The Cosi court of public opinion

By Howard Penney, Hedgeye

Earlier this week Brad Blum, CEO of the Blum Growth Fund and 7% owner of the restaurant chain Cosi, announced that he is doing something unique in the public markets. He is using the court of public opinion and shareholder (activism) democracy to resurrect the company. This means he wants the CEO and the board to all step aside and let Blum run the show.

"We call upon all shareholders to join us in our efforts to effect positive change at Cosi and participate in a non-legally binding expression of 'no confidence' for the current board," Blum said in his press release. "This is not a proxy fight or a hostile takeover, but an exercise in shareholder democracy."

As things stand, I would bet that "shareholder democracy" is going to win. On a couple different measures, so far, the court of public opinion is winning. Since putting out the press release Cosi (COSI) shares are up 15.64% on extremely high volume. In the six months prior to Blum's press release, the stock declined 50%.

We are also getting questions from shareholders, some of which are "is he for real?" As an industry analyst for the past 20 years, I have been an eye witness to Blum's success and also some of his failures. That being said, the obvious answer to that is yes, Blum is for real and his track record as a leading industry executive is one of the best there is. He has extensive restaurant experience and brings to the table a very specific skill set that has created a real economic value for a number of restaurant concepts (he held leadership positions at Burger King, Darden Restaurants (DRI) and Romano's Macaroni Grill).

Unfortunately for Cosi, the previous chairman, Jim Hyatt resigned recently and has subsequently taken a position at Church's Chicken in Atlanta. Hyatt did an amazing job of getting Cosi reorganized and set in the right direction, despite the most difficult macro environment in a generation. His departure was driven by personal reasons and had nothing to do with Cosi, the company or the brand. Having spoken to Hyatt, I know it was a very difficult decision for him to leave after putting in three very long years with the company.

The future for Cosi is extremely bright. There are not many small restaurant concepts today that that have the potential triple in size. It is a concept that operates in the hottest segment of the industry: fast casual. The fast casual segment continues to take market share from the more tradition categories of the industry. Importantly, the heritage of the company is focused on the food (especially the bread), allowing for strong consumer appeal across three day-parts, which is rare in the indutsry and offers the company and shareholders tremendous opportunity.

It looks like the chances of Blum succeeding are high. Since the departure of Mr. Hyatt, the company has been silent about the future of the company besides a few cursory comments.  While I do not know the interim CEO and Chairman of the Board, Mark Demilio, I do not suspect he wants the job and none of the current board members are likely to take the job either, in my opinion.

Even more telling is that the company is in a degree of turmoil and management has had over 48 hours to respond to Blum's overtures yet there has been no press release defending their position. To be honest, the company position is defenseless, but the lack of a response does not instill confidence to the current shareholder base that the lights are on and management is keeping the momentum that Jim Hyatt established.

Right now, time is critical and not on management's side. Management and the board need to act now on the where they are taking the company, the longer they put off the inevitable, the worse the business will get. Shareholders and the employees deserve leadership from the board; whether it is via new leadership or not, the company's potential needs to be achieved.