Sbarro, the Italian restaurant chain that’s a fixture in mall food courts, is preparing a bankruptcy filing following a nine-month review of its operations, according to people familiar with the situation.
The move, which could happen in the coming weeks, would let the pizza chain restructure as it struggles with sluggish demand and debt costs, said the people, who asked not to be identified because the matter isn’t public.
The filing would represent the company’s second trip to bankruptcy court in the past three years. Sbarro first sought protection from creditors in April 2011, citing slower sales and higher costs for ingredients such as cheese. As part of its latest efforts to streamline the company, Sbarro announced plans last month to close 155 locations in North America.
Jonathan Dedmon, a spokesman for the Melville, New York-based company at the Dilenschneider Group, declined to discuss a possible bankruptcy.
“During the past nine months, our new management team and its advisers have been thoroughly evaluating our business,” he said yesterday. “We are making significant progress. Sbarro continues to be a strong brand with a bright future.”
Sbarro’s comeback has been led by David Karam, who took over as chief executive officer last year. He previously worked as an executive at fast-food chain Wendy’s Co.
The pizza company’s restaurants are concentrated in malls, where slowing traffic and muted consumer spending have taken a toll on food courts. To offset sluggish growth at home, Sbarro has continued to expand overseas. It has more than 800 stores worldwide, including 81 that opened in 2013.
The owner of Hot Dog on a Stick, another restaurant commonly found in shopping malls, filed for bankruptcy last month. That chain “signed some very expensive leases during the booming economy of the mid-2000s,” Dan Smith, CEO of HDOS Enterprises, said in a statement in February. Like Sbarro, Hot Dog on a Stick has suffered from a decline in mall foot traffic.
Founded in 1956 by the Sbarro family, the chain expanded its pizza empire over the decades to more than 40 countries. MidOcean Partners, a New York private-equity firm, acquired the closely held business in 2007 for $417 million. Then came the recession, which meant fewer consumers visiting shopping malls and eating at food courts.
When Sbarro exited bankruptcy in 2011, it agreed to give ownership of the company to senior lenders, which were owed about $176 million. Since then, the company hasn’t made enough progress improving its operations, according to a report in January from Standard & Poor’s Ratings Services, which downgraded Sbarro’s credit rating to CCC- from CCC+.
“We believe that Sbarro’s current capital structure is unsustainable and that the company will likely seek to restructure its balance sheet,” S&P said in the report. “In our opinion, this could lead to a selective default or a filing for protection under Chapter 11.”
The pizza market remains fragmented and competitive, increasing challenges for the chain, according to S&P. It’s also vulnerable to a broader decline in shopping-mall traffic and the volatility of ingredient prices. The ratings firm has a negative outlook on the company.
The sluggish economy hasn’t been kind to other pizza chains. Uno Restaurant Holdings Corp., another Italian restaurant company, filed for bankruptcy in January 2010, saying the economic slump had caused more diners to stay home, hurting its 200 U.S. pizzerias.