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Portillo's (NASDAQ:PTLO) Surprises With Q4 Sales, Stock Soars


Full Report / February 27, 2024

Casual restaurant chain Portillo’s (NASDAQ:PTLO) reported Q4 FY2023 results topping analysts' expectations, with revenue up 24.5% year on year to $187.9 million. It made a GAAP profit of $0.13 per share, improving from its profit of $0.08 per share in the same quarter last year.

Portillo's (PTLO) Q4 FY2023 Highlights:

  • Revenue: $187.9 million vs analyst estimates of $184.2 million (2% beat)
  • EPS: $0.13 vs analyst estimates of $0.06 ($0.07 beat)
  • Gross Margin (GAAP): 24.3%, up from 21.2% in the same quarter last year
  • Same-Store Sales were up 4.4% year on year
  • Store Locations: 84 at quarter end, increasing by 12 over the last 12 months
  • Market Capitalization: $762.3 million

Begun as a Chicago hot dog stand in 1963, Portillo’s (NASDAQ:PTLO) is a casual restaurant chain that serves Chicago-style hot dogs and beef sandwiches as well as fries and shakes.

In addition to the signature dogs and sandwiches, Portillo’s is known for its decadent chocolate cake. Not everything will expand your waistline, though, as the chain has expanded its offerings to include healthier options such as salads and chicken breast sandwiches.

The core Portillo’s customer is diverse. Maybe it’s someone looking for convenient and indulgent food that’s a bit unique compared to the typical fast food menu. Perhaps it’s a family looking for a weekend treat where everyone can find something they like on the menu. Maybe it’s a Chicago native looking for that comfort food from the old neighborhood.

Portillo’s locations feature retro diner themes to ramp up the nostalgia and lively atmosphere. There are tables and booths that are often a feature of diners. Vintage photos featuring Chicago landmarks, celebrities, or pop culture line the walls to remind everyone of the restaurant’s roots.

Traditional Fast Food

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Competitors offering convenient comfort food that can sometimes conjure nostalgia include Potbelly (NASDAQ:PBPB), Shake Shack (NYSE:SHAK), Brinker International (NYSE:EAT), and The Cheesecake Factory (NASDAQ:CAKE).

Sales Growth

Portillo's is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale.

As you can see below, the company's annualized revenue growth rate of 9.1% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was decent as it opened new restaurants and grew sales at existing, established dining locations.

Portillo's Total Revenue

This quarter, Portillo's reported remarkable year-on-year revenue growth of 24.5%, and its $187.9 million in revenue topped Wall Street's estimates by 2%. Looking ahead, Wall Street expects sales to grow 12% over the next 12 months, a deceleration from this quarter.

Number of Stores

The number of dining locations a restaurant chain operates is a major determinant of how much it can sell and how quickly company-level sales can grow.

When a chain like Portillo's is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. Portillo's restaurant count increased by 12, or 16.7%, over the last 12 months to 84 locations in the most recently reported quarter.

Portillo's Operating Retail Locations

Over the last two years, Portillo's has rapidly opened new restaurants, averaging 8.1% annual increases in new locations. This growth is among the fastest in the restaurant sector and gives Portillo's a chance to scale towards a mid-sized company over time. Analyzing a restaurant's location growth is important because expansion means Portillo's has more opportunities to feed customers and generate sales.

Same-Store Sales

Portillo's demand within its existing restaurants has generally risen over the last two years but lagged behind the broader sector. On average, the company's same-store sales have grown by 5.7% year on year. With positive same-store sales growth amid an increasing number of restaurants, Portillo's is reaching more diners and growing sales.

Portillo's Year On Year Same Store Sales Growth

In the latest quarter, Portillo's same-store sales rose 4.4% year on year. This growth was a deceleration from the 6% year-on-year increase it posted 12 months ago, showing the business is still performing well but lost a bit of steam.

Gross Margin & Pricing Power

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.

In Q4, Portillo's gross profit margin was 24.3%. up 3.1 percentage points year on year. This means the company makes $0.23 for every $1 in revenue before accounting for its operating expenses. Portillo's Gross Margin (GAAP)

Portillo's has subpar unit economics for a restaurant company, making it difficult to invest in areas such as marketing and talent to grow its brand. As you can see above, it's averaged a paltry 23.5% gross margin over the last two years. Its margin, however, has been trending up over the last 12 months, averaging 8.1% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment.

Operating Margin

Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Portillo's generated an operating profit margin of 7.7%, up 3.4 percentage points year on year. This increase was encouraging, and we can infer Portillo's was more disciplined with its expenses or gained leverage on its fixed costs because its operating margin expanded more than its gross margin.

Portillo's Operating Margin (GAAP)

Zooming out, Portillo's was profitable over the last two years but held back by its large expense base. It's demonstrated mediocre profitability for a restaurant business, producing an average operating margin of 7.6%. However, Portillo's margin has improved, on average, by 1.1 percentage points each year, showing the company is heading in the right direction.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q4, Portillo's reported EPS at $0.13, up from $0.08 in the same quarter a year ago. This print easily cleared Wall Street's estimates, and shareholders should be content with the results.

Portillo's EPS (GAAP)

Between FY2020 and FY2023, Portillo's adjusted diluted EPS grew 270%, translating into an astounding 54.7% compounded annual growth rate. This growth is materially higher than its revenue growth over the same period, showing that Portillo's has excelled in managing its expenses.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 46.6% year-on-year increase in EPS.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Although Portillo's has shown solid business quality lately, it historically did a subpar job investing in profitable business initiatives. Its five-year average ROIC was 7.1%, somewhat low compared to the best restaurant companies that consistently pump out 15%+.

Key Takeaways from Portillo's Q4 Results

We were impressed by how significantly Portillo's blew past analysts' EPS expectations this quarter. We were also excited its revenue, gross margin, and EBITDA outperformed Wall Street's estimates. The main driver behind the company's outperformance was better-than-expected same-store sales growth (4.4% vs estimates of 3.5%). It also opened 6 new restaurants during the quarter (12 for all of 2023) in Illinois, Texas, and Florida. Earlier in the year, the company opened some locations in Arizona.

For 2024, the company estimates commodity and wage inflation to be in the mid-single digits. It will seek to offset these headwinds by raising the price of certain menu items by 1.5%. Furthermore, it plans to open at least 9 new restaurants in 2024 and stated its long-term goal of 12-15% annual increases in restaurant locations. Its near-term focus will be on the Sunbelt region and areas near its hometown of Chicago.

Zooming out, we think this was an impressive quarter that should delight shareholders. The stock is up 9% after reporting and currently trades at $15 per share.

Is Now The Time?

Portillo's may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Portillo's is a solid business. First off, its revenue growth has been solid over the last four years, and growth is expected to increase in the short term. And while its low free cash flow margins give it little breathing room, its new restaurant openings have increased its brand equity. On top of that, its EPS growth over the last three years has been fantastic.

Portillo's price-to-earnings ratio based on the next 12 months is 34.7x. Despite its flashes of high business quality, the state of its balance sheet makes us uncomfortable. We'd like to see the company reduce its leverage before recommending the stock.

Wall Street analysts covering the company had a one-year price target of $21.30 per share right before these results (compared to the current share price of $15).

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