Portillo's Inc. Q1 2023 Earnings Call

Affected the mix and then and then I do have a question on on restaurant development.

If you could just maybe talk a bit further a bit more about the Chicago land development. I know you said there were some lessons from the first.

Off premise only but anything else just given how gens that market already is.

Anything that you can kind of tell us about cannibalization impact on comps anything to give us a sense of of the.

The reason for building building out that market even more thank you.

You bet, let me, let me talk about development and I'll, let Michelle here, but the mix question.

On development look.

Chicago is <unk>.

Incredibly good the fourth pillar.

But when we build a restaurant in Chicago. It comes out of the gate doing exceptionally well very very high levels of revenue very attractive margins. So it is incumbent on us to.

Portfolio selectively fill in the Chicago market.

<unk> there is just a hole in our coverage.

People, who live in that area and you drive 2025 to get to the port pillows, we'd like to make it easier.

This was a fantastic location.

It's on the pad of one of the busiest Walmart on the planet.

We think it's going to be an absolute homerun for us we're super excited.

Then the Joliet pick up location, and I say pickup, but remember its drive thru pickup catering.

What it really isn't it isn't a dining experience.

No.

Gilead has done very well.

<unk>.

Doing everything that we wanted and then some.

But the truth is we probably overbuilt a restaurant it here and I think we've discovered that we can build a smaller footprint a little bit of a tighter kitchen and that there's some little things that we can do well. We've got all we have is a very busy restaurants for third party delivery for our own delivery for pick up and so we want to.

To make sure that we have.

That builds into the restaurants better than we did in Joliet. So we're continuing to master how that pick up location looks and I've said this before Sharon I think that our portfolio is pickup is a wonderful infill strategy and I can imagine us building a bunch more of those in Chicago and.

In other markets as we achieved local scale.

Thank you.

Sure I can take the next question.

Yes.

That's okay.

Okay.

Next there is as you know, there's multiple things that come into mix.

Panamax plays into it but I think generally.

What youre seeing is a continuation of what we had been talking about over the course of the back half of last year, where we are seeing a little bit less attachment. So lower items per transaction. So as Michael mentioned, we're still seeing growth and that transaction count, but we're seeing a little bit less add ons, whether that's a drink.

Or.

Aside et cetera, that's what we're generally seeing in the mix, but you do get a little bit of channel in there as well.

Thank you.

Yeah.

Our next question comes from Zane you guys are with UBS. Please go ahead.

Great. Thank you good morning, Michael and Michelle I wanted to ask about given the strength of the performance of recent opens.

Including I think results generally exceeded our underwriting expectations and in many cases can you talk about how maybe.

Slight adjustments, maybe its underwriting assumptions going forward plus.

Plus this kind of no dining opportunity what that might mean for your your total restaurant count overtime, if theres any any thoughts at this juncture to ought to share on that.

It is an outstanding question and I apologize because I'm going to punt on it for a bit we are going through the process.

<unk>.

Looking at our total addressable market, especially now that we are getting comfortable with this new format and so our expectation is that we're going to have an analyst day.

A more modest one.

In late September and we're going to go through what we believe is our fully addressable market, our full potential including standard restaurants.

Our portfolio pick up as well as targeting what we think are non traditional venues so think.

<unk>.

Airports.

Things like that and we're also going to try and take a look at what we think we can do with regard to international franchisees.

So that's that.

The whole process I don't want to speak off the cuff right now about what we think but.

We'll have a we'll have a very fulsome conversation about that in September .

Very exciting we look forward to that and just one other one then and I think you touched on this some but as it relates to the newbuild environment than what you've done already this year and now you are on track for that for the full year any more commentary on sort of the supply chain situation the timing on the permitting side et cetera.

That.

Where you see that improving.

We go through the year any more color there, obviously youre targets speak for themselves, but yes.

Yes.

Hi.

Look I think there's a glimmer of hope, but I'm not going to describe it is much more than that so we're seeing we're certainly seeing the supply chain.

The supply chain is freeing up a hair and so we're not quite as nervous about that part of it is the biggest issue is still the permitting processes and I think we've talked about this before that we have budgeted a heck of a lot more time for permitting than we ever did in the past.

We've just added a ton of time, it's one of the reasons why the nine new restaurants that we're building. This year are all backend loaded or all Q3 Q4 is because it is because of permitting issues. So.

<unk>.

I'm not seeing we're not seeing a ton of improvement there, but on the supply chain, it's getting a little bit more.

Free flowing.

And I think that we're seeing.

I'm not going to say cost moderating, but theyre not going up as fast as it were.

Matt.

Michel anything you want to add to that no I would just add to that Dennis to Michael's point undeveloped cost side. He is exactly crack we're not seeing any moderation from what we previously talked about the good news is we're not seeing hefty increases the availability is getting a little bit better and so we'll see how the class of 23 shapes.

But.

We feel good about the timing to Michael's point that we put out there and our ability to get those belt with that in the back half of the year.

Thanks, guys I appreciate it.

Thanks, Dan.

Hey, guys good morning.

Quick update on the.

Colony would you like.

I'd like to share kind of where that settling in on an average weekly sales basis.

I will say, what I would say Andy is that it continues to.

All of our expectation is crushing it is still on pace to be one of our top three or four restaurants in the company.

Maintaining outstanding momentum.

It is just it is a.

It puts the telco hi, Tommy.

<unk> is doing really really well continues to give us a lot of confidence about what we can accomplish in Texas.

Yes look forward to seeing it.

Michelle and maybe Michael.

On the margin improvement.

I mean should we think of that as kind of a modest restaurant level margin improvement versus 22, and then I wanted to.

I mean.

Do we kind of think of the efficiencies that you continue to get out of the business as a way to.

Sort of funds some of the wage investment and some of the NRO inefficiencies just any more color on that would be helpful.

Yes, let me handle the second.

And then let Michelle I'll handle the first so Andy you're 100% right there.

We are.

We are getting smarter and smarter and smarter about how to run our restaurants efficiently. So we continue to outsource some of the prep that is actually stuff that our team members don't want to do don't enjoy doing and we're getting smarter at letting our suppliers do more prep for us.

And then Rick.

Call that we rolled out what we call kitchen 23.

As a retrofit of some of our existing kitchens in the Chicago land market. It's Bruce is up the restaurant it moves the salad Bowl area back into the line. It puts in a grab and grow go merchandising inside the restaurant it is actually quite beautiful.

Catching.

And it's got a we think that theres, a little bit of upside in terms of sales number.

<unk> hundred 43 is a big unlock continuing to take prep to the suppliers and letting them do more of it for US is another big unlock for us.

Yeah, and I can tackle the restaurant level margin question, Andy So to your point I am expecting for the full year right looking at modest improve.

Improvement versus full year 2022, you can obviously see the compares as we get into Q2 last last year Comping over 25, 5% margin in Q2, and looking at Q3, Q4 et cetera, but as you look at those key input costs, you mentioned, one labor and the other being.

Our food costs and so as we look at how those continue to behave right I think that's going to drive where we see margins coming in at and as I mentioned on my remarks, we're going to be flexible on our pricing approach SaaS take pricing.

It's unknown quarter over quarter, how thats going to behave, but I'm just going to stick to the point that yes for the full year, we definitely expect margin improvement versus 22.

And just a quick follow up on the on the Remodels I think the number. This year you were trying to get to is 15% to 20 do you can you kind of have a schedule youre willing to share with us on on when those are taking place or how many are expected in the first half of the year.

Yeah.

I wanted to just not rush into it so we took a little bit weaker.

We took a little bit of time to figure out exactly what the right merchandising is and how to make that section of the restaurant look beautiful.

So I suspect that we'll start deploying these and do a lot of that heavy lifting beginning in the third quarter. So it's very much a back half loaded.

Dynamic and it is we're still targeting between 15 and 28 in Chicago.

Thanks, guys.

You bet.

Our next question comes from Gregory <unk> with Guggenheim Securities. Please go ahead.

Hey, guys. Thanks for the questions.

The first one I had was just on.

Maybe the new store openings recently outs outside of Texas.

One in Kissimmee, and a couple of Arizona, how they've been performing and I guess I ask you within the context of <unk>.

The sunbelt market has performed.

Pretty substantially kind of above the system on <unk> and I am wondering if the new store volumes. This your sales this year might come in.

Meaningfully above your $6 million you guys have seen historically, just any thoughts on that.

Yeah.

Look I have certainly bragged about <unk>.

The colony and partly because I think there was some questions whether or not we can survive or do well in Texas.

Both are important to talk about the performance of the economy.

The rest of the class a 'twenty two Greg is doing outstanding So weather is Tucson Gilbert.

<unk>, Indiana is killing it and so.

Extremely happy with the class of 'twenty two.

As a class were very comfortable that it's going to be all of our underwriting expectations and we've got a whole lot.

And that's how we think about it right we're not going to have every single restaurant crush. It every single year. Our goal is as a class.

To beat our underwriting expectations, and we're very comfortable with class a 'twenty two is doing that.

Honestly I think we've kind of figure out a formula.

Where to build how to build by the Bill that gives me a lot of confidence that there is a replicable model.

And that we can find that we can find restaurants that are going to outperform.

So I'm really excited just as excited about the class of 'twenty three I think.

The restaurants that we've already announced are going to be outstanding.

I would be.

I'm not a betting man, but by well certainly bet on the over on that.

How I think the cost of 23.

Awesome, Thanks, and then maybe.

One for Michelle just.

I think one of the kind of topics. We here a bit is the beef beef inflation in the next few years.

Can you, maybe remind us where that stands if youre able to hedge it and as you look towards the end of the year I guess the mid single digit inflation would suggest you drop into that kind of flat to low single digit range.

What is embedded in there around beef and maybe the rest of the commodity basket that are the offsets.

Yes, Greg no problem, so as you know.

Hey.

About 35% of our total basket with the B flats in particular, particularly being a heavier portion of that so when we look at what we've done with that.

On the on the fly apps, we have about 50% hedged on that for the remainder of the year.

With close to 70% of that hedged in Q2 alone.

So we feel good about that line item in particular and being able to lock that in at prices that are below our internal budget as we looked at that line item.

But youre right. We do we've expected all along that beef was still going to be elevated.

This year and 23 versus <unk> 22, I think what you are seeing offsetting some of that when you look at the other items in her basket chicken and pork in particular are the other two proteins make up just over somewhere between 15 and 16% of our basket, we're seeing deflation on those proteins right. This year. So that's buffering some of that increase.

But then as I've mentioned before we are seeing heavier increases in our French fries and onion rings as well.

And so that's that's hurting us as we look at 'twenty three versus 22, but when we look at the overall basket of goods and where we're at today.

As I mentioned the flats are hedged, where we still are hedged about 35%.

For the full year, and so with the flats being a strong portion of that so I feel good about where we said we are still exposed to a little bit and some of the other beef items like our burgers.

I think to your point, we do expect to see some deflation both within Q2, and particularly in Q3 and Q4.

Awesome. Thank you guys no problem.

Yes.

Our next question comes from Chris <unk> with Stifel. Please go ahead.

Thanks, Good morning, guys.

Clinical I understand a few of the openings from the class of 22 fell into this year, but the company is planning to open a significantly higher number of units in a shorter time frame than it was initially planning. So I was hoping you could speak to the availability of resources, such as training teams and things like that that you might need.

To.

You bet or going to clearly support these openings.

Yes, it's a great question, Chris I would phrase it slightly differently, it's not that we're opening a bunch more is that honestly, we met some deadlines in the course of 'twenty two that slipped into 'twenty three so the plans for 'twenty three have always been the plan for 'twenty three and the thing that matters. The most to me to Michel to the leadership team is at every.

One of the restaurants that were opening.

Has a and experienced portillo general manager at the helm.

What is the key Derisking this investment making sure. These restaurants open well I would tell you I believe it has experienced management and so every one of the rest of the nine restaurants, we are targeting for the class of 'twenty three we know who the GM. So in fact the class the restaurants that we're targeting for the class of 24, we know who the GM sorry.

So that to me is a massively important unlock we have a wonderful new restaurant opening team and the way our new restaurant opening teams operate is it.

Our view would be like the.

Fire Department right, you've got full time people on the NRO team, but then you've got volunteer NRO people in markets, where they can help out as necessary. So when we opened in Arizona at this point, it's honestly, it's just super easy for us because we've got Gms in place we've got very experienced team members in place.

So Queen Creek I suspect will open.

Really seamlessly quite well we're.

We're opening we announced two more restaurants in Texas.

The Gms in Texas are already at the colony, and Thats, where theyre getting their legs under them, we over invested in the colony with.

With talent to make sure that we can open it so when it comes to management.

That's the gating factor and when it comes to the NRO team I feel like we're in a really really good position.

And we can open not just get it open and that's not good enough, but get it open in an outstanding way and give guests and team members great experiences from the get go.

So let me see.

Yeah, no that's great.

Does the mix the menu mix than in the colony and maybe some of these other new stores has it been representative of the system.

In general yet, although there was an oddity with the colony, which is that.

We're selling a heck of a lot more beef sandwiches that I think is normal for our out of market restaurants.

Yes.

Actually a heck of a lot more of these sandwiches that we sell at any of our restaurants.

Wonderful news by the way because I think in the back of some investors' minds. It does it does.

Italian beef sandwich actually travel.

<unk>.

Boy is it traveling and taxes and it just it gives me a lot of comfort because it is truly an iconic menu items.

You wanted Italian be sandwiched in Texas.

Pretty much come to us and so I love. The fact that it's mixing very high I love. The fact that people are coming into those be sandwiches, and then coming back to those be sandwiches.

Because again it gives me a lot of confidence that our concept and the food will travel better than maybe some people expected.

Yes, I agree that's encouraging to hear that.

And then just lastly, Michele how much do you believe new unit performance was a drag on the restaurant margin during the quarter I think you called that out as a drag.

Yes, we haven't quantified that Chris and so I am not going to give you an exact number obviously as Michael alluded to it's exceeding our expectation. So I would just point to that but as you know it's.

It's definitely going to be a drag as we've talked about the profile of restaurants in year, one, particularly in that first quarter right that they open crest, it's going to be a bigger drag than it normally would be as you look at our <unk> of the year because.

You're staffing up the restaurants as Michael mentioned with some additional labor to make sure you're servicing the gas et cetera. So we're not quantifying that but you're spot on it was a little bit of a drag particularly in <unk>.

Q1 is as we add more new openings.

Great. Thanks, guys.

Yeah.

Thanks, Chris.

There are no further questions at this time.

Concludes today's teleconference. You may disconnect your lines at this time, thank you for your participation.

Yes.

Yeah.

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