Cosi Sees Top-Level Exit

Cosi Inc. (COSI - Snapshot Report), a premium casual dining restaurant chain, recently announced that its Chief Executive Officer (CEO), President and a member of the board of directors, James Hyatt has resigned due to personal reasons.

Hyatt joined the company as the CEO, President and director in September 2007 and took all possible measures to improve the company’s top line and narrow losses. He believes that the initiatives taken under his tenure to drive traffic and expand margin by reducing costs has gained momentum and will ensure growth in future.

Until a permanent CEO is found, Cosi has decided that Mr. Mark Demilio, Chairman of the company’s board, will serve as the interim CEO. However, Mr. Hyatt will continue to remain an employee until September 23 to facilitate a seamless transition.

Mr. Demilio has been a member of the board of directors of Cosi since 2004 and became Chairman in 2010. He has previously served as the Chief Financial Officer of Magellan Health Services, Inc. (MGLN - Snapshot Report) and Youth Services International, Inc. Presently, Mr. Demilio also serves as a member of the board of directors and Chairman of the audit committee of Restoration Hardware.

The company’s search for a new CEO has begun, but as long as the new CEO is not appointed we prefer to remain on the sidelines. Consequently, we maintain our long-term Underperform recommendation on the stock. Cosi currently retains a Zacks #5 Rank (short-term Strong Sell rating).

In the recent second quarter 2011 results, Cosi reported a loss of 1 cent per share in the second quarter of 2011, significantly worse than the Zacks Consensus Estimate of earnings of 3 cents.

Moreover, the company experienced a plunge of 9.2% in total revenue as system-wide comparable store sales inched down 0.2% from the year-ago quarter due to sluggish consumer spending.

However, the company’s restaurant operating income expanded to $3.2 million from $2.7 million during the year-ago quarter, aided by a 20-basis point (bps) contraction in cost of food and beverages and a 270-bp drop in labor and related benefits.

Cosi currently operates 138 restaurants out of which 80 are company-owned and 58 are franchised.

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