7/9/2014
By Charles Payne

Yes, I am always telling people to begin the investing journey by looking at things they know, places where they spend their money, and rave about it to family and friends. Once you have singled out a few of these names, you have to do some homework. When it comes to retail names, homework begins with reviewing same-store sales (also known as comparable store sales).

Because retailers are always opening new locations, simply judging overall revenue growth is misleading for the most part, the top line is always going to be higher year- over- year.

By looking at the same-store sales of locations typically opened 12 to 15 months, you’ll get a real feel of the demand for the company’s products and services. You can find same- store sales information in quarterly earnings releases and annual reports.

Crumbs went public June 30, 2011 at $13.00 a share. The company used a mechanism known as a reverse take-over, merging with a company already trading to the public, requiring less rigorous due diligence than a normal initial public offering.

Over the years, this was a glaring trend, along with a stock that was mostly in perpetual freefall.

Business Red Flags

Crumbs reported same -store sales a week after going public, and there was a glaring red flag- down 6%.

New store losses mount year after year:

Crumbs was the quintessential American success story. Mia and Jason Bauer opened a small cupcake shop on the upper west side of Manhattan in 2003, long before the cupcake craze began. However, one of the problems was always a barrier to an entry listed in each financial filing:

Competition

The industry in which Crumbs conducts its business is intensely competitive. Crumbs’ stores compete with well-established national, regional and locally-owned traditional bakeries, cupcake specific bakeries, cafés and other companies providing baked goods and coffee. Additionally, Crumbs competes with certain quick-service restaurants, delicatessens, specialty food stores, take-out food service companies, supermarkets and convenience stores. The principal factors on which Crumbs competes are taste, quality, price of products offered, customer service, atmosphere, location, convenience and overall customer experience. Crumbs also competes for retail space in desirable locations. Many competitors or potential competitors have substantially greater financial and other resources, which may allow them to react more quickly to changes in pricing, marketing and consumer tastes. As Crumbs expands, Crumbs will continue to encounter additional competitors. See the risk factor entitled, “Crumbs’ success depends on its ability to compete with cupcake specific bakeries, traditional bakeries and other food service businesses” that is contained in Item 1A of Part I of this Annual Report on Form 10-K under the heading, “Risks Associated with Crumbs” Business and Industry.

The company went public knowing the pitfalls, and even using the boom-and- bust of Krispy Kreme to avoid making mistakes.

Jason Bauer was aiming for 200 stores by 2014, and eventually got up to 600 outlets, but not 10,000, because that was one of the reasons Krispy Kreme, which rallied from $9.00 in 2000 to $33.00 in 2003 crashed and burned.

The founders also boxed themselves in as a one-trick pony, initially dismissing the idea of licensing products or franchising stores.

Conclusion

I say buy what you know, but think of investing like buying a big, shiny freight truck. It looks great on the outside, but the next step is to look under the hood. The cupcakes at Crumbs were great, but it was easy to see the business as an investment was a disaster from day one.

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Charles Payne
Wall Street Strategies

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