Presenting at William Blair’s 44th annual Growth Stock Conference, Portillo’s shared two sides of the potential it’s touted since going public in October 2021. Long-term, the Chicago-born brand wants to accelerate to 12–15 percent annual expansion. That would translate to mid-teens sales growth on a low-single-digit comp, and low-teens adjusted EBITDA expansion.
Originally, Portillo’s headed to the stock-market as a 67-unit brand with visions of 600 over the next 25 years. That would mean the business, started in 1963 when Dick Portillo took $1,100 meant for a first home and used it instead to purchase a 6-by-12-foot trailer, would lift some 900 percent. As wide as that view is, though, it was always going to be deliberate.
Close to three years later, Portillo’s has about 85 stores (as of May) after opening a restaurant in Denton, Texas. Eight more were scheduled for 2024. The brand expanded by net 11 locations in 2023.
At the turn of its IPO, CEO Michael Osanloo was asked why the company-run operation (no franchises) wasn’t thinking bigger. There was nothing keeping one of the highest-volume fast casuals of scale—if not the highest—in America from tossing a four-digit target in front of investors and watching the buzz swell. His reasoning: “I want every single Portillo’s that we open to feel and operate like a Portillo’s.”
Essentially, Portillo’s isn’t a brand that can be streamlined. Some are nearly 8,000 square feet, needing close to 90 people, on average, to staff.
Despite a challenged climate, the brand’s methodical growth has held its performance in check. Average-unit volumes in Q1 clocked in at $9 million, up from $8.7 million the year before. That figure was $7.9 million systemwide ($9.1 million in Chicagoland) ahead of 2021’s filing.
And this is where the other corner of Portillo’s ambition checks in.
Management provided some fresh detail at William Blair’s conference regarding the performance of new units opened in 2022 and 2023. Both classes are posting yearly sales at or above Year 3 targets.
As has been the case for a while, Portillo’s Year 3 cash-on-cash returns remain targeted at 25 percent predicated on AUVs of $7.3 million to $7.5 million, unit-level margins of 22 percent, and a buildout cost of $6.2 million to $6.5 million. To date, Portillo’s fleet of 2022 units, Osanloo and CFO Michelle Hook explained, are generating AUVs of $8.2 million, store-level margins of 19.9 percent (versus a year-one margin target of high-teens), and a 21.5 percent cash-on-cash return on $7.6 million average buildout costs. Although early, 2023 stores are at AUVs of $7 million to $7.5 million and unit-level margins of 16 to 19 percent, translating to cash-on-cash returns of 16 to 20 percent.
Broken down, the AUVs of Chicagoland restaurants have climbed to $11.3 million; the broader Midwest at $5.7 million; and the Sunbelt $6.7 million.
Much of Portillo’s expanding network, however, is still in its infancy in terms of awareness. Arizona (eight); California (two), Florida (six), Indiana (eight); Iowa (one); Michigan (one and another coming soon); Minnesota (three); Texas (five and two coming soon); and Wisconsin (four) are all sub-eight restaurant DMAs.
The brand in Q1 said it made a “small investment” in traditional advertising to boost awareness in Arizona and saw signs of transaction growth. It planned to do the same in Chicagoland in Q3 and, somewhere in between, jump advertising on third-party delivery sites outside the anchor market to generate trial.
Once inside restaurants, Portillo’s is confident it can drive traffic through menu innovation and digital engagement. For instance, it tested a spicy chicken chopped salad and pecan salad at the end of Q1 that proved so robust Portillo’s accelerated launch by a month. The company noted the salads generated higher sales than any new menu rollout in the past five years—and without a full marketing push. Salads also helped mix by displacing lower-margin items. Additionally, Portillo’s will look to build traffic and product mix by relaunching its Famous 5 combo meal that features an entrée, side, and drink.
Portillo’s began touting the menu innovations in May with digital channel advertising. It also recently hired Steak ‘n Shake and Dairy Queen vet Keith Correia as chief information officer, back-ending a push toward tech innovation. Portillo’s has been working on ways to improve its digital app ordering and started testing kiosks in California.
Broadly, though, this type of new news menu approach isn’t novel for Portillo’s.
While known for its Italian Beef and hot dogs/sausages, the brand sold more than $600,000 worth of salad per restaurant the year before it went public. The other two categories accounted for 23 and 14 percent of sales, respectively. In fact, no single category totaled more than 23 percent. Lunch and dinner dayparts were nearly even as well, with 52 percent of business taking place during the former.
Monday through Wednesday mixed 12 percent of sales. Thursday rose to 13 percent, with Friday at 17 percent, Saturday at 18, and Sunday slipping to 16.
Put plainly, Portillo’s customers use the chain for multiple occasions, day agnostic (this will come up with value and pricing shortly).
So the larger challenge with new-market development, the company felt, was more about trial than anything else. It’s proven over the years the ability to maintain frequency and market itself by innovating through menu tiers.
Portillo’s same-store sales declined 1.2 percent in Q1 as transactions slid 3.2 percent, offset by a 2 percent rise in average check. But like the vast majority of chains in early 2024, it was comping against a strong industry quarter in 2023 with one that endured weather challenges in the Midwest that spanned multiple weeks and caused transactions to drop double-digits. Comps and traffic improved and got into the low positive digits by early Q2.
Portillo’s took 1.5 percent price in January and at the end of March, which, it said, was needed to mitigate food and labor inflation. The March decision was pushed up from Q2 thanks to California’s AB 1228 regulation that went into effect in April and brought minimum wage for non-exempt fast-food employees to $20 per hour.
Coupled with previous actions, Portillo’s pricing was effectively 6 percent in Q1 and 3 percent rolled off in May, leaving it at 3 percent about six weeks in Q2.
Even so, William Blair analysts said, Portillo’s value proposition enjoys a strong foothold in today’s climate. Its most popular meal combination is priced at roughly $13.50 in suburban Chicago, representing a 15 percent discount to its peer group (Potbelly, Shake Shack, sweetgreen, Panera, Five Guys, and Chipotle, per William Blair). It’s 25 percent-plus when including recommended tips. Tipping is available at all those concepts except Portillo’s and Chipotle.
Hook said in Q1 Portillo’s has optionality and flexibility with pricing, and that it hasn’t seen much resistance from guests. But it is aware of the ceiling. “We are going to continue to see how things move within the landscape, and I’ve continued to say and [CEO Michael Osanloo has that we look at pricing as a lever to offset the inflationary pressures,” she said. “That’s how we’re going to continue to view it.
Even going back to 2022, Portillo’s was hesitant on this front. Its goal was to lag behind inflation and competitors and to guard a sharp proposition that’s historically helped it do exactly what was mentioned earlier with salads and steady dayparts—maintain repeat visits from ultra-heavy and heavy users, which it’s long relied on. At the same time, Portillo’s isn’t a race-to-the-bottom discounting brand, either. It doesn’t market on being cheaper than the pack; it just doesn’t want to outprice its core.
The brand saw a softer lower-income consumer in Q1, as well as fewer items per transaction—both common industry observations of late. Specifically, there was lower beverage attachment at the drive-thru.
That latter point isn’t a surprising one given that’s generally where the quick-service loyalist goes. And it’s raising the bar for Portillo’s to improve.
The company said tightening drive-thru speed of service remains a significant focus area. Currently, it’s lagging 2019 levels by roughly a minute. The brand is rethinking employee training, which, William Blair said, holds the potential to bolster results, with a 30-second improvement in drive-thru times equating to roughly a comp point. Portillo’s is also in the process of building a loyalty program—an effort that could serve as a driver of frequency long-term.
Portillo’s asset evolution was spotlighted at the conference as well. The chain will roll a new smaller-format location in Q4, with the first headed to Texas. These boast a footprint of 6,300 square feet (down 1,500) and a shorter production line that translates into a $1 million reduction in overall store buildout costs to $5.2 million to $5.5 million. Management said bids so far were coming in at the lower end of the range. Yet, even so, it’s a model Portillo’s believes preserves the production capacity needed to hit $10 million-plus AUVs.
All locations are earmarked to open under the new format starting in 2025. William Blair feels the smaller-format design will materially de-risk Portillo’s 25 percent cash-on-cash return target given a required AUV of only $5.9 million to $6.5 million. So if three-year volumes hit targeted metrics of $7.3 million to $7.5 million, cash-on-cash returns would balloon to 28 to 31 percent.
It becomes clear then why Portillo’s has amped-up development visions. Growth is set to jump from 11 to 12 percent in 2024 before settling in at 12–15 percent annually in 2026 and beyond. The chain’s go-forward map includes infilling across the Dallas-Fort Worth area (up to 16–20 stores) along with Portillo’s Houston entry planned for Q4. Going further, Portillo’s has circled Atlanta, Denver, Las Vegas, San Antonio/Austin, and the Carolinas as future breakthroughs. “We know Portillo’s has a long runway for continued growth,” Osanloo said in Q1.
