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

I'm Brian Mullan, restaurant and food distribution analyst at Piper Sandler. Very happy to have the team from Portillo's. We have Mike Miles, who is the Interim CEO. Company is also undergoing a search for a full-time CEO. And we have Michelle Hook, CFO. Portillo's is a small but growing rapidly restaurant brand with 102 restaurants across 11 different states.

Thank you, Brian. Good morning, everybody, and thank you for your interest in Portillo's. As Brian said, I'm going on now 4 months as Interim CEO of Portillo's, but I've been part of the brand as Chairman of the Board going back to 2014 when our founder, Dick Portillo, retired. Here's our legal stuff, and here's what we'd like to talk to you about today. First, to give you a little bit of a feel for what is special about Portillo's as a restaurant and as a business. Talk a little bit about the lessons that we've learned in 50 years of growing the company and how we're going to take it forward in the years ahead. And then Michelle will add it all up and share how 2025 ended up, and what our outlook is for 2026. How many of you all by show of hands have been to Portillo's? That's why you're here this morning. To know Portillo's really is to love it. And it's hard to capture in a PowerPoint presentation, the menu, the Italian beef sandwiches, the service, the decor, the energy, the atmosphere, really the entire experience. It's also hard to capture in words how much passion there is for Portillo's among the people who do know us. But for those of you who didn't raise your hand, we have a short video that gives you at least a little bit of a taste for what makes Portillo's as special as it is. [Presentation]

So J.J. Watt, Candace Parker, Mindy Kaling, the Pope, all among Portillo's promoters, but we have millions of promoters. And that's the reason that we consistently rank at or near the top of the industry in Net Promoter Score, favorite restaurant, customer satisfaction. To know Portillo's, as I said, is to love it. And our raving fans access us through all of our different channels. And we do volumes in each of those channels that rival the total restaurant sales for some competitors in the industry. Better than $3.7 million inside, $3.4 million through our drive-thru, and $1.5 million in our -- from our delivery business and with our catering business. When you put all that together under one roof, you get exciting industry-leading volumes, $8.6 million in 2025. That passion for Portillo's also shows up in the way our customers engage with our new Perks loyalty program, which is now over 2 million participants only less than a year after it's been launched. The number of people in the program is exciting. What's really exciting is the way that our customers engage with that when we do something like free rings for Taylor Swift's engagement or free cheese sauce on cheese sauce Fridays. This gives us a clear channel to communicate with our customers in a space where some of our competitors have 9-figure advertising budgets and a way for us to suggest new menu items that they haven't tried, get them to bring a friend or for people who just signed up in a new market to really encourage that second or third visit. But there's nowhere that the passion that people have for Portillo's shows up more than when we enter a new market. Last November, we opened our first store in Atlanta, Georgia, actually in a suburb called Kennesaw, which is about 30 minutes northwest of the city. What you're looking at is a map of Atlanta. Atlanta, you can't really see the city there. It's there in the A and the center is where the center of city of Atlanta is. And this is Placer.ai data that shows the origin of each of the customers that have come to visit based on where their cell phone spends the night. You can see that there's a tight cluster of folks who came from a 10-mile radius around the restaurant. But really, people drove from all over Atlanta over an hour in many cases to go get their first fix of Portillo's in years. I talked to many of them in the drive-through that morning, in the restaurant, and folks who have driven over an hour. And in one case, a table of customers who were back for their fourth visit, and we've only been open 6 days, and they drove an hour each way to get there. And in fact, it's not just from all over the Atlanta area, but from all over the Southeast United States from most of Georgia, all of like states of Alabama, Tennessee and the Carolinas. There's a huge amount of passion for Portillo's and pent-up demand for it in every market that we visit -- that we come to. The results at Kennesaw were pretty strong, $2.2 million of sales in the first 7 weeks open in spite of the fact that we were closed for Thanksgiving and Christmas in that period of time, and we haven't turned on the delivery business there yet. And the store did $300,000 the first week of 2026. As good as those results are, though, they are very consistent with what Portillo's sees whenever we come to a new market. These are the 8 states that we've brought new restaurants to in the last decade. And you can see that with the exception of Michigan, where we opened in COVID with our dining room closed, we averaged $2 million in the 7 weeks -- first 7 weeks that we're open. Portillo's has got an installed base of really strong fans in every single market in the country that we've been to. And based on the fact that whenever we announce a new restaurant opening, we get tweets and e-mails and text back begging us to come to someone else's home market. We think we've got that in the rest of the country as well. So let's talk about how we're going to go to the rest of the country and based on the -- what we've learned over the last few years. Portillo's is a long growth story. We've been growing for longer than many of the folks in this room have been alive since Dick opened his second restaurant in 1969. And over the years, have gradually added new restaurants, never closing one and finished 2025 with 102 restaurants. Dick built the first 30 restaurants in the Chicago area. And then in 2005, got excited to go to California and opened the restaurant there in Buena Park. Followed that in 2006 in Merrillville, Indiana, the first 2 states and then on to Arizona in 2013. In 2016, we went to Florida and Wisconsin and gradually expanded across the adjacent states in the Midwest before we went to Texas in 2023. And then, as I said, to Atlanta and the Georgia market in 2025. Those first 4 stores that have been opened for more than a decade have matured into strong performers, averaging $9.1 million sales that would look normal in the suburbs of Chicago. Buena Park does over $10 million now. Merrillville, Indiana, $11 million, and the 2 stores in Arizona -- first 2 stores we opened in Arizona, $7 million and $8 million, respectively. Admittedly, we don't have any markets outside Chicago that yet perform like our home base. But the Phoenix market gives you some sense for how Portillo's matures as we get beyond that first pent-up demand of Portillo's maniacs and begin to expand to the broader market. We've now got 8 restaurants in Phoenix after over 12 years in the market. And you can see at the bottom of the slide how we're beginning to build the awareness that we need and have pretty good trial and even better repeat and adoption among customers who've gotten to know us. The numbers compare decently with some of our better-known competitors. And we now average 5.8 million AUVs in Phoenix. It's still something that we've got a long way to build on. You can see we've only got 49% awareness, but it gives you a sense for how Portillo's can expand beyond that initial installed base, as I call it, of pent-up demand. But this is a story that was over a decade in the making, as you can see. And over the last several years, we tried to go into new markets and rapidly penetrate them, which led us, frankly, to open too many restaurants too quickly and too close together in Texas. Houston is probably the best or worst example of this. If you look at the map on the left, you can see that we opened 5 restaurants in the space of a year within a circle with a radius of 20 miles. If you remember the -- what I showed you from Kennesaw, you know that people drive a lot further than that to come to Portillo's. And what you -- what we had as a result is the picture you see on the right where each successive restaurant just divided up the demand that we had amongst more and more, each one cannibalizing the last -- until we had 5 restaurants that did about the volume that we would have expected had we only opened 2. We had a bit of the same situation in Dallas. Our geographical dispersion is better, but they're still open -- we opened more restaurants more quickly than I think we would have liked. We don't need to do this because there's so much white space for Portillo's in the country, and we've got that fan base everywhere we go. So going forward, we will focus on new markets, first restaurant in, give that time to breathe and allow the demand and the awareness to build before opening the second, third and fourth restaurants as we go. The other thing that we've learned over the years is that we don't need to build restaurants in new markets at the same size that we have in Chicago. Dick Portillo started out in 1967 with a 4,000 square foot restaurant. That one still does very nicely at $4,000 -- excuse me, $4 million volumes. But over time, as Portillo's grew in popularity in Chicago, the restaurants got bigger and bigger, and we opened the Canal & Taylor restaurant in 2016 at 9,000 square feet. It does $20 million now. But we've taken that -- we took that same approach to new markets, both based on the success we were seeing in Chicago and also those early volumes that I showed you in those other markets and got ourselves too big outside Chicago. We've been working that problem now for several years. And the Kennesaw location that you had, you saw is 6,200 square feet and closer in size to the Villa Park restaurants. Going forward, we will be in boxes like Kennesaw or other new prototypes that include even smaller versions of Portillo's. So let's show how that all is going to work out going forward for us. We announced a reset of our growth strategy in the fourth quarter, and this is really what it means. We're going to leverage that base of super fans that we talked about in every new market that we get to, but recognize that it's going to take time beyond that first group to build awareness and demand, and then we're going to let the new development follow that demand. We've got an improved real estate process now. We've been using a real estate model that was over reliant on Chicago observations and was delivering too many false positive reads and causing us to overestimate what the restaurants would do. We now have a real estate model that is just based on stores outside Chicago and does a much better job explaining the variability between $3 million and $10 million of those restaurants. We'll open fewer restaurants in these new markets. And no, I don't -- I'm not promising you all in Louisville, Columbus, Charlotte and Nashville that we'll be there immediately, but that should give you a sense for what we're thinking about and the pace at which we'll develop those markets. And we'll use the smaller format that we talked about. Importantly, we'll be focused on good shareholder returns with our new real estate development, focused on unit economics and also getting our cost structure in line with the size of the company that we are today and with the growth rate that we're talking about. Here's why that's going to look over the next couple of years. As all of you know, it takes a while to turn the ship of real estate development. So there are some legacy decisions in this -- in the next couple of years that if we can wave a magic wand, we probably would have postponed for a year or 2. But you'll see us open 8 restaurants in 2026, including in the DFW Airport and an in-line restaurant on North Michigan Avenue in Chicago, and 8 restaurants again in 2027, including our new prototype restaurant of the Future 2.0. Before I turn it over to Michelle, I do want to say that none of this would be possible without the 8,000 people we've got at Portillo's, great associates who make the food and serve the customers. We've worked hard to make it a Great Place to Work, and we're proud to be recognized again last year as one of the Best Places to Work in the restaurant industry. Our associates have rewarded us with great low turnover and with great service to the customers. We've changed a few things over the last few months at Portillo's, but one thing will not be changing. People are at the heart of Portillo's. With that, let me turn it over to Michelle to talk through the numbers.

Great. Thanks, Mike. And so what we wanted to do today is provide you with some insights into how 2025 ended and then we'll talk a little bit about '26. So if we look here how we ended the quarter, and we had guided to numbers that were a little bit -- these are better than the numbers that we had guided to. But when you look at how the year progressed, we had a challenging year. That's no different than others within the restaurant industry. When you look at how we started out the year, the first 2 quarters of 2025, we did have a positive comp. We saw that start to degrade coming into Q3, and we knew that Q4 was going to be a challenging quarter as well. And so that's where you see we came in Q4 with a negative 3.3% comp, and you see the composition of the comp. And so we saw the challenges with negative traffic or transactions within our business all throughout 2025 and frankly, 2024 as well. So we know that as we go into 2026, the things that we're going to focus on are driving traffic or transactions within our business. And Mike talked about our Portillo's Perks program, our loyalty program that we launched in March of 2025. That's one lever that we have to continue to drive that traffic growth within our restaurants because we know it works. When we've had offers on that platform, we've seen the results of that. So the point being is we still have work to do, obviously, to continue to drive the comp in the right direction, driven by traffic growth. When you look at our total revenue growth at the $732 million for the year, that's about a 3% growth rate year-over-year. Again, with the negative -- slightly negative comp for the year coming into play, we did get a lift from the 8 restaurants that we opened in 2025. When you look at our restaurant level margins, you can see how we closed out the year. When you look at it as a percent, so in Q4, 21.8% restaurant level margins and for the full year, 21.6% restaurant level -- 21.6% restaurant level margins for the full year. So we still have healthy margins, but we got to continue to focus on, as Mike mentioned, the new restaurants that we're opening, continue to drive the returns on those restaurants and the unit economics of those restaurants that we're opening. When you look at the adjusted EBITDA, you can see we ended the year just over $97 million in adjusted EBITDA growth. To put that into perspective, we have 102 restaurants that drive $97 million in adjusted EBITDA growth. So we have a very healthy business here at Portillo's that generates a lot of cash flow that we'll talk about on the next slide, we're going to use to continue to invest back in our business. So when we look at where do we think '26 is going. So typically or historically, we've given some top line guides. We don't plan to do that this year. I think there is a lot of fluidity going on when you look at the top line, specifically for us as we look at some of the new restaurants that we're opening, and there's just a lot of unknowns. However, we do feel we have better visibility on the middle of the P&L and the new restaurants that we're opening next year, which is why we feel more comfortable as we look at the guides that we have. So we plan to open, as Mike mentioned, 8 restaurants in 2026. The timing, we see 6 of those coming in the first half of the year. We knew that this class was going to be front-loaded. That's the way we like that. Generally, we don't want to open restaurants later in the year in the November, December time frame. And then we'll have 2 coming in the second half of the year. One of those 2 being the in-line on North Michigan Avenue in Chicago will be coming in the second half of the year. We are excited for our first airport location to open in the Dallas-Fort Worth Airport. I think that will continue to help build the brand and build the awareness in the Dallas market as an addition there. We think commodities are still going to be a headwind for us next year. So when we look at where we're at today, we're projecting mid-single digits. Beef is going to continue to be a headwind for us. That's about 30% of our market basket is beef. We think we're still going to see some pressures on pork. That's about 5% of our basket as well. And look, we'll get a little bit of easing on other parts of the commodity basket. But when you add all that up, we're projecting mid-single-digit inflation. Labor, we still see that continuing to be an investment that Portillo's is going to make in labor. So we're projecting 3% to 5% there. Then when you get into the profitability metrics, you can see what we're projecting our restaurant level margins. Yes, we're projecting margin degradation because we ended '25 at 21.6%. Having said that, though, I wanted to call out that we do have a known headwind. We're coming into the year assuming a full bonus payment for our restaurants as well as our support center. And so there, I wanted to call out for you the headwinds that we expect to see there within all these numbers. G&A, we're being very disciplined. And so we know we have the $4.5 million headwind in G&A. And you can see we're being very disciplined on guiding to the $80 million to $82 million as we continue to, I think, run appropriately and efficient business within our G&A and support functions. Within G&A, we do have a portion of our advertising expense. And so within that G&A guide is additional investments that we plan to make in advertising this year as well. So we feel really good about that, that we're investing in the areas of the business that we need to, to continue to grow and build this brand. When we look at the CapEx, you'll see the guide there at $55 million to $60 million. I've broken down for you where we expect that to be, which is primarily building new restaurants, not just with the Class of '26, the 8, but also we're going to go under construction with the 8 restaurants in the Class of '27 with a portion of those. So there'll be some capital investment for that class this year as well. We got to have some R&M CapEx as well as some investments and some other initiatives on the technology side there. So when you roll all that up, we expect that our adjusted EBITDA will be flat year-over-year, so around that $97 million that you saw on the prior slide. And the point being that we do plan to be positive free cash flow this year. So we feel very good about that. We're in a very healthy cash position here. We plan to continue to generate a good amount of cash and invest that back in the business. So with that, I will end with -- it looks like most of you, with raising your hand, have visited our restaurant. We have a restaurant 10 minutes away from here on Palm Parkway. I encourage you all to visit. And as an incentive, we have Sarah, Denise and Beck, I believe they have Portillo's hats, handing out free sandwich cards for everyone as an incentive to come visit us. So please enjoy that, and thank you for your time today.