Q2 2023 Portillo's Inc Earnings Call

Although formica.

Greetings and welcome to the ports so low second quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.

Brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it.

It is now my pleasure to introduce your host Barbara No Verine ports. So those director of Investor Relations. Thank you. Please go ahead.

Thank you operator.

Everyone and welcome to our fiscal second quarter 2023 earnings call you can read through the results we announced this morning in our earnings press release and supplemental presentation at investors got Portola is dot com with me on the call today is Michael <unk>, President and Chief Executive Officer, and Michelle Hook, Chief Financial Officer.

Let's begin with a reminder, that any commentary made during this call about our future financial results and business conditions constitute forward looking statements, which are based on management's current business and market expectations and are not guarantees of future performance. We do not undertake to update these forward looking statements unless required by law or any.

You'll report on Form 10-K, and our Form 10-Q. Both include discussions of 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 any non-GAAP financial measures should not be considered as an alternative to GAAP measures. We direct you to the materials. We released this morning for the reconciliations of these non-GAAP measures to the most comparable GAAP measures.

Finally, after we deliver our prepared remarks, we will open the lines for your questions now let me turn the call over to Michael are finally, president and Chief Executive Officer.

Thank you Barb and good morning, everyone. We're glad to have you with us for our second quarter 2023 earnings call.

I'm proud to report that we delivered another quarter of double digit revenue and restaurant level EBITDA growth results that highlight the durability of our brand. We grew total sales by 12, 3% and achieve restaurant level margins of 25, 3%.

We generated this level of profitability, even under the weight of adding six new restaurants since Q2 of 2022.

Michel will detail our financial performance in a moment, but first let me walk through the main drivers of this momentum that we have.

To continue this positive.

Oh, sorry.

First we feel great about our class two of 22 restaurants in their overall contribution to our financial performance.

While it's still early this class of restaurants continues to outperform our underwriting expectations.

And I know, we've talked a lot about the colony, but year to date. This restaurant has already done over $8 5 million in sales that's not an annualized number that's a year to date number that's feeding a lot of happy taxes.

Tucson, and Gilbert are already generating average weekly sales comparable to a mature, Arizona restaurants, and Shareable, Indiana is cruising generating Chicago like <unk>.

To continue this positive trajectory, we heavily emphasize quality and execution. So that we deliver an outstanding experience for both team members and guests new restaurants tend to have lower margins early on because we invest additional resources to ensure great performance, but what's really exciting.

Is that the class of 'twenty two's margin drag has been lighter than expected.

That's a testament to both the operating strength of that class and the fact that there are over achieving on the top line.

Which brings me to my next point, we've earned the right to grow because of the strength in our core in the second quarter same restaurant sales grew five 9%.

Michel will decompose that comp for you in a minute, but in an economic environment. That's been sending mixed signals. We delivered mid single digit comps against the low single digit target we have in our long term growth algorithm.

Our restaurants are fully staffed and we are empowering our team members to prioritize the guest experience by serving delicious high quality food and an engaging environment at a great price point.

This focus has allowed us a sustained multi year highs in key guest experience metrics like speed of service accuracy overall satisfaction and importantly in our value perception.

These metrics carry even greater weight when consumers are feeling pinched because guests are a lot choosier about where to spend money when their wallets feel lighter, we're confident that offering a consistently great experience for our team members and in turn for the guests they serve as the right way for us to thrive amidst economic fluctuations.

<unk>.

Yeah.

Finally in this quarter, we saw continued restaurant level margin improvement.

We've implemented two strategic initiatives to help us maintain this momentum.

One we've been actively managing our commodity exposure locking in prices when appropriate and letting the restaurant. We continue to expect some margin benefit from that unlock portion of our commodity basket as the rate of inflation continues to ease.

Second we continue to hunt down labor efficiencies across the system one.

One example of this is our kitchen twenty-three initiative we've already.

We completed a third of the kitchen 'twenty three conversions that we planned for this year. These involve quick and capital light Remodels of legacy Chicago land restaurants that feature our relocated salad Bowl grab and go retail displays and self service fountain drinks.

These these changes are generating real operational efficiencies and helping us meet our 2023 margin improvement goals.

But kitchen 'twenty three is not just about cost efficiency. We're also seeing incremental beverage and product sales from smarter merchandising and frankly, the restaurants just look better.

This initiative is doing everything we hoped it would and youll see more of them come online and ongoing retrofits and as new builds and the class of 23.

Now let me remind you that Q2 is typically our seasonally highest margin quarter and we have a couple of margin headwinds on the horizon. We recently implemented our annual wage increases for the restaurants and the remainder of the year will be heavy with restaurant openings. Despite that we remain committed to you.

Year over year margin improvement for the full year of 2023.

Now, let's talk about the new restaurants opening in the class of 23.

As a reminder, we've announced that we will open three new restaurants in the Dallas Fort worth market three in Chicago land, including our second Portillo as pickup in Rosemont, Illinois, one location in Arizona and one in Central Florida.

The bulk of the class a 'twenty three will be in the sunbelt, where we continued to build out markets to achieve efficient scale.

For example, Queen Creek in Arizona marks our sixth in the Phoenix Metropolitan area.

We also recently announced Claremont, which further develops the central Florida market and expanding our footprint in the DFW market is a clear priority, we're actively building and Allen and Arlington, which we plan to feature at site visits during development day on September 19th and.

And we will round out the class of 'twenty three with one more location in Fort worth.

These eight class of 2023 restaurants are actively underway and we're very happy with that progress.

We will open two restaurants in Q3 and the rest in the fourth quarter, we do have a ninth restaurants in the 2023 pipeline, but we will deliberately paced that out into the first quarter of 2024 operationally, it's not ideal to open restaurants during our seasonally busiest period and this tactic was.

Three successful for us with the colony earlier this year.

All told we are navigating an uncertain economic environment and delivering profitable growth while building successful new restaurants performance in our core is solid it allows us to reinvest our cash flow to fund more growth and remember all of our growth is self funded.

With that let me hand, it over to Michelle.

Great. Thank you Michael in Q2, we saw strong topline revenue growth revenues were $169 2 million, reflecting an increase of $18 6 million or 12, 3% compared to the second 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.

Same restaurant sales increased five 9% during the second quarter, which was attributable to an increase in average check of seven 1% and a one 2% decrease in transactions.

The higher average check was driven by an approximate nine 9% increase in menu prices, partially offset by a change in mix.

We are experiencing expected cannibalization from some of our recently opened restaurants, we estimate the impact this quarter to be approximately 60 to 80 basis points.

As we build more locally in Illinois. This year, we do expect some additional cannibalization to occur.

The increments of the new restaurant revenue and margin is very attractive and well worth the short term cannibalization.

Total revenues are in line with our expectations and we remain committed to delivering on our long term growth algorithm of high single to low double digit revenue growth.

Food beverage and packaging costs as a percentage of revenues decreased to 33, 2% in the second quarter of 2023 from 34, 4% in the second quarter of 2022. This.

This was primarily due to an increase in our revenue and lower third party delivery commissions, partially offset by a five 5% increase in commodity prices we continue.

Do you expect that overall commodity inflation will ease in the back half of the year and estimate mid single digit commodity inflation for the full year, we have locked in pricing on 64% of our commodity basket for the remainder of fiscal 2023.

Labor as a percentage of revenues increased to 25, 5% in the second quarter of 2023 from 25, 2% in the second quarter of 2022.

This increase was primarily driven by incremental investments in our team members, including hourly rate increases and variable based compensation and higher labor utilization quarter over quarter, partially offset by the increase in our revenue.

Hourly labor rates were up four 7% in the second quarter of 2023 and up six 5% year to date versus the prior year periods.

In the third quarter, we did make additional wage investments in our team members and remain committed to providing a compelling compensation and benefits package.

We currently estimate mid single digit labor inflation for the full fiscal year.

Other operating expenses increased $3 7 million or 24, 1% in the second quarter of 2023. This was primarily due to higher credit card fees as our transition to cashless drive throughs drove an increase in credit card transactions year over year.

As well as an increase in repair and maintenance expenses higher insurance and utilities expenses and the opening of new restaurants.

Occupancy expenses increased <unk> 9 million or 11, 6%, primarily driven by the opening of new restaurants in 2022 and 2023.

As a percentage of revenues net occupancy expenses were flat to the second quarter of 2022.

Restaurant level adjusted EBITDA increased 11, 3% to $42 7 million in the second quarter of 2023 from $38 4 million in the second quarter of 2022.

Restaurant level adjusted EBITDA margins were 25, 3% in the second quarter of 2023 compared to 25, 5% in the second quarter of 2022.

Restaurant level adjusted EBITDA margin continued to improve since the fourth quarter of 2022.

This improvement is on top of opening four new restaurants in the first two quarters of 2023, which I'll have a lower margin profile to start.

Our strategic pricing actions have been a very large factor in this margin improvement combined with our continued focus on the guest experience and operational efficiencies.

We do anticipate restaurant level adjusted EBITDA margins to be pressured by the aforementioned wage investments and our planned new restaurant openings in the back half of 2023.

On pricing as a reminder, we have taken to pricing actions. This year in January we increased menu prices by approximately 2%.

At the beginning of May we increased menu prices by approximately 3%.

These increases continue to combat inflationary cost pressures and progress towards our goal to improve restaurant level adjusted EBITDA margins for fiscal 2023.

We still believe we have pricing power, we can use if necessary. We will we will continue to monitor the current environment and remain flexible and strategic in our pricing approach moving forward, our focus remains providing a great value for our guests.

Our G&A expenses increased $4 2 million to 11, 6% in the second quarter of 2023 from 10, 3% in the second quarter of 2022.

This increase was primarily driven by higher variable based compensation, an increase in wages and related costs and higher professional and licensing fees. We are currently estimating to be at the high end of our targeted $72 million to $77 million range for the full fiscal year.

Preopening.

<unk> expenses decreased <unk> 1 million <unk>, 2% in the second quarter of 2023 from <unk>, 3% in the second quarter of 2020 to the.

The decrease was due to the timing and geographic location of activities related to our planned new restaurant openings.

All of this slide to adjusted EBITDA of $29 2 million in the second quarter of 2023 versus $27 6 million in the second quarter of 2022, an increase of five 8%.

Below the EBIT line interest expense was $6 5 million in the second quarter of 2023, an increase of <unk> 4 million from the second quarter of 2022.

This increase was primarily driven by the year over year rising interest rate environment, partially offset by the improved lending terms associated with our 2023 term loan and revolver facility.

As of the end of Q2, the effective interest rate on the term loan was eight 2%.

In the third quarter, we paid down $5 million on our revolver and currently at $5 million of outstanding borrowings against our $100 million revolver facility.

Income tax expense was $1 5 million in the second quarter of 2023, a decrease of <unk> 8 million from the second quarter of 2022 or.

Our effective tax rate for the quarter was 13, 5% versus 17, 9% in the second quarter of 2022.

Our effective tax rate decreased versus the second quarter of 2022, primarily driven by the recording of net operating loss carry forwards, partially offset by an increase in class a equity ownership, which increases our share of taxable income or loss.

We ended the quarter with $22 5 million in cash our growth will continue to be self funded by our operating cash flows and our available cash we remain committed to delivering healthy topline and bottomline growth in 2023 and beyond.

And with that let's turn to Q&A operator, please open the line for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Okay.

And the first question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.

Hi, good morning, everyone.

To come back to development and I know that there's a team working on ways to kind of bring down the cost of the box is that anything you can share kind of the progress about it or do we have to wait until September and then on cannibalization is that something Michelle where we would expect that.

To ramp as the year goes on considering the comments you made about Chicago land or is the 60 to 80 basis points kind of a good level to stick out.

Yeah no. Good good question, Sharon So I'll start with the.

Question on the the new restaurant prototypes, So Michael mentioned catch in 'twenty three so that's that's part of the evolution as we move towards what we're calling restaurant of the future and so I think in the short term.

Michael said is true, which is we are retrofitting some Chicago land restaurants, and then the new builds that youll see as part of the class of 23.

All have elements of of restaurant of the future and that was and so as we've mentioned before we do expect some efficiencies in those kitchens are both in the short term and as we move forward and then in terms of restaurant in the future, which again is that smaller prototype we will share more with you our development days, so a whole tight for that and we'll share more with you then.

And then from a cannibalization standpoint, I think for this year, that's a pretty good number Sharon because as the Chicago restaurants, the three come online as part of the class a 'twenty three you'll see more of that impact I think come later on and so for right now the 60 to 80 is a fairly decent number to use in the near term.

Sure on the cannibalization point, let me just reiterate something that I think Michel mentioned, but it only happens really in the markets, where we have some scale and density so like think Chicago land and a little bit in Arizona.

But it's really smart cannibalization right the incremental or the of the revenue of the Incrementals will be of that margin is so attractive that it's well worth doing for the short term short term little bump on cannibalization.

Thank you.

And the next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.

Hey, guys. Good morning, just wanted to.

Level set on the commentary around second half margins.

So can you give us more color I know we're expecting.

A move down from the highest seasonal <unk> levels, but.

Can you contextualize that a little bit more maybe sequentially or year over year Michelle.

Yeah, Andy we're you know I don't want to get in you know that's I don't want to get them to happen up getting giving margin guidance, but I will tell you that the comments that we made on both Cogs and labor I think can help you contextualize, where we see margins going in as Michael mentioned Q2, we see of the high watermark for the year similar to what you saw last year.

Sure. So you know I don't expect us to hit the highs that we saw in Q2 and the wage investments that we made in.

In Q3 will definitely have a little bit of impact as we get into Q3, and then you'll see the full impact of those wage increases come into Q4, because we put the increases in <unk>.

Mid way through July and so its not a full impact in Q3, so you'll see the full impact come through in Q4, and that's where you'll see the primary pressure points come in is on that labor line in the back half of the year.

Gotcha and then just wanted to circle back also on.

The new restaurant opening inefficiencies, which had been better than expected are you doing anything.

Currently.

In terms of opening the restaurants or is it really purely that.

Top line is exceeding your expectations you are able to cover some of those extra costs around opening yes.

It's.

It's a lot of the answer is yes to all of that so.

Certainly I mean, there's certainly an element of these these are in general the class of 'twenty two is exceeding our expectations on the top line and the marginal revenue flows through really well. So that's a that's obvious but we've done a lot of things differently in how we open restaurants, and our new NRO processes, which allow us to get to what I describe as <unk>.

Steady operations faster. So we are training smarter more efficiently and for shorter period of time, we're pulling out extra resources, a little bit more quickly because of the teams that are there are much more capable of running the restaurants themselves.

We have gone away from doing huge big Bang openings to a more steady state opening which allows the team to get their legs under them and we're being very thoughtful about turning on additional channels until those restaurants really are able to handle it you may recall like in Orlando. For example, we did not turn on and off premise.

Is any of the off premise channels for a year because the restaurant was performing well the restaurant needed to get its legs under it and so that all of those things contribute to an improved margin profile early.

Yeah.

Thank you very much.

You bet.

And the next question comes from the line of Brian Malone from Piper Sandler. Please proceed with your question.

Thank you I was just hoping you could speak to the debt entre counts that that you've been disclosing which perhaps I think you said it is a better way to think about that Patrick.

Somewhat related to that it sounds like from the prepared remarks, you haven't decided yet on prices and.

In terms of taking any additional pricing actions or the balance of year, but could you just speak to the primary considerations that are front and center in your minds right now as you do weigh any decision.

Yes, so the entre count is actually getting yearly close to the combination of mix and transaction. So they're both around negative three plus percent, so and I think that as as our channel shifting stabilizes, Brian we're likely to just talk about.

The transaction mix component, it's probably the cleanest number now that we have more standardized and stable transaction mix, but so.

I'm not alarmed by that and in fact, I think Michelle would say that in the last three.

Three quarters.

The aberration of the first quarter, aside, which we're lapping <unk>, we're actually seeing some of the better better trends on that combination of transaction and mix. So we feel reasonably.

Good about that yeah, I think obviously, Brian the macro environment is what it is but when I look at the combination of transactions and Max and to Michael's point when you throw a side Q1, because of we were rolling over omicron, which as you know in the entire industry. We saw improved transactions, we've actually seen improved combined transactions in.

Max.

Going back to Q2 of last year, and then going into Q2 of next year. So to Michael's point I think we like where those trends are going and we like the fact that when we look at the underlying metrics of the business, which Michael mentioned guest satisfaction scores order accuracy speed of service value perception. Those all look really good which for us is a leading indicator.

So we feel good about the business and then on the pricing front.

Yes, we have made no decisions on what we're going to do the remainder of the year. We do know that we have about three 4% pricing thats going to drop off at the beginning of Q4 in October and so we have made no decisions.

What we're going to do there, but we will as I mentioned, we will remain flexible and.

And in our decisions.

Shell alluded to this Brian , but I think it's worth reiterating.

We feel really good about where we are on pricing with the consumer and with vis vis our competition, we're still getting very we're getting some of our best guest satisfaction metrics scores we've ever gotten in terms of total guest satisfaction speed of service accuracy and very importantly, we're getting great scores.

On value perception. So that's really important and we are constantly monitoring how our most popular bundles compare with competitors most popular bundles and.

In a in a suite of six seven different high quality fast casual restaurant chains were anywhere from $1 to $6 $7 less than their most popular bundle. So we feel great about where we're priced.

And we need.

Needs B, we feel like we still have pricing power that we I prefer not to take but if we have to take because of commodity or labor increases.

We're well positioned to do that.

Thank you very much.

You bet.

Yeah.

And the next question comes from the line of Sara Senatore with Bank of America. Please proceed with your question.

Alright. Thank you a couple of follow ups, if I may the first one the wage investments just trying to understand where those unexpected or rather.

Got it on more recently as opposed to maybe at the beginning of the year versus just being consistent with the kind of.

Continuous over time increases merit raises things like that and if so what may have prompted the decision to make some of those labor investments and so that's the first question and then I have one more please.

Yes.

Sara those are always contemplated the timing of it was a little up in the air and it was a little bit more complicated to rollout than maybe some previous years, we as minimum wages have continued to increase across the country. We saw a tightening of wage differences between our veterans and some of the newer.

Team members and we wanted to make sure that we were taking good care of our veterans and so we went through a relatively thoughtful process of allocating the wage dollars. So that veterans who have been with US for 10, 15, 20 years, we're getting an appropriate raise and that.

They tend to be very productive.

Team members flexible et cetera. So.

That's all it was and so it's not a standard spread like peanut butter X percentage increase across the board. Some people saw double digit weight a percent increases some people saw low single digit.

It just took a little bit of time to implement and communicate to the field.

Got it. Thank you and then I just wanted to clarify what you were saying about the mix plus transactions. So both of those numbers I think were negative this quarter.

To your point <unk> was maybe exceptional incentive on the crime.

But you know in.

In the context of those I guess entre declines or however, you want to characterize it.

You know that the nine 9% pricing you talked about the relative value still being very strong, but do you see anything that would suggest that you know as your pricing is a little bit higher than that negative entre count.

Also gets more negative or just kind of trying to understand the dynamic between price and then potentially losing some of those entrees.

Yeah, I think Michael mentioned necessary as we continue to look at our value scores right. We continue to see those be at multi year highs and benchmarking the bundles and so I look at those as do we see a sign of pushback in guest satisfaction scores those value perception scores.

We're not seeing that pushback and we.

We monitor pricing and what other brands are doing and there is a lot of brands too that are carrying over a decent amount of price. So I don't feel like we're out of line in terms of.

How were approaching pricing from that respect.

And we've talked about is we've seen the next component, which is generally lower items per transaction lower attachment to some of the orders we continue to see that in the cider category I'd say when you look at.

Fried cheese sauce things of that nature, that's where we continue to see some of the impacts I would say if the macro environment more so than our pricing action.

Okay.

And I think I think underlying your question Sarah is are we concerned.

I mean, I don't want to sound glib, but.

When we look at the underlying trends of our business. We look at guest satisfaction, we look at the execution and how were doing it everything that we look at from a for everything that would be a leading indicator of our business gives us a lot of confidence that we're on a good path.

Got it thank you very much.

And the next question comes from the line of Gregory Frankfurt with Guggenheim. Please proceed with your question.

Hey, Thanks. Thanks for the question I've got a couple of things. The first one is just I know that you guys have.

It's a little smoother than this in terms of the classes, but you guys are going to open up I think 11 or 12 restaurants this year.

How much of that is how much is that dragging margins this year versus last year, and maybe versus what might be more steady state like 10, 10, 11, and 12% unit growth.

Yeah.

Yeah.

I don't think we actually talk about that number Greg I mean, it's a great question it's like.

What we have and Youre right by the way the number I think with four hangover from the class of 22 and the eight from this class. So we will have opened 12 this year, which is a very high number for us.

And obviously right when you open a brand new restaurant in the first six to nine months they tend to be.

Lower margin than our steady state restaurant, especially when you look at our margins in general. So there does tend to be a little bit of a margin drag. We're just not seeing it as much as we have historically a lot of that is because theyre over achieving on revenue, but a lot of that is also because we are.

Executing just better in how we open what we do how much support we need to provide and how quickly these restaurants get up to a steady state. So I don't think we've quantified that number now that we have now Michelle shake his head vigorously so don't try but.

There is an undeniable margin drag with new restaurants in the first call. It six to 12 months of their existence, but it's not as bad as we had.

Thought.

Okay, great. Thanks, and maybe just can you just update us on where turnover stands what youre seeing on the labor market or.

Alex you want to frame it but what's the six looks like on that.

Yeah look.

If you look at us, especially versus <unk>.

Black box and the competition, we're continuing to perform exceptionally well, we're probably 2030 percentage points better.

Versus everybody else from an hourly standpoint, and we're probably another 15 to 15 percentage points better on a management standpoint.

Obviously look.

You get it right.

Clear hard costs associated with elevated turnover youre spending money and hire new people et cetera, but there is there is probably even more soft costs like lost productivity.

People, who arent quite aligned with how we're doing things they don't know when to help out each other so.

Improving turnover continues to be a very important tactic for us maintaining.

Highly engaged happy workforce is a huge initiative for us and we'll continue to work very very hard to make sure we're doing that.

Got it and maybe the last one from me is just I think you're opening up another small box like Joliet.

I think it's later this year can you talk about what you might be changing in the format.

Square footage smaller drive through any different just what changes you take them from Joliet to the new box. Thanks, Yeah, Yeah. The new one is at Rosemont, Illinois, which is just outside O'hare I'd say.

Dining and hotel corridor, it's right near where all the car services Park for O'hare in front of a large hotel. So it's a great location, we're super excited about it.

Joliet as I think I've mentioned before we would we would describe as an out a fantastic success, it's exceeding our expectations, but being being continuous improvement kind of people. We identified everything we didn't love about the Joliet build we probably overbuilt. It we probably did not have enough room for people coming in to pick up.

The food themselves at.

Who wanted to walk inside so we've tweaked it its a smaller kitchen, it's a smaller footprint, we're still going to have a very very.

Tractive easy to access drive thru.

It should it.

It should cost a little bit less to build than it should still generate.

<unk> revenues so we're.

We're super excited about it Greg I think it is.

It's a version two point, though of the port <unk> pick up.

I have no doubt that we will make it will be much better than joliet in terms of functionality and operational ease, but I have no doubt that that version three <unk> will be better still and then I think we might be at a place where we can mass produce them.

Thank you.

And the next question comes from the line of Chris <unk> with Stifel. Please proceed with your question.

Hi, guys and thanks for taking the question I.

I had a follow up question related to cannibalization and then a question on development strategy and I apologize if I missed this but is the level of cannibalization in line with the Companys projections when they selected the site.

Yes.

Yes, Chris comes on line and we knew us.

As we put.

Sure Val Indiana in place.

Gilbert in place there was going to be a little bit of cannibalization and that's where we're seeing that.

Which is why we've kind of introduce this concept and we've talked about this before but I wanted to make sure as we have three Illinois restaurants coming online later this year that you all understand that yes, we do expect some level of cannibalization, however to Michael's point before the increments of revenue that we're going to generate clearly as well.

<unk> and <unk>.

We're very comfortable with that and it was absolutely expected.

Okay, and then Michael I am wondering if the success of the new other recent new openings in these high profile locations that obviously costs more to build but drive higher volumes is cause you to reconsider rethink the company's development strategy I'm just wondering if I mean, it doesn't seem like building brand awareness with back filling is really necessary, which.

It may allow you to pursue more new markets sooner.

I think that's a great challenge for us.

Here's the flip side of that there is an undeniable benefit to our business when we achieve local scale.

Getting to $67 eight restaurants in a metropolitan area you just see the benefit on the bottom line. We've shared that example, particularly with Arizona, we're going from two to four restaurants improved by 70 basis points. Yeah, just just going Chris two to four restaurants, we improve margins three.

<unk> hundred 70 basis points in Arizona So.

For US there is an undeniable benefit to getting to density and to scale in markets. There is also a challenge when you're opening in a new market. It does the first in a new market as a particularly challenging operational move to open to execute et cetera, and so we're huge believers in de risking how we.

Invest money and making sure that those investments work out really well so our cadence is essentially one new market every year. This year was was Dallas.

The fact that we built the colony, it's doing exceptionally well we have three more coming online in the second half of the year here in DFW feel great about that I think we've openly said that next year, we're going into Houston, It's still Texas, but Houston is a very different market geographically pretty far away requires a different level of risk.

Source et cetera, and so I think that it's very viable for us to keep building.

Entering one maybe two new markets in a given year and achieved density quickly so that both from a revenue and margin profile of those restaurants get too.

Our very high internal expectations as soon as possible.

Okay, and then just lastly on.

One of the benefits of having several sales channels would be the opportunity to raise menu prices in different channels.

And I'm just curious if you could kind of share with us what the in restaurant or drive through restaurant pricing is.

I'm just wondering if you're taking more pricing maybe in catering or other channels that may be less sensitive to.

Yes.

It's a great question and so when we do pricing.

I think Thats a great question, let me explain how we do pricing first of all we have.

Number of pricing tiers, we're at eight different pricing tiers and those pricing tiers are a reflection of what that local markets cost structure is so if a municipality has say minimum wages at $15 $16 an hour, it's going to have a different cost.

It's a different cost structure for us than municipalities that might have different minimum wages. So we price differently there.

When we do price, we don't price like peanut butter and spread.

The 3% we did in May it wasn't 3% across the board, we go and get it and we look very carefully by channel and by item for where we can price effectively so.

We might price in one situation recently, we just priced catering in third party delivery, we said that look theres, a big gap between where we are from catering standpoint, and how we priced via third party delivery, we're going to price those two to get our X percentage of pricing, we're not pricing the in restaurant experience. So we are very.

Thoughtful and careful about how to get the pricing, we need and to look at it both by mix by channel by product line.

To generate that pricing and what we think is the least.

Lease transaction impactful way.

Does that makes sense.

That did that.

That helped you.

You bet.

And the next question comes from the line of Dennis Geiger with UBS. Please proceed with your question.

Thank you and good morning, Michael Michele I want to start off with one question higher level and I know you've spent a lot of time sort of addressing this but Michael if you could kind of speak a bit more to some of the learnings.

Some new openings over the last several years and how much better or more efficient those openings have been.

Given sort of the the strength of the let's call it a reasonably new team.

Ramping up on the brand et cetera, just how much better as you've observed is that the team has gotten and sort of maybe what that means on the go forward just kind of adding to your confidence in the development story even adjustments.

To make the to make the story, even better just at a high level. If there is anything extra to add as we think about that impact on the on the development story.

Yeah.

Great question, Dennis Let me I'll tell you a couple of things that are probably.

Sounds like motherhood, and Apple pie, but.

The first one is we only opened new restaurants, now with an experienced portillo as general manager.

And that's a big deal right. So the eight restaurants, we're opening this year all experienced portillo GFS.

The ones, we're targeting for 24, all experienced port pillows GFS those Gms know how port pillows as opposed to function. We had the benefit that every one of the restaurants. We're opening this year also hasnt experienced assistant general manager and I think 60, 70% of the other managers our typical restaurant has a <unk>.

General manager and assistant General manager and a typical one has about five or six managers.

60% to 70% of them are also experienced portfolios people that is huge because youre not going to.

Youre not to be able to move around hourly team members to run new restaurants, but you can have leadership, there who knows where the portals are supposed to look like how its supposed to operate they understand what our culture is supposed to be and those are the things that make a smooth running operation. So I would tell you. That's the single biggest thing to Derisk and opening is to have experienced leadership in those restaurants.

And we now have we've worked really hard from a from a people pipeline to have a pipeline of talent that we know people that we know want to be promoted we're training them. We have the training programs in place. So we've done there's just been a lot of heavy lifting over many over the last two years or three years really to get us in that position. So that's one.

Big thing, we've learned to train folks on speed when if you've worked in another fast casual setting or a <unk> setting.

A very very busy hour might be two to $3000 an hour.

Portillo, you'll do $67000 lunch hour frequently and so we train people on how to handle volume and speed and not buckle under the pressure that's been a light change difference in how our teams react to business how they can handle it they don't they don't get.

Freaked out people don't don't don't get burned out as quickly and it's a big deal and then we've done a ton of other little things that I would describe our NRO. We've invested heavily in new restaurant opening teams. We can theoretically now opened three restaurants simultaneously and we have.

Bandwidth with MRO to open.

Geez 30, plus restaurants, if we needed to that's a big investment to make sure that we have a world class team that can parachute in open a restaurant and then move onto the next one as quickly as possible. So I think I would give you those are a few of the examples of things that derisk that opening make it much more likely to be successful.

And then make sure that we're doing things in a very sustainable fashion.

That first three months that you've got a lot of first time guests and you get one chance to win them over so it's really important to execute well those first three months.

Very helpful. Michael I appreciate that.

So curious to again sort of at a high level anything. Additionally, you could add sort of on the net effect of some of the margin pressures that you spoke to with respect to wage and some of the new opening dynamics relative to pricing expected pricing that could potentially come just framing up maybe kind of full year.

How your expectations on margins have changed obviously, we can roughly do do the math to some extent, but without putting numbers on it is there relative to the last quarter anything sort of net that you could speak to high level on.

Change in how you think about margins this year versus <unk> versus the prior quarter.

Yeah, I think Dennis really when I, when I think about the commodity outlook, it's coming in roughly where we thought it was right. We're still planning that mid single digits I think as we look at labor I mentioned still for the full year, we're expecting mid single digits on on labor inflation for the full year. So I wouldn't say there is a change in my outlook in the back.

Half of the year at all what I would say is we don't know what we don't know in terms of some of the outlooks on the commodities as I mentioned, we are 64% locked in the back half of the year, but we're still floating.

I think as you kind of commented on the number of items per order changing is really maybe one of the only observed changes in customer behavior.

But any other behavior changes, whether its day part day of the week off premise versus on delivery anything else. There that lets change it's been an interesting observation that I appreciate the questions.

No nothing that I would call out on US I think just what I called out before is we are still seeing the lower items per transaction.

When we look at again, Michael mentioned, when we look at the combined metric of transactions and Max.

We feel.

Comfortable with where we're at especially when we look at the industry and we compare to black box and our performance there versus the industry as a whole I think we felt very good about that so nothing I would call out I would just reiterate what Michelle said, but be a little bit more specific that it does seem like channels have really stabilized over the last six months for us so.

Our channel mix of drive through inside delivery catering et cetera, et cetera has had very very little movement over the last six months. It seems like we're at some level of new normal.

Great. Thank you guys.

Okay.

And the next question comes from the line of David Tarantino with Baird. Please proceed with your question.

Hi, good morning.

A couple of questions here first Mitch.

Michelle.

We think about building our models for the second half of the year.

And really I think we know what your pricing contribution would be if you didn't take anymore.

What I'm really asking about here is on the traffic and mix component is there anything unusual to think about for the back half of the year relative to maybe the most recent quarter that we should factor in them or we're making our assumptions for those metrics.

Yes, David I would say from a pricing standpoint, we were based on the timing of when we took pricing in Q2, we were a little bit higher. So we're at the $9 nine I expect Q3 to be around nine ish percent price versus the $9 95 in Q2, and then I'd say when I look at the trends I will just tell you.

Again, Q1, aside but when I look at the combined transaction next trends Q4 of 'twenty. Two we were at just over 4%. So four 2% in Q2. The numbers. We just released today. We're at three 9% so cost caught four ish percent. When you combine those two I don't really see any changes in the back.

Half of the year to those trends I don't see the environment all of a sudden getting extremely batter and so to me I don't expect a material change in those trends that we've been seeing on those two line items combined so that's how I would think about it David and then you already know the pricing component.

Yeah, Great. That's that's.

Very helpful and then Michael.

Michael just maybe a question on development. It seems like last year was extremely back loaded and you had some slippage into this year and this year again is very back loaded in terms of when the openings occur.

Yes.

As 2024 going to be similar way back loaded or or I know you'd ideally like to have it a little more evenly spread across the year. So any update on the progress to getting it more even loaded.

Yeah.

It is it is.

It's not fun to be this backloaded, some luck and a lot about that.

We have a much better pipeline for 'twenty four than we did this time last year for 'twenty three or this time two years ago for 'twenty. Two so we are much much better in terms of the pipeline of deals that we're actively working and finalizing we have more signed deals for 24 right now then.

We haven't.

Way ahead of the game, but 24 will still not be perfect in terms of timing it'll still we'll definitely have more in the front half of 'twenty four than we did this year or in 'twenty two.

My hope is that by 'twenty five is when we will see ideally.

My perspective.

Prefer not to open any new restaurants in November and December I prefer to open all of our new restaurants in the first 10 periods of the year November December seasonally for US are very very busy. It's just extra heavy lifting to open them in November and December . So that's my goal is that by 'twenty five we're not doing that undoubtedly we will still have.

Some second half openings in the class of 24.

My first one hope is that it's a lot better than what it is this year.

Great. Thank you.

You bet David.

And the next question comes from the line of Brian Harbor with Morgan Stanley . Please proceed with your question.

Thanks. Good morning, guys could you just comment on the food side, what's what's primarily locked in I guess more generally.

Do you think there'd be similar kind of improvement in food cost in the second half for or maybe in fact better.

Yeah, Brian So most of what we have locked is going to be on our be flatten on that beef line item.

In the back half of the year, we have some lacks on some other smaller items, but as you know beef is 30.

<unk> 30, plus percent of our overall basket. So most of the blacks going to come in in that form.

Taken some positions on the flats into Q1 of 'twenty four but for.

For the back half of the year, it's mostly on that line item and so.

As I mentioned, 64% the rest of the year and so we're feeling good about where we where we sit there and when I look at the trend you.

As you know Q1, our inflation on commodities was up $8 nine we saw that taper down to five and a half in Q2, I expect a little bit of tapering down from what we saw in Q2 and the back half of the year, but.

To get us to that mid single digits I do expect a little bit of tapering in the back half versus what we saw in Q2 to get us to the mid single digits for the full year.

Okay got it. Thanks, just in terms of the kind of margin impact of new stores is is there a less of a drag from Chicago stores versus some of the other markets.

Yes.

It's a great point, it's the Chicago stores, just open up with very high revenues and the margin profile because opening up in a place where we already have scale benefit. So they open up with higher revenues and they open up with better margins and that's why that little bit of cannibalization is well worth it because those are not.

Chicago restaurants tend to be much less of a margin drag.

Okay. Thanks.

Ladies and gentlemen, there are no further questions in the queue and that concludes the question and answer session that also concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Okay.

Okay.

Thank you.

[music].

Yes.

Yes.