Revisiting Crumbs Bake Shop: Is It Finally The Next Krispy Kreme?

| About: Crumbs Bake (CRMB)

Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

Soon after Crumbs Bake Shop (NASDAQ:CRMB) went public, early investors clamored for an opportunity to profit on the then current cupcake craze. Numerous articles and analysts determined that Crumbs had the makings of the next Krispy Kreme (KKD). It has been over two years since Crumbs went public and now more than ever, the Krispy Kreme parallel may finally hold true.

Krispy Kreme Doughnuts went public in 2000 opening at $8 per share and three years later by 2003, it had soared to an all time intraday high of $49.74 as a result of aggressive store expansion and prospective forecasted growth plans. However, this "fad" doughnut retailer was then blindsided by yet another fad, the "Atkins Diet." Coupled with over expansion and declining sales at both company owned and franchisee sites, the price per share fell victim to the shifting tastes of diet conscious consumers. After a six-year slide, by 2009 KKD shed 98% of its former self and stood at only $1.01 per share.

Strikingly, Crumbs Bake Shop has traveled through a remarkably similar, painful path to where it sits today. At $1.15 per share, CRMB trades 93% off of its all time intraday high of $16. Incorrect in hindsight, in 2009 critics such as J.P. Morgan's John Ivankoe stated that the novelty of the Krispy Kreme Doughnut shop was lost due to "waning fad appeal." However, investors who had the stomach to establish a position during the company's lengthy turnaround efforts are now seeing tremendous gains. Even after today's disappointing quarterly earnings and outlook KKD is up 108% year to date and an astounding 1,900% from all time lows. Now, the important question to any value investor is, does Crumbs have the potential to be a 19 Bagger as well? Perhaps it does. At today's close Krispy Kreme held a market capitalization of 1.52B while Crumbs holds a comparatively paltry valuation of 13.48M. Despite only being a fraction of a percent in capitalization, Crumbs' revenue stands at nearly 10% of Krispy Kreme. The bakeshop trades at a price to sales ratio of .25 while Krispy Kreme trades at a price to sales ratio of 3.01. Metric comparisons like this should pique any value investors' ears. Contrarian investors alike may be rewarded here for exploiting this cupcake fad overstatement. If gourmet cupcakes have indeed built a permanent niche, Crumbs is still your best pure play.

Growing Pains

Crumbs has not escaped all of its growing pains since going public. In the company's most recent quarterly report earnings disappointed:

For the three and six months ended June 30, 2013, Crumbs recorded a net loss attributable to common stockholders of $(2.75) million and $(4.73) million, respectively, or basic and diluted net loss per common share of $(0.23) and $(0.41), respectively.

Crumbs has an unfavorable cash burn rate, which potentially forecasts a future necessity for private financing or a secondary offering. However, ex Aeropostale CEO Julian R. Geiger who currently helms the company has said, Crumbs is taking restructuring efforts to increase closures of underperforming stores and return to profitability. Specifically, a new real estate initiative aimed "on a shift in strategy from opening street stores to opening mall-based stores." is intended to increase brand awareness, foot traffic, and reduce occupancy expenses. Implementation of this initiative has been accelerated and since the 3rd quarter of 2012, 27 of the company's 29 new store openings have been either inline mall sites or in mall kiosks.

If management can successfully execute their new strategy and improve overall financial performance, then it is finally possible that Crumbs will be positioned to become a Krispy Kreme redux.

Disclosure: I am long CRMB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.