5/22/2024: Red Lobster Files for Bankruptcy
Red Lobster filed for Chapter 11 Bankruptcy this past Sunday. I read through the bankruptcy filing and I found the story quite interesting. I actually have never eaten at Red Lobster. I grew up in Taiwan with amazing seafood so I am not a big fan of seafood in America. Therefore, I never try Red Lobster. But according to the filing, Red Lobster is the largest Seafood restaurant chain in America with $2B annual revenue and 36,000 employees. Red Lobster purchases 20% of all North American lobster tails and 16% of all rock lobsters sold worldwide!!!!
Since 2019, Red Lobster’s annual guess count has declined ~30% and only slightly recovered after the pandemic. In the past 12 months, sales also experienced material decline. The company suffered a $76M net loss in 2023 and the company’s cash position has dwindled to less than $30M.
Restaurant businesses are hard but Red Lobster’s trouble rooted back to its 2014 leveraged buyout. Golden Gate Capital bought Red Lobster from Darden for $2.1B in 2014. According to this LA Times article, Golden Gate bought Red Lobster for $2.1B. But $1.5B out of the $2.1B is financed by selling Red Lobster’s real estate to American Realty Capital and Red Lobster would simply lease the real estate back. If I understand this correctly, Golden Gate only needed to come up with $600M to complete the deal. According to the bankruptcy filing, in 2016, Thai Union acquired 49% of the equity stake of Red Lobster for $575M. If Thai Union bought the stake from Golden Gate, this means Golden Gate basically got all their investment back from the deal in 2016. In 2020, Thai Union bought the remaining stake from Golden Gate for an undisclosed sum. One thing we can be sure is that Golden Gate Capital definitely made a lot of money from the Red Lobster deal. But Thai Union becomes the bag holder and their equity is set to be wiped out at bankruptcy.
In the bankruptcy filing, the company mentioned that they are paying $190M a year in rent and $64M+ of the rent is for underperforming stores. This sales-lease-back arrangement back in 2014 definitely made Red Lobster less financially stable. It’s hard to make money as a restaurant if the rent to sales ratio is close to 10%. But the PE buyer didn't seem to be too concerned about the long term sustainability of the business.
Another interesting bit from the bankruptcy filing is that their seasonal promotion of endless shrimps has been made permanent despite negative margins. Red Lobster seems to be buying an unreasonable amount of shrimp from their largest equity holder Thai Union. Thai Union earlier this year acknowledged that their Red Lobster equity holding is worthless. It appears that as the majority equity owner, Thai Union got Red Lobster to buy a lot of shrimps from them so they can recoup some losses. I feel Red Lobster could have been a decent business if a dedicated owner who focuses on operations (instead of financial engineering) is in charge. Multiple parties basically fleeced the company through overpriced leases and excessive shrimp purchases while the customer experience stayed mediocre. Anyways, I am going to try their endless shrimp for $20 before they discontinue it. I am confident I can easily eat $20+ worth of shrimp in one meal. (Note: Just realized the endless shrimp is now $25 on Mondays! I am still confident I can comfortably eat $25+ worth of shrimp, which is like 3 pounds of shrimp under the current inflationary environment.)