Portillo’s is feeling new pressure from an activist investor that has ideas on how to improve the company.
Engaged Capital acquired shares worth 9.9 percent ownership, according to an SEC filing. The hedge fund has communicated with the chain’s board of directors and management team about “potential steps to unlock the intrinsic value” of the business. More specifically, that includes improving restaurant performance, increasing restaurant-level cash on cash returns, potentially changing who sits on the board of directors, and even exploring a sale.
Portillo’s confirmed with media outlets that it has had conversations with Engaged.
“Portillo’s regularly engages with its shareholders to understand their perspectives and we have spoken with Engaged Capital,” the company said in a statement. “Our board and management team will continue to take actions and make decisions that are in the best interest of our shareholders.”
The 88-unit fast casual’s shares are down roughly 25 percent year-to-date and 68 percent since its IPO in 2021, according to CNBC. Portillo’s has recently struggled with traffic and inefficient operations at the drive-thru.
Sources told CNBC that Engaged believes Portillo’s should no longer own and develop real estate and should build smaller restaurants. The hedge fund thinks these changes could enhance cash-on-cash returns from 25 percent to 50 percent. Engaged wants the fast casual to seek national growth and also believes the brand is undervalued. The activist thinks Portillo’s should be worth at least 100 percent more than its current valuation, CNBC said.
The media outlet reported that Engaged wants to impact Portillo’s similar to what it did with Shake Shack last year. To avoid a proxy battle, the burger fast casual signed a cooperation deal in which it agreed to add former Domino’s CFO Jeffrey Lawrence and an independent member to its board of directors. Shake Shack also committed to retaining a consulting firm to enhance its operational and financial performance. Founder Danny Meyer, who serves as Shake Shack’s chairman of the board as well as Union Square Hospitality Group, and “certain of his affiliates,” will step down their director designation rights over time as well.
Shake Shack’s stock price has doubled since Engaged invested in spring 2023, CNBC said. CEO Randy Garutti announced his retirement in December 2023. In March, the brand revealed former Papa Johns CEO Rob Lynch as its new leader.
Portillo’s said during its Q2 earnings call that it’s steering away from aggressive promotions and discounting, focusing instead on enhancing the overall dining experience to deliver value. The strategy is anchored on four key pillars: running world-class operations, amplifying digital engagement and marketing, building more efficient restaurants, and taking care of employees.
CEO Michael Osanloo emphasized the importance of improving the drive-thru and said Portillo’s realigned its general managers to focus on key metrics that drive transactions and sales. This shift has resulted in a 15-second improvement in drive-thru speed year-to-date. The chain is also ramping up its digital efforts, including the launch of kiosk prototypes and an upcoming advertising campaign in Chicagoland focused on food quality. Additionally, Portillo’s is innovating with a new 6,300-square-foot restaurant prototype that reduces costs without compromising on performance. And the company is investing in its employees through initiatives like the Strive for Greatness Scholarship program.
The chain’s same-store sales dropped 1.2 percent in Q1 and 0.6 percent in Q2. Portillo’s changed its 2024 outlook to flat to slightly positive same-store sales, down from low-single-digit same-store sales. Even with this lowered expectation, it still means the brand expects improved sales for the rest of the calendar year. The chain plans to open 10 new restaurants by the end of the year, primarily in Texas and Florida.
