Q1 2024 Earnings Summary
- Strong Performance and Bullish Outlook in New Markets: Portillo's expansion into Sunbelt markets such as Texas, Arizona, and Florida continues to outperform their Midwest restaurants outside of Chicagoland, and management remains extremely bullish about growth prospects in these regions.
- Maintaining Industry-Leading Margins Despite Expansion: The company is focused on maintaining its restaurant-level margins within the 23% to 24% range, even as it opens new restaurants. By quickly scaling in new markets and leveraging operational efficiencies, Portillo's aims to buffer against the natural margin pressures from new restaurants, which bodes well for future profitability.
- Proactive Management of Commodity Cost Pressures: Despite inflationary pressures on beef products, Portillo's has hedged approximately 60% of their beef flats for the full year, effectively mitigating risks to margins and demonstrating prudent cost management.
- Portillo's is experiencing ongoing pressure on transactions and product mix, which have not yet returned to positive territory, indicating potential challenges in driving same-restaurant sales growth amidst a choppy consumer environment. ,
- The company anticipates modest declines in restaurant-level margins due to the increasing number of new restaurants, which have lower initial margin profiles and may exert downward pressure on overall profitability. , ,
- Persistent delays in the permitting environment are impacting Portillo's expansion plans, as the company faces longer build cycles and uncertainties in opening new restaurants, potentially hindering its growth trajectory.
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Margin Outlook
Q: How will new units impact margins this year?
A: Michelle Hook explained that the addition of new restaurants, which naturally have lower margin profiles, will cause some margin degradation in 2024. However, they aim to maintain restaurant-level margins within the 23% to 24% range for the full year by driving top-line growth and finding efficiencies in operations. They believe that building scale quickly in new markets will help buffer margin pressures. -
Same-store Sales and Traffic Trends
Q: Are traffic declines improving into April?
A: Michelle Hook noted that while they saw improvements from the weather-impacted January into February and March, they are still experiencing pressures on both transactions and mix. The trends have mitigated but have not yet turned positive. They are leveraging strategies like investing in advertising and relaunching value offerings to stimulate traffic. -
Impact of New Units and 'Honeymoon Curve' on Revenue Growth
Q: How does the 'honeymoon curve' affect new unit performance?
A: The 'honeymoon curve' causes new restaurants to experience a sales dip as they enter their second year. With only three restaurants entering the comp base this year, this dynamic will impact revenue growth, keeping the gap between unit growth and comp growth wide. Despite this, they are pleased with the overall performance of new units. -
Pricing Strategy and Customer Response
Q: How are customers responding to price increases?
A: The company implemented two 1.5% price increases in January and March, totaling 3%. Michelle Hook reported little resistance from customers due to the menu's breadth and the ability to selectively adjust prices across categories and channels. They view pricing as a lever to offset inflationary pressures but remain cautious given the consumer environment. -
Drive-thru Speed and Throughput
Q: What are the plans to improve drive-thru performance?
A: Michael Osanloo acknowledged that drive-thru service speed is factually slower than in 2019, impacting customer satisfaction, especially among lower-income consumers who favor drive-thru. The focus is on training and operational excellence to increase throughput, ensuring staff promptly deploy outside order takers and understand performance expectations. -
Commodity Cost Pressures
Q: Are beef prices affecting costs?
A: Michelle Hook stated they are experiencing inflation across all beef products, with burgers feeling more pressure due to leaner cuts. They are hedged on beef flats about 60% for the full year, which helps mitigate risks. The company continues to explore ways to manage costs amidst ongoing beef inflation expected throughout the year. -
Advertising Strategy
Q: Why increase advertising spending now?
A: Michael Osanloo explained that previous advertising efforts showed a positive return on investment, improving traffic trends and paying for themselves quickly. The company plans to invest modestly in advertising, especially in Chicagoland and outer markets, utilizing digital channels and third-party delivery platforms to drive trial, awareness, and frequency. -
Sunbelt Performance
Q: How are restaurants performing in Sunbelt markets?
A: The company is extremely pleased with performance in the Sunbelt, where restaurants generally outperform those in the Midwest outside of Chicagoland. They remain bullish on growth prospects in Texas, Arizona, and Florida. The Colony restaurant in Texas generated significant trial and awareness, though initial sales levels were unsustainable long-term due to the 'honeymoon curve.' -
G&A and EBITDA Guidance
Q: What is the outlook for G&A expenses and EBITDA growth?
A: G&A expenses are expected to be in the $85 million to $87 million range for the year, with a higher impact in the third quarter due to advertising investments. While EBITDA growth may be below the long-term algorithm, the company aims to drive top-line growth and leverage G&A to improve margins, focusing on revenue-driving activities. -
Catering Business Development
Q: How is the catering business progressing?
A: Michael Osanloo shared that they now have a catering team fully deployed, focusing on both inbound and outbound sales. While not a huge part of the business, catering punches above its weight by generating trial and awareness, especially in outer markets. In Chicagoland, the focus is on reminding customers of their services and executing flawlessly.