Restaurant chain Cosi (NASDAQ:COSI) reported Q1 2006 earnings May 10, and while the news wasn't great, it showed definite signs of better times ahead.
While revenue was close to estimated levels, earnings per share (EPS) missed rather badly, unless you exclude $1.9 million in stock compensation expenses. Without that, Cosi met the expectation of a $0.05-per-share loss. That's a far cry from its quarterly losses of more than $1 per share just a few years ago. The company expects to rack up positive earnings of $0.06 to $0.11 per share for all of 2006, excluding stock compensation expense.
Gross margins improved due to efforts to control the cost of food. Cosi was wise enough to lock in a distribution agreement contract recently, which should temporarily cushion them from changes in petroleum prices. Poultry, dairy, and cheese prices are also down, which helps Cosi, but doesn't help producers like Pilgrim's Pride (NYSE:PPC).
Franchise fees are a growing contribution to the top line, as well. Starting at just $52,700 in 2005's second quarter, they have grown quickly to more than $187,000 last quarter. As the company continues to license more franchisees -- approximately 20 are expected to open this year -- this will have a larger positive impact on Cosi's finances.
Same-store sales are one of Cosi's weaker spots. Last year, it reported 6.9% growth for the entire year, but a much lower 4.1% in the fourth quarter. Comps this quarter were better at 5.3%, comparing favorably to Ruby Tuesday's (NYSE:RI) 4.7% at company owned stores, but less than rival Panera Bread's (NASDAQ:PNRA) 9%. (I hesitate to even mention Chipotle Mexican Grill's (NYSE:CMG) comp increase of 19.7%.)
On the other hand, several other restaurants, including Applebee's (NASDAQ:APPB) and O'Charley's (NASDAQ:CHUX), reported very low same-store sales growth for the first quarter, at the 1%-2% level. The entire sector seems to be in a bit of a slump; many analysts have indicated that rising fuel costs are beginning to get in the way of consumer discretionary spending. Slumping stock prices, though, could make for decent entry points into many of these companies.
As a Foolish investor, I'd be wary of purchasing Cosi shares for a couple of reasons. It has yet to turn a profit as a public company, and the new rules on expensing stock-based compensation aren't likely to change that this year. Second, while I have been known to take a flyer on an unprofitable company, that company was cash flow-positive before I even considered it. Cosi, unfortunately, reports very bumpy cash flow from operations, ending up negative on a yearly basis. Cosi has been a decent turnaround story, clawing its way back from a low of just less than $1 per share to a high of near $10. Still, other profitable restaurants might make better long-term investments. You might want to keep an eye on Cosi's menu, but I wouldn't order anything just yet.
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Fool contributor Jim Mueller likes to conduct research at different restaurants, but his wife has been known to sigh at the constant stock talk over dinner. He assures us that he does not own shares in any company mentioned, in accordance with the Fool's delicious disclosure rules.
