TradeEdge Exchange:It wasn't just the endless shrimp: Red Lobster's troubles detailed in bankruptcy filing

Red Lobster's Chapter 11 bankruptcy filing and TradeEdge Exchangethe closing of multiple locations of the Florida-based chain are the culmination of massive debt, a carousel of CEOs, an all-you-can-eat shrimp controversy and an overall decline in guests.

Bankruptcy documents filed in the Middle District of Florida detail how Red Lobster has struggled in various ways, including a 30% drop in guests since 2019. In a 124-page document obtained by USA TODAY on Tuesday, Red Lobster CEO Jonathan Tibus explains why the seafood restaurant chain filed for bankruptcy on Sunday and why he supports the decision.

"Recently, the debtors have faced a number of financial and operational challenges, including a difficult macroeconomic environment, a bloated and underperforming restaurant footprint, failed or ill-advised strategic initiatives, and increased competition within the restaurant industry," Tibus said in the bankruptcy document.

When Tibus was retained as Red Lobster's chief revenue officer on Jan. 11, prior to being named CEO, he said that "it was immediately clear that Red Lobster’s performance was deteriorating and had been doing so for several years," according to the filing.

"Red Lobster’s annual guest count has declined by approximately 30% since 2019 and has only marginally improved from pandemic levels seen during 2020 and 2021," Tibus said. "Although Red Lobster’s net sales increased by approximately 25% from 2021 to 2023 (which itself represents modest recoveries following the COVID-19 pandemic), net sales have begun to show material decline during the last twelve months."

Red Lobster has an outstanding debt of $294 million, according to the bankruptcy filing.

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Red Lobster's liquidity declined rapidly

Red Lobster suffered a $76 million net loss during fiscal year 2023, according to Tibus. Cash losses, including $31 million from June 2023 to September 2023, led to Red Lobster's liquidity rapidly declining, the CEO said in the document.

Red Lobster expected to generate "a significant amount of cash" to recover the cash losses by December, but things did not rebound.

"By the end of 2023, it became clear that the company’s liquidity crisis would not be cured by the seasonal bump in revenue," Tibus said.

According to Tibus, Red Lobster's business continued to take a hit for the following reasons:

◾ Menu prices across the restaurant industry increasing due to inflation, leading to potential consumers feeling less inclined to eat out.

◾ A "material portion" of the leases for Red Lobster's 687 locations being priced above market rates. The company spent $190.5 million in lease obligations, over $64 million of which paid for underperforming stores.

◾ Operational decisions by former management harming the company's financial situation in recent years.

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Unlimited endless shrimp menu addition being investigated

Tibus references a significant example of mismanagement, and it involves former Red Lobster CEO Paul Kenny adding unlimited endless shrimp as a permanent $20 item to the menu "despite significant pushback from other members of the company's management team," according to the bankruptcy filing.

Kenny's decision regarding the endless shrimp cost Red Lobster $11 million and saddled the company "with burdensome supply obligations, particularly with its investor, Thai Union," Tibus said in the bankruptcy filing.

Red Lobster is investigating the circumstances around Kenny's decision, including whether he and Thai Union were behind supply issues that resulted in major shortages of shrimp, according to Tibus. Restaurants went days or weeks without certain types of shrimp, he added.

Thai Union was also heavily promoted in Red Lobster stores, which Kenny encouraged, Tibus said in the bankruptcy document. Kenny also eliminated two of Red Lobster's breaded shrimp suppliers, leaving Thai Union with an exclusive deal that resulted in higher costs for the seafood restaurant chain, the document continued.

USA TODAY was unable to find contact information for Kenny and Red Lobster didn't respond to an email requesting it.

'Restructuring is the best path forward'

To get Red Lobster back on its feet, Tibus said he "developed a three-prong strategic priority plan." The plan includes making sure Red Lobster is a "great place to work" by focusing on employee culture and retention, continuing to provide "consistent experiences and excellent customer service," and reducing the company's cost structure without compromising quality, he detailed in the bankruptcy filing.

After closing and vacating 93 nonperforming stores on May 13, Red Lobster is now working to identify and eliminate nonproductive spending across all departments, Tibus said. The company attempted to relocate the employees of the "financially burdensome" stores to nearby locations and reorganize midlevel management, according to the CEO.

"This restructuring is the best path forward for Red Lobster. It allows us to address several financial and operational challenges and emerge stronger and re-focused on our growth," Tibus said in a statement Sunday night. "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."

Contributing: Gabe Hauari