Getting Cosi With Down and Out Restaurants
Success among publicly traded restaurant names is often fleeting, save for a handful that have had true staying power throughout the years. McDonald's (MCD) is perhaps the greatest success story, with its long storied history and net profit margins in the 20% range, which makes it look more like a pharmaceutical name than a restaurant. I can still order the same things from the McDonald's menu that I did as a child; although the company has added much to the menu over the years, the basics are still the same.
Other, "newer" names, such as Panera (PNRA) , Yum Brands (YUM) and Darden (DRI) have also shown great successes over their histories in the public markets, while concept names such as Buffalo Wild Wings (BWLD) have also made a splash.
Then there's Chipotle (CMG) , which had a massive run and was a veritable "ten bagger" between late 2008 and early 2012. While it has pulled back substantially in the past year, Chipotle has been the poster child for new restaurant concepts, and the most talked about name in the sector the past few years. It's also a great example of what happens when expectations are too high. This may end up being one of the greats, but it was priced for perfection, and fell about 45% between last April and October.
As a value investor, I'm not wired for the growth stories, or the high multiples that come along with great expectations. I am wired to look for the down and out names that are ignored by the market, exhibit some characteristics that suggest a potential turnaround, and are mispriced (in my opinion, anyway.)
While it is a dangerous game to buy down and out restaurant names, I've had some success the past several years with names like Denny's (DENN) , Cracker Barrel (CBRL) and Krispy Kreme (KKD) . I've also had disappointment with Wendy's (WEN) .
My current restaurant reclamation project is Cosi (COSI) , 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 data by YCharts