What Red Lobster’s Bankruptcy Means for Consumer ETFs

What Red Lobster’s Bankruptcy Means for Consumer ETFs

Iconic restaurant chain’s struggles might reflect inflation concerns

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Reviewed by: etf.com Staff
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Edited by: Ron Day

Seeing red is never a good sign for a business. And for Red Lobster, the North American chain that brought affordable seafood to the masses, the news of its bankruptcy filing reminds us just how tenuous the economy is, despite glowing forecasts from around Wall Street.

Red Lobster was reportedly mismanaged. How else does a company with $2 billion in sales end up in the hands of the courts and creditors, $1 billion in debt and just $30 million in cash? A pandemic and inflation resurgence that followed didn’t help matters.

Consumer spending is under pressure. Pandemic-era savings are largely depleted. The desire to spend is always top of mind for the U.S. consumer. But with rates staying high, there are risks that things will slow down, perhaps suddenly.  

That makes navigating consumer, leisure, and restaurant stocks much more challenging. Unless, that is, we look beyond single stocks to ETFs, where a robust menu awaits hungry profit-seekers.  

Lobster “Tales” Across the ETF Universe

The $285 million Invesco Dynamic Leisure and Entertainment ETF (PEJ) has been around since way back in 2005. And while it is an index fund, it turns over its portfolio at a very high 167% annual rate, making this 30-stock portfolio feel more like a tactical ETF. And for those looking for restaurant exposure, unlike many consumer discretionary ETFs, this one has several. Those include companies in the fast-casual segment such as Shake Shack and Wingstop, which have contributed to the struggles of traditional chains like Red Lobster.  

For a more dedicated dining fund, the Advisor Shares Restaurant ETF (EATZ) is three years old, completely ignored, but potentially a beneficiary of industry consolidation down the road. EATZ owns 25 restaurant stocks, which covers a wide swath of the publicly traded stocks in business. This highlights one of the reasons that ETFs can be great research tools well before they are broadly investable. Just seeing the companies listed and analyzing them can help an investor to better understand what is out there. The EATZ basket of stocks projects 18% revenue growth and sells at 21 times forward earnings, not a bad combination.  

And for those who are bullish on continued consumer resilience, a desire for global exposure, and who prefer to do their investing dining on the run, the ALPS Global Travel Beneficiaries ETF (JRNY) is a fairly new, $6 million fund that invests mostly in hotels, credit card stocks, casinos, airlines and cruise companies.  

All three ETFs noted above have moved largely in sync on their way to double-digit returns in the past 12 months. That indicates that despite the decline of a former leader in the restaurant space, investors have many ways to pursue returns via changing consumer preferences that favor other types of leisure stocks.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.