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Crumbs Bake Shop, Inc. (NASDAQ:CRMB)

Q4 2013 Earnings Conference Call

March 19, 2014 5:00 p.m. ET

Executives

John Ireland – CFO

Edward Slezak – CEO

Analysts

David Wanetick – Incremental Advantage

Operator

Greetings and welcome to the Crumbs Bake Shop, Inc. Yearend 2013 Conference Call.

[Operator Instructions]

I would now like to turn the conference over to your host, Chuck Ireland, Chief Financial Officer of Crumbs Bake Shop. Thank you. You may now begin.

John Ireland

Thank you, operator. Good afternoon.

By now everyone should have access to our fourth quarter 2013 earnings release. It can also 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 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 for a more detailed discussion of the risks that could impact our future results and financial condition. We will file our 2013 10-K the last week of March and we 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 in isolation or as a substitute for results prepared in accordance with GAAP. And the reconciliation comparable to GAAP measures is available in our earnings release.

With that out of the way, I'd like to introduce Ed Slezak. Ed joined the company in August 2013 as General Counsel and, upon the expiration of Julian Geiger's employment agreement with the company, was appointed as Interim Chief Executive Officer effective January 1st. I'm pleased to announce that our Board's formally changed Ed's title to Chief Executive Officer and General Counsel at its Board meetings held last week.

I will now turn the call over to Ed.

Edward Slezak

Thanks, Chuck, and thank you all for joining us this afternoon.

Before I begin, I would like to take this opportunity to thank Julian Geiger who has served as our CEO for the past two years, for all of his many contributions to the company and for his continued leadership and guidance as a member of our Board of Directors.

In addition, I would also like to thank Edwin Lewis who has served as Chairman of our Board from May 2011 until his resignation in January of 2014, for his leadership and guidance of the company and its Board. As you may have seen in our 8-K last week, Fred Kraegel has been appointed by our Board to serve as Chairman. We are all very excited to congratulate Fred on this appointment.

Our remarks today will largely be focused on the fourth quarter, but we will also discuss certain important events which have occurred and initiatives we have put in place subsequent to yearend.

Regarding the fourth quarter, as you might have seen in our press release, our results were an improvement in trend as compared to the third quarter but clearly not yet where we need them to be as a company. For the fourth quarter, same-store sales were down 8.5% as compared with the 17.3% drop in the previous quarter. As you would expect, we experience significant drops in sales anytime there was an inclement weather in the region where we have stores. The sales drops during weather events affected both our street level and mall-based stores, and not only caused us to miss sales due to reduced foot traffic, but as you can imagine, significantly increased our costs of goods sold during that period.

While outside of the fourth quarter, a prime example of weather materially affecting our business was in the days leading up to and including the all-important Valentine's Day holiday where the Northeast was affected by significant snow storms. While we are not pleased with our overall performance, we remain focused on the initiatives and strategies which we believe will ultimately change the trajectory and vitality of our business.

Those include continuing to develop and build upon our third-party licensing program, upon which we will provide greater detail later in this call; actively developing a franchise store model, including our existing store base, which we believe to be one of our most important initiatives; closing those under-performing stores that represent the largest profit drains on our business; improving the quality and consistency of the customer experience in our stores and online; continuing to introduce unique and creative baked goods and complementary products in our stores; continuing to implement expense reduction and cost savings initiatives; increasing the penetration of our Crumbs' branded coffee as a percent of our total business; revitalizing the look and feel of certain of our older New York stores; and lastly, completing the rollout of a centralized automated ordering system that more closely matches supply to demand.

Clearly the goal for each of these initiatives is to lead us to a measurable and sustainable growth in brand recognition, brand loyalty and overall profitability. I will touch on certain of these later in the call, but at this point I would like to return the call back over to Chuck who will take you through our financials for the fourth quarter.

John Ireland

Thanks, Ed.

For the fourth quarter ended December 31st, net sales increased 5.4% to $11.4 million from $10.8 million as contributions from additional store openings during 2013 more than offset lower volumes at stores opened prior to the fourth quarter of last year. During the quarter we generated $1.3 million in sales from the 28 stores that are not in our same-store sales base, while 42 stores that were in the same-store sales base experienced an $800,000 decrease in sales due to reduced traffic in our stores, particularly in mall-based stores, resulting in a lower volume of transactions.

Cost of sales remained flat as a percentage of sales at 47.1%. This level of cost is attributable to several considerations including the We Proudly Serve Starbucks beverage program and higher customer sales discounts from promotional products. In an effort to improve our overall coffee business, we transitioned our coffee program back to our previous coffee vendor over the course of fourth quarter. Coffee costs are expected to be lower in 2014 than we experienced for much of 2013. Our gross profit increased 5.3% to $6 million.

Turning to our operating expenses, selling expenses increased to $615,000 from $395,000, and as a percentage of sales increased 170 basis points to 5.4%. This increase was due to radio and print advertising campaigns, printing of new promotional displays, increases in public relations expenses, royalties related to sales of products pursuant to the terms of the Girl Scouts of America license agreement, and increase in merchant account fees from new stores.

Staff expenses decreased 4.1% to $4.1 million, and as a percentage of sales increased 270 basis points to 32.9%. In 2012, staff expenses included approximately $1.9 million of non-cash expense associated with the vesting of stock compensation granted to Julian Geiger. Separately, this change was due to incremental corporate infrastructure spending and staff for new stores, partially offset by decrease in store staff expenses at existing stores.

Occupancy expenses increased 160 basis points to 26.8% 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 660 basis points to 9.1% of sales. On an absolute dollar basis, G&A increased from $900,000 to $1 million due to additional consulting and professional fees, increases in bank service charges, and store supplies from new stores. These costs were partially offset by a reduction in director compensation costs.

New store opening expenses were approximately $3,000 in the fourth quarter of 2013 compared to $129,000 in the fourth quarter of 2012, as we only opened one store at the very beginning of the quarter.

Depreciation and amortization increased from $524,000 to $731,000, reflecting our larger store base, including related lease review and negotiation fees, an increase of 150 basis points to 6.4% of sales.

Net loss attributable to stockholders was $4.8 million compared to a net loss of $5.4 million last year. On a per share basis, the net loss was $0.42 compared to a net loss of $0.49 last year.

We anticipate that the auditor's opinion to our financial statements will make reference to Going Concern Matters. Management closely monitors the cash position of the company as we transition to the plan Ed is about to outline in more detail. Discussions with potential sources of capital have and will continue to take place.

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

Edward Slezak

Thanks, Chuck. As I mentioned, earlier, at this time I would like to give a more detailed view of how we plan on executing our primary initiatives.

Licensing, this initiative is central to our strategy for the future and is off to a very strong start, definitely exceeding our initial projections. Through our licensing consultants we have already seen significant interest on the part of major retailers to participate in programs that are product extensions for Crumbs and have the potential for significant revenue development and classifications that will complement, not cannibalize what we currently sell in our own stores. These programs will add not only profit but also visibility, enhancing the Crumbs brand.

Clearly the Crumbs brand name is seen as having significant value. In each product classification we have explored to date, suppliers had been aggressive in vying to become our licensees. To date we have publicly announced two signed agreements, White Coffee for coffee beans, ground coffee and single-served cups, and Pelican Bay for baked mixes, hot chocolate mixes and related novelty gift items. You will note in our fourth quarter financial statements that we have already begun receiving licensing royalties. We will be announcing additional exciting licensing arrangements in the very near future.

Franchising, this may ultimately prove to be our most important short as well as long-term initiative based on our discussions with companies specializing in this area. We are crafting a strategy and actively working to become a registered franchisor. Our hope is to be registered to sell Crumbs franchises domestically by no later than the end of the third quarter. This program will not be limited to new locations. We will also actively consider converting a significant number of existing operating Crumbs stores from a company-run business model to a franchise model.

It is our expectation that moving the daily operation of our stores to a franchisee owner-operator will alleviate a number of the challenges we as a company have historically experienced in attempting to deliver a consistent customer experience in our stores. A franchise operator should, candidly, be even more vested in reaching the high standards we expect for our customer store experience and in efficiently controlling payroll and cost of goods.

In a similar fashion, we are also considering developing an international franchising model to which we can open Crumbs stores abroad and capitalize on additional markets for development. Although we are only in the earliest stages of this initiative, it is likely that the first country outside of the United States in which we will seek to franchise stores will be Canada. We will provide additional information and periodic progress on our domestic and international franchising initiatives in subsequent earnings calls.

Store closures, as we have discussed in prior calls, the closing of unprofitable stores at a reasonable cost is a key short-term initiative of the company. Since our last earnings call, we have made significant progress closing those under-performing stores. During the fourth quarter of 2013 we closed nine stores in varied geographic areas. So far in 2014, year to date, we have closed an additional six under-performing stores, with additional closures expected in the very near future. We are on pace to complete this process of closing under-performing stores ideally well before the end of the third quarter.

Newness and freshness of our product assortment. When it comes to newness and innovation in baked goods, Crumbs has been in the forefront for the past 10 years. We believe that we continue to occupy that position in cupcakes but need to extend our creativity to other areas of baked goods. It is incumbent upon us to continue to inject new and innovative products into the marketplace. We must continue to give customers new reasons to come into our stores.

As an example, in August of last year we entered into a licensing arrangement with the Girl Scouts of America, melding the Girl Scouts cookie brand and product experience with our own unique and special cupcakes. I am happy to report that the Girl Scouts cupcakes are selling according to plan, and we look forward to introducing additional co-branded products in the near future.

Investment by Fischer Enterprises. As many of you may have seen, on January 24th we filed an 8-K announcing that we entered into a $5 million senior secured loan and security agreement with Fischer Enterprises, LLC, the owners of Dippin' Dots. We have closed on the first tranche of that financing, with the second tranche scheduled to close on April 1st. As we have disclosed, Fischer Enterprises received the right to appoint two members to our Board of Directors. We look forward to providing additional information on those appointments very soon.

Since late January we have been working closely with members of Fischer Enterprises and Dippin' Dots, actively exploring co-branding, co-licensing and franchising opportunities. We expect that this partnership will only continue to develop and expand over time, and we very much look forward to working very closely together as we look to develop opportunities for these brands.

At this point, I hope we have provided a clear impression of where we have been, where we are now and where we are heading. Without doubt, the levels of accomplishment in the past have been disappointing. We are at an inflection point for our company and for our business. We are evolving our business model. We are focusing on brand expansion and extension, while reducing our store footprint in the short run.

We are continuing to develop our licensing programs and attracting new licensees. We are continuing our program of reducing expenses wherever possible in order to match the company's expense structure with our revenues. And we are actively moving towards a franchise store model.

Working hard is not enough if those efforts fail to bring desired results. We need to work smart and create alliances with those partners who will enable the Crumbs brand to reach its full potential.

We are realistic that performance trends do not change quickly, and we are not saying that dramatic improvement will occur overnight. However, we are executing our initiatives every day and we are making progress. With the dedication of our employees and the meaningful business changes we are implementing, we firmly believe that we can succeed in the future.

Operator, Chuck and I are now ready to answer any questions.

Question-and-Answer Session

Operator

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions]

Our first question comes from David Wanetick from Incremental Advantage.

David Wanetick – Incremental Advantage

Thank you. I have two questions. What are your plans for the gluten-free effort? Is that something that you also hope to franchise?

And secondly, with the license you announced with Pelican Bay, I'm not sure I understand the consistency in the branding there. In the press release it said that Pelican Bay sells through mass merchants, and the vision in my mind when I hear mass merchants is low-end stores like Walmart or something like that. And if that's true, it seems a bit inconsistent with selling premium cupcakes at highly-trafficked, high-expense retail outlets.

Edward Slezak

Okay, sure. Dave, I'd be happy to answer that.

Let's just start with Pelican Bay. Pelican Bay, actually a lot of the products that they're going to be making for us, the baked mixes, the hot chocolates and the novelty gifting items we think are excellent complements to our existing cupcakes and products that we sell on our stores. Pelican Bay doesn't only sell into some of the lower end of the retail chains.

They actually have some very strong distribution, that was one of the reasons we chose them, is their distribution spans from the Bed Bath & Beyonds to Target, to many others. And we have a lot of hope and aspiration that they're going to be getting our products into a number of retailers that are very much in line with the projection of the brand that we have in our stores.

David Wanetick – Incremental Advantage

Okay, thank you. And the gluten-free --

Edward Slezak

I'm sorry, what was your first -- yes -- what was your first targeted question, I'm sorry?

David Wanetick – Incremental Advantage

The -- your intentions for possibly expanding the gluten-free store and if franchise that as well.

Edward Slezak

Yes. Regarding gluten-free, as you know, we only have one store right now that's a dedicated gluten-free store. We are definitely looking at expanding gluten-free appropriately. We think it is a definite growth area for us, and it is -- and it's something that's very important for a large number of consumers. We are looking to, not in the short run, but to franchise that. We want to make sure we get it right ourselves, that we have -- that we're happy with the store experience and we're happy with the products. And we may consider converting some additional existing stores to that. We have not decided that yet. We just want to make sure we get the product and the experience right completely the way we want it first, hopefully expand the assortment of it, and then look to future expansion opportunities for gluten-free. But we're focusing franchising on our core products and our core stores first.

David Wanetick – Incremental Advantage

Okay. Thank you.

Edward Slezak

You're welcome.

Operator

Thank you. [Operator Instructions]

We do have a follow-up coming from David Wanetick.

David Wanetick – Incremental Advantage

Thank you. So I understand that you're considering converting some of the existing stores into franchise stores. But currently or looking in the near future, are the existing stores that have not closed, are they profitable, or can you give us any guidance on what percent of the existing stores are profitable?

John Ireland

Dave, we are considering closing some of the additional stores that we have at this point. We are waiting to see if some of these would fit the franchise model well. But for the most part the stores that we're considering closing would be stores that are losing money right now and that we would not see a prospect for losing -- or for making money in the future.

Edward Slezak

Sure. And as -- David, maybe to also answer your question, is it possible that we would franchise existing profitable stores? Under the right economic arrangement, we would. We definitely would consider that.

We're not going to breakdown now how many of our stores are profitable versus not, we're not going to break at that level of detail. But once we are registered for -- as a franchisor, the totality of the stores is open for consideration as far as, as I said, right economic situation, we would look to franchise those, most definitely.

David Wanetick – Incremental Advantage

Does your franchise strategy focus on I think they call the master franchises where you have an area -- you have an area developer that will franchise many stores for you or are you looking to do this on a one-off basis?

Edward Slezak

Well, we don't have all of the necessary expertise in-house to sell franchises. So we are going to look to either partner with people that might already have that expertise who are very close to us or potentially go out to the market to speak with some of the largest franchise agents. So that hasn't been determined yet, ultimately what vehicle we will use as far as getting out to franchise and who'll be representing us, or if we'll be doing it ourselves.

David Wanetick – Incremental Advantage

If you don't mind, maybe just one more question, can you just educate us a little bit on Dippin' Dots, how many stores do they have, where do they have their stores, and what do they sell? Is it more of an ice cream store or?

Edward Slezak

Yes. Dippin' Dots sells, if you're familiar, it's with that pelletized, beaded ice cream that's at a very, very cold temperature, negative 40 degrees I believe, their ice cream is. And they sell through a variety of different means. They sell into all the big amusement parks, they sell into carnivals, they sell in points of sale, going from convenience stores to all sorts of areas throughout the United States. They have many, many, many points of sales as I said.

They don't own and operate stores the way we do necessarily, other than they are in the process of opening some stores. I don't want to give too much detail as to their business. But we believe that their products will be -- are and will be very complementary to the core products that we sell.

David Wanetick – Incremental Advantage

Okay. Thank you.

Edward Slezak

You're welcome.

Operator

Thank you. I'll now turn the call back over to Mr. Slezak for closing comments.

Edward Slezak

Thank you very much. And thank you everyone for listening and for joining us today. And we very much look forward to speaking to you again in our first quarter 2014 earnings call which is only a short time away. So we look forward to giving you more information and giving you progress on our initiatives. Thank you very much.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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