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Getting Cosi With Down and Out Restaurants

My current restaurant reclamation project is Cosi (COSI - Get Report), which actually got some press yesterday when Roth Capital put a buy rating and $2 target price on the stock. This company has been the epitome of a bad experience for investors. Cosi has been in the black (from operations) just one quarter in its 10-plus years as a publicly traded company. While the food has been very good (at least as long as I've been a patron) the operating costs have been extremely high, and the menu way too complicated. COSI Chart COSI data by YCharts

This was a name that I would not touch with a ten foot pole; that is until late 2011, when a major shareholder, Brad Blum of the Blum Growth Fund (7% stake) began making some waves as an activist. Blum, former CEO of Burger King (BKW), offered to step in as CEO to right the ship. He got a chilly response from the company's board of directors, but ultimately, Cosi brought in a new CEO Carin Stutz, and Blum ended up dropping his activist campaign, and came onboard as a consultant.

While it's still too early to say with certainty that Cosi can be saved, the company reported its first ever profit for the second quarter of 2012. It was a small profit at that, just $77,000, but it was a start. New management has taken steps to reduce the number of items on the menu, and shorten waiting times. More recently, Cosi has been experimenting with new menu items, and a new restaurant design.

It will be a tough road for Cosi, but the company ended last quarter with $16 million in cash, partially the results of a rights offering, and no debt. Cosi bought itself some time, but now has to demonstrate that it has a place in the extremely competitive restaurant landscape, and that it can be consistently profitable.

A tall order, for sure.

At the time of publication the author is long KKD, COSI.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.
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