Coffee With That Cupcake? A Crumbs Bake Shop Follow-Up

Aug.24.12 | About: Crumbs Bake (CRMB)

Crumbs Bake Shop (NASDAQ:CRMB) announced on August 6, 2012, a partnership with Starbucks (NASDAQ:SBUX). Let's look at the terms of the announcement and Crumb's Second Quarter 2012 results to see how Crumbs Bake Shop turnaround efforts are progressing (read our first article on Crumbs here).

Starbucks Announcement

Crumbs Bake Shop and Starbucks announced that Crumbs will become the largest United States retail partner of Starbucks' 'We Proudly Serve' coffee, tea, and espresso-based products. For Crumbs, the partnership is significant because it can help drive attachment purchases of both beverages and baked goods, either one or the other, or both individually. As a result, the partnership could help drive both the top line, and certainly will help improve profitability.

Second Quarter Results

Crumbs' second quarter 2012 results could be best described using a potential cupcake attribute: stale. Sales increased 7.7% to $11.1 million, and net loss increased to (.14) cents per share, or $.8 million, from a loss of (.06) cents per share (.3 million) in the same period of 2011. Adjusted EBITDA was a negative (.5) million versus .1 million last year.

The company also announced an aggressive growth strategy in 2012 of opening 25 new locations, many of the kiosk and in line mall variety. For the balance of 2012, 6 new stores are planned using those same store types.

Crumbs stated they are looking at different alternatives for financing the expansion, with all options being considered.

Future Possibilities with SBUX

As with any high profile announcement, the Crumbs partnership agreement brings potential possibilities to the mind of investors. The obvious first step might be Crumbs providing its cupcakes to all Starbucks locations. My analysis of a broad distribution agreement for Crumbs is there is little to no chance of it happening in the foreseeable future. Starbucks recently bought La Boulange Bakery for $100 million on June 4, 2012. The purpose of the acquisition was to eventually include all La Boulange products in all U.S. Based Starbucks stores. Eventually, those products will be a way for SBUX to better compete with Panera Bread (NASDAQ:PNRA) and others for lunch, snack, and dinner business. Starbucks would not forgo La Boulange products for Crumbs cupcakes under any large scale distribution agreement.

However, it is possible SBUX would try out Crumbs products in New York City. The logistics of such an agreement line make sense because both Crumbs and Starbucks have a high concentration of stores in the New York City area. Typically, Starbucks tries new products on a limited scale first to see the consumer reaction to the new placement. If the cupcakes proved successful, a broader arrangement could be attempted in Boston, Washington D.C., Chicago, etc.

Another area where Crumbs could work with Starbucks is with the adoption of the Square technology for credit and debit card payment processing. Starbucks recently signed an agreement with Square to invest $25 million in the company and use the device in Starbucks company owned retail locations. Crumbs could eventually follow Starbucks' lead and potentially use Square for the same purposes.

Finally, it is also reasonable Crumbs Bake Shop would start to carry Evolution fresh bottled juice beverages in their stores to enhance and expand the beverage product line. Starbucks bought the Evolution Fresh brand last year as a way to enter the fresh juice and beverage market. Starbucks has opened a few stores using the Evolution Fresh name and are investing to operate a juice plant for greater distribution of those products. Crumbs Bake Shop could eventually be a place where those products are offered. From the Crumbs standpoint, ordering both coffee and bottled beverages from one vendor makes the logistics of such a transaction very simple.

Certainly, there are lots of interesting possibilities to consider for both Crumbs Bake Shop and Starbucks regarding their new partnership.

Other Considerations

In listening to the conference call, the management of Crumbs seems very confident their existing work to improve the business will start to show results in the upcoming quarters, which is nice to hear. They are very confident the Starbucks partnership is a win-win situation with respect to both growing revenues, improving attachment rates, and certainly helping the overall profit margins in the business. With 10-20% of their existing business in beverage sales (yearly revenues of 4-5 million), a 50-100% improvement in those numbers should flow straight to the bottom line.

What was troubling about the conference call was the refusal of management to give specific answers about any question investors asked. Questions were posed about projections from the Starbucks partnership, the cost of expansion, and how the company will finance their growth plans. Earth to Crumbs management: Hello? Your market capitalization is below $20 million. If any investor asks you a question about what you are doing, just answer the query, or at least give a response which somewhat tries to tell people what they want to know.

With respect to the financing of the growth plans of 2012, the management team has every reason not to dilute shareholders as they are the ones who would most suffer. I would expect them to go to a bank to borrow the capital, or possibly issue notes as a way to not add to the existing share count.

Bottom Line

Crumbs is still a work in progress. It will be interesting to see how the business fares over the remaining 2012 and into 2013.

Disclosure: I am long CRMB, SBUX. 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.