Shells Files for Bankruptcy, Closes Stores

The seafood chain succumbs to the tough operating environment hurting casual dining.

By David Farkas, Senior Editor -- Chain Leader, 9/4/2008 11:28:00 AM

Shells filed for Chapter 11 bankruptcy protection and closed eight of its 22 stores.

Tampa, Fla.-based Shells Seafood Restaurants filed for Chapter 11 bankruptcy protection in Tampa, say documents filed Wednesday with the Securities and Exchange Commission.

The company will continue to run its restaurants while reorganizing finances and being protected from creditors. Shells, meanwhile, closed eight of its 22 units, including sites in Orlando and the surrounding area. All Shells restaurants are in Florida.

"It's a classic example of a company that had a tough time growing against bigger names, especially Red Lobster. Shells always was a second alternative," says Chris Muller, professor of multiunit restaurant management at the University of Central Florida, in Orlando.

Muller also noted the company's size--just 22 restaurants before the bankruptcy--meant it was likely Shells didn't have the scale to leverage its purchases to compete on price. A new, lower-priced menu, however, was rolled out in July.

Sales Drop

Shells reported on August 11 that same-store sales tumbled 18.1 percent in the second quarter (ended June 29) as losses--$667,000, or three cents per share, on revenues of $9 million--mounted. A share of the company's stock was changing hands for a penny on the Over the Counter Bulletin Board, down from a 52-week high of 19 cents.

Chief Executive Officer Marc Bernstein, who joined the company in April, blamed the Chapter 11 filing on the operating environment, citing a consumer spending pullback has hurt sales at many casual-dining chains.

"The restaurant industry has been negatively affected by the economic downturn, as recently reflected by the closings of Bennigan's and Steak and Ale restaurant chains," Bernstein said in a prepared statement.

Bennigan's Grill & Tavern shuttered all of its company-owned units after the chain's parent, Plano, Texas-based Metromedia Restaurant Group, filed for bankruptcy protection under Chapter 7 of the bankruptcy code in late July. In a Chapter 7 bankruptcy filing, a company seeks to liquidate its assets and shut down.

Gaining Its Balance

Shells intention, the release added, is to emerge from Chapter 11 with a capital structure and a balance sheet that will allow the chain to continue to operate.

That will require an influx of new capital. Muller doubts Shells would find it given the beleaguered chain's declining sales, an inability to compete on price, and tightening of credit markets. "It's the toilet-bowl syndrome, when everything is swirling downward," he says.

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