Business Context and Reporting Period
Portillo’s Inc. operates fast-casual restaurants in 10 states and two food production commissaries in Illinois. This unaudited 10-Q covers the 13 weeks ended March 31, 2024, compared with the 13 weeks ended March 26, 2023. The company reported 85 restaurants at quarter-end, including one 50%-owned C&O restaurant; it opened a Denton, Texas location during the quarter.
Financial Performance and Liquidity
| Metric | Q1 2024 | Prior-year quarter |
|---|---|---|
| Net revenue | $165.8 million | $156.1 million |
| Operating income (margin) | $10.1 million (6.1%) | $8.5 million (5.4%) |
| Net income (loss) | $5.3 million | $(1.3) million |
| Net income (loss) attributable to Portillo’s Inc. | $4.6 million | $(0.5) million |
| Cash from operating activities | $9.1 million | $6.5 million |
| Capital expenditures | $16.9 million | $20.2 million |
- Revenue rose 6.3%, primarily from restaurants opened in 2023 and one Q1 opening, which contributed approximately $14.4 million. Same-restaurant sales declined 1.2%, reflecting transactions down 3.2%, partly offset by average check up 2.0%.
- Restaurant operating expenses were 78.1% of revenue, versus 77.7%. Food, beverage and packaging costs improved slightly as a share of revenue; labor and occupancy each increased as a share. Commodity inflation was 4.8%, compared with 8.9% in the prior-year quarter.
- Adjusted EBITDA, a non-GAAP measure, increased to $21.8 million from $19.6 million; margin was 13.1% versus 12.6%. Restaurant-Level Adjusted EBITDA increased to $36.4 million from $34.8 million, while its margin declined to 21.9% from 22.3%.
- Cash and restricted cash were $13.2 million at March 31. The company had $63.8 million available on its revolver after letters of credit. Operating cash flow was below investment outflow; cash increased $2.7 million in the quarter, partly supported by $17.0 million of net short-term borrowings.
- Credit-agreement borrowings totaled $324.5 million principal: $292.5 million term loan and $32.0 million revolver. Balance-sheet debt, net of unamortized costs, was $321.7 million. Variable-rate loans carried rates of 7.96% and 7.93%; the effective rate was 8.37%. The facilities mature February 2028. The company reported covenant compliance.
- The Tax Receivable Agreement liability was approximately $328.5 million, including $7.2 million current; $4.4 million was paid during the quarter and a further $7.2 million payment is expected within 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by new restaurant openings despite same-restaurant sales reversing from 9.1% growth in the prior-year quarter to a 1.2% decline.
- Net income improved by $6.6 million. The comparison also reflects a $3.5 million prior-year loss on debt extinguishment, absent in Q1 2024, and a current-quarter income tax benefit of $1.1 million.
- Interest expense declined to $6.5 million from $7.4 million. The company attributed the decrease to improved lending terms associated with its 2023 credit facilities.
- The Q1 secondary offering involved 8.0 million shares at $14.37 per share. Proceeds were used to repurchase shares and redeem LLC units; Portillo’s received no proceeds. Its ownership of Portillo’s OpCo rose to 84.1% from 76.1%.
Outlook, Commentary, Risks and Unusual Items
- Management plans to open at least seven additional restaurants during the remainder of 2024. One Surprise, Arizona restaurant opened after quarter-end. Management expects operating cash flows, cash on hand and revolver availability to meet needs for at least the next 12 months.
- Management cited pricing actions, operational efficiencies, guest experience initiatives and growth in the restaurant base as drivers of improved results. Menu prices were increased approximately 1.5% in January and again at the end of March; management said it will monitor costs, competition and consumer sentiment.
- Key risks include weaker consumer demand and traffic, food and labor cost inflation, hiring and retention challenges, union activity, food safety, competition, supply constraints, cybersecurity and privacy, and the ability to secure sites and execute restaurant expansion.
- Employees at the Addison and Aurora, Illinois commissaries voted in favor of union representation in 2023 and 2024. The company filed objections to both elections with the National Labor Relations Board. Management warns that unionization, labor disputes or employment-related litigation could increase costs or disrupt operations.
- The company is party to ordinary-course legal claims, including employment matters, customer injuries, contractual disputes and property damage; management does not expect these to materially affect the financial statements. The TRA’s estimated future payments depend on taxable income and tax law; the company estimates approximately $386.5 million of related tax savings if all benefits are realized.
- No formal earnings or same-store sales guidance was provided. Q1 results include a tax benefit related primarily to a reduced valuation allowance following the secondary offering. The quarter had no debt-extinguishment loss, unlike the prior-year period.
Important Facts for Investors to Verify
- Whether traffic and same-restaurant sales stabilize, and whether menu pricing can offset cost pressures without further weakening transactions.
- Whether planned 2024 openings are achieved on schedule and generate expected sales and returns.
- Debt, variable interest rates, revolver usage and compliance with credit covenants, alongside capital spending and cash generation.
- The timing and cash impact of TRA payments, and the assumptions supporting realization of deferred tax assets.
- Developments in commissary union proceedings and any resulting labor, operating or legal costs.
- Non-GAAP EBITDA measures are supplemental and exclude certain expenses; assess them alongside GAAP earnings and cash flows.