Red Lobster has filed for Chapter 11 bankruptcy protection as part of its ongoing efforts to reduce its footprint and secure a buyer, the company announced in a statement. This filing is part of a strategic move to address financial struggles and adapt to a challenging business environment for the iconic seafood chain.

The company has also revealed that it has a stalking horse bid from its existing lenders to purchase the business, providing a baseline offer unless a higher bid emerges. This follows reports from CNBC last month that Red Lobster was actively seeking a buyer due to substantial debt and long-term lease commitments. The company recently appointed Jonathan Tibus, a restructuring expert and managing partner at advisory firm Alvarez & Marsal, as its CEO to navigate through this turbulent period.

In a court filing, Tibus attributed the need for Chapter 11 protection to a "difficult macroeconomic environment, a bloated and underperforming restaurant footprint, failed or ill-advised strategic initiatives, and increased competition within the restaurant industry." He emphasized that the chain's real estate portfolio, a legacy of its former owner Golden Gate Capital, has become a significant burden. When Darden Restaurants sold Red Lobster to the private equity firm in 2014, the deal included a $1.5 billion sale-leaseback agreement. This arrangement required Red Lobster to pay rent on properties it once owned, while Golden Gate profited from the sales—a model that has proved unsustainable as the chain's revenues have declined.

Red Lobster currently operates 551 locations in the U.S. and 27 restaurants in Canada. The company recently closed 93 underperforming locations on May 13 and is seeking bankruptcy court approval to reject 108 additional leases to further streamline its operations. The chain employs approximately 36,000 people, most of whom work part-time.

The Orlando, Florida-based company listed assets and liabilities each estimated between $1 billion and $10 billion in its bankruptcy filing. Its largest creditor is Performance Food Group, which claims Red Lobster owes it $24.4 million.

“This restructuring is the best path forward for Red Lobster,” Tibus said in a statement late Sunday. “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.”

Red Lobster was founded in 1968 and was acquired by General Mills two years later. In 1995, General Mills spun off its restaurant division into Darden Restaurants, which also included Olive Garden. Nearly two decades later, Darden sold Red Lobster to Golden Gate Capital. In 2016, Thai Union Group, a seafood supplier and long-time vendor of Red Lobster, acquired a stake in the company. By 2020, Thai Union, members of Red Lobster management, and investors operating under the alias Seafood Alliance bought out Golden Gate's remaining stake.

Despite surviving the COVID-19 pandemic, Red Lobster's business has faced significant challenges since. According to the bankruptcy filing, the chain's traffic has dropped about 30% since 2019. The company’s long-time CEO, Kim Lopdrup, retired in 2021, leading to a succession of CEOs and a lack of stability needed to turn around the business. Jonathan Tibus is the third CEO in as many years.

In fiscal 2023, Red Lobster reported a net loss of $76 million, partly due to its ill-fated “endless shrimp” promotion. Initially introduced to boost slower sales by offering the deal daily instead of once a week, the promotion backfired as it attracted diners seeking inexpensive meals, which squeezed the company's margins. According to court documents, this promotion may have been driven by a desire to increase sales for Thai Union, Red Lobster’s sole shrimp supplier after two other suppliers were dropped under interim CEO Paul Kenny. This decision significantly raised costs for Red Lobster.

The debtors are also investigating whether Thai Union and Kenny overly pushed for in-store promotions, which frequently led to major shrimp shortages. This aspect of the investigation highlights the internal challenges Red Lobster faces as it seeks to stabilize its operations and return to profitability.

Red Lobster’s path forward involves addressing its financial and operational challenges through this restructuring process. By shedding underperforming locations and renegotiating leases, the company aims to create a more sustainable business model. The support from existing lenders and the potential for new investment will be crucial as Red Lobster navigates its way out of bankruptcy and strives to reestablish itself in the competitive restaurant industry.