Rubio’s Coastal Grill, a 167-unit Mexican fast casual based in San Diego, filed for bankruptcy Monday to move forward with a “comprehensive financial restructuring” to recapitalize the brand.
The chain will enter court proceedings after an agreement with investor Mill Road Capital and lender Golub Capital. As part of the restructuring, Rubio’s will receive an additional investment from Mill Road and up to $8 million in debtor-in-possession financing from Golub Capital. The financial backing will allow Rubio’s to keep stores open in its restaurants across California, Arizona, and Nevada.
The fast casual said that it expects restructuring to finish by the end of 2020. Rubio’s is saddled with roughly $82.3 million in outstanding funded debt obligations, including a $10 million forgivable loan from the Paycheck Protection program.
“Rubio’s entered the year in a strong financial position, which has helped the Company remain flexible in navigating the unprecedented impact of the pandemic,” said Marc Simon, president and CEO of Rubio’s, in a statement. “The agreement with our sponsor and lenders will position the Company to thrive in this constantly evolving market. This plan will strengthen our finances and allow us to continue to serve our loyal guests and drive our business forward.”
According to Chief Restructuring Officer Melissa Kibler, Rubio’s responded to the COVID crisis by temporarily closing stores or reducing hours. The restaurant also had to account for increased costs related to health and safety equipment and the expansion of takeout and delivery. The chain negotiated with landlords and in some cases stopped paying rent to conserve cash.
Roughly 45 percent of the Restaurant Support Center and field management were furloughed as well as more than 1,400 restaurant workers. Additionally, 26 underperforming units permanently shut down between May and June. Among the closures were all of Rubio’s footprint in Colorado and Florida, areas where the chain didn’t achieve sufficient penetration and recognition. A small number of stores are still temporarily closed.
“Management could not have predicted the scope, scale and impact of the government-ordered shutdowns, which effectively altered the viability of the Debtors’ business model overnight,” Kibler said in the court filing. “Given that on-premises dining had traditionally accounted for approximately 47 percent of the Debtors’ sales, the shutdowns delivered a sudden and significant blow to the Debtors’ liquidity position.”
However, the efforts to cut costs fell short as Rubio’s defaulted in June. Since that time, the restaurant has been in negotiations with Golub and Mill Road to restructure its balance sheet and resize its footprint.
Rubio’s cited the saturation of the fast-casual market, minimum wage increases, and the growth of off-premises as factors that contributed to the bankruptcy. The restaurant also noted a new IRS rule related to the Affordable Care Act in mid-2017 that led to the firing of 341 employees with invalid Social Security numbers.
Between 2018 and 2020, Kibler said Rubio’s launched several initiatives to combat these challenges, such as relaunching its website, creating a new online ordering system and branded delivery program, rolling out a loyalty app, forming partnerships with third-party delivery companies, and enhancing data and analytics-driven marketing initiatives.
The moves appeared to work as satisfaction scores improved and same-store sales grew 2.4 percent in 2019 after two years of break-even or declining sales.
Management planned to leverage the improvements to initiate a sales process, but that strategy was halted when the COVID pandemic arrived in March.
“Despite Management’s success in restoring OSAT scores and rebuilding the Debtors’ customer base, the unprecedented scale of the COVID-19 pandemic and the severity of its impact on customer demand and store operations were unforeseeable circumstances,” Kibler said.
Ralph Rubio co-founded Rubio’s in 1983, beginning with a walk-up stand in San Diego. The brand went public in 1999, but was acquired by Mill Road in 2010 for $91 million and taken private. The brand has gone through several iterations over the years, changing from “Rubio’s, Home of the Fish Taco” to “Rubio’s Baja Grill” to “Rubio’s Fresh Mexican Grill” and finally to “Rubio’s Coastal Grill” in 2014.