Sbarro files for Chapter 11, vows quick recovery

Sbarro LLC has filed a petition seeking Chapter 11 bankruptcy protection in order to reorganize and reduce its outstanding debt.

The Melville, N.Y.-based operator and franchisor of the Sbarro pizza chain said in a statement that a near-unanimous majority of the company’s lenders, holding 98 percent of its debt, supported the bankruptcy filing. It is part of a prepackaged reorganization plan designed to allow for a quick exit from bankruptcy, Sbarro said, allowing the management team to execute a broader turnaround plan that included the closure of 155 company-owned restaurants last month.

The company is closing an additional 27 units with this announcement, but added that there are no plans to close any more locations “other than in the normal course of business,” said a source close to Sbarro who wished to remain unnamed.

The lenders supporting the bankruptcy plan will provide $20 million of debtor-in-possession financing to Sbarro LLC, eliminating the company’s approximately $140 million of outstanding secured debt in exchange for substantially all of the equity in the reorganized business.

The company said this balance sheet restructuring, which reduces Sbarro’s outstanding debt by more than 85 percent, as well as the closures of underperforming units, would improve the company’s profitability.

As part of the plan, Sbarro said it would run a marketing process for any “topping” bids to ensure creditor recoveries are maximized. However, if no alternative bids or transactions arise, Sbarro would seek to confirm the standalone reorganization promptly.

The source close to Sbarro said the company likely would emerge from bankruptcy protection “in probably less than 90 days, with a debt-to-EBITDA ration of about 1-to-1,” if the prepackaged reorganization goes through.

“The brand has been trimmed, but we’re confident we’ll grow that back,” the source said. “We’ll recoup the closures in a pretty short time because there’s a lot of dynamism in the brand, particularly outside the United States.”

Plans to turn around the domestic business include growing profits at the 210 remaining company-owned locations through a refocusing of the menu and operations around pizza, as well as upgrades to restaurant interiors, packaging and signage.

“Focusing more on pizza, as opposed to the steam table — which tended to date the brand — will accelerate growth and improve the unit-level economics,” the source said. “That steam table is labor- and food-cost-intensive and not as relevant to consumers today. … We have to improve our hold times and reheat times, putting in those operational disciplines we’re working on, and then we can tell that story far more effectively that we have a great pizza.”

Further development of Pizza Cucinova, the company’s fast-casual concept prototype, would be another growth initiative for the post-reorganization Sbarro, the source said. Two locations are open in Columbus, Ohio, with another currently under construction. Three more Pizza Cucinova restaurants are in development for the end of 2014 or beginning of 2015, at which point Sbarro likely would begin franchising the concept, the source added.

The company has more than 800 units in the United States and more than 40 countries worldwide, and 81 new Sbarro restaurants opened in 2013. The bankruptcy filing does not affect the 600 franchise locations in Sbarro’s global system, the company said.

Contact Mark Brandau at [email protected].
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