Things continue to look shaky for premium convenience restaurateur Cosi (NASDAQ:COSI). Its weak third-quarter performance follows on the heels of a lackluster Q2, in a negative trend that instills little confidence.
For Q3, net sales increased by 7%, thanks almost entirely to revenue growth from Cosi's newest stores. For restaurants open more than a year, however, it's quite a different story. Here, same-store sales dropped to 4.2% despite an increase in the average check of 3.4%. The most telling figure is that the transaction count for units open for more than a year declined by a staggering 7.6%.
A decrease in transactions of this magnitude is a major concern, particularly since this metric was unimpressive in the year-ago period as well. In the same quarter a year ago, comps rose 7.8%, with the average check contributing a 5.5% increase, while transactions rose a paltry 2.3%.
For such a young concept as Cosi, these figures are particularly alarming. This is the very time that the company needs to be creating a solid, loyal customer base, not driving customers away. A strategy that seems to rely on price increases is doing little to woo the public.
Rather than slow down to fix the flaws in its current stores, Cosi is determined to turn out more and more units. Unfortunately, these new units aren't likely to be stellar performers until some radical changes take place. For the quarter, eight new units were added, contributing to a 16.1% year-over-year increase of restaurants in operation.
Cosi is hopeful that the newer units, employing a refreshed design, will be better performers than the older "heritage" counterparts. Currently, the "new generation" concepts represent only 28% of all of its sites in operation, but Cosi is forecasting that the newer units will surpass the older ones through the course of fiscal 2007.
As for existing sites, Cosi is banking on new menu additions, as well as retooled marketing initiatives, to increase guest traffic and keep them coming back for more. We shall see. The Fool in me says there's no reason to be hasty making an investment here -- let Cosi's management first prove it has a successful strategy to increase transactions.
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Fool contributor Jeremy MacNealy has a player rating of 98.41 and is ranked 197 out of 12,354 participants at Motley Fool CAPS. He has no financial interest in any company mentioned. The Motley Fool has a nifty disclosure policy.
