Why Crumbs Really Crumbled

No amount of icing could sweeten what's become of Crumbs, a pioneer in the cupcake craze whose financial woes are forcing it to close all of its stores.

Jul 14, 2014 at 2:46PM

We've all experienced a sugar high at some point in our lives. You thrive from a burst of high energy, and then you crash and burn.

Unfortunately, it took too long for Crumbs Bake Shop to realize that a sugar high doesn't last forever -- and that the aftermath can be somewhat painful. After the company was officially delisted from the Nasdaq stock exchange, Crumbs announced last week that it's closing all 48 of its stores.

Crumbs crashed and burned
Crumbs overextended itself after it got a sugar rush at the height of the cupcake craze in 2011. The company's stock made its debut on the Nasdaq market in June 2011. After the stock hit an all-time high in July 2011 at $13.28 per share, the company began to rapidly expand.

Even though the stock price continuously fell after its IPO, the company's expansion didn't stop. Just last year, Crumbs had as many as 70 stores in 11 states and Washington, D.C. That number decreased to 48 in 2014. The initiative to close underperforming stores began around the time that the stock price dropped below $1 per share late last November.

Trends are trendy for a reason: The hype lasts for only so long, and then it plateaus. That was the case with Crumbs cupcakes. Yes, people still indulge in cupcake treats, but not at nearly the same rate -- Crumbs cupcakes in particular.

It seems Crumbs was operating with a false sense of reality. In an increasingly health-conscious society, did the cupcakery really think sales of cupcakes with two-inch-thick icing and more than 600 calories would be sustainable? In a society that loves to follow the sweetest new trend, did Crumbs actually think people would always consume cupcakes at such a high rate? The sugar must have really gone to the company's head.

Although the cupcakery's same-store sales increased each year, the increase was primarily attributed to the sales revenue from opening new stores, not increased sales in the existing stores. Share value slowly crumbled after the company recorded net losses in the years following its IPO. In fiscal 2013, for example, Crumbs suffered a net loss of $15.3 million, or a loss of $1.32 per share. Similarly, it recorded a net loss of $7.7 million, or a loss of $1.12 per share, for fiscal 2012.

Crumbs was trying to operate more than 40 stores across the country with revenues that couldn't cover its expenses. The company was consuming its cash resources at a rate that wouldn't let it offset or exceed its expenses. Although there were attempts to reduce operating expenses and increase gross profits, such as partnering with Starbucks and restaurateur David Burke to diversify and broaden the menu offerings, most partnerships ended after brief stints because of poor sales.

Not even crumbs remain
What was once considered the largest chain of cupcake bakeries in the country could no longer sugarcoat its financial troubles. Expanding too quickly and operating in a competitive industry caused Crumbs to crumble into nonexistence. Mom-and-pop bakeries and privately owned baked-goods companies, such as Georgetown Cupcake and Gigi's Cupcakes, will fare better in the long term.

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Italia Marr has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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