Portillo’s Inc. (NASDAQ:PTLO) Q3 2023 Earnings Call Transcript November 5, 2023
Operator: Greetings and welcome to the Portillo’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Barbara Noverini, Portillo’s Director of Investor Relations. Please go ahead.
Barbara Noverini: Thank you, operator. Good morning, everyone, and welcome to our fiscal third quarter 2023 earnings call. Our 10-Q earnings press release and supplemental presentation are posted at investors.portillos.com. With me on the call today is Michael Osanloo, President and Chief Executive Officer; and Michelle Hook, Chief Financial Officer. Any commentary made here about our future results and business conditions are forward-looking statements, which are based on management’s current expectations and are not guarantees of future performance. We do not update these forward-looking statements unless required by law. Our 10-K and our quarterly 10-Qs identify risk factors that may cause our actual results to vary materially from these forward-looking statements.
Today’s earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning’s posted materials. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Now, let me turn the call over to Michael Osanloo, President and Chief Executive Officer.
Michael Osanloo: Thank you, Barb. Good morning, everyone. Thank you for joining our third quarter 2023 earnings call. We demonstrated excellent operating leverage this quarter as total sales growth of 10.4% translated into restaurant level EBITDA growth of 22.9%. These results highlight the benefit of our throughput, operational efficiency, and labor utilization even as we continue to expand our restaurant base. Our ability to sustain profitable growth is a key differentiator for Portillo’s. The strength of our brand, the consistency of our operations, and the ongoing execution of a disciplined development strategy all support our fantastic business model. At our Development Day in September, we talked about how profitable unit growth is the key driver for our valuation.
We also shared our plans for accelerating that growth and expanding our markets, which we know fans across the country are excited about. In fact, we’ve already had a great reaction from fans in our new frontiers of Colorado, Nevada, and Georgia. We can confidently play the long game because of the financial strength of our business. It continues to carry us through the ebbs and flows of the current economic environment. As a growth company, we expect the contributions of our newly opened restaurants to increase that momentum. And in Q3, we can already see the impact of new restaurant development as a countercyclical factor. Revenue contribution from our newly opened restaurants meaningfully drove year-over-year growth. The bulk of that improvement comes from our class of 2022 restaurants, which continue to outperform our underwriting expectations.
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Q&A Session
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We’re opening and operating our new restaurants incredibly well, and our early read on the class of 2023 is that it will also continue this strong performance. In the third quarter, same restaurant sales grew 3.9%, despite an industry-wide transaction sluggishness. The good news is that we’ve already seen improvements going into the fourth quarter. Comps will fluctuate as they’ve always done in this industry. What’s different for us now is the growing strength of our development engine. Keep in mind that we entered this year with 72 restaurants and we’ll end the year with 84 restaurants. So, investors can count on our self-funded development to drive revenue growth in the near term not just in some far flung future. Our third quarter restaurant-level margin of 25.1% increased 250 basis points year-over-year.
We’re also well on track to deliver year-over-year margin expansion for full-year 2023. We’re doing this even as we add more restaurants in a single year than we ever have throughout our 60-year history. Again, this is a testament to our profitable business model. We generate enough operating cash flow to self-fund all of the development plans we shared with you several weeks ago and few growth companies can say that. Speaking of growth, let’s talk about what’s left for the class of ’23. In Q3, we successfully opened Queen Creek, Arizona and Allen, Texas, both of which feature our more efficient modern kitchen design. And we’ve since opened in Cicero, Illinois and will open next week in Arlington, Texas. The other four restaurants in the class of 2023 Fort Worth, Texas; Clermont, Florida; Rosemont and Algonquin, Illinois are on track to open in the fourth quarter.
As a reminder, we will have opened 12 restaurants this year. Nine of those are in the Sunbelt, four in Texas, three in Arizona, and two in Florida, and we’re still growing the Midwest with three in our home state of Illinois. As we continue to grow, I’d like to thank our amazing team members for bringing Portillo’s to life. They’re the reason why Portillo’s is an experiential brand with a growing fan base. Guests can rely on Portillo’s for a delicious meal at a great price point in a vibrant environment. I’m certain that by taking care of our guests our team members make a meaningful impact on driving long-term shareholder value. So, with that, let me hand it over to Michelle to discuss the quarter’s financial performance.
Michelle Hook: Great. Thank you, Michael. In Q3, we continue to see strong top line revenue growth. Revenues were $166.8 million, reflecting an increase of $15.7 million or 10.4% compared to the third quarter of 2022. This increase in revenues was primarily due to the opening of new restaurants in 2022 and 2023 and an increase in our same restaurant sales. New restaurants contributed approximately $11 million to revenue growth in the quarter. Same restaurant sales increased 3.9% during the third quarter, which was attributable to an increase in average check of 7.4%, partially offset by a 3.5% decrease in transactions. Higher check was driven by an average 9.1% increase in menu prices, partially offset by product mix. As Michael mentioned earlier, we have seen improvements going into the fourth quarter on our combined transactions and mix.
We are committed to delivering on our long-term revenue growth targets primarily through new restaurant growth, while continuing to deliver positive comp growth. Food, beverage, and packaging costs as a percentage of revenues decreased to 33.3% in the third quarter of 2023 from 35.3% in the third quarter of 2022. This was primarily due to an increase in our revenue and lower third-party delivery commissions, partially offset by a 3.5% increase in commodity prices. We continue to estimate mid-single digit commodity inflation for the full year. Labor as a percentage of revenues decreased to 25.5% in the third quarter of 2023 from 25.9% in the third quarter of 2022. This decrease was primarily driven by an increase in our revenue, partially offset by higher labor utilization, incremental investments in our team members, including hourly rate increases and variable based compensation.
Hourly labor rates were up 1.9% in the third quarter of 2023 and up 4.8% year-to-date versus the prior-year periods. In the third quarter, we made additional wage investments in our team members and remain committed to providing a compelling compensation and benefits package. We continue to estimate mid-single digit labor inflation for the full year. Other operating expenses increased $1.7 million or 10% in the third quarter of 2023. This was primarily due to the opening of new restaurants, higher credit card fees as our transition to cashless drive-thrus drove an increase in credit card transactions, as well as an increase in utilities and insurance expenses. Occupancy expenses increased $0.6 million or 7.4%, primarily driven by the opening of new restaurants in 2022 and 2023.
