Portillo's (PTLO)

Casual restaurant chain Portillo’s (NASDAQ:PTLO) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 6.4% year on year to $176.4 million. Its GAAP profit of $0.05 per share was in line with analysts’ consensus estimates.

Company Overview

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.

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).

A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $721.2 million in revenue over the past 12 months, Portillo's is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can grow faster because it has more white space to build new restaurants.

As you can see below, Portillo's grew its sales at a decent 8.4% compounded annual growth rate over the last five years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, Portillo’s revenue grew by 6.4% year on year to $176.4 million, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 12.9% over the next 12 months, an acceleration versus the last five years. This projection is commendable and implies its newer menu offerings will spur better top-line performance.

Number of Restaurants

A restaurant chain’s total number of dining locations influences how much it can sell and how quickly revenue can grow.

Portillo's operated 94 locations in the latest quarter. It has opened new restaurants at a rapid clip over the last two years, averaging 11.9% annual growth, much faster than the broader restaurant sector. This gives it a chance to scale into a mid-sized business over time.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at restaurants open for at least a year.

Portillo’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.7% per year. This performance suggests it should consider improving its foot traffic and efficiency before expanding its restaurant base.

In the latest quarter, Portillo’s same-store sales rose 1.8% year on year. This performance was more or less in line with its historical levels.

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.

Portillo’s gross margin is slightly below the average restaurant company, giving it less room to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged a 23.8% gross margin over the last two years. Said differently, Portillo's had to pay a chunky $76.25 to its suppliers for every $100 in revenue.

This quarter, Portillo’s gross profit margin was 20.8%, marking a 1.2 percentage point decrease from 21.9% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as ingredients and transportation expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key profitability metric because it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.

Portillo's has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 8.2%, higher than the broader restaurant sector.

Looking at the trend in its profitability, Portillo’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Portillo's generated an operating profit margin of 5.9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Portillo’s EPS grew at an astounding 50% compounded annual growth rate over the last five years, higher than its 8.4% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

In Q1, Portillo's reported EPS at $0.05, down from $0.08 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 4.9%. Over the next 12 months, Wall Street expects Portillo's to perform poorly. Analysts forecast its full-year EPS of $0.43 will hit $0.39.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Portillo's broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, an encouraging sign is that Portillo’s margin expanded by 2.8 percentage points over the last year. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Portillo's burned through $9.59 million of cash in Q1, equivalent to a negative 5.4% margin. The company’s cash burn was similar to its $7.86 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Portillo's historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.3%, somewhat low compared to the best restaurant companies that consistently pump out 15%+.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Portillo’s $534 million of debt exceeds the $12.94 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $104.2 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Portillo's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Portillo's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We were impressed by how significantly Portillo's blew past analysts’ same-store sales expectations this quarter. On the other hand, its revenue and EBITDA fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 6.7% to $9.70 immediately after reporting.

Updated: May 21, 2025 at 10:37 PM EDT

Before making an investment decision, investors should account for Portillo’s business fundamentals and valuation in addition to what happened in the latest quarter.

Portillo's isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was decent over the last five years and is expected to accelerate over the next 12 months, its projected EPS for the next year is lacking. And while the company’s new restaurant openings have increased its brand equity, the downside is its cash burn raises the question of whether it can sustainably maintain growth.

Portillo’s P/E ratio based on the next 12 months is 31.5x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $14.78 on the company (compared to the current share price of $11.60).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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