Will This Restaurant Catch a Buyer's Eye?

 | Jun 18, 2013 | 2:00 PM EDT
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I wrote on Monday about the $205 million offer from home improvement retailing giant Lowe's (LOW) to buy certain assets of Orchard Supply Hardware (OSH), a West Coast retailer boasting a $12 million market cap and a $270 million enterprise value. 

That got me thinking about another small company that continues to struggle with its own turnaround, restaurant operator Cosi (COSI). Cosi is a $37 million dollar chain of fast casual restaurants inspired by Parisian cafes and offers an array of freshly made sandwiches, soups, salads, and its signature flatbread.

Cosi has been often compared to Panera Bread (PNRA). As of Dec. 31, 2012, Cosi operated 125 restaurants. Most are located in the northeastern U.S. in New York and Pennsylvania and the mid-Atlantic states.

Cosi shares have punished investors for years. After a one-for-three reverse stock split recently, shares now trade for $2. In the past five years, the stock has steadily declined from over $11 a share to just above $2 today. The company has been unable to generate any form of profitability. In the past three years, the company has lost nearly $15 million.

Operating cash flow over those three years has been a negative $8.4 million. Stock sales have been the company's tool of choice in raising new capital. Since 2008, shares outstanding have increased from 40 million to over 60 million today.

Cosi continues to struggle to find the right leadership. Less than two years after her hire, CEO Carin Stutz resigned recently. To say that Cosi is trying to find its direction and niche paints a pretty accurate picture.

Despite these very valid concerns, the company does have some things going for it. The concept -- fresh fast casual food -- seems to be attractive. Although revenues have experienced a slow decline, the company still pulls in $100 million a year in sales. Cosi also continues to pursue a growth effort centered on franchising its brand.

Many stores are located in high traffic desirable food cities like New York, Chicago, and Philadelphia. Simply getting a foot hold in those locations could be very attractive to a brand like a Panera or other restaurant concept. In this case, the balance is clean. At March 31, 2013, Cosi had over $12 million in cash and virtually no debt -- giving the company an enterprise value of $25 million.

Cosi's struggles have been well documented. But the company seems to have a unique concept that is missing that one key ingredient. Perhaps it's a matter of opening more profitable locations. With 125 units, Cosi is dwarfed by fast growers Chipotle and Panera who each boast well over a 1,000 locations and are adding more each year.

Perhaps Cosi needs the right leader, one who has a fresh perspective on doing things. Or maybe Cosi is better off in the hands of a competitor or private equity. Restaurants, with somewhat stable revenues and cash flows, are attractive buyout targets. With a cash rich balance sheet, Cosi offers patient investors what could perhaps be a very lucrative option on a turnaround.

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