Dive Brief:

• Red Lobster has struggled with paying its vendors on time in recent months — just one of several warning signs leading up to its bankruptcy announcement earlier this week, according to an analysis by credit monitoring and risk management firm Creditsafe.
• Creditsafe data shows a significant amount of volatility in Red Lobster’s vendor payment behavior over the last six months, a key indicator of cash flow challenges, according to Ragini Bhalla, head of brand, North America for Creditsafe. Red Lobster’s average “days beyond terms” jumped from 15 in December to 30 in January, reaching 57 as of March, according to Creditsafe data shared with CFO Dive.
• “The combination of factors that push a company to bankruptcy is different for every company, but just looking at Red Lobster’s erratic payment behaviors and high DBT, you could see the pressure was growing,” Bhalla said in emailed comments.

Dive Insight:

The pace of U.S. corporate bankruptcies has accelerated since the start of the year, with the total number of new bankruptcy filings jumping to 66 in April compared to 61 in March, according to an S&P Global Market Intelligence report. However, the 210 filings recorded over the first four months of 2024 is lower than the 224 recorded over the same time frame in 2023, the report noted.

“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 report said.

Besides Red Lobster, at-home fitness company BowFlex and mall retailer Express have also filed for bankruptcy this year.

A survey unveiled by Creditsafe last week found that more than half (58%) of U.S. businesses have increased their long-term debt in the last 12 months. In addition, nearly three-quarters of businesses have seen operating expenses rise during that time. 

The current economic environment has heightened the need for CFOs and their teams to prioritize financial planning and strategy due diligence, according to Bhalla.

“It’s never one single thing that causes the demise of a company,” she said. “It’s often the combination of multiple things going wrong simultaneously — and they’re usually going on for quite some time.”

On top of dwindling profits, Red Lobster has been grappling with higher material expenses and labor costs, Bhalla said.

The seafood chain paid just 3.35% of its vendor bills on time in January and 18.66% of them on time in February, according to Creditsafe. The number has improved considerably since then, with the company paying 76.03% of its bills on time as of April, according to the data.

Red Lobster didn’t immediately respond to a request for comment.

On Sunday, the company said it was voluntarily filing for bankruptcy “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.” As part of the process, the company has entered an agreement to sell its business to an entity formed and controlled by its existing term lenders, it said.

“This restructuring is the best path forward for Red Lobster,” Red Lobster CEO Jonathan Tibus said in a press release. “It allows us to address several financial and operational challenges and emerge stronger and re-focused on our growth.”

The company's restaurants will remain open and operating as usual during the bankruptcy process, the release said.

CNBC reported this month that at least 99 locations of Red Lobster were being auctioned off amid questions about the seafood chain’s long-term future.

Red Lobster lost $76 million last year and saw a 30% drop-off in guest count since 2019, according to its bankruptcy filing, which stated that “certain operational decisions by former management have harmed” its financial situation in recent years.

The filing highlighted a decision last year by former Red Lobster CEO Paul Kenny to make the company’s limited-time “endless shrimp” promotion a permanent menu item. This decision created both operational and financial issues for the the company, costing it $11 million and saddling it with “burdensome supply obligations, particularly with its equity sponsor, Thai Union,” the filing said.