Q3 2024 Earnings Summary
- Portillo's is optimizing its restaurant model by reducing the size of its new units with the "restaurant of the future" prototype, decreasing from 7,800 square feet to 6,250 square feet, which reduces building costs to $5.2 million to $5.5 million. This smaller, more efficient prototype aligns with consumer trends toward off-premise dining and is expected to achieve a 25% cash-on-cash return with sales of $5.9 million to $6.3 million. Management believes these restaurants can still handle Portillo's volumes without limiting capacity.
- The company has a strong development pipeline with leases signed, giving them confidence to grow their restaurant count by 12% to 15% next year. They have plans to open more units quickly in new markets like Houston to spread demand and build momentum, learning from past experiences to optimize new unit performance. Portillo's is also ahead in terms of their development pipeline, looking at sites for the back half of '26 and '27.
- Portillo's is enhancing technology and operational efficiency to drive transaction growth. They have rolled out kiosks across all restaurants, expecting them to improve mix and transaction volumes. They are also developing a loyalty program to be launched early next year , and are focusing on improving speed and efficiency in drive-thru and dine-in operations . These initiatives aim to enhance customer experience and drive traffic.
- Portillo's is reducing the size of its new restaurants, cutting square footage from 7,800 to 6,250 square feet, to lower construction costs and improve cash-on-cash returns, but there is a risk that the smaller format may not support the same sales volumes, potentially impacting revenues and margins.
- Negative population growth in Chicagoland, where Portillo's has average unit volumes (AUVs) over $11 million, makes it a tall task to grow transactions in its core market, potentially limiting same-restaurant sales growth.
- Beef prices, which constitute over 30% of Portillo's food basket, are expected to remain elevated, posing margin pressure if the company cannot fully offset costs through pricing in a competitive environment with heavy discounting.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Comparable Sales | FY 2024 | no prior guidance | -1% | no prior guidance |
Restaurant-Level Adjusted EBITDA Margins | FY 2024 | 23% to 24% | 23% to 24% | no change |
General and Administrative (G&A) Expenses | FY 2024 | $82M to $84M | $78M to $80M | lowered |
Labor Inflation | FY 2024 | mid-single digits | 3% | lowered |
Commodity Inflation | FY 2024 | mid-single digits | mid-single digits | no change |
Effective Tax Rate | FY 2024 | 21% to 24% | 21% to 23% | lowered |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Restaurant Footprint Optimization and New Unit Design | Discussed across Q4 2023, Q1 2024, and Q2 2024 with emphasis on reducing square footage (around 1,500 sq ft reduction), lowering build costs, and maintaining the brand experience | In Q3 2024, the focus continues with a new 6,200–6,250 sq ft prototype designed for off‐premise dining, enhanced kitchen consolidation, and plans for a version 2.0 prototype with innovative financing options | Continued focus with iterative product improvements and a sharper tilt toward off‐premise formats. |
New Market Expansion and Development Pipeline | Addressed in Q4 2023, Q1 2024, and Q2 2024 emphasizing expansion in Texas, DFW, Arizona, and an extended 18‐month pipeline to counter permitting delays | Q3 2024 highlighted significant Houston-area entry, detailed market-specific sales curves, and a strong 2024 pipeline with plans for a 12–15% increase in restaurant count followed by early 2026/2027 site evaluations | Persistent expansion strategy with refined market learning and continued strong pipeline development. |
Operational Efficiency and Digital Enhancements | In Q1 and Q2 calls, improvements in drive-thru speed, testing of kiosks, digital ordering, and efficiency initiatives in Q4 2023 retrofits were noted | Q3 2024 continues this theme with broader kiosk deployment across all restaurants, an ongoing focus on drive-thru efficiency, and plans for a loyalty program announcement in early 2025 | Steady commitment to operational excellence enhanced by broader digital tool adoption. |
Capital Expenditure Management and Cost Reduction | Q2 and Q4 2023 detailed efforts to reduce build costs through smaller footprints (with build cost ranges around $5.2M to $5.5M) and strategic CapEx planning | Q3 2024 reiterates smaller restaurant prototypes, explores build-to-suit/reverse build-to-suit models, and aims for improved cash-on-cash returns with even lower capital burdens | Ongoing pressure to reduce costs with evolving restaurant designs and innovative financing strategies. |
Commodity Price Pressures and Hedging Strategies | Q1 2024 discussed commodity inflation (~4.8%) with hedging for beef flats (60%), while Q2 and Q4 mentioned rising food costs and peak inflation expectations without much hedging detail | Q3 2024 notes mid-single-digit inflation, with beef costs highlighted as a key pressure but without renewed hedging commentary | Commodity pressures remain persistent; hedging was more explicit in earlier periods but is less emphasized now. |
Marketing and Advertising Initiatives | Q1, Q2, and Q4 2023 focused on digital and traditional advertising experiments (including NFL-related and menu innovation campaigns) tailored by market, with selective spend in Chicago and Arizona | Q3 2024 emphasized a Chicagoland campaign, planned Dallas-Fort Worth advertising, and integrated kiosk initiatives that enhance add-on sales, reinforcing long-term brand building | Consistent commitment to advertising with evolving regional strategies and multi-channel integration. |
Transaction Trends and Same-Restaurant Sales Performance | Q1 2024 showed declines driven by weather and transaction drops; Q2 2024 reported moderated declines with slight average check increases; Q4 2023 saw healthy gains in transactions and average check | Q3 2024 recorded a slight decrease in same-restaurant sales (–0.9%) driven by a 3.5% drop in transactions, albeit partially offset by a 2.6% higher average check and ongoing price adjustments | Mixed performance continues with cautious optimism and a focus on boosting transaction volumes despite pricing adjustments. |
Permitting Delays Impacting Future Expansion | Q1 2024 noted permitting delays as a challenge, prompting an 18‐month pipeline extension for more predictable openings | Not mentioned during Q3 2024 | Topic was de-emphasized in the current period, suggesting either resolution or reduced focus. |
Demographic Challenges in Core Markets | Little to no mention in Q1, Q2, and Q4 2023 discussions | Q3 2024 explicitly highlighted negative population growth in Chicagoland and acknowledged difficulty growing transactions in that region | Emerging as a distinct concern in Q3 2024, prompting strategic shifts toward growth regions. |
Shifting Margin Dynamics Between New and Established Restaurants | Q1 2024 and Q4 2023 detailed lower margins for new restaurants versus established units, noting expected short-term margin degradation as new units ramp up | Q3 2024 continued to acknowledge margin dynamics by emphasizing the new efficient prototypes and the critical need to achieve targeted cash-on-cash returns while managing the inherent lower margins in new units | Ongoing focus on balancing growth with margin preservation through operational and design efficiencies. |
Consumer Dining Trends and the Shift Toward Off-Premise Formats | Q1 2024 and Q2 2024 discussed the importance of drive-thru performance and noted mixed trends across delivery and dine-in; Q4 2023 mentioned pickup-only formats with successful pilots | Q3 2024 strongly emphasized off-premise trends by redesigning restaurants for drive-thru, pickup, and digital orders, reflecting a deliberate move to align with evolving consumer behavior | Sustained and deepening shift toward off-premise dining, driving physical design and operational changes. |
-
Guidance on Cost Inflation and Margins
Q: What are your expectations for cost inflation and margins next year?
A: Michelle Hook indicated that they do not expect significant inflation compared to this year as they enter 2025. While they foresee some pressure on the beef side, which accounts for over 30% of their basket, labor costs are anticipated to remain relatively moderate. She promised more detailed guidance in January. -
Unit Growth and Development Pipeline
Q: What has changed in the development pipeline to support next year's unit growth?
A: Michael Osanloo expressed strong confidence in their development pipeline, highlighting that they have a solid deal pipeline and signed leases, which makes him very comfortable with the numbers they've quoted for next year's growth of 12%-15% in restaurant count. The development team is further ahead than ever, and they are focusing on ensuring they have great locations and capable personnel to support this acceleration. -
Confidence in Smaller Footprint Units
Q: How confident are you that smaller units won't lead to lower sales volumes?
A: Michael Osanloo explained that they have carefully designed the new "restaurant of the future" units to maintain high sales volumes. They have ensured these units can handle weekly sales of $200,000, equivalent to a fully matured Portillo's with $10 million AUVs. The team has worked closely to optimize kitchen design without compromising capacity or the customer experience. Michelle Hook added that with reduced build costs of $5.2 to $5.5 million, they require sales of $5.9 to $6.3 million to achieve a 25% cash-on-cash return, and they believe they can surpass these figures, as they are already seeing above $6 million AUVs in Sunbelt markets. -
Levers to Drive Transaction Growth
Q: What are your strategies to improve transaction performance next year?
A: Michael Osanloo stated that their primary focus is on improving efficiency and throughput, particularly in the drive-thru and inside the restaurants. The rollout of kiosks is expected to enhance both mix and transaction counts. He acknowledged the challenge of growing transactions in Chicagoland, where AUVs are over $11 million amidst negative population growth. Therefore, they are aggressively expanding in growth markets like Texas, Florida, and Arizona. Additionally, they plan to introduce a loyalty program early next year, which should further drive transactions. -
Pricing Strategy Amid Competition
Q: How are you approaching pricing next year given the competitive environment?
A: Michelle Hook conveyed that they intend to use pricing strategically to offset inflationary pressures, while ensuring they continue to offer good value. They believe they have pricing power due to their expansive menu, allowing selective price adjustments without impacting the customer experience. They took pricing up 8.5% in 2023 and expect it to be just over 4% by year-end. Pricing actions next year will be more moderate and depend on the inflation environment. -
G&A Expense Outlook
Q: What factors have contributed to the lowered G&A guidance, and what should we expect next year?
A: Michelle Hook explained that the reduction in G&A guidance is primarily due to lower variable compensation, including bonus and stock-based compensation. They have also controlled wage expenses by being disciplined in adding positions. Depending on company performance next year, G&A could be under pressure due to variable compensation expenses. They plan to remain disciplined, investing in strategic priorities that advance the brand, and will provide more guidance on G&A in January. -
Houston Market Entry and Expansion
Q: How is the entrance into Houston progressing, and what are you learning from previous openings?
A: Michael Osanloo expressed that they are thrilled with the performance of their first Houston restaurant in Richmond, which is exceeding expectations. They plan to open two more locations in the next 1.5 months to distribute customer traffic and foster organic growth across the market. They have refined their field marketing tactics, focusing on community engagement. Additionally, they are testing a slightly rationalized menu in Houston to reduce kitchen complexity, and it is performing well so far. -
Impact of Kiosks on Comps
Q: Despite the kiosk rollout, why isn't there significant improvement in fourth quarter comps?
A: Michelle Hook acknowledged that while the kiosks are improving mix, they are still experiencing impacts from macroeconomic factors and discounting on traffic. With uncertainties in November and December, including reliance on catering and comparison to last year's favorable weather and advertising campaign, they are cautious and not expecting significant improvement in Q4 comps, guiding towards negative 1% for the year. -
Loyalty Program Plans
Q: Can you update us on plans for a loyalty program?
A: Michael Osanloo stated that they are making good progress on developing a loyalty program and look forward to making an announcement early next year. They prefer to announce it when it's ready to roll out rather than pre-announcing. -
Stance on Discounting and Value Menus
Q: Do you consider introducing a value menu or price point marketing to appeal to lower-end consumers?
A: Michael Osanloo emphasized that introducing a value menu or engaging in discounting would be contrary to Portillo's brand. They are not reliant on the true value consumer and prefer to focus on offering everyday great value through high-quality food and abundant portions. Their strategy is to maintain brand integrity and avoid short-term tactics that could harm the brand in the long run.