Portillo's Inc. (PTLO) Q3 2025 Earnings Call Transcript

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Overview

The earnings call revealed declining financial metrics, including a decrease in restaurant-level adjusted EBITDA and cash from operations, along with increased expenses. The Q&A highlighted uncertainties in marketing efficacy and commodity costs, and management's reluctance to provide specific guidance for Q4. Despite some positive marketing strategies, the overall sentiment is negative due to financial pressures and lack of clear future guidance.

Key Financial Performance

Revenues $181.4 million, reflecting an increase of $3.2 million or 1.8% compared to last year. The growth was driven by non-comp restaurants contributing $5.6 million, while same-restaurant sales declined 0.8%, decreasing revenues by approximately $1.2 million. The decline in same-restaurant sales was due to a 2.2% decrease in transactions, partially offset by a 1.4% increase in average check.

Food, Beverage, and Packaging Costs Increased to 34.5% of revenues from 33.7% in the prior year. This was primarily due to a 6.3% increase in commodity prices, partially offset by an increase in average check.

Labor Costs Increased to 26.6% of revenues from 25.8% in the prior year. The increase was driven by lower transactions, incremental wage increases, higher benefit costs, and deleverage from newer restaurant openings, partially offset by an increase in average check and labor efficiencies. Hourly labor rates were up 3.3%.

Other Operating Expenses Increased by $2.3 million or 10.8% compared to the prior year, primarily due to new restaurant openings and higher repair and maintenance, utilities, and advertising expenses. As a percentage of revenues, these expenses increased to 12.9% from 11.8%.

Occupancy Expenses Increased by $1.4 million or 14.7% compared to the prior year, primarily due to new restaurant openings. As a percentage of revenues, these expenses increased by 0.7%.

Restaurant-Level Adjusted EBITDA Decreased by $5.3 million to $36.7 million from $41.9 million in the prior year. Margins decreased by 330 basis points to 20.2% from 23.5%, primarily due to pressures from non-comp restaurants.

General & Administrative Expenses Increased by $1.7 million to $20 million or 11% of revenue from $18.3 million or 10.3% of revenue in the prior year. The increase was driven by $3.3 million in dead site costs, partially offset by a $1.1 million net benefit from the CEO transition.

Preopening Expenses Increased by $1.5 million to $3.3 million compared to $1.7 million in the prior year, primarily due to the number and timing of activities related to planned restaurant openings.

Adjusted EBITDA Decreased by 23.4% to $21.4 million from $27.9 million in the prior year. The decrease was influenced by changes in G&A expenses and other operational pressures.

Interest Expense Decreased by $0.8 million to $5.7 million from the prior year, driven by a lower effective interest rate of 6.9% compared to 8.3% in 2024.

Cash from Operations Decreased by 32.3% year-over-year to $48.7 million year-to-date.

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Operating Highlights

Portillo's Perks loyalty program: Launched earlier this year, it is being used to stimulate visits and expand reach, especially in new markets.

New market entry strategy: Portillo's is slowing development in 2025 and 2026, limiting openings to sites with already signed leases, and focusing on a smaller format restaurant model for better unit economics.

Expansion milestone: Portillo's will open its 100th restaurant in Kennesaw, Georgia, marking a significant milestone.

Operational reset: Portillo's is addressing low-volume restaurants opened in the past 24 months, particularly in Texas, and focusing on improving trial and labor efficiency.

Cost management: Efforts include managing commodity inflation (forecasted at 3%-5% in 2025) and labor inflation (estimated at 3%-4% for the full year).

Strategic reset: Portillo's is refocusing on delivering an outstanding guest experience and slowing down its development pace to avoid cannibalization and improve restaurant economics.

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Risk or Challenges

Strategic Reset and Slowed Development: Portillo's announced a strategic reset, slowing development in 2025 and 2026 due to overexpansion in the past 24 months, particularly in Texas. This led to low initial volumes in new restaurants, negatively impacting unit economics. The company is now limiting openings to sites with signed leases and pushing back or dropping other sites.

Low-Volume Restaurants: Several newly opened restaurants have low initial volumes, which are insufficient to deliver healthy economics. The company is working to drive trial and optimize labor at these locations.

Commodity Inflation: The company experienced a 6.3% increase in commodity prices during the quarter, with significant pressures from beef. Forecasted commodity inflation for 2025 is 3% to 5%.

Labor Costs: Labor as a percentage of revenues increased due to lower transactions, wage increases, higher benefit costs, and inefficiencies from newer restaurant openings. Labor inflation is estimated at 3% to 4% for the full year.

Other Operating Expenses: Other operating expenses increased by 10.8% due to new restaurant openings, higher repair and maintenance, utilities, and advertising expenses.

Occupancy Costs: Occupancy expenses increased by 14.7% due to new restaurant openings, further pressuring margins.

Decreased Same-Restaurant Sales: Same-restaurant sales declined by 0.8%, driven by a 2.2% decrease in transactions, partially offset by a 1.4% increase in average check.

Margin Pressures: Restaurant-level adjusted EBITDA margins decreased by 330 basis points to 20.2%, driven by pressures from non-comp restaurants and increased costs.

G&A Expenses: General & Administrative expenses increased due to $3.3 million in dead site costs and CEO transition-related adjustments. G&A expenses for 2025 are now estimated at $76 million to $79 million.

Impairment Charge: A noncash impairment charge of $2.2 million was recorded for the legacy Barnelli's trade name due to an increased discount rate.

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Guidance & Outlook

Development Strategy: Portillo's announced a strategic reset, slowing development in 2025 and 2026, and refocusing operations on delivering an outstanding guest experience. Openings will be limited to sites with already signed leases, and several sites in the pipeline have been pushed back or dropped. The company plans to have more time and distance separating openings in new markets and is deploying a smaller format restaurant model to achieve good unit economics at $4 million to $5 million of sales.

Same-Store Sales Growth: The company is focusing on driving more transactions through the Portillo's experience, leveraging the Portillo's Perks loyalty program, affiliate marketing, catering, and delivery partners to stimulate visits and expand reach.

Commodity Inflation: Portillo's forecasts commodity inflation of 3% to 5% in 2025, with the most significant pressures coming from beef.

Labor Inflation: Labor inflation is estimated at 3% to 4% for the full year 2025.

Restaurant-Level Adjusted EBITDA Margins: Margins are estimated to be in the range of 21% to 21.5% in 2025.

General & Administrative Expenses: Updated estimate for fiscal year 2025 G&A expenses is $76 million to $79 million.

Adjusted EBITDA: Portillo's expects adjusted EBITDA of $90 million to $94 million for fiscal year 2025.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Could you speak to marketing efficacy in the quarter and how you think about marketing strategy going forward, especially with Denise joining in September?

A:Marketing investments are focused on driving trial and awareness, particularly in newer markets like Dallas and Houston. In core markets like Chicagoland, campaigns are ongoing to reinforce the brand and value proposition. Management believes these investments provide good payback now and in the future.

Q:How do you view your value perception among guests and your broader value proposition, given that pricing seems to be running towards the high end of the industry range?

A:Pricing is indexed below the September inflation data for food away from home (3.7%). No price increases are planned for Q4, and future pricing decisions will consider inflationary cost pressures while focusing on driving traffic into restaurants.

Q:What are your expectations for restaurant openings in 2026 and beyond? Are there scenarios where you might pause development to focus on existing assets?

A:Eight restaurants are planned for 2026, with some already in progress. Expansion in Dallas and Houston will slow after 2026, with growth shifting to other markets like Atlanta in 2027. Management intends to grow gradually and does not foresee pausing development entirely.

Q:Can you provide early thoughts on commodity costs, particularly beef, and labor inflation guidance for next year?

A:Beef costs are expected to remain pressured into next year, with plans still being finalized. About 30% of the cost basket is beef. Labor inflation is currently at 3%, at the lower end of the forecasted 3%-4% range. The average hourly rate is above $17, and no significant geographical concentration of wage increases is noted.

Q:What enabled the company to deliver better comp performance than guided in the business update?

A:The Perks program contributed to better comp performance by stimulating visits and engaging customers. Offers like lapsed guest activation and menu trials were effective, along with targeted promotions to the customer base.

Q:How does the full-year comp guidance imply a decrease in Q4, and what factors are influencing this?

A:Management did not provide specific Q4 comp details but noted tougher year-over-year comparisons and industry uncertainties. Seasonal catering business in core markets could also impact Q4 performance.

Q:Can you provide color on comp cadence through Q3 and any notable shifts in consumer behavior by age or income cohorts?

A:Promotions like $1 hotdog week and 50% cheeseburger week drove better performance in July and September compared to August. Consumer behavior remains fluid and pressured, with no significant shifts by age or income cohorts noted.

Q:Have you observed any noticeable changes in Hispanic or younger consumer cohorts during the quarter?

A:No significant changes were observed in these cohorts. However, pressures in the drive-thru channel were more pronounced in Q3.

Q:How is the focused marketing effort in Texas progressing, and how are you developing a cohesive marketing message for different markets?

A:Efforts in Texas include sampling events, Perks program offers, and market-wide promotions to drive trial. Management acknowledges the need for a clearer way to communicate Portillo's value to new markets and is working on a cohesive strategy under the new CMO, Denise.

Q:Review of Unclear Management Responses

A:Management avoided providing specific Q4 comp details, citing industry uncertainties and seasonal factors. They also did not elaborate on consumer behavior shifts by age or income cohorts, using general terms like 'fluid' and 'pressured.'

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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Portillo's Inc. (PTLO) Q3 2025 Earnings Call Transcript