Crumbs Investor Presentation Looks Good Enough to Eat

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Crumbs Bake Shop, which was founded in 2003 by wife-and-husband team Mia and Jason Bauer, hopes to see their company stock soon listed on the NASDAQ exchange – quite an achievement coming at the tail end of the recent recession.

The 2/8/11 Crumbs investor presentation is as nicely laid out as the Crumbs store I visited earlier this week, and a must-see document for any would-be restaurant owner who is thinking about writing a business plan.  At first glance, I was amazed by the degree of disclosure of their business strategy, and key metrics.

Crumbs’ business model may wind up being  just as delicious for investors as their cupcakes are for consumers.   By baking their cupcakes off-premises, the average build-out cost of a Crumbs location is held to $300,000, while their average ticket (i.e., sales per transaction)  of $18-20 translates to average sales per location of $1.1 million, for an average 16-month cash payback on each new location.   And with an average EBITDA per store of $231,000, their cash-on-cash return on that $300,000 build-out cost is a tasty 77%.

The vehicle for taking Crumbs public is 57th Street Acquisition Corp, which already trades over-the-counter, and in January announced plans to acquire Crumbs as soon as this month, which would be the final step of a reverse merger.  The Crumbs investor document projects that at closing, 55% of Crumbs stock will be owned by the public, 40% by current Crumbs management, and 5% by 57th  Street sponsors.  The deal structure is less easy to understand than the store economics, and I noticed from the investor document that a considerable number of contingent shares are being created which would be issued once the stock price reaches certain future targets, which could serve to dilute public investors’ returns. And at $31 million of (unaudited) 2010 revenue, Crumbs is on the small size to be a publicly traded company, although it projects it will be at $85-90 million of revenue by 2012, and be at 200 units by 2014.

So with cupcakes coming in three different sizes: “taste”, “classic” and “signature”, hopefully there will be enough Crumbs to go around on a post-IPO basis to make everybody satisfied.

Borders’ Bankruptcy Result of Bad Timing and Decisions

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Borders’ February 16th, 2011 bankruptcy filing was the result of bad timing and bad decisions, as reported by the “Wall Street Journal” and others.  The recession that started in 2008 cut a swath through the ranks of bricks and mortar retailers, as consumers cut out discretionary purchases, taking out such big names as Linens ‘N Things, Circuit City, Mervyn’s,  The Sharper Image and Wickes Furniture.  And Borders was slow to diversify to on-line sales, having turned over its internet operations to Amazon in 2001, and only taking back its Borders.com website in 2008.

One truly poor bad decision that has been just a minor mention in most press coverage of its recent bankruptcy filing was Borders’ heavy stock repurchases: nearly $600 million dollars worth over for the three fiscal year period ending 2/3/2007.  For perspective, the share repurchases over these three fiscal years is nearly three times the amount it owed in aggregate to its top ten unsecured creditors at the time of its recent bankruptcy filing.

Companies typically choose to repurchase their stock to accentuate the growth of their earnings per share, anticipating that they can reduce the number of shares more than the added interest expense reduces their net income. And if that happens, the reasoning goes, then stock holders will be rewarded with a higher stock price, and in a very tax efficient way.

This sometimes works beautifully, and an example that I have used in my Introductory Finance class is Coca-Cola’s share repurchases for the ten year period from 1987 to 1997.  Over that stretch Coca-Cola’s net income increased an average of 16.3%, and due to an ongoing program of share repurchases, its earnings per share increased an average of 18.7%.  Better yet, Coca-Cola’s stock price had average annual gains of 30.2% over those ten years, as institutional and individual shareholders clamored for a decreasing supply of Coca-Cola shares.  (For more about the Coca-Cola share repurchase, go to https://www.rudofskyassociates.com/finance.html and press on the widget to hear a 4:30 voice recording)

The difference between Coca-Cola and Borders is that Coca-Cola was consistently profitable over that stretch, and it also had a well-defined and winning strategy in place, which meant no surprise alternative uses for all that cash.  The share repurchase algebra fell apart for Borders because it ran a $151 million loss in fiscal 2007, and reducing the number of shares can’t accelerate your earnings per share growth, if your earnings per share isn’t positive to begin with.

In conclusion, if all the cash that was used to repurchase shares in the middle of this past decade had instead been used to somehow strengthen or restructure the company on a more proactive basis – perhaps by either launching a more competitive eBook reader  or by closing some of their many unprofitable stores earlier – Borders’ creditors, employees and shareholders all probably would have been better served.

LinkedIn Taking the Long Road to Riches

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Just before writing this blog posting I noticed an email from LinkedIn with small thumbnail photos of my 40 LinkedIn contacts that changed jobs in 2010, described by “Fortune” as “the best networking email that I will receive all year.”   I totally agree with Fortune magazine’s assessment, and it really underscores to me the value of being a long-term LinkedIn user.

All of this technology has a price tag, and now that LinkedIn has announced its intentions to sell its stock to the public for the first time, through their S-1 Report, which is available on EDGAR, the U.S. Government repository of public company financial filings.

For the first nine months of 2010, LinkedIn had revenue of $161 million, with 73% of this coming from its Hiring Solutions and Marketing Solutions lines of business, as the vast majority of its 90 million individual members (including me) continued to take advantage of LinkedIn’s free basic service.  Even with $161 million of revenue, LinkedIn had slightly negative free cash flow over this nine month period, as its $37 million of Cash Flow from Operations was offset by $40 million they invested back in the business, including investment to build out their data centers, technology hardware to support growth, and software to support website functionality development, which would include, I suppose, that email mentioned above.

To LinkedIn’s credit, they are flagging that their future growth will require substantial additional investment, and even have the courage to say in their S-1 that they do not expect to be profitable, on a GAAP basis, in 2011.  Adding one new member every second does not come cheap!  LinkedIn has a good lead in the professional networking space, but they may attract considerable competition from Facebook, Google, Microsoft, Twitter and others, all of which explains why they are going to the public markets for fresh equity investment, even thought they had nearly $90 million of cash on hand as of Sept. 30, 2010 – roughly equivalent to the amount of private investment they have taken in over the last few years.

By way of comparison to LinkedIn, Google was a cash cow even before their stock went public.  For example, in 2001, Google has revenue of $86 million and Cash Flow from Operations of $31 million, of which only $13 million had to be invested in property and equipment to support the business, with the balance invested in “short term investments.”   And Google maintained its positive cash flow characteristics even as its revenue exploded to $439 million in 2002 and exceeded $1.4 billion in 2003.

While LinkedIn is probably not the next Google from an investment standpoint, I do love being a member, and its management team appears to be the bringing the same degree of thoughtfulness to stewardship of the company, as they have in the past to evolution of LinkedIn’s functionality.

Who Owns Stowe Ski Resort?

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I try not to do business while on vacation, but couldn’t restrain myself from a little light investigation of who owns Stowe Ski Resort, while on a family vacation there last week. First I asked a ski instructor, while sharing a chair lift up Spruce Mountain, and was told that it was owned by the U.S. government. And that there was a stretch of time in 2009 when the U.S. was approving all of the expenditures, following the record $183 billion government bailout of AIG .  “So maybe that is why they are not doing more snow making I thought”, as I avoided the icy sections on my next downhill run, “it’s because of the federal budget crisis!”

Later, I checked with the owner of the Golden Eagle Motel (a Stowe resort property) who told me that Stowe resort had been owned by AIG, and now was owned by Chartis, an AIG subsidiary.  A little further research back home confirmed that AIG’s connection with Stowe started in 1946, when AIG founder C.V. Starr invested in the resort, that AIG has been 100% owners of Stowe since 1988, and that they did indeed transfer ownership to their 100% owned subsidiary Chartis, in late 2009.   Financial terms of the transfer were not disclosed, but in addition to the Stowe ski resort, with its 119 trails over two mountains, it included two 18-hole golf courses, and an upscale lodge.

Stowe, Vermont is a very special place – quintessential New England –  and based on what I saw and read, the Stowe ski resort is perhaps the finest on the East Coast.  Stowe’s new Spruce Mountain Lodge is breathtaking, and the gondola across route 108, connecting the two ski mountains is incredibly convenient.   Skiing is obviously part of AIG’s DNA, but it is not remotely part of its corporate mission,  which raises the question in my mind about what kind of payback AIG shareholders are getting on AIG’s $300 million, 10-year capital program to expand and upgrade Stowe.

Why Businesses go Bankrupt: CB Holding (Charlie Brown’s Restaurants)

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CB Holding, the company that owns restaurant chains Charlie Brown’s, Bugaboo Creek and The Office, filed for bankruptcy under Chapter 11 on Wednesday, November 17th.   CB Holding announced that it was closing nearly half of its restaurants, and is looking to sell its 39 remaining restaurants.  A CB spokesman told the “Newark Star Ledger” that the 29 closed restaurants were targeted for “under-performance” and that the company would work with the 2,300 displaced workers to “help them find jobs, both within and outside the company.”

The CB Holding bankruptcy petition states the company has assets of $100 – 500 million, and liabilities of $50 – $100 million, so there apparently was not an accounting insolvency (i.e., liabilities greater than assets) at the time of the filing, and it is not even clear from the reporting whether there was a technical insolvency (i.e., firm unable to meet its obligations.)   It appears likely that this was a strategic bankruptcy, planned by CB Holding’s principal owner, the private equity firm Trimaran, to enhance the restaurant chains’ value, prior to a sale.

One of the most famous strategic bankruptcies was Continental Airlines, which declared bankruptcy in 1983 so it could break its high cost union labor contracts, and more effectively compete with new non-union airlines, following the deregulation of the airline industry.   But Continental stayed in the airline business, while Trimaran is exiting from restaurants, as quietly as possible.   I agree with Fortune Magazine writer Dan Primack who recently wrote: “when you fire 2,000 workers workers without warning – in a lousy labor market to boot – then you should at least explain why it happened.”