Portillo’s Inc. — Form 10-Q Summary
Reporting period: Quarter and three quarters ended September 26, 2021; comparisons are with periods ended September 27, 2020. The operating financial statements are for PHD Group Holdings LLC and subsidiaries (“Portillo’s OpCo”). Portillo’s Inc. was a newly formed holding company and had not commenced operations by quarter-end.
Business context and results
Portillo’s operated restaurants across nine states and reported 67 restaurants including its 50%-owned C&O restaurant. The filing describes recovery from COVID-19 restrictions, restaurant expansion, and continued use of dine-in, drive-through, carryout, delivery and catering channels.
| Metric | Q3 2021 | Q3 2020 | First three quarters 2021 | First three quarters 2020 |
|---|---|---|---|---|
| Revenue | $138.0 million | $119.7 million | $396.0 million | $337.0 million |
| Operating income | $17.2 million | $18.9 million | $52.5 million | $41.7 million |
| Operating margin | 12.5% | 15.8% | 13.3% | 12.4% |
| Net income | $6.5 million | $8.1 million | $20.4 million | $7.4 million |
| Net margin | 4.7% | 6.8% | 5.2% | 2.2% |
| Adjusted EBITDA (non-GAAP) | $24.2 million | $26.4 million | $75.3 million | $64.3 million |
| Adjusted EBITDA margin (non-GAAP) | 17.5% | 22.1% | 19.0% | 19.1% |
| Restaurant-Level Adjusted EBITDA (non-GAAP) | $34.2 million | $34.6 million | $107.1 million | $87.4 million |
| Same-restaurant sales growth | 6.8% | (2.1)% | 10.6% | (7.2)% |
Common-unit earnings after preferred-unit accretion were $0.6 million in Q3 2021 versus $2.8 million in Q3 2020; for the first three quarters, they were $3.4 million versus a $7.9 million loss. These are OpCo common-unit results, not Portillo’s Inc. standalone earnings.
Cash flow, debt and liquidity
- For the first three quarters, operating cash flow was $39.9 million, versus $38.1 million a year earlier. Capital spending was $27.7 million versus $10.1 million, primarily reflecting three 2021 restaurant openings; investing cash use was $27.8 million.
- Cash and cash equivalents were $49.4 million at September 26, 2021; cash plus restricted cash was $49.6 million. The $50 million revolving facility had no borrowings and $44.7 million available after letters of credit.
- Quarter-end debt was $470.1 million net of discount and issuance costs, including $155.0 million of second-lien principal and $326.6 million of first-lien principal. First- and second-lien effective interest rates were 7.80% and 12.22%, respectively. The company reported compliance with debt covenants.
- After quarter-end, the October 25 IPO generated approximately $429.9 million of net proceeds. Together with cash on hand, funds were used to redeem preferred units for $221.7 million, repay second-lien borrowings for $158.1 million, and purchase units or shares from certain pre-IPO members for $57.0 million. The first-lien debt remained outstanding; the filing does not give a clear post-transaction cash balance.
Material changes, outlook and risks
- Q3 revenue rose 15.3%, but operating income declined 8.8% and net income declined 19.4%. Same-restaurant sales growth reflected a 7.9% increase in average check, partly offset by lower traffic. The five restaurants opened in late 2020 and the first three quarters of 2021 contributed to revenue growth.
- Q3 food costs increased to 32.1% of revenue from 30.6%, driven particularly by higher ground beef and beef-flat prices. Labor rose to 26.8% of revenue from 24.3%, reflecting wage increases, training and discretionary bonuses. These costs compressed restaurant-level and adjusted EBITDA margins.
- Management said it expected to increase menu prices in Q4 2021. The filing provides no quantified full-year or longer-term financial guidance.
- The IPO created a tax receivable agreement requiring Portillo’s Inc. to pay certain pre-IPO members 85% of specified cash tax savings actually realized. The company also expected Q4 2021 compensation costs related to IPO award modifications: approximately $1.3 million cash and $23.3 million non-cash, plus $12.7 million additional non-cash expense over about 4.5 years. Approximately $6.3 million in cash payments for substituted options were also expected in Q4.
- Portillo’s expects adoption of lease accounting standard ASC 842 to materially increase balance-sheet assets and liabilities, but not significantly affect operating results or cash flows. The company reported no material impairment charges. Management believed ordinary-course legal claims would not materially affect the financial statements; an unclaimed gift-card funds contingency was resolved for $0.8 million during the quarter.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing refers investors to the IPO prospectus for risk factors and states there were no material changes to those risks.
Important facts for investors to verify
- Whether sales growth and planned pricing increases can offset food and labor inflation without further margin deterioration.
- Post-IPO debt, cash, leverage and interest expense after the second-lien repayment; the filing does not provide a clear post-transaction cash balance.
- The future cash obligations under the tax receivable agreement and the timing and amount of resulting tax benefits.
- The realized impact of IPO-related compensation and the dilution from equity awards and retained pre-IPO ownership.
- Restaurant opening pace, comparable-sales traffic trends, and the extent to which 2021 performance reflects recovery effects and new locations.