Q2 2025 Portillo's Inc Earnings Call

Chris Brandon: Greetings and welcome to Portillo's second quarter 2025 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Brandon, Vice President of Investor Relations. Thank you, sir. You may begin.

Greetings and welcome to Portillo's second quarter 2025 earnings conference call.

Time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad,

Michelle Hook: Thanks, operator, and good morning, everyone, and welcome to our second quarter 2025 earnings call. My first since joining this outstanding team and exciting investor story. With me on this call today is Michael Osanloo, President and Chief Executive Officer, and Michelle Hook, Chief Financial Officer. You can find our 10Q earnings press release and supplemental presentation on investors.portilloes.com. 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 10K 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.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host. Chris Brandon, vice president of investor relations. Thank you sir, you may begin.

Thanks operator and good morning everyone and Welcome to our second quarter 2025 earnings. Call my first since joining this outstanding team and exciting. Investor story with me on this call today is Michael osanloo president and chief executive officer and Michelle hook Chief Financial Officer. You can find our 10q earnings, press release and supplemental presentation on investors.pershing.com.

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 a future performance.

We do not update these forward-looking statements unless required by law.

Our 10K, identifies risk factors that may cause our actual results to very materially from these forward-looking statements.

Michelle Hook: 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 be happy to take questions from our covering sell-side analysts. And with that, I will turn the call over to our President and Chief Executive Officer, Michael Osanloo.

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.

Finally, after we deliver our prepared remarks, we will be happy to take questions from our covering Southside analysts.

Michael Osanloo: Thanks, Chris, and good morning, everyone. Before we begin today's call, I want to take a moment to address what has been a very difficult few days for the Portillo's family. As you may have seen in the news, the front entrance of our restaurant in Oswego, Illinois, was the site of a tragic car accident. We pride ourselves on being a special part of the local communities we serve, and right now, we are deeply hurting for the entire Oswego community and the families affected. We stand with them during this difficult time and will continue to offer our support in any way we can. With that, I'll now turn today's call to our second quarter results. I'd first like to thank our dedicated restaurant team members, managers, and company leaders.

And with that, I will turn the call over to our president and chief executive officer. Michael Osamu.

Thanks Chris. Good morning, everyone.

Before we begin today's call, I want to take a moment to address. What has been a very difficult, few days for the Portillo's family.

Have you may have seen in the news. The front entrance of our restaurant in Oswego Illinois was the site of a tragic car accident.

At ourselves and being special part of the local communities. We serve. And right now, we are deeply hurting for the entire Oswego community, and the families affected.

We stand with them during this difficult time and will continue to offer our support in any way we can.

I'll now turn today's call to our second quarter results.

Michael Osanloo: Their hard work in a still challenging economic environment continues to allow us to bring the Portillo's experience to life for our guests every day. This is the foundation for our future growth. We continue to manage the flow-through elements of our business effectively in the second quarter, delivering restaurant-level adjusted EBITDA of $44.5 million with a margin of 23.6%. While there are bright spots, we know we have areas to improve within our overall performance. Specifically, our non-comp restaurants in Texas have gotten off to a slower start and continue to pressure overall top-line revenue performance. We remain focused on building awareness and driving transactions while staying true to what makes Portillo's special: our craveable, high-quality food and one-of-a-kind guest experience. At the same time, we're playing offense. We're testing new ideas, growing our loyalty and tech platforms, and reducing build costs, all in pursuit of industry-leading unit economics.

I'd first like to thank our dedicated restaurant team members, managers and Company leaders.

Hard work in a still challenging economic environment continues to allow us to bring the Portillo's experience to life for our guests every day.

This is the foundation for our future growth.

We continue to manage the flow through elements of our business. Effectively in the second quarter, delivering restaurant, level adjusted ebit da of 44.5 million with a margin of 23.6%.

While there are bright spots, we know we have areas to improve within our overall performance. Specifically our non-comp restaurants in Texas, have gotten off to a slower start and continue to pressure overall, Topline Revenue performance

We remain focused on building awareness and driving transactions. While staying true to what makes Portillo special, our craveable high-quality food and 1 of A Kind guest experience.

Michael Osanloo: I'm proud of the progress we're making and confident these actions will drive sustained growth and long-term shareholder value. We had an active start to the second quarter with two strong initiatives. First, we celebrated Italian Beef Month in May with a buy-one-get-one offer for our Portillo's Perks loyalty members. Then, in a moment of perfect timing, the Vatican named a Chicago native as the new Pope. Our team acted quickly, launching the Leo, a nod to the new Pope Leo XIV, with a version of our signature Italian beef sandwich. It was a great example of our company's agility and nimbleness to jump on a cultural moment creatively and with speed. We're proud of that ability, and that's a competitive advantage for Portillo's versus the rest.

At the same time, we're playing offense. We're testing new ideas, growing our loyalty and Tech platforms, and reducing build costs, all in pursuit of industry-leading unit, economics,

I'm proud of the progress. We're making and confident, these actions will drive sustained growth and long-term shareholder value.

We had an active start to the second quarter with 2 strong initiatives.

First, we celebrated, Italian Beef Month, in May with a buy 1, get 1 offer for our Portillo's perks, loyalty members.

Then, at a moment of perfect timing, the Vatican named a Chicago native is the new pope, our team acted quickly launching the Leo. A nod to the new Pope, Leo, the 14th with a version of our signature Italian beef sandwich. It was a great example of our companies agility and nimli. We're proud of that ability, and that's a competitive Advantage for Portillos versus the rest.

Michael Osanloo: Both initiatives drove meaningful engagement and positive transactions in May, giving us valuable insights on how we use Perks as a promotional and customer acquisition tool. As anticipated, we saw performance level off some in June. While transactions were negative 1.4% for the quarter, we did deliver 170 basis points sequential improvement in transactions over Q1. It's a step forward, and we're encouraged by the early traction from actions designed to strengthen traffic, as well as our favorable management of margins in Q2. We remain committed to overcoming near-term industry traffic pressures and are focused on our four key initiatives. First, multi-channel marketing. Our ongoing campaigns in key markets like Phoenix and Dallas led to sales lifts in both markets. Second, continuous operational improvement, especially within speed and hospitality. For example, our AI-powered drive-through technology is getting strong feedback from operators for real-time execution and training benefits.

Both initiatives drove, meaningful engagement and positive transactions in May giving us valuable insights on how we use perks as a promotional and customer acquisition tool.

As anticipated, we saw performance level off some in June.

While transactions were negative 1.4% for the quarter.

We did deliver 170 basis. Point sequential Improvement in transactions over q1.

It's a step forward.

And we're encouraged by the early traction from actions designed to strengthen traffic as well as our favorable management of margins in Q2.

We remain committed to overcoming near-term, industry, traffic pressures and are focused on our 4 key initiatives.

first multi-channel marketing, our ongoing campaigns in key markets, like Phoenix and Dallas led to sales lifts in both markets

Second continuous, operational Improvement, specially within speed and hospitality.

Michael Osanloo: We're actively expanding that test now. Third, kiosk adoption. In-restaurant usage now exceeds 33% with clear benefits to average Czech and mix. And fourth, evolving Portillo's Perks, now with over 1.9 million members and counting. Our May performance highlighted its growing power as a nimble, scalable platform for guest engagement, acquisition, and retention. These four initiatives are building a stronger foundation for transaction growth now and in the future. Shifting to restaurant development, we remain on track to open 12 restaurants in the back half of 2025, and our build cost reduction plan is delivering results, tracking in the range of our projected net cost average of 5.2 to 5.5 million per restaurant. This represents well over $1 million in per restaurant build cost savings versus our class of 2024 openings.

For example, our AI powered drive-through technology is getting strong feedback from operators. For Real Time, execution, and training benefits. We're actively expanding that test now

Third kiosk adoption.

In restaurant Usage. Now exceeds 33% with clear benefits to average check and mix.

And forth evolving Portillos perks. Now, with over 1.9 million members and Counting

Our May performance highlighted its Growing Power as a Nimble. Scalable platform for guest engagement, acquisition and retention.

These 4 initiatives are building a stronger foundation for transaction growth now and in the future.

Shifting to restaurant development.

We remain on track to open 12 restaurants in the back half of 2025.

And our build cost reduction plan is delivering results tracking in the range of our projected, net cost average of 5.2 to 5.5 million per restaurant.

Michael Osanloo: We just opened our third Restaurant of the Future 1.0, with two more to follow next week, and are encouraged by what we're seeing. The combination of build cost reduction and operational efficiencies gives us even more confidence in our 2.0 restaurant design. This next iteration, which will debut in the back half of 2026, will reduce build costs further, streamline labor, and unlock incremental site opportunities due to a more consolidated design. I'm really excited about our class of 2026 pipeline. It's the most diverse lineup of formats in Portillo's history, including multiple 2.0s and a great mix of new prototypes. Progress on new formats is equally encouraging. Later this week, we'll open our first inline restaurant in the Villages in Florida, followed by our debut airport restaurant at Dallas-Fort Worth Airport in 2026.

This represents well over 1 million dollars in per restaurant. Build cost savings versus our class of 2024 openings.

We just opened our third restaurant of the future 1.0 with 2 more to follow next week and are encouraged by what we're seeing.

The combination of build costs reduction and operational. Efficiencies gives us even more confidence in our 2.0 restaurant design.

2026 pipeline. It's the most diverse lineup of formats in Portillo's history, including multiple 2.0's and a great mix of new prototypes.

Progress on new formats is equally encouraging.

Later this week, we'll open our first inline restaurant. In The Villages in Florida.

Michael Osanloo: We believe these inline and non-traditional format restaurants could play a meaningful part of our development future. As we grow, we're continuing to refine our new market playbook. We saw early traction in Dallas, and Houston has been a little bit slower to ramp up. In hindsight, we probably overcorrected at times in Texas to manage volumes and maintain service. We've since learned the importance of sustained marketing investment and have beefed up our efforts to accelerate awareness and drive revenue in Texas, which includes multi-channel campaigns and new local field marketers on the ground to lead grassroots efforts. Every market is different, but we're learning quickly and adapting to build a more scalable, consistent approach for new market entries. Atlanta is our next big opportunity this fall, and we look forward to sharing those updates next quarter.

Followed by our debut Airport Restaurant at Dallas Fort Worth airport in 2026.

We believe these inline and non-traditional format restaurants, could play a meaningful part of our development future.

As we grow, we're continuing to refine our new market Playbook. We saw early Traction in Dallas, and Houston has been a little bit slower to ramp up.

In hindsight.

We probably overcorrected at times in Texas to manage volumes and maintain service. We've since learned the importance of sustained marketing investment and have beefed up, our efforts to accelerate awareness and drive Revenue in Texas, which includes multi-channel campaigns and new local field marketers on the ground to lead, Grassroots efforts.

Every market is different, but we're learning quickly and adapting to build a more scalable, consistent approach for new market entries.

Atlanta's, our next big opportunity, this fall and we look forward to sharing those updates next quarter.

Michael Osanloo: At Portillo's, there are some non-negotiables: craveable, made-to-order food and fast, friendly service. If we do these two things well, we will drive exceptional value for our guests while building restaurants that deliver industry-leading unit economics. In the restaurant business, growth follows strong four-wall returns. Our AUV strength, coupled with our expedited efforts to reduce build costs, positions us to deliver top-tier cash-on-cash returns across diverse formats, geography, and stages of market maturity. To level set, we know we're a bit of a show-me story within the investment community. It's an opportunity that we actually embrace. We're putting the right energy, investments, and resources into what matters most: improving transactions, driving consistent new market performance, strengthening unit economics that support growth, and continuously evolving our strategy without losing what makes Portillo's one-of-a-kind.

at Portillo's, there are some non-negotiables

craveable made to order food and fast friendly service.

If we do these two things well, we will drive exceptional value for our guests while building restaurants that deliver industry-leading unit economics.

In the restaurant business growth follows strong 4-wheel. Returns our auv strength coupled with our expedited efforts to reduce build costs. Positions us to deliver top tier cash on cash returns across diverse formats geography and stages of Market maturity.

To level set, we know.

we're a bit of a show me story within the investment Community, it's an opportunity that we actually embrace

We're putting the right energy, Investments, and resources into what matters most improving transactions, driving consistent, new market performance.

Strengthening unit economics, that support growth.

Michael Osanloo: I believe in the work we're doing, the strength of our team, and in our ability to create long-term value for both our guests and our shareholders. With that, I'll hand it over to Michelle.

And continuously evolving our strategy without losing. What makes Portillo's 1 of a kind.

I believe in the work we're doing, the team, and our ability to create long-term value for both our guests and our shareholders.

Chris Brandon: Great. Thank you, Michael, and good morning, everyone. Before we dive into the financial results, I wanted to recap an equity transaction by Berkshire Partners. In the quarter, Berkshire redeemed 7.3 million LLC units for newly issued shares of Class A common stock. As of the end of the quarter, Class A shares represent 95.4%, and Class B shares represent the remaining 4.6% of the 75.3 million in total outstanding shares. Berkshire's beneficial ownership after this transaction is approximately 5.2% of the company, down from over 60% at the time of the IPO. Now, moving on to the second quarter, revenues were 188.5 million, reflecting an increase of 6.6 million, or 3.6% compared to last year. Our revenue growth in the quarter was driven by both non-comp restaurants and same restaurant sales. Restaurants not in our comp restaurant base contributed 6.1 million in revenue during the quarter.

With that, I'll hand it over to Michelle.

Great. Thank you, Michael and good morning everyone. Before we dive into the financial results. I wanted to recap an equity transaction by Berkshire partners.

In the quarter Berkshire, redeemed 7.3 million LLC units for newly issued shares of class a common stock.

As of the end of the quarter, Class A shares represent 95.4%, and Class B shares represent the remaining 4.6% of the 75.3 million total outstanding shares.

Berkshire's beneficial ownership. After this transaction, is approximately 5.2% of the company down from over 60% at the time of the IPO.

Now, moving on to the second quarter revenues, were 188.5 million reflecting an increase of 6.6 million or 3.6% compared to last year.

Our Revenue growth in the quarter was driven by both non-comp restaurants and same restaurant sales.

Chris Brandon: Same restaurant sales increased 0.7%, which drove revenues up approximately 1.1 million in the quarter. The same restaurant sales growth was attributable to an increase in average Czech of 2.1%, partially offset by a 1.4% decrease in transactions. The higher average Czech was driven by an approximate 3.4% increase in menu prices and a 1.3% decrease in product mix. Same restaurant sales on a two-year stack basis were flat. We are currently forecasting our comp sales for the full year at the low end of our 1 to 3% range. To address inflationary cost pressures, we increased menu prices by approximately 1.5% in January, 1% in April, and 0.7% in late June. Our effective price increase for the third quarter is estimated to be approximately 3.3%.

Restaurants not in our comp restaurant. Base contributed 6.1 million in Revenue during the quarter.

Same restaurant sales increased 0.7% which drove revenues up approximately 1.1 million in the quarter.

The same restaurant sales growth was attributable to an increase in average. Check of 2.1% partially offset by 1.4%. Decrease in transactions.

The higher average track was driven by an approximate, 3.4% increase in menu prices and a 1.3% decrease in product mix.

Same restaurant sales on a 2-year stack basis were flat.

We are currently forecasting, our cap sales for the full year at the low end of our 1 to 3% range.

Chris Brandon: We will continue to assess pricing in relation to our costs, the competitive environment, and our value proposition to our guests as the year progresses. Moving on to our costs, food, beverage, and packaging costs, as a percentage of revenues, decreased to 33.8% in the second quarter of 2025, from 33.9% in the prior year. This decrease was the result of an increase in our average Czech, partially offset by a 1.9% increase in our commodity prices. In the quarter, we experienced increases in chicken, hamburger, and dairy products. We continue to forecast commodity inflation of 3 to 5% in 2025, with the most significant pressures coming from beef. Labor, as a percentage of revenues, increased to 25.7% in the second quarter of 2025, from 25.5% in the prior year.

To address inflationary cost pressures. We increase menu prices by approximately 1.5% in January, 1% in April and 0.7% in late, June, our effective price increase for the third quarter is estimated to be approximately 3.3%.

We will continue to assess pricing in relation to our costs.

Grasses.

Moving on to our costs.

Food beverage and packaging costs as a percentage of revenues decreased to 33.8% in the second quarter of 2025 from 33.9% in the prior year.

This decrease was the result of an increase in our average check partially offset by 1.9% increase in our commodity prices.

In the quarter, we experienced increases in chicken hamburger and dairy products.

We continue to forecast, commodity inflation of 3 to 5% in 2025 with the most significant pressures coming from beef.

Chris Brandon: The increase was primarily due to lower transactions, increased benefit costs, and incremental wage increases, partially offset by labor efficiencies and an increase in our average Czech. Hourly labor rates were up 2.9% in the second quarter of 2025. We continue to estimate labor inflation of 3 to 4% for the full year. Other operating expenses increased 2 million, or 9.8% in the second quarter of 2025, compared to the prior year, which was primarily driven by the opening of new restaurants and an increase in repair and maintenance and utilities expense. As a percentage of revenues, other operating expenses increased to 11.6% from 11% in the prior year. Occupancy expenses increased 0.8 million, or 8.2% in the second quarter of 2025, compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.2% compared to the prior year.

labor as a percentage of revenues increased to 25.7% in the second quarter of 2025 from 25.5% in the prior year,

The increase was primarily due to lower transactions, increased benefits costs and incremental wage increases partially offset by Labour efficiencies and an increase. In our average check

Hourly labor rates were up 2.9% in the second quarter of 2025.

We continue to estimate labor inflation at 3% to 4% for the full year.

Other operating expenses, increased 2 million or 9.8% in the second quarter of 2025 compared to the prior year, which was primarily driven by the opening of new restaurants in an increase in repair and maintenance and utilities expense.

As a percentage of revenues other operating expenses, increase to 11.6% from 11% in the prior year.

Occupancy, expenses increased 0.8 million or 8.2% in the second quarter of 2025 compared to the prior year. Primarily driven by the opening of new restaurants,

Chris Brandon: Restaurant-level adjusted EBITDA margins decreased 90 basis points to 23.6% in the second quarter of 2025 versus 24.5% in the prior year. We continue to estimate our restaurant-level adjusted EBITDA margins to be in the range of 22.5% to 23% in 2025. Our general and administrative expenses increased by 0.9 million to 18.8 million, or 10% of revenue in the second quarter of 2025, from 17.9 million, or 9.9% of revenue in the prior year. The increase was primarily due to higher professional fees and higher advertising expenses driven by ad campaigns in the Phoenix market. Pre-opening expenses decreased by 0.4 million to 1.7 million in the second quarter of 2025, compared to 2.1 million in the prior year, primarily due to the number and timing of activities related to our planned restaurant openings.

as a percentage of revenues occupancy expenses, increased 0.2% compared to the prior year.

Restaurant level adjusted even a margins decreased 90 basis points to 23.6% in the second quarter of 2025 versus 24.5% in the prior year.

We continued to estimate our restaurant-level adjusted IBA margins to be in the range of 22.5% to 23% in 2025.

Our general administrative expenses increased by $0.9 million to $18.8 million, or 10% of revenue, in the second quarter of 2025, up from $17.9 million, or 9.9% of revenue, in the prior year.

The increase was primarily due to higher professional fees and higher advertising expenses, driven by ad campaigns in the Phoenix Market.

Pre-opening expenses decreased by 0.4 million to 1.7 million in the second quarter of 2025 compared to 2.1 million. In the prior year, primarily due to the number and timing of activities related to our planned restaurant openings,

Chris Brandon: All this led to adjusted EBITDA of 30.1 million in the second quarter of 2025 versus 29.9 million in the prior year, an increase of 0.7%. Below the EBITDA line, interest expense was 5.7 million in the second quarter of 2025, a decrease of 0.9 million from the prior year. This decrease was driven by a lower effective interest rate of 6.9% versus 8.3% for 2024. At the end of the quarter, we had 70 million drawn on our revolving credit facility. Our total net debt at the end of the quarter was 317 million, compared to 312 million at the end of last year. We have approximately 75 million of available capacity on the revolver, and we'll continue to use our cash generated from operations and the capacity on the revolver to fund our new restaurant growth this year.

All the flood to adjusted ibida of 30.1 million in the second quarter of 2025 versus 29.9 million in the prior year and increase of 0.7%.

Below the Eva line, interest expense was $5.7 million in the second quarter of 2025, a decrease of $0.9 million from the prior year.

This decrease was driven by lower effective interest rate of 6.9% versus 8.3% for 2024.

At the end of the quarter, we had 70 million drawn and our revolving credit facility.

Our total net debt at the end of the quarter was 317 million compared to 312 million at the end of last year.

We have approximately 75 million of available capacity on the revolver and will continue to use our cash generated from operations and the capacity on the revolver to fund our new restaurant growth this year.

Chris Brandon: Income tax expense was 3.7 million in the second quarter of 2025, an increase of 0.2 million from the prior year. Our effective tax rate for the second quarter was 26.8%. We expect the full-year tax rate to be approximately 25 to 27%. Cash from operations decreased by 31.1% year over year to 28.7 million year to date. We ended the quarter with 16.6 million in cash. Lastly, let's turn to our financial outlook for 2025. We have updated certain metrics to reflect our year-to-date results and expectations for the remainder of the year. We expect our total revenue growth to now be in the range of 5 to 7%. Two key factors from our non-comp restaurants are driving this revenue change. First, the class of 2024 restaurants have seen a slower ramp up, specifically in Texas.

Income tax expense was 3.7 million. In the second quarter of 2025 in increase of 0.2 million from the prior year.

Our effective tax rate for the second quarter was 26.8%.

We expect the full year tax rate to be approximately, 25 to 27%.

Cash from operations decreased by 31.1% year-over-year to 28.7 million year to date.

We ended the quarter with $16.6 million in cash.

Lastly, let's turn to our financial outlook for 2025.

We have updated certain metrics to reflect our year-to-date results and expectations for the remainder of the year.

We expect our total revenue growth to now be in the range of 5 to 7%.

Chris Brandon: Second, our Stafford, Texas, opening, originally scheduled for Q1, has been delayed for several months due to local permitting challenges, driving lower sales weeks versus our forecast. During the third quarter, we plan to open four to six new restaurants out of our 12 targeted this year, with the remainder opening later in the fourth quarter. On the cost side, we are now estimating G&A expenses in the range of 78 million to 80 million. Given the change in our revenue and G&A outlooks, we now estimate adjusted EBITDA growth to be flat to low single digits. We remain confident in the long-term financial targets we have previously provided. Thank you for your time, and with that, I'll turn it back to Michael.

2 key factors from our non-comp restaurants are driving this Revenue change. First, the class of 2024 restaurants have seen a slower ramp up specifically in Texas.

Effort, Texas opening. Originally scheduled for q1 has been delayed for several months. Due to local permitting challenges driving, lower sales weeks versus our forecast.

During the third quarter, we plan to open 4 to 6 new restaurants out of our 12 Target this year with the remainder opening later in the fourth quarter.

on the cost side, we are now estimating GNA expenses in the range of 78 million to 80 million

Given the change in our Revenue in GNA outlooks. We now estimate a growth to be flat to low single digits.

We remain confident in the long term Financial targets. We have previously provided

Michael Osanloo: Thanks, Michelle. In closing, Portillo's is a place people want to be a part of. In a recent report by William Blair, Portillo's was named in the top 10 of nearly 90 restaurant companies in employee satisfaction. And in April, Newsweek ranked us 25th out of 700 companies in its America's Most Trusted Companies list. I believe it's because of the amazing experience we strive to create for anyone who enters our restaurants. Whether it be in our restaurants or amongst field operators, restaurant support team members, and the management team, the Portillo's culture is something we're very proud of and thrilled to share with our guests each and every day. Look no further than the talent that has joined our company, particularly in Q2, as we put the finishing touches on what is undoubtedly the strongest board of directors in the restaurant industry.

Thank you for your time. And with that, I'll turn it back to Michael.

Thanks, Michelle.

In closing Portillos is a place people want to be a part of in a recent report by William. Blair Portillos was named in the top 10 of nearly 90 restaurant companies and employee satisfaction.

and in April Newsweek, ranked us 25th out of 700 companies, in its America's, most trusted companies list, I believe it's because of the amazing experience, we strive to create for anyone who enters our restaurants,

Whether it be in our restaurants or amongst field. Operators, restaurant support, team members and the management team. The Portillo's culture is something we're very proud of, and thrilled to share with our guests each and every day.

Look no further than the talent that has joined our company.

Michael Osanloo: I'm proud of the work we're doing to evolve the Portillo's investor story, some of which is tangible and some of which has yet to hit the scoreboard. But we're getting there, and the foundation in place is exciting. Thank you all for your time today, and we're happy to take some questions.

Particularly in Q2 as we put the finishing touches on what is undoubtedly, the strongest board of directors in the restaurant industry.

I'm proud of the work, we're doing to evolve the Portillo's investor story some of which is tangible and some of which has yet to hit the scoreboard.

But we're getting there and the foundation in place is exciting.

Thank you all for your time today and we're happy to take some questions.

Chris Brandon: Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for your questions. Our first question comes from the line of Sharon Zacchia with William Blair. Please proceed with your question.

Thank you. Well, now I'll be conducting a question and answer.

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'd like to remove your question from the queue. For participants using speaker equipment, may be necessary to pick up your handset before pressing, the star Keys 1 moment, please while we pull for your questions.

Sharon Zackfia: Hi, good morning. I guess two questions. First, on the mix in the quarter, I was a little surprised to see it go negative, just given the kiosk usage increasing. So maybe if we could get some clarity on what's going on with the mix. And then separately, I think the bigger question that investors have is just kind of the path to get to that mid-teens revenue growth that is the longer-term, you know, goal here. Is that something that you think can be achievable in '26, and what are the key kind of strategies to get there? Thank you.

Our first question comes from the line of Sharon Zakia with William Blair please proceed with your question.

Hi, good morning I guess 2 questions first on on the mix in the quarter. I was a little surprised to see it go. Negative just giving them the kiosk usage increasing. So maybe if we could get some clarity on what's going on with mix and then separately, I think that the bigger question that investors have is just kind of the path to get to that mid teens Revenue growth, that is the longer term. You know, goal here is that something that you think can be achievable in 26 and and what are the key kind of strategies to get there. Thank you.

Michael Osanloo: Morning, Sharon. Let me tackle your second question, and then I'll let Michelle take the first one. I think we remain confident on mid-teens revenue growth. We have built some great restaurants in Texas, and they've just started off slow. And we haven't given up on them. We think that there's a lot of potential there. We're seeing some momentum. We've done, I think, a lot of the foundational work to make sure that Texas continues to grow and evolve. We've got field marketers in both places. We have active marketing campaigns. We're building a loyalty database, and we'll keep using the loyalty database. So, you know, mid-teens growth is very reasonable to target for us for '26. And I think that, you know, I'll let Michelle talk about the mix.

Uh, morning, Sharon. Let me, let me uh, uh, tackle your second question. Then I'll let Michelle take the first 1. I think we're, uh, we remain confident on Mid teens Revenue growth. Um, we have, uh, built some great restaurants in Texas and they've just started off slow. And we're not, we're not, um, uh, we haven't given up on them. Uh, we think that there's a lot of potential there. We're seeing some momentum

Um, we've done, I think a lot of the foundational work to make sure that Texas continues to grow and evolve. Uh, we've got filled marketers in both places, we have, um, active marketing campaigns. We're building a loyalty database and we'll keep using the Loyalty database. So, um, you know, mid teens growth is very reasonable to Target for us for 26.

Sharon Zackfia: Yeah, Sharon, in terms of mix, so you're absolutely right. The benefit we see on kiosks is definitely benefiting that. So there's two components to the mix. The first is the items per transaction, and then the next is true mix in terms of what people are buying. So where you're seeing the kiosk benefit is the lift on the items per transaction. But where we're really seeing pressures is on the other part of mix, where essentially people are still buying the item, but they're trading down. So think of it as instead of buying a big beef, they're buying just a regular beef. Instead of buying a large fry, they're buying a small fry, et cetera. And so that's really where we're seeing the pressures on the mix is that true mix being offset not fully by the benefits that we're seeing on kiosks.

um, and I think that, uh, you know, I'll let Michelle talked about the mix

Sharon Zackfia: And obviously, we believe that's an indicator of what's going on in the broader macro in terms of the trade downs that we're seeing there. But we clearly, as Michael said in his prepared remarks, want to drive the business through transaction growth and other mechanisms. But we're definitely seeing pressures in mix on the trade downs.

Definitely seeing pressures in mix uh, on the trade Downs.

Chris Brandon: Thank you. Thank you. Our next question comes from the line of Chris O'Call with Stifel. Please proceed with your question.

Okay, thank you.

Speaker 5: Yeah, thanks. Good morning, guys. I did have a follow-up on new stores. And I mean, the annualized sales contribution from the 10 locations that you guys opened last year was lower this quarter than in the prior quarter, which I believe you guys expected it to improve. So just can you give us a little more detail of what you did this quarter to try to improve the performance of those stores and what's planned for the rest of the year?

Thank you. Our next question comes from the line of Chris oall with stifel please proceed with your question.

Sharon Zackfia: Yeah, absolutely, Chris. So when you think about the class of 2024, some of those restaurants are getting into being in their second year. So you're starting to see some of a honeymoon effect to certain of those restaurants. Some of the later restaurants that were open in the class of 2024 are later in the year, such as the Houston restaurants that we've mentioned. And so the things that we're doing are what Michael mentioned, which is continuing to pump the markets with marketing and advertising. And so, as we've talked about previously, we ran a campaign in Dallas in the first quarter. In the second quarter, we were on with a campaign in the Phoenix market, but then also hired a field marketer within the Houston market and continued to do some advertising within that market as well.

Yeah, thanks. Good morning, guys. Um, I did have a follow-up on new stores. I mean, the annualized sales contribution from the 10 locations that you guys opened last year was lower this quarter than in the prior quarter, which I believe you guys expected it to improve. So, just can you give us a little more detail on what you did this quarter to try to improve the performance of those stores? And what's planned for the rest of the year?

Yeah, absolutely Chris. So

Sharon Zackfia: So we're going to continue to invest in those newer markets to make sure that we continue to grow the top line. And as we go into the back half of the year, we'll continue to look at advertising efforts. We'll run another campaign in Dallas in the fourth quarter as well to continue to pump that market with additional awareness and trial.

When you think about the class of 2024, some of those restaurants are getting into, uh, being in their second year. So uh, you're starting to see some of the honeymoon effect to certain of those restaurants. Some of the later restaurants that were open in the class of 2024 or later in the year, such as the Houston restaurants that, uh, that we've mentioned. And so the things that we're doing are what Michael mentioned, which is continuing to pump the markets with, uh, marketing and advertising. And so, as we've talked about previously, we ran a campaign in Dallas in the first quarter. And the second quarter, we were on with the campaign and the Phoenix Market, but then also hired, uh, a field marketer within the Houston Market and continue to do some advertising uh, within that market as well. So, uh, we're going to continue.

Michael Osanloo: Yeah, Chris, I would just add to what Michelle said that it's a little bit of pick and shovel work. We're building awareness every week. It takes a little bit of time. And you're right. I think that the, you know, essentially flattish performance in Q2 versus Q1 for some of those Texas restaurants was disappointing to us. But we're active and very aggressive in building awareness. We've got field marketers out there making sure that people know who we are. We do really well once people try our food. So we're being very aggressive at getting our food in people's mouths, sampling, doing things with local communities and embedding ourselves in local communities. So it does take a little bit of time. I'm not daunted by the fact that it hasn't picked up aggressively, but I do expect it to improve over the next few quarters.

To invest in those newer markets to make sure that we can continue to grow in the top line. And as we go into the back half of the year, we'll continue to look at uh, advertising efforts. Uh, we'll run another campaign in Dallas uh in the fourth quarter as well. To continue to uh pump that market with additional awareness and trial. Yeah, Chris I would just add to what Michelle said that this it's a little bit of pick and shovel work. We're building awareness every week. It takes a little bit of time and you're right. I think that the um, you know, essentially flattish performance in Q2 versus q1 for some of those Texas restaurants was disappointing to us, but we're

Speaker 5: Okay. And then, Michael, just given the weak year-to-date comp and new store performance, why does it make sense to continue opening units beyond the current signed leases, especially when it will likely require the company to increase borrowings to kind of fund those openings?

Active, and very aggressive in building awareness. We've got filled marketers out there, making sure that people know who we are. Um, we we do really well once people try our food. So we're being very aggressive at getting our food and people's mouths sampling, um, doing doing doing doing things with local communities and embedding ourselves in local communities. So, it it does take a little bit of time. I'm not daunted by the fact that it hasn't picked up aggressively, but I, I, I do expect it to improve over the next few quarters.

Michael Osanloo: Yeah, that's a great question. I would tell you that we are taking a hard look at the performance of new restaurants and how actively we're building. So we're not building for the sake of just building. We're building, I think, in a very thoughtful way. There is this balancing act. You know, we see that when we reach a certain level of awareness and scale, our business performs very well. And we have those proof points. Arizona performs really well for us. It's a great testament to what Portillo's can do once it has a certain level of awareness and once we have a certain level of scale. Indiana actually performs well for us. Wisconsin is starting to pick up some speed. So there is this balancing act between getting a sufficient density so that you start to build awareness, and then those restaurants fill in.

Okay, and then Michael just given the week year to date comp and new store performance. Why does it make sense to continue? Opening units beyond the current signed leases especially when it will likely require the company to increase? Borrowings to kind of fund those openings?

Michael Osanloo: So we probably are a little bit ahead of demand with the supply that we have of restaurants in Dallas. And you know, we've got a couple more in flight, but we're not pushing the gas there. We're making sure that we're filling in in other places where there's a lot of growth ahead for us. And you know, the other thing that I would just reiterate, we're really being focused on generating the right cash-on-cash returns. So you know, that number that Michelle and I have talked about, class of '25 thus far is coming in at that 5.2 to 5.5 million. You know, I'm not, that's a material decline in cost versus the class of '24, which is, I'm sure you recall, came in at 6.8 million. And we have other examples of really great investments.

Yeah, that's a great question. I I I would tell you that. We are taking a hard look at the performance of new restaurants and how actively we're building. So we're not we're not building for the sake of just building. We're we're building. I think in a very thoughtful way um there is this Balancing Act, you know, we we see that when we reach a certain level of awareness and scale our business performs very well. And we have those proof points, Arizona, performs really well for us. It's a great Testament to what Portillos can do, once it has a certain level of awareness, and once we have a certain level of scale, Indiana actually performs well for us. Um, Wisconsin is starting to pick up some speed, so there is this Balancing Act between getting a sufficient density, so that you start to build awareness. And then those restaurants fill in, so we probably are a little bit ahead of Demand with the supply that we have of restaurants in Dallas. Uh,

And that's and, you know we've got a couple more in flight but we're not pushing the gas there. Um we're making sure that we're filling in in other places where there's a lot of growth ahead for us. And and you know the other thing that I would just reiterate um we're really being focused on generating the right cash on cash returns so um, you know, that that number that Michelle and I have talked about class of 25 thus far is coming in at that, 5.2 to 5.5 million.

Michael Osanloo: We just built an inline that we're opening in the next few weeks in the Villages in Florida. And that thing is going to come in at sub $4 million in investment costs. If it can do anywhere near what we think, it's a home run for investors. So we're not trying to like step on the gas and go crazy. We're being very prudent. I think we're being thoughtful, and I think we're targeting growth where we think we can get, you know, best-in-class cash-on-cash returns.

I, you know, I'm not, uh, it that's a that's that's a material decline in cost versus the class of 24, which is, I'm, I'm sure you recall came in at 6.8 million and we have other examples of really great Investments. We just built an inline that we're opening in the next few weeks in The Villages in Florida.

Sharon Zackfia: And just to add on to borrowing in the short term, Chris, we've talked about the fact that we're getting ahead of the pipeline for '26. And so we're going to have a lot of spend this year that's going to be for the class of '26. And so that's going to come into play in some of the capital needs this year. But our goal is what we continue to say, which is, you know, as we go into '26, we don't want to have any net new borrowings on the revolver. But yes, we're going to continue to borrow this year because we have to fund some of that growth as we move into '26.

Can do anywhere near what we think. It's a home run for investor. So, um, we're not trying to like step on the gas and grow crazy. We're being very prudent. I think we're being thoughtful and I think we're targeting, uh, growth where we think we can get, uh, you know, best-in-class cash on cash returns.

And just to add on to borrowing uh in the short term Chris. Uh, we've talked about the fact that we're getting ahead of the pipeline for 26 and so we're going to have a lot of spend this year that's going to be for the class of 26. And so uh that's going to come into play in some of the capital needs this year but our goal is what we continue to say which is, you know, as we go into 26, we don't want to have any net new borrowings on the revolver. But yes, we're going to continue to borrow this year uh, because we have to fund some of that growth as we move into 26.

Speaker 5: Okay. Thanks, guys.

Michael Osanloo: Yep.

Okay, thanks guys.

Yep.

Chris Brandon: Thank you. Our next question comes from the line of Gregory Frankfurt with Guggenheim Partners. Please proceed with your question.

Speaker 5: Hey, thanks for the question. I had two questions. The first is maybe just looking at Texas versus the rest of the Sunbelt. How much of the Texas performance do you think is just how many stores in the industry are opening up in the state right now? And can you maybe talk about how Arizona and Florida have been performing? I think you touched on it a little bit, Michael, but if you could just expand.

Thank you. Our next question comes from the line of Gregory Frankfurt with Guggenheim Partners. Please proceed with your question.

Michael Osanloo: Well, I think that's a great insight. Texas is not unique to us in development. I think Texas continues to be, especially with all of the growth, all of the development, the population growth, it's no secret to the restaurant industry. So wherever we're building, there's, you know, all of our competitors are building right near us. So I'm sure that has a little bit to do with the slower start. And I'm sure that there are other restaurant companies that, you know, need to get up sort of that curve in Texas as Texas digests all of these restaurants. I don't know, you know, I don't know what the timeline is for Texas to become as great as Arizona and Florida and other markets are for us. I just have, I take solace in seeing the performance in Arizona. You know, we've talked about this in the past.

Hey, hey, thanks for the question. I I had 2 questions. Um, the first is maybe just looking at Texas versus the rest of the Sun Belt, how much of of the Texas performance? Do you think is just how many stores in the industry are opening up in the in the state right now? And can you maybe talk about how Arizona and Florida have been performing? I think you touched on a little bit Michael but if you could just expand

Well, I think that's a great Insight. Texas is not um a unique to us in development. I think Texas, uh continues to be especially with all of the growth all of the development, the population growth, it's no secret to the restaurant industry. So there are wherever we're building. There's, you know, all of our competitors are building right near us. So I'm sure that has a little bit to do with the slower start. And I'm sure that there are other restaurant companies that you know, um uh need to get up sort of that curve in Texas is Texas digests all of these restaurants um

I I don't know, you know, I don't know what the timeline is for Texas, to become as great as Arizona and Florida and other markets are for us.

Michael Osanloo: When we went from two to four restaurants, we saw material improvement in both awareness, in revenues, but most importantly, in our margin profile in Arizona. And I'm really confident that we're going to see the same dynamic as Texas matures and that as the demand for us catches up with the supply of restaurants. And I think that there's just this balancing act always between having restaurants, you know, when somebody has a craving for Portillo's, we'd like to be able to satisfy it. All of the research that we do when we ask people, why did you not, you know, if you don't regularly visit us, why don't you visit us? The top two things are awareness, I didn't know you were here, and then inconvenience. There's a reason why we are so dominant in Chicago.

I just have I take solace in seeing the performance in Arizona, you know, we we've talked about this in the past when we went from 2 to 4 restaurants we saw material Improvement in both awareness in revenues but most importantly in our margin profile in Arizona and I'm I'm really confident that we're going to see the same dynamic as Texas matures and that as the demand for us, catches up with the supply of restaurants and I think that there's a there's just this Balancing Act always between having restaurant. You know, when when somebody has a craving for Portillos we'd like to be able to satisfy it.

All of the research that we do, when we ask people, "Why did you not... you know, if you don't regularly visit us, why don't you visit us?" The top two things are awareness: "I didn't know you were here" and then inconvenience.

Michael Osanloo: If you're in the Chicagoland area in any of the suburbs, pretty much within five miles of you, there's a Portillo's. So if you have a craving for a Portillo's, you can go. We're not there yet, really, in any other market. And so I think there's a, you know, there's this balancing act.

There's a reason why we are so dominant in Chicago. If you're in the Chicago land area in any of the suburbs, pretty much within 5 miles of you, there's a Portillos. So if you have a craving for a Portillos, you can go

We're not there yet really in any other market. And so I think there's a there's you know there's this Balancing Act.

Speaker 5: That's helpful. And then maybe my second question is for you, Michelle. Just as I look at labor inflation and food inflation, it feels like you have beef moving maybe a little bit against you, but it also seems like the labor market might be a little bit easier. Can you just talk about the outlook for both of those going forward?

Sharon Zackfia: Yeah, absolutely, Greg. So as we came into this year, we knew we were going to be pressured on beef. We knew it was going to be back half loaded. So I'll start with commodities. So you saw we were up 3.4% in Q1, 1.9% this quarter. I expect Q3 to be the most pressured quarter for commodities. And then Q4 will be higher as well than what we saw in the first half of the year. So that's how we get to our 3 to 5%. But yes, we absolutely expect the back half to be a little bit more pressured. And that is primarily related to beef. But I feel really good about our ability to de-risk this and get in front of it. We're almost 90% hedged on our beef plants for this year. For our overall commodity basket, we're over 70% locked in.

That that that's helpful. And then and then maybe my my second question for you, Michelle. Um, the the just as I look at Labor inflation and food inflation, it feels like you have beef moving. Maybe a little bit against you, but it also seems like the labor market might be a little bit easier. Can you just talk about the outlook for for both of those going forward?

Yeah, absolutely Greg. So as we came into this year, we we knew we were going to be pressured on beef. We knew it was going to be back half loaded. So I'll start with commodities. So you saw we were up, uh, 3.4% in q1 1.9% this quarter. I expect to be acute. I expect Q3 to be the most pressured quarter for Commodities. Uh, and then Q4 will be higher as well than what we saw in the first half of the year. So that's how we get to our our 3 to 5%. But we, yes, we absolutely expect the back half to be a little bit more pressured and that is primarily related to beef. But I feel really good about our ability to

Sharon Zackfia: And so I feel really good about us coming into this year having de-risked that line item for us. So we feel very comfortable with the commodity outlook.

Michael Osanloo: Yeah, Greg, let me just build on that. I'm very proud of our team and under Michelle's leadership. We saw this coming towards the end of last year. And early, you'll recall, we did, you know, we had higher beef inflation numbers than most everybody else. And we took that, we believe that beef was going to be inflationary this year. And we've taken a number of actions to mitigate that: forward buying, making sure that we're pushing every lever that we can to minimize conversion costs, and making sure that we are on top of this. And so I'm very proud of the team because we've done all those things so that our guests will not experience that inflation like they see elsewhere. We still are really focused on making sure that despite the inflationary pressure on beef, that we're providing amazing value to our guests.

Good, uh, de-risk this and, and, and get in front of it. Uh, we're almost 90% hedged on our bee flats for this year, uh, for our overall commodity basket. We're over 70% locked in, and so, I feel really good about us coming into this year having de-risked that line item for us. So we feel very comfortable with the commodity Outlook. Yeah, Greg, let me just build on that. I'm very proud of our team. Um, and under Michelle's leadership that

Michael Osanloo: We're not playing any games with shrinkflation. We're not gouging people. We're still, you know, our burgers are still a third of a pound. Our beef sandwiches are huge and indulgent. So we're making sure that the guest gets all the value that we want. And we have managed that behind the scenes like, you know, a prudent company should.

Sharon Zackfia: Yeah, and Greg, just on the labor front, you saw in both quarters we were up 2.7% and 2.9% in Q2. I don't expect that to be materially different in the back half of the year. We've continued over the course of the last several years to make meaningful labor investments within our system. And so I feel good about that guide at 3 to 4% for the full year. We don't see that changing.

We've taken a number of actions to mitigate that forward buying, uh, making sure that we're uh, pushing every lever that we can to minimize conversion costs and making sure that we are on top of this. And so very proud of the team because we've done all those things so that our guests will not experience that inflation. Uh like they see elsewhere, we still are really focused on making sure that despite the inflationary pressure on beef that we're providing amazing value to our guests. We're not playing any games with shrinkflation. We're not gouging people. We're still, you know, our burgers are still a third of a pound. Our beef sandwiches are huge, and indulgent. So we're making sure that the guest gets all the value that we want and we have managed that behind the scenes like, you know, a prudent company should

Speaker 5: Thank you very much.

Yeah, and and Greg just on the labor front. Uh, you saw in both quarters, uh we were up 2.7% then 2.9% in Q2. I don't expect that to be material materially different and the back half of the year, uh, we can, we've continued over the course of the last several years to make meaningful labor Investments, uh, within our, within our system. And so I feel good about that guide at 3 to 4% for the full year. We don't see that changing

Sharon Zackfia: Sure.

Thank you very much.

Chris Brandon: Thank you. Our next question comes from the line of Sarah Senator with Bank of America. Please proceed with your question.

Sure.

Speaker 5: Thank you. Just a question about maybe unit economics and then a follow-up on maybe the line items. So you mentioned, you know, build costs are a million lower maybe with this new prototype. But as I think about the shift to some of these maybe smaller boxes, I think you mentioned inline, presumably those are more, you know, more of the build-to-suit approach. And I guess as I think about that model, you know, presumably it would lower your build costs even more. I mean, optically, you would be paying more in rent. So your margins might look lower, but presumably the ROI would be much higher. So I guess the question is, you know, can you give me a sense of what that might look like for, you know, restaurant-level margins and also for, you know, the invested capital associated with it?

Thank you. Our next question comes from the line of Sarah Senator with Bank of America. Please proceed with your question.

Speaker 5: And I guess confirm that that is kind of the complexion, maybe lower margins, but a higher ROI.

Oh, thank you. Uh, uh, just a question about maybe unit economics and then, um, and then a follow up on on, maybe the, the line items. So you mentioned, you have billed costs or a million lower maybe with this new prototype. But as I think about the shift to some of these maybe smaller boxes, I think you mentioned in line, um, presumably those are more, uh, you know, more of the build to suit approach. And I guess as I think about that model, you know, presumably it would lower your your build costs even more. I mean optically you would be paying more in rent um so your margins might look lower but presumably the ROI would be much higher. So that's the question is, you know, can you give me a sense of what that might look like for you know restaurant level margins and also for you know the invested Capital associated with it. Um and I guess confirm that that that is kind of the the complexion maybe lower margins but but a higher Roi

Michael Osanloo: Let me start with that and give Michelle a chance to build on that. We have, I think I mentioned just briefly that the class of '26 is going to be the most, we're excited by it. So we have some of these 1.0s; they're smaller restaurants. Those are the ones that have come in this year between 5.2 and 5.5. We have some 2.0 restaurants, and they'll start opening up in the back half of next year. Those are another order of magnitude smaller. They should be lower costs. We haven't talked about the cost yet. And then we have some atypical restaurants. We have obviously a restaurant opening up in the Dallas-Fort Worth Airport. And we have a couple of other inline restaurants that I can't talk about the locations yet, but should be fantastic economics for us.

Um uh uh let me let me start with that and and give uh Michelle a chance to build on that. I we have um I think I mentioned just briefly that the class of 26 is going to be the most uh uh we're excited by it. So we have some of these 1.0

Michael Osanloo: So you're 100% right, Sarah, that as a class, we're going to see reduced build costs across the board. We're actively determining what the margin impact is if, in fact, we do more build-to-suits. Keep in mind that some of these smaller restaurants, especially the 2.0s, because it's a different configuration in the kitchen. I don't want to get super technical, but our kitchens are historically very linear. That kitchen is either U-shaped or a little E, which creates a lot more work sharing, reduces overall energy load capacity needs, and reduces HVAC needs. So we expect to see some operating improvement in terms of labor costs and OPEC. So I'm not sure how much margin you give up with those smaller kitchens if, in fact, you do do a build-to-suit and pay more rent. So it's still evolving.

They're smaller restaurants. Those are the ones that have come in this year between 52 and 55. We have some, uh, some 2.0 restaurants and they'll start opening up, uh, in the back. Half of next year, those are another, um, order of magnitude smaller. They should be lower costs. We haven't talked about the cost yet. Um, and then we have some uh, atypical restaurants. We have obviously a restaurant opening up in the Dallas Fort Worth airport. And we have a couple of other inline restaurants that uh, can't talk about the locations yet but should be fantastic economics for us. So you're 100% right, Sarah? That as a class, we're going to see reduced build costs across the board. We're actively determining what the margin impact is. If in fact we do more build the suits, keep in mind that some of these smaller restaurants especially the 2.0, because it's a different configuration in the kitchen. I don't want to get super technical.

But our kitchens are historically, very linear that rest that kitchen is either u-shaped or, uh, a little e, which creates a lot more work. Sharing reduces overall, uh, energy load capacity needs and reduces, uh, HVAC needs. So uh, we expect to see some operating Improvement in terms of labor costs and Opex. So I'm not sure how much margin you give up with those smaller kitchens if in fact, you do do a build a suit and pay more rent. So,

Michael Osanloo: But for certainty, I can tell you that we are targeting lower capital and, you know, not lower capital. And you can imagine a world where you get to a certain capital point with our typical revenues that we target by year three, the cash-on-cash returns get really, really attractive.

We're still, it's still evolving. But for certainly, I can tell you that we are targeting lower capital and you know, not lower capital and you can imagine a world where um that you get to certain Capital point with our typical revenues that we Target by year 3, the cash on cash returns get really, really attractive.

Speaker 5: That's very helpful. Thank you. And then just on the line items, you know, when I look at your P&L, you know, your cost of goods is probably higher than almost any other fast casual restaurant. You know, that reads as very good value on the plate. But I'm not sure if consumers really recognize that. I mean, I would think in this current environment, you know, that would translate into a lot of traffic share gains. So I guess, you know, on that front, do you get credit for that? And also, you know, whether or not you do, is there any opportunity, whether it's from a supply chain or distribution or something else, to maybe lower that cost of goods line?

Michael Osanloo: Yeah, it's a great question. I mean, let me start with the second part. Everything is on the table for us. You know, we are actively looking at distribution costs. It is expensive for us to get some of our products across the nation. And so we need to evolve that. We need to get better at distribution and the entire supply chain motion. I mean, your question really is, you know, call it the 34-ish percent in commodity cost. How much of that is really value to the guests, and is there some waste in there? You know, the reality is there's probably a little bit of efficiency that we can do, and we'll always keep looking at improving efficiency. But I want to anchor back to your first point. We're very proud of the fact that we give that kind of value to our guests, right?

Current environment, you know that would translate into to a lot of um you know traffic share gains. So I guess you know on that front do you get credit for that and and also you know whether or not you do is there any opportunity? Whether it's from a supply chain or distribution or or something else to to maybe lower that cost of goods line?

Yeah, it's a great question. I mean, let me start with the second part. Everything is on the table for us. Um, you know, we, we are actively looking at distribution costs. It is expensive for us to get our, uh, uh, uh, some of our products Across the Nation. And so, uh, we, we need to evolve that we need to get better at distribution and the entire supply chain motion. I mean, your your question really is of, you know, call it the 34% in commodity costs how much of that is really valued at the gas and is there some waste in there? You know, the reality is, there's probably a little bit of efficiency that we can do, and we're always keep looking at improving efficiency.

Michael Osanloo: It's important to us. Our burgers are a third of a pound. Our beef sandwiches are really big. They're beefy. You know, we're not playing games with fries. Our small fry, our regular fry is bigger than most people's large fries, and it's cooked in tallow. So we're very proud of the quality and the value that we give guests. I believe that guests notice this. I don't think it's one of those things where they move in a herd week to week. I think it takes a little bit of time. And I think right now we like being in a position where we're providing great value. Our value score is really good internally. We're very happy with it. And I think it's just a question of time when the consumer behavior catches up to the consumer sentiment for us.

But I I want to Anchor back to your first point. We're very proud of the fact that we give that kind of value to our guests, right? It's important to we our our burgers are a third of a pound, our beef sandwiches are really big, they're beefy. Um, you know, we're we're not playing games with fries. Our small fry, our regular fry is bigger than most people's large fries, and it's cooked in Tallow. So we're very proud of the quality and the value that we give guests. I believe the guest noticed.

Is this I don't think it's 1 of those things where they move in a herd week to week. I think it takes a little bit of time and I think right now we like being in a position where we're providing great value, our value scores are really good internally. We're very happy with it and I think it's just a question of time when the consumer Behavior catches up to the consumer sentiment for us.

Speaker 5: Thank you very much. Both very helpful.

Thank you very much.

Michael Osanloo: You bet.

You bet.

Chris Brandon: Thank you. Our next question comes from the line of Brian Mullen with Piper Sandler. Please proceed with your question.

Thank you. Our next question comes from the line of Brian. Mullen with Piper Sandler. Please proceed with your question.

Speaker 5: Thank you. I just want to ask about the breakfast testing in Chicago. Can you talk about how that's going, what you are seeing on incrementality, which I think was a really important factor that you were watching?

Michael Osanloo: Yeah, look, breakfast is, we're trying to be very cautious with breakfast, but I appreciate you asking about it. It's frankly going as well as I could have hoped. It appears that it is incremental. It appears that our guests really love it. And it's not negatively affecting in any way our lunch or dinner business at those restaurants, either in terms of guest satisfaction or sales. So there's a lot to like about breakfast. And if you haven't tried it, it's absolutely delicious. I think we have the best, you know, I've gotten feedback from one investor that they're too big. Our egg sandwiches are just too big and decadent. But it's delicious. And we're continuing to evaluate it. We want to make sure that it's sustainable for our teams and our management. We don't want to burn people out.

Hey, thank you. Uh, just want to ask about the breakfast testing in Chicago. Um, can you talk about how that's going, what you are seeing on incrementality, which I think was a really important factor that you were watching.

Yeah, look, breakfast is, uh, we're trying to be very, um, cautious with breakfast, but I appreciate you asking about it. Um, it's, it's frankly going as well as I could have hoped. Uh, it appears that it is incremental, it appears that our guests really love it. Uh, and um, it's not negatively affecting in any way our lunch or dinner business at those restaurants either in terms of guest satisfaction or sales. So there's a lot to like about breakfast and if you haven't tried it, it's absolutely delicious. I think we have the best uh, you know, I've gotten feedback from 1 investor that, they're too big. Our egg sandwiches are just too too big and uh, decadence but it's delicious. And um, we're continuing to

Michael Osanloo: We don't want to take our eye off the ball. So we're going to run this test through the end of the year. And then we'll have options. If we decide that the test is a distraction, we'll kill it. I don't know if that's going to happen, but you know, none of us are obtuse in seeing that there's a lot of other great restaurant companies that have tried breakfast multiple times and failed. I don't know. I don't think that, I hope that's not going to happen to us, but that happens. Second option is we decide that breakfast is really just a Chicago thing and that, you know, in Chicagoland, we have the credibility and the right with consumers to give them an amazing breakfast meal and that they will buy in.

Evaluate it. We want to make sure that it's sustainable for our teams and our management. We don't want to burn people out. We don't want to take our eye off the ball.

Michael Osanloo: And then the third test, the third option is that we think breakfast has potential for us as a national thing, at which point we would have to test outside Chicago to see if we can also be relevant in breakfast. But it's going really well. We're happy about it. And we just want to make sure that it's sustainable.

Um, so we're going to run this run this test through the end of the year and then then we'll have options. Well, if if we decide that the test is a distraction, uh, we'll kill it. Uh, I don't know if that's going to happen, but, you know, none of us are obtuse and seeing that there's a lot of other great restaurant companies that have tried breakfast multiple times and failed. Um, I don't, I don't know, I don't think that I hope that's not going to happen to us, but that's that, that happens. Uh, second option, is we decide that breakfast is really just a Chicago thing and that, you know, in Chicago land we have the, uh, uh, credibility and the right with consumers to give them an amazing breakfast meal and they will buy in. And then the third test, the third option is that we think breakfast has, um, potential for us as a national thing at which point we would have to test outside Chicago, to see if we can also be relevant in breakfast, but it's going really well. We're happy about it and um uh, we just want to make sure that it's sustainable.

Speaker 5: Okay, thank you for that. And then I wanted to ask about the limited menu you went with in Houston. It doesn't seem like it would be right to equate the slow start just to that. So would you agree with that? And then, you know, if so, what are some of the merits to the limited menu? And are you still exploring the idea of trying that in other geographies potentially?

Michael Osanloo: Yeah, it's a great question. There's definitely a tail on that limited menu that we're really confident in eliminating across the board as we open new restaurants. So that's for sure. But I do think that there are other things that we think create some uniqueness and an experiential vibe at Portillo's that maybe we should not have taken off and we've already been adding back. So like any good test, there's learnings. There's learnings on what you did right and there's learnings on what you didn't do. So simplification is healthy for us, right? When you can, you know, you go from eight to three salads, that's a great dynamic because everything is fresher, it's being made faster, it requires less training on your team, you're less likely to screw things up. So that's a great example.

Okay, thank you for that. And then I, I wanted to ask about the limited menu. Uh, you went with in Houston, it doesn't seem like it would be right to equate. This will start just to that. So would you agree with that? And then you know, if so what are some of the merits to The Limited menu and are you still exploring the idea of trying that in other geographies potentially?

Things on what you did, right? And there's learnings on what you uh, didn't do. So

Michael Osanloo: I think we went with a reduced fleet, a reduced variety of salads. And I think that's a great, that was a great takeaway. There's a couple of things, like quirky things that we sold in Chicago that we didn't put into Houston, no one's missed. We decided to test not selling beer in Houston. I think that was a mistake. I think there's a dynamic where people love coming to a Portillo's and having a frosty stein of beer with a burger or a beef sandwich. We missed that occasion. That was a mistake. And we've added that back now and we learned. So I think it's a balancing act.

Simplification is healthy for us, right? It it when you can we, you know, you go from 8 to 3, salads, that's a great dynamic because everything is fresher, it's being made faster, it's requires less training on your team, you're less likely to screw things up. So that's a, that's a great example. I think we went with a reduced Fleet of of reduced, um, variety of salads and I think that's a great. That was a great takeaway. There's a couple things like, quirky things that we sold in Chicago that we didn't put into Houston. No 1's missed. We didn't we, we decided to test not selling beer in in Houston. I think that was a mistake. I think there's a, there's a dynamic where people love coming to a Portillos and having, uh, Frosty Stein of beer with a burger, or a beef sandwich, we missed that occasion, and that was a mistake. And we've added that that back now. And we learned, so I think it's a balancing act.

Speaker 5: Thank you.

Thank you.

Chris Brandon: Thank you. Our next question comes from the line of Jim Salera with Stevens Inc. Please proceed with your question.

Thank you. Our next question comes from the line of Jim salera with Steven zinc. Please proceed with your question.

Speaker 5: Yes, good morning. Thanks for taking our question. Michael, I wanted to ask a little bit about the Portillo's perks. And you guys said you're almost at 2 million members now. Do you want to give us any insight? Presumably, those are all predominantly in the Chicagoland area, but just kind of the geographic breakdown of the rewards program. And is that possibly a lever that could be leaned into a little bit more in some of the expansion markets to maybe drive repeat and frequency?

Guys, good morning. Thanks for taking a question. I wanted to ask a little bit about the, uh, Portillo's parks. And you guys said, you're almost at 2 million members. Now,

Be able to give us any insight. I presumably, those are all or predominantly in the Chicago land area, but just kind of the, you know, Geographic breakdown

of, uh,

The words program and is that possible?

Michael Osanloo: Yeah. So great question about perks. Let me sort of, I wish I could tell you it's 2 million. It's a little over 1.9, but it's growing. Here's what I'd say. Let's keep in mind perks. We literally rolled this out in March. So it's super early days for us. Our aspiration, I think back when we talked about it, was we would be at 1.5 to 1.7 million members by mid-summer. We're at 1.9. So I feel really good about that. And in almost every way, it's exceeding my expectations. It's really easy to forget that we only have 95 restaurants. If you look at loyalty members per restaurant, I think that the 1.9 million puts us in pretty rarefied air in terms of people who are engaged with our brand and want to be part of our brand.

Ever that could be linked into a little bit more in some of the expansion markets to to maybe drive repeating frequency.

Yeah.

so, um, great question about perks, let me sort of

where, um,

I wish I could tell you. It was 2 million. It's a little over 1.9 million, but it's growing. Here's what I'd say: let's keep in mind perks. We literally rolled this out in March, so it's super early days for us. Our aspiration, I think back when we talked about it, was that we would be at 1.5 to 1.7 million members by Midsummer. We're at 1.9 million, so I feel really good about that. In almost every way, it's exceeding my expectations. It's really easy to forget that we only have 95 restaurants. If you look at, you know, loyalty members per restaurant.

Michael Osanloo: So I'd encourage you to pop that into your ChatGPT and ask it, you know, loyalty members per restaurant across all leading restaurant companies. That's a really good place to be. We're still learning what it can do for us. And it's like a brand new toy that we're playing with. We're learning that food promotion works really well. People love our food. When we offer something for free or a BOGO or bring in a friend and sign up, when we do that kind of stuff, it really works well. People love our food. But we're also, you know, we get a lot of engagement with badges. We get engagement with people who want to be loyalty members. We have people who are posting all kinds of fun stuff in social media. So they're becoming an army of evangelists for us.

Uh, I think I think that, you know, the 1.9 million puts us in pretty rarefied air in terms of uh, people who are engaged with our brand and want to be part of our brand. So I, you know, I encourage you to pop that into your chat GPT and ask it, you know, loyalty members per restaurant across all leading, uh, restaurant companies. That's a really good place to be.

We're still learning.

Michael Osanloo: I don't think we have plumbed the depths of what perks can do for us. I don't think we fully appreciate it yet. It's going to be a great gift that we give to our new CMO who will be able to use perks to generate activation, guest acquisition, and improve frequency. So I think that it's very early days, and I'm super excited by what we're going to do with this over the course of the next 18 months or so.

What it can do for us and it's like, a, a brand new toy that we're playing with where learning that food promotion works really well. People love our food. When we offer something for free, or a BOGO, or a bring in a friend and sign up when we do that kind of stuff, it really works. Well people love our its people but we're also, you know, we get a lot of Engagement with badges. We get engagement with people who want to be loyalty members. We have people who are posting all kinds of fun stuff in social media, so they're becoming an army of evangelists for us.

I don't think we have plumbed the depths of what perks can do for us. I don't think we fully appreciate it yet. It's going to be a great gift that we give to our new, uh, to our new CMO, who will be able to use perks to generate activation, guest acquisition, and improved frequency. Um, so I think that it's very early days, and I'm super excited by what we're going to do with this over the course of the next 18 months or so.

Speaker 5: Great. And then I apologize if you guys touched on this already, but if we think about DFW AUVs and the expansion market AUVs, is there a scenario if the consumer kind of stabilizes that we could see an acceleration there in '26, or are we still kind of trying to find a stabilization point for some of those market AUVs?

Great. And then

I apologize if you guys touched on this already, but

If we think about DFW AUVs in the expansion market, is there a scenario where, if consumer kind of stabilizes, we could see an acceleration there in 2026? Or are we still kind of trying to find?

Sharon Zackfia: Yeah, I think, Jim, I'll take that one. So we've talked about, you know, how we've gotten out of the gate a little slower in Texas. But I think as we get into '26, we're still going to be heavily focused on growth in the Sunbelt. That's going to include continuing to grow the markets that we're in in Texas and Dallas and Houston. We'll likely go into, we've talked about going into San Antonio, Austin. So, you know, we need to continue to drive that awareness, which is going to continue to drive the top line in those AUVs. And so we're learning. Like we're still, we're still learning how these curves are behaving in these markets. And so I think that's one of the things for us is as we move forward.

you know, stabilization point for some of those Market A's

Sharon Zackfia: And there still is a honeymoon curve to what we see in some of our restaurants, actually in most of our restaurants. And so you have to play that into consideration, right? Remember, we're still going to have 12 restaurants that are going to open into 25. Our expectations, you know, continue to remain high. But in terms of what we're targeting, we are still targeting by year three as a class to be in that 5.9 to 6.3 range. That is still our target goal. Now, the composition of the classes will determine how, you know, the behavior of those AUVs are. Because as Michael and I sit here today, I don't think that we expect Houston to have a significant curve. We expect that market to continue to grow. And we'll have three more opening in Houston this year as well.

Sharon Zackfia: And so, you know, we're going to continue to put that new market playbook into play. And we're going to continue to get tighter on that. And as Michael mentioned, our new CMO coming on board, they're going to have great tools to work with. But I can't reiterate the excitement that myself and Michael and the rest of the team have about the class of '26. I think it's going to be fantastic. We're still on the class of '25, but we're really excited about that class as well.

Learning how these curves are behaving in these markets. And so I think that's 1 of the things for us is as we move forward. And, and there still is, uh, a honeymoon curve to what we see in some of uh, our restaurants actually in most of our restaurants. And so you have to play that into consideration, right? Remember we're still going to have 12 restaurants that are going to open into 25. Um, our expectations, you know, continue to remain high but in terms of what we're targeting, we are still targeting by year 3 as a class to be in that 59 to 63 range that is still our Target goal. Now the composition of the classes will determine how you know, the behavior of those A's are. Because as Michael and I sit here today, I don't think that we expect Houston to have a significant curve. We expect that, we expect that market to continue to grow and we'll have 3 more opening in Houston this year as well. And so, you know we're going to continue to uh put that new market Playbook uh into play and we're

Michael Osanloo: You know, and I would just, one other follow-up on what Michelle said. This is not, it's not totally unusual for us when fill-in restaurants start off a little slow. We've experienced this in the past. We had restaurants in Wisconsin that start off slow that are performing admirably. We've had restaurants in Arizona, fill-in restaurants that started off slow that are performing admirably. So our newest restaurants in Florida right now are probably performing better than some of our first few restaurants. So it's not an uncommon thing that happens. This is not something that we're ill-equipped to deal with. We're not daunted by the notion of driving some sales in Dallas.

We're going to get continue to get tighter on that. Um and as Michael mentioned, our new CMO coming on board, they're going to have great tools to work with. Uh but I I can't uh, reiterate the excitement that myself and Michael and the rest of the team have about the class of 26, I think it's going to be fantastic. We're still on the class of 25 but we're really excited about that class as well. You know and I would just um 1 other follow-up on Michelle said it it this is not um it's not totally unusual for us when fill in rest.

Restaurants. Start off a little slow. We've experienced this in the past, we had restaurants in Wisconsin, to start off slow that are performing admirably. We've had restaurants in Arizona, fill-in restaurants. It started off slow, that are performing admirably. So our newest restaurants in Florida right now are probably performing better than some of our first few restaurants. So it's not an uncommon thing that happens. This is not, uh, something that we're ill equipped to deal with. We're not we're not daunted by the notion of, um, driving some sales in Dallas.

Speaker 5: I appreciate the thoughts, all of that.

Appreciate the thoughts all about you.

Chris Brandon: Thank you. Our next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.

Thank you. Our next question comes from the line of Andy barish with Jeffrey's, please proceed with your question.

Speaker 5: Hey, guys. Didn't hear much on kind of operations and drive-through speed. And can you kind of give us an update on that channel, you know, vis-à-vis the rest of the business, just kind of given the, you know, persistent, you know, promos and discounts in the broader QSR world?

Hey guys. Um, didn't hear much on um kind of operations and drive-through speed and and can you kind of give us an update on that channel, you know? V excuse me the rest of the business just kind of giving the

You know, persistence.

Michael Osanloo: Yeah, it's a great question. We continue to grind and slowly but inexorably improve on speed in the drive-through, Andy. So thank you for bringing that up. And that's hugely important because speed very quickly converts into frequency and transactions, et cetera. At the same time, to be totally transparent, the drive-through is where you typically see the most economically pressured guests. And it probably has the place that has some of the most challenging dynamics for us. So we have to get faster. And that's a way of mitigating some of the pressure for the guest. We can't, you know, we're not going to go to value menus or dollar menus or any of that stuff. And that guest will choose those other options if they have to. So speed continues to improve. Accuracy continues to improve. I'm really happy overall with how we're performing in the drive-through.

you know, promos and discounts in the broader qsr world,

Yeah, that's a great question. We continue to grind and, uh, slowly, but inexorably improve on speed in the drive-through Andy. So thank you for um, for bringing that up. Uh, and that's, that's hugely important because speed very quickly converts into, uh, frequency and transactions, Etc, at the same time,

Michael Osanloo: But, and you know, the test, we mentioned it, you know, the AI tests that we're using. We've got, I think, the right, it's really fun to watch. We have these cameras. The cameras translate into highly intuitive monitors inside the restaurant so that the team knows exactly what's going on. The individual anecdotes that I'm hearing about, you know, we had times that were ridiculously long late in the evening because we just weren't aware of people waiting. Now we are. It immediately has changed. We've, you know, shaved minutes off at different day periods. So I love it. It's helping us train our teams better. We're putting tools in the hands of the teams so that they can be more successful. And we're seeing that real time. It's a test. My expectation is that we will wrap up this test sometime in the third quarter.

Same time to be totally transparent. The drive-through is where, uh, you typically see the most economically pressured guests. And it probably has the place that has some of the most, uh, uh, challenging, uh, Dynamics for us. So we have to get faster and that's a way of mitigating. Some of the pressure for the guests. I, we can't, you know, we're not going to go to, um, value menus or dollar menus or any of that stuff and that, that that guests will choose those other options. If they, uh, if they have to sew speed continues to improve accuracy, continues to improve, and really happy overall with how we're performing in the drive-through. But

And and you know the test, we mentioned it. You know the AI tests that we're using. Uh we've got I think the right. Um it's really fun to watch. We have these cameras, the cameras translate into highly intuitive monitors inside the restaurants so that the team knows exactly what's going on the individual anecdotes that I'm hearing about, you know? We, we had we had we had uh, times that were ridiculously long late in the evening because we just weren't aware of people waiting. Now we are it immediately has changed. We've you know shaved minutes off at different day periods.

So I love it. It's helping us train our teams better. We're putting tools in the hands of the team so that they can be more successful and we're seeing that real time.

Michael Osanloo: And all, you know, all things going well, we will deploy it in the fourth quarter. And in the first half of '26, we'll see material improvement on drive-through times.

It's it's a test. My expectation is that we will wrap up this test sometime in the third quarter and all, you know, all things going. Well, we will deploy it in the fourth quarter and uh and the first half of 26, we'll see material Improvement on Drive 2 times.

Speaker 5: Got it. Appreciate it. And then, Michelle, just on the revenue guidance change of kind of, you know, the mid-single-digit reduction, I guess just thinking about that, is it sort of evenly balanced between, you know, a point or so of lower comp as well as new restaurant openings and then, you know, fewer operating weeks? How did, you know, kind of how do you parse that out?

Got it, appreciate it. And then Michelle just on the

On the revenue guidance change of kind of a, you know, the mid-single-digit reduction. I guess just thinking about that, is it...

Sharon Zackfia: Yeah, I'd say, you know, it's primarily driven by more of the non-comp pressures, Andy, that I mentioned. You'll get a little bit on the comp. Like you said, we're trending to the lower end of the 1 to 3% range that we previously guided to. And so, you know, I think about it as more heavily weighted on the non-comp side, specifically as we talked about the class of '24, you know, continuing to see a little bit of headwinds there as well as timing. I think that the timing issue is real for what we came into the year thinking in terms of timing for the class of '25 versus what we're seeing. You know, I mentioned our Stafford Texas restaurant, which is in Houston, the delay of that, which was months of delays.

Sharon Zackfia: And then for our Q4 openings, it's more back and weighted in the quarter as well. So it's the timing component, the class of '24 component that's primarily the driver, but you do get a little bit of comp in there.

You know, a point or so of lower comp as well as new restaurant openings and then the, you know, fewer operating weeks how, how did you know kind of how, how do you parse that out? Yeah, I I'd say, you know, it's primarily driven by more than non-com pressures. Andy, that I mentioned, you'll get a little bit on the comp, like you said, we're trying to go to the lower end of the 1 to 3% range that we previously guided to. And so, you know, I think about it as more heavily weighted on the non-comp side specifically as as we talked about the class of 24. Um, you know, continuing to see a little bit of headwinds there as well as timing. I think that the timing issue is real for what we came into the year thinking in terms of timing for the class of 25 versus what we're seeing. Um, you know, I mentioned our staff for Texas restaurant, which is in Houston, uh, the delay of that, which was, uh, months of delays. And then, uh, for our Q4 openings, it's it's uh, more back and waited in the quarter as well. So it's the timing component.

Component, the class of 24 component, that's primarily the driver, but you do get a little bit of cap in there.

Speaker 5: Okay. Thank you.

Sharon Zackfia: Yep.

Thank you.

Yep.

Chris Brandon: Thank you. Our next question comes from the line of Dennis Geiger with UBS. Please proceed with your question.

Thank you. Our next question comes from the line of Dennis Skye with UBS. Please proceed with your question.

Speaker 5: Great. Thanks, guys. I wanted to ask another one just on the new stores and specifically the new stores outside of Texas. I guess just kind of clarifying the stores outside of Texas, newer stores outside of Texas, generally all or mostly performing well or consistent with expectations or, Michelle, I couldn't tell if you were alluding to maybe some other markets, a little softer, anything on the non-Texas newer stores to call out?

Sharon Zackfia: Yeah, I would say, Dennis, that, you know, it is primarily Texas. And when we say Texas, we have the Dallas restaurants in there as well. So when we think about the class of '24, there's three restaurants that are in Dallas. There's three restaurants that are in Houston of the 10 that we open. And so the other restaurants that you have in that class, Michael mentioned Florida. There's a Florida restaurant in there. There's an Arizona restaurant. There's a restaurant in Michigan. Those are largely performing near expectations. I wouldn't say that, you know, there's any one of those restaurants that's, you know, I would call a home-run restaurant. But the pressures that we're seeing are primarily the infill restaurants within the Dallas market, not all the Dallas infill restaurants, a certain handful of those, as well as Houston. So that's why we call that out specifically.

Great. Thanks guys. I wanted to ask another 1 just on the new stores and and specifically the new stores outside of of Texas. I I guess just kind of clarifying the the stores outside of Texas, newer stores outside of Texas, generally all or or mostly performing well, or consistent with expectations or or Michelle, I couldn't tell if you were alluding to maybe some, some other markets, um, a little softer, I'll be, um, any anything on uh, on the non Texas newer stores to, um, to call out?

Sharon Zackfia: We're not, the Arizona market continues to be, as Michael mentioned, a very strong market for us as we continue to infill that market. And we've been in that market for over 10 years. And so we're beginning to continue to build awareness. And then our second restaurant in Michigan is one that, again, is challenged by awareness. So we got to continue to, you know, work through some of those challenges. But there's nothing outside of that that I would call out that we're concerned about.

So that, you know, it is primarily taxes. And when we say taxes, we have the Dallas restaurants in there as well. So when we think about the class of 24, there's 3 restaurants that are in Dale. If there's 3 restaurants that are in Houston of the uh 10 that we open. And so uh the other restaurants that you have in that class uh Michael mentioned Florida, there's a Florida restaurant in there. There's an Arizona restaurant, there's a restaurant in Michigan. Those are largely performing near expectations. I wouldn't say that, you know, there's any 1 of those restaurants. That's, you know, I would call a home run restaurant, but the pressures that we're seeing are primarily the infill restaurants within the Dallas Market, not all the Dallas, Russ, infill restaurants, a certain uh handful of those as well as Houston. So that's why we call that out. Specifically, we're not the the Arizona Market continued.

Continues to be, as Michael mentioned, a very strong market for us as we continue to infill that market. And we've been in that market for over 10 years. And so, we're beginning to continue to build awareness. And then our second restaurant in Michigan is 1 that again is challenged by awareness. So we got to continue to you know, work through some of those challenges but there's nothing outside of that that I would call out that we're concerned about.

Speaker 5: Great, helpful. Thank you. And then just one more, either Michael or Michelle, as you think about sort of those four key priorities or initiatives to drive sales, how do you think about maybe the most impactful to support either transaction or comp gains back half of this year into next? I'm sure it's all of all four and then some, you know, working in tandem. But are there any kind of particular callouts to maybe give some color on the initiatives individually, but just what you think could be more impactful for the base driving that comp over the coming quarters? Thank you.

Michael Osanloo: That's a great open-ended question, Dennis. Here's what I'd say. I think that the priority of those tactics is slightly different in the core versus outside of the core. So when you think about in the core, like the continuous improvement on operations, getting great at drive-through, that really benefits us in Chicagoland. So, you know, every second that we can improve speed dramatically helps us in Chicago. We need awareness outside Chicago, particularly in Dallas and Houston as we open in Atlanta. We need people to know who we are. And that's where all that multi-channel marketing. We've got field marketers deployed right now who are sampling food, setting up fundraisers, going to local baseball games. In Texas, they're going to, you know, we're sending our beef bus to high school football games in the fall. That's a thing. You know, there's stadiums with 10, 20,000 people.

Great helpful. Thank you. Um, and then just 1 more either. Michael. Michelle is, as you think about sort of those 4 key priorities, or initiatives to drive sales, how do you think about maybe the the most impactful to support, either transaction or comp? Gains the back half of this year into next? And I'm sure it's all of all 4 and then some, you know, working in tandem but there are any kind of particular callouts that may give some some color on the initiative individually. But just what you think, could be more impactful for that for the base driving that comp over the, the coming quarters. Thank you.

That's a great. Open-ended question tennis. Um, here here's what I'd say. I think that the uh, priority of those tactics is slightly different in the core versus outside the core. So when you think about in the core like the continuous Improvement on operations getting great at drive through that really benefits Us in Chicago land. So, you know, the every second that we can improve speed dramatically helps us in Chicago, um, we need awareness outside Chicago, particularly in Dallas and Houston as we open.

Michael Osanloo: That's a great way of building awareness. So it's, you've got to do that. And then, you know, the sort of my favorite thing, which is not fully deployed yet, is perks. I think that as perks mature, as we learn more, we will use it very surgically to drive guest acquisition outside Chicago and frequency in Chicago. That tool allows us to do basically one-to-one marketing, and it allows us to be very segmented in our approach. And that's, I think, what gives me the most confidence for '26 and beyond. And of course, like I didn't mention the kiosk. I think we've done a great job with the kiosk. You know, our data and our partners' data would say we're awfully close to best-in-class already with the kiosk. But what I love about the kiosk is that it's just creating a frictionless environment for guests.

In Atlanta, we need people to know who we are. And that's where all that multi-channel marketing comes in. We've got field marketers deployed right now who are sampling food, setting up fundraisers, and going to local baseball games in Texas. They're going to, you know, we're sending our beef bus to high school football games in the fall. That's a thing; you know, there are stadiums with 10,000 to 20,000 people. That's a great way of building awareness. So, you've got to do that and then...

Frequency in Chicago that that that tool allows us to do basically 1-to-1 marketing and it allows us to be very segmented in our approach and that's I think um what gives me the most confidence for 26 and Beyond.

Michael Osanloo: There's a whole generation of people who just want to order digitally. They want to come into the restaurant. They want to see pictures of food. They want to order it on the kiosk. We've made great strides on kiosks. They haven't even been deployed yet a year. And, you know, we're rolling out the next innovations over the next six months on kiosks. Already, if you come to one of our kiosks, you can see your order history. If you have something that's pretty specific, you can put it in once. You don't have to recreate it every time. So we're getting really good with kiosks, and I think that's another way of becoming frictionless for our guests.

And of course, like I didn't mention the kiosk, I think we've done a great job with the kiosk um, you know, our our data and our partners data would say we're uh awfully close to best-in-class already with the kiosk. But what I love about the kiosk is that it's it's just creating a frictionless environment for guests. There's a whole generation of people who just want to order digitally. They want to come into the restaurant, they want to see pictures of food, they want to order it on the kiosk. We've made great strides on kiosk. They haven't even been deployed yet a year.

Sharon Zackfia: I would just add on to what Michael's saying in terms of the menu. And when you think about perks, I think there's some cool, fun things we can do with the menu when you talk about secret menu items and exploration of what we're going to do with the menu as we move forward. I think there's some things that, you know, are potentially in the pipeline for us that we're exploring from menu innovation that could be fun and exciting, not so much, you know, in the short term in terms of the third quarter, but as we go into, you know, '26, I think menu innovation can play a role as well in helping to drive some transactions, whether it's in our core or outside.

And you know, we're rolling out the next Innovations over the next 6 months on kiosk already. If you come to 1 of our kiosks, you can see your order history if you have something that's pretty specific, you can put it in once you don't have to recreate it every time so we're getting really good with kiosk. And I think that's another way of becoming frictionless for our guests. I, I would just add on to what Michael's saying in terms of the menu. And when you think about perks, I think there's some cool fun things we can do with the menu, when you talk about secret menu items and exploration of of what we're going to do with the menu as we move forward. I think there's some things that, you know, are potentially in the pipeline for us that we're exploring from menu, Innovation. That could be fun and exciting. Not

So much, um, you know, in the short term in terms of the third quarter, but as we go into, you know, 26, I think the menu Innovation, uh, can play a role as well in helping to drive some, uh, transactions, whether it's in our core or outside.

Chris Brandon: Thank you. Our next question comes from the line of Brian Harbor with Morgan Stanley. Please proceed with your question.

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

Speaker 5: Yeah, morning, guys. What are the inline locations going to look like? I mean, how big are those? Like, what's the experience going to be like there relative to kind of a typical Portillo's?

Yeah, morning guys. Um, what what are what are the inline locations going to look like? I mean, how, how big are those like what's the experience going to be? Like they're relative to kind of a typical portilla's

Michael Osanloo: Yeah, so I would, I don't know if we've posted them online yet. I'm sure we will on social media soon, but our Village's restaurant is gorgeous. It's a beautiful experiential restaurant. I mean, we call it an inline. The truth is, I think technically it's an end cap, so it's a beautiful location. It's in a, I don't know how familiar you are with the Village's. It's one of the largest retirement communities in America. So it's a beautiful restaurant. We're not going to make them anything less than that. They still need to be experiential. We want people to enjoy coming to Portillo's, feel good about that dynamic, and then we want to win them over forever with amazing value, quality, and speed. So we're not, when we say an inline, don't think of a, you know, tiny little box that could be anything. It's still a Portillo's.

Yeah, I, it's so I would um,

I don't know if we've posted them online yet, I'm sure we will on social media soon, but our Villages restaurant is gorgeous. It, it's a, it's a beautiful experiential restaurant. I mean, we call it an inline, the truth is, I think technically it's an end cap, so it's a beautiful location. It's in a, I don't know how familiar you are with the villages. It's 1 of the largest retirement communities in America. So it's a beautiful restaurant. I we're not going to make them anything less than that. They still need to be experiential. We want people to enjoy coming to Portillos feel good about that Dynamic. Uh, and then we want to win them over forever with amazing value, quality, and speed. So um, we're not when we say an inline, don't think of a you know, tiny little

Michael Osanloo: It's still decorated to the nines. It looks beautiful. You're still going to see, you know, people cooking in the kitchen. You're going to see action in the kitchen, and it's going to have that Portillo's look and feel.

Sharon Zackfia: Yeah, and I'll just add on to that, Brian. Not all are created equal. So as Michael said, the Village's may be different than a few inlines that we're exploring for the pipeline, whether it's next year or in the future. I think what we're all excited about is the potential, the return potential of these inline units. When you look at the investment cost and what we believe that the AUVs can do, what we believe that this can provide to the cash-on-cash return targets, I think as we sit here, the unit economics story for us is extremely important. And as we think about that class of restaurants, continue to drive that industry-leading unit economics is something that is paramount for us as we move forward.

Sharon Zackfia: And I think the inlines play a role in driving that for us when we think about the composition of classes as we move forward.

Box. It could be anything. It still a Portillos. It's still decorated to the nines. It looks beautiful. You're still going to see, you know, people cooking in the kitchen. You're going to see action in the kitchen. Uh and it's going to have that Portillo's uh look and feel. Yeah, and and I'll just add on to that. Brian. Not all are created equal. So as Michael said, The Villages may be different than a few in lines that were exploring uh for the pipeline. Whether it's next year in the future. Uh, I think what we're all excited about is the potential, the return potential of these inline units. When you look at the investment cost and what we believe that the auvs can do, what we believe that this can provide to the cash on cash. Return targets. I think, as we sit here, the, the unit economic story for us is extremely important. And as we think about that class of restaurants, continue to drive that industry-leading unit economics, is something that is Paramount for us as we move forward. And I think the inlines play a role in

driving that for us when we think about the composition of classes as we move forward.

Speaker 5: Great.

Chris Brandon: Thank you. Thank you. Our final question comes from the line of David Tarantino with Baird. Please proceed with your question.

Great. Thank you.

Thank you. Our final question comes from the line of David Tarantino with beard. Please proceed with your question.

Speaker 5: Hi, good morning. One more on the performance of new units. And I guess, Michael, you know, I know you've learned a lot, you know, as you've kind of opened some of these locations in Texas. And I wondered if you could just comment on whether you're thinking differently about how you enter new markets in the future. And I know, you know, that you've talked in the past about marketing support, but also, I guess the nature of my question is, you know, you added a lot of locations in a fairly short window, and I'm wondering if you're rethinking whether that sort of pace of openings in the new markets should be adjusted going forward.Um,

Hi, good morning, 1 1 more on the, the performance of new units. And and I guess Michael, um,

you know, I know you've learned a lot, you know, as you kind of opened some of these locations in Texas and I, I wondered, if you could just comment on whether you're thinking differently about how you enter new markets in the future. And, and I know, you know, that you've talked in the past about marketing support. But also,

From the new markets.

Chris Brandon: so any thoughts you have on that question would be great.

Michelle Hook: You bet, David. Good to hear from you. I would tell you that there's, you know, you're always learning and trying to get better every single day. You're trying to get a little bit better than you were yesterday. And so, our perspective is that, we've learned a lot about how to open and how to open successfully. We, I think we're lulled into a false sense of security with the success of the colony. It was just, we put a lot in in pre-marketing that, that, that restaurant. And it was just an enormous opening that almost broke the restaurant. So we quickly then tamped down all marketing. and Houston was the result of that. We started off slow in Houston. And the fill-ins in Dallas were slow because we didn't really have a lot of active marketing going on.

Should be adjusted going forward. Um so any thoughts you have on that? Question would be great.

You bet, David. Good to hear from you! Um, I would tell you that there's, you know, you're always learning and trying to get better every single day, trying to get a little bit better than you were yesterday. And so, um, our perspective is that.

Uh we've learned a lot about how to open and how to open successfully we. Uh I think we're lowed into a false sense of security with the success of the colony. It was just we put a lot in in pre-marketing that that uh uh that restaurant and it, it was just an enormous opening that almost broke the restaurant. So we quickly then tamped down all marketing.

Michelle Hook: So I think the biggest lessons for us is we are, we do want a big opening because we do want to get some excitement and momentum and get people engaged with the brand early on. And then we need to keep a steady drip of marketing going on during the course of the next, call it 12 months. I think we'll see that in Atlanta. I think Atlanta is going to be an exciting, good test for us. we're opening in Kennesaw, which is a very, very attractive market. It's a great location. We're doing all of the good grassroots things that we should do to build momentum. We're partnering with Coca-Cola, who, you know, you don't get better at marketing than Coca-Cola. And we'll get some great activation at that restaurant. I think the pace of growth is something that we continue to think about and learn from.

Uh, and Houston was the result of that. We started off slow in Houston, and the fill-ins in Dallas were slow because we didn't really have a lot of active marketing going on.

So, I think the the, the biggest lessons for us is we are, we do want a big opening because we do want to get some excitement and momentum, and, and get people engaged with the brand early on. And then, we need to keep a steady drip of marketing going on during the course of the next call at 12 months. Um, I think we'll see that in Atlanta, uh, I think Atlanta is going to be, uh, an exciting good test for us. Uh, we're opening in Kennesaw, which is a very, very, uh, attractive Market. It's a great location. We're doing all of the good Grassroots.

Things that we should do to build momentum. We're partnering with Coca-Cola who, you know, you don't get better at marketing than Coca-Cola and we'll get some great activation at that restaurant.

Michelle Hook: you know, I think implicit in your question is, did you build too many restaurants too quickly in Dallas? I think it's a very fair question. And I don't know if I have a clean answer for that. I think that, clearly without the marketing support, that was, it was too many too quickly. The flip side is that we need to build awareness. And so maybe it's a combination of building and doing marketing to continue to build awareness and drive demand. So I think that's a, that's more of a nuanced balancing act. And we'll continue to evaluate, look at what's happening in Dallas and figure out, what the impact of that is in Houston, etc.

I think the pace of growth is something that we continue to think about and learn from. Um, you know, I think implicit in your question is, did you build too many restaurants too quickly in Dallas? I think it's a very fair question, and I don't know if I have a clean answer for that. Uh, I think that.

Uh, clearly without the marketing support that was, it was too many too quickly. The flip side is that we need to build awareness and so maybe it's a combination of building and doing marketing to continue to build awareness and drive demand. So I think that's a that's more of a nuanced Balancing Act and we'll we'll continue to evaluate look at what's happening in Dallas and and figure out um, what the impact of that is in Houston Etc.

Michael Osanloo: Thank you. We have reached the end of our question and answer session. And this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Thank you. We have reached the end of our question.

And Conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.