Bankruptcy Filings Give Quiznos, Sbarro Chances to Change

Quiznos Sandwich Shop Prepares For Bankruptcy Filing
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March hasn't been a good month for the quick-service industry. Sbarro -- the pizza and pasta chain that's a staple in many malls -- filed for Chapter 11 bankruptcy reorganization earlier this month. A few days later it was toasted-sandwich maker Quiznos following suit.

This doesn't mean that you'll never have another slice of Sbarro's New York-style pizza or a French dip sub at Quiznos. Unlike Chapter 7 bankruptcy, where cash-strapped companies wind down their operations, Chapter 11 gives companies another chance to get it right after negotiating with creditors. It's not a good place to be -- and this is the second time Sbarro has gone this route in the past three years.

However, things have to be pretty bad if you're willing to risk upsetting creditors and potentially hand over ownership in the pursuit of a cleaner balance sheet.

Sbarro and Quiznos hope that a fiscal makeover will turn the tide. Sbarro will surrender ownership to lenders in a move that will replace 80 percent of its debt with equity. Quiznos filed a prepackaged restructuring plan that would shave $400 million of debt. Both chains will live on, but they may not be the same.

Mauled at the Mall

Sbarro has shut 180 company-owned locations with plans to shutter dozens more. There are now less than 800 units. Quiznos has 2,100 largely franchisee-owned locations, but we'll have to see how that holds up over time.

Sbarro cited an "unprecedented decline in mall traffic" as a factor in its slide. As shoppers migrate online, there has been slower foot traffic at the suburban mall and hence to the food court.

Quiznos relies on standalone locations and strip-mall outlets that haven't necessarily suffered from the thinning shopping mall crowds that have hurt Sbarro. However, Quiznos has been hit by everything from the larger Subway following it into toasted subs to folks scaling back on carbohydrates.

%VIRTUAL-article-sponsoredlinks%It didn't seem as if this was a problem last year. Two of the hottest IPOs out of the gate last year -- Potbelly (PBPB) and Noodles & Co. (NDLS) -- were companies where their specialties feature the same high carbs that are supposedly tripping up Sbarro and Quiznos. Potbelly's star attraction is its line of toasted subs just like Quiznos, and Noodles naturally boils up pasta -- something that Sbarro's has always done and Quiznos started doing last month with toasted pasta.

All four companies are competing in the fast casual niche that's supposedly thriving as customers trade up from fast food establishments without having to take the time for longer meals at casual dining chains. However, things aren't so rosy in fast casual these days. Potbelly and Noodles & Co., after posting uninspiring financial results, are now trading far lower than their initial euphoric highs. Quiznos and Sbarro may have seen their finances hit the breaking point -- forcing bankruptcy reorganization -- but they may not be alone.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

Originally published