Q2 2024 Portillo's Inc Earnings Call
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Operator: Hello, and thank you for standing by. Welcome to the fiscal second quarter 2024 conference call and webcast. I would now like to turn the call over to Barbara Noverini, Director of Investor Relations at Portillo's, to begin.
Barbara Noverini: Hello and thank you for standing by. Welcome to the fiscal second quarter 2024 conference call and webcast. I would now like to turn the call over to Barbara Noverini, Director of Investor Relations at Portillo's to begin.
Barbara Noverini: Thank you, Operator. Good morning, everyone, and welcome to our fiscal second quarter 2024 earnings call. You can find our 10-Q earnings press release and supplemental presentation on investors.portillos.com. With me on the call today are Michael Osanloo, President and Chief Executive Officer, and Michelle Hook, Chief Financial Officer.
Barbara Noverini: Thank you, operator. Good morning, everyone, and welcome to our fiscal second quarter 2024 earnings call. You can find our 10-Q earnings press release and supplemental presentation on investors.portillos.com.
Speaker Change: With me on the call today is Michael Osanloo, President and Chief Executive Officer, and Michelle Hook, Chief Financial Officer.
Barbara Noverini: Any commentary made here about our future results and business conditions is forward-looking statement, which are based on management's current expectations and are not guarantees of future performance. We do not update these forward-looking statements unless required by law. Our 10-K 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
Speaker Change: We do not update these forward-looking statements unless required by law. Our 10-K identifies risk factors that may cause our actual results to vary materially from these forward-looking statements.
Speaker Change: 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.
Speaker Change: Finally, after we deliver our prepared remarks, we will open the lines for your questions.
Barbara Noverini: Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Now, I turn the call over to Michael Osanloo, President and Chief Executive Officer of Portillo's.
Michael Osanloo: Now, let me turn the call over to Michael Osanloo, President and Chief Executive Officer of Portillo's. Thank you, Barb. And good morning, everyone. Thanks for joining us on our second quarter 2024 earnings call.
Michael Osanloo: Thank you, Barb. And good morning, everyone.
Michael Osanloo: Thanks for joining us on our second quarter 2024 earnings call. Let me start by saying that the second quarter results fell short of my expectations. Although we did see some top and bottom line improvement compared to Q1, we definitely have room for improvement. There's still work to be done.
Michael Osanloo: Let me start by saying that second quarter results fell short of my expectations.
Michael Osanloo: Although we did see some top and bottom line improvement compared to Q1, we definitely have room for improvement. There's still work to be done.
Michael Osanloo: In the second quarter, we grew total sales 7.5% with a comp of negative 0.6%. However, we did manage restaurant level margins to a healthy 24.5%. It was encouraging to see sequential improvement in all three of these metrics in Q2. But in this macroeconomic environment, it's an undeniable headwind on traffic and mix. And that is why we must maintain a sharp focus on the factors within our control. Based on the first half of the year.
Michael Osanloo: In the second quarter, we grew total sales 7.5% with a comp of negative 0.6%.
Michael Osanloo: We did manage restaurant level margins to a healthy 24.5%.
Michael Osanloo: It was encouraging to see sequential improvement in all three of these metrics in Q2. But in this macroeconomic environment, it's an undeniable headwind on traffic and mix. And that is why we must maintain sharp focus on the factors within our control.
Michael Osanloo: We now expect to deliver flat to slightly positive comp versus our low single-digit projection earlier in the year. We will still generate 23 to 24% restaurant level margins. And I am excited to announce that we now expect to open at least 10 restaurants in fiscal 2024. This 10th restaurant will boost our unit growth percentage close to 12% for 2024, ahead of the 10 plus percent we communicated at development day in September, and more importantly, we'll open this restaurant while reducing total cap backs for the year. Michelle will talk more about this in her section.
Michael Osanloo: Based on the first half of the year.
Michael Osanloo: We now expect to deliver flat to slightly positive comp versus our low single digit projection earlier in the year.
Michael Osanloo: We will still generate 23 to 24 percent restaurant-level margins, and I am excited to announce that we now expect to open at least 10 restaurants in fiscal 2024.
Michael Osanloo: This 10th restaurant will boost our unit growth percentage close to 12% for 2024, ahead of the 10 plus percent we communicated at development day in September .
Michael Osanloo: And more importantly, we'll open this restaurant while reducing total cap backs for the year. Michelle will talk more about this in her section.
Michael Osanloo: Before I hand things over to her, let me benchmark our recent progress against the four strategic pillars we revealed last quarter. These pillars are one running world-class operations. 2. Innovating and Amplifying the Portillo's Experience. 3.
Speaker Change: Before I hand things over to her, let me benchmark our recent progress against the four strategic pillars we revealed last quarter.
Michelle Hook: These pillars are one, running world-class operations.
Michelle Hook: Two, innovating and amplifying the Portillo's experience.
Michael Osanloo: Building Restaurants with Industry-Leading Returns and for taking great care of our people. These pillars sit on a foundation of strong culture and help us deliver on our commitment. So let's dive into some of the specifics. First, I'll reiterate that running world-class operations is the single most important tool we have to drive sales and transactions. When guests taste our food and have a great experience, they recognize the value in our brand, and they return over and over again.
Michelle Hook: Three building restaurants with industry-leading returns.
Michael Osanloo: In Q2, we took a hard look at our drive-thru experience. The drive-thru channel is the heartbeat of our operation and a key element of our value proposition. A team member comes to your car, they curate your order, and they ensure you're served quickly.
Michael Osanloo: We know that convenience and consistency in the drive-thru lead to industry-leading AUVs. Since our recent leadership change, I've been closely observing and participating in our operations across our system. I've concluded that our processes for measuring success relied on too many metrics that took our GMs' focus away from the guest experience.
Michael Osanloo: We've realigned our GMs to focus on the factors that matter to drive transactions and sales. We need to refocus on training our team members for the speed and sense of urgency that we're known for, especially in our drive. But we're already seeing signs of progress.
Michael Osanloo: I'm happy to share that year-to-date, our drive-thru speed has actually improved by 15 seconds versus the same time period last year. We're still working to get back to 2019 levels, but with the right focus, we're seeing improvements. Our second pillar is centered on innovating and amplifying the Portillo's experience through digital engagement, marketing efforts, and menu innovation. I'm pleased to announce that last week we launched our first kiosk prototype in one of our suburban Chicago locations.
Michael Osanloo: We studied best practices across the restaurant industry to pinpoint how kiosks can enhance the Portillo's guest experience. We're especially excited about helping guests visually explore our menu. We love the idea of using images to suggest entrees and add-ons that appeal to various consumer types.
Michael Osanloo: And in Q3, we plan to install kiosks in our flagship downtown Chicago location, followed by two more restaurants in California. We look forward to updating you on this initiative in future quarters. If you've been in the Chicago area recently, you may have seen some of our TV commercials or billboards. This is ramping up to a full relaunch of our advertising efforts in Chicagoland. Our comprehensive advertising campaign kicks off later this month to coincide with the start of the NFL season.
Michael Osanloo: The focus is simple and straightforward, just highlighting what we're known for, delicious, craveable food. It's hard not to feel hungry when you see Portillo's in the campaign, and we're confident this will drive guests in much like it did in the fourth quarter of 2023.
Michelle Hook: The focus is simple and straightforward, just highlighting what we're known for, delicious craveable food.
Speaker Change: It's hard not to feel hungry when you see Portillo's in the campaign.
Michael Osanloo: Our third strategic pillar is building restaurants with industry-leading returns. I'm really excited about the progress we've made on this front. It took us less than two years to conceptualize, test, and build a 6,300-square-foot prototype. The 1500 square foot reduction significantly reduces our build cost. To be clear, that's a 20% reduction in our square footage without constraining our capacity to deliver industry-leading AUVs.
Speaker Change: Our third strategic pillar is building restaurants with industry-leading returns.
Speaker Change: I'm really excited about the progress we've made on this front. It took us less than two years to conceptualize, test, and build a 6,300 square foot prototype.
Speaker Change: The 1,500 square foot reduction significantly reduces our build costs.
Speaker Change: To be clear, that's a 20% reduction in our square footage without constraining our capacity to deliver industry-leading AUVs.
Michael Osanloo: We will have three restaurants in Texas with this footprint by the end of. Our final strategic pillar is taking great care of our people. We continue to invest in our training programs and our leadership development program, IGNITE, to prepare our teams for accelerated growth. We maintain very high retention rates by treating our people well. This past quarter, for example, we made a concerted effort to launch and highlight some programs available to team members across the company.
Speaker Change: We will have three restaurants in Texas with this footprint by the end of the year.
Speaker Change: Our final strategic pillar is taking great care of our teams.
Speaker Change: We maintain very high retention rates by treating our people well. This past quarter, for example, we made a concerted effort to launch and highlight some programs available to team members across the company.
Michael Osanloo: We launched the Strive for Greatness Scholarship Program to increase access to higher education. We also implemented a comprehensive employee assistance program that provides a wide range of support benefits, including mental health, financial planning resources, and legal services. This holistic approach ensures we meet the needs of more than 8,000 dedicated team members. When we take care of them, they take care of our guests, ultimately creating value for our shareholders. With that said, let me hand it over to Michelle.
Speaker Change: This holistic approach ensures we meet the needs of more than 8,000 dedicated team members.
Michelle Hook: Great. Thank you, Michael, and good morning, everyone.
Speaker Change: With that, let me hand it over to Michelle.
Michelle Hook: This quarter, we introduced new tables in our Form 10-Q and Supplemental Report to offer more detailed information about the composition of our revenue and the variances for both the quarter and year-to-date periods. These additions allow you to see the revenue base of our comparable restaurants and distinguish the year-over-year sales contributions from restaurants not yet included in our comp base. Please refer to the 10-Q and Supplemental Report for these new tables.
Michelle Hook: These additions allow you to see the revenue base of our comparable restaurants and distinguish the year-over-year sales contributions from restaurants not yet included in our comp base. Please refer to the 10-Q and supplemental report for these new tables.
Michelle Hook: In Q2, revenue growth was driven by the opening of new restaurants. During the second quarter, revenues were $181.9 million, reflecting an increase of $12.7 million, or 7.5% compared to last year. Restaurants not in our comparable restaurant base contributed $12.6 million of the total year-over-year increase. Revenue also benefited $1.2 million in the second quarter due to the shifting of comparable restaurants. These increases in revenues were partially offset by a same restaurant sales decrease of 0.6%, which drove revenues down $1 million in the quarter.
Michelle Hook: During the second quarter, revenues were $181.9 million, reflecting an increase of $12.7 million, or 7.5 percent, compared to last year. Restaurants not in our comparable restaurant base contributed $12.6 million of the total year-over-year increase.
Michelle Hook: These increases in revenues were partially offset by a same restaurant sales decrease of 0.6%, which drove revenues down $1 million in the quarter.
Michelle Hook: The same restaurant sales decrease was driven by a decrease in transactions of 2.3%, partially offset by an increase in average check of 1.7%. The higher average check was driven by an approximate 4.3% increase in certain menu prices, partially offset by product mix. Comp on a two-year stack basis was 5.2%.
Michelle Hook: The same restaurant sales decrease was driven by a decrease in transactions of 2.3%, partially offset by an increase in average check of 1.7%.
Michelle Hook: The higher average check was driven by an approximate 4.3% increase in certain menu prices partially offset by product mix.
Michelle Hook: In June, we re-tiered some of our restaurants and higher cost areas, contributing to an effective price increase of approximately 1%. With earlier pricing actions, this puts us at an effective price increase of just over 4% in the third quarter. As Michael mentioned, we are targeting flat to slightly positive same restaurant sales growth for fiscal 2024. Moving on to our call.
Michelle Hook: In June , we re-tiered some of our restaurants in higher cost areas, contributing to an effective price increase of approximately 1%.
Michelle Hook: With earlier pricing actions, this puts us at an effective price increase of just over 4% in the third quarter.
Michelle Hook: As Michael mentioned, we are targeting flat to slightly positive same restaurant sales growth for fiscal 2024.
Michelle Hook: Food, beverage, and packaging costs as a percentage of revenues increased to 33.9% in the second quarter of 2024 from 33.2% in the second quarter of 2023. This increase was primarily due to a 6.9% increase in commodity prices, partially offset by increases in our average check. In the second quarter, we experienced the largest commodity pressures on beef, pork, and produce.
Michael Osanloo: Moving on to our costs.
Michael Osanloo: Food, beverage, and packaging costs as a percentage of revenues increased to 33.9% in the second quarter of 2024 from 33.2% in the second quarter of 2023.
Michael Osanloo: This increase was primarily due to a 6.9% increase in commodity prices, partially offset by increases in our average check.
Michael Osanloo: In the second quarter, we experienced the largest commodity pressures on beef, pork and produce.
Michelle Hook: We had anticipated that the second quarter would mark the peak of commodity inflation for the year. However, our projections indicate that inflation will decrease in the latter half as we anticipate some easing in hamburger, produce, and french fries costs. We are still estimating commodity inflation in the mid single digits in 2024. Labor as a percentage of revenues was flat to the prior year at 25.5%. The benefit from the increase in our average check and variable-based compensation is being offset by the lower transactions and wage rate increases; hourly labor rates were up 3.1% in the second quarter of 2024 versus the prior year period. We still project labor inflation to be in the mid single digits in 2024.
Michael Osanloo: We had anticipated that the second quarter would mark the peak of commodity inflation for the year. Our projections indicate that inflation will decrease in the latter half as we anticipate some easing in hamburger, produce, and french fry costs.
Michael Osanloo: We are still estimating commodity inflation in the mid-single digits in 2024.
Michael Osanloo: Labor, as a percentage of revenues, was flat to prior year at 25.5%. The benefit from increase in our average check and variable-based compensation is being offset by the lower transactions and wage rate increases.
Michael Osanloo: Hourly labor rates were up 3.1% in the second quarter of 2024 versus the prior year period.
Michael Osanloo: We still project labor inflation to be in the mid-single digits in 2024.
Michelle Hook: Other operating expenses increased 1.1 million, or 6%, in the second quarter of 2024 compared to the second quarter of 2023, which was primarily driven by the opening of the restaurant. As a percentage of revenues, other operating expenses decreased slightly to 11% from 11.1% in the prior year. Occupancy expenses increased by 1 million, or 11.8%, in the second quarter of 2024 compared to the second quarter of 2023, primarily driven by the opening of new restaurants.
Michael Osanloo: Other operating expenses increased $1.1 million, or 6%, in the second quarter of 2024 compared to the second quarter of 2023, which was primarily driven by the opening of new restaurants.
Michael Osanloo: As a percentage of revenues, other operating expenses decreased slightly to 11 percent from 11.1 percent in the prior year.
Michael Osanloo: Occupancy expenses increased $1 million or 11.8% in the second quarter of 2024 compared to the second quarter of 2023, primarily driven by the opening of new restaurants.
Michelle Hook: As a percentage of revenues, occupancy expenses increased 0.2% compared to the prior year. Restaurant Level Adjusted EBITDA increased 4.3% to $44.6 million in the second quarter of 2024. Restaurant Level Adjusted EBITDA margins were 24.5% in the second quarter of 2024 versus 25.3% in the second quarter of 2023. This reflects a decline of 80 basis points year over year driven by softer sales.
Michael Osanloo: Restaurant level adjusted EBITDA increased 4.3% to 44.6 million in the second quarter of 2024.
Michael Osanloo: Restaurant-level adjusted EBITDA margins were 24.5% in the second quarter of 2024 versus 25.3% in the second quarter of 2023. This reflects a decline of 80 basis points year-over-year driven by softer sales.
Michelle Hook: Through the first two quarters of 2024, restaurant level adjusted EBITDA margins were 23.3%, which is 50 basis points lower than the prior year. We are still estimating our restaurant level adjusted EBITDA margins to be in the range of 23 to 24% in 2024. Our general and administrative expenses decreased by $1.7 million to $17.9 million, or 9.9% of revenue, in the second quarter of 2024 from $19.6 million, or 11.6% of revenue, in the second quarter of 2023. The decrease was primarily driven by lower equity and variable-based compensation.
Michael Osanloo: Through the first two quarters of 2024, restaurant-level adjusted EBITDA margins were 23.3 percent, which is 50 basis points lower than prior year.
Michael Osanloo: We are still estimating our restaurant-level adjusted EBITDA margins to be in the range of 23 to 24 percent in 2024.
Michael Osanloo: Our general and administrative expenses decreased by $1.7 million.
Michael Osanloo: to $17.9 million or 9.9% of revenue.
Michael Osanloo: In the second quarter of 2024,
Michael Osanloo: from $19.6 million or 11.6% of revenue in the second quarter of 2023. The decrease was primarily driven by lower equity and variable-based compensation.
Michelle Hook: This was partially offset by expenses associated with our ERP implementation, as well as higher advertising expenses. We have carefully managed G&A expenses this year and have shown that we will achieve greater efficiency in controlling these costs. We remain committed to investing in our growth and supporting our strategic priorities. We will continue allocating funds this year towards strategies aimed at boosting sales, including marketing. We will maintain discipline in these investments and proceed cautiously in our hiring initiatives.
Michael Osanloo: This was partially offset by expenses associated with our ERP implementation as well as higher advertising expenses.
Michael Osanloo: We have carefully managed G&A expenses this year and have shown that we will achieve greater efficiency in controlling these costs.
Michael Osanloo: We remain committed to investing in our growth and supporting our strategic priorities. We will continue allocating funds this year towards strategies aimed at boosting sales, including marketing.
Michael Osanloo: We will maintain discipline in these investments and proceed cautiously in our hiring initiatives.
Michelle Hook: Given our focus on these expenses this year, we are lowering our G&A spend estimates for the year. We are now estimating G&A expenses to be between $82 million and $84 million in 2024 versus our previous range of $85 million to $87 million. Pre opening expenses increased 1.8 million to 1.2% in the second quarter of 2024 from 0.2% in the second quarter of 2023. This increase was due to the number and timing of executed and planned new restaurant openings.
Michael Osanloo: Given our focus on these expenses this year, we are lowering our G&A spend estimates for the year.
Michael Osanloo: We are now estimating G&A expenses to be between $82 million to $84 million in 2024 versus our previous range of $85 million to $87 million.
Michael Osanloo: Pre-opening expenses increased $1.8 million to 1.2% in the second quarter of 2024 from 0.2% in the second quarter of 2023. This increase was due to the number and timing of executed and planned new restaurant openings.
Michelle Hook: As Michael mentioned, we are now targeting at least 10 new restaurants to open in 2024. As a result of this update and our clearer view into our 2025 pipeline, we are now estimating pre-opening expenses to be between $10 to $10.5 million in 2024 from our previously guided range of $8 to $9 million. This number may flex depending on the timing of restaurants we open in early 2025.
Michael Osanloo: As Michael mentioned, we are now targeting at least 10 new restaurants to open in 2024.
Michael Osanloo: As a result of this update and our clearer view into our 2025 pipeline, we are now estimating pre-opening expenses to be between $10 to $10.5 million in 2024 from our previously guided range of $8 to $9 million.
Michael Osanloo: This number may flex depending on the timing of restaurants we open in early 2025.
Michelle Hook: All this led to adjusted EBITDA of $29.9 million in the second quarter of 2024 versus $29.2 million in the second quarter of 2023, an increase of 2.2%. Below the EBITDA line, interest expense was $6.6 million in the second quarter of 2024, an increase of $0.1 million from the second quarter of 2023. This increase was driven by a higher effective interest rate due to the additional borrowings on the revolver facility. As of today, our outstanding borrowings under the revolver are $17 million, a decrease of $15 million from the end of Q1.
Michael Osanloo: All this led to adjusted EBITDA of $29.9 million in the second quarter of 2024 versus $29.2 million in the second quarter of 2023, an increase of 2.2%.
Michael Osanloo: Below the EBITDA line, interest expense was $6.6 million in the second quarter of 2024, an increase of $0.1 million from the second quarter of 2023.
Michael Osanloo: This increase was driven by a higher effective interest rate due to the additional borrowings on the revolver facility.
Michael Osanloo: As of today, our outstanding borrowings under the revolver are $17 million, a decrease of $15 million from the end of Q1.
Michelle Hook: Our effective interest rate on the 2023 term loan and revolver facility is 8.3% versus 8.2% for 2023. Income tax expense was $3.5 million in the second quarter of 2024. Our effective tax rate for the second quarter was 29.1 percent. Our future effective tax rate will fluctuate as Class A equity ownership increases and as equity-based awards are exercised and vast. We continue to expect the full-year tax rate to be approximately 21 to 24 percent.
Michael Osanloo: Our effective interest rate on the 2023 term loan and revolver facility is 8.3% vs. 8.2% for 2023.
Michael Osanloo: Income tax expense was $3.5 million in the second quarter of 2024.
Michael Osanloo: Our effective tax rate for the second quarter was 29.1%.
Michael Osanloo: Our future effective tax rate will fluctuate as Class A equity ownership increases and as equity-based awards are exercised in VEST. We continue to expect the full year tax rate to be approximately 21 to 24 percent.
Michelle Hook: Cash from operations increased by 33% year-over-year to $41.6 million year-to-date. We ended the quarter with $12.4 million in cash. We will be using our cash balance plus operating cash flow to support our growth in new restaurant openings this year and beyond. As Michael mentioned, we will begin opening our smaller footprint restaurants in the fourth quarter of this year at a reduced build cost. As a result, we are reducing our estimated range of capital expenditures for this year. We are now expecting capital expenditures to range between $85 million and $88 million versus our previously guided range of $90 million to $93 million.
Michael Osanloo: Cash from operations increased by 33% year-over-year to $41.6 million year-to-date. We ended the quarter with $12.4 million in cash.
Michael Osanloo: We will be using our cash balance plus operating cash flow to support our growth in new restaurant openings this year and beyond.
Michael Osanloo: As Michael mentioned, we will begin opening our smaller footprint restaurants in the fourth quarter of this year at a reduced build cost.
Michael Osanloo: As a result, we are reducing our estimated range of capital expenditures for this year. We are now expecting capital expenditures to range between $85 million to $88 million versus our previously guided range of $90 million to $93 million.
Michael Osanloo: Thank you for your time. And with that, I'll turn it back to Michael. Thank you, Michelle. I'm really
Michael Osanloo: I'm really proud of the culture we've created here at Portillo's, and I am confident in our ability to deliver because of our people.
Michael Osanloo: Thank you for your time and with that I'll turn it back to Michael. Thank you Michelle. I'm really proud of the culture we've created here at Portillo's.
Michael Osanloo: and I am confident in our ability to deliver because of our people.
Michael Osanloo: I want to thank all of our Frontline team members, our managers, our teams at the Restaurant Support Center, and our teams at the commissary. Across the organization, we have incredible people focused on ensuring our guests get fresh, made-to-order food in a fun, energetic environment. The dedication to that experience is our not-so-secret recipe for success. It's our everyday commitment, and it's how we achieve long-term, lasting results. Thank you.
Michael Osanloo: I want to thank all of our front line team members, our managers, our teams at the restaurant support center, and our teams at the commissaries. Across the organization, we have incredible people focused on ensuring our guests get fresh, made-to-order food, in a fun, energetic environment.
Michael Osanloo: The dedication to that experience is our not-so-secret recipe for success. It's our everyday commitment, and it's how we achieve long-term, lasting results. Thank you.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your questions from the queue. If you are using Speaker Equipment, it may be necessary to pick up your handset before pressing the start key. One moment, please, while we poll for questions. The first question comes from the line of Sara Senatore with Bank of America. Please go ahead.
Speaker Change: The first question comes from the line of Sara Senatore with Bank of America. Please go ahead.
Sara Senatore: Hi, great. Hopefully, you can hear me.
Sarah Senator: Hi, great. Hopefully you can hear me. I have just a clarification, please, and then a question. I'll start with the question first.
Sara Senatore: I just need some clarification, please, and then a question. I'll start with the question first.
Sara Senatore: The Full Year Comp Guide assumes the second half is stronger than the first half. I know the comparisons are easier, at least on a one-year basis, and you mentioned marketing, but I think you're lapping that as well. So could you just talk about what you see as the primary drivers of that acceleration given that, I think it sounds like the operating environment is pretty unchanged through the year even.
Sarah Senator: Could you just talk about what you see as the primary drivers of that acceleration given I think it sounds like the operating environment is pretty unchanged.
Sara Senatore: And then the clarification was just about CapEx. I know you have innovated some of these new prototypes, and you have been targeting building more of your restaurants in these smaller footprints. So did you take even more costs out, or you just have more of the restaurants that can, Bee, and the newest prototypes of Smaller Footprints? Just how are you getting to that lower CapEx given how much work you've done already? Thanks.
Speaker Change: targeting building more of your restaurants in these smaller footprints. So did you take even more cost out or you just have more of the restaurants that can?
Speaker Change: Be in the newest prototypes of smaller footprints. Just how are you getting to that lower capex given how much work? You've done all you have done already. Thanks
Michael Osanloo: Great. Sara, I'll handle the first part, and I'll let Michelle clarify on the CapEx.
Michael Osanloo: The trends that we're seeing, I mean, keep in mind, our transaction trend, and our comp trend has improved quarter over quarter, and it's only recently that we have really put the focus on throughput, which is one of the key enablers for us, and we're seeing a benefit of that focus. We've also, I think I've talked about this a bunch now, but we've initiated a lot of marketing. We know that our business is highly responsive to marketing, particularly in the Chicago area, and we are getting pretty aggressive with marketing.
Speaker Change: We've also...
Speaker Change: I think I've talked about this a bunch now, but we've initiated a lot of marketing. We know that our business is highly responsive to marketing, particularly in the Chicago area, and we are getting pretty aggressive on marketing. Not discounting, but just marketing brand awareness. And so, those two things.
Michael Osanloo: Not discounting, but just marketing brand awareness. And so those two things, we believe, will continue to accelerate our performance into the second half of the year, and that's what gets us to flattish to slightly positive. I'll let Michelle talk about CAPEX.
Michelle Hook: Yeah, and CapEx, Sara, as we mentioned, we have three restaurants coming online in Q4 this year that are in the 6,300 square foot footprint. But we were able to pivot into the seven other restaurants that we built that are not restaurants of the future, but we were able to make some improvements in those restaurants as well as we were building those to some of the..., some of the design elements of that.
Speaker Change: As we mentioned, we have three restaurants coming online in Q4 this year that are in the 6,300 square foot.
Speaker Change: Footprint, but we were able to pivot into the seven other restaurants that we built that are not restaurant of the future, but we were able to make some improvements in those restaurants as well as we were building those to some of the.
Speaker Change: Some of the design elements of that and we are able to save.
Michelle Hook: And we are able to save some capital expenditure dollars on those builds as well. And then even more on those three that are coming online in the back half of the year, where we mentioned before, the range for those is going to be between five, two to five and a half million. So we have a line of sight on that. And then as we start to build the 25 pipeline, as well, Sara, in this new footprint, those costs start to, you know, come into play this year, as well as we're building some of those 2025 restaurants at that lower build cost. So our comfort level with that now is obviously higher, and so that's where we feel very comfortable putting out the lower range of 85 to 88 million. Great, thank you very much.
Sarah Senator: those three that are coming online in the back half of the year, where we mentioned before, the range for those are going to be between five, two to five and a half million. So we have line of sight on that. And then as we start to build the 25 pipeline as well, Sarah, in this new footprint,
Sarah Senator: Those costs start to, you know, come into play this year as well as we're building some of those 2025 restaurants at that lower build cost. So our comfort level with that now is obviously higher, and so that's where we feel very comfortable putting out the lower range of $85 to $88 million.
Unknown Executive: Great. Thank you very much.
Speaker Change: Great, thank you very much.
Chris Ockel: Thank you. The next question comes from the line of Chris Ockel with CFL. Please go ahead.
Speaker Change: Thank you. Next question comes from the line of Chris Ockel with CFL. Please go ahead.
Chris Ockel: Yeah, thanks. Michael, I know you launched a fresh round of marketing in Chicago here in the third quarter, but I was hoping you could help us understand any tweaks you've made to the messaging or maybe the level of investment relative to the campaign you ran late last year.
Chris Ockel: Yeah, thanks. Michael, I know you launched a fresh round of marketing in Chicago here in the third quarter, but I was hoping you could help us understand any tweaks you've made to the messaging or maybe level of investment relative to the campaign you ran late last year.
Michael Osanloo: The messaging is actually first, good morning, Chris. The messaging is very consistent. We see that our business is super responsive when we remind people of how much they love Portillo's. So, not to be glib, but it's essentially food porn.
Michael Osanloo: The messaging is actually, first good morning Chris, the messaging is very consistent.
Michael Osanloo: We see that our business is super responsive when we remind people of how much they love Portillo's. So it's, not to be glib, but it's essentially food <expletive> . We show beautiful images of our food, I think we get people excited about it, and we just remind them how much they love the taste, the smell, the sights of Portillo's. So that's what it is.
Michael Osanloo: We show beautiful images of our food. I think we get people excited about it, and we just remind them how much they love the taste, the smell, and the sight of Portillo's. So that's what it is.
Michael Osanloo: It's very consistent with the ad campaign last year. We have a series of billboards out, we've gotten some TV spots, but it really kicks off strong with the onset of the NFL campaign. We bought a lot of spots around Bears games. There's a lot of enthusiasm in the Chicagoland area for the Bears.
Speaker Change: It's very consistent with the ad campaign last year. We have a series of billboards out, we've gotten some TV up, but it really kicks off strong with the onset of the NFL campaign. We bought a lot of spots around Bears games. There's a lot of enthusiasm in the Chicagoland area for the Bears.
Michael Osanloo: It's a material spend. It's probably more than we spent in the fourth quarter of last year. Now, I'm sure you're going to try to model that. I don't know how I would encourage you to model it or not model it. But it's a material spend. And we think that it is going to help move the needle for us.
Speaker Change: It's a material spend. It's probably more than we spent in the fourth quarter of last year. Now, I'm sure you're going to try to model that. I don't know how I would encourage you to model it or not model it, but it's a material spend and we think that it's, it is going to help move the needle for us.
Michael Osanloo: Great. And then I know you mentioned the speed of service improved in the drive-through this quarter. Can you help us understand the most impactful operational changes that drove that improvement? And then how much more headroom you have in terms of opportunity there? And then, Michelle, have you been able to correlate the improvement in throughput to maybe comp sales improvement? So, let me, let me, let me.
Speaker Change: Great, and then I know you mentioned the speed of service improved in the drive-thru this quarter. Can you help us understand the most impactful operational changes that drove that improvement?
Speaker Change: How much more headroom you have in terms of opportunity there? And then, Michelle, have you been able to correlate the improvement in throughput to maybe comp sales improvement?
Michael Osanloo: So let me try to answer that for you, the whole thing. In 2019, we were almost a minute faster in our drive-thrus than we were in this past sort of trailing 12-month period. In a very short period of time, because we really started emphasizing throughput and drive-through excellence for about the last four to six weeks now, we've carved back 15 seconds of that. And it's, it's, I don't want to be simplistic, Chris, but it's really just making sure that there's managerial presence outside.
Michael Osanloo: And we're coaching up and training our team members on what it means at Portillo's to be fast and efficient. We just lost our way a little bit. And a manager outside giving real-time feedback, real-time coaching, making sure that our team members are working as adeptly as our expectations is the key to that success. So we've carved a little bit of that time back, but there's still a lot to go.
Michael Osanloo: I'm very enthusiastic about it because the teams have embraced it. And of course, we're doing contests and competitions and, you know, rewarding all the great people at Portillo's and encouraging the not so great to be a little bit better. But I'm very optimistic about this. You know, we are an execution machine. We just need to know what to execute against. And now the team's
Michelle Hook: and encouraging the not-so-great to be a little bit better. But I'm very optimistic about this. We are an execution machine. We just need to know what to execute against, and now the teams know.
Michelle Hook: Great. That's helpful. Thank you. You bet, Chris.
David Tarantino: Thank you. The next question comes from the line David Tarantino with Baird. Please go ahead.
David Tarantino: Good morning. Michael, I just wanted to clarify your comments about what you're seeing in the third quarter. I think you mentioned quarter over quarter improvement. Was that related to comps or transactions or both? And I guess the nature of my question, as we've heard the opposite from a lot of the other companies we've seen, so I just wanted to clarify that.
Speaker Change: Good morning. Michael, I just wanted to clarify your comments about what you're seeing in the in the third quarter. I think you mentioned quarter over quarter improvement. Was that related to comps and or transactions or both? And I guess the nature of my question is we've heard
Speaker Change: The opposite from a lot of the other companies we've we've seen so I just I wanted to clarify that
Michael Osanloo: No, it does sound a little unusual, but if you just harken back to Q1 for us, we had negative 3.2 transactions, Q2 we improved to negative 2.3, our comp was negative 1.2, we improved to negative 0.6, and even our mix has improved slightly. So I think that the flywheel is starting to pick back up for us.
Michael Osanloo: No, I, I, um...
Michael Osanloo: It does sound a little unusual, but if you just harken back to Q1 for us we had negative 3.2 transactions, Q2 we improved to negative 2.3, Q1 our comp was negative 1.2, we improved to negative 0.6.
Michael Osanloo: slightly. So I think that the flywheel is starting to pick
Michael Osanloo: I know, David, you're thinking of the macroeconomic environment and what's happening to the low-end consumer. I'm not, you know, I guess I'm not smart enough to answer that for you. But what I can tell you is that our business is gaining momentum, and I think we're doing the right things to help drive our business.
Michael Osanloo: I know, David, you're thinking of the macroeconomic environment and what's happening to the low-end consumer. I guess I'm not smart enough to answer that for you. What I can tell you is that our business is gaining momentum, and I think we're doing the right things to help drive our business.
Unknown Executive: Great. Thank you.
David Tarantino: And I guess, you know, on that, did that, I guess maybe I was confused. Did that comment on quarter-over-quarter improvement apply to what you're seeing so far in the third quarter? Maybe I misunderstood that.
David: Great. Thank you. And I guess, you know, on that, I guess maybe I was confused. Did that comment on quarter over quarter improvement apply to what you're seeing so far in the third quarter? Maybe I misunderstood that.
Michael Osanloo: I don't think I'm commenting on the third quarter; I was just commenting on Q2 versus Q1.
David: I don't think I'm not I'm not commenting on the third quarter. I was just commenting on q2 versus q1 God, okay. Thank you. Sorry for that confusion. And then I had a question, you know on the price increase you recently took I guess
David Tarantino: Okay, thank you. Sorry for that confusion. And then I had a question, you know, on the price increase you recently took. Can you maybe explain the rationale for that move? And I guess, in today's very uncertain environment, your confidence and taking that approach, you know, given the sensitivity of consumer spending?
Speaker Change: Can you maybe explain the rationale of that move and, I guess, you know, in today's very uncertain environment, your confidence in taking, you know, that approach, you know, given the sensitivity on consumer spending?
Michael Osanloo: Yeah, we, um... I guess I'm not trying to be cute, but I don't think of it so much as a price increase. We have different price tiers, and what we try to do is keep our pricing and our margins fairly neutral, despite what different jurisdictions might do with local labor rates and things like that. And so we've had a number of jurisdictions where labor costs have gone up significantly over a period of time.
Speaker Change: Yeah, we, um...
Speaker Change: I guess I'm not trying to be cute, but I don't think of it so much as a price increase we have.
Speaker Change: Different price tiers, and what we try to do is keep our pricing and our margins fairly neutral.
Speaker Change: despite what different jurisdictions might do with
Speaker Change: Local labor rates and things like that.
Speaker Change: And so we've had a number of jurisdictions that labor costs have gone up significantly over a period of time. We did not increase them to the right price tier all in one fell swoop. We've been much more methodical about changing pricing to make sure that there's no sticker shock at any one time. And this is a little bit of cleanup pricing. So that's what we mean by tier pricing. There's a handful of restaurants that were...
Michael Osanloo: We did not increase them to the right price tier all in one fell swoop. We've been much more methodical about changing prices to make sure that there's no sticker shock at any one time. And this is a little bit of cleanup pricing. So that's what we mean by tier pricing. There are a handful of restaurants that were candidly being subsidized by other markets, and now we've put them into the right price
Unknown Executive: Got it. Thank you very much.
Speaker Change: candidly being subsidized by other markets and now we've put them into the right price tier.
Speaker Change: Thank you very much. You bet, David.
Brian Mullan: Thank you. The next question comes from the line of Brian Mullan with Piper Sandler. Please go ahead.
Speaker Change: Thank you. Next question comes from the line of Brian Mullan with Piper Sandler. Please go ahead.
Brian Mullan: Thank you. Just follow up on the topic of throughput. You've spoken about the drive-through. I'm wondering if you also see an opportunity for improved throughput in the restaurant as well, and if you could just tie that into the chief operating officer position if you're looking to fill that role, or is that something you think can be handled internally with the team?
Brian Mullen: Thank you. Just to follow up on the topic of throughput, you've spoken about the drive-through. I'm wondering if you also see an opportunity for improved throughput.
Speaker Change: in the restaurant as well. And if you could just tie that into chief operating officer position, if you're looking to fill that role, or is that something you think you can be handled internally with the team in place?
Michael Osanloo: So, the first part of your question, Brian, throughput. Absolutely, I think that there's a throughput opportunity at Portillo's. I think that when you lose your focus on throughput, it's not just in the drive-thru; it's probably inside as well. Our data and our analytics suggest that it's most obvious in the drive-thru, so we definitely can do better in terms of throughput inside the restaurant. And it's actually one of the reasons why we're testing kiosks.
Speaker Change: So, the first part of your question, Brian , throughput, absolutely, I think that there's a throughput opportunity at Portillo's. I think that when you lose your focus on throughput, it's not just in the drive-thru, it's probably inside as well. Our data and our analytics suggest that it's most...
Speaker Change: Most obvious in the drive-thru. So we definitely can do better in terms of throughput inside the restaurant And it's actually one of the reasons why we're testing kiosks. So I'm excited about the kiosk test I think we'll talk more about it in the future, but that we think is another way of helping with throughput. So
Michael Osanloo: So I'm excited about the kiosk test; I think we'll talk more about it in the future, but that we think is another way of helping with throughput. So throughput, for sure, in the drive-thru and also inside.
Speaker Change: Throughput for sure in the drive-through and also inside.
Michael Osanloo: We are actively looking for a new COO, but I'm enjoying my time being close to the operators right now. I work very closely with them. I kind of started my job here at Portillo's by working closely with them. And it gives me a lot of insight into what we're focusing on and what we shouldn't be focusing on. And so it gives me a chance to reinvigorate the team to be the great execution machine that we are.
Speaker Change: We are actively looking for a
Speaker Change: a new CLO.
Speaker Change: But.
Speaker Change: I'm enjoying my time being close to the operators right now. I work very closely with them. I kind of started my job here at Portillo's working closely with them.
Speaker Change: And it gets me a lot of insight into what we're focusing on and what we shouldn't be focusing on. And so it gives me a chance to reinvigorate the team to be the great execution machine that we are. And just to focus on a few basic things that make us
Michael Osanloo: And just to focus on a few basic things that make us fantastic. We are actively in a search for a COO, but we're not going to rush into anything we want. You know, we want a world-class leader who fits our culture and appreciates Portillo's for the sleeping giant that it is.
Speaker Change: fantastic. We are actively in a search for a COO, but we're not going to rush into anything. We want, you know, we want a world-class leader who fits our culture and appreciates Portillo's for the sleeping giant that it is.
Brian Mullan: Okay, thank you for that. And my follow up is actually at the kiosk. You know, if you were to like what you see from the first couple stores, I assume you'd want to deploy that more broadly. If you could just talk about how not to get ahead of myself, but how quickly you could do something like that if you liked what you saw, and then just talk about making sure the consumer experience stays intact for all of your guests. I'm sure some guests would be thrilled. Some might like the interaction that they have at the front counter. So how are you thinking about that? I'm open to all options.
Speaker Change: Okay, thank you for that. And my follow-up actually is on the kiosk, you know, if you were to like what you see from the first couple stores...
Speaker Change: I assume you'd want to deploy that more broadly, if you could just talk about how.
Speaker Change: Not to get ahead of myself, but how quickly you could do something like that, if you like what you saw, and then just talk about making sure the consumer experience stays intact for all of your guests. I'm sure some guests would be thrilled, some might like the interaction that they have at the front counter, so how you're thinking about that.
Michael Osanloo: I'm open to all options, to be honest with you. It's been less than a week at one restaurant, so I don't want to jump into any premature conclusions.
Speaker Change: I'm open to all options, to be honest with you. It's been less than a week at one restaurant, so I don't want to jump into any premature conclusions.
Michael Osanloo: I love the way it looks, and I'm very proud of our team. I'm very proud of how they've deployed it. They really have studied best-in-class performance by other restaurant companies, and we're not too proud to steal great ideas and great concepts, so I think the deployment of our kiosks is as good as it gets, and I'm super excited to see how it works in our Downers Grove location. We're rolling it out to downtown Chicago.
Speaker Change: I love the way it looks. I'm very proud of our team. I'm very proud of how they've deployed it. They really have studied best-in-class performance by other restaurant companies, and we're not too proud to steal great ideas and great concepts. So I think the deployment of our kiosks
Speaker Change: are as good as it gets.
Speaker Change: And I'm super excited to see how it works in our Downers Grove location. We're rolling it out to downtown Chicago. We're doing it in California. I want to see how it looks, and if it does what it seems to do for everybody else, then I think we have something very exciting that we can do.
Michael Osanloo: We're doing it in California. I want to see how it looks and if it does what it seems to do for everybody else, then then I think we have something very exciting that we can hopefully do very quickly.
Speaker Change: hopefully very quickly deploy.
Andy Barish: Thank you. The next question comes from the line of Andy Barish with Jeffrey. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Thank you. The next question comes from the line of Andy Barish with Jeffrey. Please go ahead.
Andy Barish: Yeah, just a quick clarification. Michelle on inflation and commodity inflation. I missed it. Did you say that the 6.9 and the 2Q, you know, continues to be what you think will be the peak, you know, increases for the year?
Andy Barish: Yeah, just a quick clarification, Michelle, on the commodity inflation. I missed, did you say that the 6.9 and the 2Q?
Andy Barish: You know, continues to be what you think will be the peak, you know, increases for the year.
Michelle Hook: Yeah, Andy, that's correct. We had always anticipated Q2 would be the peak for the year, and we still expect that. So we do expect an easing in the back half of the year. And I mentioned, you know, some of the areas we expect easing are in our hamburger, produce, and French fry costs in the back half.
Michelle Hook: Yeah, Andy, that's correct. We had always anticipated Q2 would be the peak for the year, and we still expect that. So we do expect easing in the back half of the year, and I mentioned some of the areas we expect easing are in our hamburger, produce, and French fry costs in the back half.
Andy Barish: And then with the pre-opening increase, I mean, it seems as if it implies, you know, some number of openings for 25 without getting too far ahead of the first quarter at 25 without getting too far out in front of guidance or anything. You were hoping 25 was going to be a more evenly spaced year in terms of openings. Further insight on that as we get closer, that you would like to share at this point?
Michelle Hook: Okay.
Speaker Change: And then with the pre opening increase. I mean, it seems as if it implies, you know, some number of openings for 25 without getting too far for the first quarter at 25 without getting too far.
Speaker Change: Out in front of guidance or anything you were you were hoping 25 was going to be a more evenly spaced year in terms of openings any Further insight to that as we get closer that you would like to share at this point
Michelle Hook: Yeah, Andy, I think obviously, I mentioned we have a clear view into the 2025 pipeline. And so we always expected 24 to not be great. But as we get into 25, we do expect that cadence to look a little more smooth. And, as you know, part of that pre-opening and costs includes a deferred rent component. So as we get into these 25 restaurants and start incurring some of those costs, that's where that better line of sight gives us confidence that you know, we have a little bit of an increase in that line item. But again, yes, we expect 25 to be a little bit more smooth than what we're seeing in 24. And what we saw in 23.
Andy Barish: And just one final one, Michael, on the marketing in Chicago. Can you give us a sense of how it's ramping up for football, you know, next month? Does it continue into the fourth quarter to kind of lap what you did last year? I guess just trying to level the playing field on that.
Michael Osanloo: Yeah, it might dribble a hair into the fourth quarter, Andy, but it's primarily a third quarter spin.
Speaker Change: Yeah, it might dribble a hair into the fourth quarter, Andy, but it's primarily a third quarter spent.
Unknown Executive: Okay, thank you very much.
Andy Barish: Okay, thank you very much.
Matt Curtis: Thank you. The next question comes from the line of Matt Curtis with William Blair. Please go ahead. Hi, good morning.
Speaker Change: Thank you. Next question comes from the line of Matt Curtis with William Blair. Please go ahead.
Matt Curtis: Hi, good morning. Just a question on the bundled meals. I mean, did the return of Famous Fives in April have any meaningful impact on average ticket for you? And then, I guess more broadly, are you comfortable with where you are on value right now relative to tiers? Or do you think you need to lean in more on value in the second half?
Matt Curtis: Hi, good morning.
Michael Osanloo: I would tell you it's a great question. I would tell you we're happy with redeploying the Famous Five. It does seem to be having a positive impact on our business. First guests like it because it helps curate what they think they should be getting. And especially in our markets, it makes a lot of sense for them. We are seeing a slight check uptick as well as a mix uptick.
Speaker Change: I would tell you it's a great question. I would tell you we're happy with redeploying the Famous Five. It does seem to be having a positive impact on our business. It's first guests like it because it helps curate what they
Michael Osanloo: So I'm happy about that. In terms of value, you know, we're not a brand that is going to be on sale. We're not a brand that does value meals. We're a brand that provides, you know, we're sort of an EDLP merchant, Everyday Low Pricing. We provide phenomenal value for what a guest gets. Our price points are excellent. Our beef sandwich is huge. Our fries are huge. No one is, you know, calling us out for skimflation or shorting portions.
Speaker Change: In terms of value, you know, we're not we're not a brand that is going to be on sale. We're not a brand that does value meals. We're a brand that provides, you know, we're sort of an EDLP merchant, everyday low pricing.
Speaker Change: We provide phenomenal value for what a guest gets. Our price points are excellent.
Michael Osanloo: You can see it in our cost of sales. We spend a lot of money on food, and we give guests great value in what they're receiving. So, I'm not. For the consumer who wants a great experience and a great, fair price point, I think we're still a wonderful value. Okay.
Speaker Change: You can see it in our cost of sales. We spend a lot of money on the food and we give guests a great value in what they're receiving. So, for the consumer who wants a great experience and a great, fair price point, I think we're still a wonderful value.
Matt Curtis: Okay, understood. And then just getting back to drive through for a minute. I mean, it's good to hear that the drive through speeds are improving. But can you talk about how drive through traffic is doing in light of just the promotion?
Speaker Change: Okay, understood. And then just getting back to drive-through for a minute. I mean, it's good to hear that the drive-through speeds are improving, but could you talk about how drive-through traffic is doing in light of just the promotional intensity across the fast food space right now?
Michael Osanloo: I mean, I think you probably answered your own question, Matt. I mean, drive-through traffic is a little bit challenging because of the promotional intensity. The big QSRs are largely drive-through businesses, and while they're engaging in some very aggressive promotion and discounting, we will probably have a little bit of pressure on our drive-throughs. The way for us to mitigate that is by being excellent at the drive-through, by being speedy, fast, efficient, getting our food into a guest's hand that's made to order, not sitting in a bin. It's made to order. It's hot, fresh, fast, and delicious. That's how we compete in the drive-through. We just have to get a little bit better in terms of our speed and execution.
Speaker Change: I mean, I think you probably answered your own question, Matt. I mean, drive-through traffic is a little bit challenged because of the promotional intensity. The big QSRs are largely drive-through businesses.
Unknown Executive: Okay, I understand. Thanks very much. You bet.
Speaker Change: Okay, I understood. Thanks very much. You bet.
Brian Harbour: Thank you. The next question comes from the line of Brian Harbour with Morgan Stanley. Please go ahead.
Speaker Change: Thank you. Next question comes from the line of Brian Harbour with Morgan Stanley . Please go ahead.
Brian Harbour: Yeah, thanks. Good morning, guys.
Brian Hubbell: Yeah, thanks. Good morning, guys. Michael, the kind of slight improvement in mix that you mentioned, was that, did you
Brian Hubbell: Just to clarify the prior response, was that largely what drove it? Or have you seen anything else in terms of customer behavior that's driven mix? And do you still think that can kind of moderate through the balance of the year?
Michael Osanloo: Mix continues to perplex me if I'm being honest. I think at some point you know when you're lapping negative mix over negative mix it does have to mitigate itself and so I'm hopeful with Mix. We are engaging in some strategies to help with Mix.
Michael Osanloo: I think the Famous Five is something that can help with mix. I think that, I'm hoping the kiosks actually can help with mix. And so, we're taking some strategies to help with mix, but it does perplex me a little bit, the mix challenge that we've been facing.
Michael Osanloo: Um, Michael, the kind of slight improvement in mix that you mentioned, was that, just to clarify, the prior response was, was that largely what drove it? Or have you seen anything else in terms of customer behavior that's driven mix? And do you still think that can kind of moderate through the balance of the year?
Speaker Change: Yeah, makes sense The the normalization of kind of new units just on a sales basis has that still been
Speaker Change: kind of consistent with what you were thinking. And I mean, Michelle, any comments on how you think about that in the second half?
Brian Harbour: I think it's probably a factor, Brian, but I don't know if it's the dispositive factor.
Michael Osanloo: There's so much noise in that data. MIX continues to perplex me, if I'm being honest. I think at some point, you know, when you're lapping negative MIX over negative MIX, it does have to mitigate itself. And so I'm hopeful with MIX. We are engaging in some strategies to help with MIX. I think the Famous Five is something that can help with MIX. I think that I'm hoping the kiosks can actually help with MIX. And so we're taking some strategies to help with MIX, but it does perplex me a little bit, the MIX challenge that we've been facing.
Michelle Hook: They are performing at our expectations. We're thrilled with the consumer reception. I think, you know, we've opened up our, what, six restaurant in DFW. It's, that is incredible for a company like us.
Michael Osanloo: Yeah, makes sense. The normalization of new units, just on a sales basis, has that still been kind of consistent with what you were thinking? And I mean, Michelle, any comments on how you think about that in the second half?
Speaker Change: to quickly get to scale to a minimum efficient scale in Dallas and
Michael Osanloo: Yeah, I'll tell you, as an overarching theme, I'm very happy with our new products. They are performing at our expectations, and we're thrilled with the consumer reception.
Brian: less than two years is something I don't think we could ever have imagined. So we're super excited about the trends and the trajectory of our new restaurants. Yeah, I'd add, Brian , we are going to enter the Houston market. I know we've talked about that before as our new market this year in the back half of the year. So we're excited about that new market entrance and then getting up to scale within that market, as Michael mentioned, continue to build out DFW.
Michelle Hook: I think, you know, we've opened up our, what, sixth restaurant in DFW. That is incredible for a company like us to quickly get to scale to a minimum efficient scale in Dallas in less than two years is something I don't think we could ever have imagined. So we're super excited about the trends and the trajectory of our new restaurants. Yeah, I'd add, Brian, we are going to enter Houston.
Michelle Hook: Yeah, I'd add, Brian, we are going to enter the Houston market. I know we've talked about that before as our new market this year, in the back half of the year. So we're excited about that new market entry.
Michelle Hook: And then getting up to scale within that market, as Michael mentioned, continuing to build out DFW. And then just continuing to get scale in the other markets we operate in. We opened up another restaurant in Arizona in the first half of the year, but we're going to focus primarily in the back half of the year on those Dallas and Houston markets. And as Michael mentioned, we're really excited about those restaurants as well as what they're going to do for the markets to drive awareness.
Brian: and then just continuing to get scale in the other markets we operate in. We opened up another restaurant in Arizona in the first half of the year, but we're going to focus primarily in the back half of the year on those Dallas and Houston markets. And as Michael mentioned, we're really excited about
Michael Osanloo: those restaurants as well as what it's going to do to the markets to drive awareness.
Michelle Hook: And I think we've continued to talk about as we get scale, that the key is to not only drive cost efficiencies within those markets but to drive awareness. And that's, I think, what we're all very excited about as well, is that continued awareness-building effort through scale building.
Michael Osanloo: And I think we've continued to talk about, as we get scale, that's the key, is to not only drive cost efficiencies within those markets, but to drive awareness. And that's, I think, what we're all very excited about as well, is that continued awareness-driving effort through scale building.
Unknown Executive: Mr. Harbour, are you done with the questions?
Michael Osanloo: Mr. Harbour, are you done with your questions?
Operator: Operator, are there any other questions?
Operator: Operator, are there any other questions?
Operator: Yes, we have a question from Jim Salera. I'm Stephanie. Please go back.
Speaker Change: Yes, we have a question from Jim Salera.
Jim Salera: Hi guys. Thanks for taking our question. Maybe I could ask one backward-looking and one forward-looking question. First, the backward one.
Speaker Change: from Stephening. Please go back.
Speaker Change: Hi, guys. Thanks for taking our question. Maybe if I could ask one backward-looking and one forward-looking question. First, the backward-looking one. If my notes served me correctly, I believe last quarter you guys talked about
Jim Salera: If my notes served me correctly, I believe last quarter you guys talked about seeing low single-digit same-store restaurant sales growth in April kind of coming out of one queue. And obviously, the results for the quarter would indicate that those trends kind of deteriorated throughout the quarter. So just any color on kind of the puts and takes there throughout the quarter, if there's anything that happened that we should kind of be aware of continuing into the back half of the year?
Speaker Change: Seeing low single-digit same-store restaurant sales growth in April , kind of coming out of one queue, and obviously the results for the quarter would indicate that those trends kind of deteriorated throughout the quarter.
Speaker Change: So just any color on kind of the puts and takes there throughout the quarter, if there's anything that happened that we should kind of be aware of continuing into the back half of the year.
Michelle Hook: Yeah, I'd say, Jim, the only thing I would call out is you're absolutely correct. April, we did see a low single-digit comp. And I'd say May was a bit more challenging. I'd say that was probably the most challenging month in the quarter. And then we saw a little bit of pick-up as we moved into June. So that's, you know, just to give you some color; it was, you know, it was choppy. Like everything in this environment, we continue to see choppiness in the quarter. But that's, you know, par for the course for this year.
Speaker Change: Yeah, I'd say, Jim, the only thing I would call out is you're absolutely correct. April , we did see a low single-digit comp.
Speaker Change: And I'd say May was a bit more challenged. I'd say that was probably the most challenged.
Speaker Change: month in the quarter. And then we saw a little bit of pickup as we moved into June . So that's, you know, just to give you some color, it was, you know, it was choppy, like everything in this environment, we continue to choppiness in the quarter. But that's, you know, par for the course for this year is how I would characterize it.
Michelle Hook: Okay, great. Does that have any kind of analog as we go into 3Q? I know you guys don't want to go into too much detail about the quarter, but just kind of as we think about, you know, Yeah, no, I would say Jim, I think I use the word choppy. I'd continue to use that, you know, if there's choppiness, as Michael mentioned, our advertising is really going to start to kick in later this month as the NFL season kicks into gear. And so we'll But we expect to continue to see that choppiness intra-quarter, whether that's, you know, Q3 and beyond.
Speaker Change: Okay, great. Does that have any kind of analog to as we go into 3Q? I know you guys don't want to give too much detail on the quarter, but just kind of as we think about, you know, the production of the quarter.
Speaker Change: Yeah, no, I would say Jim, I think I use the word choppy, I'd continue to use that, you know, if there's choppiness, as Michael mentioned, you know, our advertising is really going to start to kick in later this month as the NFL season kicks into gear. And so we'll see what that does. But we expect to continue to see that choppiness intra quarter, whether that's, you know, Q3 and beyond.
Jim Salera: Okay, great. And maybe one follow-up question on the marketing, you know. I'm excited to see the spots around the bears, although I'm a Pittsburgh Steelers fan myself. But if we think about all of the restaurants and kind of food concepts that advertise around football, you know, wings, pizza. How do you kind of pierce the veil and have Portillo's message stand out among all of those other, you know, options that consumers have to choose from on GameDay?
Speaker Change: Okay, great. And maybe one follow up question on the marketing, you know, excited to see the spots around the Bears, although I'm a Pittsburgh Steelers fan myself. But if we think about all of the
Speaker Change: Restaurants and kind of
Speaker Change: Food concepts that advertise around football, you know, wings, pizza. How do you kind of pierce the veil and have Portillo's message stand out among all of those other, you know, options that consumers have to choose from on game day?
Michael Osanloo: You know, this is going to sound a little cocky, but we're just a brand that punches above its weight in Chicagoland. So in a lot of other markets, it's a different dynamic for us. But in Chicagoland, when Portillo's is on TV or we're actively marketing, it captures the consumer's attention. We are a 60-year-old beloved brand in Chicagoland, and we don't advertise regularly. So when we do, it has a very strong positive impact on us.
Speaker Change: You know, this is going to sound a little cocky, but we're just a brand that punches above its weight in Chicagoland.
Speaker Change: So, in a lot of other markets, it's a different dynamic for us. But in Chicagoland, when Portillo's is on TV or actively marketing, it catches the consumer's attention. We are a 60-year-old beloved brand in Chicagoland, and we don't advertise regularly. So when we do, it has a very strong positive impact for us.
Unknown Executive: Great. Thanks guys. I'll hop back in a minute.
Speaker Change: Great, thanks guys. I'll hop back into it. Thanks Jim.
Dennis Geiger: Thank you. The next question comes from the line of Dennis Geiger with UBS. Please go ahead.
Speaker Change: Thank you. Next question comes from the line of Dennis Geiger with UBS. Please go ahead.
Dennis Geiger: Thanks, morning guys. I'm just curious, anything additional...
Dennis Geiger: Highlight on Customer Behaviors.
Dennis Geiger: Thanks. Morning, guys. I'm just curious, anything additional to highlight on on customer behaviors, you know, either day part or day of the week? I guess the channels I'd be particularly interested if, if anything, off premise, you know, delivery, if you're if you're seeing anything notable there, and if there's any implications off the back of those observations.
Dennis Geiger: Whether it is day part or day of the week.
Dennis Geiger: I guess the channels I'd be particularly interested in if anything off-premise, you know delivery, if you're seeing anything notable there, and if there's any implications off the back of those.
Michael Osanloo: Off the Back of Those Observations. You know, I'm going to steal my own.
Michael Osanloo: You know, I'm gonna steal my partner's line here when she says choppy. I'd say it's the same dynamic; within every channel, there's some choppiness. There are some elements of third-party delivery that are very strong, some elements that are not as strong, some elements some times you find a week or two where the day part is strong, others not so strong on average, though Dennis it's pretty consistent for Very helpful, Michael.
Speaker Change: You know, I'm going to steal my partner's line here when she says choppy, I'd say it's the same dynamic.
Speaker Change: There's, you know, within every channel, there's some choppiness, there's, you know,
Speaker Change: Some elements of third party delivery that are very strong, some elements that are not as strong.
Speaker Change: Sometimes, you find a week or two where the day part is strong, others not so strong. On average though, Dennis, it's pretty consistent for us and we're seeing similar performance across channels.
Dennis Geiger: On average. Very helpful, Michael.
Michael Osanloo: Very helpful. One other question, if I could, just as it relates to guest satisfaction scores, I know, you know, we've been seeing some real solid strength there. Not sure if I missed something, but just kind of the latest update there. I know you talked about value earlier, but no value scores, but more broadly on satisfaction scores, what you're seeing, and again, how you think about those scores.
Dennis Geiger: Yeah.
Dennis Geiger: Very helpful. Thank you.
Speaker Change: One other, if I could, just as it relates to...
Speaker Change: Guest Satisfaction Scores. I know, you know, we've been seeing some real solid strength there. Not sure if I missed, but just kind of the latest update there. I know you talked value earlier, but, you know, value scores, but more broadly on satisfaction scores, what you're seeing and and, again, how you think about those scores looking ahead and what that means. Thank you.
Michael Osanloo: Those scores, looking ahead, what that means. Thank you.
Michael Osanloo: Yeah, I think they continue to be very, very strong. I'm, you know, kind of consciously deemphasizing them a little bit with the organization because when they are accurate, they're a leading indicator, and I want to make sure that our teams are engaging in the right behaviors that drive these scores and not trying to manage them. So when it comes to things like accuracy, speed, and overall satisfaction, we remind the teams that the way to control those is to smile, to be fast, and that if a guest has a problem, resolve the problem in the guest's favor. And so just, you know, be a good human being. And so that's what we try to emphasize, not to manufacture scores.
Speaker Change: Yeah, I think they continue to be very, very strong for us.
Speaker Change: Deemphasizing them a little bit with the organization because I when they are accurate They're a leading indicator and I want to make sure that our teams are engaging in the right behaviors
Speaker Change: that that drive these scores and not trying to manage score. So when it comes to things like accuracy, speed, overall satisfaction, we remind the teams that
Speaker Change: The way to control those is to smile, to be fast, that if a guest has a problem, resolve the problem.
Speaker Change: in the guest's favor. And so just, you know, be a good human being. And so that's what we try to emphasize, not to manufacture scores.
Michael Osanloo: And I think that that message is getting through. We're seeing signs of meaningful improvement in our restaurants. We're seeing signs of, you know, some behavior changes, especially when it comes to friendliness, speed, things that really matter to a guest. You know, and I'm sorry, Dennis, to build on that, we are not going to differentiate ourselves on price points, we're not going to be a discount brand, we are going to differentiate ourselves by exceptional execution, we're going to be friendly, we're going to be fast, we That's the way Portillo's succeeds in this environment.
Gregory Francfort: Thank you. The next question comes from the line of Gregory Francfort with Guggenheim Securities. Please go ahead.
Speaker Change: and and I and I think that that message is getting through we're seeing signs of meaningful improvement in our restaurants we're seeing signs of you know some behavior changes especially when it comes to friendliness speed things that really matter to a guest
Dennis Geiger: And I'm sorry Dennis, to build on that, we are not going to differentiate ourselves on price points. We're not going to be a discount brand. We are going to differentiate ourselves by exceptional execution. We're going to be friendly. We're going to be fast. We're going to get you hot, delicious food as quickly as we can. That's the way Portillo's succeeds in this environment.
Dennis Geiger: Makes sense. Thank you.
Dennis Geiger: Thanks, Dennis.
Speaker Change: Thank you. Next question comes from the line of Gregory Francfort with Guggenheim Securities. Please go ahead.
Gregory Francfort: Hey, thanks. I had two questions. The first is maybe just as a follow-up on that, so the store managers, I guess you're changing what metrics the store managers are bonusesed on, and maybe what were those and what are they now?
Gregory Frankfurt: Hey, thanks. I had two questions. The first is maybe just as a follow-up on that. So the store managers, I guess you're changing what metrics the store managers are bonused on and maybe what were those and what are they now?
Michael Osanloo: We're not actually changing that, Greg. Store managers at Portillo's are bonused on sales, and the way it's communicated to them is sort of the old Texas Roadhouse model, not too proud to steal a great concept. They get a percentage of the incremental profit that they generate for the company. So our store managers, we try to create an ownership mindset, and it's based on sales. And so that's what I want it to be.
Speaker Change: We're not actually changing that, Greg. Store managers at Portillo's are bonused on sales.
Speaker Change: And the way it's communicated to them is sort of the old Texas Roadhouse model, not too proud to steal a great concept.
Speaker Change: They get a percentage of the incremental profit that they generate for the company. So our store managers, we try to create an ownership mindset.
Speaker Change: And it's based on sales. And so that's what I want it to be. I think in the past we got a little cute, and we had them working on lots of different metrics. And now we've stripped a lot of that away, and I'm trying to create as much simplicity and focus as possible.
Michael Osanloo: I think in the past, we got a little carried away, and we had them working on lots of different metrics, and now we've stripped a lot of that away, and I'm trying to create as much simplicity and focus as possible.
Unknown Executive: Got it. Okay, thanks.
Speaker Change: Got it. Okay, thanks. And maybe for Michelle, just on wage inflation and labor hours, I mean, I think you're saying, I think the first two quarters of the year have been 3.1% wage inflation each quarter. You're still saying mid-singles for the year.
Speaker Change: Is that a pickup expected in the second half? And I think that line you've been managing quite well, is that labor hours that you've been managing well? Is it insurance swings? I'm just trying to think what else might be in there.
Michelle Hook: And then maybe for Michelle, just on wage inflation and labor hours. I mean, I think you're saying that the first two quarters of the year have been 3.1% wage inflation each quarter, and you're still saying mid singles for the year. Is that a pickup expected in the second half? And I think that line you've been managing quite well. Are those labor hours that you've been managing well? Is it insurance swings? I'm just trying to think of what else might be in there that we might be missing. Thanks. Yeah.
Michelle Hook: Yeah, yeah, no, Greg, yeah, you got that right. So the first two quarters, it was 3.1%. We do expect it to tick up as we give our annual rate increases, which will come into play in the Q3 time period. So we expect a little bit of a tick up into Q3 and into Q4.
Michelle Hook: That we might be missing. Thanks. Yeah. Yeah. No, Greg. Yeah, you got that right. So the first two quarters it was 3.1% We do expect it to kick up as we give our annual rate increases
Speaker Change: Those will come into play in the Q3 time period, so we expect a little bit of tick up.
Michelle Hook: But you're right; we are very focused on how we deploy labor in our restaurants. And, you know, we continue to look for efficient ways to manage labor; we look for efficiencies within our kitchens. And so you're seeing some of that bear out in those labor numbers. We're definitely deploying labor according to what our ideal labor grid says. You know, there were situations several years ago where we were, you know, managing not purposefully, but our labor was, we weren't managing to those hours, those ideal hours.
Speaker Change: into Q3 and into Q4. But you're right, we
Speaker Change: are very focused on how we deploy labor in our restaurants and
Speaker Change: You know, we continue to look for efficient ways to manage labor. We look for efficiencies within our kitchens.
Speaker Change: And so you're seeing some of that bear out in those labor numbers. We're definitely deploying labor according to what our ideal labor grid says. You know, there were situations several years ago where we were, you know, managing that purposefully, but our labor was we weren't managing to those hours to those ideal hours.
Michelle Hook: As we sit here today, I feel comfortable that we're that labor utilization number is in a pretty good spot. And so you hit the nail on the head; it's really just efficiencies that we continue to work on in the kitchens, offset by some of those wage rate increases. But that's what we expect to see a little bit of a tick up in the back half that puts us, you know, in that call it four to 6% range, but closer to the low end, Greg.
Speaker Change: As we sit here today, I feel comfortable that we're, that labor utilization number is pretty, in a pretty good spot. And so.
Speaker Change: You hit the nail on the head. It's really just efficiencies that we continue to work on in the kitchens and offset by some of those wage rate increases. But that's what we expect to see a little bit of tick up in the back half that puts us, you know, in that call it four to six percent range.
Unknown Executive: Thank you guys, I appreciate all the help.
Speaker Change: But closer to the low end, Greg.
Greg: Thank you guys, appreciate all the help.
Operator: Thank you. A reminder to all the participants that you may press star and one to ask a question. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Thank you. A reminder to all the participants that you may press star and 1 to ask a question.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.