Red Lobster Files for Bankruptcy Amid High Costs

The business estimated that it has more than 100,000 creditors and liabilities to the tune of $1 billion to $10 billion.
Red Lobster Files for Bankruptcy Amid High Costs
A Red Lobster restaurant is seen in this file photo (AP Photo/Alan Diaz, File)
Naveen Athrappully
5/20/2024
Updated:
5/28/2024
0:00

Seafood restaurant chain Red Lobster filed for bankruptcy on May 19 after struggling with rising costs over the past years and recently shut down dozens of its outlets.

Red Lobster voluntarily filed for Chapter 11 bankruptcy at the U.S. Bankruptcy Court for the Middle District of Florida.

“The Company intends to use the proceedings to drive operational improvements, simplify the business through a reduction in locations, and pursue a sale of substantially all of its assets as a going concern,” the restaurant chain stated.

Red Lobster clarified that its restaurants will remain open and operating while the bankruptcy proceedings progress. To this effect, the firm is coordinating with vendors to ensure that the operations remain unaffected.

Red Lobster CEO Jonathan Tibus said that the Chapter 11 bankruptcy restructuring “is the best path forward” for the business.

“It allows us to address several financial and operational challenges and emerge stronger and re-focused on our growth. The support we’ve received from our lenders and vendors will help ensure that we can complete the sale process quickly and efficiently while remaining focused on our employees and guests,” he said.

Red Lobster has 700 restaurants, employing 58,000 people, across the United States and Canada. The company, founded in 1968, is headquartered in Orlando.

The seafood chain has been struggling with rising lease and labor costs in recent years and also with promotions such as its iconic all-you-can-eat shrimp deal that backfired. Demand for one such recent promotion overwhelmed restaurants, reportedly contributing to millions in losses.

In its bankruptcy petition, Red Lobster estimated that it had assets in the range of $1 billion to $10 billion, with liabilities in the same range. The company calculated the total number of creditors to exceed 100,000. The petition was signed by Mr. Tibus, a corporate restructuring specialist who took the top post at Red Lobster in March.

Red Lobster has secured $100 million in debtor-in-possession (DIP) financing commitment from its existing lenders.

DIP financing, available to firms that have filed Chapter 11 bankruptcy, allows companies to raise capital to fund operations while the bankruptcy process proceeds. Lenders who provide DIP financing get priority over existing debt holders, equity holders, and other claim holders.

The company has entered into a “stalking horse purchase agreement,” in accordance with which Red Lobster will sell its business to an entity formed and controlled by existing term lenders. A stalking horse bid is an initial bid made on a bankrupt firm’s assets that sets the low end of a bidding process.

Last week, restaurant liquidator TAGeX Brands announced that it would be auctioning off the equipment from more than 50 Red Lobster locations that were recently closed. The store closures span more than 20 states—reducing Red Lobster’s presence in cities such as Denver, San Antonio, Indianapolis, and Sacramento.

Earlier this year, Red Lobster co-owner Thai Union Group, one of the world’s largest seafood suppliers, announced its intention to exit its minority investment in the dining chain. Thai Union first invested in Red Lobster in 2016 and upped its stake in 2020.

In January, while announcing Thai Union Group’s plans to divest from Red Lobster, Thai Union CEO Thiraphong Chansiri said the COVID-19 pandemic, industry headwinds, and rising operating costs had hit the dining chain hard and caused “prolonged negative financial contributions to Thai Union and its shareholders.”

US Bankruptcies

Red Lobster is the latest business to file for bankruptcy this year. Specialty fashion retailer Rue21 and Steward Health Care, the largest physician-led hospital operator in the United States, filed for bankruptcy in early May.

In April, Express Inc., which dealt in casual office attire, filed for bankruptcy. In addition, fabrics and crafts retailer Joann and cosmetics brand The Body Shop also ceased operations in the United States.

During the first quarter of 2024, overall commercial bankruptcies rose by 22 percent from the same period in 2023, the American Bankruptcy Institute said in an April 2 statement citing bankruptcy data provider Epiq Bankruptcy. Chapter 11 bankruptcies were up by 43 percent in the first quarter of 2024 from the same period in 2023.

“As we expected, the upward trajectory in both commercial and individual related bankruptcy filing volumes continue,” Michael Hunter, vice president of Epiq AACER, said. “March marks 20 consecutive months that total, individual, and commercial bankruptcy filings have registered monthly year-over-year increases.

“Factors contributing to this trend are the higher cost of funds and interest rates, a reduction in consumer discretionary spending, higher housing costs, and a continued drawdown of excess savings. These factors coupled with the post-pandemic anticipated normalization of bankruptcy volumes lead me to believe this upward trend will continue through 2024.”

According to a May 7 report by S&P Global, U.S. corporate bankruptcy filings rose to their highest level in a year in April. There were 66 new bankruptcy filings in April, up from the revised 61 filings in March.

S&P only covers bankruptcy data of (a) public companies or private firms with public debt where either assets or liabilities at the time of bankruptcy are greater than or equal to $2 million, and (b) private companies where assets or liabilities are greater than or equal to $10 million.

“The pace of bankruptcies has accelerated since the start of the year, though the 210 filings recorded over the first four months of 2024 is marginally lower than the 224 recorded over the same time frame in 2023,” S&P said.

“Fading hopes of lower interest rates are likely contributing to the increase in filings, as companies that may have held out hope for rate cuts at the beginning of the year come to terms with the reality that they will remain higher for longer.”

The Associated Press contributed to the report.