Portillo's Inc. (PTLO) Q4 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents mixed signals. While there are positive aspects such as improved value perception scores and operational improvements in drive-thru performance, cash from operations decreased significantly. Management's lack of clear guidance on revenue growth and the impact of the growth strategy adds uncertainty. The strategic reset in development and focus on guest experience could stabilize the business, but inflationary pressures and higher costs loom. Overall, the sentiment is balanced, suggesting a neutral stock price movement.

Key Financial Performance

Revenues $185.7 million, reflecting an increase of $1.1 million or 0.6% compared to last year. The growth was driven by non-comp restaurants, which contributed $7.8 million of the total year-over-year increase. However, same-restaurant sales declined 3.3%, reducing revenues by approximately $5.4 million due to a 3.3% decrease in transactions.

Same-Restaurant Sales Declined 3.3%, reducing revenues by approximately $5.4 million. The decline was due to a 3.3% decrease in transactions. Average check was flat, with a 2.3% increase in net effective menu prices offset by a 2.3% decrease in product mix.

Food, Beverage, and Packaging Costs Increased to 34.6% of revenues from 34.1% in the prior year. This was primarily due to a 4% increase in commodity prices, partially offset by an increase in price. Increases were noted in categories like beef and pork.

Labor Costs Increased to 26% of revenues from 24.6% in the prior year. The increase was due to lower transactions, incremental wage increases, and deleverage from newer restaurant openings, partially offset by labor efficiencies and an increase in price. Hourly labor rates were up 3% in 2025.

Other Operating Expenses Increased by $0.4 million or 1.9% compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, these expenses increased to 12.2% from 12% in the prior year.

Occupancy Expenses Increased by $1.2 million or 13.6% compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, these expenses increased by 0.6%.

Restaurant-Level Adjusted EBITDA Decreased by $4.7 million to $40.6 million from $45.2 million in the prior year. Margins decreased by approximately 270 basis points to 21.8% from 24.5%. The Texas market expansion created a headwind, impacting consolidated restaurant-level margins by 180 basis points in the fourth quarter.

General and Administrative Expenses Decreased by $0.9 million to $19.4 million or 10.5% of revenue from $20.3 million or 11% of revenue in the prior year. The decrease was driven by lower variable-based compensation, partially offset by $1.5 million in dead site costs related to the strategic development reset.

Preopening Expenses Decreased by $0.6 million to $3.3 million from $4 million, reflecting a strategic reset of development activities and deferral of planned openings into 2026.

Adjusted EBITDA Decreased by 2.1% to $24.7 million from $25.2 million in the prior year. The decrease includes a $9 million headwind from a fully earned bonus at both the restaurant level and support functions.

Interest Expense Decreased by $0.4 million to $5.7 million, driven by a lower effective interest rate of 6.7% compared to 7.5% in 2024.

Income Tax Benefit $0.8 million compared to an expense of $1.9 million in the prior year. The effective tax rate for the year was 12.4%, down from 16.2% in 2024, driven by changes in Class A equity ownership, valuation allowance, and effective state tax rates.

Cash from Operations Decreased by 26.7% year-over-year to $71.9 million year-to-date. The company ended the quarter with $20 million in cash.

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Operating Highlights

Restaurant of the Future 1.0 format: Introduced a new restaurant format that is 20% smaller than previous designs, aimed at reducing costs and improving unit economics.

Perks program: Expanded to over 2 million members, showing strong results in promotions and expected to drive traffic improvements in 2026.

Atlanta market entry: Opened a new restaurant in Kennesaw, Georgia, which generated over $2 million in sales in its first 8 weeks, demonstrating strong demand in new markets.

Texas market challenges: Faced operational challenges in Texas, leading to losses, but implemented targeted actions that showed slight improvements by the end of the quarter.

Labor management improvements: Focused on improving labor management and profitability in lower-volume restaurants, particularly in Texas.

Commodity and labor cost pressures: Experienced a 4% increase in commodity prices and a 3% rise in hourly labor rates, impacting profitability.

Development strategy reset: Slowed new store openings to focus on healthy unit economics and better returns on investment.

Leadership change: Appointed Brett Patterson as the new CEO to lead the next phase of growth with a focus on strategic and operational excellence.

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Risk or Challenges

Texas Market Expansion: The Texas market expansion has been a headwind for the business, causing losses and negatively impacting consolidated restaurant-level margins by 180 basis points in Q4 and 170 basis points for the full fiscal year. Targeted actions have been taken to improve performance, but challenges remain.

Same-Restaurant Sales Decline: Same-restaurant sales declined by 3.3% in Q4, driven by a 3.3% decrease in transactions. This decline negatively impacted revenues by approximately $5.4 million.

Commodity Price Inflation: Food, beverage, and packaging costs increased due to a 4% rise in commodity prices, particularly in beef and pork. Mid-single-digit commodity inflation is forecasted for 2026, with primary pressures from the beef category.

Labor Costs: Labor costs as a percentage of revenues increased to 26% in Q4 from 24.6% in the prior year, driven by lower transactions, wage increases, and deleverage from newer restaurant openings. Labor inflation is estimated at 3% to 3.5% for 2026.

Occupancy Expenses: Occupancy expenses increased by 13.6% in Q4 compared to the prior year, primarily due to the opening of new restaurants. As a percentage of revenues, occupancy expenses increased by 0.6%.

Strategic Development Reset: Dead site costs of $1.5 million in Q4 and $5.1 million for the full year were incurred due to a strategic reset of development activities, reflecting a deliberate decision to slow new restaurant growth and reemphasize unit economics.

Preopening Expenses: Preopening expenses decreased by $0.6 million in Q4, reflecting a strategic reset of development activities and deferral of planned openings into 2026.

Debt Levels: Total net debt at the end of Q4 was $334 million, with $90 million drawn on the revolving credit facility. Interest expense was $5.7 million in Q4, with a lower effective interest rate of 6.7% compared to 7.5% in 2024.

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Guidance & Outlook

Future Restaurant Openings: Portillo's plans to open 8 new restaurants in 2026, with a total capital expenditure range of $55 million to $60 million. The company is focusing on a more measured pace of new restaurant growth, emphasizing unit economics and return on investment.

Atlanta Market Expansion: The next restaurant in Atlanta will open in 2027, approximately 50 miles from the Kennesaw location, following a strategy of spacing out new unit openings to build awareness and demand.

Restaurant-Level Adjusted EBITDA Margins: For 2026, restaurant-level adjusted EBITDA margins are estimated to be in the range of 20.5% to 21%, inclusive of headwinds from Texas restaurants and $4.5 million of additional bonus expense.

Adjusted EBITDA: Portillo's anticipates adjusted EBITDA to remain flat in 2026 compared to 2025, including a $9 million headwind from fully earned bonuses.

Labor Inflation: Labor inflation is estimated to be 3% to 3.5% in 2026.

Commodity Inflation: The company is forecasting mid-single-digit commodity inflation in 2026, with primary pressures from the beef category.

Pricing Strategy: Portillo's will evaluate pricing options in 2026 but will focus on growth via transactions rather than pricing increases. Perks and other offers are expected to pressure pricing benefits.

Free Cash Flow and Debt Management: Portillo's expects to generate positive free cash flow in 2026 and plans to use any excess cash to pay down its revolving credit facility.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What are the sales figures and expectations for the Kennesaw restaurant?

A:The Kennesaw restaurant achieved $3.8 million in sales during its first 100 days, averaging around $200,000 per week. Management does not expect it to become a $14 million restaurant and anticipates sales to level off below the current weekly average. Unlike Dallas, there will be less cannibalization as the next Atlanta restaurant won't open until 2027.

Q:What contributed to the positive EBITDA results in the final period of the quarter?

A:The positive EBITDA results were driven by both margin expansion and profitability across all Texas restaurants. This was primarily due to adjustments in labor and labor deployment to adapt to lower volumes.

Q:How does the new growth strategy impact manager and employee hiring, preopening, and G&A?

A:The new growth strategy, which involves spreading out new markets with single stores for longer periods, will result in less efficient new openings and slightly higher distribution and oversight costs. However, these costs are considered minor compared to the benefits of avoiding sub-$5 million AUVs.

Q:Are there any regional or income cohort trends in comps?

A:Comps are consistent between Chicagoland and outer markets, with some pressure in Arizona due to cannibalization from a restaurant opened in 2025. There is no significant gap between Chicagoland and outer markets.

Q:What is the status of consumer value perception scores in Chicagoland?

A:Value perception scores improved in 2025, driven by the Perks program and promotional offers like BOGO beef, hotdog, and cheeseburger deals. Operational improvements in hospitality, accuracy, and speed of service also contributed to the positive trend.

Q:What are the priorities for improving the Texas market?

A:The top priority is building sales through short-term levers like Perks offers, third-party affinity offers, and bundled meal deals. Marketing efforts aim to better explain Portillo's to unfamiliar consumers, with a focus on converting new customers into long-term patrons.

Q:What are the marketing priorities for 2026 under the new CMO?

A:The priorities include driving traffic through the Perks program, improving the Texas market, and maintaining consistent brand visibility in newer markets. The focus is on digital, social, and field marketing rather than traditional advertising.

Q:What is the pricing strategy for 2026?

A:Pricing actions from 2025 will roll off in stages throughout 2026, with 1.5 points rolling off in January, 1 point in April, and 0.5-0.7 points in June. The company aims to grow through transactions rather than price increases, though pricing remains a lever if needed.

Q:What is the impact of the Perks program on ticket size and profitability?

A:The Perks program has not significantly degraded ticket size, with the average ticket at $23.60. The program's offers are measured for their impact on profitability, and results have been favorable so far.

Q:Is there a plan to convert the Perks program into a points-based system?

A:There are no current plans to convert the Perks program into a points-based system. Management prefers the current 'surprise and delight' model, which aligns with Portillo's experiential brand.

Q:What are the operational updates, particularly for drive-thru performance?

A:Drive-thru speed improved by nearly 40 seconds in 2025, along with significant accuracy improvements. Staffing levels are strong, with hourly turnover below 80% and GM turnover at historic lows.

Q:What are the trends in customer behavior across channels and dayparts?

A:The pickup channel was the fastest-growing in 2025, followed by delivery. Off-premise channels are seeing more growth, and the company is focused on maintaining guest satisfaction across all channels.

Q:What is the guidance for restaurant-level margins and commodity inflation in 2026?

A:Restaurant-level margin guidance assumes some pricing actions in 2026 but not enough to fully offset mid-single-digit commodity inflation. Inflation is expected to be higher in the first half of the year.

Q:What is the mix component of same-store sales for 2026?

A:Mix is expected to remain a headwind in 2026 due to lower items per transaction and trade-downs. Kiosks and digital channels are helping to mitigate these headwinds.

Q:Review of Unclear Management Responses

A:Management avoided providing direct guidance on top-line revenue growth, citing limited visibility and macroeconomic uncertainties. They also did not fully quantify the impact of the new growth strategy on preopening and G&A costs. Additionally, there was no clear answer on how marketing efficiency is being measured under the 'always-on' approach.

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