Portillo’s takes the saying, “everything is bigger in Texas,” seriously.
On January 18, the fast casual debuted in The Colony, a suburb of Dallas. Since, it’s been the No. 1 restaurant in the system and has matched volumes of decades-old Chicago restaurants. The store has averaged $48,000 in sales per day since its grand opening. If you’re curious what that is at an annualized level—$17 million per year.
“That’s a crazy number, so please don’t model that,” CEO Michael Osanloo told investors during the company’s Q4 and full-year earnings call. “It’s definitely coming down, but we feel really good that this restaurant will significantly exceed our underwriting expectations and set us up for further success in Texas as we continue to expand.”
For comparison, Portillo’s earned $8.5 million in AUV in 2022, up from $8.2 million during the prior year.
In its first 30 days, guest satisfaction scores at The Colony store outperformed averages of all restaurants open since 2021. Osanloo described The Colony location as an “iconic flagship restaurant” that should perform closer to a Chicago unit instead of a typical out-of-core location. The success is quite validating for Portillo’s, which faced questions like, “Do you think you’ll succeed in Texas?” or, “Do you think that people will eat Italian beef in Texas?” said Osanloo.
“It’s only six, eight weeks in, but, I feel like the answer to that is a resounding yes,” the CEO said. “They seem to like our beef sandwiches a lot. No surprise, beef and bread works really well in the great state of Texas.”
There are multiple reasons for the restaurant’s eye-popping figures. Oslanoo began by referencing the unit’s ideal location. It’s based in Grandscape, one of the largest mixed-use real estate developments in the U.S., with dining, hotels, apartments, offices, retail, and entertainment. The area is anchored by The Nebraska Furniture Mart, just under 1.9 million square feet, and Scheel’s sporting good store, which is roughly 331,000 square feet.
Oslanoo also praised the amount of time, energy, and money that went into marketing Texas, including sending the “Beef Bus” for two tours. In terms of staffing, he said the chain “over-invested.” Seventy percent of the management and crew chiefs have prior Portillo’s experience.
“We stack the deck to make sure that we can handle these volumes, etcetera,” Osanloo explained. “Despite all that, I am a little surprised and overwhelmed by the response that we’ve gotten. I think that Texas can be either hit or miss for restaurant companies. If you do well, if you really approach it with a sense of humility and work your butt off, you can be great. If you try to mail it in, just assume you’re going to be great, you might stub your toe.”
“We are approaching our Texas expansion with a great deal of humility,” he added. “We’re looking for A-plus locations. We’re going to continue to over-invest in management team and training of our team members. We’ll open the restaurant when it’s beautiful and ready to go and the folks are ready to go.”
Osanloo advised investors to not draw conclusions about margin. Portillo’s put a significant amount behind labor to make sure the restaurant could handle high volume and provide a quality guest experience.
“When you’re first in market, you’re at a new restaurant, it’s really important to provide a great experience or you’re going to chase people away for a long time,” he said. “We over-invest, and I frankly don’t even care about the margin coming out of the gate for the first couple quarters.”
The typical margin profile for new restaurants is high teens. Then there’s a slight improvement to flat in year two and growth in year three.
Systemwide, Portillo’s restaurant-level adjusted EBITDA margin was 21.2 percent in Q4 and 22.6 percent for the full year.
“I think that when you think about the overall margin profile of Portillo’s, as Michael [Osanloo] mentioned in his prepared remarks, we’re committed to improving that despite the restaurant openings in ’23 because we know and we’ve talked about that we purposefully had margin degradation in ’22 because of our price laggard approach and so that is what we’re looking to do in ’23, despite the openings,” CFO Michelle Hook said.
Scale is important for margin building, too. When Portillo’s reaches six to eight restaurants in a market, Osanloo said there’s an inflection point in operating margins. And Portillo’s wants more. The plan is to debut another four to five stores in Texas before the year is over. Allen and Arlington have been confirmed thus far.
The Colony restaurant is currently only allowing dine-in, pickup, and drive-thru. Third-party delivery, digital ordering, and catering will turn on when volumes start to normalize. When those channels do come online, it should provide another boost for the store. Delivery mixes 14 percent at Portillo’s, up from 6 percent prior to COVID.
“Delivery continues to grow, and I think everyone’s aware that the price points on a third-party delivery are materially different than if you go through the drive-thru or you pick it up in the restaurant,” Osanloo said. “There’s, fees etcetera, and tip and all those things add up, but that consumer sort of defies any price elasticity and continues to be very robust and continues to order from us.”
Portillo’s same-store sales increased 6 percent in Q4, driven in part by a 7.9 percent increase in pricing. That was offset by a 2.3 percent decrease in transactions. The restaurant trended positively in the fourth quarter until Winter Storm Elliot disrupted sales during the final week. Portillo’s estimated the storm had a negative impact of at least 70 basis points on comps growth. Same-store sales lifted 12.3 percent in January and 7.9 percent in February as the company lapped Omicron. The chain projects comps in the 8-10 percent range for Q1.
The company was scheduled to open seven restaurants in 2022, but four came after the fiscal year ended. Kissimmee, Florida, The Colony, and Tucson, Arizona, have already opened. The remaining 2022 holdover, Gilbert, Arizona, should debut in March.
“My hope is that [The Colony] is a precursor of what we can expect for Texas,” the CEO said. “But, look, Florida’s doing really well. Our newest restaurant in Tucson, Arizona, is just fantastic. We feel like we’ve got the flywheel working for us in the Sunbelt.”
Nine stores are expected to open in 2023, including three to four in Q3 and the rest in Q4.
“As we continue to navigate the new normal in the restaurant development life cycle, our ’23 openings will still be back-half loaded,” Osanloo said. “However, we’re already planning to better balance our 24 restaurant openings across the four quarters.