Krystal, which claims to be the South’s oldest fast-food chain, filed for Chapter 11 bankruptcy protection January 19 in U.S. Bankruptcy Court in Atlanta. The legacy burger brand, founded 1932 on a downtown street corner in Chattanooga, Tennessee, reported assets between $10 and $50 million, and liabilities between $50 million and $100 million.
In the past 12 months, Krystal shuttered 44 locations, the company revealed in a filing, including 13 on December 16 (it has opened three units in the past year as well).
Krystal said it would continue to operate locations as it restructures debt and pays off creditors during proceedings. The chain runs 182 corporate units (all leased) across nine states (Mississippi, Kentucky, the Carolinas, Arkansas, Alabama, Florida, Georgia, and Tennessee). Franchisees own another 116. Krystal employs about 4,890 people, including 743 full-time hourly workers, 3,856 part-time employees, and 291 full-time salaried. The Krystal Company is owned by Atlanta-based Argonne Capital Group LLC.
Krystal named Jonathan Tibus, managing director for Alvarez and Marsal, chief restructuring officer. In a filing, Tibus said he’s held the title since December 16, 2019. He has a track record in turnaround projects. In July, before its bankruptcy filing, Kona Grill named Tibus CEO (the chain has since been sold to The One Group). He previously served as CEO of Real Mex Restaurants (Chevy’s, El Torito, Sinigual, and Las Brisas), and led the since dissipated Ignite Restaurant Group (Joe’s Crab Shack and Brickhouse Tavern) and Last Call Operating Co. (Fox & Hound, Champps). All of those companies filed for bankruptcy protection. Tibus also worked as chief restructuring officer at Quiznos, a brand that emerged from bankruptcy in 2014, and chief operating officer of Max & Erma’s, which filed for Chapter 11 protection in 2009 and nearly shuttered all of its restaurants.
In a statement to The Chattanooga Times Free Press, Krystal said its “customers can expect to continue to enjoy the same great food and service that they have come to expect from us. The actions we are taking are intended to enable Krystal to establish a stronger business for the future and to achieve a restructuring in a fast and efficient manner."
Krystal engaged Alvarez & Marsal in November.
The chain listed 30 unsecured creditors, led by media agency The Tombras Group, at $4.2 million.
In November, Krystal hired Tim Ward as president and chief operating officer—a newly created position—and Bruce Vermilyea as chief financial officer. It came as CEO Paul Macaluso, a former McAlister’s Deli president who joined the brand in April 2018, left the company to take the top role at full-service chain Another Broken Egg Café. CFO Barry Epley also departed in a planned transition unrelated to Macaluso’s departure, the company said.
Ward previously served as COO at Captain D’s, while Vermilyea clocked 18 years with Qdoba—three as CFO.
Krystal’s filing is 23 years post bankruptcy in 1997 that stemmed from millions of dollars of employee claims for unpaid overtime. Port Royal Holdings purchased the brand out of bankruptcy for $145 million before selling it to Argonne Capital in 2012. Krystal relocated headquarters from Chattanooga to Atlanta a year later.
As for what led to Krystal’s Chapter 11 this time around, Tibus wrote in a filing the chain “experienced strong industry-specific headwinds due to a combination of shifting consumer tastes and preferences, growth in labor and commodity costs, increased competition, and unfavorable lease terms.”
The company also credited the “proliferation of fast-casual restaurants as well as online delivery platforms has created new competition for traditional quick-service chains. Moreover, quick-service restaurants have faced increasing difficulty finding and retaining qualified employees in the current labor market.”
In the fall of 2017, Krystal retained Boston Consulting Group to advise the company. The following April, it began a “significant investment” in nine of its stores that involved completely demolishing and then rebuilding locations. Or “scrape and rebuilds,” as Krystal referred to them previously.
The chain completed five of these in 2018 and four in 2019 and said, on average, these rebuilds required an investment of about $950,000 per location. While they “resulted in substantially increased sales for these locations,” the move also required significant capital investment and appears to have left Krystal with more debt.
In 2018, thanks to declining financial performance, same-store sales, and income from operations, Krystal failed to comply with certain of “the financial covenants in the Prepetition Credit Agreement for the fourth quarter of 2018.”
“This failure was ultimately cured by an equity contribution,” the filing wrote. “The Debtors then defaulted under the Prepetition Credit Agreement due to the Debtors’ failure to deliver audited financial statements without a “going concern” qualification for the fiscal year ending December 31, 2018. The Debtors subsequently failed to comply with the financial covenants under the Prepetition Credit Facility for the second quarter of 2019. To address these and certain other events of default, on October 31, 2019, the Debtors entered into a forbearance agreement with their lenders under the Prepetition Credit Facility.”
A “forbearance agreement,” signals lenders agreed not to call their loans to default. This expired at 11:59 p.m. on the day Krystal filed for bankruptcy.
Leading up to the petition date, Krystal tried to address its financial woes. It reduced its labor force, including senior executives, “to consolidate functions and right-size the regional management team.” It also shuttered “certain unprofitable restaurant locations,” after a comprehensive review of nonresidential real estate.
Krystal added in the filing that it’s also actively investigating a security incident that involves one of the payment processing systems that services some of its restaurants. The chain “retained a leading forensics firm and are conducting an investigation to determine the extent to which information in the Debtors’ systems may have been impacted,” it said. The incident appears to have occurred July through September 2019.
In October, Krystal said it engaged The Cypress Group, a specialized investment banking firm, to manage a refranchising initiative that called for the sale of about 100–150 corporate units. Krystal also recently signed veteran franchisees Anand Patel and Kalpesh Das of Slider Joint, LLC to a three-unit deal in Jonesboro, Arkansas. Das and Patel represented the first new franchisees to join Krystal since 2005.
Krystal established a "restructuring information hotline" for interested parties at 888.249.2792 in the U.S./Canada and 310.751.2607 for international.