Cosi CEO details turnaround amid 140% rebound


Six months into a fresh turnaround attempt at struggling sandwich chain Cosi, the changes appear to be resonating with investors.

Since CEO R.J. Dourney took the helm in March, Cosi's stock has rebounded roughly 140 percent to $2.40 (which, still, is a fraction of its all-time high of $44.84).

"Anybody that takes the time to come in, get under the covers, see what we're doing—you see how successful this could be," he said in an interview.

To be sure, the company faces a huge challenge. Its net loss more than doubled in the most recent quarter. Revenue fell, while general expenses and those related to lease terminations rose. A recent financing bolstered the company's cash reserves, which were still less than half of where they stood a year earlier.

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Dourney declined to forecast when Cosi would turn profitable, but he views the company's current cash burn as an investment.

While Cosi has yet to make a profit, it has $226 million in net operating loss carryforwards as of year-end. These substantial losses should be a boon to its bottom line if it does turn profitable.

"When we do make money, we're not going to be paying any taxes on the money that we make, which is a beautiful thing, so we'll leverage that," Dourney said.

What's out of the cards in its turnaround attempt? Going private, Dourney says.

"I feel like I have an obligation to the shareholders to help them realize a return," he said. "A lot of the folks that have invested in Cosi like me have been in for a while, and I think this company has enormous potential."

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Aaron Allen, founder of a restaurant consulting firm, attributed the chain's problems to a lack of differentiation.

Its initial pop was a result of investors trying to get into the fast casual space, he said. But as more restaurants entered the emerging field, they had to differentiate themselves. "That's where Cosi kind of missed the boat," Allen said.

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Allen noted the key to a successful turnaround is getting franchisees on board.

"Most often, the odds are stacked against them," Allen said in a phone interview. "When restaurant names start to deteriorate or shutter locations, most of the time brands stick around but are a shell of their former selves."

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Cosi is planning a refresh with new menu boards and a different ordering system that focuses on making the process faster.

The company is also revamping its dishes, re-engineering recipes and simplfying ingredients lists.

So far, sales are showing signs of a turnaround as a result of closing underperforming company stores. Second-quarter comp sales fell 4.7 percent systemwide, better than a 9.5 percent drop in the first quarter.

"I'm really happy with what I'm seeing," Dourney said about recent performance in stores. "When you do all these things and if nothing were happening, that's when you get nervous. But when you do these things and you see the lift, the momentum that you're hoping for, it's very encouraging."