Portillo’s Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and three quarters ended September 24, 2023; comparisons are to the periods ended September 25, 2022. Unaudited interim results. Unless otherwise indicated, dollar amounts are in millions.
Business context and period
Portillo’s operates fast-casual restaurants in 10 states and two Illinois food-production commissaries. At September 24, the company reported 77 Portillo’s restaurants, plus a 50%-owned C&O restaurant (78 total including C&O). It opened six restaurants in the first three quarters; one more opened after quarter-end. Management planned five additional openings in Q4 2023.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | First three quarters 2023 | First three quarters 2022 |
|---|---|---|---|---|
| Revenue | $166.8 | $151.1 | $492.0 | $436.2 |
| Operating income | $15.1 | $10.6 | $41.0 | $34.8 |
| Net income | $6.5 | $3.2 | $15.2 | $14.5 |
| Net income attributable to Portillo’s Inc. | $4.4 | $1.6 | $10.6 | $6.9 |
| Diluted EPS | $0.07 | $0.04 | $0.19 | $0.17 |
| Adjusted EBITDA (non-GAAP) | $27.3 | $21.6 | $76.1 | $66.9 |
| Adjusted EBITDA margin (non-GAAP) | 16.4% | 14.3% | 15.5% | 15.3% |
| Restaurant-Level Adjusted EBITDA margin (non-GAAP) | 25.1% | 22.6% | 24.3% | 23.0% |
Q3 same-restaurant sales rose 3.9%: average check increased 7.4%, while transactions fell 3.5%. For the first three quarters, same-restaurant sales rose 6.1%, with average check up 7.1% and transactions down 1.0%. The filing attributes higher checks primarily to menu pricing and product mix. These non-GAAP measures are supplemental and are not substitutes for GAAP results.
For the first three quarters, operating cash flow was $53.6, capital expenditures were $57.7, and investing cash use was $57.6. Cash and restricted cash fell to $12.9 from $44.4 at fiscal year-end 2022. Current assets were $39.1 versus current liabilities of $90.0.
At September 24, debt was $298.1 principal under the 2023 Term Loan ($295.0 net carrying value); the company had no revolver borrowings at that date and $95.7 available after letters of credit. It borrowed $7.0 on September 29, leaving $88.7 available. The term loan’s stated interest rate was 8.14% and effective rate 8.50%. Operating lease liabilities totaled $239.7. The estimated Tax Receivable Agreement (TRA) liability was $301.5, including $6.5 current.
Material changes versus comparable periods
- Q3 revenue rose 10.4%, supported by new restaurants and comparable-sales growth; first-three-quarter revenue rose 12.8%.
- Q3 operating income margin increased to 9.1% from 7.0%; restaurant operating expenses declined to 74.9% of revenue from 77.4%.
- Commodity inflation moderated to 3.5% in Q3 and 5.8% year to date, versus 15.4% in each comparable 2022 period. Food costs and labor declined as a share of revenue, while year-to-date other operating expenses rose as a share.
- Q3 net income improved, while year-to-date net income increased only modestly. The year-to-date comparison includes a $3.5 loss on extinguishment of the prior credit agreement.
- In February 2023, Portillo’s refinanced its prior debt with a $300.0 term loan and a $100.0 revolver, both maturing in February 2028. The year-to-date secondary offering proceeds were used to repurchase shares and redeem LLC units; Portillo’s states it received no net proceeds. Its ownership of Portillo’s OpCo increased from 67% to 76%.
Outlook, commentary, risks and unusual items
Management said cash from operations, cash on hand and revolver availability are expected to meet needs for at least the next 12 months. It planned five Q4 restaurant openings and said pricing decisions will continue to reflect costs, competition and consumer sentiment. Menu price increases of approximately 2% in January and 3% in May 2023 were implemented. No numerical full-year earnings or revenue guidance is provided in the filing.
Key risks include labor availability and wage/benefit costs; unionization and employment-law matters; food safety; commodity inflation and supply disruption; consumer demand and economic conditions; competition; and the ability to secure sites and execute restaurant expansion. One commissary’s team members voted for union representation; Portillo’s challenged the election and appealed to the NLRB Regional Director. The company also disclosed cash concentration risk: cash is held primarily at one financial institution, often above FDIC insurance limits. Management reported compliance with debt covenants. Routine legal claims were not expected by management to have a material effect.
The TRA generally requires payment of 85% of specified realized or deemed tax benefits. Management estimates $301.5 of future payments, contingent on matters including sufficient taxable income and tax law; it expects a $6.5 payment for tax year 2022 within 12 months. The 2023 refinancing, new-restaurant investment and increased lease obligations are significant financing and capital-allocation considerations.
Important facts for investors to verify
- Whether comparable-sales growth can persist as transactions declined in Q3 despite higher average checks and menu pricing.
- Whether restaurant-level margin gains continue amid labor, utility, insurance and other operating-cost pressures.
- The pace, funding and returns of planned restaurant openings, including the five Q4 openings stated in the filing.
- Cash needs and borrowing capacity after the September 29 revolver draw, and exposure to variable interest rates under the credit agreement.
- The timing and cash impact of TRA payments, and the assumptions underlying the estimated liability and tax savings.
- Developments in the commissary union election appeal, other labor matters, and the company’s cash concentration exposure.