It seems the U.S.’s craze for cupcakes has fizzled out.
New York-based Crumbs Bake Shop, Inc. (CRMB) announced the closure of all its 48 stores. Further, the company is evaluating its options, including a probable bankruptcy filing, according to the Wall Street Journal.
The shop closings come after the company was delisted from Nasdaq on Jul 1, and management cautioned that this would lead to non-payment of certain debts.
In its filing with the Securities and Exchange Commission, Crumbs stated that the Nasdaq decision was based on its failure to comply with the minimum stockholders equity obligation of $2.5 million. When the delisting was announced, Crumbs shares, which once traded at around $13.00, had plunged to 23 cents.
Cupcake Craze Busted?
Crumbs, which started its journey in 2003, with a shop on the Upper West Side of Manhattan, went public in 2011 when the cupcake industry was in its heydays. The company offered specialty cupcakes in a variety of flavors, like caramel macchiato, milkshake and cookie dough, for as high as $5 each.
However, trouble began for the cupcake maker a month later, when same-store sales declined 6%. By Sep 2011, Crumbs’ share price had plummeted 70% to less than $4.00. Although Crumbs engaged in aggressive expansion and diversified its offerings, the overall financial performance has been on a downtrend ever since.
Deteriorating financial outlook, years of incurring losses, dwindling cash supply and persistent decline cupcake demand added fuel to fire.
In fact, the overall cupcake sales in the U.S. have declined steadily for the past two years, according to NPD Group consulting firm. In 2012, cupcake sales dropped 6% but were flat last year. Sales further slipped 1% through the first four months of this year.
Health is Wealth?
Health consciousness is increasing among the masses and Americans are gradually refraining from energy-dense food that are high on fat and sugars but low on vitamins, minerals and other micro-nutrients. As a result, the demand for healthier food and beverage alternatives is growing. It was this growing trend for health consciousness that backfired for Crumbs and its sugar-coated cupcakes.
Our Viewpoint
Additionally, Crumbs' primary challenge as a public company was to differentiate itself among the highly competitive space. Crumbs was primarily a desert-specialty chain and faced competition from restaurants offering more menu innovation. Although the chain started innovating with croissant-doughnut hybrid — crumbnut — and inked deals to sell Crumbs-branded coffee and cake mixes, it did little to turn around its fortunes. This lack of innovation forced the company to go out of business, in our view.
Stocks to Consider
Other stocks in the broader restaurants sector which can be considered include Chipotle Mexican Grill, Inc. (CMG), Red Robin Gourmet Burgers Inc. (RRGB) and Sonic Corp. (SONC). All these stocks carry a Zacks Rank #2 (Buy).
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