BH Report: Crumbs Bake Shop 2014/11/25

Context

When I first cupcakes in high school, I thought they were way too sweet (I think this is common for the

people who didn't grow up in the US). Funny enough, years later – it is one of my most favorite snacks.

New York has many good cupcakes – it's not that I actively go out of my way to buy them, but just by

being in the city, I have already tried the cupcakes from 4 major cupcake places i.e., Crumbs, Magnolia,

Melissa and Sprinkles (ATM version)

Of these I have tasted, Crumbs was the most omnipresent one (you see them everywhere you go), so it

was truly surprising when I first saw the lights being out with a piece of paper saying "good bye." I soon

found out that it went bankrupt – and my initial reaction was "how is that even possible when it was

doing just fine until yesterday!"

In this report, I tried to explore the following:

• Overview – what is it?

• Financials – what happened before & after going public?

• What now?

What is Crumbs Bake Shop?

Source: Crumbs Bake Shop annual reports; Janney Capital Markets; DealBook

• Founded in March 2003

by Mia & Jason Bauer

• First opened in Upper

West Side of Manhattan

• Handled fresh baked

goods – with specialty/

premium cupcakes as the main

product (~80% of sales)

• Quickly became the largest

cupcakes chain in the US

• The company went public

(NASDAQ) in 2011 – market cap

assessment was $66M at the time

What happened before/after going public? High-level summary

Crumbs experienced tremendous growth in the 8 year period since its startup in 2003

• ~60% CAGR in revenue, regardless of the economic downturn

• Acceleration in new store opening: 46% CAGR in 2003-2008, 65% CAGR in 2008-2011

• 9% CAGR in average revenue per store, partially offset by -2% CAGR in 2008-2011

The company went public in 2011 – the market analysts were bullish on the company & Crumbs was expected to accelerate its growth from ~60% p.a. to ~84% p.a. through 2013

• Primary driver being an aggressive new store opening (66% p.a.)

• Coupled with continued revenue per store (11% p.a.)

However, in reality, it experienced significant slow down in its growth rate (~9% p.a.) as a result of both new store opening being below expectation (26% vs. 66% p.a.) and significant decline in average revenue per store (-14% vs. 11% p.a.)

• Haven't gone deep enough to know why this is the case – but most likely explanations being the increasing competition/commoditization of the main product (i.e., cupcakes)

The lowered average revenue per store & the cost associated with new store openings/ changes in product mix resulted in significant cost increase across all components (most notably occupancy and labor costs) – operating margin declined by 33% from 2010 to 2013

Ultimately, Crumbs entered bankruptcy in July 2014

Before going public

('03-'11)

After going public

('11-'14)

Going public (2011)

Prominent decline in average revenue per store

4743

40

31

24

95

3220

20

40

60

+61%

2010 2007 2009 2008 2011 2012 2013

$M

2004 2005 2006

+9%

+59%

65

54

41

29

189

54320

20

40

60

80

+65%

2007

+26%

+46%

2013 2012 2011 2010 2009 2008 2006 2005 2004

732804

9851,090

1,307

1,0531,035

857880750

0

500

1,000

1,500+9%

2013 2012 2011 2010 2009

-2% $K

2008 2007 2006 2005 2004

-14%

Avg # of stores

Avg revenue per store

Revenue

x

Source: Crumbs Bake Shop annual reports

Back-up: Analyst forecast (May '11) had more aggressive assumptions on the pace of expansion and per-store sales

403124

95322 47430

50

100

150

200

2008 2007 2006 2005 2004

+61%

$M

+84%

+59%

2013

135

2012

80

2011 2010 2009

4129

18954326554

0

50

100

150

200

2011 2010 2009 2008

+65%

+66%

67 +46%

2013

111

2012 2007 2006 2004 2005

9851,090

1,307

1,0531,035857880

750

0

500

1,000

1,500

2,000-2%

2006 2005 2004

$K

2007

+11% +9%

2013

1,220

732

2012

1,189

804

2011 2010 2009 2008

Avg # of stores

Avg revenue per store

Revenue

x

Source: Crumbs Bake Shop annual reports; Janney Capital Markets; Morgan Joseph Triartisan

All cost components significantly increased from 2010 to 2013, reducing operating margin by 33%

41 42 44 46

2737 36 35

15

1823 27

1011

13

6

8

0

50

100

150

COGS & Operating expense as % of revenue

Labor

Other

SG&A

Occupancy

4 5

2013

COGS

3

120 112

94

127

2012 2011 2010

'10-'13

change

+3%

+5%

+12%

+8%

+5%

+33%

Source: Crumbs Bake Shop annual reports

Key driver

-

Promotions esp. in new market (e.g.,DC/Chicago) and prof. fees

New store opening/ lower average revenue per store

Lower average revenue per store

Packaging and beverage costs, higher level of discarded merchandise

Lower average revenue per store directly impacted

~20% out of 33% margin decline

Stock price peaked in mid 2011 followed by a sharp drop Decline continued for the following 3 years – the price is ~25 cents post bankruptcy

Source: Yahoo Finance

May 17th, Janney Capital Markets set fair value market estimate

of ~$13 per share

June 29th, Morgan Joseph Triartisan set price target

of ~$16 per share

What happened since bankruptcy... it actually came back!

• On July 8, 2014, the company announced it would immediately close all of its remaining locations and is evaluating its options, including a possible bankruptcy filing

– Shortly after Crumbs closed its shops, an announcement was made that a deal had been reached to transfer the rights to the chain to an investment group including Marcus Lemonis (of the CNBC reality show The Profit) and Fischer Enterprises

– The group stated that their intentions were to rapidly reopen stores with more diverse offerings. As part of the agreement the existing corporation filed for bankruptcy, and court approval was needed to finalize the deal

• On August 26, 2014, Crumbs won court approval to start reopening its stores

• On October 14, 2014, Crumbs reopened its first shop in Manhattan, followed by reopening of additional ~25 stores within a month

• Long story short... I'm very happy

Source: Wikipedia; FOX News; Business Insider

Disclaimer

This document is provided for general information only and nothing contained in the material constitutes a recommendation for the purchase or sale of any security. Although the statements of fact in this report are obtained from sources that I consider reliable, I do not guarantee their accuracy and any such information may be incomplete or condensed. Views are subject to change on the basis of additional or new research, new facts or developments.