I like to invest in companies that make money.
Companies that operate year in and year out without showing a dime of free cash flow -- companies like Cosi (NASDAQ:COSI) -- will never attract my investing dollars. Mind you, I love the food at Cosi, but its business has a history of burning cash that gives this investor heartburn. And it was no surprise when Cosi reported earnings last week and announced that it remains free cash flow-negative.
Actually, let's separate those clauses. On Wednesday, Cosi announced that it remains unprofitable. Cosi also announced that it was free cash flow-negative. The first announcement came via an earnings release that, for some reason, included no income statement, no balance sheet, and no cash flow statement. The second announcement arrived in the firm's simultaneously-filed-with-the-SEC Form 10-Q, which did include all of those statements.
Why the company makes its investors jump through hoops to view its financials is a mystery to me. The stories told in the press release and the SEC filing are pretty similar. The press release describes how Cosi lost $0.06 per share in its third quarter, 50% better than its $0.12 per-share loss one year ago. The SEC filing shows that Cosi burned through $7.3 million in free cash flow over the first three quarters of this year -- also an improvement over the equivalent year-ago period. What's more, Cosi generated positive cash from operations during this quarter, for only the second time since 2002.
Although it was "cash-flow positive" in Q2 and Q3 (although not for the year to date), Cosi is not yet "free cash flow-positive" -- remember, that's cash from operations minus capital expenditures -- and it won't be any time soon. As much cash as Cosi is now generating from operations, it's spending that and more to build out its store count. This quarter, Cosi intends to open eight restaurants, bringing its total to 93. Next year, the store count should hit 110. The company expects to continue opening about 24 new locations a year in 2007, 2008, and 2009.
With its rate of new store openings accelerating, I suspect that Cosi will remain free cash flow-negative for a few more years, at least. Which likely means it will need to return to the public markets for a cash infusion, and dilute existing shareholders, within the next couple of years.
Cosi rival Panera Bread (NASDAQ:PNRA) is also unattractive as an investment, but for a different reason. The company has been free cash flow-positive in eight of its past 10 quarters, and GAAP-profitable in every quarter of each of the past three years. But it's trading at 57 times trailing free cash flow, which means that however profitable the company is, it's also overpriced.
Learn more about the two trendy eatery rivals in:
Fool contributor Rich Smith does not own shares of either company named above.
