Portillo's Inc. quarterly report, Q3 FY2022

Portillo’s Inc. — Q3 2022 Form 10-Q

Business context and reporting period. Unaudited results cover the 13-week quarter and first three quarters ended September 25, 2022, compared with periods ended September 26, 2021. Portillo’s operates fast-casual restaurants and food commissaries; it reported 71 restaurants including one 50%-owned location, and opened two restaurants in the first three quarters of 2022.

Financial performance

Revenue growth reflected new restaurants and higher average checks, partly offset by lower transactions. In Q3, average check rose 6.3%, including a 2.8% benefit from the accounting presentation of third-party delivery price premiums; transactions declined 3.3%. The filing says the delivery presentation change affects reported revenue and cost of goods sold, but not operating income.

Restaurant operating expenses rose to 77.4% of revenue in the quarter from 75.2%; cost of goods sold rose to 35.3% from 32.1%. Operating margin fell to 7.0% from 12.5%. Non-GAAP Restaurant-Level Adjusted EBITDA was $34.1m, down slightly, with margin of 22.6% versus 24.8%; Adjusted EBITDA was $21.6m versus $24.2m, with margin of 14.3% versus 17.5%. For the three quarters, Restaurant-Level Adjusted EBITDA was $100.5m versus $107.1m and Adjusted EBITDA was $66.9m versus $75.3m. These are non-GAAP measures and are not substitutes for GAAP results.

For the first three quarters, operating cash flow was $39.0m versus $39.9m; capital expenditures were $30.0m versus $27.7m; cash and restricted cash increased $7.5m to $46.7m. At September 25, 2022, total debt, net, was $318.6m, including $3.3m current; the term loan’s stated interest rate was 8.02% and effective rate 8.84%. There were no revolver borrowings, $45.0m of revolver availability after $5.0m of letters of credit, and the company reported compliance with debt covenants. Total assets were $1,064.1m and total liabilities $619.9m.

Material changes and unusual items

• Compared with the prior-year quarter, operating income fell $6.6m and consolidated net income fell $3.3m. Cost inflation—especially beef and chicken—and higher labor costs pressured restaurant margins; corporate G&A also increased, including higher equity compensation.
• Interest expense declined to $7.1m from $10.7m for the quarter, principally because the second-lien debt was repaid with IPO proceeds in 2021; this benefit was partly offset by a higher first-lien rate.
• In Q3, a secondary offering of 8.1m shares at $23.75 was conducted by existing holders. The company received no proceeds from share sales; it used the net proceeds to acquire LLC interests and repurchase shares from certain pre-IPO holders. Portillo’s ownership of OpCo rose to 58.7% from 50.1% at year-end.
• The Tax Receivable Agreement liability was $205.3m, up from $156.6m at year-end, including a $51.1m liability recorded in connection with the secondary offering. Future payments generally equal 85% of realized or deemed tax savings; no TRA payments were made in the reported periods.

Outlook, risks and contingencies

Management provided no quantified revenue or earnings guidance in this filing. It expected significant commodity cost pressures to continue through Q4 2022 and said inflation and wage investments would continue to weigh on restaurant-level margins for the remainder of fiscal 2022. Menu price increases and operating efficiencies were cited as offsets: certain prices rose about 1.5% in Q1, 3.5% in Q2, and about 3.0% on certain items in Q4. Management stated it expected operating cash flows to meet needs for at least the next 12 months and the foreseeable future, and did not expect current commodity pressure to materially affect long-term growth and profitability.

Key risks include food-cost and wage inflation, declining restaurant transactions, variable-rate debt and economic disruption. The company said it was party to routine legal claims, but management did not expect their outcome to materially affect the financial statements. It expected adoption of the lease accounting standard in fiscal 2022 to significantly increase reported assets and liabilities, without a material effect on operating results or cash flows. Management reported effective disclosure controls and no material change in internal control over financial reporting.

Investor verification priorities

• Track whether menu pricing and efficiencies offset commodity and labor inflation without further weakening transactions or restaurant margins.
• Reconcile reported same-restaurant sales growth with price increases, third-party delivery presentation changes, and transaction declines.
• Monitor the variable-rate term loan, upcoming maturities, revolver availability, and covenant compliance.
• Assess the cash-flow and valuation implications of the $205.3m TRA liability and whether sufficient taxable income is generated to realize associated tax benefits.
• Review subsequent restaurant openings, capital spending, and the balance-sheet effect of adopting lease accounting.