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Tuesday, June 5, 2012

Is it too late to short cupcakes? Crumbs Bake Shop Inc (CRMB)

 Jason and Mia Bauer started Cumbs Bake Shop in 2003. In 2011 they went public through a reverse acquisition via 57th Street General Acquisition Corp.



I remember watching this video about a year ago and thinking this could be a great short. You have a crappy business and a fad all mixed in together with a reverse acquisition. It smelled like a great short. Yet, for whatever reason, the idea of shorting Crumbs never went into fruition and I forgot all about cupcake bakeries (there is only one in Taipei, and the cupcakes weren't so good.)

Crumbs Bake Shop had very high hopes of what their business could produce. Look at these estimates they had....wow. [pg. 7 here also shows their roadshow expectations]

Reconciliation of Adjusted EBITDA to Net Income

The following table reconciles adjusted EBITDA to net income for the time periods indicated:

 
Years Ended

 
December 31


December 31


December 31

 
2010


2011


2012

 
(a)


(b)


(b)

 


Net income (1)

$ 1,640,000

$ 3,452,500

$ 8,522,500
 











Income taxes, including any gains or losses resulting from the change in estimate relating to the Tax Receivable Agreement (2)


0


282,500


1,712,500
Depreciation


605,000


1,200,000


2,000,000
Accelerated Depreciation of Abandoned Leasehold Improvements


190,000


0


0
Amortization


65,000


65,000


65,000
Interest income


0


0


0
Interest expense


0


0


0
Equity-based compensation


0


-


-
Acquisition costs


0


     (c)

0
 











Adjusted EBITDA as presented

$ 2,500,000

$ 5,000,000

$ 12,300,000
[page 7 http://www.sec.gov/Archives/edgar/data/1476719/000114420411001468/v207688_ex99-1.htm]


Jason Baurer was very aware of their past growth and what they estimated as their future growth. They started going to road shows, like Rodman & Renshaw, showing their investor presentation.  Jason went on Bloomberg saying, Crumbs was a "perfect public company story." He knew very well, that Crumbs would be getting sweet valuation as a public business and that going public through a SPAC, would allow him to go public quicker and with less scrutiny from the underwriters who would need to vet the business.
 



( One of the most important documents 423B3s or the prospectus files you get from the SEC. In the 423B3 there is great bit of information called "Use of the Proceeds". If the common stock they are selling is from the company to expand the business: that's generally a good thing. If the common stock they are selling is from the insiders to sell the public: beware. In this case, it was from the insider, 641,394 shares were being sold. The selling shareholder was not the Bauers, but their partner Edwin Lewis, who bought 50% of the company for $10M)

By the way, how much did shareholders of Crumbs get when they sold it to 57 Street?

Upon consummation of the Merger, the Members of Crumbs received consideration in the form of newly issued securities and approximately $22,080,060 in cash. The securities consisted of (i) 4,541,394 New Crumbs Class B Exchangeable Units (the aggregate of which is exchangeable for 4,541,394 shares of our common stock, and 641,394 of which New Crumbs Class B Exchangeable Units have been exchanged for shares of our common stock and are being sold by a selling stockholder), issued by Crumbs and (ii) 454,139.4 shares of Series A Voting Preferred Stock (each such share entitling its holder the right to vote 10 votes per share in all matters for which the holders of common stock are entitled to vote), issued by us (64,139.4 of which have been surrendered and cancelled by us upon the exchange of 641,394 New Crumbs Class B Exchangeable Units for the 641,394 shares of common stock issued to a selling stockholder). In addition, Crumbs, as the entity surviving the Merger, received as a capital contribution from us, the sum of $13,724,513.92 (not including refunds receivable after the closing of the Merger) after giving effect to the retention of $53,156.01 by 57th Street for future public company expenses and the payment of $148,752.72 for 57th Street’s then outstanding franchise taxes.
[pg.1 http://www.sec.gov/Archives/edgar/data/1476719/000095012311083665/w83542b1e424b3.htm]

---

Fast forward to the present, a random cupcake reference and the idea of Crumbs comes racing back to my mind. I check out how they've done and the chart says it all.



What has happened since their IPO?

For one, their founder is no longer the CEO of the company. In November 2011 Julian Geiger became the appointed CEO, in what seemed to be a sudden decision.  On the Crumbs website, Jason and Mia Baurer are still part of the management team but my guess the entrepreneurial zeal is gone with the new CEO, Julian Geiger;   Julian is a sixty-six year old ex-CEO of A√©ropostale and not the man investors envisioned as their entrepreneurial leader. (The conference calls are filled with CEO babble: business acronyms, strategies and six part plans)  They have also stopped giving out information on same store sales. Not a very good sign when you are withholding crucial information for a retail operation.

So now the question is, at current prices, is Crumbs still a good short? Crumbs currently trades at $2.30 a share with a market value of $13.2M and 4M in cash according to the last quarter filing. Leaving an enterprising value of 9M (Of course, leases should be included as part of the debt of the company, but for now let's just say it's debt free). Although it isn't currently profitable, it does have 41M in TTM sales (higher now with store growth), which means if it could just get an profit margin of 5% you are looking at 2M in income for a company with an enterprise value of 9M. I am guessing 5% margins are not likely and if they were, they wouldn't say this in their last 10k:
In light of the decline in operating performance at a number of the Company’s stores, management continues to evaluate and, as necessary, address weaknesses and implement improvements in the Company’s operations and growth strategies as part of its efforts to maximize overall profitability and shareholder value.

One of the most startling problems Crumbs faces is the rapid decline in cash.


The foodies of the world are calling for the end of the cupcake bubble as well, for the start of the pie bubble. Although people have been calling the cupcake bubble for a while, I think the founders knew they were at the peak and that's why they sold Crumbs. 

My guess is, the cupcake market is highly saturated and becoming increasingly competitive. It's going to be harder for these bakeries to keep their quality consistent as they grow and customers will start to tire of the coolness of a cupcake bakeries when they are littered all over the street. The man who made the smartest trade here was Jason Bauer by selling out right at the top of the cup cake craze (all while denying the existence of it's bubble.)

Some people might say, that Cupcake business might grow to be as big as the doughnut business. Yet, that doesn't make much sense. I think the doughnut business is already in the cupcake business, or could very well go into it -- how much harder would be start selling cupcakes at doughnut stores? It also, without a doubt, ever get as big as the coffee business. For one major reason. Coke and coffee has one huge advantage over food. It has no taste memory and for that reason, it allows people to drink 5-6 cans a coke a day. I can't say that for muffins.





I enjoyed this comment/questions during the 3rd Quarter 2011 conference call. Where the caller states the obvious: Crumbs was sold at the height of the hype and now the shareholders are seeing the results of a crumbling cupcake market.




 The current borrow rate from Interactive is 2.16% which shows there is some people interested in shorting this stock already, but it is fairly cheap compared to other names. (I believe TSLA is in the double digits.)


Even though I think this company will die an eventual beanie baby death, there is still a possibility of being acquired (Starbucks?) or a pop if they show a surprise quarterly profit.  I doubt either of these two things will happen, but they are real risks to be concerned with if you are shorting.
 
Tell me what you think about shorting CRMB. Leave comments or email me at wallis.joshua@gmail.com

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