Cosi Inc. (COSI) reported a loss of 1 cent per share in the second quarter of 2011, significantly worse than the Zacks Consensus Estimate of earnings of 3 cents, but narrower than the year-ago quarter loss of 3 cents per share. Lower-than-expected results were due to lower traffic resulting in a decline in comparable store sales growth.
Total revenue, which comprises company-operated restaurant sales and franchise fees and royalties, plunged 9.2% year over year to $29.6 million in the quarter. Company-operated restaurant sales tumbled 8.7% to $28.6 million due to the sale of 13 company-owned restaurants to a franchisee in the second quarter of 2010. Moreover, franchise fees and royalty revenues dropped 24.2% year over year to $0.8 million, attributable to excess franchise fee recognized in the year-ago quarter due to the cancellation of a certain area development deal.
System-wide comparable store sales inched down 0.2% from the year-ago quarter due to sluggish consumer spending. Cosi witnessed negative comps during the reported quarter after four consecutive quarters of growth. The company-owned comparable restaurant sales grew 0.5%, driven by a rise of 2.9% in average guest check, but were substantially offset by a decline of 2.4% in traffic. Same-store sales at franchise-operated restaurants also plummeted 1.3%.
However, Cosi continues to make efforts to expand its customer base and drive traffic by providing catering services for breakfast as well as lunch day parts.
Based in Deerfield, Illinois, the company’s restaurant operating income expanded to $3.2 million from $2.7 million during the year-ago quarter. This improvement was aided by a 20-basis point (bps) contraction in cost of food and beverages and a 270-bp drop in labor and related benefits, partially offset by a 10-bp spike in occupancy and other restaurant operating expenses, as a percentage of restaurant sales.
During the quarter, Cosi also succeeded in reducing its administrative cost by 6.6% to $3.4 million.
Store Update
During the quarter, the company closed one company-owned restaurant. At the end of the second quarter, the company had 140 restaurants, out of which 81 were company-owned and 59 franchised.
Financial Position
Cosi ended the quarter with cash and cash equivalents of $8.3 million and shareholders' equity of $9.2 million. Additionally, the company has no debt apart from lease obligations.
Our Take
We expect estimates to remain mixed in the coming days, since the company is unable to drive traffic, though it has succeeded in enhancing margins and contained costs in an inflationary environment. The Zacks Consensus Estimates for 2011 and 2012 are pegged at earnings of 1 cent and 15 cents, respectively.
Cosi operates in 18 states including the District of Columbia in the U.S. and also operates in the United Arab Emirates. Its prime competitors include Panera Bread Co. (PNRA) and Starbucks Corp. (SBUX).
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