Q1 2024 Portillo's Inc Earnings Call
[music].
Greetings and welcome to the poor tell US first quarter 2024 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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 is now my pleasure to introduce your host Barbara Hill, Verine Portola as head of Investor Relations. Thank you you may begin.
Barbara Margaret Noverini: Thank you operator, good morning, everyone and welcome to our first quarter 'twenty 'twenty four earnings call our.
Barbara Hill: Our 10-Q earnings press release, and supplemental presentation are posted at investors that porcella Dot com with me on the call today is Michael <unk>, President and Chief Executive Officer, and Michelle Hook, Chief Financial Officer.
Barbara Hill: Any commentary made here about our future results and business conditions are forward looking statements, which are based on management's current expectations and are not guarantees of future performance.
We do not update these forward looking statements unless required by law.
Our 10-Q identifies risk factors that may cause our actual results to vary materially from these forward looking statements.
Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials.
Barbara Hill: Finally, after we deliver our prepared remarks, we will open the lines for your questions.
Barbara Hill: Now, let me turn the call over to Michael <unk>, President and Chief Executive Officer of Porcello Us.
Michael: You Barb and good morning, everyone. Thank you for joining us for our first quarter 2024 earnings call.
Michael: It's an exciting time at port Telus during the first quarter, we opened our fifth restaurant in the Dallas market and then just a few days ago, we opened our seventh restaurant in the Phoenix Scottsdale area.
Barbara Hill: We're happy with how quickly we're building scale in the Sunbelt, where there continues to be plenty of room for us to grow.
Barbara Hill: Now in the first quarter, we grew total sales six 3% and achieved restaurant level margins of 21, 9%.
Barbara Hill: Our comp was negative one 2% as we got off to a slow start due to some miserable weather across the Midwest.
Barbara Hill: And please recall, we have 69 restaurants in the comp base and 60 of them are still in the Midwest. This means the majority of our comp base felt the impact of that cold snap.
Barbara Hill: That said, we've seen top line trends improve going into the second quarter.
Barbara Hill: So far in April our efforts have mitigated transaction declines in comp is settled back into the positive low single digits for.
Barbara Hill: For the full year of 2024, we're still confident in our ability to deliver low single digit comp.
Barbara Hill: 23% to 24% restaurant level margins and open at least nine new restaurants.
Speaker Change: But for Michelle reviews, our Q1 performance.
Speaker Change: I'd like to take a moment to share with you our strategy.
Speaker Change: Our strategy is predicated on four pillars that provide guideposts for near term goals and serve as the foundation for quality long term growth.
Speaker Change: You can see a graphic of our strategy in the earnings supplemental.
Speaker Change: The four pillars are first running world class operations.
Speaker Change: Second <unk>.
Speaker Change: Innovating and amplifying the portfolio's experience.
Speaker Change: Third building restaurants with industry leading returns.
Speaker Change: And fourth taking great care of our teams.
Speaker Change: And of course, our pillars sit on the foundation of a winning culture and.
Speaker Change: In 2024, we've committed to prioritizing sales and transaction growth. So let's dive into some of the specifics on how each pillar where support our goals in 2024.
Speaker Change: First running World class operations is the single most important tool we have to drive sales. It is the core element of our business that's totally under our control.
Speaker Change: And it gives us the right to grow guests, who enjoy the taste of our food and have a great experience and see the value in our brand and come back time and time again.
Speaker Change: Those misses those visits may not look the same each time, whether they want to dine in with their kids Zip through our drive throughs enjoy port pillows at home or cater for a big event, our strong multichannel muscle remains a competitive advantage that drives guest engagement and traffic and.
Speaker Change: In 2024, we're specifically focused on improving the drive through experience, we're already known for our double Lane drive throughs and friendly order takers, but speed really matters throughput matters. Our overall satisfaction scores in the drive through has been good but our services slowed down a bit and we know we can do better.
Speaker Change: A 32nd improvement in our drive through speed equates to a point of comp.
Speaker Change: So we continue to double down on speed of service by empowering our restaurant leaders with tools and coaching.
Speaker Change: To give real time feedback based on those key metrics at critical time points during the day.
Speaker Change: Our second pillar is centered on innovating and amplifying the port till those experience through menu innovation marketing efforts and digital engagement.
Speaker Change: Each of these avenues raises brand awareness and reaches guests through the consumer landscape.
Speaker Change: At the end of Q1, we tested a spicy chicken chopped salad and the and a chicken pecan salad. We were so pleased with the initial feedback from the tests of these fresh new salads that we accelerated their launch by a month, a testament to our nimbleness as an organization.
Speaker Change: And already sales of these new salads are the highest of any of our new menu launches over the last five years and that's without the full marketing campaign behind it starting.
Speaker Change: Starting this month, you'll see our mix it up marketing campaign on digital channels, highlighting the freshness of all of our housemaid ready to order salads.
Speaker Change: They've also had a positive impact on mix by displacing lower margin items.
Speaker Change: Simply put these salads are a win.
Speaker Change: They are clearly delicious they add menu variety that appeals to a range of demographics and they make poor till those even more veto proof.
Speaker Change: At the end of Q1, we also made a small investment in some traditional advertising to amplify brand awareness in Arizona really the only other market outside of Chicago, where we have some scale.
Speaker Change: We've seen early signs of transaction improvement in this region in conjunction with that campaign.
Speaker Change: Given that success and the success in general of our advertising we're planning on another round of advertising in Chicago land in the third quarter.
Speaker Change: We will also continue to innovate our digital advertising approach.
Speaker Change: In Q2, we increased our advertising on third party delivery sites outside of Chicago land to generate trial and raise brand awareness. This is a proven tactic and we'll be doing more of it as we assimilate in new markets.
Speaker Change: Yeah.
Speaker Change: Technology will also continue to play a role in amplifying the port till those brand.
Speaker Change: I am excited to share that Keith Korea has joined <unk> as our new Chief Information Officer, a longtime restaurant industry executive Keith will continue to advance the portfolio's team member and the guest experiences.
Speaker Change: Under Keith's leadership, we're embracing technology as a business driver in ways that create impact in value at a port pillows.
Speaker Change: Our team is actively partnering with stakeholders throughout the business to identify opportunities for optimization and innovation and in particular, we're looking at how to improve our digital ordering experience through our App and were planning our first testing of kiosks in California that will enhance our signature guests.
Speaker Change: Experience.
Speaker Change: Our third strategic pillar is building restaurants with industry leading returns.
Speaker Change: We're focused on maintaining our industry, leading <unk>, while optimizing our footprint and lowering our build costs. We're also looking to scale in new markets quickly as we lean on replicable development processes.
Speaker Change: We're on track to open our first restaurant of the future in Texas in Q4, and as a reminder, the restaurant of the future is a smaller format prototype with some built in efficiencies.
Speaker Change: The early contractor bids suggests that we're well within the estimated build cost range of 5.2 to $5 5 million.
Speaker Change: And remember this saves at least $1 million on each new restaurant of the future build puts us in a very enviable position when it comes to cash on cash returns.
Speaker Change: Now importantly, even with a 500 square foot reduction these restaurants will still look and feel like a portal those.
Speaker Change: They will have local personality they will be led by an experienced <unk> and most importantly, we expect them to still produce the same industry, leading <unk> of all our other restaurants.
Speaker Change: We have a few restaurants in the future coming online this year and we're really excited to see what they do.
Speaker Change: We've built a tremendous development pipeline and we feel confident in our ability to continue to expand at a faster pace than we have in previous years. We know portillo has a long runway for continued growth.
Speaker Change: Our final strategic pillar and maybe our most important one is taking great care of our teams it.
Speaker Change: It wouldn't be possible to serve our fresh amazing food or create memorable guest experiences without our team members.
Speaker Change: We're proud of our industry, leading team member retention, which averaged about 20 percentage points better than the rest we're focused on providing a meaningful work environment pay and benefits that matter to the team member and a clear pathway for professional development.
Speaker Change: We're especially proud of our ignite development program, that's been totally built in house.
Speaker Change: As you know a critical component of new restaurants success is having an experienced general manager.
Speaker Change: I am proud to share that because of ignite we have a deep leadership bench, we have identified experienced <unk> for all of our 2024 pipeline as well as most of the 2025 pipeline already.
Speaker Change: Nearly all of those gms or ignite graduates.
Speaker Change: More confident than ever in the talent pipeline, we have built to support our growth.
Speaker Change: And beyond the general manager level, we have team members across this organization, who see the potential for long term careers with portfolios in.
Speaker Change: In the first quarter of 2024, we promoted 60 for team members, who went through the ignite program continuing to develop that in house talent, we're thrilled with how many folks raised their hands and want to be a part of <unk> growth.
Speaker Change: They can envision the exciting future for us and they want to be part of it. It's our team members who create the portfolio's experience that keeps our guests coming back and we're focused on making sure that's what we deliver.
Speaker Change: With that let me hand, it over to Michelle.
Michelle Greig Hook: Great. Thank you Michael and good morning, everyone before we discuss our first quarter results I want to recap our recent secondary offering.
Michelle Greig Hook: This quarter, we completed the offering of 8 million shares of the company's class a common stock at an offering price of $14.37 per share.
Michelle Greig Hook: All of the shares sold in the offering represented class a and B shares owned by pre IPO members. We used the proceeds to purchase shares from Berkshire partners, a private equity firm that acquired Portela was in 2014 and subsequently sponsored our IPO in 2021.
Michelle Greig Hook: As of May seven 2020 for class a shares that represented 84, 1% and class B shares represent the remaining 15, 9% of the $73 2 million in total outstanding shares.
Michelle Greig Hook: Since the IPO there had been for secondary transactions, which have collectively reduced Berkshire is beneficial ownership to approximately 19, 3% of the company from over 60% at the time of the IPO.
Michelle Greig Hook: Over this time, we've more than doubled our public float.
Michelle Greig Hook: Now turning to the results for the first quarter.
Michelle Greig Hook: In Q1 revenue growth was driven by the opening of new restaurants.
Michelle Greig Hook: During the first quarter revenues were $165 8 million, reflecting an increase of $9 8 million or six 3% compared to last year, new restaurants positively impacted revenues by approximately $14 4 million, which was offset by a one 2% decrease in same restaurant sales.
Michelle Greig Hook: This was primarily driven by a decrease in transactions of three 2%, partially offset by an increase in average check up 2%.
Michelle Greig Hook: The higher average check was driven by an approximate five 1% increase in certain menu prices.
Michelle Greig Hook: We offset by product mix.
Michelle Greig Hook: And a two year stack basis was seven 8%.
Michelle Greig Hook: Strong same restaurant sales growth of nine 1% in the first quarter of 2023 and.
Michelle Greig Hook: Ongoing consumer uncertainty and winter weather give greater contacts to this quarter same restaurant sales performance and.
Michelle Greig Hook: In particular Q1 transactions were heavily impacted by severe weather in the Midwest. This period spans several weeks during which transactions declined by double digits.
Michelle Greig Hook: Same restaurant sales and transactions subsequently improved as.
Michelle Greig Hook: As Michael mentioned, we're focused on several initiatives to drive transactions and what continues to be a choppy consumer environment.
Michelle Greig Hook: We are happy that these efforts supported low single digit same restaurant sales growth and improved transactions at April versus our first quarter results.
Michelle Greig Hook: For the full year, we are still estimating low single digit same restaurant sales growth.
Michelle Greig Hook: Moving on to our costs food beverage and packaging costs as a percentage of revenues decreased to 34, 3% in the first quarter of 2024 from 34, 4% in the first quarter of 2023.
Michelle Greig Hook: This decrease was primarily due to an increase in our revenue and lower third party delivery commissions, partially offset by a four 8% increase in commodity prices.
Michelle Greig Hook: We experienced commodity pressures on beef pork and produce during the first quarter.
Michelle Greig Hook: We are still estimating commodity inflation in the mid single digits in 2024.
Michelle Greig Hook: Labor as a percentage of revenues increased to 26, 1% in the first quarter of 2024 from 25, 9% in the first quarter of 2023.
Michelle Greig Hook: The increase was primarily driven by lower transactions and incremental wage rate increases for our team members, partially offset by increases in our average check and lower variable based compensation.
Michelle Greig Hook: Hourly labor rates were up three 1% in the first quarter of 2024 versus the prior year period we.
Michelle Greig Hook: We are currently estimating labor inflation in the mid single digits in 2024.
Michelle Greig Hook: Other operating expenses increased $1 2 million or six 2% in the first quarter of 2024 compared to the first quarter of 2023, which was primarily driven by the opening of new restaurants.
Michelle Greig Hook: As a percentage of revenues other operating expenses remained flat at 12% compared to the prior year.
Michelle Greig Hook: Occupancy expenses increased <unk> 9 million or 10, 5% in the first quarter of 2024 compared to the first quarter of 2023, primarily driven by the opening of new restaurants.
Michelle Greig Hook: As a percentage of revenues occupancy expenses increased <unk>, 2%.
Michelle Greig Hook: Compared to prior year.
Michelle Greig Hook: Restaurant level adjusted EBITDA increased four 5% to $36 4 million in the first quarter of 2024.
Michelle Greig Hook: Restaurant level adjusted EBITDA margins were 21, 9% in the first quarter of 2024 versus 22, 3% in the first quarter of 2023.
Michelle Greig Hook: This reflects a modest decline of only 40 basis points. Despite softer sales and the addition of nine new restaurants since the first quarter of 2023.
Michelle Greig Hook: Note that Q1 has historically been our lowest revenue and restaurant level adjusted EBITDA margin quarter. We are currently estimating a restaurant level adjusted EBITDA margins to be in the range of 23% to 24% in 2024.
Michelle Greig Hook: To offset the inflationary cost pressures noted abob, primarily on food and labor, we did take two pricing actions during the quarter during January and at the end of March we increased certain menu prices by approximately one 5% in each period.
Michelle Greig Hook: To offset the implementation of the fast Act in California, and in connection with our new sale a bunch, we accelerated the pricing decision we would've made in Q2.
Michelle Greig Hook: To the end of March.
Michelle Greig Hook: These actions combined with the lapping our previous pricing actions put us at an effective price increase of approximately 6% at the end of the first quarter.
Michelle Greig Hook: Subsequently another 3% of prior year pricing just rolled off last week, which puts us at an effective price increase of 3% today.
Michelle Greig Hook: 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.
Michelle Greig Hook: Our general and administrative expenses decreased by <unk> 2 million to 11, 2% of revenue in the first quarter of 2024 from 12% in the first quarter of 2023.
Michelle Greig Hook: The decrease was primarily driven by lower equity based compensation and lower variable based compensation, partially offset by an increase in wages attributable to annual rate increases as well as increases in professional fees advertising and marketing expenses.
Michelle Greig Hook: Preopening expenses decreased <unk> 9 million to <unk>, 9% in the first quarter of 2024 from one 5% in the first quarter of 2023.
Michelle Greig Hook: The decrease was due to the number and timing of executive.
Michelle Greig Hook: <unk> executed and planned new restaurant openings.
Michelle Greig Hook: We continue to expect preopening expenses to be between $8 million to $9 million in 2024.
Michelle Greig Hook: Please keep in mind that our reported Preopening expenses includes deferred are noncash rent expense as well as actual costs incurred prior to the restaurants are opening.
Michelle Greig Hook: All of this led to adjusted EBITDA of $21 8 million in the first quarter of 2024 versus $19 6 million in the first quarter of 2023, an increase of 10, 9%.
Michelle Greig Hook: Adjusted EBITDA margin also improved 50 basis points to 13, 1% in the first quarter versus the prior period.
Michelle Greig Hook: Below the EBITDA line interest expense was $6 5 million in the first quarter of 2024, a decrease of <unk> 9 million from the first quarter of 2023.
Michelle Greig Hook: This decrease was primarily driven by improved lending terms associated with our 2023 term loan and revolver facility, which has a reminder was refinanced during February of 2023.
Michelle Greig Hook: As of today, our outstanding borrowings under our revolver, our $22 million.
Michelle Greig Hook: Our effective interest rate on the 2023 term loan and revolver facility with eight 4% as of 2024 versus eight 1% for 2023.
Michelle Greig Hook: Income tax benefit was $1 1 million in the first quarter of 2024.
Michelle Greig Hook: Our effective tax rate for the first quarter was negative 27% driven by a change in our valuation allowance, which was partially offset by an increase in the companys ownership interest.
Michelle Greig Hook: Our future effective tax rate will fluctuate as class a equity ownership increases and as equity based awards are exercised and fast we expect the full year tax rate to be approximately 21% to 24%.
Michelle Greig Hook: Cash from operations increased by 39, 9% year over year to $9 1 million in the quarter, we ended the quarter with $13 $2 million in cash.
Michelle Greig Hook: We are confident that the strength of our brand and our operational execution will continue to deliver on our long term growth algorithm.
Michelle Greig Hook: Thanks for your time and with that I'll turn it back to Michael.
Michael: Thank you Michelle.
Michael: As I close I just want to thank the more than 8000 people who work so hard for US every single day to provide a great experience for our guests is that in our culture that creates a winning formula I am excited to share our strategy with you and plan to update on how we're executing against these pillars in the future.
Michael: We're committed to running world class operations to innovating and amplifying the Porte <unk> experience building, great restaurants with industry, leading returns and taking great care of our teams. This is the strategy that we will execute against its how we will grow our transactions is how we will grow our comp and its how we will deliver.
Michael: Industry, leading returns for our investors.
Speaker Change: Thank you with that let me turn it back to the operator.
Speaker Change: Thank you we will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Confirmation tone will indicate your line is in the question queue.
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Speaker Change: Please while we poll for questions.
Speaker Change: Thank you. Our first question comes from the line of David Tarantino with Baird. Please proceed with your question.
David E. Tarantino: Hi, Hi, good morning.
David E. Tarantino: My question.
David E. Tarantino: Sorry.
David E. Tarantino: The performance for then the units that are not in the comp base. So when I look at the first quarter performance.
David E. Tarantino: By our estimates you know down quite a bit versus last year and I just I just wanted to know.
Speaker Change: Your thoughts on on why that happened I know you're cycling some very big openings from last year, but perhaps you can comment on what you're seeing on on the recent openings.
Speaker Change: How those are performing relative to your expectations.
Speaker Change: Yeah, David Thanks for the question.
Speaker Change: So obviously you hit the nail on the head a bit when you mentioned certain of our restaurants.
David E. Tarantino: In early 2023 came out of the gate strong we definitely called out the colony, specifically and how that was performing I would say keep in mind. There is two things one that as we get into year two with those restaurants. There is the honeymoon curve that we typically have talked about and so those restaurants that are coming in into that year, two or <unk>.
David E. Tarantino: Going to depth in terms of sales as we mentioned before with that curve. So that's the first thing I would point out the second thing I would say is also keep in mind that weather does have an impact on restaurants that are not in the comp base and so we did have three new restaurants that were in our core in Chicago Atlanta that opened in the fourth quarter and so we're there.
Speaker Change: It was pressured by weather absolutely and so there were those couple of dynamics going on that I would call out specifically.
Speaker Change: And Michelle when you.
Michelle Greig Hook: Just for some of those factors how would you characterize.
Speaker Change: I guess the class of 2023 openings.
Michelle Greig Hook: Relative to the targets that you have for <unk>.
Michelle Greig Hook: I'd say, we're very happy David with the performance in terms of the total class, which as you know it's eight restaurants.
Michelle Greig Hook: In mind six of that was did open.
Michelle Greig Hook: Late in 2023, so it's still early innings I would say David in terms of us assessing those restaurants, but they are performing at or above our expectations as a class.
Speaker Change: Great. Thank you very much.
Speaker Change: No problem.
Michelle Greig Hook: Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.
Sharon Zackfia: Hi, good morning.
Sharon Zackfia: I guess I wanted to clarify on the improving trends youre seeing into June does that mean that you you're seeing lesser than negative trial or I'm, sorry into April and flipping ahead to the June quarter does that mean youre seeing lesser.
Sharon Zackfia: Lesser traffic declines or have you kind of gotten back into flattish to positive traffic I was a bit unclear on the tax.
Speaker Change: Yeah, I think Sharon when you look at specifics right as I mentioned we.
Speaker Change: We're coming out and pricing as we're currently sitting at 3%.
Speaker Change: Still say, we're still pressured by both mix and transaction impacts.
Speaker Change: We use black box when we look at the industry data. So you can see the industry data is where I'd say, you're still seeing negative trends in that data, we're performing better at the industry, but we haven't gotten quite to positive territory. When we think of those two metrics.
Speaker Change: Can you talk about I mean, your business is different than a lot of others out there that you can have extremely high volumes and you're also multichannel we've heard.
Speaker Change: Kind of more pressure I'd say from traditional <unk> in terms of lower income consumer and maybe you would see that more in the drive through into your business I'm just interested from a channel perspective, I also know you've been doing some things on delivery.
Speaker Change: How is the channel mix kind of performing in the maybe excluding the weather impact in the first quarter.
Speaker Change: Okay.
Speaker Change: Sure, it's a little bit of a continuation of the same story for us which is.
Speaker Change: When the consumer when the lower lower and the consumer is pressure it tends to impact us a little bit more in the drive through where they are going to <unk> is largely drive through business. So that's why for us.
Speaker Change: Being incredibly quick efficient fast and generating throughput is so important in the drive through and Thats why the focus is on speed and the drive through our dining rooms continue to perform relatively well in crazy as it is catering and third party is still very very strong for us.
Speaker Change: Great. Thank you.
Speaker Change: Beth.
Speaker Change: Our next question comes from the line of Dennis Geiger with UBS. Please proceed with your question.
Dennis Geiger: Great. Good morning, Thanks, guys I wanted to ask a little bit more mid Michelle on on mix or any additional color you could provide I think it was sort of a menu mix that was the check mix drag there, but any additional color in the quarter and then maybe on the go forward, how youre thinking about mix through the year at a high level.
Michelle Greig Hook: Yeah, absolutely and so we're still seeing plus items per transaction.
Michelle Greig Hook: Still seeing a little bit more pressure in the drive through versus the dine in business.
Michelle Greig Hook: As Michael mentioned, we believe that that channel gets more pressured.
Speaker Change: Our income consumer is feeling a bit more challenged I would call out drink attachment, specifically, we're seeing a little bit more pressure there both within the drive thru and dine in business. So some of the things that we're doing to combat that more recently in April we relaunched our famous five which is R V.
Speaker Change: Version of a bundled meal and we did that specifically because we.
Speaker Change: We believe that that can help with our mix in terms of highlighting meals that feature.
Speaker Change: Aside of Fry and a drink as well and so that just relaunched on our digital menu boards in April and I think it also drives awareness specifically in our Artur markets for some of the menu items, we're trying to drive those consumers towards in terms of what <unk> is known for so.
Speaker Change: Those are some of the specific things that we're doing there.
Speaker Change: In terms of looking at how to combat mix more things to come in the future, but that's what we're seeing at least in the short term and how we're thinking about it.
Speaker Change: That's very helpful kind of in that line of thinking just curious on on price and as you think about the go forward to your points earlier is still kind of thinking through that.
Speaker Change: Just curious any additional commentary on the customer response to the pricing value scores, which I think had been very solid where those are just any other.
Speaker Change: Observations around price and sort of the customer response, and where the value positioning is right now thank you.
Speaker Change: Yeah, Dennis to pricing actions, we took which as I mentioned, we took one 5% in January and then took the other $1 five at the end of March.
Speaker Change: We've seen little pricing recessive resistance on that I think part of the reason for that too Jonathan when you think of that breadth and depth of our menu and our ability to take price in different categories.
Speaker Change: Thats, what Youre seeing I mentioned, specifically one of the levers for us taking price at the end of March was the launch of our salad and so we were able to take some price on sale, it's there and specifically take pricing around the in California, where we have two restaurants to combat the labor inflation in that market. When you look at the categories are about.
Speaker Change: I need to take price, whether it's on our burgers, our beef our size our chicken category I mentioned salads, when we look at channels, taking price in the catering channel in the delivery channel I think that we have a lot of optionality and flexibility to pricing I think we still continue to have that as we move forward and so we're not.
Speaker Change: <unk>, one way or another to not taking pressure to taking price, we're going to continue to see how how things move within the landscape.
Speaker Change: I've continued to say and Michael has that we look at pricing as a lever to offset the inflationary pressures.
Speaker Change: How are we going to continue to view it but we've seen little resistance within the first couple of pricing actions. We've taken this year, but we understand that the consumer is getting to a boiling point so to speak so we have to be very surgical in how we take price.
Speaker Change: Very helpful. Thank you.
Speaker Change: Yep.
Chris: Our next question comes from the line of Chris I'll call with Stifel. Please proceed with your question.
Chris: Great. Thanks. Good morning, guys. This is Patrick on for Chris Michel.
Patrick: Michel I had a quick follow up on the quarter to date comp and I. Just was hoping you could maybe give a little bit more color on the traffic improvement versus the price contribution and how we should be thinking about sort of the confidence level of continuing that low single digit level with that 3% pricing rolling off more recently.
Michel: Yeah, Patrick I mean, you you saw the quarterly comp and we definitely had some impacts from.
Michel: Traffic specifically in that we were looking at down just over 3%. We did see intra quarter. We saw improvements from the weather event in January specifically on transactions and then as we moved into February and March we saw improvements on that we saw improvements going into April on that but as I answered the question of share.
Michel: And we're still seeing pressures on bulk transactions in Mexico that was necessary those have that flipped positive as we sit here today.
Michel: We're at 3% pricing, but it's a definitely mitigated which as Michael mentioned and so we feel really good about the trends and our ability to continue to mitigate what we're seeing because we have seen those trends improved since that point in January.
Michel: Enter the latter half of Q1 into April so we have some strategies in place as Michael mentioned, we are going to invest in advertising in our Chicago land market in the third quarter, we made a little bit of investment in Q1 into Arizona. So we are continuing to use those tools in our toolkit to come back.
Michel: The trends that we're seeing today, but we're still not out of the weeds, so to speak and we're still seeing some impacts there from just the macro environment as a whole.
Speaker Change: Great. That's helpful. And then Michael I know you mentioned excellence in the drive thru as one of the key strategic pillars. This year at least one of the underlying point to the key strategic pillars. So I mean, what are the real pinch points. You believe you have right now in the drive thru and what's what are those key areas of focus for your Gms that are going to result in better throughput in.
Michel: That drive through channel is it is it a focus on training is is it something else that you guys have identified that you can really centered in on and allow that to improve the throughput at peak periods.
Michel: Yes.
Michael: You actually answered the question yourself, which is it is a focus on training I think we got a little complacent and how well we're performing based on guest satisfaction scores, but the reality is that when you actually see what's going on in our drive throughs and very carefully monitor them, we're being a little slow in deploying that next person as an hour.
Michael: Side order taker, we're being a little slow in getting food to them. So the focus for our teams is throughput make sure that we're getting people in and out of the drive throughs as quickly as possible and it does really begin with appropriately staffing and making sure that our folks know what great looks like and what the expectations are.
Speaker Change: Great. Thanks, guys.
Speaker Change: You bet.
Speaker Change: Our next question comes from the line of Sara Senatore with Bank of America. Please proceed with your question.
Sara Harkavy Senatore: Oh. Thank you I wanted to I guess two clarifications. The first is that you know you noted that the second year normalization is perhaps pretty meaningful should we be expecting them that that gap between unit growth and and comp growth between that and an overall revenue growth should remain.
Michael: Pretty wide over the course of the year and specifically.
Michael: What are you seeing in the Sunbelt I know you said that youre seeing a lot of room for growth, but trying to understand how to.
Michael: To contemplate the second year normalization in that context.
Speaker Change: Yeah, I think Sara it's.
Michael: We've given some metrics in the past when you look at how year, one and year two performs and how that honeymoon curve depth for a class of restaurants I'd point to those metrics before in terms of for you to get a sense for how how that curve depths.
Michael: Keep in mind that.
Michael: There is only three restaurants this year that are going to enter the comp base and so we had one enter the comp base.
Michael: In Q1, we will have one enter the comp base.
Michael: In Q2, and then we'll have one out of the comp base in Q4, so still largely speaking right. We're going to have a class of restaurants that are going to be on that non comp window that are going to be in that honeymoon curves and so those are the dynamics I'd point out in terms of as you think about revenue moving forward and what's cap versus.
Michael: Non comp that theres still going to be that dynamic that exists.
Michael: Point to the prior numbers in terms of the depth of the honeymoon curve in terms of the performance in the Sunbelt I would say we continue to be extremely happy with their performance and as you know we've mentioned before that those restaurants generally outperform the restaurants in the Midwest outside of Chicago land, So that dynamic still continues to exist.
Michael: We continue to be extremely bullish on.
Michael: Restaurants, as we move forward in Texas, Arizona and Florida.
Speaker Change: Just recall.
Speaker Change: At this time last year. The colony was the only restaurant opened in Texas and it was trending towards like an outrageous number I think I quoted 17 million at this time, if that's what it was trending towards which as we said, it's an unsustainable number it was generating enormous amounts of trial and awareness, which is great because it's part of the <unk>.
Michael: Reason why the next four restaurants in the DFW market perform so well because you had so much trial and awareness coming out of the colony, but it was never going to sustain that performance that was that was not a it is going to have a natural curve, it's going to be a fantastic restaurant for us It is a fantastic.
Michael: Restaurant.
Michael: But it was never.
Michael: Got to come back down to.
Michael: Closer to Earth after that first opening start.
Speaker Change: Okay. That's helpful and just to sort of drill a little bit further down into that.
Michael: Michelle you said like look at the previous data or presentations I guess, so colony, we should be thinking about the honeymoon curve is like percentages as opposed to dollar values an inflow. So something instead of opening at 662 and go into 5.8. It opens at 17 and goes down a similar percentage or.
Michael: The issue that.
Michael: The honeymoon plus you have no intentional sales transfer or these new restaurants.
Michael: I'd say the best way for you to think about <unk> as that percentage decline specifically of the class I know, obviously individual restaurants are going to vary as Michael mentioned the colony, but I think the best way to think about it is that percentage decline as a class.
Speaker Change: Okay. Thank you.
Speaker Change: No problem.
Speaker Change: Our next question comes from the line of Brian Harper with Morgan Stanley. Please proceed with your question.
Brian Harper: Yeah. Thanks, good morning, guys.
Brian Harper: Michelle.
Brian Harper: Kind of change in margin we saw in the first quarter is that.
Speaker Change: You know something you'd expect to be similar as.
Brian Harper: I know, we're lapping the extra week in the fourth quarter, but is that something you'd kind of expect to be similar or any sort of like lumpiness from a margin perspective, we should think about.
Brian Harper:
Speaker Change: Nothing I'd call out specifically, Brian I think yes, we as I've called out before is as we continue along 2024 with the restaurants as we've been talking about that are.
Brian Harper: Not in the comp base that naturally have lower margin profiles on your other restaurants through that alone you should see natural margin degradation, but in terms of as we go quarter to quarter and as we compare I think that yeah, I wouldn't expect anything any specific quarter to be impacted more than another the only.
Brian Harper: I'd call out is Q2, we do expect a little bit more pressure on the commodity side, but not beyond the mid single digits that we've mentioned outside of that though you might get some lumpiness just based on those input costs that come in each quarter, but nothing significant that I would call out.
Brian Harper: We still feel confident that for the full year, we're going to be in that 23% to 24% range.
Brian Harper: Okay, and then G&A I assume still on track with maybe you expect more of the year over year increase of it third quarter is that fair.
Speaker Change: Correct, because we are going to start to do some advertising again in Chicago land and that third quarter and that will pressure G&A, specifically in that quarter as we spend those dollars on that advertising.
Brian Harper: But I still expect as we sit here today to be in that range of 85 to 87 for the year.
Speaker Change: Okay. Thanks.
Brian Harper: Yep.
Brian Harper: Our next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.
Andrew Marc Barish: Hey, good morning, guys.
Andrew Marc Barish: Just a clarification on the on the famous Fives I think last quarter you talked about.
Andrew Marc Barish: Portillo pairings that you were looking at it value test that basically the same thing or.
Andrew Marc Barish: Remembering something different there.
Andrew Marc Barish: No you're remembering correctly, we ended the year last year, using having port till those pairings on our outside menu boards and inside the restaurant and we were trying to highlight.
Andrew Marc Barish: Specifically for guests great.
Andrew Marc Barish: Great duos, they've got you under close to 10 Bucks.
Andrew Marc Barish: Good news Bad news the good news is that it had an effect on how guests ordered the bad news is it brought down mix and.
Andrew Marc Barish: The number of items, they ordered and so we think that we're better off with the port pillows famous five highlighting our absolute best dishes, which.
Andrew Marc Barish: We think worked really well is accretive to the guests and also.
Andrew Marc Barish: Hopefully picks us up a little bit better mix.
Brian Harper: Gotcha.
Brian Harper: Our value, but a little bit higher than that $10 price point maybe.
Brian Harper: We typically have a beverage with them where the pairings did not.
Brian Harper: Yes.
Brian Harper:
Speaker Change: Perfect. Thanks, and then.
Speaker Change: Well, thus far this year I think they're going to be another 20, or so kitchen 'twenty three.
Brian Harper: Remodels in the Chicago land area have those began in earnest or is that a different time time of year that you plan to roll those out.
Speaker Change: Yes, Andy we had done 17 of the retrofits last year and we have 23 on tap for this year I'd say the vast but it's gotten started its underway. The vast majority of those will come in the back half of the year. So they havent rolled out.
Speaker Change: Fully yet and most of those a lot of those will be and our our outer markets as well as some in our core but most of those will come in the back half.
Speaker Change: Got it got it and then let me just wanted to level set I think just kind of adding everything up.
Speaker Change: This year's EBITDA growth.
Speaker Change: He is going to probably be a little bit below the long term algo.
Speaker Change: Maybe maybe thinking of it in a way like.
Speaker Change: Yes, it's a tough consumer environment, but what would.
Speaker Change: What would have to go right to kind of get to the low teens, I guess, especially with the with the 53 week labs.
Speaker Change: I think we got to continue to push topline growth Andy I think when you look obviously as you know the flow through on the incremental revenue is going to be very powerful on that bottom line I think outside of that.
Speaker Change: <unk> to look for efficiencies within our kitchens.
Speaker Change: We continue to do that that's that's just something that's in our DNA in general the retrofits in the back half of the year as I mentioned do provide.
Speaker Change: Some form of flavor benefit, but then as we continue to look for.
Speaker Change: With that I think as Michael mentioned throughput through the drive thru.
Speaker Change: Continues to be a focus that we believe has the ability to drive that top line growth to drive that.
Speaker Change: Action growth and so as we continue as I mentioned to drive that top line, we believe that that could provide incremental benefit but that to me would be what would have to happen. We don't believe we're as you know we're a growth organization. We don't believe that we're going to cut our way to greatness. So we're going to continue to invest in the business, we're going to continue to.
Speaker Change: Good decisions to drive this business forward, but those are some of the things that I would call out and I just I don't.
Speaker Change: No if youre getting at G&A, but I mean, like obviously G&A as you got Michele may have committed to generating G&A leverage right and so and.
Speaker Change: And we have goals in mind, but we absolutely need to be leveraging G&A. It's still I think we're trying to be smart in how we spend we're spending and things that are.
Speaker Change: Revenue driving and transaction driving activities. So that's an area that we need to be continued to be focused on.
Speaker Change: But michelle's right the marginal contribution from revenue growth is so attractive to us that extra guests that we can get through the drive through or through dine in is so attractive for our investors that that's really the best way for us to expand our margins.
Speaker Change: Very helpful. Thank you.
Speaker Change: Our next question comes from the line of Brian Mullan with Piper Sandler. Please proceed with your question.
Brian Hugh Mullan: Thank you just a follow up on some of the drive through commentary I don't want to belabor. This but just trying to understand do you think the drive thru speed of service today is slower than at other times in Portola as long history.
Brian Hugh Mullan: So youre able to see that in your data and you kind of know Theres a high watermark that you are running below or Conversely is this just not about being slower than before as just you just believe there's opportunities to get better just.
Speaker Change: Clarification on that.
Speaker Change: It's factually slower.
Speaker Change: <unk>.
Speaker Change: When I look back to 2019, it's it's slower.
Speaker Change: Undeniably slower than we were in 2019 and so that's what gives us goals in mind, that's what gives us confidence that we can get get our swagger back a little bit and make sure that our drive throughs are moving as quickly as we would like them to.
Speaker Change: Okay. Thank you understood and then just wanted to ask about the catering business you highlighted that last call as an area of opportunity, particularly outside of Chicago, and maybe something you were going to invest resources behind so just where are you with that now with what's the plan for this year and how do you envision that starting to build overtime.
Speaker Change: Yeah, we have we have a <unk>.
Speaker Change: <unk> team now that's fully deployed doing both inbound sales, but also outbound reaching out to customers.
Speaker Change: For example around mother's day people, who ordered in the past who have an order theyre getting calls from our sales team, saying Hey, you ordered last year are you interested in doing something so we're doing that I think it takes on a it takes on almost two flavors of performance in outer markets. It's a lot of generating trial and awareness.
Speaker Change: Catering is great for that and so the sale itself is fantastic, but getting customers acclimated to how to use port pillows is even a bigger win for us inside Chicago land. It is it's much more about making sure that we are reminding people that we help them facilitate that order and that we execute flawlessly. So it's.
Speaker Change: Great.
Speaker Change: It's not a huge business I'm not going to pretend it's a huge business, but it's a it.
Speaker Change: It punches over its weight because of its ability to generate trial and awareness and put a lot of our food and a lot of different people's mouths, who may otherwise not have been customers.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jim <unk> with Stephens. Please proceed with your question.
Speaker Change: Hi, This is Tyler Krauss on for Jim.
Tyler Krauss: My question was around the permitting environment are you seeing any improvement on that front and additionally, you've talked in the past about smoothing openings throughout the year compared to previous years can you talk a little more high level about the steps you're taking behind the scenes to smooth yearly opening between quarters and I had one follow up.
Speaker Change: It's a great question, what I would tell you is that we're not seeing a ton of improvement on the timelines for permitting.
Speaker Change: Silly things like getting.
Speaker Change: Lots of silly things that are sort of outside of our control. So what we've done for that is our development pipeline has extended dramatically and so when we have we target a restaurant in Texas to open in the fourth quarter of 2024, that's a restaurant that we started the entire process 18 months prior.
Speaker Change: So our build cycle now is 18 months in advance and we begin the permitting way in advance so that we have a more predictable pipeline, our chief development officer likes to say, it's a lot easier for him to slow things down and to speed things up and so we have a very very fulsome pipeline for 'twenty four 'twenty five in <unk>.
Speaker Change: And and it's much more predictable for us because we just have so much extra time built it.
Speaker Change: Very helpful and just one follow up you gave some great color at the Investor day regarding shaping the demand curve in new markets and can we get an update on how this is trending in the five Texas locations as far as activating delivery and catering.
Speaker Change: Yes.
Speaker Change: I don't want to get into the specifics of each restaurant, but we feel like one of the things about Texas is the colony was an extraordinary success early on it does do everything that we want it introduces port till those to the DFW community. It has an extraordinary attachment for the first six months because it's the only restaurant we.
Speaker Change: Half so people were driving from everywhere as we have now started to fill in we have five restaurants in the Dallas Fort worth area and anybody anybody who spent time in Dallas Fort Worth note five is not scale, we still need to keep building in that market. There are you can spend an hour driving from one <unk> to another still but what else.
Speaker Change: Ziv happening is you start to build latent demand you start to see as we turn on alternate channels. So in the company now where Harman with every channel open.
Speaker Change: Started to do the same tactics in Arlington and Alan in Fort Worth and then Denton that we just recently opened is a little more constrained right now because we want to make sure that we're executing flawlessly inside and in the drive through but you can imagine that the first restaurants, a little bit more staged but we get a little bit more.
Speaker Change: <unk> of opening the alternative channels in restaurants, 3456 through 10 et cetera.
Speaker Change: Yeah.
Speaker Change: Does that complete your question.
Speaker Change: Yes. Thank you.
Speaker Change: Our next question comes from the line of Gregory Frankfurt with Guggenheim. Please proceed with your question.
Gregory Ryan Francfort: Hey, thanks, Thanks for the question.
Gregory Ryan Francfort: My first is just maybe going back to the advertising and the decision to increase it.
Gregory Ryan Francfort: We also made a comment about advertising on third party delivery sites.
Gregory Ryan Francfort: <unk> been doing that before if that's just the increase what did you see that made you make that decision and then.
Gregory Ryan Francfort: Kind of what was the advertising historically for the brand if you can remind me.
Gregory Ryan Francfort: So we're Greg Great question, So we're not.
Greg: We're just historically not big spenders on advertising, it's just not our R. R.
Greg: Our best marketing and I still believe is outstanding operational execution right. When you give people great experience they come back.
Greg: But the.
Speaker Change: Our finance team will say undeniably that the advertising we did in the back half of last year worked undeniably that the advertising that we did in Arizona worked in improved traffic trends in both instances improved traffic trends and is it pays for itself in a very quick timeframe.
Speaker Change: And so.
Greg: It gives us a little bit more confidence that we can start to spend a little bit more on advertising and not blow up our P&L that it will return it drives traffic it drives comp and it creates a positive return on investment. So we're intrigued by that and will continue to test that selectively we're not we're not going to do anything crazy or not.
Greg: We're not doing $50 million of AD campaigns, that's not who we are but can we spend a little bit in advertising in a very targeted way. Yeah. I think we can do that we know that the advertising in Chicago works and with the.
Greg: The scale of restaurants in Chicago that advertising covers a lot of restaurants. So we're eager to do that and there is some I think fun angles that the marketing team has on what we can do in Chicago.
Greg: To drive.
Greg: To drive awareness presence and frequency.
Greg: Outside of Chicago.
Greg: We're seeing really good success with some relatively modest advertising in the digital channels, particularly with our third party.
Greg: Delivery partners.
Greg: We actually think that what ends up happening is that we have guests who maybe we were not in there.
Greg: They are in their mindset that convert to a portillo said think about port <unk> and then become.
Greg: <unk> converted portillo guests. So we're going to test that more aggressively and we're going to more aggressively use digital channels, particularly third party delivery channels as a way of generating trial and awareness and think of like markets, like Arizona, and Texas and Central Florida Places, where we're starting to build up scale, but.
Greg: Candidly, we still have the awareness that we want and it's a great way of building awareness in a very targeted fashion that we think pays dividends.
Speaker Change: Got it thanks for that perspective, and then maybe.
Speaker Change: Michel just can you remind us.
Michel: There's been very different situations in the beef markets between maybe hamburger meat steaks and I just don't have an appreciation for where be flat net can you just give me an understanding of maybe.
Michel: Are those inflationary right now.
Michel: Any thoughts on overall contracting thanks, Yeah, no that is.
Speaker Change: It's a great question, Greg and obviously.
Greg: As you saw we were up four 8% in Q1, but our beef products are hot dogs are burgers, and then to be flat, which we used to make.
Greg: Our Italian beef sandwiches, we're seeing inflation in all of those line items.
Speaker Change: The burgers in particular are a little bit more pressured because thats going to use a leaner cut and saw that that lean market, we do feel a little bit more pressure on the burgers.
Greg: Which is what I called out as part of the Q1.
Greg: Headwinds.
Greg: We are hedged on our flat, though about 60% for the full year and so I feel good about derisking that line item are we continuing to look at ways to mitigate costs on the other beef product center, our burgers our hotdogs.
Greg: But our other line items as while we saw a little bit of pressure on pork and produce in.
Greg: In Q1, but.
Greg: Some other items are helping to mitigate some of those pressures, but beef in particular as we called out at the beginning of the year, we think will be a pressure for us all year.
Speaker Change: That makes sense, thanks for the call Michelle no problem.
Speaker Change: Our next question comes from the line of John <unk> with <unk> Capital. Please proceed with your question.
John: Hi, good morning, and thanks for taking my question.
John: When we look at the restaurant level margin guidance for this year. It implies a modest decline from 2023 and inclusive in that decline I imagine is the impact of a larger number of immature restaurants in the base compared to a year ago. So I was wondering if you could.
Speaker Change: US quantifying how big of a headwind those new restaurants are in the restaurant level margin and then as we look at multiple years into the future and think about the complexion of the restaurant base changing outside of Chicago land into newer markets do you still anticipate restaurant level margins in that 23 to 24.
Speaker Change: Percent range, how are you thinking about that thank you.
Speaker Change: Yes, John we haven't and we're not going to quantify the impacts on those newer units and that margin for this any specific year in this specific year in general.
Speaker Change: Ideally, yes, our goal is to keep our restaurant level margins within generally that range. How we do that is as Michael talked about getting to scale quickly and markets that we're operating in so that's the goal is to continue to build that scale quick within those markets to buffer against.
Speaker Change: The natural margin degradation that you have as many restaurant when the new restaurants.
Speaker Change: Open up because we know that scale matters and that there is benefits on the distribution cost Michael mentioned, leveraging the marketing getting more awareness and.
Speaker Change: And just getting in People's decision sets.
Speaker Change: Early on and having that scale, so that you become part of their routine within those markets.
Speaker Change: The strategy and how we believe we can keep margins in that in that range, but absolutely. That's that continues to be the goal.
Speaker Change: Yeah.
Speaker Change: Thanks, very much no.
Speaker Change: No problem.
Speaker Change: Thank you we have reached the end of the question and answer session and with that the conclusion of todays teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Speaker Change: Okay.