Ever since Portillo’s went public in October 2021, CEO Michael Osanloo has preached patience. While the lights of Wall Street often lure brands into aggressive projections, Portillo’s opened by saying it would expand from 67 to 600 restaurants. But it would take 25 years to do so.
The 1963-founded brand simply isn’t designed to be rushed. The menu is complex and daypart agnostic; stores employ more than 80 people; and few, if any, counter-service brands boast an average-unit volume at this loft ($9.1 million in 2023). In plain terms, Portillo’s had more to lose from scaling too fast and drifting than it did from gaining on volume.
And that long-term lens has held, whether it was post-COVID reactionary efforts or today’s inflationary pressure. Osanloo on Tuesday said Portillo’s won’t be “going on sale” to counter the promotional storm dialed up by peers of late. He believes holding on quality and brand DNA will prove the proper call when macro conditions settle.
For now, however, it’s dragging performance. Portillo’s Q3 same-store sales declined 0.9 percent, comprised of 4.3 percent price (average check lifted 2.6 percent), and a 3.5 percent slide in traffic.
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Portillo’s also saw a media campaign in Chicago lift transactions, but not to the degree hoped for or seen last year. Osanloo credited the muted response to an election season and “the noise created by the restaurant price wars.”
Those “price wars,” he added, are coming at Portillo’s from multiple fronts. Quick service, fast casual, and even casual-dining brands (Chili’s being a good example) are filling the marketplace with deal-based messaging to draw back a cautious consumer, and, widely, to keep up with each other. Osanloo said Portillo’s will absorb the traffic hit rather than overact. “ … Portillo’s does not play the discount game,” he said. “We compete on great everyday pricing for our craveable food and abundant portions, and we know this approach will benefit us in the medium and long term.”
Restaurant-level margin declined 160 basis points in the quarter to 23.5 percent, as 3.6 percent commodity inflation (higher produce, chicken, and dairy), 2.8 percent hourly wage inflation, inefficiencies associated with new unit openings, higher repair/maintenance expenses, and sales deleverage more than offset price and lower insurance costs, William Blair said in a note. Adjusted EBITDA was $27.9 million.
Portillo’s also did something its touted throughout the past couple of years as well—try to stay cautious on price. It took zero action in Q3 and doesn’t plan to for the remainder of the fiscal calendar. The company’s price benefit, though, should remain at about 4 percent in Q4 and further upticks might happen, executives said, if need be.
Portillo’s strategy through the value rush, meanwhile, will be to angle itself for growth by strengthening some of its operations and routes to the customer. One example being kiosks. Last quarter, the brand announced a pilot where it deployed and tested the technology in two restaurants over the summer. Osanloo said it was such a “resounding success with minimal upfront costs and immediate guest adoption” that Portillo’s decided to pull the trigger on rapid expansion. Kiosks, as of today, are live in every restaurant (there were 88 units at the end of Q3 compared to 78 in the year-ago period).
“I love making Portillo’s more frictionless,” Osanloo said. “It’s undeniable that our guests love using the kiosks. At the same time, it’s undeniable we have guests who love ordering with our front cashiers. No matter how guests want to interact with Portillo’s, we’re meeting them where they want.”
While early, he added, Portillo’s has seen benefits similar to other chains. Essentially, a positive impact on ticket driven by higher attach rates, especially on brand add-ons such as cheese sauce, peppers, fries, and drinks.
Osanloo said Portillo’s will learn and grow as the rollout matures. Expect to hear a more quantifiable update early next year.
Also coming in 2025 will be an advertising push in Dallas Fort Worth as Portillo’s scales up the market. The ad campaigns will educate and reintroduce guests to the brand, Osanloo said. Previous examples in new-market entries rocketed traffic, and Portillo’s is confident DFW will respond similarly.
At that juncture, Portillo’s will likely have eight locations in DFW, which Osanloo said is “definitely a viable scale to justify advertising and get attractive returns on it.”
“As thrilled as I am with the performance of our Dallas Fort Worth business, it’s undeniable that we’re still a relative unknown,” he said. “And so, one of the things that’s important is as we’re growing these markets is to generate trial and awareness … I love the fact that we’re getting to a scale where we can throw some gasoline on that fire and watch it take off.”
This, too, goes back to the higher-level approach. Portillo’s has elected to methodically seed markets with high-volume openings through corporate development instead of flooding regions with as many units as possible. In October, the brand opened its first Houston-area location in Richmond, Texas. It marked a significant milestone, Osanloo said, as Portillo’s continues its path through the Sun Belt (80 percent of future growth will come in three states, Arizona, Texas, and Florida).
Richmond sales, he shared, have been in line with what Portillo’s reported two years ago in The Colony—its first Dallas-area restaurant. That store debuted in January 2023 and earned $13 million in Year 1.
Portillo’s remains on track to cut the tape on 10 restaurants this year (five more are on deck, all scheduled for December). Its pipeline in 2025 should expand unit count 12–15 percent.
And as development unfolds, Portillo’s plans to introduce a new store model with a reduced footprint. Later in Q4, its first two “Restaurant of the Future” builds are slated to arrive in Texas. These sit at 6,200 square feet, 1,500 smaller than traditional boxes. Portillo’s expects them to clock in at the low end of its net construction cost range of $5.2 million to $5.5 million. It will use the prototype for all 2025 openings.
This isn’t just a ROI effort. Osanloo said the design represents a pivot toward where customers are taking the brand, and quick-service restaurants more broadly. The store is less reliant on dine-in. When Portillo’s looked at its restaurants through time-motion studies and examined how many cars were in the parking lot at lunch and dinner, it realized what so many other concepts have coming out of COVID—that more and more diners are headed outside the four walls.
So these Restaurant of the Future Portillo’s will target the same $9 million-plus AUVs, but where those transactions occur will shift in line with evolving preference. For the brand to be successful, Osanloo said, it needs a great drive-thru (in the 12 months leading up to June 2021, before it went public, drive-thru sales alone were $4.9 million per unit—more than McDonald’s entire AUV). It also needs momentum for third party and order pickup and digital. This prototype added doors on the side of the building with pickup shelves just inside and dedicated parking spots.
Osanloo expects the restaurant will send Portillo’s to a different mix, which opens up the reality that it won’t need as much dining room space. That allows the brand to be smarter and more thoughtful about kitchen configuration. It can consolidate, but Osanloo doesn’t want Portillo’s to evolve toward a “stainless-steel box where you’re taking hot food out of the cabinets,” either, he said.
“You still want all the excitement of a Portillo’s kitchen,” he said. “You want that food theater. You want to see flames shooting out of the broiler. You want to see people assembling the hot dogs. You want to see the beef coming out of the steam well.”
“And so,” Osanloo added, “the balancing act is take away dead space while still providing a Portillo’s experience, Portillo’s vibe overall. All of those things that note fresh, delicious food made to order.”
What’s important to consider as well is Portillo’s upcoming models aren’t the closing chapter. They’re going to continue to get more efficient as learnings emerge.
“I think of the things that is clear to me is the amount of dollars that we put into our buildings is still relatively high,” Osanloo said. “And I want to bring that down. So, we’re looking at a versions 2.0 of Restaurant of the Future that we think can be smaller. And I think we’re looking at doing some smart things with landlord financing and other forms of financing sot that Portillo’s is not necessarily putting all of the capital into the building, but it’s more of a shared mindset with our landlords.”
On that topic, Osanloo said Portillo’s, as expansion marches forward, will explore new building and real estate structures to optimize cash-on-cash returns. That includes taking square footage out of restaurants. It’s also seeking increased tenant allowances on leases and exploring build-to-suite and reverse build-to-suite opportunities.
Portillo’s targets 25 percent cash-on-cash returns. So with the build cost for those restaurants down to 5.2 to 5.5 percent, the sales required to get there is 5.9 to 6.3 percent, CFO Michelle Hook said.
Portillo’s Q3 revenue grew on new openings. It came in at $178.3 million, up $11.4 million, or 6.9 percent, year-over-year. Restaurants not in the comparable base (70 are counted in it, mostly in the Midwest) contributed $13.6 million of the total increase—a figure partially offset by the same-store sales decrease, which drove revenues down $1.4 million in the quarter. Even negative in Q3, Portillo’s comps grew 2.9 percent on a two-year basis. For the full year, Portillo’s expects same-store sales to report negative 1 percent.
Getting back to the “price wars,” Osanloo said the fast casual won’t try to jump into the green this year at the expense of larger goals. “Our strategy is rooted in long-term success, not quick fixes,” he said. “We’ll continue to invest in our amazing people, strengthen operations and fuel smart growth. We’re profitable, we’re controlling what we can, and we’re positioned to emerge from this economic cycle even stronger.”
Portillo’s has conducted consumer segmentation research to understand its guest. Perhaps unsurprisingly, data showed a lower percentage of that “true value consumer.” It’s not as reliant there as some other counter-serves might be.
When value seekers do show up, Osanloo added, they tend to pull up to the drive-thru. “I think it would false to who we are to go in that direction. I don’t want to get into the discounting business,” he said. “I don’t want a value menu. I think that would be a very, very ugly path for Portillo’s. I think that we have to stick to our guns in we have every day great value, and we have fantastic high-quality food. We never skimp on quality. And we have abundant portions. Our guests know that and we continue to reiterate that in all of our marketing.”
One upcoming lever could be the 2025 launch of loyalty. Osanloo said Portillo’s continues to work behind the curtain and plans to make an announcement early next year.
However, when it comes to marketing outreach overall, Osanloo called himself a “dinosaur” in that Portillo’s main goal is to put food in people’s mouths and inspire them to return.
“That’s being true to who we are,” he said. “So I don’t want to do short-term things because of short-term economic cycles. I want to make sure we’re protecting this brand for the medium and long term and just avoid like the plague [that is] discounting.”
