed to $1.1 million from $2.1 million in the year-ago quarter. The loss contracted due to 120 basis points (bps) decline in labor and related benefits, as a percentage of restaurant sales, 140-bp plunge in restaurant operating expenses partially offset by a 30-bp rise in cost of food and beverage.

Store Update

During the quarter, the company closed one franchised unit. At the end of the first quarter, the company had 135 restaurants, out of which 80 are company-owned and 55 franchised. Cosi did not open any unit in the reported quarter.

Financial Position

Cosi ended the quarter with cash and cash equivalents of $4.8 million and shareholders’ equity of $4.5 million. Additionally, the company has no debt apart from lease obligation.

Our Take

Cosi is set to drive its top line by simplifying its menu and enhancing customer’s dinning experience. The company also remains committed to its cost control initiatives. Moreover, Cosi is taking a set of initiatives to grow further. We prefer to remain on the sidelines until those measures translate into better numbers.

Cosi, which competes with companies like Jamba Inc. (JMBA), currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We also maintain our long-term Neutral recommendation on the stock.

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