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

Operator: Our next question comes from the line of Brian Harbour with Morgan Stanley. Please proceed with your question.

Brian Harbour: Good morning, guys. Michelle, kind of change in margin we saw in the first quarter, is that something you’d expect to be similar as we move through — I know we’re lapping the extra week in the fourth quarter, but is that something you’d kind of expect to be similar or any sort of like lumpiness from a margin perspective we should think about?

Michelle Hook: There’s nothing, I’d call out specifically, Brian. I think, yes, as I’ve called out before, as we continue along 2024 with the restaurants, as we’ve been talking about that are not in the comp base that naturally have lower margin profiles than your other restaurants. Through that alone, you should see natural margin degradation. But in terms of, as we go quarter-to-quarter and as we compare, I think that, I wouldn’t expect anything, any specific quarter to be impacted more than another. The only thing I’d call out is, Q2 we do expect a little bit more pressure on the commodity side, but not beyond the mid-single-digits that we’ve mentioned. Outside of that though, you might get some lumpiness just based on those input costs that come in each quarter, but nothing significant that I would call out. We still feel confident that for the full-year we’re going to be in that 23% to 24% range.

Brian Harbour: Okay. And then G&A, I assume still on track, but maybe you expect more of the year-over-year increase in the third quarter. Is that fair?

Michelle Hook: Correct, because we are going to start to do some advertising again in Chicagoland in that third quarter and that will pressure G&A specifically in that quarter as we spend those dollars on that advertising. But still expect as we sit here today to be in that range of $85 million to $87 million for the year.

Operator: Our next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.

Andy Barish: Good morning, guys. Just a clarification on the Famous 5s. I think last quarter you talked about some Portillo’s pairings that you were looking at value test. Is that basically the same thing? Or am I remembering something different there?

Michelle Hook: You’re remembering correctly. We ended the last year using, having Portillo’s pairings on our outside menu boards and inside the restaurant. We were trying to highlight, specifically for guests, great duos that got you under close to $10. Good news, bad news. The good news is that, it had an effect on how guests ordered. The bad news is it brought down mix and the number of items they ordered. We think that, we’re better off with the Portillo’s Famous 5, highlighting our absolute best dishes, which we think work really well, is accretive to the guests and also hopefully picks us up a little bit better mix.

Andy Barish: Got you. Those are value, but a little bit higher than that $10 price point maybe?

Michelle Hook: Yes. They typically have a beverage with them where the pairings did not.

Andy Barish: Yes. Perfect. Thanks. Where are you thus far this year? I think there were going to be another 20 or so, kitchen 23 remodels in the Chicagoland area. Have those begun in earnest or is it a different time of year that you plan to roll those out?

Michelle Hook: Yes, Andy. We had done 17 of the retrofits last year and we have 23 on tap for this year. I’d say, it’s gotten started. It’s underway. The vast majority of those will come in the back half of the year. So, they haven’t rolled out fully yet. Most of those a lot of those will be in our outer markets as well as some in our core. But most of those will come in the back half.

Andy Barish: Got it. Let me — I just wanted to level set, I think just kind of adding everything up, this year’s EBITDA growth is going to probably be a little bit below the long-term algo. Maybe thinking of it in a way like, yes, it’s a tough consumer environment, but what would have to go right to kind of get to the low teens I guess especially with the 53-week lap?

Michelle Hook: I think we got to continue to push top line growth, Andy. I think when you look obviously as you know the flow through on the incremental revenue is going to be very powerful on that bottom-line. I think outside of that, continuing to look for efficiencies within our kitchens. We continue to do that. That’s just something that’s in our DNA in general. The retrofits in the back half of the year, as I mentioned do provide some form of labor benefit, but then as we continue to look for that. I think as Michael mentioned throughput through the drive-thru continues to be a focus that we believe has the ability to drive that top-line growth, to drive that transaction growth. As we continue, as I mentioned to drive that top line, we believe that, that could provide incremental benefit.

But that to me would be what would have to happen. As you know we’re a growth organization, we don’t believe that we’re going to cut our way to greatness. We’re going to continue to invest in the business. We’re going to continue to make good decisions to drive this business forward. But those are some of the things that I would call out.

Michael Osanloo: I just I don’t know if you’re getting at G&A. I mean, like, obviously, G&A is — you got to Michelle and I have committed to generating G&A leverage, right? We have goals in mind, but we absolutely need to be leveraging G&A. I think we’re trying to be smart in how we spend. We’re spending in things that are revenue driving and transaction driving activities. That’s an area that we need to be continue to be focused on. But Michelle is right. The marginal contribution from revenue growth is so attractive to us. That extra guest that we can get through the drive-thru or through dine-in is so attractive for our investors that, that’s really the best way for us to expand our margins.

Operator: Our next question comes from the line of Brian Mullan with Piper Sandler. Please proceed with your question.

Brian Mullan: Thank you. Just a follow-up on some of the drive-thru commentary. I don’t want to belabor this, but just trying to understand. Do you think the drive-thru speed of service today is slower than at other times in Portillo’s long history? You are able to see that in your data and you kind of know there’s a high watermark that you’re running below? Or conversely, is this just not about being slower than before, it’s you just believe there’s opportunities to get better? Just clarification on that.

Michael Osanloo: It’s factually slower. It’s when I look back to 2019, it’s slower. It’s undeniably slower than we were in 2019. That’s what gives us goals in mind. That’s what gives us confidence that we can get our swagger back a little bit and make sure that our drive-thrus are moving as quickly as we would like them to.

Brian Mullan: Okay. Understood. And then just want to ask about the catering business. You highlighted that last call as an area of opportunity, particularly outside of Chicagoland, maybe something you were going to invest resources behind. Just where are you with that now? What’s the plan for this year? How do you envision that starting to build over time?

Michael Osanloo: Yes. We have a catering team now that’s fully deployed doing both inbound sales but also outbound, reaching out to customers. For example, around Mother’s Day, people who ordered in the past, who haven’t ordered, they’re getting calls from our sales team saying, ”You ordered last year. Are you interested in doing something?” We’re doing that. I think it takes on almost two flavors of performance. In outer markets, it’s a lot of generating trial and awareness. Catering is great for that. The sale itself is fantastic, but getting customers acclimated to how to use Portillo’s is even a bigger win for us. Inside Chicagoland, it’s much more about making sure that we’re reminding people that we help them to facilitate that order and that we execute flawlessly.

It’s a great. It’s not a pretend it’s a huge business. But it punches over its weight because of its ability to generate trial and awareness and put a lot of our food in a lot of different people’s mouths, who may otherwise not have been customers.

Operator: Our next question comes from the line of Jim Salera with Stephens. Please proceed with your question.

Unidentified Analyst: Hi. This is Tyler Prowse [ph] on for Jim. My question was around the permitting environment. Are you seeing any improvement on that front? Additionally, you’ve talked in the past about smoothing openings throughout the year compared to previous years. Can you talk a little more high level about the steps you’re taking behind the scenes to smooth yearly openings between quarters? I had one follow-up.

Michael Osanloo: It’s a great question. What I would tell you is that, we’re not seeing a ton of improvement on the timelines for permitting and silly things like getting lots of silly things that are sort of outside of our control. What we’ve done for that is, our development pipeline has extended dramatically. When we target a restaurant in Texas to open in the fourth quarter of 2024, that’s a restaurant that we started the entire process 18 months prior. Our build cycle now is 18 months in advance. We begin the permitting way in advance so that, we have a more predictable pipeline. Our Chief Development Officer likes to say, it’s a lot easier for him to slow things down than to speed things up. We have a very, very fulsome pipeline for ’24, ’25 and beyond, and it’s much more predictable for us, because we just have so much extra time built in.

Unidentified Analyst: Very helpful. Just one follow-up. You gave some great color at the Investor Day regarding shaping the demand curve in new markets. Can we get an update on how this is trending in the five Texas locations as far as activating delivery and catering?

Michael Osanloo: Yes. I don’t want to get into the specifics of each restaurant, but we feel like one of the things about Texas is the Colony was an extraordinary success early on. It does do everything that we want. It introduces Portillo’s to the DFW community. It has an extraordinary catchment for the first six months because. It’s the only restaurant we have. People were driving from everywhere. As we have now started to fill in, we have five restaurants in the Dallas Fort Worth area. Anybody who’s spent time in Dallas Fort Worth knows five is not scale. We still need to keep building in that market. There are — you could spend an hour driving from one Portillo’s to another still. But what ends up happening is you start to build latent demand.

You start to see — as we turn on alternate channels. So, in the company now, we’re humming with every channel open. We started to do the same tactics in Arlington, in Allen, in Fort Worth. And then Denton that we just recently opened is a little more constrained right now, because we want to make sure that we’re executing flawlessly inside and, in the drive, thru. But you can imagine that, the first restaurant is a little bit more staged, but we get a little bit more aggressive opening the alternative channels in restaurants three, four, five, six through 10, et cetera.

Operator: Does that complete your question?

Unidentified Analyst : Yes. Thank you.

Operator: Our next question comes from the line of Gregory Francfort with Guggenheim. Please proceed with your question.

Gregory Francfort: Thanks for the question. My first is just maybe going back to the advertising and the decision to increase it. I think you also made a comment about advertising on third-party delivery sites. I don’t know if you’ve been doing that before or if that’s just an increase. What did you see that made you, make that decision? And then what was the advertising historically for the brand, if you can remind me?

Michael Osanloo: Greg, great question. We’re just historically not big spenders on advertising. It’s just not, our best marketing, and I still believe this, is outstanding operational execution, right? When you give people great experience, they come back. But our finance team will say, undeniably that, the advertising we did in the back half of last year worked, undeniably that the advertising that we did in Arizona worked and improved traffic trends, in both instances, improved traffic trends and it pays for itself in a very quick time frame. It gives us a little bit more confidence that we can start to spend a little bit more on advertising and not for our P&L. But it will return. It drives traffic. It drives comp and it creates a positive return on investment.

We’re intrigued by that and we’ll continue to test that selectively. We’re not going to do anything crazy. We’re not doing $50 million ad campaigns. That’s not who we are. But can we spend a little bit in advertising in a very targeted way? Yes, I think we can do that. We know that, the advertising in Chicago works. With the scale of restaurants in Chicago, that advertising covers a lot of restaurants. We’re eager to do that. There’s some, I think, fun angles that the marketing team has on what we can do in Chicago to drive just awareness, presence and frequency. Outside of Chicago, we’re seeing really good success with some relatively modest advertising in the digital channels, particularly with our third-party delivery partners. We actually think that, what ends up happening is that, we have guests who maybe we were not in their mindset that convert to Portillo’s, that think about Portillo’s and then become converted Portillo’s guest.

We’re going to test that more aggressively and we’re going to more aggressively use digital channels, particularly third-party delivery channels as a way of generating trial and awareness and think of markets like Arizona and Texas and Central Florida, places where we’re starting to build up scale, but candidly, we still don’t have the awareness that we want. It’s a great way of building awareness in a very targeted fashion that we think pays dividends.