Which will cost more from Cosi Inc.: the roasted turkey and brie flatbread sandwich or a single share of stock in the hip restaurant popular with Washington's downtown lunch crowd?
Aiming to price its shares between $8 and $10, Cosi, a restaurant company that caters to health-conscious palates, plans to go public today in a deal that may test the appetite of Wall Street for a fast-expanding, high-spending and unprofitable young firm.
Cosi needs capital to fund its aggressive expansion plans, but Wall Street may already be skeptical. Three of the four underwriters for the initial public offering -- Credit Suisse First Boston Corp., Banc of America Securities LLC and U.S. Bancorp Piper Jaffray Inc. -- have backed out since April, a move that all three declined to discuss for this article.
A source familiar with the pull-outs said that the company's lack of profit made the underwriters nervous, and that they disagreed with management about whether it was the right time to go public.
The company plans to offer 5.55 million shares to fund the next few years' expansion and pay off the debt it has accumulated in opening new restaurants, closing others and redecorating more.
Cosi, which merged with coffee bar Xando Inc. in 1999, has 79 restaurants in 11 states across the Northeast and Mid-Atlantic, including 16 in the Washington area. The company has apparently struck a chord with its "gourmet" sandwiches, made to order with ingredients such as pesto chicken, spinach-artichoke spread and smoked salmon.
It was founded in 1996 by Jay and Shep Wainwright, two New York brothers in their twenties, after one of them took a liking to a gourmet sandwich shop in Paris while studying abroad in college.
The firm quickly expanded by using initial investments from friends and family members and plowed revenue into further expansion. The Wainwright brothers counted on their uncle Eric J. Gleacher, a Wall Street veteran at Gleacher Partners LLC who founded the mergers-and-acquisitions unit of Lehman Brothers, to round up $500,000 to get started and another $15 million from friends and family to keep growing.
Andy Stenzler, former chief executive of Xando, now serves as Cosi's chairman and CEO. Jay Wainwright is president and a director of Cosi, and Shep Wainwright is vice president of real estate. Gleacher is also a director.
The underwriting banks' pull-out from the IPO leaves Cosi with one firm, Chicago-based William Blair & Co., ranked 95th in total capital among investment banks, as its sole underwriter.
"The IPO market continues to be for the very brave underwriters and issuers," said James D. Cox, a securities law professor at Duke University. But, Cox said, the banks' pull-out "may not reflect as much about the particular offering, but the nervousness within the IPO market today."
David Menlow, president of IPO Financial Network, which analyzes public offerings, said William Blair shouldn't be discounted because of its small size. The firm usually underwrites IPOs in conjunction with other firms, but it took the lead on a deal to take public a debt-reselling firm early this month whose stock has risen from $13 to $17.
"They've got a lot of marketing muscle right now," Menlow said.
Cosi did not return several phone calls seeking comment yesterday.
The company may not have any attractive option but to go public, some analysts say. In filings with the Securities and Exchange Commission, the company said it has $3 million in cash on hand and has incurred $114 million in losses. Without an additional infusion of money to pay off its debt and fund its ambitious plan to open more restaurants, the firm said, it will have difficulty operating beyond the latter part of 2003.
At the very least, "at this point in their business plan they need to access capital markets," Menlow said. But, he said, "They're losing money, which they have been consistently, and they're running out of resources to continue with their business plan."
Cosi has never turned a profit. In SEC filings, the firm does not offer any date by which it expects to be profitable.
Like Starbucks Corp., Cosi plans more locations in places where it already has several restaurants. In fiscal 2002, the company plans to open 25 more restaurants, and in 2003 it plans to add 53 to 59 more.
Cosi had $61 million in sales for the first nine months of this year, compared with $52 million last year. It posted a $10 million loss during that period, down from $17.9 million for the same period last year.
"It looks like an iffy thing," said Carl Sibilski, restaurant analyst at Morningstar Inc. Other restaurant companies, such as Panera Bread Co., are turning a profit, he said, adding that he isn't sure what's going on with Cosi's operations.
"It may catch on as a fad," Sibilski said, but in the long term "do people still want to go to your store, or do they say, 'I don't want to spend $8 for a sandwich'?"
Judging from the lunchtime crowds at several locations, many people do. The Cosi concept has caught on with the young, urban business crowd, which the company says works longer hours and craves healthy and more sophisticated foods.
Cosi joins a new and rapidly growing segment of the restaurant industry called "fast casual," which sells higher-quality food to customers who may be willing to spend more than a typical fast-food customer but don't have time for a sit-down restaurant.
Boston Market Corp. leads this category, which also includes restaurant chain Chipotle Mexican Grills, both owned by McDonald's, and Panera Bread.
According to research firm Technomic Inc., customers of "fast casual" restaurants spend $7 to $9 per check; at $6.37, Cosi's average check is slightly lower, probably because some customers come just for espresso drinks. The $5.2 billion "fast casual" industry had an average 15 percent sales growth in 2001, Technomic said.
"Our objective is to build a nationwide system of distinctive restaurants that generate attractive unit economics by appealing to a broad range of customers across five dayparts: breakfast, lunch, afternoon coffee, dinner and dessert," Cosi has said in SEC filings.
At Cosi "you have more ambience" than at other quick-lunch spots, said Renato Zaratz, a 28-year-old painter and student who was enjoying a mocha frozen espresso drink yesterday at the company's restaurant on 15th and K streets. Zaratz said he visits Cosi twice a day, once in the morning for coffee and later for lunch, because it's close to work and his home. "If I have to do fast food, I come here," he said.