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Portillo’s Inc. (NASDAQ:PTLO) Q1 2024 Earnings Call Transcript

Portillo's Inc. (NASDAQ:PTLO) Q1 2024 Earnings Call Transcript May 7, 2024

Portillo's Inc. beats earnings expectations. Reported EPS is $0.07541, expectations were $0.05. Portillo's Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Portillo's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Barbara Noverini, Portillo's Head of Investor Relations. Thank you. You may begin.

Barbara Noverini: Thank you, operator. Good morning everyone and welcome to our first quarter 2024 earnings call. Our 10-Q, earnings press release and supplemental presentation are posted at investors.portillos.com. With me on the call today is Michael Osanloo, President and Chief Executive Officer and Michelle Hook, Chief Financial Officer. Any commentary may hear about our future results and business conditions are forward-looking statements, which are based on management's current expectations and are not guarantees of future performance. We do not update these forward-looking statements unless required by law. Our 10-Q identifies risk factors that may cause our actual results to vary materially from these forward-looking statements.

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In today's earnings call, we'll make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Now, let me turn the call over to Michael Osanloo, President and Chief Executive Officer of Portillo's.

Michael Osanloo: Thank you, Barb and good morning everyone. Thank you for joining us for our first quarter 2024 earnings call. It's an exciting time at Portillo's. During the first quarter, we opened our fifth restaurant in the Dallas market, and then just a few days ago, we opened our seventh restaurant in the Phoenix, Scottsdale area. We're happy with how quickly we're building scale in the Sunbelt, where there continues to be plenty of room for us to grow. Now in the first quarter, we grew total sales 6.3% and achieved restaurant-level margins of 21.9%. Our comp was negative 1.2% as we got off to a slow start due to some miserable weather across the Midwest. Please recall, we have 69 restaurants in the comp base and 60 of them are still in the Midwest.

This means the majority of our comp base felt the impact of that cold snap. That said, we've seen top-line trends improve going into the second quarter. So far, in April, our efforts have mitigated transaction declines and comp has settled back into the positive low single-digits. For the full-year of 2024, we are still confident in our ability to deliver low single-digit comp, 23% to 24% restaurant level margins and open at least nine new restaurants. Before Michelle reviews our Q1 performance, I'd like to take a moment to share with you our strategy. Our strategy is predicated on four pillars that provide guideposts for near-term goals and serve as the foundation for quality long-term growth. You can see a graphic of our strategy in the earnings supplemental.

The four pillars are: First, running world-class operations. Second, innovating and amplifying the Portillo's experience. Third, building restaurants with industry-leading returns. And fourth, taking great care of our teams. Of course, our pillars sit on the foundation of a winning culture. In 2024, we've committed to prioritizing sales and transaction growth. Let's dive into some of the specifics on how each pillar will support our goals in 2024. First, running world-class operations is the single most important tool we have to drive sales. It is the core element of our business, that's totally under our control and it gives us the right to grow. Guests who enjoy the taste of our food and have a great experience see the value in our brand and come back time and time again.

Those visits may not look the same each time. Whether they want to dine in with their kids, zip through our drive-thrus, enjoy Portillo's at home or cater for a big event, our strong multichannel muscle remains a competitive advantage that drives guest engagement and traffic. In 2024, we are specifically focused on improving the drive-thru experience. We're already known for our double-lane drive-thrus and friendly order takers, but speed really matters, throughput matters. Our overall satisfaction scores in the drive-thru have been good, but our service has slowed down a bit, and we know we can do better. A 30 second improvement in our drive-thru speed equates to a point of calm. We continue to double down on speed of service by empowering our restaurant leaders with tools and coaching to give real-time feedback, based on those key metrics at critical time points during the day.

Our second pillar is centered on innovating and amplifying the Portillo's experience through menu innovation, marketing efforts and digital engagement. Each of these avenues raises brand awareness and reaches guests through the consumer landscape. At the end of Q1, we tested a spicy chicken chopped salad and a chicken pecan salad. We were so pleased with the initial feedback from the test of these fresh, new salads that we accelerated their launch by a month, a testament to our nimbleness as an organization. Already, sales of these new salads are the highest of any of our new menu launches over the last five years, and that's without the full marketing campaign behind it. Starting this month, you'll see our Mixes It Up marketing campaign on digital channels, highlighting the freshness of all of our house made ready to order salads.

They've also had a positive impact on mix by displacing lower margin items. Simply put, these salads are a win. They are clearly delicious, they add menu variety that appeals to a range of demographics and they make Portillo's even more Vito proof. At the end of Q1, we also made a small investment in some traditional advertising to amplify brand awareness in Arizona, really the only other market outside of Chicago where we have some scale. We've seen early signs of transaction improvement in this region in conjunction with that campaign. Given that success and the success in general of our advertising, we're planning on another round of advertising in Chicagoland in the third quarter. We'll also continue to innovate our digital advertising approach.

In Q2, we increased our advertising on third-party delivery sites outside of Chicagoland to generate trial and raise brand awareness. This is a proven tactic and we'll be doing more of it as we assimilate in new markets. Technology will also continue to play a role in amplifying the Portillo's brand. I'm excited to share that Keith Correia has joined Portillo's as our new Chief Information Officer. A longtime restaurant industry executive, Keith will continue to advance the Portillo's team member and the guest experiences. Under Keith's leadership, we're embracing technology as a business driver in ways that create impact and value at Portillo's. Our IT team is actively partnering with stakeholders throughout the business to identify opportunities for optimization and innovation.

In particular, we're looking at how to improve our digital ordering experience through our app and we're planning our first testing of kiosks in California that will enhance our Signature guest experience. Our third strategic pillar is building restaurants with industry-leading returns. We're focused on maintaining our industry-leading AUVs while optimizing our footprint and lowering our build costs. We're also looking to scale in new markets quickly, as we lean on replicable development processes. We're on track to open our first restaurant of the future in Texas in Q4. As a reminder, the restaurant of the future is a smaller format prototype with some built-in efficiencies. The early contractor bids suggest that, we're well within the estimated build cost range of $5.2 million to $5.5 million.

And remember, this saves at least $1 million on each new restaurant of the future build, puts us in a very enviable position when it comes to cash on cash returns. Now importantly, even with a 1500 square foot reduction, these restaurants will still look and feel like a Portillo's. They will have local personality. They will be led by an experienced GM and most importantly, we expect them to still produce the same industry-leading AUVs of all our other restaurants. We have a few restaurants of the future coming online this year and we're really excited to see what they do. We've built a tremendous development pipeline, and we feel confident in our ability to continue to expand at a faster pace than we have in previous years. We know Portillo's has a long runway for continued growth.

Our final strategic pillar and maybe our most important one is taking great care of our teams. It wouldn't be possible to serve our fresh, amazing food or create memorable guest experiences without our team members. We're proud of our industry-leading team member retention, which averaged about 20 percentage points better than the rest. We're focused on providing a meaningful work environment, pay and benefits that matter to the team member and a clear pathway for professional development. We're especially proud of our Ignite Development Program that's been totally built in-house. As you know, a critical component of new restaurant success is having an experienced general manager. I'm proud to share that because of Ignite, we have a deep leadership bench.

A customer biting into a freshly prepared char-grilled burger, with crinkle-cut French fries and a chopped salad in the background.
A customer biting into a freshly prepared char-grilled burger, with crinkle-cut French fries and a chopped salad in the background.

We have identified experienced GMs for all of our 2024 pipeline as well as most of the 2025 pipeline already. Nearly all of those GMs are Ignite graduates. I'm more confident than ever in the talent pipeline we have built to support our growth. Beyond the general manager level, we have team members across this organization, who see the potential for long-term careers with Portillo's. In the first quarter of 2024, we promoted 64 team members who went through the Ignite program, continuing to develop that in-house talent. We're thrilled with how many folks raise their hands and want to be a part of Portillo's growth. They can envision the exciting future for us and they want to be part of it. It's our team members who create the Portillo's experience that keeps our guests coming back, and we're focused on making sure that's what we deliver.

With that, let me hand it over to Michelle.

Michelle Hook: Great. Thank you, Michael, and good morning, everyone. Before we discuss our first quarter results, I want to recap our recent secondary offering. This quarter, we completed the offering of 8 million shares of the company's Class A common stock at an offering price of $14.37 per share. All of the shares sold in the offering represented Class A and B shares owned by pre-IPO members. We used the proceeds to purchase shares from Berkshire Partners, the private equity firm that acquired Portillo's in 2014 and subsequently sponsored our IPO in 2021. As of May 7th, 2024, Class A shares represented 84.1% and Class B shares represent the remaining 15.9% of the 73.2 million in total outstanding shares. Since the IPO, there have been four secondary transactions, which have collectively reduced Berkshire's beneficial ownership to approximately 19.3% of the company from over 60% at the time of the IPO.

Over this time, we've more than doubled our public float. Now turning to the results for the first quarter. In Q1, revenue growth was driven by the opening of new restaurants. During the first quarter, revenues were $165.8 million, reflecting an increase of $9.8 million or 6.3% compared to last year. New restaurants positively impacted revenues by approximately $14.4 million, which was offset by 1.2% decrease in same-restaurant sales. This was primarily driven by a decrease in transactions of 3.2%, partially offset by an increase in average check of 2%. The higher average check was driven by an approximate 5.1% increase in certain menu prices, partially offset by product mix. Comp on a two-year stack basis was 7.8%. Strong same-restaurant sales growth of 9.1% in the first quarter of 2023, ongoing consumer uncertainty and winter weather, give greater context to this quarter's same-restaurant sales performance.

In particular, Q1 transactions were heavily impacted by severe weather in the Midwest. This period spans several weeks during which transactions declined by double-digits. Same-restaurant sales and transactions subsequently improved. As Michael mentioned, we're focused on several initiatives to drive transactions in what continues to be a choppy consumer environment. We are happy that these efforts supported low single-digit same-restaurant sales growth and improved transactions in April versus our first quarter results. For the full year, we are still estimating low single-digit same-restaurant sales growth. Moving on to our costs. Food, beverage and packaging costs as a percentage of revenues decreased to 34.3% in the first quarter of 2024 from 34.4% in the first quarter of 2023.

This decrease was primarily due to an increase in our revenue and lower third-party delivery commissions, partially offset by 4.8% increase in commodity prices. We experienced commodity pressures on beef, pork and produce, during the first quarter. We are still estimating commodity inflation in the mid-single-digits in 2024. Labor as a percentage of revenues increased to 26.1% in the first quarter of 2024 from 25.9% in the first quarter of 2023. The increase was primarily driven by lower transactions and incremental wage rate increases for our team members, partially offset by increases in our average check and lower variable-based compensation. Hourly labor rates were up 3.1% in the first quarter of 2024 versus the prior year period. We are currently estimating labor inflation in the mid-single-digits in 2024.

Other operating expenses increased $1.2 million or 6.2% in the first quarter of 2024 compared to the first quarter of 2023, which was primarily driven by the opening of new restaurants. As a percentage of revenues, other operating expenses remained flat at 12% compared to the prior year. Occupancy expenses increased $0.9 million or 10.5% in the first quarter of 2024, compared to the first quarter of 2023, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.2% compared to prior year. Restaurant-level adjusted EBITDA increased 4.5% to $36.4 million in the first quarter of 2024. Restaurant-level adjusted EBITDA margins were 21.9% in the first quarter of 2024 versus 22.3% in the first quarter of 2023.

This reflects a modest decline of only 40 basis points despite softer sales and the addition of nine new restaurants since the first quarter of 2023. Note that, Q1 has historically been our lowest revenue and restaurant-level adjusted EBITDA margin quarter. We are currently estimating our restaurant-level adjusted EBITDA margins to be in a range of 23% to 24% in 2024. To offset the inflationary cost pressures noted above, primarily on food and labor, we did take two pricing actions during the quarter. During January and at the end of March, we increased certain menu prices by approximately 1.5% in each period. To offset the implementation of the FAST Act in California and in connection with our new salad launch, we accelerated the pricing decision we would have made in Q2 to the end of March.

These actions combined with the lapping of previous pricing actions put us at an effective price increase of approximately 6% at the end of the first quarter. Subsequently another 3% of prior year pricing just rolled off last week, which puts us at an effective price increase of 3% today. We will continue to monitor our cost pressures, the competitive landscape as well as consumer sentiment to inform our pricing decisions in the coming quarters. Our general and administrative expenses decreased by $0.2 million to 11.2% of revenue in the first quarter of 2024 from 12% in the first quarter of 2023. The decrease was primarily driven by lower equity-based compensation and lower variable-based compensation, partially offset by an increase in wages attributable to annual rate increases as well as increases in professional fees, advertising and marketing expenses.

Pre-opening expenses decreased $0.9 million to 0.9% in the first quarter of 2024 from 1.5% in the first quarter of 2023. The decrease was due to the number and timing of executed and planned new restaurant openings. We continue to expect pre-opening expenses to be between $8 million to $9 million in 2024. Please keep in mind that our reported pre-opening expenses includes deferred or non-cash rent expense as well as actual costs incurred prior to the restaurants opening. All this led to adjusted EBITDA of $21.8 million in the first quarter of 2024 versus $19.6 million in the first quarter of 2023, an increase of 10.9%. Adjusted EBITDA margin also improved 50 basis points to 13.1% in the first quarter versus the prior period. Below the EBITDA line, interest expense was $6.5 million in the first quarter of 2024, a decrease of $0.9 million from the first quarter of 2023.

This decrease was primarily driven by improved lending terms, associated with our 2023 term loan and revolver facility, which as a reminder was refinanced during February of 2023. As of today, our outstanding borrowings under our revolver are $22 million. Our effective interest rate on the 2023 term loan and revolver facility was 8.4% as of 2024 versus 8.1% for 2023. Income tax benefit was $1.1 million in the first quarter of 2024. Our effective tax rate for the first quarter was negative 27%, driven by a change in our valuation allowance, which was partially offset by an increase in the company's ownership interest. Our future effective tax rate will fluctuate as Class A equity ownership increases and as equity-based awards are exercised at best.

We expect the full-year tax rate to be approximately 21% to 24%. Cash from operations increased by 39.9% year-over-year to $9.1 million in the quarter. We ended the quarter with $13.2 million in cash. We are confident that the strength of our brand and our operational execution will continue to deliver on our long-term growth algorithm. Thanks for your time and with that I'll turn it back to Michael.

Michael Osanloo: Thanks, Michelle. As I close, I just want to thank the more than 8,000 people, who work so hard for us every single day to provide a great experience for our guests. It's that in our culture that creates our winning formula. I'm excited to share our strategy with you and plan to update on how we're executing against these pillars in the future. We're committed to running world-class operations, to innovating and amplifying the Portillo's experience, building great restaurants with industry-leading returns and taking great care of our teams. This is the strategy that we'll execute against. It's how we'll grow our transactions. It's how we'll grow our comp and it's how we'll deliver industry-leading returns for our investors. Thank you. With that, let me turn it back to the operator.

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