Cosi Q4 2009 Earnings Call Transcript

123jump.com Staff
06 Apr, 2010
New York City

Revenues fell 8.1% to $28.2 million and net loss was $4.45 million or 11 cents a share. Restaurant operating expense as a percentage of restaurant net sales was 70.2% compared with 68.5% in the 2008 quarter. Operating loss was $3 million compared to $2.1 million operating loss a year ago.

Cosi, Inc. ((COSI))
Q4 2009 Earnings Call Transcript
March 29, 2010 5:00 p.m. ET

Executives

William Koziel – Chief Financial Officer
James F. Hyatt – President and Chief Executive Officer

Analysts

Christopher Donnelly – Pacific Rock Capital

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the Fourth Quarter 2009 Cosi Incorporated Earnings Conference Call. My name is Felicia and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If at any time, your require operator assistance, please press star followed by zero and we will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Bill Koziel, Chief Financial Officer. Please proceed, sir.

William Koziel

Thank you, operator. Good afternoon. I''d like to welcome you to Cosi''s 2009 fourth quarter and full year results conference call. Joining me on the call today is Jim Hyatt, Cosi''s President and Chief Executive Officer. Cosi''s earnings release was issued today at market close and is available in the investor information section of our website at www.getcosi.com.

During the call, we will be referencing supplemental materials which are also available in the investor information section of our website. If you have not already done so, please access the supplemental materials at this time.

Part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and are inherently subject to risks and uncertainties. You should not place undue reliance on these forward-looking statements. We refer all of you to our filings with the Securities and Exchange Commission for more detailed discussion of the risks and uncertainties that may have a direct bearing on our operating results, our performance and our financial condition.

For today''s call, Jim will begin with some initial thoughts on the past year. I will then review the financial and development results for the quarter and the year. And Jim will conclude by discussing our work and plans around specific components of our business as we look forward into 2010. We''ll then open the call for questions. Jim?

James F. Hyatt

Thanks, Bill and good afternoon, everyone. It''s been a while since we last spoke to you but I want to assure you that we have been here, hard at work, positioning Cosi for long-term success as a premier brand in the fast casual space. I want to take a moment as well to thank all of our shareholders for their continued support. Now, 2009 was a difficult year for Cosi as it was for many in the restaurant sector as we had to navigate through one of the most macroeconomic periods with high unemployment and a significant slowdown in consumer spending.

The impact on Cosi was erosion in our sales this past year, especially in our catering business, giving our density in certain large urban markets. However, I was and continue to be encouraged by the improved comparable sales trends we experienced, across both company-owned and franchise restaurants during the fourth quarter.

We are also pleased with the progress we have seen from our focus on improving the day-to-day operations of our business, streamlining the performance of our restaurants, providing a superior experience and service our guests have come to expect and we are pleased with the deliberate and continuous work of reducing our administrative costs. We still have much work to do, but we are moving in the right direction to capitalize on this very strong concept and brand.

After Bill takes you through the results, we''ll spend some time before the Q&A to talk with you about our work and our plans as they pertain to several important areas of revenue growth, expenses, operations and people. Now, I''ll turn it back over to Bill for the financial discussion.

William Koziel

Thanks, Jim. Now, I''ll review our detailed financial and operating performance for the fourth quarter and the full year 2009. Pages four through seven of the supplemental information will guide you as I go through my remarks.

For the fourth quarter, we reported a net loss of approximately $4.4 million or $0.11 per share. This compared with a 2008 fourth quarter net loss of approximately $8.4 million or $0.21 per share. Our operating loss for the 2009 fourth quarter excluding impairment provisions, closed store costs and lease termination cost was $3 million, compared to $2.1 million operating loss in the 2008 fourth quarter.

During the fourth quarter of 2009, we recorded charges of $1.4 million, related primarily to asset impairment provisions for six company-owned locations, including two from the 2006 class of restaurant openings whose performance in large part has been impacted by poor site selection and two, in the Michigan market, where business has been significantly impacted by the recession and where we have determined it unlikely that the asset values for these two locations can be recovered over the short remaining life of the lease.

In the 2008 fourth quarter, we recorded charges of $6.3 million related primarily to asset impairment provisions for 15 company-owned restaurant locations, of which 13 were from the 2005-2006 class of restaurant openings, where as we have previously discussed, our performance was largely impacted by poor site selection.

For the year, we reported a net loss of approximately $11.1 million or $0.27 per share, compared with a net loss of approximately $16.2 million or $0.40 per share in 2008. Our operating loss for the full year 2009 was approximately $9.2 million versus approximately $8.3 million in the 2008 period, excluding impairment provisions, closed store costs and lease termination cost.

The charges for asset impairments, closed store cost and lease termination expense were $1.9 million and $7.7 million for the 2009 and 2008 years respectively. Continuing through the P&L, based on continuing operations, total revenues for the quarter including franchise fees and royalties, declined 8.1% to $28.2 million, compared with $30.7 million in the 2008 fourth quarter.

The contribution of franchise fees and royalties in the 2009 fourth quarter declined to $529,000 from $875,000 in the previous year''s quarter, largely the result of approximately $300,000 less in fees recognized year-over-year related to fewer new restaurant openings. For the year, total revenues, including franchise fees and royalties decreased by 12.5% to approximately $119 million, from approximately $136 million in 2008.

Franchise fees and royalties contributed $2.2 million in 2009, compared to $3.1 million in 2008. Again, the decrease in franchise fees and royalties was due primarily to a decline in fees related to fewer new restaurant openings in 2009, as compared to 2008, as well as the recognition in 2008 of $460,000 in fees, resulting from a franchise termination.

At the end of the fourth quarter, there were 145 Cosi restaurants, of which 46 were operated by franchisees, compared to 151 Cosi restaurants at the end of 2008, of which 50 were operated by franchisees. At the end of the fourth quarter, there were 97 locations in the company-opened, comparable restaurant base, compared to 99 at the end of 2008.

As announced, our system-wide comparable restaurant sales in the fourth quarter declined by 5.4% as measured for restaurants in operation for more than 15 months. Franchise comparable restaurant sales decreased by less than 1% in the fourth quarter, as compared to the prior year period, with over 36% of the locations in the franchise base reporting positive comparable sales.

Company-owned comparable sales declined by 6.6% in the 2009 fourth quarter, as compared to the prior year, due to a 5.9% decline in traffic and a 0.7% decrease in average check. The decrease in average check was largely impacted by a 13.5% decrease in catering sales in the quarter as compared to the prior year.

For the full year 2009, system-wide comparable restaurant sales declined 10% as compared to 2008, largely due to the impact of the adverse economic environment with high unemployment and sharply reduced consumer spending. Franchise comparable restaurant sales decreased by 6.9% for 2009, as compared to the prior year.

Company-owned comparable sales declined by 10.8% in 2009, as compared to the prior year, due to an 8.9% decline in traffic and a 1.9% decrease in average check. The decrease in average check was largely impacted by a 24% decrease in catering sales in 2009 as compared to the prior year.

Although 2009 was a very difficult sales year given the turbulent economic environment, we were encouraged, as Jim said, by the comparable sales results of the fourth quarter, especially from our franchise partners. Turning to slides four and six. Cost of food and beverage for the 2009 fourth quarter was 23.2% of restaurant net sales compared to 22.9% in the prior year''s quarter.

Cost of food and beverage for the 2009 full year was 22.7% of restaurant net sales compared to 22.8% for the 2008 full year. For the full year 2009, we were advantaged overall in commodity costs, but that advantage was partially offset in the latter half of the year by certain promotional menu items that focused on generating gross margin dollars that carried a higher cost as a percentage of restaurant net sales, such as our steak salad and steak sandwich.

For the fourth quarter, restaurant operating expense as a percentage of restaurant net sales was 70.2%, compared with 68.5% in the 2008 quarter. For the 2009 full year, restaurant operating expense was 68.1% of restaurant net sales, compared to 64.2% for 2008.

Labor and related benefits expense as a percentage of restaurant net sales were 140 basis points higher in the fourth quarter at 37.6%, as compared to 36.2% in the prior year period. For the 2009 full year, labor and related benefits expense as a percentage of restaurant net sales were 36.7% or 250 basis points higher as compared to the prior year.

The year-over-year increase as a percentage of restaurant net sales for both the quarter and the full year were due primarily to the deleveraging impact of the comparable restaurant net sales decrease on the fixed portion of these costs. Other restaurant operating expenses decreased by 50 basis points in the fourth quarter to 12.3% of restaurant net sales as compared to 12.8% in the prior year period.

Other operating expenses were flat as a percentage of restaurant net sales at 12% for both the 2009 and 2008 full years. The year-over-year performance for the quarter and the full year reflect our continued efforts to drive improvements in restaurant level operating costs despite the deleveraging impact of the decrease in sales.

Occupancy costs were 20.2% of restaurant net sales for the 2009 fourth quarter, compared to 19.5% in the 2008 period. For the 2009 full year, these costs were 19.4% of restaurant net sales, compared with 18% for the full year 2008.

Again, the year-over-year increase in occupancy cost as a percentage of restaurant net sales for both the quarter and the full year were primarily due to the deleveraging impact of the comparable restaurant net sales decrease on the fixed portion of these costs. Total restaurant cash flow for the 2009 fourth quarter was approximately $1.8 million, resulting in a cash flow margin rate of 6.7% versus 8.6% in the 2008 quarter.

For the full year, cash flow was approximately $10.6 million, resulting in a cash flow margin rate of 9.1% versus 12.9% in 2008. The year-over-year higher expenses and margin pressures at the restaurant level for the 2009 fourth quarter and full year were partially offset by the continued progress we have demonstrated in corporate expense control.

General and administrative expenses was 13.7% of total revenues for the 2009 fourth quarter as compared to 11.2% in the prior year period. The increase was due primarily to the reversal in the fourth quarter of 2008 of an incentive bonus accrual of approximately $650,000.

For the 2009 full year, general and administrative expense improved by 200 basis points to 12.7% of total revenues, as compared to 14.7% of total revenues for the 2008 full year. This reflects an actual reduction in general and administrative expense for 2009 of $4.9 million or 25% as compared to 2008.

Again, the continued improvement reflects our ongoing commitment to align our corporate expenses with our current trends and infrastructure needs. Cash, cash equivalents and short-term investments were approximately $4.1 million as of December 28, 2009. Cosi had virtually no debt.

On slides five and seven, we have provided a reconciliation of the non-GAAP measures from slides four and six to our reported quarterly and full year results respectively. In summary, the turbulent economic environment of 2009 adversely impacted our sales. However, we were encouraged by the sales results of the fourth quarter and pleased with the impact of the cost savings we''re completed at both the restaurant and corporate level.

As Jim said, we still have much work left to do as we move forward to complete the work we have begun to achieve our objective of turning this great concept into a great business. Regarding development, during the 2009 fourth quarter, two franchise locations opened, one at the Dulles International airport in Virginia and one in Secaucus, New Jersey. While one franchise location closed in the United Arab Emirates.

Subsequent to the end of fiscal 2009, two franchise locations closed, one in Minnesota and one in the United Arab Emirates. We have opened two company locations during 2009 while we closed a total of six. During 2009, our franchise partners opened a total of six locations, while closing 10 including one location in Minnesota that reopened as a company-owned location.

Now, I will turn it back over to Cosi''s President and Chief Executive Officer, Jim Hyatt, for some further thoughts. Jim?

James F. Hyatt

Thank you, Bill. First, we believe that Cosi continues to be a tremendously strong brand with great food, variety and an extremely loyal guest base. Second, the fast casual segment is still, in my view, the most exciting segment in the restaurant business today. Third, we were very focused in 2009 on right-sizing the cost structure of the business and resetting our foundations.

I believe that the combination of what Cosi offers to its guests in this attractive segment with the solid work completed on cost controls positions this brand incredibly well for long-term growth and profitability. What I''d like to spend some time addressing the four key areas that every Cosi executive, support team member, district manager and store manager know and will continue to be held accountable for delivering and they are revenue growth, expense control, operations and people.

Well, let''s start with revenue growth. Historically, Cosi has been very single-threaded with its marketing message which has been primarily focused on its most loyal customer base and as a result, we still lack significant brand awareness, even in markets where we have an established presence.

We receive feedback all the time from guests who tell us that they are experiencing Cosi for the very first time, even by those who work and live within blocks of our locations. Cosi has grown up primarily using its in-store loyalty programs and e-mail customer marketing.

Now, that''s needed and valuable for starting out, but will only take you so far. So Cosi has until now really been spending its marketing allowances on communicating with those who already know and love Cosi. It has not been brand-building focused. We believe it''s time to move into this next step in strategic traffic growth and that is a shift to include extended brand awareness.

We believe that is a big opportunity for revenue growth and it lies in the expansion of our marketing initiatives to reach a broader audience. And we want to make that step this year. Last fall, we went through an extensive search for a new ad agency to help us move to the next level.

We selected through that extensive process the advertising agency, ESW of Chicago, who we feel aligns their talents and vision with the brand identity of Cosi and with our short and long-term marketing objectives. So as we move forward, we will not only adjust how we use our current marketing resources but we will look to increase our spend on out-of-store media as a way to reach new guests, increase awareness of the brand and drive traffic and sales.

Now, what ESW has helped us accomplish over the past few months has confirmed our excitement about growing the business now beyond our historical spending borders and our consumer base. Our newly designed website, our menu board adjustments, our food photography, our social media team now in place are all examples of our pivot work to position us for revenue growth. Speaking of the website, we also expect to leverage our website capabilities as we prepare to launch online ordering, online catering and social media promotions in 2010.

With websites, you can compete equally with those brands who can outspend you on traditional media methods. So with this move, we feel we close the gap on competing for share of traffic.

We completed the refacing and functionality of our website in late 2009, which allows us now to communicate and promote by restaurant, by market or system-wide. Our new dynamic website provides a cost effective way to interact with our very tech-savvy guests and they are beginning to respond to what we''ve done.

We are also now providing our guests with the information they want about Cosi''s great food, including new product launch information, calorie content and allergens. And the website is very food focused and brand oriented. We see another revenue growth opportunity in catering, where we have started to see some recovery in early 2010 from the economic turbulence of 2009.

We already have a great menu available for catering. We are now focused on the logistics of improving our ordering, packaging and delivery. We are also preparing to launch a catering loyalty program in 2010. We have consolidated our catering call center operation into one location for efficiency and for better performance oversight.

We have a strong catering team for the organization now and we are providing best practices training to the restaurants and to our franchisee partners. In 2010, we will be expanding our direct sales efforts in our markets as we believe we have a big runway for catering revenue, specifically in our urban markets and with our franchisees.

We are very competitively priced for catering with our food quality and respect for nutrition. We like the road ahead related to catering and get back the catering sales that eroded a bit in 2009. Being accountable to deliver guest excellence, thus increasing likely to return and likely to recommend attributes is another opportunity to drive sales and is job one at our restaurants.

We don''t underestimate the word of mouth advertising that satisfied guests provide our brand. Our improved performance in guest excellence as measured through our guest feedback tools and external measures continue to show improvement and signal our commitment to being best-in-class related to food, service and facility.

Our restaurant teams are showing muscle memory now in service deals and I''m proud of the progress they have shown to ensure that every guest matters and every visit matters. We have system-wide operations calls every month to discuss in detail our operations of our restaurants with our general managers and our district managers.

We have deployed operational progressive improvement assessment tools to ensure we remain focused on the guest expectations and that we hold ourselves accountable to improve on the things that matter to our guests. We have focused the past two years on how to be a better business and right-size this economic model.

And we have that figured out now, so our entire focus from here is to maintain those business skills while shifting all of our remaining work on revenue growth and brand-building. Beyond marketing, website and guest excellence focus to help lift sales, I want to also discuss the day part and product opportunities we have to drive revenue growth.

For lunch, we continue to work on procedure simplification and capacity improvements to serve more guests in the power hours of the day. Faster lines are possible and we''re working on that very hard. We have a lunch menu that customers crave, so we need to learn how to serve more of them at lunch and our improvements in this area are being felt in our recent sales lifts and from positive response from feedback tools.

We know we have opportunity to drive additional revenue growth in the breakfast day part. Today, we took another step forward to that end as we launched three new breakfast wraps which we believe enhance our menu options with great products that are quick, convenient and value priced.

At the same time, we launched a new higher quality scrambled egg that better aligns with the guest expectations of Cosi''s brand. These additions fit well into our menu architecture that offers a variety of fresh and flavorful products such as steel cut oatmeal, breakfast sandwiches, Squagels unique to Cosi and fruit parfaits. You can see the new breakfast wraps on Cosi''s website home page.

As for our kids menu, I think we are on the right track as evidenced by our number one rating in 2009 as the best fast casual restaurant for kids’ meals. We spent time working on menu offerings that were kid friendly as well as parent friendly, related to nutrition. It''s nice to get food recognition in journals like Heath Magazine, Parents Magazine and Men''s Health as examples. But we feel we have just started with our ideas around better food, fresh, variety, nutrition, go green and so on.

We know those familiar with Cosi see and appreciate those attributes, so we know getting the word out beyond the current customer base is where we need to push now. Cosi also needs to do a better job capitalizing on our opportunity around our strong coffee heritage and our grab and go beverage products and we will.

The potential for both margin and traffic growth demand that we revitalize this business opportunity and we will be adjusting the beverage tactics in the coming months. Beverage is a powerful lever and we need to play offensively on this and recapture this heritage and revenue levels we enjoyed at Cosi in years past.

Our beverage partners and teams have recently assessed these business opportunities and have plans for getting better results in beverage. Another area of revenue opportunity is in franchising.

We have been working proactively with our franchisee partners to improve their sales and their operating margins and we see good results. We have worked with them on making the same type of food and labor control advances as we have, keeping administrative costs down and for the franchisees, getting them more active in the catering opportunities, which are significant for them in my view.

As for franchise unit growth, all franchisees have seen their access to capital for new restaurant development tighten up in the past two years, given all the difficulty in the credit markets. We''ve opened six new franchise locations in 2009 and we expect our existing franchisee partners to open additional franchises in 2010.

We will continue to evaluate and take advantage of interest in refranchising opportunities when we feel we have the right partner opportunity for a long-term success of a market. Bringing in quality franchisees and matching them with the right development strategy is something we have a lot of passion about right now. 2010 and 2011 will be the restart for Cosi to get back at offering franchisee development and in building a very strong franchisee system.

While the economy contributed to the stalling of franchise development, in all honesty, we needed to get the Cosi business reset before we moved forward with this opportunity. We will be selective in bringing in quality, experienced franchisees who have the resources, capability and the motivation to not only operate according to our standards, but also to develop multiple stores in an area.

The economy has been an added challenge for all brands with a franchisee business model, but we feel the right time for us to begin actively engaging in and solicitation of new franchise partner opportunities as another growth opportunity is now. We think we have a very attractive concept with the potential for solid economics in the fast-growing fast casual segment with assignment development areas for entrepreneurs to grow responsibly within.

I''ll turn now from revenue opportunity to expenses and operations, which we see as being two sides of the same coin. If we operate in a disciplined and accountable manner across our organization, we will provide a better experience for our guests and we will reduce expenses.

Every component of the P&L is fair game. Our priorities have been in three dominant areas, cost of goods sold, labor and G&A, but every line item is being interrogated on a routine basis. You''ve heard from Bill, the dramatic improvement we made in G&A on a year-over-year basis, even with the decline in sales.

As our revenue recovers, the margin will rightsize itself even further. We are much improved in this area, but we are still improving as we focus on the highest and best use of our G&A. We saw improvement in cost of goods sold in 2009 as our managers now have the tools to take accountability for the management of their inventories. We continue to take advantage of commodity pricing opportunities without impacting quality.

I want to spend a few moments on what we''ve been doing to strengthen our operations and no surprise, it comes back to accountability. But before you can hold people accountable, we believe you need to be sure that everyone clearly understands what they''re responsible for, what their specific role is.

And we believe you also need to make sure they understand how their role and responsibility fits into the organization''s overall goals. And that''s what we''ve done. We have worked as a team to get all of the general managers and district managers on the same page.

We have and continue to delineate exactly what is expected from each player in the organization, so that there is no question about responsibility and accountability and we are spending a lot of time now on recognition because they have responded and given Cosi results. Over the last couple of months, I have personally visited every company restaurant in every company market, meeting with the district managers and restaurant general managers at their restaurants, evaluating performance, identifying areas for improvement, communicating the performance we are striving for, outlining how improvements will be achieved, in what time line and maybe most importantly, how we would help them.

We have in place an operations excellence platform which provides our teams with the tools to develop, implement and execute an operations plan. Sharing best practices across the system from both company-owned and franchise locations that we know will give us improved revenue and improved profitability.

Finally, we are focused on our people. We have been very successful at reducing our manager and partner turnover, even with a much higher bar of expected performance. Turnover, which many of you know, has a direct impact on our margins. We can improve our training, but if we lose the people we train, then we''re back to square one and we lose all the equity in management skill and guest excellence.

We think people like working in a setting where expectations are clear and there''s accountability. Including reward for performance and we''re going to see more of them succeed with guest and profitability excellence and as a result, they''ll stay with us.

So the face-to-face time that I spent the last couple of months with our district managers and our general managers was extremely helpful to ensure we all understand this is a people business first. We are very focused on our talent, the right talent, our need to continue to build our partner skills and our need to be one of the best places for people to work.

The last item I want to address before I turn it back to Bill is the NASDAQ situation. As you know, we received and expected a delisting notification from NASDAQ, regarding our minimum bid price which has been below $1 since June, 2009. We filed the appeal and the delisting has been stayed pending a hearing with NASDAQ.

At that time, we will be seeking an extension of time, during which we expect to achieve compliance. As part of the process, we will be seeking, if necessary, shareholder approval at our annual meeting to affect a reverse stock split, should the minimum price bid requirement not be met during the interim.

We believe that we are a stronger company today, largely due to the things that I''ve discussed. Better expense control, better operating discipline, more accountability and also due to the proceeds of the rights offering which provided us with the capital we needed to move Cosi forward.

When I came to Cosi, I found as expected, a long list of business issues and previous decisions made by Cosi which has caused a great concept to suffer great penalty. For a learning curve, frankly, that could have been avoided. I watched the U.S. economy fall off the cliff, 30 days from joining the Cosi business.

We have pushed out all the transparency of what I found, what had to be corrected, what consequences were to be experienced, so that we could then reset the business and get on with the rewards of running a great business and a great concept. We are, in my view, at that pivot point now and I believe we will see Cosi bounce back from here and get on our way to what all of us believe to be a responsible and progressive brand turnaround story, leading to continued success for those who go with us.

We are seeing improved sales trends in our business. We expect to complete the month of March with positive system-wide comparable sales for the month, both company and franchise locations. The improving comparable sales trends that we are on and we were coming out of January with, got somewhat derailed in February due to the record snow and weather that we experienced in 100% of our company markets.

So positive comps for March and improved comps for the quarter, they also come to us without the normal marketing support in the quarter versus the prior year quarter. We made a decision to shift our marketing resources away from the extreme weather months and add it to the other quarters, which now appears to have been a very good decision.

So we look forward to having those adjusted resources and additional marketing to help us beginning the second quarter. So we are excited about the direction that we''re moving with our new marketing initiatives and we are convinced they will improve sales and margins.

We feel our new website capabilities will enable us to push farther, faster, by allowing us to communicate quickly and effectively. Our new product launches such as the breakfast wraps, today will enable us to expand our day part sales.

We will maintain a strong discipline around cost controls and we''ve demonstrated that through 2009. We will continue to provide the fresh, favorable and innovative products our of guests desire. And we''re committed to completing the work of making this great concept a great business and one that will drive shareholder value.

Once again, we thank all of our shareholders, our guests, franchisees and our Cosi partners for their continued support. Bill?

William Koziel

Thanks, Jim. That concludes our brief presentation portion this afternoon. We look forward to answering your questions. Operator, please open the line to questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press star followed by two. Questions will be taken in the order received. Please press star followed by one to begin. Again as a reminder, press star followed by one to ask a question. Again as a reminder, press star followed by one to ask a question.

Ladies and gentlemen, if you have a question, please press star followed by one on your phone. And the first question comes from the line of Mr. Chris Donnelly with Pacific Rock Capital. Please proceed.

Christopher Donnelly – Pacific Rock Capital

Thanks, guys for taking my question. I was a little late joining the call. Do you mind if you could repeat what you had said as it relates to the recent comp trends, most notably in March and then I believe you gave a little bit of color for what you thought for the second quarter?

William Koziel

Hey, Chris, this is Bill. Thanks for the question. We spoke about March only from the perspective of saying that both company-owned and franchise sales for March will reflect positive comp sales. We did, however, Jim spoke to say that we came into the year with some -- with improving trends coming out of the fourth quarter. We were a little bit derailed in February as related to the weather, we saw in all of our markets, where that impacted us adversely but we are pleased to report that March will be a positive comp sales month. We did not signal anything as to the second quarter.

Christopher Donnelly – Pacific Rock Capital

Okay. Can you give us a little bit of perspective as to given all the cost cuts that you''ve made, what positive comps would mean for you guys as it relates to contribution to hopefully positive EBITDA at some point?

James F. Hyatt

Well, the positive comps I think really go well for us in flow-throughs. We reposition and recapture the sales that we gave up in ‘09 with what we think is a lot of economic issues. The food cost controls, the labor controls that we have, even the G&A that we have, all were deleveraged last year by those sales. So we really think, Chris, when these sales start to lift and come back to us as we''ve seen here recently. Cosi''s flow-through model''s about 40% so we''re going to see a pretty significant bounce for us in the profit sections for the business because of the sales. And being positioned very well with the cost control systems that I think the managers and the DMs and even our G&A structures have been worked on so hard last year.

Christopher Donnelly – Pacific Rock Capital

Okay. And one last question, then I''ll jump back in the queue. Can you elaborate a little bit more on your efforts as it relates to franchisees going back to some of the contacts that you may have and the opportunities you see there?

James F. Hyatt

Sure. We''ve known that the runway for Cosi is both company development, but very significantly the franchise development is the big opportunity. And finding and seeing Cosi reset itself, I think was something that was extremely important for the kind of operators that we want to attract, that needed to be done.

Cosi wasn’t ready a year ago, really, to start taking on good conversations with franchisees because they needed to see that Cosi was going to get to clean space. They needed to see that Cosi''s economic model was reset and in good shape.

And two, that we were operationally ready to operate and function the business and bring on new franchisees into the system. I have had the opportunity to meet a lot of people who operate restaurants in the space, both fast casual, also obviously, in the fast food arena. So a lot of conversations are there for us to start talking about markets or even refranchising which has actually been a lot of interest over the last six, eight, nine months.

So we think the time is right now for us to go back and re-engage. We''ve done really with our materials, we prepared those and in April and May, we''re going to start making those very specific contacts to individuals in various markets and we''ll then explore where we are. I think the economy has a role to play in that, but we''ll do our part and see how far the economy comes along with the other side.

But we look forward to getting back into the conversation with quality franchisees about a great business model, the CapEx for Cosi is much less than most other concepts and the opportunity for sales and flow-through margins, cash flow margins of a Cosi restaurant are very good when we do things like we''re supposed to, picking the right sites, opening the restaurants very successfully and then doing the day-to-day blocking and tackling with the right operators, is really where this thing is going to unfold.

So a little more maybe in the coming quarters, talking about that specifically because we''re just now going to get back into doing it but we felt the time wasn''t quite right but we do think now we are ready to go.

Christopher Donnelly – Pacific Rock Capital

Great. Thanks, guys. I''ll jump back into the queue.

Operator

Ladies and gentlemen, as a reminder, press star followed by one to ask a question. Ladies and gentlemen, this concludes the question-and-answer session for today''s call. I would now like to turn the conference over to Mr. William Koziel for any closing remarks.

William Koziel

Thank you, operator. Again, we want to thank all of you for joining us on today''s call and we look forward to continuing to update you on our progress as we move through 2010.

Operator

Ladies and gentlemen, this concludes today''s presentation. You may now disconnect.