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Crumbs Lives to See Another Day; Shares Soar

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Shares of Crumbs Bake Shop, Inc. skyrocketed an astonishing 1,197.10% after a CNBC report stated that the New York-based cupcake chain might have found a buyer.

On Wednesday, Marcus Lemonis, a CNBC reality-show host and Chief Executive Officer (CEO) of Good Sam Enterprises confirmed plans to invest in the struggling cupcake company. Good Sam is a provider of membership clubs, as well as subscription-based products, services and publications, for outdoor enthusiasts.

Lemonis, who also owns Florida candy store chain Sweet Pete’s, would be leading a group of investors to re-invigorate Crumbs Bake Shop. The group of investors also includes Fischer Enterprises LLC, owned by Mark and Scott Fischer. Mark Fischer also owns Oklahoma City Oil and Chaparral Energy. The investor group aims to finance Crumbs prior to a possible acquisition.

In fact, Fischer Enterprises which is also the owner of ice-cream brand, Dippin’ Dots lent Crumbs money earlier this year, which was primarily used by the cupcake chain to diversify its offerings.

Cupcake Craze Fizzling Out?

Crumbs Bake Shop, launched in 2003, with a shop on the Upper West Side of Manhattan, went public in 2011. It offered specialty cupcakes in a variety of flavors, like caramel macchiato, milkshake and cookie dough, for as high as $5 each.

However, a month later, the cake maker’s same-store sales declined 6%. By Sep 2011, Crumbs’ share price had plummeted 70% to less than $4.00. Despite aggressive expansion and diversifying 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. 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.

Crumbs announced the closure of all its 48 stores after it was delisted from Nasdaq on Jul 1 due to its failure to comply with the minimum stockholders equity obligation of $2.5 million. Further, it was weighing its options, including a probable bankruptcy filing, according to the Wall Street Journal.

Challenging Business Landscape

Crumbs' primary challenge as a public company was to differentiate itself among the highly-competitive baked products space. Being a specialty cupcake chain, with very little menu diversification backfired for the company.

Additionally, the fact that Americans nowadays are more health conscious made it harder for Crumbs to survive.

In our view, the biggest challenge for the investors bailing out Crumbs will be to diversify its offering, and to keep the concept relevant in a crowded industry. However, we believe the Lemonis’ and the Fischers’ expertise in bailing out sweets companies (Fischer Enterprises bought Dippin' Dots out of bankruptcy in 2012), would be advantageous for Crumbs.  

Stocks to Consider

Other stocks in the broader restaurants sector which can be considered include Chipotle Mexican Grill, Inc. (CMG - Free Report) , Red Robin Gourmet Burgers Inc. (RRGB - Free Report) and Sonic Corp. . All these stocks carry a Zacks Rank #2 (Buy).

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