Portillo’s Inc. — Q2 2022 Form 10-Q
Reporting period: 13-week quarter ended June 26, 2022, and two quarters ended June 26, 2022; comparatives are periods ended June 27, 2021. Unaudited. Portillo’s operated 71 restaurants across nine states at quarter-end, including one 50%-owned C&O location.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First two quarters 2022 | First two quarters 2021 |
|---|---|---|---|---|
| Revenue | $150.6 million | $140.7 million | $285.1 million | $258.0 million |
| Operating income | $17.4 million | $24.5 million | $24.3 million | $35.3 million |
| Consolidated net income | $10.8 million | $13.7 million | $11.3 million | $13.9 million |
| Net income attributable to Portillo’s Inc. | $5.1 million | $8.2 million | $5.3 million | $2.8 million |
| Diluted earnings per share | $0.13 | $0.16 | $0.13 | $0.05 |
| Adjusted EBITDA (non-GAAP) | $27.6 million | $32.5 million | $45.2 million | $51.1 million |
| Adjusted EBITDA margin (non-GAAP) | 18.3% | 23.1% | 15.9% | 19.8% |
| Restaurant-Level Adjusted EBITDA margin (non-GAAP) | 25.5% | 30.6% | 23.3% | 28.2% |
Q2 same-restaurant sales rose 1.9%; first-half same-restaurant sales rose 4.8%. Q2 average check increased 4.8%, while transactions declined 5.6%. Reported Q2 operating margin was 11.6%, versus 17.4% a year earlier; first-half operating margin was 8.5%, versus 13.7%.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash were $49.7 million at June 26, 2022, compared with $39.3 million at December 26, 2021. Current assets were $69.3 million and current liabilities were $53.5 million.
- Net carrying value of debt was $318.7 million, including $3.3 million current and $315.4 million long-term. Term-loan principal was $324.1 million; the reported interest rate was 6.56% (effective rate 7.38%).
- No revolving-credit borrowings were outstanding; $45.0 million was available after $5.0 million of letters of credit. The company reported covenant compliance.
- For the first two quarters, operating cash flow was $25.4 million, capital spending was $13.9 million, and financing cash outflow was $1.0 million. Operating cash flow decreased from $32.8 million in the comparable period.
- Management said cash from operations should be sufficient for needs for at least the next 12 months. Total stockholders’ equity was $443.8 million.
Changes, outlook and other notable items
- Revenue growth reflected new restaurants and same-restaurant sales. Two restaurants opened in the first half of 2022; management cited approximately $7.4 million of Q2 revenue and $15.2 million of first-half revenue from new restaurants.
- Cost of goods sold rose to 34.4% of revenue in Q2 from 30.0% a year earlier, primarily due to inflation, delivery-price presentation and restaurant growth. Management reported commodity inflation of 15.2% in Q2 and 15.5% for the first half, with the largest increases in pork, chicken and beef.
- Management expected commodity cost pressures of 13%–15% for the remainder of fiscal 2022. Wage investments and expected commodity inflation were expected to pressure restaurant-level margins; menu price increases and operational efficiencies were being used to offset costs. Menu prices increased approximately 1.5% in Q1 and 3.5% in Q2. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Q2 net income included a $1.8 million benefit from remeasurement of the Tax Receivable Agreement (TRA) liability, which management excluded from Adjusted EBITDA. The TRA liability was $154.9 million; payments generally equal 85% of specified realized or deemed tax savings and depend on future taxable income and other factors.
- The IPO-related structure affects comparability: Portillo’s Inc. allocates part of OpCo income to non-controlling interests, and the prior-year period included preferred-unit accretion. Portillo’s also began recording third-party delivery menu-price premiums in revenue rather than cost of goods sold; management said this presentation change raises reported same-restaurant sales growth by an estimated 2%–3% in 2022 but does not affect operating income.
- Adoption of lease accounting guidance was planned for fiscal 2022; management expected a significant balance-sheet impact from recognizing operating lease assets and liabilities, with an immaterial impact on the income statement, equity and cash flows.
- Routine legal claims include employment, contract, customer injury and property-damage matters; management did not expect any resulting liability to materially affect the financial statements. The filing reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Track whether menu pricing and operating efficiencies can offset continued commodity inflation, labor costs and falling transaction counts.
- Reconcile revenue and same-restaurant sales growth with the delivery-price accounting presentation and new restaurant contributions.
- Review cash generation against restaurant expansion and capital spending, and monitor variable-rate debt, its 2024 maturities and available revolver capacity.
- Assess the potential cash burden and assumptions underlying the $154.9 million TRA liability, including future taxable income.
- Compare GAAP results with non-GAAP EBITDA measures and account for non-controlling interests and the changed post-IPO capital structure.
- Confirm the effect of lease-standard adoption and monitor disclosed legal contingencies and other business risks.