Current trends and management commentary, encouraging for 2Q10.
COSI’s quarter was not pretty but the winter weather was ugly too and 100% of the store base was impacted by adverse conditions. What is more important is the trend in sales since the end of the quarter. It is clear that the sun is now shining much brighter on the concept. Given current trends, a 3%-5% same-store sales estimate is not a bad target for 2Q10. Dare I say, with that sales number comes a profitable quarter?
NOTES FROM THE CONFERENCE CALL
Sold 13 of the company’s 24 stores in DC market. The company also made an agreement with franchisees to develop 6 new restaurants in that market. There is already an impact in that market from the Capitol C Group.
- Improvement in performance
- Sales and margins were adversely impacted by weather in February
- February comps were -9.4%
- >10% decline in traffic
- Moving in the right direction
- Operating loss was same as net loss
- No other significant items
- Contribution of franchise fees and royalties declined slightly
- 143 restaurants
- 44 operated by franchisees
- System-wide comps declined 3.4%
- Franchise comps decreased by 0.3%
- Company owned declined by 4.3%
- 5.6% traffic
- 1.3% increase in check
- Higher catering sales yoy
- Comp catering sales increased 2% vs prior year
- Traffic impacted by weather in February
- Company traffic declined by more than 10% in February
- 1Q sales were below expectations but March beat expectation at company owned and franchise locations
- Promotional items (steak salad, lobster bisque soup) hurt margins
- Increase in labor due to deleveraging impact on fixed portion of costs due to weather
- Increase in state unemployment taxes
- Other restaurant operating expenses increased because of a 50 bp increase in costs for routine repairs and maintenance
- Occupancy costs were up because of the deleveraging impact of the comparable net sales decrease due to weather
- Demonstrating good control of G&A with a significant saving year-over-year
- Ongoing commitment to align expenses with trends and infrastructure needs
- Virtually no debt
Results for the quarter hurt by weather but sales recovery in March was encouraging.
3 Key areas of focus:
- Although weather had an impact, there was improvement in areas
- March was strong
- It has extended through April and into May
- Catering has shown recovery
- Working on a catering loyalty program
- Started to shift marketing to out-of-store to increase awareness
- Urban markets advertising – bus stations, metro stations, near the stores
- Improved website, social media outreach
- Social media promotions are proving successful
- Expecting to further leverage website in online ordering – something COSI has lagged on
- Faster service
- Deliver products that are consistent across locations
- Standardizing locations
- Simplifying and making the experience more predictable
- Improved products and increased variety
- Needs to improve coffee and return to strong heritage in this category
- Beverage tactics will be adjusted in the coming months
- Making good strides in implementing food and labor costs the company has benefitted from
- Franchise unit growth
- Access to capital has tightened
- Remaining optimistic about franchisee growth
- COSI opened 6 new franchise locations in 2009
- Internationally, there is a site under construction in the Middle East
- Will continue to monitor refranchising opportunities (like Capitol C)
- Significant strides have been made
- Still improving in GA
- Some erosion in cost of goods in 1Q
- Need to improve this
- Lost food inventory due to weather and outages
- Fumbled a few things
- Managers must be accountable for oversight
- All general managers are getting on the same page
- Delineated what is expected from everyone in the organization
- Results are showing
- Operations excellence platform gives teams the tools to improve – “best practices”
- Reducing turnover even with higher expectations for performance
- Discussed additional ways to develop managers
Consecutive months of positive comps are encouraging but competition is difficult. Marketing initiatives are paying off.
Q: Amazing how little the company advertises and Panera has a better awareness level. You compete favorably with them…more advertising? Also, are you looking at high margin things like coffee and beverages?
A: Transitioning to work outside the restaurants on advertising more. Other companies have been outshouting COSI.
We have seen the drink category leak away over the past couple of years. Need to do a better job in coffee and lemonades.
Q: Perspective around the positive comps in April and May…how are they happening, where, day parts? Reconciliation on cash level?
A: We’ve been working ourselves to get customer back. Catering is an active runway – a 2% lift in catering business. Wraps have been helpful in terms of units sold. We like the lift opportunity for breakfast.
The balance sheet improvement in cash included rights offering. Minimal capex for the quarter but will generate more cash throughout the year.
A: Holding our own in lunch…that is the one day part where there was some erosion in the first quarter. The wraps are doing very well around breakfast.
Some soft locations and difficult competition. Expecting some strength moving into the summer.
Q: What are the catering margins vs overall?
A: Tightly wound in terms of labor, it is planned. Increase in packaging offsets that. The catering business in downtown NY saw vendors drop COSI but we think the margins for it are pretty good.
Q: Why are your franchise stores doing better in terms of comp sales? Are you planning on selling to franchisees in future?
A: They are doing a better job in serving the customer.
There are a few places where COSI will focus company markets but we’re not actively trying to market any company locations.