Portillo’s Inc. — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 26, 2023; unaudited. The company operates fast-casual restaurants and food production commissaries. At quarter-end it had 74 restaurants excluding its 50%-owned C&O restaurant (75 including C&O) and two non-traditional locations.
Financial performance
| Metric | Q1 2023 | Prior-year quarter | Change / context |
|---|---|---|---|
| Revenue | $156.1 million | $134.5 million | +16.0%; same-restaurant sales +9.1% versus +8.2% |
| Operating income / margin | $8.5 million / 5.4% | $6.8 million / 5.1% | Operating income increased $1.7 million |
| Net income (loss) | $(1.3) million | $0.6 million | Portillo’s-attributable result was $(0.5) million versus $0.2 million |
| Adjusted EBITDA (non-GAAP) | $19.6 million; 12.6% margin | $17.6 million; 13.1% margin | Amount rose; margin declined |
| Restaurant-Level Adjusted EBITDA (non-GAAP) | $34.8 million; 22.3% margin | $28.0 million; 20.8% margin | Amount and margin increased |
| Operating cash flow | $6.5 million | $0.8 million | Improved year over year |
| Capital expenditures | $20.2 million | $6.3 million | Higher, primarily reflecting restaurant openings and construction |
Revenue growth reflected same-restaurant sales and new restaurants. Same-restaurant sales benefited from a 7.0% increase in average check and 2.1% transaction growth; the average-check increase reflected pricing, partly offset by mix. New restaurants contributed approximately $10.6 million in revenue. Food costs were 34.4% of revenue, unchanged year over year; labor improved to 25.9% from 27.7%, while other restaurant operating costs rose to 12.0% from 11.3%.
Cash and restricted cash ended the quarter at $14.6 million, down from $44.4 million at fiscal year-end. Debt borrowings were $310.0 million: a $300.0 million term loan and $10.0 million drawn on the revolver. The balance-sheet debt carrying amount was $306.5 million net of discount and issuance costs. Revolver availability was $85.6 million after borrowings and letters of credit. Lease liabilities totaled $215.8 million.
Material changes and unusual items
- On February 2, the company refinanced its prior credit agreement with a $300 million term loan and $100 million revolver, both maturing February 2, 2028. The new facilities bear floating SOFR-based rates; quarter-end rates were 7.59% on the term loan and 7.47% on the revolver. The company reported covenant compliance.
- Interest expense rose to $7.4 million from $6.1 million. A $3.5 million loss on extinguishment of the former debt contributed to the quarterly net loss.
- The quarter’s $8 million-share secondary offering generated no proceeds for Portillo’s: proceeds were used to purchase shares and redeem LLC units from existing holders. Company ownership of Portillo’s OpCo increased to 75.2% from 67.0% at year-end.
- The offering-related tax-basis increase generated a $34.9 million deferred tax asset and a $47.4 million additional Tax Receivable Agreement (TRA) liability. Estimated future TRA payments were $298.8 million; $6.3 million was expected within 12 months.
Outlook, management commentary and risks
- Management planned nine additional restaurant openings in 2023 and said operating cash flows should meet needs for at least the next 12 months. The filing provides no formal full-year revenue or earnings guidance.
- Management expected commodity inflation to ease and estimated mid-single-digit commodity inflation for fiscal 2023, versus 8.9% in Q1 2023 and 15.7% in Q1 2022. It anticipated further wage investments. Menu prices were raised approximately 2% in mid-January and 3% at the beginning of May.
- Management cited pricing actions, operating efficiencies and guest experience efforts as supporting improved restaurant-level margins. Adjusted EBITDA margin nevertheless declined year over year, in part amid higher corporate expenses and opening costs. Non-GAAP measures are supplemental and are not substitutes for GAAP results.
- Labor and employment matters are a highlighted risk. Team members at one commissary voted for union representation on April 13, 2023; the company said it was working with them and the National Labor Relations Board.
- The company reported holding operating cash primarily at one financial institution, sometimes above FDIC insurance limits, and warned that banking disruptions could affect access to cash or credit. Other disclosed risks include food and labor costs, competition, supply availability, restaurant development, cybersecurity and consumer demand. Ordinary-course legal claims were not expected by management to have a material financial-statement effect.
- One restaurant opened after quarter-end in Gilbert, Arizona; the filing’s descriptions differ on the precise opening timing. The underwriter also exercised part of its over-allotment option on April 5.
Important facts for investors to verify
- Whether same-store sales growth and pricing can be sustained without weakening transaction trends, and how the planned openings affect costs and returns.
- How commodity inflation, wage investments and the reported labor-organizing activity affect margins and operations.
- The effect of floating interest rates on interest expense, cash flow and compliance with credit covenants.
- The timing and tax-benefit assumptions behind the substantial TRA liability, including the expected $6.3 million payment.
- Cash availability and concentration at one financial institution, alongside capital spending and liquidity needs.
- The restaurant opening count and timing, given inconsistent quarter-end and post-quarter descriptions in the filing.