Portillo’s Inc. — Q2 2023 Form 10-Q
Business and period. Unaudited results cover the 13-week quarter ended June 25, 2023, and the two quarters ended that date; comparisons are to periods ended June 26, 2022. Portillo’s operates fast-casual restaurants and food commissaries. It reported 76 restaurants across 10 states, including one 50%-owned location; the company-operated count excluding that location was 75.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First two quarters 2023 | First two quarters 2022 |
|---|---|---|---|---|
| Revenue | $169.2 million | $150.6 million | $325.2 million | $285.1 million |
| Operating income | $17.4 million | $17.4 million | $25.9 million | $24.3 million |
| Net income | $9.9 million | $10.8 million | $8.6 million | $11.3 million |
| Net income attributable to Portillo’s Inc. | $6.8 million | $5.1 million | $6.3 million | $5.3 million |
| Adjusted EBITDA (non-GAAP) | $29.2 million | $27.6 million | $48.9 million | $45.2 million |
| Adjusted EBITDA margin (non-GAAP) | 17.3% | 18.3% | 15.0% | 15.9% |
| Restaurant-Level Adjusted EBITDA (non-GAAP) | $42.7 million | $38.4 million | $77.6 million | $66.4 million |
Q2 same-restaurant sales rose 5.9%, driven by a 7.1% higher average check, partly offset by 1.2% fewer transactions. First-half same-restaurant sales grew 7.4%, with average check up 7.1% and transactions up 0.3%. Q2 operating margin was 10.3%, versus 11.6%; net margin was 5.9%, versus 7.1%. First-half operating margin was 8.0%, versus 8.5%.
Cash flow and liquidity. First-half operating cash flow was $31.3 million, compared with $25.4 million; capital expenditures were $37.4 million, compared with $13.9 million. Cash and restricted cash fell to $22.5 million from $44.4 million at year-end. At June 25, the company had $85.7 million available on its revolver after $10.0 million borrowed and $4.3 million of letters of credit. Management expects operating cash flows to meet needs for at least 12 months.
Debt and obligations. Gross borrowings were $310.0 million: a $300.0 million term loan and $10.0 million revolver borrowing. The new facilities mature February 2028 and carried an 8.00% rate at quarter-end (8.16% effective rate). The company refinanced its prior credit agreement in February, recording a $3.5 million debt-extinguishment loss in the first half. It was in compliance with debt covenants. The estimated Tax Receivable Agreement obligation was $302.0 million; a $6.3 million payment was expected within 12 months. A subsequent $5.0 million revolver repayment on July 31 increased availability to $90.7 million.
Material changes and management outlook
- Revenue increased 12.3% in Q2 and 14.1% in the first half, supported by same-store growth and new restaurants. New locations contributed approximately $10.4 million of Q2 revenue and $20.9 million in the first half.
- Restaurant-level operating expenses were 74.7% of revenue in Q2 versus 74.5%. Food and packaging costs improved as a share of revenue, but labor and other operating expenses rose as a share, reflecting wage investments and higher operating costs. General and administrative expenses rose 27% in Q2.
- Commodity inflation eased compared with 2022: 5.5% in Q2 and 7.1% in the first half. Management estimated mid-single-digit commodity inflation and mid-single-digit labor inflation for fiscal 2023. It planned eight restaurant openings in the third and fourth quarters. No full-year revenue or earnings guidance was provided in the filing.
- Menu prices were increased approximately 2% in January and 3% in May. Management said margin improvement since Q4 2022 reflected pricing, guest-experience initiatives, and operational efficiencies.
- The Q1 secondary offering proceeds were used to purchase shares and redeem LLC units; Portillo’s received no net proceeds. Its ownership of Portillo’s OpCo rose to 75.9% from 67.0%, affecting the allocation of consolidated net income between the company and non-controlling interests. Q2 company-attributable income increased even as consolidated net income declined.
Risks, contingencies, and unusual items
- On April 13, 2023, employees at one commissary voted for union representation. The company challenged the election and sought to have it set aside; additional union activity and related labor costs remain risks.
- The company holds operating cash primarily at one financial institution, sometimes above FDIC insurance limits, and warns that bank failures could affect access to cash or financing.
- Management identified exposure to food and labor inflation, hiring and retention, supply availability, competition, restaurant expansion execution, food safety, technology and cybersecurity, and consumer and economic conditions.
- Legal proceedings and claims arise in the ordinary course, including employment, contractual, injury, and property matters. Management did not expect the outcomes to materially affect the financial statements.
- The $3.5 million debt-extinguishment loss and the increase in the TRA liability following tax-basis increases are notable first-half items. No impairment charges were reported.
Investor verification points
- Track whether same-store sales growth can persist without relying predominantly on pricing, given the Q2 transaction decline.
- Monitor labor, commodity, and other operating costs against management’s fiscal-year inflation estimates and the company’s margin trends.
- Verify planned second-half openings, construction spending, and cash generation against the reduced cash balance and ongoing capital needs.
- Assess refinancing costs and variable-rate exposure, revolver usage, covenant headroom, and the timing and funding of TRA payments.
- Follow the commissary union-election challenge and any broader labor developments, including potential operating or cost impacts.