Q3 2023 Portillo's Inc Earnings Call
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Greetings and welcome to the park low third 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.
I Didnt want it should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host background Overrated Partlow director of Investor Relations. Please go ahead.
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 Dot Porcello Dot com with me on the call today is Michael <unk>, 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.
<unk> 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 counter parts 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 assign Lu President and Chief Executive Officer. Thank you Barb and 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 portola is.
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.
And 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 expanding our markets, which we know fans across the country are excited about in fact, we've already had a great reaction from France from fans and our new frontiers of Colorado.
So, 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 counter cyclical 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, we're opening and operating our news restaurants incredibly well and our early read on the class a.
2023 is that it will also continue this strong performance.
In the third quarter same restaurant sales grew three 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.
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 in Allen, Texas, both of which feature our more efficient modern kitchen design and we have 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 Sun belt Foreign 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 porcello to life. There. The reason why portals as an experiential brand with a growing fan base guests can rely on portfolios for a delicious meal at a great price point in a vibrant environment.
I am 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 Michele to discuss the quarter's financial performance.
Great. Thank you Michael in Q3, we continued to see strong topline revenue growth revenues were $166 8 million, reflecting an increase of $15 7 million or 10, 4% compared to the third quarter of 2022.
The 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 three 9% during the third quarter, which was attributable to an increase in average check of seven 4%, partially offset by a three 5% decrease in transactions.
Check was driven by an average of nine 1% increase in menu prices, partially offset by product mix.
As Michael mentioned earlier, we have seen improvements going into the fourth quarter and our combined transactions on Max.
We are committed to delivering on our long term revenue growth targets, primarily through new restaurant growth, while continuing to deliver a 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.
We offset by a three 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 50.
This decrease was primarily driven by an increase in our revenue, partially offset by higher labor utilization incremental investments that our team members, including hourly rate increases and variable based compensation.
Really labor rates were up one 9% in the third quarter of 2023 and up four 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 up new restaurants higher credit card fees as our transition to cashless drive throughs drove an increase in credit card transactions as well as an increase in utilities and insurance expenses.
Occupancy expenses increased <unk> 6 million or seven 4%, primarily driven by the opening of new restaurants in 2022 and 2023.
As a percentage of revenues occupancy expenses decreased <unk>, 2% compared to prior year driven by an increase in our revenue.
Restaurant level adjusted EBITDA increased 22, 9% to $41 9 million in the third quarter of 2023 from $34 1 million in the third quarter of 2022.
Restaurant level adjusted EBITDA margins were 25, 1% in the third quarter of 2023 compared to 22, 6% in the third quarter of 2022.
The improvement of restaurant level adjusted EBITDA is on top of opening six new restaurants in the first three quarters of 2023, which I'll have a lower margin profile to start.
We believe this improvement was the result of our ongoing efforts to deploy strategic pricing actions.
Great guest experiences and implement operational efficiencies.
The strength of our brand the consistency of our operations and the ongoing execution of a disciplined development strategy all drive long term shareholder value creation.
Near term, we do anticipate pressure on restaurant level adjusted EBITDA margins from the planned openings of six new restaurants in the fourth quarter and the ongoing roll off of pricing.
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 contribute towards our goal of restaurant level adjusted EBITDA.
Margin expansion for fiscal 2023.
We did have three 4% of pricing that rolled off in October which puts us at an effective five 5% price increase the last few months of this year.
We will continue to monitor our cost pressures the competitive landscape as well as consumer sentiment to inform our pricing decisions in the coming quarters.
Our G&A expenses increased <unk> 8 million to 11, 3% in the third quarter of 2023 from 12% in the third quarter of 2022.
This increase was primarily driven by higher variable based compensation and an increase in wages and related costs, partially offset by a decrease in professional fees and insurance expenses.
We are currently estimating G&A to be in the range of $78 million to $80 million for the full fiscal year.
Preopening expenses increased $1 6 million to one 4% in the third quarter of 2023 from <unk>, 5% in the third quarter of 2022. The increase was due to the timing of geographic location of activities related to our planned new restaurant openings.
All of this led to adjusted EBITDA of $27 3 million in the third quarter of 2023 versus $21 6 million in the third quarter of 2022, an increase of 26, 2%.
Below the EBIT line interest expense was $6 6 million in the third quarter of 2023, a decrease of <unk> 5 million from the third quarter of 2022. This decrease was primarily driven by improved lending terms associated with our 2023 term loan and revolver facility.
As of the end of Q3, the effective interest rate on the term loan and revolver was eight 5%.
Income tax expense was $2 6 million in the third quarter of 2023, an increase of $1 6 million from the third quarter of 2022, our effective tax rate for the quarter was 28, 6% versus 23, 9% in the third quarter of 2022.
Our effective tax rate increased versus the third quarter of 2022, primarily driven by an increase in class a equity ownership, which increases our share of taxable income or loss.
We expect the full year tax rate to be approximately 21% to 23%.
We ended the quarter with $12 9 million in cash.
As a reminder, we invest our operating cash flows and available cash into our future by self funding, our new restaurant growth.
We currently estimate the capex range to be $75 million to $80 million versus the previous range of $70 million to $75 million. We increase this range based on capital being deployed ahead of the 2024 pipeline.
Our average net build cost per restaurant remain in the range, we disclosed at development day in December.
We remain committed to delivering healthy topline and bottomline growth in 2023 and beyond.
Thank you for your time and with that I'll turn it back to Michael Thanks, Michelle and before we open for questions I'd, just like to reiterate how proud I am of Portillo bar teams and all we have to offer.
We're a growth company and we continuously earned the right to grow because we manage our core business profitably.
Q3 was another quarter with really great margins, our investors can count on us to deliver on both the top and bottom line to keep funding that growth this starts with efficient operations.
Which are in T. Our engage team members drive every single day their dedication and hard work creates a fantastic experience for our guests and keeps them coming back. This is our flywheel and youll see that its really starting to spin we expect our momentum to last long into the future and with that let's open the line for questions.
Thank you.
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Our first question comes from Sharon Zackfia with William Blair. Please go ahead.
Hi, good morning.
I know you don't normally talk about recent trends, but you did bring it up on the call and I think a lot of others have had to as well just given.
What seemed to be a return to more normal seasonality in the quarter.
Do you concur that you know part of the slowdown that you saw in the third quarter was more normal kind of pre pandemic seasonality or do you think there's something else happening in the business and you know as you think about the rebound here in October how do you think about price.
In power our value proposition as you as you look towards 2024.
Yeah, Good morning, Sharon Thanks.
Great question and yes.
We don't normally like to talk and talk about what's going on but given the context and how everyone else's opined on it we felt it was appropriate we are seeing strong momentum across the board in October and I think youre, 100% right. We're back to what I think is more of a normal rhythm in the restaurant industry.
Going back to 2019 kind of mindset.
Third quarter is always a little bit of a sluggish quarter for the restaurant industry and and and typically we come roaring back in the fourth quarter. So we're seeing a much more consistent pattern with the past. So we're happy about that and we feel very optimistic for our fourth quarter.
With regards to the second part of your question.
Look we we feel we are very very.
I guess, the Stewart on monitoring our pricing versus all of our competitors. We look at our typical basket versus everybody else, we compare ourselves to not just fast casual, but <unk> and <unk>.
Sort of the best of <unk>, and we feel we have a very strong price position.
But we're also a little cautious and we're going to play it by ear, where we've foregone.
Went I guess any pricing in October as Michelle indicated we're going to have a 2% pricing that we're going to lap off of in January and we're still evaluating whether or not we do anything there. We feel we can that's not the issue, but what we really do want to protect our price position and be a really great value for our guests. So that's the balance.
Act for us.
Thanks.
I guess I I don't want to labor the point, but I hear all the time from investors like you know how does porcello stack up as a long term investment if traffic is slightly negative.
Which has been for a couple of quarters. So it would be great. If you could help contextualize, maybe what's happening in traffic.
And I know you're burdened by this big Chicago base, where you've got kind of declining population, but if you could help frame kind of why the optimism on the long term.
When investors look at the near term and they think Wow like whats the consumer saying with that traffic number.
Yeah, I think I think you actually said it well.
Thank you for teeing up the answer but look the Midwest and in particularly in Chicago, where in a negative population state right. So as population declines that makes transaction growth very very challenging you effectively have to steal share from other people.
As I enumerated the bulk of our growth is Texas, Florida, Arizona.
All states with significant population growth and so we are putting ourselves in a position where just from a transaction standpoint, it's almost transaction arbitrage where in we are re purpose and capital to states with transaction tailwind and we will be a beneficiary.
That along with all the other restaurant companies that are in those markets.
Well, we like to think is that in Chicago land and in the Midwest. We can fight the negative macro trends with the strength of our brand and steal share where appropriate but in these growth markets, where we're reporting ourselves and putting all of our capital.
We can we can we can rise with the rest of the tide. There. So that's the play for us.
That play is going to have some quarterly fluctuation, we're not frankly to talked up about that.
But over the period over over the quarters. The years, we're very confident in port <unk> transaction strength in portfolio as traffic strength in port till those comp strength.
And especially our margin strength.
Sure and I'll just jump in for a minute and reiterate our long term growth algorithm right of that low single digit comp growth in and the revenue growth that we're just going to generate from the new units as we talked about on the call that's really going to drive.
That revenue growth as we go forward and we're definitely not saying I know how important campus and you know as <unk>.
Nickel sat on his prepared remarks that will ebb and flow, but that new unit growth and the development that we see into the pipeline I think is really going to propel us.
And so I'd say, that's definitely the investment thesis for <unk>.
Okay. Thank you.
Our next question comes from Andy Barish with Jefferies. Please go ahead.
Hey, good morning, guys.
On the labor line.
Some nice leverage there again we're.
Where seasonality maybe.
Goes against you a little bit.
I think he quoted the.
Wage increases world.
Around 2% for the quarter so did.
Should we read into that that the wage investment that you took kind of.
Picked up steam in the latter part of the <unk> just trying to drive those you know those comments with the with the results.
No I think Andy you're right Q3 labor was up one 9% and we did make the investments.
In late June early July in terms of those wage increases and they weren't they were normal increases. So there was nothing with.
With the increases that was out of the ordinary or call. It and as we go into Q4 I expect that the Q4 inflation rate will be very similar to what we saw in Q3. So nothing I would call out Andy that indicates that Q4 would look any different in Q3 from an inflationary standpoint.
Keep in mind.
Year to date number on wage inflation is four 8% so that's that.
That's something that just having your head yes, we started to lap Andy if some of the wage increases that we had given in prior years that started to roll off and again to Michael's point, we're up just under 5% year to date and when you look at even versus 2021 were up just under 17% and actually up 30%. When you go back versus 2020, so yes, we've made.
Significant investments and labor over the past three years, but we're starting to see that normalize.
Great and then.
Just with the number of openings in the fourth quarter.
Any any kind of guardrails or guidance on.
That restaurant level margin.
Sequentially or year over year, I'm, assuming it's going to be down sequentially with all those new openings, but.
You know interesting merit is just kind of help us with.
Those six openings in the quarter.
Yeah, I would say Andy when you look at we already said Cicero opened in October and Michael mentioned Arlington is Gonna open shortly and then when you look at the remaining restaurants that we're gonna open later in Q4, and so yes, you get a little bit of impact to the margins, but also the pricing that.
<unk> is off to the 3.4% pricing that rolls off does impact you. When you look at that margin picture in Q4, as well and so yes, I do expect sequential margin decline Q3 versus Q4.
Okay.
But I do expect when you look at quarter over quarter Q4, 'twenty two versus Q4 of 'twenty three of that margin improvement.
Got it and then just final one final one for me.
Happy to hear about the start.
So the fourth quarter kind of inline with what we've been hearing from others you've seen in industry data.
I think last year your catering business kind of really got got hurt with the weather and that sort of a holiday week.
Anything else that we should be aware of just the <unk>.
Quarter unfolds versus year ago.
Kind of experience.
Yeah.
Yeah.
Excellent recollection, Andy we had.
Our winter storm Elliot name that will live in infamy for me, but it ruined the Christmas holiday season. It was a week right after Christmas and that's a really big week for us from a catering standpoint, so it really pulled the rug out from under our catering business, we're hoping for more.
The weather I guess in the Midwest, So knock on wood for that but that did pull the rug out from underneath us and you will recall that this is a unique year and that we have a 50 <unk> week. So obviously, we will report.
Like for like numbers 52 week, but we do have a 50, <unk> week, which will create a little bit of extra.
On a momentum for the year.
Thank you.
Our next question comes from David Tarantino with spire. Please go ahead.
Hi, Good morning, Michael for what it's worth I'm also hoping for more mild weather in the room with us.
Amen.
So I.
I had a couple of questions. One is on the October trend that you referenced I was hoping maybe you could give us some sense of magnitude of the improvement.
From what you saw in the third quarter, just so that we're all on the same page here.
Michelle is giving me a dirty look as is my IR person, let's just say that we're definitely into positive territory in terms of transactions and I think that's all I can say right now so.
So we're very optimistic about that we've also.
We're also.
And part of that G&A spend we spent a little bit of money on advertising in Chicago land, if you're an unfortunate bears fan and you've been watching bears games or Monday night football or the World series, you will have seen some portillo is advertising and whenever we do brand enhancing marketing like that it tends to have a positive impact for us.
And so we've seen a little bit of that and I wouldn't be surprised if that continues to drive some momentum into the fourth quarter. So we're optimistic and I think we are pulling some levers to make sure that the traffic trends remain what we have seen.
Great. Thank you for that context.
The other question I had is on new unit contribution so I guess the way we model. It it came in a little a little light of what we had modeled in and it looked like maybe the the average weekly sales for the new units is a little lower than what you saw in prior quarters. So just wanted to understand.
And that dynamic and whether it might be related to kind of coming off from some of the honeymoons in the early part of the year or if there's something else going on.
I encourage you to double check your models and adjust timing because I think that it depending on if you assumed a mid quarter convention for each new unit.
We honestly didnt do that with most of our units are opening up towards the end of each quarter and the ones in the fourth quarter, you should be modeling them late in the fourth quarter, obviously, we're already into the fourth quarter, but it's it's not a function of there coming in softer it's a function of.
When they are opening and when you modeled them within a quarter.
Perfect in any comment Mike on the second Texas location, how that's opened so far.
We're very happy with Alan.
We're very happy with Alan we're very happy with Alan I think Arlington is going to be fine I mean, we're super excited about Texas.
We're eager to get Arlington open it's a beautiful restaurant the team is chomping at the bit.
And then we've got Fort worth coming in shortly after that and we already pre announced Denton early 'twenty four so I'm excited to get to five restaurants in the state of Texas in Dallas Metro.
Within 12 months, which is up.
For us.
For us Thats, an audacious tab.
Tasks that we just took on an accomplished.
Great. Thank you very much thank.
Thank you David.
Yes.
Our next question comes from Chris of Coast Cheerful. Please go ahead.
Thanks, Good morning, guys good morning.
Good morning.
The industry has started to get more promotional I think you mentioned incremental advertising here recently, but what other initiatives can the company take to keep traffic flat to positive if it needs to.
Yes.
So what I Wanna Nit Nat with one thing so the industry has gotten promotional portillo does not get promotional we don't discount so youre not going to see a dollar menu were not going to do shrink <unk>. That's just not who we are.
I support when we do brand enhancing activities just a reminder of who portfolios is in <unk>.
Our marketing is showing pictures of our food right.
'cause it's craveable, it's delicious, it's a reminder of why people love Portillo.
I think our team did an amazingly creative job with the existing advertising, which is the sounds of port <unk> hearing sort of the the crunch of the onion rings as they fall onto your plate things like that so it's brilliant brilliant brand enhancing advertising and we're seeing the impact of all of the macro.
ROE trends, Chris So our dining rooms are really full and thats, because I think that with price points, where they are in casual dining we are a refuge from that we have fantastic food in a beautiful environment and.
It's working really well for us our drive throughs did get a little slowdown in Q3, and that's because of exactly what youre, describing some very aggressive.
Discounting activities by <unk>, which again, we don't we don't discount and so theres going to be a shopper that chooses to go get.
Dollar Burger or $2 Burger versus our Burger and.
When.
Economy gets better they'll come back to us or when they want to sit down with their family they will come into our dining rooms, and so I think we just ride that ebb and flow a little bit we're happy with where we're positioned we're not going to promote we're not going to discount, but we are going to remind people of how delicious our food is and how craveable. It is in our brand enhancing way the other lever.
For us to pull is excellent execution.
The things that I don't think people.
Talk about because it's not a short term fix it's a medium and long term fix is when you give great experiences to guests every single day that is the number one reason why they choose to go back to our restaurants, it's not because of a coupon or a discount or something but it's because when I went there I had a great experience and I want to go back and so that's another way that you can differentiate your.
Self over the medium and long term and drive consistent traffic by just being operationally sound and.
That is our mantra internally, we're going to be the most operationally sound restaurant company, we can be and that will drive that will drive performance.
Okay, That's fair and then.
The margin performance was clearly impressive this quarter and I'm just wondering whether there is whether you think there may be an opportunity to give back some of that margin improvement to enhance the value proposition.
Either through changes to some of the menu items or <unk>.
And maybe something else that you think could maybe improve value.
Yeah, I think Thats a great. Another great question. It's one of the reasons why we decided to forgo any pricing for the remainder of this year and that's essentially where our pricing is coming down to five 5% and thats one way of giving value back we did not engage in any shrink <unk> lowering quality doing anything like that over.
The last couple of years in fact, what we've done is we've added value right.
We spend more money on Baker, we have I think the best Bacon in the in the restaurant industry that we're selling right now so if you try our bacon burgers are amazing.
And we've consistently done that we've added quality and so that's the other thing that we do is I'd rather in terms of reducing.
Prices getting to some sort of lower value lower cost meal, we'd rather just improve the other aspects of value, we'd rather improve the quality of what you are getting we'd rather improve the quantity of what youre getting we'd rather improve your experience.
And and then maintain prices as opposed to raising prices.
Okay. Thank you.
Our next question comes from David.
With UBS. Please go ahead.
Great. Thanks, Good morning, guys wanted to ask if anything additional to highlight on the sort of observed customer behavior changes, perhaps whether it's day parts days of the week off premise versus on delivery anything discernible over the last several months there Michael and Michele you would call out.
I think we're largely in some ways our channel mix is very stable.
Unsurprisingly, our drive throughs have a little bit of pressure on them.
Given the promotional activity in <unk>, and our dining rooms have a little bit of a.
A little bit of extra momentum given the pressures of casual dining is facing and so it's for us it's a really.
Nice dynamic.
Other things that frankly surprised us all of US every day, we look at is that our third party delivery partners are still doing a really good job with US we continue to grow third party delivery.
And that.
Is great news, it's also a little bit mystifying, given consumer pressures out there, but we're doing we feel really confident with where we are right now.
That's great. Thanks, Michael and then just one maybe two part question.
First I guess, maybe I missed this but as it relates to cannibalization anything there that you saw in the quarter, even if even if modest worth.
Worth calling out the second sort of unrelated part of the question I know we were just.
<unk> spent a month month and a half ago spent some time on development of course, but but any kind of latest update on timing permitting et cetera, I assume it's probably steady as she goes.
A month and a half ago, but any update there a lot of folks have been shifting into next year you guys. Obviously youre going to get these opened so just curious if anything has shifted with the open environment on some of that timing stuff.
Yeah, Dennis I'll take the cannibalization, there's been no changes since we gave the impact last quarter at the 60 to 80 basis points, we're seeing roughly the same impact in Q3 so.
<unk> to be a fairly insignificant for us. So we don't expect that to be a significant headwind for us as we move forward, but it was roughly the same as it was in Q2.
And then with regard to <unk>.
Permitting and those things.
I don't want to sound too glib, but it's sort of whatever that military acronym is for snafu situation normal all messed up.
We continue to face delays in all kinds of like last minute things with getting utilities hooked up et cetera et cetera, we're just.
I think we have reconciled ourselves to this this is a new normal and so we continue to pad hours and weeks.
Actually months into the building cycle for us so that we can still control we can control build the restaurants as quickly and as definitely as we can and then the stuff that you can't control it build enough cushion so youre not disappointed from budge.
Budgeting timelines et cetera.
Great. Thanks, guys I appreciate it you bet. Thank you Sarah.
Our next question comes from Sara Senatore with Bank of America. Please go ahead.
Thank you.
Alex I wanted to ask you a little bit about the idea of like sort of what flow through margins should look like and I think.
Specifically.
You just sort of a fair amount of price most of the margin expansion seem to come from food. So, yes, I think through like labor and occupancy, particularly or other operating I should say in the context of maybe additional drags from.
From new units coming on in fourth quarter.
Do you have any circuit.
Sure.
Framework for like what's the right comp number to get margin expansion on some of those six lines.
And similarly in the same vein like G&A.
Creeping up a little bit so just trying to kind of calibrate incremental revenues or same store sales versus.
Margin on the restaurant line and also G&A and then and then I'll have one follow up question.
Yes, Sir I think when you look.
Quarter over quarter, I'll talk Q4, 'twenty two versus 23 right you really you hit the nail on the head I mean commodities when you look at that and you look at what we're running on that.
And that food line for US I think Thats, where you see some of the improvement quarter over quarter I think if you're talking sequentially Q3 versus Q4.
We do have the pricing rolling off so that's going to be a headwind and as these new units come on.
We talked about they're coming on later in the quarter, but that does have.
A bit of an impact when you think about particularly that labor line and so I see the improvement coming year over year and quarter over quarter.
Primarily from that commodity side when you look at that because I think labor is generally when you look at Q4 'twenty two versus <unk>.
'twenty three will generally be in line and so you get the impact of the commodities, but sequentially I think will be impacted with that pricing rolling off.
Okay, Yeah, I was more thinking year over year, just this idea that <unk> versus <unk>.
You had some improvement but most of it came from.
Commodity so is that that's sort of the same.
If you look at Q3 of last year, we were running at about just over 35% versus the 33% this year and so I don't expect Q4 of this year to change.
Sequentially I think inflation will be.
Similar to what we saw in Q3 from a commodity standpoint.
Okay, and so as we think about the complexion of margin year over year for Q should look similar.
<unk> in a sense that most of the tailwind coming from the commodities.
Correct Okay.
And then even with perhaps better transaction trends.
As Michael mentioned in October we are seeing better trends than I said in my prepared remarks, when we look at transactions mix combined yes, we are seeing improved trends versus what we saw in Q.
Q3.
But still thinking about the margin construct similarly, even though trends okay. Yeah.
Okay, and then and then just on again on G&A.
Sort of thinking through that increase.
How should I think about sort of your the variable comp.
In terms of.
When we think about your long term algorithm should we be thinking about your sort of internal goals is consistent with that so that you know as we.
We're trying to sort of think about where there might be upside in terms of variable comp. It should look sort of similar to what you've articulated at your long term growth targets. Yeah, correct. As you know long term, we are targeting 75% of that revenue growth rate as we think about and you think about modeling G&A in the future.
Absolutely.
How we think about it internally for the fourth quarter, we increased the range I think Michael mentioned the incremental dollars that we're spending on advertising in the fourth quarter within our just our core market of Chicago land, where we have scale.
Think thats definitely.
Think to Chris's question earlier, one of the levers that we can pull as we're in this.
As Michael mentioned at sluggish environment.
That we have scale like our market of Chicago, we can pull that lever Sara.
That's where we're seeing the increase in the investment that we made in G&A and that's why you're seeing that range go up in particular in for the full year library, we raise that range.
Okay got it thank you yeah.
Our next question comes from Gregory <unk> from Guggenheim. Please go ahead.
Okay, Hey, thanks.
A couple of quick ones.
The first is.
Do you guys have not historically wanted to comment a lot about.
Trends regionally, but just just given the traffic declines I'm curious any big differences between either Chicago, non Chicago or regional things to call out.
No Greg first good morning, I wouldn't say, so I think that we obviously look.
We look very carefully at our traffic trends and transaction trends and we use black box, we compare ourselves within Chicago, Atlanta, Chicago land and I would tell you overall the trends are pretty consistent and the improvements are pretty consistent so I don't think theres anything idiosyncratic there.
With our bot it messes market yes.
Okay got it and then just.
We've seen a few companies starting to talk about 'twenty 'twenty four labor inflation in the mid single digit range. I think it's interesting that you guys are running well below that I don't know if that's something to do with <unk>.
Either where you are regionally or.
I'm just curious if you kind of think that Thats I know it might be a little bit early if that's something that would be consistent with what you guys would expect to or.
If you guys might be able to run below that next year.
So a couple of thoughts keep in mind that our labor inflation year to date is four 8% right. So that's where we are and I'll, let Michele talk about what's going to happen going forward, but there is.
So theres a whole bunch of noise in this so our overall labor is negatively affected by labor wage inflation.
It's kind of a mixed news on our staffing is really good right. Now we are much better staff than we were last year, which is a good news and a bad news. The good news is it means our guests are getting great experiences or restaurants are fully staffed we can handle volume.
The bad news is it puts a little bit of pressure on the labor line because it means.
Spending more money.
It pays off over time, so it's a no brainer to do that and then the really positive news and I'm very proud of our ops team as we continue to get appropriate labor leverage and operational efficiencies.
I may kind of a big deal about we've got a new kitchen design in Queen Creek in Allen, Texas that new kitchen designed is meant to reduce wasted effort and by wasted effort I mean, needless conveyance people walking 50 feet to go get something when there should be a refrigerator Ben right by their feet and so our kitchen.
<unk> are more efficiently designed it reduces conveyance, we've gotten smart about reducing prep work et cetera. So those three factors really Greg affect labor rising rates.
How well staffed you are and then are you getting efficiency by removing.
Effort that that is not value added and so the net of those is is how we are going to manage our labor line and I think we can we're still targeting to offset most of the wage inflation Michelle yes, yes, Greg I would just add is as we look at 'twenty four obviously, we're putting those plans together nothing that im.
Seeing today indicates that we're going to.
<unk> be different than what we saw this year, which when you think about that mid single digit wage inflation I don't anticipate us being outside of that range as I sit here today.
Okay got it and then maybe just one last one I know this is kind of more model focus that I would like for this call that the last week between Christmas and new year's I think it shifts between <unk> and <unk> the coming two quarters is that a big sales volume week for you and just just in terms of right sizing both the impact on <unk>, but also potentially impact.
<unk> of next year.
Yeah.
Generally the week after Christmas and so as Michael mentioned, we see a lot of catering leading up to that Christmas time, Greg as he mentioned and so I would say what we saw last year as Michael mentioned Elliot and we saw like an immediate pickup in sales last year right. After the.
Year ended in 'twenty, two so that first week in fiscal 'twenty three we saw a big pick up so as we're lapping that week.
That we can be that 50, <unk> week, let me just say it could be year over year, a little bit pressured because you had the pickups from Elliott last year versus this year, if that makes sense to you. So long story short I don't say, it's like a huge blow out week for US I think the week. Prior when you look at that Christmas Eve Christmas timing.
Is a lot of the bigger catering catering volume that we see.
Understood. Thank you no problem.
Our next question comes from Brian <unk> with Morgan Stanley. Please go ahead.
Yes. Thank you good morning.
Good morning, Brian.
So just to kind of follow on those comments about 24 do you have any kind of early thoughts on commodities next year at this point or.
Even on the beef side do you think.
Could it be a little less inflation than 'twenty, three or maybe something similar.
I don't think beef is going to lighten up Brian into next year, So I think that'll still be pressured.
On the last call, we're still take we're taking positions.
Into 'twenty four and so when we look at the B flats were trying to Derisk some of that line item and we have taken some positions into both Q1 and Q2 of next year to Derisk that but no I expect that to continue to be pressured but when we look at the overall basket I'll say the same thing I said about labor as I sit here today.
Expect to be outside of that mid single digit range. We'll update you all as we get into the new year at ICR with what we're seeing offered for the fall of 'twenty for fiscal year, but I'm not seeing anything today that would indicate anything beyond that mid single digit for 24 as well on the commodity line.
Okay sounds good.
<unk>.
Just on four wall margins I mean, they have been quite strong year to date, so you're kind of comfortably higher as you have suggested do you think thats.
Mainly influenced by just strong new store openings, maybe they're kind of ramping a bit quicker than you thought or.
Anything else broadly that you'd characterize as really helps store margins.
I want to brag about my team because I will tell you that the labor efficiencies that we've gotten by putting people in the right position and remove and reducing conveyance has been a big help otherwise the labor would have been out of control Michelle and her team have done a brilliant job of forward buying beef and so and doing other Cree.
<unk> of things to make sure that we're not as.
We're not held hostage to the beef prices so.
We track very carefully where be flats are versus the market and we're really happy with what were paying versus the market and I give a lot of credit to my team for that so it's a lot of.
Brian It's a lot of pick and shovel work behind the scenes to make sure that those margins are as robust as they are absolutely having great new restaurants that open above.
Your targets helps undeniably that helps but theres a lot of like heavy lifting behind the scenes that goes into maintaining those kind of margins and in our team across the board is doing a great job of protecting our shareholders and funding our growth.
Thank you.
Thanks, Brian.
Sorry, our next question comes from Brian Lewis with.
Piper Sandler. Please go ahead.
Hi, Good morning, this is Ashley on for Brian.
I'm just wondering if you could comment on mix it looks like it was still negative in the quarter, but it has improved sequentially I know this negative mix dynamic is not unique to <unk>, but just wondering if theres been any changes as to what's driving this and what it could look like as we progress into 2024. Thanks.
Yeah, No problem, yeah, absolutely, we did see improvements to your point in the mix.
Going from negative $2 seven in Q2 to about negative one eight in Q3, I think Ashley to Michael's point.
In Q4, we're seeing improvements on both transactions and next so we're seeing some improvements of that.
Q4, I'd say nothing's changed underlying that in terms of we're still seeing the lower attachment the last items per transaction that's.
That's the main component of that next change so nothing I would call out that's changed from what we previously discussed on that line item.
Great. Thank you.
Yes.
Okay.
There are no further questions at this time. So this concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
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