Portillo's Inc. (PTLO) Earnings Call Transcript & Summary

Good morning, everybody. Thank you for joining us. I'm very happy to have with me up here on the dais Mike Osanloo. We just had a conversation about the pronunciation. So I think I overcorrected. And Michelle Hook from Portillo's. And I'm sure many of you know Portillo's, but it's a fast casual restaurant that specializes in Chicago specialties like Chicago-style hot dogs and Italian beef sandwiches but also more traditional limited service menu. So we're going to have a wide-ranging discussion because both Mike and Michelle bring a tremendous amount of history, both obviously Portillo's, but the industry broadly. If you do have questions, please don't hesitate to raise your hand. I think we have a mic or we'll have a mic circulating and happy to have audience participation.

So with that, let me jump in here and let's start talking about the consumer. And in particular, the consumer in the context of your trends. So what we have seen over the past, let's call it, 4 quarters, is that -- it looked to me like there was -- demand was very strong and then maybe you -- we, as an industry, hit a little bit of a softer spot in 2Q of last year. And then you've seen some steady improvement. I know you look at entree counts. I think the cadence sort of follows that for you, but like I said, it seems like a broader audience. I guess to what do you attribute that cadence, if you will, because the macro environment hasn't -- doesn't feel like it's changed that much consumer sentiment. But do you have any thoughts on that and how we should think about consumer demand going forward given all the volatility?

Well, first, thanks for having us here, Sara.

My pleasure. Thank you.

I think the consumer is complicated, right? And I think there's -- when you think about a consumer psyche, it's what's the next shoe to drop? What's the next shock. And I actually think that for a period of time, for the last 3, 4 quarters, it's been relatively -- yes, the macroeconomic environment hasn't dramatically improved, but it hasn't gotten worse. There haven't been some big shocks, and I think consumers are very adaptable. And so I think the consumers said, okay, so now we're used to conflict in Ukraine, higher energy prices, inflation at 7%, 8%. We're used to this now. And so I think that they started reacting to a new normal and the benefit for our industry is that as much as inflation has affected us, it's affected the CPG companies worse. So food, away-from-home has not gone up nearly as much as food at-home and food away-from-home still tends to be something that human beings like to do. You like to go out. You like to go break bread with someone and interact and the quality and the taste of food away-from-home continues to improve. 20 years ago, fast casual didn't exist because the quality just wasn't there. So I think the value propositions, the enthusiasm for going out and I think getting adjusted to a little bit of a new norm has helped our industry maybe more so than others.

That's a good segue to my next question, which is, I think the longer-term algorithm calls for low single-digit same-store sales, the implication, I think, to your point, we're not usually banking on 7% to 8% inflation and price increases. So implicitly, the view, I think, is that transactions will be maybe flattish or slightly positive. How do we get there from here? Is it sort of we've reset now and go from here, what's the sort of transaction driver go forward so that we can have that sort of low single digit?

I'll talk about our company in specific because we're really -- we're kind of 2 companies in 1. So when you think about Portillo's, and we have committed to a low single-digit comp, it's a combination of we have a very strong base in Chicagoland and not lying suburbs, right? We're a mature company there. We've been there for 60 years. And Chicago is not a growing market, population base is not growing. So for -- when we grow comp in Chicago, you're fighting tooth and nail because transactions are actually organically declining. So we think we can be flattish on transactions, which means we're taking share, and we'll get a couple of points of pricing on a regular basis. So the Chicago market and the core Midwest will be positive low single digits. We expect better out of our investments along the Sunbelt, places like Florida, Texas and Arizona, where they will open up at AUVs below what the Chicago market has. But these markets have population growth, transaction growth. And so we think that those will be better comp and will continue to grow and be a really nice story for us. But Chicago is incredibly profitable for us, generates a ton of cash. And we're taking that cash and deploying it to high-growth markets.

Great. And in terms of thinking about that traffic growth because again, this past year, and we'll get to sort of channel shift and all the other dynamics, but the past year, entree count has been sort of flattish, but transaction growth, I think, has been has been modestly negative. So I guess, 2 things. One is, should we be thinking about entree growth and then two, how do we get from negative to flat or to positive. And that's, I guess, the cracks of sort of -- have we reset lower because there have been so many adjustments in related to COVID and now we grow from here.

I think you've caught on to the point. I want to emphasize something about entree growth. I think it's important for companies like us to look at entree growth because channel mix clouds the story, right? I've explained this like when you have somebody who comes -- when you have 2 people, 2 friends that go and dine in at your restaurant, they typically each are ordering for themselves, that counts as 2 checks to people. If the same 2 people went through the drive-thru, it's usually 1 person paying and it's 1 check, 1 bill. And then if they did third-party delivery, come back and send it back to the office, it might be 1 check, but like 5 people. So when you look at transaction count, it's really check count and it can be misleading when channel mixes are shifting so radically and they have been. I think channel mix is starting to stabilize. And so at that point, then I think you just go back transactions traditionally. Now we have had very positive trends on both actually transaction and check sorry, sandwich count and transaction count over the last 6, 9 months. In fact, we announced this at our earnings, we are positive year-to-date on both transactions and on sandwich count. So we think that the consumer, at least with our brand is voting with their feet, and we feel really good about where our value proposition is. And we made -- we got some heat for it. We made very purposeful investments in the consumer in 2022. We did not raise prices as aggressively as almost any of our peers. And so we invested in the consumer. That value proposition is paying back now.

Right, right, in the form of a better transaction growth Right. And I guess maybe just to put a finer point on that, relative to your underlying trends, the strength year-to-date, does it surprise you? Or it sounds like you could view it as a continuation because I think for outside observers, it felt like the step change higher in January, February. But as I think about the underlying volumes, is that maybe less accurate characterization, it's much more consistent with trend?

I think it is a trend. I'm -- I don't know if I'm an old school or an analytic guy, but I pay attention to what I think are the underlying drivers of our business, right? If anybody -- I can look at sales in any given week and say hey, we did great. I look at things that are leading indicators like our OSAT scores, our value perception. I see what guests are telling us. They're telling us, our overall satisfaction scores, our value perception, our speed of service metrics. These are really important in our industry. Those all reached multiyear highs in the third and fourth quarter of '22. I love when I see that because that means I'm going to have a good '23 right? Now if people are saying hey, this is the best -- and by the way, the back half of '22, it wasn't an easy time to please guess, right? The bar is really high. They're very demanding. And so when I see those things, it gives me a lot of confidence looking forward. Conversely, when I don't see those things, I get -- I fret and we deal with them. But I think the leading indicators for our business have been very strong now for the last 6 to 9 months, and we watch them assiduously and we make sure that we're giving guests a great experience. We do the right things, the sales come.

Right. Right. And I think those are the data that as outside observer, we can't always see. But you're tracking the guest intention and the guest perception, which is so critical. I guess one dynamic, and we talked a little bit about this in terms of mix shift that we've seen is that off-premise sales have not -- they've remained higher. They're not at pre-COVID, but they're well above pre-pandemic levels. So I guess, maybe talk a little bit about what -- to what you attribute that? And also, what does that mean in terms of -- as you think about going forward, whether it's your -- whether it's how you build your restaurants or how you staff or whatever kind of changes to the operating model you might need.

Yes, it's -- I confess to be a little confuse. The person ordering through the third-party app off-premise remains stubbornly price inelastic. You can't charge them enough for them to say no more. And I just don't -- I don't get that. Except I see my daughter ordering from like Starbucks, like $20 worth of coffee that costs $10. I'm like, what are you doing?

You would be surprised how many executives I talk to point to their kids. The kids are price insensitive to say the...

I saw that nonsense. I'm like it's 5 blocks away, go walk. So I think that there is a segment of our society that is highly price inelastic and greatly values the somebody bring it to me dynamic. I would have guessed that, that growth in that would have stopped. It has not stopped. It's still a very healthy channel for us. It still grows dramatically and God bless them. So I'm not sure I get it. Whether or not I get it, I think it's important then to think about how do you design and build your restaurants for a stronger off-premise business. And so we have been working on that in multiple ways. I'm going to let Michelle talk about this because she's leading -- we have a project we call a Restaurant of the Future which is what the new Portillo's restaurants are going to look like. It's not going to happen this year, but hopefully, it affects the class of '24 or '25, but I'll let Michelle talk about how we want to be omnichannel, have it all.

Yes. I think when you think about Portillo's, to Michael's point, we are multichannel. So have double drive-thrus in all of our restaurants. And we have the capability for third-party delivery. We do pick up where you can order on our app, pick up in the restaurant. And then we have a robust dine-in business as well. So we're sort of QSR plus. We're fast casual with QSR elements. But the way that we think the restaurant of the future is going where the consumer is going, which is we've seen more off-prem business. Before COVID, we were about 50% dine-in. And right now, we're about 35%, 40%. So it's a dine-in has bounced back, but not the pre-COVID levels, and we don't expect to get back to that. But our restaurants today are about -- we're building about 7,800 square feet today and how do we get that more in line with, again, the off-prem business. I think there's opportunities as we look at that restaurant in the future to shrink the footprint a little bit further, Sara, as we look at, again, more robust off-prem business, but still have experiential nature of a Portillo's and not losing that aspect of it. And then again, providing the way the customer wants to order from us, and we're there to service that business. So -- but think about like restaurants as you have those third-party delivery folks coming into your restaurant, having dedicated doors, right, where they know where they're coming in and they're not going through the restaurant and looking around where do I go, where do I go? So having that dedicated entrance for them, having dedicated space for those pickup shelves for the consumer who wants to order online and come in, making it easier for our team members, right as they're making the food and looking at those efficiencies in the kitchen, I think, are important too because as they're making the food, right, they're going to have to deal with putting it on the shelves, dealing with the drive-thrus, dealing with the consumer inside. We're used to all that today, but how do you design a kitchen as well that is efficient for our team members to work in. I think it's important, too, because when you think about the labor right, and we'll probably get into that, it's not easy to staff restaurants, right? And I think you -- everyone is talking about the labor environment. Portillo's, we're able to staff our restaurants. We've never closed because of staffing. We've never had to shutter channels, et cetera, but it's a challenge. And so how do we think about a restaurant of the future that maybe doesn't wire as much labor because we can get more efficient in how we work in the kitchen.

That's actually -- so yes, you're right. I'm going to grill you on the part of the plan on margins and costs. But I do want to ask about that because one of the things about off-premise is that you lose the gatekeeper in the cashier, right? Like you have infinite basically order points because everybody come, so how do you manage that? Like the burstiness or -- and what are you doing, can you still actually reduce labor if you have -- what strikes me as a much more kind of hard to predict demand flow. So how are you handling that?

Yes, there are opportunities, now Portillo's is right where -- you see our AUVs on here. I think they're on there, are they, Michael? 8.5 million AUVs. Portillo's are busy. We're busy all the time. The demand flow is easy, it's always high. It's always happened and there's always been [indiscernible] restaurants. Of course, you have your peak period lunch and dinner. But for us to understand that demand flow is we do understand it. And we've been operating restaurants, as Michael mentioned, for 60 years. And so how we schedule that labor, how we manage that labor is actually pretty surgical. So we have a robust labor scheduling tool that we utilize where we look at the demand within a specific restaurant, we can schedule our labor by shift, obviously, and by making sure we have coverage during those peak periods. But how do we -- as we're talking about get to a point where we don't need as much labor, right? And I think looking at just efficiencies in the kitchen, the equipment that we're operating with, I think there's some things we can do there that we're looking at in restaurant in the future with a lot of people talk about ordering platforms, too. I don't believe in putting kiosks in restaurants. I think the smartphone is a kiosk. So how do we use that to do maybe some QR codes at the table where people can order and I think those type of channels will help with the labor as we move into, again, that restaurant of the future. So I think there's a number of things that we can do.

One simple thing, last year, we went from very distinct POS, using it on the outside versus the inside. So we have inside order takers, and we're not like -- our drive-thrus are not like what you might think of in typical QSR. You drive up, you squawk into a box, go to a window pay, go to another window, collect your food. That's not how ours work. You have menu boards, 2 people come out and the person takes your order, collects payment right there. And then as you move forward in line, a runner comes out, runs your food to you, and then you can pop out a line when you get your food. So it's a very different model than typical QSR. We used to have 2 different POS systems, for outside and inside. Both those POS systems, they're antiquated, just is the only way to describe it. They're antiquated. If you wanted an [ Everdog ], which is a hot dog with everything on it, you had 2 dog, add, add, which is insane because it's a popular. So we refresh the POS systems inside and outside. We align them around common language. So [ Everdog ], there's literally a picture of a hotdog with an E. Eat that up? You're good. You want to take something away? Then take stuff away, easier. It dramatically reduces the amount of time that we need to train people at fund cash and outside. The other nice thing that it did is if your super busy outside, you can move a cashier outside. They're already trained on how to do it. If you're slow outside, the weather is bad, but you bump in inside, you move a person inside. It's save time, save training, better accuracy and it created labor flexibility. There's still a [ raf ] of opportunities like that for us because on one hand, we're a 60-year-old brand but we've been run professionally for like 3, 4 years.

Right. So which is a nice place to be in the sense of all of the brand equity and all of the familiarity, the 60 years brings a lot of opportunity.

All the opportunity, that 60 years of entrepreneurial that brings you.

I call that a sweet spot, if you will. So I do want to just quickly talk about in this context, you talked about drive-thru. You've opened -- I know you have a drive-thru only location in Juliet. I think this format is more about infill markets and capturing that as opposed to new markets. But maybe you can talk about sort of the balance of nontraditional versus traditional, I think, definitely leading towards the latter, give us a sense of kind of what the footprint looks like.

I hesitate to say this because there's restaurant companies that say, well, we're a technology company that makes me chuckle. We are an experiential restaurant company. I want people to experience Portillo's. Dick Portillo, when I first like came on board, I was visiting restaurants with him. He has a genius to the way he thought about Portillo's. And one of the things that he said to me really stuck with me is when you come into a Portillo's, it appeals to all of your senses. There's something to that. When you come into our restaurant, there's a ton of stuff going on visually. Like it's silly, but we have these LED stars in the ceiling that twinkle, it catches your eye. It's a beautiful restaurant. It's tricked out with all kinds of stuff. There are sounds. It's a loud restaurant, but that creates a sense of energy. You can smell a lot of stuff cooking. And I love the smell when you go -- my mouth -- it's a Pavlovian response. I start salivating. So all those things are really, really important. I want people to establish their love affair with Portillo's by going into the restaurant and eating at the restaurant. There is no -- our fries are the best fries in the world. But even the best fries in the world, they spend 20 minutes commuting, die. And so I want them to eat the food in the restaurant. So we want beautiful restaurants. We want to engage people. We want you to bring your kids in so that your kids can go, wow, look at this, then there's a Toyota truck hanging from the ceiling. What you've got established relationship with our brand, then we want to make the brand pervasive and easy to access. And then that's when it makes sense to have fill-ins. So fill in, the drive-through only makes a ton of sense in Chicago. Ton of sense in Chicago. So don't be surprised if we build more drive-thru-only model in Chicago. People know us. They know how to use us. And so that works. And then I think you think about where will you saturate next and where does it make sense? And honestly, I think Arizona would be the next market for us. We've been in the valley now for a decade. We're building restaurants. 6 right now, we'll have 7 and 8 next year. And then I think you can start thinking about some infills in Arizona because those people also know our brand.

Right. I'm going to come back to that sort of how you know where your -- the demand is and your shift -- before I do, I do want -- I promised you were talking to you about margins, so I'm going to do that. One of the things that sort of as I was thinking about this drive-thru model, it's actually not more labor intensive. There are more people involved than historically was the case, right? So it used to be exactly what you said. You're talking to a speaker box and maybe you do payment, same person might give you the food or somebody else. Where now, you're actually ordering with somebody and they're running the food to you. And so in some sense, it's almost surprising how many -- how much more interaction you have than a traditional. So I guess, there are 2 things I'm getting at. One is, to what extent is there sort of interactive component of that, that is important because you talked about the Portillo's experience and two, getting back to this sort of question, if -- how should we think about the balance between technology and labor? Because as you said, it's been a really hard market to hire.

Yes. I'll start and then let Michelle build. Here's the thing. There's a lot of companies that are moving more towards technological solutions, kiosks, and fun order, things like that. That's awesome. I love competing against them. You can become a glorified food kiosk and will still be a restaurant because human beings still want to interact with most to -- you definitely find people who don't want to interact, but most do. I love when you order at front cash with a Portillo's person because they're with -- he'll say, if you order a beef sandwich, they're going to say, would you like sweet or hot peppers on that? They help you curate the meal. If you don't order it, they'll say, by the way, have you ever tried our chocolate cake? We make homemade chocolate -- literally homemade Chocolate Cake every day in-house. It's insanely good, right? That is a curated dining experience. That still matters. And so I think that having human beings who are doing things like that, who are helping you is awesome. Our drive-thrus are ridiculously fast. I mean keep in mind, our drive -- we're doing $4 million just on the drive-thru side of our business, okay? That's people flying through there. And the reason you can do that is because you have human beings, steering traffic, you get your food, you just pop out right over there so get out of the lane. And so it's a win for consumers. It's a win for our team members, there's people who enjoy being outgoing and engaging. And so I think we have a model that works really, really well and it's a little bit unique, and I'm okay with that.

Right. Right. And to your point, unique could be good. It's a differentiator. And you think having somebody front cash or whomever, say, would you like to try our chocolate cake versus a machine that's going to try to upsell, you think there's a qualitative difference between hearing it from a person.

And what is a consultative sale because it's somebody who's helping you solve a problem. Anybody who's been a consultant, you got to find a problem before you can sell something. The other one is just a machine redirecting you to some algorithm on how other people order.

I see.

And I think we can do both those there, right? Because as Michael mentioned, people do like to interact with other people, but those that don't, I think the opportunity is there to do that upselling in other formats. One of the things we invested in, in '22 was installing digital menu boards in all of our restaurants, both in the drive-thru and in the dine-in experience. So we can upsell on that. We can feature our -- we do some [indiscernible] shakes and desserts. We can do that. If we want to upsell a certain product, we can do that. So we do have a format to do that in talking about technology and how we weave that in. That is another method we can do that if you so choose to not interact with the human being. But I think having that option is what makes the Portillo's experience different and unique and why people do want to come and dine in our restaurants. And we've seen, as I mentioned, dine-in bounced back, not quite to 50%, but it's bounced back. And I think it can go a little bit further and Michael, and I believe that can be largely incremental to the brand as people continue to want to come into restaurants.

Right. Okay. That makes sense. And sitting here as a New Yorker, I'm one of those people who want to talk to anybody. All right. So on the margin piece, I wanted to sort of talk about this kind of the economic model. And I think new units have come in at higher volumes and the Sunbelt in particular, has been very attractive. Can we talk about kind of how to think about margins because last year it was sort of, I would say, an investment year in terms of people. Going forward, you've been a price laggard, how do we think about the sort of traffic versus incremental price as a way to sort of get the margins maybe back to a more normal.

Yes. I mean, Michael and I are both committed to growing margins 2023 versus '22. We purposefully made investments in '22 because we didn't want to do long-term damage to this brand, and we wanted to make sure we balance price taking with -- not at the expense of significantly reducing our traffic. And so as we move into '23, absolutely, even though we have 13 new restaurants coming online for as part of the class of '22 and then 9 as part of the class of '23 into our portfolio. So despite that, we still believe we can grow margins, and we're going to continue to use the pricing lever. And we've already announced, we've taken 2% more pricing in mid-January. And as we look into the future, Michael and I will continue to look at the landscape and pull the pricing lever as necessary as we have to continue to offset inflationary costs in the business with both food and labor, I think those will be mid-single digits this year on those 2 high input costs for us. And so we need to offset that. But I think catch up a little bit on some of the pricing that allows us to grow the margins, and that's what we're committed to this year.

Laggard, I want to clarify something. Laggard doesn't mean we won't take pricing. Laggard just means real -- I believe that the cross elasticity effect of pricing is typically worse than the direct elasticity effect. So like after everybody else has taken their pricing and shock the system, then it's time to take pricing.

And actually, it's a good question about -- it's a good point about cross elasticity. But I guess in that context, how are you thinking about relative value, right? So everybody -- if everybody took -- and this is obviously a stylized view, but 10 points of price last year and you took less or they took, in some cases, mid-teens and you took less. And now your gap narrows a little bit. You're not worried about that. We'll see. And we'll see whether others actually hold the line on price. But if that were the case, you'd still be a value, but perhaps slightly less so. So the gap would be slightly narrow. So when you're thinking about value, are you looking at increases year-over-year? Or are you like actually measuring what can I get for my money, and I'm looking at a broad kind of group of whether it's food at home or other fast casual fast food. Maybe how is your sort of approach to relative value, maybe.

Yes, right. So it's honestly pretty -- I want to say, complicated. I'll say thorough. It's thorough. So we absolutely track pricing year-over-year, us versus them. We track the most popular bundle that we sell versus their most popular bundle for a series of different restaurant companies. And so we know that right now, our most popular bundle beef sandwich, french fries and a drink is anywhere from $1 to $7 or $8 cheaper than the people we typically compete with. And so we say just on prices, what you get for the money, we're in a really good spot. I think when you have -- you're making these decisions, you also need to look at what are your guests telling you about your value proposition, about your -- how satisfied are they with you and your speed of service. Because those are all parts of the value that you provide them. All 3 of those metrics, value proposition, speed of service, overall satisfaction are at multiyear highs for us. So that what the guest is getting from us at that price point is about as good as it's ever been, which tells us that we have we have room to price. If they're telling you, you might be below everybody else on pricing, but if your guest satisfaction scores are good, if they tell your value scores are good, you actually don't have any power to price.

Right. Right. The -- to your point, the guest will determine the value. That makes sense. Secondly, on margins, you talked about mid-single digit, which would be still up, but much less, just some nice disinflation. It seemed to me last year that labor was -- predictable is probably the wrong word, but we kind of saw a trend with labor, whereas the commodities just -- there was a tremendous amount of volatility. So how are you thinking about this year, mid-single digits is your best estimate but as you look at the commodities market, are you seeing anything that surprised you? Or are you still -- are you still anticipating volatility? Maybe talk about also where you're locked and how much visibility you have?

Yes. I mean look, we don't know what's going to happen, but as we sit here today, we think that some things have started to stabilize. For us, beef is about 35% of our total basket. And then when you add in chicken and pork, those proteins make up about 50%, all 3 of those in totality. So as those move, that's going to have an out-weighted impact on our basket. I think we all know what happened in beef last year. We saw some highs that started to come down in the back half of the year. It remains okay right now, but I think that could be pressured in the back half of the year. I think chicken and pork have largely come down from highs of last year. So that's been a good sign for us. And so that's balancing some of the increases on beef, I think we'll see this year. And then franchise for us, which is about 7%, 8% of our basket, we're seeing pretty significant increases on that this year. And so when you blend those together, Sara, I think we'll see some deflation, I believe, on chicken and pork but offset by fries and the beef cost is how we get to mid-single digits. But again, last year, I didn't think when the year started, we'd be at 15% commodity inflation. So the world just kind of fell apart. But I don't see that happening this year. I think it's stabilized a bit. And on the labor front, we were up about 11% on hourly rates last year. And so I think it's a reasonable mid-single digits is sure knowing that we still have investments that we want to make in our team members. But we've, over the course of the last 2 years, made significant investments in our team members and in labor. So I think that will largely stabilize as well this year, but still be up.

And Michael, you mentioned sort of a surgical approach. When I think about pricing, presumably, it's not you take the same price increase across all menu items. You're sort of -- yes, so how does that look? Are there certain SKUs you want to protect. You talked about the bundle? I guess, how -- maybe talk about your approach to pricing?

It is -- look, we try to be very thoughtful. We have some very popular baskets. You're not pricing everything in the basket ever. So beef sandwich, fries and a soft drink, you're not pricing sandwiches, fries, drinks. You might price sandwiches, you might price sides, you might price drinks. You might say I'm just pricing off-premise channel, I might just price catering, but we take a very surgical look to the pricing. And we do -- when we price, we compare it. What do our fries costs versus everybody else's fries, how good of a deals are for is, how good is our portion versus theirs? How about our sandwiches, where do we stack up. And so when we price, we also -- Michelle and I have said this, that we like to price in small chunks. We don't take big chunks of pricing. I'd rather take multiple small bites of pricing than a couple of big bites.

There's, I guess, less sticker shock to the customer. Yes, that makes sense. I wanted -- you thought you'd mentioned like how much food you get versus went to Portillo's that was what was pricing -- just the sheer volume -- I was just -- I remember I think you go, surely, this is going to cost me like my whole per diem that big Americas -- it was like $25 a -- crazy. So your part about Midwestern, we do use that as a service stepping you -- the question always comes up about portability of the Brand. I think it's -- at this point, your volumes in new markets are very high. But how do you think about the sort 600 plus target in the context of there are only so many Chicago ex-Patriots I guess and so we know that some of your biggest markets, I think Arizona, you mentioned, there's some of that culture that gets carried with you. So how do we think about the portability of the brand and in the existing markets where you are very successful, is that enough of a market TAM for the total count that you're thinking about?

I got to tell you, I think it's the most exciting element of the Portillo's story, right? So like I kind of feel like I bet my career on the portability of Portillo's. Like there's a lot of places I could have gone to, but I'm here because I think that I get -- I'm privileged to lead a sleeping giant. And I think Portillo's is going to be portable. I've recruited a team that's like-minded in that sense. We -- I get this question all the time. And I think underlying that question is, hey, your food is kind of different, right? It's not very typical. So in Italian beef sandwich, it's not Italian, it's Italian beef sandwich or a hotdog. What's so different about your food and will people eat it? I'll say my favorite proof point is our average restaurants in Midwest and Chicagoland does $10 million. We now have $9 million, $10 million restaurants in Arizona and Florida. We opened at the Colony in Texas, which is just past Frisco north side of DFW. Since it opened, it's been -- and it opened in early January. It's been the #1 restaurant in our system. It's averaging $48,000 a day which is -- which would trend it to be a $17-plus million restaurant, don't -- we don't model that number, don't bank on that. But you know what it is going to do, it's going to smoke our underwriting expectations. And people say, why do you think the company is doing so well? Like because people like beef and bread in Texas. It's not that complicated. It's a really good sandwich. And it's selling a ton of Italian beef, and we're getting phenomenal feedback. And it's been a home run of an opening. We're going to open a boatload of restaurants in Texas, in Florida, in Arizona, we'll go to Georgia, we'll go to these other states. I think that -- I think it's a very conservative 600 restaurants as our TAM. I think that I'm very comfortable that our food is enjoyed, loved and eaten. You don't do -- the volumes we're doing at the Colony, it's not ex Chicago ins who have found their way there. It's locals, right? You can't sustain that kind of a bid you certainly get a lot of ex Chicago ins the first couple of days are excited. It's a histologic thing. It's a taste of home. They're not driving $17 million trend. So I think it's -- and then I challenge people like, it's a fair question. Can you guys truly be a nationwide restaurant chain? Very fair question. Because we're iconic, we're unique, no one does what we do. The logical corollary to that is, if I can prove to you that we're going to be nationwide, we should get the fattest multiple in the restaurant industry because we're iconic, we're unique and no one does what we do.

Right. That I think maybe you mentioned people and judgments like beef and bread, people everywhere like to eat beef and bread.

Yes. It's going to work everywhere.

Yes. That's right. I'm just going to see if there are any questions from [indiscernible] from the audience. So in our last, I guess, 24 seconds maybe I'll ask Michelle as we think about to Mike's point about flowing through underwriting expectations. Sort of how should we think about going forward, sort of what the hurdle is and to the extent that there's probably upside, where is it going to come from?

Yes. I think we continue to think about our targets as a class of restaurants, Sara. And so when we talk about classes we are going to have restaurants that are going to be home runs in the class like the county. We're going to have restaurants that are going to be at the rates we thought they were going to be at. And so our targets still remain that by year 3, we want the class of restaurants to do $6 million and 22% margins. And that will deliver a 25% cash-on-cash return and that remains our target. Now Mike and I want to build as many home run restaurants as we can. And him and I are very competitive people. And so we are not happy with those numbers that I stated to you. So our goal is to continue to outperform those numbers and continue to build restaurants that are going to perform above our underwriting expectations.

I think investors would be happy to hear that. Well, thank you so much for joining. Thanks again.