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Crumbs Bake Shop, Inc. (NASDAQ:CRMB)

Q2 2013 Earnings Conference Call

August 08, 2013, 17:00 PM ET

Executives

John D. Ireland - SVP Finance, CFO and Treasurer

Julian R. Geiger - President and CEO

Analysts

Jack Salzman - Kings Point Capital Management

David Wanetick - IncreMental Advantage

Operator

Good day, everyone. Welcome to the Crumbs Bake Shop Incorporated Second Quarter 2013 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn things over to Mr. Chuck Ireland, CFO of Crumbs Bake Shop Incorporated. Please go ahead, sir.

John D. Ireland

Thank you, operator, and good afternoon. By now, everyone should have access to our second quarter 2013 earnings release. It can be found at www.crumbs.com under the Investor Relations section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements. These forward-looking statements are not guarantees of our future performance and therefore no one should place undue reliance on them. These forward-looking statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings including for a more detailed discussion of the risks that could impact our future results and financial condition.

We'll be filing our 10-K for the second quarter of 2013 shortly and would encourage you to review that report once it becomes available. Also, during today's call, we will discuss non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of additional information should not be considered an isolation or as a substitute for results prepared in accordance with GAAP, and the reconciliation to comparable GAAP measures is available in our earnings release.

With that out of the way, I'd like to turn the call over to Julian.

Julian R. Geiger

Thanks, Chuck, and thank you all for joining us this afternoon. As you might have seen in our press release, our results in the second quarter was disappointing. From a statistical perspective, we had expected to make some progress but we do not. While same-store sales were down 15.4% during the last three months compared to a 17.7% drop in the previous quarter, our net loss increased by about $900,000 in comparison to the first quarter.

While we traditionally do better in the first quarter, we had hoped that this historical relationship would change this year. While we are not pleased with our performance, we remain focused on the initiative and strategies that we had discussed in the past and which we still believe will be the vehicle that will ultimately change the trajectory and vitality of our business in the future.

To refresh your memories, we have stated that we are focused on the following operating goals. Improving the quality and consistency of our customer experience, increasing the penetration of coffee as a percentage of our total business, continuing to introduce unique and creative baked goods, instituting a centralized ordering system that would match supply and demand more closely, revitalizing the look and feel of many of our olden New York stores, getting a distinctive chef-directed gourmet sandwich business in New York to capitalize on a [missing] daypart, closing those underperforming stores that represent the largest profit drains on our business and capitalizing on the untapped and significant opportunity that we see by bringing the Crumbs brand to the premium [roles] within our current trading areas.

In addition to these previously discussed initiatives, during the course of the last quarter, we have also begun serious dialogue that we believe will lead us to a profitable and scalable merchandized licensing program. In addition, we've begun the process of investigating the achievability of franchising the Crumbs brand internationally. Clearly the goal of each of these approaches is to lead us to understandable, measurable, sustainable growth in brand recognition, brand loyalty and profitability.

I will touch on each of these approaches in a while, but at this time point, I would like to turn the call over to Chuck who will take you through all the financials for the second quarter.

John D. Ireland

Thanks, Julian. For the second quarter ended June 30th, net sales increased 11.5% to $12.4 million from $11.1 million as contributions from additional store openings more than offset lower volumes as stores opened prior to the second quarter of last year.

During the quarter, we generated $2.9 million in sales from 32 stores that are not in our same-store sales base, while the 49 stores that were in the same-store sales base experienced $1.7 million decrease in sales due to the factors that Julian has already addressed.

Cost of sales increased 270 basis points as a percentage of sales to 45.8%. The increase is attributable to several considerations including the transition to that we proudly serve Starbucks beverage program and higher customer sales discounts from promotional products. As a result, on a higher cost basis, gross profit increased 6.2% to $6.7 million.

Turning to our operating expenses, selling expenses increased to $500,000 from $400,000 and as a percentage of sales increased 80 basis points to 4.4%. This increase was due to a radio advertising campaign, new promotional displays, increases in public relations expenses, and increase in merchant account fees from our new stores.

Staff expenses increased 4.1% to $4.1 million, and as a percentage of sales increased 270 basis points to 32.9%. This was related to incremental corporate infrastructure spending and staff for new stores partially offset by a decrease in store, staff expenses at our existing stores.

Occupancy expenses increased 480 basis points to 26.7% of sales due to rent-related expenses for the 26 stores opened over the past 12 months coupled with the sales deleveraging across our same-store sales base.

General and administrative expenses increased 90 basis points to 8.5% of sales. On an absolute dollar basis, G&A increased from $800,000 to $1 million due to our directors' stock compensation costs, franchise taxes, NASDAQ fees, increase in bank service charges from new stores and store office supplies. These, however, were partially offset by reduction in outside consulting and other professional fees.

New store opening expenses were approximately $270,000 for the second quarters of 2013 compared to $70,000 from the second quarter of 2012 as we added more stores this year versus the same period last year.

Depreciation and amortization increased from $467,000 to $631,000 reflecting our larger store base, including related lease review and negotiation fees, an increase of 90 basis points to 5.1% of sales. Net loss attributable to stockholders was $2.8 million compared to a net loss of $400,000 last year. On a per share basis, the net loss was $0.23 compared to a net loss of $0.08 last year.

In May and June, we completed the issuance of a combined $10 million in convertible notes to fund our operations going forward. In terms of our 2013 financial outlook, we are lowering our projections from what we communicated last quarter and now estimate net sales of approximately $53 million and an adjusted EBITDA loss of $4.9 million. Previously we have expected net sales of $57 million and an adjusted EBITDA loss of $3.9 million.

Our projection for top line sales is predicated on continued weakness and the same-store sales offset by positive contributions from our newer stores. In terms of adjusted EBITDA, we anticipate that the average new stores will achieve EBITDA margin of no less than $150,000 in their first full year of operation.

And with that, I will turn the call back over to Julian.

Julian R. Geiger

Thanks, Chuck. As I mentioned earlier, at this time I would like to give a more detailed view of how we plan on approaching our primary initiatives. Essential to our vision of enhancing our customer experience is a determination to hire more qualified individuals to work in our stores and to invest more deeply in their training and product knowledge.

As you know, Crumbs assortment is the broadest and we believe the best in the industry and our managers and associates need to understand the product better and interact with the customer in a more consistent and upbeat manner. We need to be more adept to understanding the customers' needs and better engaging with them at every transaction, be it buying a single cupcake or a custom order of 500 uniquely designed cupcakes for a special occasion.

As to increasing the penetration of coffee as a percent of our total business, we continue to work with the Starbucks team to find ways to increase demand and have in fact seen some relative growth in the second quarter.

When it comes to innovation in baked goods, Crumbs has been the forefront for the last 10 years. We believe that we continue to occupy that position in cupcakes but need to extend our creativity to other areas of the baked goods. The recent Cronut craze clearly underscores that we need to broaden the scope of our assortment in a manner to have a larger morning business.

We have talked forever about introducing our own homegrown centralized ordering system. Finally at the very end of the second quarter, it went live and we're in the process of growing it out to stores on a sequential basis. Currently 15 stores are operating on the system and while everything appears to be functioning properly, it is still too early to measure any resulting benefits to top line sales and to reducing the cost of goods sold.

As you know, we have said that we intent to revitalize the look of some of our older, high volume stores in Manhattan and the final work of these stores is being identified. We believe that the initial stores under discussion could be renovated by the end of the third quarter of this year.

As for sandwiches, at the very end of June, we launched our David Burke and Crumbs gourmet sandwich collection in 10 stores in New York City with encouraging results. We learned what we want to do from the launch and our using the traditionally less traffic summer period to refine and expand the scope of the project to be able to proceed at full speed once New Yorkers return from their summer vacations. We are optimistic that this initiative will bring more traffic to our stores during the middle of the day and will be both distinctive and profitable.

Complementing our sandwich assortment, we have started to carry soft drinks and chips not only in those stores that will carry sandwiches but in a pervasive rollout to most of our street and more big stores.

We have talked repeatedly about wanting to close certain underperforming stores within our real estate portfolio. We are making real progress. At this point, one store has been closed and five others are expected to close before the end of the year on terms acceptable to us. These stores are in Chicago, California, Connecticut and Manhattan.

Counterbalancing the closures, our new store openings in super regional malls between Northern Virginia and Southern New Hampshire. In the first half of the year, we've opened a total of 18 mall stores including 10 in line stores and 8 kiosks. In the second quarter, we opened 10 stores including 7 in line stores and 3 kiosks.

Three additional mall stores will be opened during the remainder of the year, two of which have already opened during the month of July. The results of the mall-based stores continue to encourage us in terms of sales, projected EBITDA and brand recognition.

With Crumbs approaching 80 stores and the widespread recognition this growth has engendered, we believe that it is the right time to pursue other growth opportunities. The opportunities that we are continuing will not require substantial capital investment.

Through our licensing consultants we have already seen significant interest on the part of major retailers to participate in programs that will lead to [clock] the extensions for Crumbs and a potential for significant revenue development for Crumbs in classifications that will complement not cannibalize what we currently sell in our own stores. These programs should not add only profit but also visibility that would enhance the Crumbs brand.

In similar fashion, we have started the process of developing an international franchising model to which we can open Crumbs stores abroad and capitalize on markets right for development. Clearly arrangements of this type can be both profit and brand accretive. Although we are only in the earlier stages of this initiative, it is likely that the first country in which we will franchise stores will be Canada. It is a very logical conclusion that if franchising is as successful as we anticipate in Canada, we would want to adjust our domestic store growth strategy to include both company-owned stores and franchise stores based on regional opportunity.

At this point I believe that you have a pretty clear impression of where we have been, where we are and where we are heading. Without doubt the level of accomplishment in the past and present has been disappointing. Working hard isn't enough if you've ever failed to bring desired improvements. In addition to working hard, I think that the Crumbs team is working smarter than it has in the past, being more innovative, thinking out of the box and focusing on the future that could but very different than what we all see today.

We are realistic that performance trends do not change quickly and I'm not saying that size improvement will occur during the third or fourth quarter. With the dedication, the discipline and the dynamic changes we are contemplating, we do believe that we can succeed in the future.

Operator, Chuck and I are now ready to answer any questions that there might be.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question today comes from Jack Salzman with Kings Point Capital.

Jack Salzman - Kings Point Capital Management

Hi, guys.

Julian R. Geiger

Hi, Jack.

Jack Salzman - Kings Point Capital Management

Chuck, did you mention that the comps were declining for the quarter 15.7, is that the right number?

John D. Ireland

15.4, I believe, is what Julian said.

Jack Salzman - Kings Point Capital Management

15.4, okay. When do you folks go twice around on the worst of the comp declines or can you give us more specificity, if possible, on the trend in comps and more specifically what has been the root cause of the sharp declines in comps?

Julian R. Geiger

Jack, it's Julian. The decline started in the middle of 2011 as we were building lots of stores. Clearly, as you know, we are still on that trajectory. There was some moderation of the drop in the second quarter. We think that all the initiatives that we've talked about and are finally going to place – have a chance to improve the comps and that's our expectation. I can't tell you – I can't predict the future. We think we will still probably be comp negative in the third and fourth quarter but at a reduced rate.

Jack Salzman - Kings Point Capital Management

Okay. The cash burn rate for the second half of the year, are you – did we see the worst of the burn rate in the second quarter or are the initiatives still at the level where your cash burn is going to be at or above current levels?

John D. Ireland

We're looking for the second half of the year to have a cash burn of somewhere between 2.5 million to 3.5 million. That will be more in the third quarter than the fourth quarter. We do expect less cash burn in the fourth quarter and that also includes some cash set aside for closing any of the stores that we've identified. We don't know exactly how much this cost would be but we have set aside some funds for that. We've also set aside some money, as Julian talked about, revitalizing some of our older stores so we've put some money aside and our projections for that as well. And so we do expect the fourth quarter to be less of a cash burn. But in total we're looking for the 2.5 million to 3.5 million.

Jack Salzman - Kings Point Capital Management

Okay, that's for the second half of the year?

John D. Ireland

The second half of the year, yes.

Jack Salzman - Kings Point Capital Management

Julian, when are we going to be able to see some traction on either licensing opportunity or the franchising? Do you anticipate putting something in process or in clear detail before the end of this year?

Julian R. Geiger

At the rate that licensing is progressing and it's going very quickly in a faster (inaudible) than we had thought, it's not impossible that some benefits could be seen as early as fourth quarter and if not fourth quarter, from first quarter of 2014.

Jack Salzman - Kings Point Capital Management

Okay. Can we assume that the five stores that you guys want to close between now and yearend are comping at a decline worst than the 15.4?

Julian R. Geiger

I think what you can assume is that the stores we would look to close for us are those with the largest EBITDA loss, their comp rate is less important than the absolute size of their loss.

Jack Salzman - Kings Point Capital Management

Okay. And once you get these five closed, are there other stores that you think you would have an opportunity to close next year or do you feel that you're sort of content with the way the footprint looks after that?

Julian R. Geiger

No, there are other stores and that will follow. Their exact timing is unknown at this point but we think that as long as we can eliminate stores with losses with the cost to us that's acceptable makes the total chain stronger. So we're not complacent about having stores that lose money.

Jack Salzman - Kings Point Capital Management

I appreciate it guys. Thanks and good luck.

Operator

Our next question comes from David Wanetick of IncreMental Advantage.

David Wanetick - IncreMental Advantage

Thank you. Cupcake seemed like a natural product to sell into young children's birthday parties. To what extent, if any, are you making an effort to partner with chains like Little Gym or Gymboree to coordinate with them to make your cupcakes available for young children's birthday parties?

Julian R. Geiger

There are no such initiatives at that point. Dealing with people like that make us lose control of the brand a little bit and they become operationally very challenging. We do have an inactive partner which is a catering department which handles parties and special events that we can Crumbs to you both for offices and for parties, so we're handling that internally.

David Wanetick - IncreMental Advantage

Is that well marketed at the stores because I've visited five or six, seven stores and I'm not sure if I'm seen any brochures on catering of your stores?

Julian R. Geiger

They know and they're supposed to be speaking about any special orders and the number's certainly available in those stores. And that segment of the business has been doing substantially better in trend than the stores in gaining traction.

David Wanetick - IncreMental Advantage

Okay. Can you say anything about the licensing agreement you have with David Burke? Is there any minimum number of sandwiches you have to sell or volume you have to create and a royalty rate you can disclose?

Julian R. Geiger

That's something we haven't disclosed and it really is of a material nature to disclose, so that is not public information.

David Wanetick - IncreMental Advantage

Can you disclose how long your agreement is with Starbucks?

Julian R. Geiger

It was a three-year agreement.

David Wanetick - IncreMental Advantage

And when was that signed?

Julian R. Geiger

Last fall, that's September or October.

David Wanetick - IncreMental Advantage

Okay. And then just two follow-up quick questions. Anything you can say about cost of goods sold or – what's your visibility as far as cost of producing the cupcakes with your bakers? And then the last question I have for now is anything you can say about employee costs? We hear of pressure on minimum wages, of healthcare considerations you may have to cover for your employees?

Julian R. Geiger

In the course of last year, several of our bakeries have, based on increases in raw materials, raised their price to us. During the last quarter the cost of goods sold on our bakers remain constant and do not deteriorate at all. It's one of the benefits that we think we're going to get from the centralized ordering system. And yes, we are aware of pressures out there from either minimum wage increases or health benefit changes that could impact us in the future that we're working to minimize and mitigate.

David Wanetick - IncreMental Advantage

Okay, thank you.

Julian R. Geiger

Thank you.

Operator

(Operator Instructions). We will take a question from [Lance Laifer of Old Forge Asset Management].

Unidentified Analyst

Yes. I just have a quick question about the warrants outstanding. Do you know what the price is on the (inaudible) price right now after all of the financing that you've done?

Julian R. Geiger

That has been unchanged. The strike price still remains at $11.50 and then there has been no change in the warrant program at all.

Unidentified Analyst

Thank you.

Julian R. Geiger

Thank you.

Operator

We'll take a follow-up question from Jack Salzman.

Jack Salzman - Kings Point Capital

Yeah. Just one quick question on the comp declines. You folks said that the comp declines year-to-year and the second half of the year should be less than the 15.4 that was experienced in the current quarter?

Julian R. Geiger

No. We said that traditionally – that the comp decline went from 70.7 in the first quarter to 15.4 in the second quarter which represents some improvement. We said that traditionally we lose more money in second quarter than first as we don't have the advantage of Valentine's Day. And that while we had hoped to reverse that historical trend this year, it did not change and it's followed a pattern consistent with the previous years.

Jack Salzman - Kings Point Capital

I guess what I'm trying to figure out here, Julian, is the revised sales forecast, is that assuming comp declines somewhat equivalent to what we saw in the second quarter or can you give us a little bit of color as to your expectation for comps in the second half of the year?

Julian R. Geiger

We think we will be comp negative and we think they will improve marginally from where we were. Remember we had the benefit – not that it's a benefit, but we had a horrific storm at Halloween last year which substantially changed the trajectory at the end of October and November. But our internal plans, Jack, are for comps to be less negative in third and fourth quarters than they were in first or second quarter.

Jack Salzman - Kings Point Capital

Okay, I appreciate it. Thanks, Julian.

Julian R. Geiger

Okay.

Operator

With that, we have no further questions from our audience at this time.

Julian R. Geiger

Well, we thank you all for your time and your interest and look forward to speaking to you with more results and updates soon. Thanks very much.

Operator

Ladies and gentlemen, that does conclude today's conference. Again, we do thank you all for joining.

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