Portillo’s Inc. — Q1 2022 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks ended March 27, 2022, compared with the quarter ended March 28, 2021. Portillo’s operates fast-casual restaurants and food production commissaries. At quarter-end, it had 69 restaurants excluding its 50%-owned C&O restaurant, or 70 including C&O, across nine states. One restaurant opened during the quarter.
Financial performance and position
| Metric | Q1 2022 | Prior-year quarter |
|---|---|---|
| Revenue | $134.5 million | $117.3 million |
| Operating income / margin | $6.8 million / 5.1% | $10.9 million / 9.3% |
| Net income, consolidated | $0.6 million | $0.1 million |
| Net income attributable to Portillo’s Inc. | $0.2 million; basic EPS $0.01 | Loss of $5.4 million; basic EPS $(0.11) |
| Adjusted EBITDA / margin (non-GAAP) | $17.6 million / 13.1% | $18.5 million / 15.8% |
| Restaurant-Level Adjusted EBITDA / margin (non-GAAP) | $28.0 million / 20.8% | $29.8 million / 25.4% |
| Cash from operations | $0.8 million | $5.0 million |
Same-restaurant sales grew 8.2%; average check increased 7.5%, including a 2.9% contribution from the change in third-party delivery price presentation, while traffic declined 2.2%. AUV was $8.3 million versus $7.6 million.
At March 27, cash, cash equivalents and restricted cash were $32.2 million. Net debt was $318.9 million, including $3.3 million current and $315.6 million long-term. The company had no revolver borrowings and $45.0 million of revolver availability after $5.0 million of letters of credit. Net cash used in investing activities was $6.3 million, primarily for property and equipment; financing activities used $1.6 million.
Material changes versus the prior-year quarter
- Revenue increased 14.6%, reflecting same-restaurant sales growth and new restaurants; new restaurants contributed approximately $8.5 million.
- Cost of goods sold rose 32.1% to $46.3 million, and increased from 29.9% to 34.4% of revenue. Management cited commodity inflation, delivery-price presentation and restaurant openings.
- Labor expense rose 20.2% to $37.3 million, increasing from 26.5% to 27.7% of revenue. General and administrative expense increased 32.5%, primarily due to higher equity-based compensation and transaction-related fees.
- Operating income declined $4.0 million and restaurant-level and company-wide Adjusted EBITDA decreased. Lower interest expense, following repayment of second-lien debt using IPO proceeds, helped lift consolidated net income.
- Operating cash flow fell $4.2 million, mainly because changes in operating assets and liabilities used more cash, including movements in accounts payable and accrued expenses.
Outlook, risks and unusual items
- Management reported that the Omicron wave hurt sales and staffing early in January, with improvement beginning in mid-January. Same-restaurant sales growth varied by fiscal period: 9.2%, 13.6% and 2.5%; the last period faced a 24.6% prior-year comparison.
- Management cited first-quarter commodity inflation of 15.7%, particularly in pork, chicken and beef, and expected fiscal 2022 commodity inflation of 13%–15%. It anticipated further wage investment and pressure on restaurant-level margins, partly offset by operational efficiencies and menu pricing. Menu prices rose approximately 1.5% in Q1, with further increases expected in Q2.
- The company expects cash flows from operations, at current operating levels and anticipated growth, to meet needs for at least the next 12 months. It was in compliance with debt covenants. The variable-rate term debt had a 6.50% stated rate and a 7.74% effective rate at quarter-end.
- The $156.6 million Tax Receivable Agreement liability is contingent on realizing tax benefits; payments could reduce future cash available. The company estimated aggregate tax savings of approximately $184.2 million if it earns sufficient taxable income and relevant tax law does not materially change.
- Management expects adoption of lease accounting standard ASC 842 in fiscal 2022 to significantly increase reported balance-sheet assets and liabilities, with immaterial effects on earnings, equity and cash flows.
- Routine legal claims include employment, contract, customer injury and property matters; management did not expect any resulting liability to materially affect the financial statements. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Assess whether commodity inflation, wage increases and planned pricing actions affect margins and traffic as management expects.
- Review the effect of third-party delivery price presentation on reported revenue and same-restaurant sales; the filing says it increases 2022 same-restaurant sales growth by an estimated 2%–3% without affecting operating income.
- Monitor operating cash flow, capital spending, variable-rate debt costs and the $45.0 million of available revolver capacity.
- Consider the continuing non-controlling ownership of Portillo’s OpCo: Portillo’s Inc. owned 50.1% at quarter-end, and diluted weighted-average shares exceeded basic shares.
- Track the Tax Receivable Agreement’s contingent payment obligations and the balance-sheet effects of ASC 842 adoption.