The last note I wrote about COSI was titled “Destruction in Deerfield.”  In breaking down the company’s recent letter to Brad Blum it appears now that management is in desperation mode and will do anything possible to keep their jobs, even if it is to the detriment of the company.


On the day the management reported another disastrous quarter, management felt the need to send Brad Blum a letter stating their dissatisfaction with Mr. Blum and his campaign to get the company back on track. 


The letter comes across as a desperate attempt to discredit Mr. Blum, without providing any reasons why shareholders should support the current management team and their efforts, or lack thereof, to turn the brand around.


The earnings call was an awkward event; it was clear that there was no vision for the future.  The experience must have been uncomfortable for the management team, given that no participants on the call seemed to be convinced by what the executives had to say.


I have broken down the letter to Mr. Blum and added my take on what it all means:


COSI Board: “As we have said to you on several occasions, including our two recent face-to-face meetings, we would welcome your offers of assistance if only they were sincere.  Believe us, we appreciate fully the frustration of our fellow shareholders.”


HEDGEYE: Why would management think that someone who owns 6.7% of the equity would not be sincere?  How can they appreciate the frustration of fellow share holders when they (collectively) own less than 1.5% of the equity?  As I see it, the use of the word “sincere” is disingenuous; they just want to keep their jobs!



COSI Board: “This Board is conducting an aggressive but deliberate search to identify a new leader for our company.  We are searching for a CEO who brings vision, a passion for our brand, operating excellence and a track record of success.  We have met several excellent candidates and hope to conclude our search shortly.  Sadly, your so-called activist activities have only complicated our efforts and kept several promising applicants on the sidelines.”


HEDGEYE: Did management not read the letter from James A. Skinner from Royce Associates, which owns 9.6% of COSI?  Here is a small excerpt: “I am also writing to express our dissatisfaction with the Board's and Management's performance over the last several years. Whether measured by the company's revenue growth, profitability (or lack thereof), cash management, capital allocation and share price performance, COSI has fundamentally been an underperforming entity for the better part of a decade.” 


I guess there are now two (as management says) “so-called” activists.  Brad Blum is not complicating the efforts to find a CEO, because he should be the CEO and most qualified observers know that.


COSI Board: “Your demand to hand-pick the majority of the board and thus control Cosi as a precondition to your willingness to serve as CEO or as a director would in effect ask shareholders to deliver to you control of their company as the price for your services.  Shareholders are paid for changes in control, not the other way around.”


HEDGEYE: I love this statement.  Does management have an inflated view of what the company is worth?  What would you pay for a company that is bleeding cash, needs $7-10 million in capital to survive and management team that can’t articulate a vision of the future?  The current shareholders are getting paid a premium with the stock at $0.73.  If the Board appoints any CEO other than Brad Blum the stock will likely be down 30-50% and the bankruptcy clock will start ticking.     


COSI Board: “Believing you to be sincere in your offers of assistance, we heard you more than once say that you would not insist on such a preposterous governance structure.  In that belief, we interviewed you in Winter Park for the CEO position.  We also met with you in Chicago to discuss your joining our board.  Each time, we hoped that your offers of help were sincere.  Each time we discovered they were not and that you continue to insist that the only way you would serve as CEO is if we turned over control of the company to you.  We cannot do that.”




COSI Board: “During our two face-to face meetings, you failed to present any new ideas and plans for improving Cosi’s products and services, improving Cosi’s marketing program, expanding the Cosi  brand, accelerating Cosi’s revenue growth, enhancing stockholder value and, of course, achieving and maintaining profitability.  Rather, your major suggestion was to move the Company’s headquarters from Chicago to Orlando, Florida, where you reside, a concept that would be both expensive and counterproductive to the operations of the Company.”


HEDGEYE: Again this appears to be a statement is intended to discredit a restaurant executive with a track record that the brand needs.   Also, who are they to talk – the losses continue to mount every quarter!  It should also be noted that the current Blum proposal does not actually suggest the company move to Orlando, Fla.


COSI Board: “We also discovered other concerns.  In evaluating your candidacy, we spoke with several references.  Many spoke of your arrogant management style, your lack of fiscal responsibility and the string of failures that followed Olive Garden.  We were also surprised by your statement the other evening that you, while CEO of another Company, “manipulated” the comparable store sales in order to portray a story of consistent quarter over quarter growth.  Your duplicitous behavior, your public rants and your disregard for the federal securities laws in your dealings with us and our shareholders only heighten these concerns.”


HEDGEYE: The clock in running out and there are no other options but to throw a Hail Mary and cross the line of integrity and accuse Mr. Blum of violating securities laws!  Blum has offered quantifiable evidence of shareholder discontent by conducting a survey of COSI shareholders and all that management can respond with is hearsay and insults.


COSI Board: “Brad, our shareholders deserve more than self-promotional gimmicks   A veiled takeover by a wanna-be “activist” trying to make a name for himself at the expense of their company really isn’t in the best interest of our shareowners.  This Board of Directors is made up of serious business people whose motives are very straightforward.  We are not motivated by the meager financial rewards of the job.  We are not motivated by empire-building or some self-interested agenda.  We are motivated by our sincere commitment to providing the best available options for our fellow shareholders and to doing the job we agreed to do.”


HEDGEYE: Mr. Demilio, the shareholders deserve a chance to have a real restaurant executive run this company. 



Howard Penney

Managing Director



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