Hello, and thank you for standing by. Welcome to the Fiscal Fourth Quarter 2021 Conference Call and Webcast for Portillo’s Incorporated. I would now like to turn the call over to Mr. Fitzhugh Taylor, Managing Director at ICR to begin.

Thank you, Rob. Good morning, and welcome everyone. With me on today's call is Michael Osanloo, President and Chief Executive Officer of Portillo's, and Michelle Hook, the Company's Chief Financial Officer. Before we begin our formal remarks, let me remind you that part of our discussions today will include forward-looking statements. These statements are not guarantees of future performance and should not be unduly relied upon. We do not undertake to update these forward-looking statements unless required by law. And we refer you to today's earnings release in our SEC filings for a more detailed discussion of the risks that could impact Portillo's future operating results and financial condition. Our remarks also include non-GAAP financial measures such as adjusted EBITDA and restaurant level adjusted EBITDA; we direct you to our earnings release issued this morning, which is available on our website for reconciliations of these non-GAAP measures to their most comparable GAAP measures. Any non-GAAP financial measures should not be considered as an alternative to GAAP measures, such as net income or operating income, or any other GAAP measure of our liquidity or financial position. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Let me now turn the call over to Michael Osanloo, President and Chief Executive Officer of Portillo's. Michael?

Thank you, Fitzhugh. And good morning, everyone. We appreciate you taking the time to join us on our year-end earnings call. 2021 was a milestone year for Portillo's. We're thrilled with the completion of our IPO and the reception we received from investors. We're very proud of how we ended the year. I'm happy to share that Portillo's posted strong top and bottom line growth in the fourth quarter, resulting in a successful fiscal year for us. We grew total sales by 17.5%, or $79.5 million, and we grew restaurant level EBITDA by 16.5%, or $20.1 million. Michelle will give you a lot more detail on the numbers, but I wanted to highlight our great results for the year. We added five new restaurants in 2021, all of which opened well-staffed and performed at or above our expectations. This included our first entry into Michigan, as well as our first restaurant near the Orlando market, both places that we're going to continue to fill out in the near term as we expand. Portillo's recognizes success despite the volatility in the restaurant industry faced throughout 2021. Our multi-channel model proved yet again to be a competitive strength. Even in the face of the great resignation, continuing COVID restrictions, and ever-changing commodity costs, we continued to perform. This is reflective of our dedication to delivering an unrivaled experience to our guests through our outstanding team members. We regularly say that people are the heart of Portillo's, and I'm so grateful to our team members who, through all these challenges, have embraced our purpose and lived our values of family, greatness, energy, and fun. Now, the fourth quarter is always big for Portillo's, and it was again this year. We have so many loyal fans who make Portillo's part of their holiday celebrations and gatherings. This remained true when we saw heavy catering sales over the holidays. Still, Omicron did impact us, both from a sales and staffing perspective. We saw a greater number of cancellations and an increased number of team members out because of COVID. Despite that, we had a very strong fourth quarter and closed the year out well. We delivered against all of our growth commitments. We're very happy with our recent performance. What’s even more exciting is our future. We have one of the best teams in the restaurant industry, all of whom are dedicated to delivering greatness on every front. We're committed to our Portillo's family. Staffing continues to be a challenge for the industry, but we believe in taking care of our team members, who in turn take great care of our guests. Not only do we offer competitive pay, we invested another $12 million last year to have a total rewards package that includes shift meals, extra pay on key holidays, flexible scheduling, and a more affordable healthcare program. We offer an experience unlike any other. About a quarter of our new Portillo team members come to us through internal referrals. We provide a full spectrum of training and leadership development opportunities for those team members. First, we've implemented new training materials, offering a blended approach to learning that includes both hands-on activities as well as e-learning modules. This is the way people want to learn today. Second, we've launched a leadership development program we call Ignite. It emphasizes leadership training for our team members who want to take the next step in their career with Portillo's. This includes skills like leading change, having difficult conversations, and building relationships, skills that our team will use throughout their entire career. What we found is that this dedication to their growth keeps team members with us, and we've seen an internal management promotion rate of over 80%, a metric that we're extremely proud to share. While many restaurant brands have had to close their doors or rope off tables because of staffing, our doors have remained open. We've also invested in making technological improvements, but they have to be real changes and upgrades that positively impact the guest or team member experience. For example, we rolled out a new version of our POS system that's easier for our team members to use. It increases throughput and reduces training time for new hires. Traditionally, we had three different systems for ordering, one inside, one in the drive-thru, and then a handwritten process for line busting when the lines get long. Our new system is the same throughout the restaurant, so we only need to train the team member once to be able to take orders anywhere. When it comes to our food, our culinary approach is to have an ownable, veto-proof menu. And that means we scrutinize anything we add to the menu; it needs to be a significant improvement over existing items. It has to add meaningful traffic and reduce operational complexity, which is a very high bar. But one of our most successful new items ever was a spicy chicken sandwich that we launched last year. It tested off the charts with our consumers; our guests simply love it. Second, it's been incremental to our business, and third, it's operationally very simple to execute. On top of being a delicious sandwich, we've received a lot of buzz for it from our guests. We use world-class digital marketing that is clever, witty, and cost-effective. If you haven't seen any of our spicy chicken marketing, please check it out; just Google Portillo's spicy chicken. Innovation also extends within our restaurants themselves. Not only have we identified ways to reduce the size of our back of house without impacting operations, but we've implemented a third drive-through lane, which offers increased convenience to the growing number of guests who choose a digital ordering experience. Our drive-thru is already one of the most efficient in the business. Now this dedicated third lane draws consumers to our direct ordering channels, our website, and our app by offering a rapid pickup option for guests who use those channels. We first launched it in West Madison, Wisconsin, and it's also in place in Joliet, Illinois, at our first off-premise-only restaurant, which we call Portillo's Pickup. We're super excited by the early results of this Portillo's Pickup prototype. It opened on February 1, and it's a fraction of the size of our typical restaurant, yet it's still serving an incredible amount of food for drive-through, takeout, third-party delivery, and catering. Due to the smaller size and format, this new model has the potential to unlock whole new real estate options for us and help fill existing markets to better serve our guests whenever and however they want to get their Portillo's. Importantly, we're confident in our ability to deliver sustainable and profitable growth. With new restaurants opened successfully in Indiana and Wisconsin in the fourth quarter and the recent opening of Joliet in February, we are now at 70 restaurants and we're not slowing down. Our second restaurant for 2022 is scheduled to open in St. Petersburg, Florida, in early April. Next, we look forward to opening an additional five restaurants in the third and fourth quarters. We'll continue to build scale in existing markets as well as in the growing Sunbelt. Now, I'm sure you saw a recent announcement regarding our first Texas restaurant. It's located in the Grandscape complex in The Colony on the north side of Dallas. This restaurant is going to be a showstopper. It has our garage style theme with a Texas twist. Importantly, it's going to be a place where our Texas guests will get the true Portillo's experience. I'm confident this restaurant will be a home run for us and pave the way for future growth in Texas. For each of our new restaurant openings, we have a very prescriptive hiring strategy that allows us to find values-driven team members who then deliver the Portillo's experience for our guests. The hiring environment we create and the great frontline leadership we develop have enabled us to hire over 100 team members for the Joliet restaurant, and we're currently at over 120 hires for St. Petersburg already. This gives us tremendous confidence that we can find staff for all of our new restaurants with amazing, values-based team members. We're also very conscious of the current cost environment, including labor, food, distribution, energy, and building costs. We do not have a set date for price increases, but we stay flexible. We look at costs and pricing daily to evaluate our menu and competitive position. Yet our strategy is to be a price laggard. We intentionally price below inflation and we haven't priced as aggressively as many other restaurant brands. We believe in providing strong value to our guests. In times of economic uncertainty, we know people are seeing prices increase all around them. We aim to be a respite from that; a comforting place where people don't have to worry about increasing costs. We want them to come, have a beef sandwich, and enjoy a great experience, leaving their stresses at the door. That's our priority. As we continue on the path of being a new public company, we're excited about the future. There's a lot happening for Portillo's in 2022 and we're only just getting started. So, with that, I'm going to hand it off to Michelle to share more details of the quarter and our expectations moving forward.

Great. Thank you, Michael, and good morning, everyone. I want to thank our amazing team members in our restaurants, at our commissaries, and at our restaurant support center, for the work that they do as we continue to work together and navigate this challenging landscape. Our people-centric culture is centered on working together to create a fun and energetic atmosphere while living our values. As I discussed on our third quarter earnings call, we completed our successful IPO in late October. You can find all the details on that transaction in our 10K filed this morning. This transaction did have a one-time effect on our G&A in the quarter, and I'll touch upon that later. Now turning to our results for the fourth quarter and full-year 2021. We are extremely proud of our performance as we saw strong and balanced top line growth. The second half of the year proved challenging with Omicron and pressures on our commodity and labor costs. Despite these headwinds, we were able to exceed our expectations on restaurant level adjusted EBITDA growth and adjusted EBITDA growth in both the quarter and full-year 2021. We remain confident that we can continue to deliver healthy top line and bottom line growth in 2022 and beyond. More importantly, we remain committed to our long-term outlook and metrics that were provided in our earnings release this morning. Let's dive into the details. Revenues were $138.9 million, reflecting an increase of $20.4 million, or 17.2%, compared to the fourth quarter of 2020. This was driven by a 10.3% increase in same-restaurant sales, combined with the opening of seven new restaurants since the beginning of the fourth quarter of 2020. The same-restaurant sales increase of 10.3% was primarily driven by a 9.5% increase in average check and a 0.8% increase in transactions. Our higher average check was due to increases in our menu prices of approximately 6.4%, with the remainder being a benefit from the mix of items sold. As Michael previously mentioned, we did see a dampening as a result of Omicron in both our sales and staffing levels in the fourth quarter, particularly during the last few weeks of the quarter and in our seasonal catering business. We continue to observe these negative impacts during the first several weeks of January. However, trends in both our sales and staffing levels have since improved, and sales trends and transactions improved from January to February. Our same-restaurant sales during period one of 2022 grew 9.2% and then accelerated to grow at 13.6% in period two. We estimate same-restaurant sales for the first quarter of 2022 to be in the range of 7.5% to 8.5%, rolling over a cap of 24.6% in period three of 2021. For the full-year, revenues were $535 million, up $79.5 million, or 17.5% year-over-year, and an increase of more than 12% compared to 2019 revenues. The increase versus 2020 was driven by a 10.5% increase in same-restaurant sales combined with the opening of seven new restaurants since the beginning of the fourth quarter of 2020. The 10.5% increase in same-restaurant sales was driven by a healthy balance of menu price increases of approximately 4.4%, transaction growth, and the mix of items sold. Before I close my comments on revenues, I would like to point out a change that will impact certain metrics in 2022. At the end of 2021, we revised how we account for third-party delivery partners. We now reflect the total price charged for delivery orders versus regular menu prices in revenues. The delivery price differential was previously reflected in cost of goods sold as an offset to commission fees paid to our partners. As a result, we expect this change to positively impact our same-restaurant sales growth by 2% to 3% in each quarter of 2022, and for the full fiscal year, with a corresponding increase in cost of goods sold. This change will not impact restaurant level adjusted EBITDA or adjusted EBITDA. We will continue to note the impact of this change in future 2022 filings. Cost of goods sold, excluding depreciation and amortization as a percentage of revenues increased to 32.6% in the fourth quarter of 2021, from 30.7% in the fourth quarter of 2020. This increase was primarily driven by an increase in our commodity prices, specifically, our beef and chicken import prices. This was offset by an increase in our average check. We continue to see commodity inflation during the first quarter of 2022. In January, I provided a range of 5% to 7% expected increases in our commodity basket for 2022. We now currently anticipate 13% to 15% inflation across our commodity basket for 2022. You can tell we're dealing with real-time changes in commodities, energy, freight, and distribution. As a reminder, beef and chicken imports comprise approximately 50% of our commodity basket, and we are seeing significant increases in all those categories. Now moving on to labor. Labor as a percentage of revenues increased to 26.2% in the fourth quarter of 2021 from 24.3% in the fourth quarter of 2020, primarily due to an increase in hourly rates, investments made in training, and discretionary bonuses, partially offset by an increase in our average check and the impacts of lower staffing. The labor market continues to remain extremely challenging, and everyone is competing for talent. We made a substantial investment in team member pay in the second quarter of 2021 as part of our ongoing commitment to pay benefits, training, and talent development. We continue to see the impacts flow through in the fourth quarter as our average hourly rates were up roughly 20% in the fourth quarter of 2021 versus the fourth quarter of 2020. We anticipate making additional wage investments in 2022 as the environment continues to be fluid and we remain committed to ensuring our restaurants are staffed with exceptional team members. We are extremely proud that despite these labor challenges, we've not had to limit service channels or hours of operation. That speaks to the extraordinary productivity of our frontline team members during these challenging times. We're proud that even with these increases in food and labor, we produced strong restaurant level adjusted EBITDA dollars and margin in the fourth quarter and full year of 2021. Our other operating expenses increased $2.5 million or 19.5% in the fourth quarter of 2021, which was primarily driven by the opening of seven new restaurants since the beginning of the fourth quarter of 2020. Additionally, operating expenses were impacted by incremental costs as we expanded our dining capacity. Occupancy costs remained flat as a percent of sales, primarily due to the quarter-over-quarter sales increase previously described, inclusive of the opening of seven new restaurants since the beginning of the fourth quarter of 2020. As a result, restaurant level adjusted EBITDA increased 1.3% to $35 million in the fourth quarter of 2021. Restaurant level adjusted EBITDA margins were 25.2% in the fourth quarter of 2021 versus 29.2% in the fourth quarter of 2020. The decrease of approximately 400 basis points was largely driven by the impact of commodity and labor inflation. As mentioned on our third quarter call, we did increase menu prices approximately 3% in early Q4 to combat these headwinds. We do expect these headwinds in both labor and commodities to continue in 2022. We expect restaurant level adjusted EBITDA margins to be negatively impacted in each of the four quarters. We plan to partially offset these increases through additional menu price increases, as well as operational efficiencies. During the first quarter of 2022, we did increase menu prices approximately 1.5%. As a result of this current pricing action, combined with the previous actions taken in 2021, we estimate the net price in effect in Q1 of 2022 to be in the range of 7% to 7.2%, which is slightly below inflation. Our G&A expenses increased $39.4 million to 37% in the fourth quarter of 2021, from 10.1% in the fourth quarter of 2020. This $39.4 million increase was due primarily to a $29.3 million increase in equity-based stock compensation expense, a $6.6 million option holder payment, and $2.9 million of transaction related expenses, all associated with the IPO. The remaining $600,000 increase in G&A was due to ongoing costs of the business, largely within wages. We are continuing to invest in G&A this year, with an eye toward the long-term growth potential for the company, and expect to spend between $70 million and $75 million, inclusive of equity-based stock compensation expense. Pre-opening expenses were relatively flat in the fourth quarter of 2021 versus the fourth quarter of 2020, as we opened two restaurants in both quarters. We expect pre-opening expenses to be between $6 million and $6.5 million in 2022, as we anticipate opening seven new restaurants during the year. All this led to adjusted EBITDA of $23.2 million in the fourth quarter of 2021 versus $23.5 million in the fourth quarter of 2020, a decrease of 1.2%. Below the EBITDA line, interest expense was $7.6 million in the fourth quarter of 2021, a decrease of $3.2 million from the fourth quarter of 2020. This decrease was driven by the payoff of our Second Lien Term Loan and lower outstanding borrowings under our First Lien Term Loan. During the fourth quarter of 2021, we also recognized a $7.3 million loss on extinguishment of debt due to prepayment penalties and a write-off of debt discount and deferred issuance costs. Now turning to the balance sheet, as previously mentioned, we use proceeds from the IPO along with cash on hand to repay the redeemable preferred equity in full, repay outstanding borrowings under our Second Lien Term Loan, and purchase LLC Units from certain pre-IPO LLC members. After making all those payments, our balance sheet remains in a strong position, and we ended the quarter with $39.3 million in cash. We will be using our cash balance plus operating cash flow to support our strong growth in new restaurant openings. In 2022, we expect capital expenditures to range between $60 million and $65 million. Thank you for your time. And with that, I'll turn it back to Michael.

Thanks, Michelle. Before we open for questions, I just want to reiterate what our main goal is as a company. We are committed to taking care of our team members, who in turn create an unrivaled experience for our guests. That experience is our priority. In a world full of stress, we want to be a stress relief. Our guests can expect a fun atmosphere and a great meal at an amazing price. We want to be their oasis. You can see by our sales and comp trajectory that consumers are choosing Portillo's; we have demand. Commodity and labor pressures will come and go. The world may face uncertainties. But we're going to keep the hot dog steaming and the cheese sauce flowing. So, thank you. Operator, turning it over to you.

Thank you. We'll now be conducting a question-and-answer session. Our first question comes from the line of David Tarantino with Baird. Please proceed with your question.

Hi, good morning. My first question is on the margin outlook. Michelle, given all the moving parts you described on the cost inflation outlook, and then this incremental pricing that you said in the first quarter? How are you thinking about restaurant level EBITDA margins for the near-term, I guess for 2022, if you can give us a sense of the framework that we should be thinking about?

Yes, David, obviously, given the fluidity of the situation, right, I mentioned that, you know, just in January, we had commodities at 5% to 7% inflation, and now we're at 13% to 15%. It's a very fluid situation for us. But as we think about that, we know margins will be pressured. And I'm not giving any definitive guidance on margin for a reason, and that's because of the uncertainty surrounding that. But I do expect it to be pressured; I expect it to be pressured against what we saw both in the third quarter and fourth quarter, coming into the first quarter, as well as the out quarters in 2022, simply because of that commodity outlook. And I also want to remind you, as you think about restaurant level EBITDA, the labor market continues to remain fluid as well. Michael and I, as he mentioned, are going to continue to look at pricing as a lever, but also at operational efficiencies. We do want to remain price laggards, as he mentioned, but I do expect margins to be pressured.

And then maybe as a related follow-up. It sounds – I understand the philosophy on being a price laggard. But do you have a sort of long-term target that you want to manage to on that line? I guess, some of those inflations sounds like it's not temporary, so is there a path to I think in the past, you've had mid-20s restaurant level EBITDA; is that a goal longer-term, and I guess, how do you get there over time?

Yes, obviously, we want our goal to continue to be to produce the margins that you and we've seen historically, David. And the mix of our margin profile is going to vary in terms of our core Chicagoland market versus our outer markets. So, I'll just remind you that as we continue to build outside of our core market, those outer markets will naturally pressure margins, regardless of what's going on in the inflationary environment. So, that's just a reminder. Absolutely, as Michael and I think about the margin profile, we think about the next core Chicagoland market, which traditionally has been in the 30-plus percent margin range, versus the outer markets. The blended range, I would expect to be above the 20% range as we move forward.

David, I can add to what Michelle mentioned. During uncertain times like these, we believe that while others may be reducing portions and increasing prices above inflation, our philosophy is to attract more customers. We want to be an excellent option for consumers and are very aware of the price pressures they are experiencing. Our objective is to increase traffic, transactions, and revenue. Additionally, Michelle and I prioritize margin dollars over margin percentage. Our focus is on working hard to grow margin dollars, and we are not as concerned about the percentages.

Great. Thank you, both.

Good to hear from you, David.

The next question comes from the line of Nicole Miller with Piper Sandler. Please proceed with your question.

Good morning and thank you. Just kind of following up on that topic, but asking in a different way. So understanding the lag strategy on price, I was curious if you or how you manage the gap? So, like you said, Michelle, back in January, if you were facing 5% to 7% inflation and still had 7% price, who knows? If you would have put all that into effect, but let's say you're managing at most a 200 basis point gap or no gap. I mean, it could have been in your favor frankly. And now you could be facing like a mid- to high single-digit gap. What gap is in the model that still allows you to achieve a store level margin percentage or dollar POS profit growth?

Yeah, I think, Nicole, to Michael's point, the way that we're thinking about it is clearly in terms of dollars. But there was a reason why Michael and I put a pricing action in effect in January, because we saw some of those additional headwinds coming into play, right, we pushed out an additional point and a half of pricing in the first quarter of '22 to combat some of these headwinds. But remember, pricing is not the only action we've mentioned. We're still looking at operational efficiencies as a means to close that gap. But we don't want to get ahead of ourselves on pricing either, Nicole. We understand, as Michael mentioned in his commentary, that there is inflation going on all around our consumers, and our guests, and we want to continue to drive traffic into our restaurants and provide good value. So yes, we know there's a gap there and we need to continue to address it to close that gap. But we're looking at a couple of different mechanisms outside of just pricing. I want to be clear that what I said holds true that we do think that margins will take a hit as a percent—they will definitely be impacted in the short term as we work through these challenges.

Maybe one other way of looking at it, and it might not be associated, but I'd be curious about Michael, your comments at the very beginning of the call, the benefits of the multi-channel model. So how are employees and/or guests impacted if you were to push one channel over another or turn one channel on or off? I mean, previously, you've been mandated, for example, to close dining rooms. Is it better to push everybody through a drive-thru? Is there some kind of impact that benefits employees or customers in terms of speed, service, accuracy, or even benefits the enterprise and margins, or is it really kind of normalized all else equal?

To be honest, I don't believe we focus on directing our customers to a specific channel. What's important is responding to how our customers prefer to experience Portillo's. During the height of COVID, having a drive-thru, digital options, and off-premise services proved critical. However, we are now noticing a return of customers to our dining areas. In 2019, 53% of our business was dine-in; in 2021, that figure dropped to about 36%, but it is gradually increasing. We aim to cater to consumers in whatever way they choose to engage with us. Our priority is to be a consumer-centric company. We want them to have an enjoyable experience at Portillo's, serving as a comfort in a stressful world, without excessive costs. Currently, high fuel prices are impacting consumer disposable income, and we firmly believe that offering great value will resonate with consumers in the short term. If fuel and commodity prices decrease in the future, we will reassess our pricing strategy. For now, we feel confident in our strong financial position, generating substantial cash flow, which allows us to capture market share and enhance guest experiences.

Thank you.

Thank you. Our next question is from the line of Chris O'Cull with Stifel. Please proceed with your questions.

Thanks. Good morning, guys. Michelle, my question is regarding the preopening CapEx. It was a lot higher than we had expected, but unit opening guidance was unchanged. Are you seeing greater inflation there, or is there some sort of timing issue at the end of the year?

Both, Chris. To answer your question. I'll start with CapEx: Yes, we're seeing clear inflationary pressures in our build costs. Right now, our build costs generally ran between $4.5 million to $5 million, and we're seeing about $1 million higher build costs on the high end of that range, so call it about $6 million of build costs that we're seeing today. Additionally, the CapEx includes build costs for restaurants that will open in early 2023. We’re also investing significantly in technology. Michael mentioned the point of sales system; we're also putting in digital menu boards in all of our restaurants, so there's some technology investment in that CapEx number as well.

Okay. That's helpful. Can you explain how the pricing will progress for the remainder of the year without any additional pricing? Also, could you share your thoughts on the timing of any pricing actions?

Yeah, absolutely. I don't know exactly what we're going to do for the rest of the year, Chris, as Michael mentioned, right, we want to remain flexible in how we approach pricing. But as an example for Q2, if we did nothing else, and we just rolled forward with the pricing actions that we took in Q1 of this year, as well as the pricing actions we did in 2021, Q2 would have a set about a 5% price, because we do have some of that price dropping off that we took in 2021 in Q2 as well. Looking into the out quarters, it's generally going to run a little bit under that around four-ish percent, but that again, Chris, depends on what we're going to do and what pricing actions are taken in 2022. So I can't say for certainty that this will be exactly what it is, but at least I want to give you some visibility into Q2, which gives us some visibility into the first half of the year. But we want to keep our options open in terms of when and how we take price.

Helpful. Thank you, guys.

Yes.

The question comes from the line of Andy Barish with Jefferies. Please proceed with your questions.

Hey, good morning, guys. I would imagine even with some of the challenges in Q4 and what I imagined was some overtime spending and things like that, you still saw some pretty decent labor productivity and talking about operational efficiencies. This year, are there a couple of things we can focus on that front, as wage inflation continues to move higher?

Yes, thanks. First of all, great to hear from you, Andy. I would tell you that there's both labor efficiency and productivity; they're two separate things. We've gotten really smart at training our team members historically, with COVID, we had a stilted operating model. Now that we're getting back into a healthy operating model, I think we're going to see our productivity measures improve. We look at items per labor hour, and I believe we're going to see our items per labor hour improve to two very strong numbers. That gives us some productivity; it's the trade-off. We're paying more per hour, but using fewer hours. The second way we can enable that is through productivity enhancers that just keep adding up. A couple of examples we've done: we do a lot of catering, and we've switched to boxes that just pop and lock instead of ones we needed to tape. This saves hundreds of hours. We have catering bread that's pre-cut now, and we’ve previously cut it by hand. This has saved hours and reduced food waste. Another change is that our Maxwell Street Polish sausages used to require trimming by hand; now they arrive pre-cut. There’s a raft of ideas like that we’re pursuing to eliminate wasted effort in our restaurants. The caveat is, we will not negatively affect the consumer experience. We're focused on that.

Thanks. Let me just shift to the top-line. Michelle, you talked about the acceleration in March last year? Do you see that in the two-year trends running in the mid-20s; is that true through January and February as well? I know there are a lot of moving pieces, but just trying to get a sense of where things are running currently?

Yes, I mean, definitely to your point, Andy, lots of moving pieces. But yes, I mean, clearly, we were seeing the commodities, as I mentioned, in that 13% to 15% range that is impacting us. As we look at rolling into this year, too, we continue to staff up, which is a good thing, right. We're continuing to staff at the level we need to be, and our labor utilization numbers look favorable. Looking at some of the performance in the fourth quarter, and I think Michael talked about productivity—last quarter, we saw that lower staffing levels as well. So, as we start to staff up in Q1 and beyond, that puts a bit more pressure on that labor line as well, as well as the commodity line. Those are two things to consider as we look at Q1 versus say Q4 and some of those trends that sway toward something that's higher than what we saw in Q4.

I appreciate the call. I fully understand. However, I'm curious if there's a significant difference in the two-year trend of same-store sales in March compared to the first couple of months of the year.

Got it. Yes, no. February, Andy, is traditionally the lowest month for us in terms of sales. As we come out of the colder February into March, our sales trends, when we view average weekly sales and looking at that nitrogen, our trends are definitely improving. Remember we're comping over 24.6% from period three of last year, so we're comping over a big number, but our sales trends remain very healthy. To Michael's point, we have demand.

Right. If you go back and look at January and February of 2020, those were actually really good numbers for us. We were performing really well, and then things fell off due to Omicron in March of 2020. So, then when you go to 2021, we look good in January and February because we're lapping strong numbers with COVID still occurring. Then in March 2021, we looked really good because we were lapping a complete shutdown from 2020. This year, the numbers are lapping decent numbers in January and February and really good-looking numbers in March. But the two-year stack is consistent, and we feel it looks strong. The three-year stack looks even better when you compare what we’re doing this year versus 2019.

Yes, if you look at the two-year stack Andy, in Q1 of last year, we achieved a 0.8% comp, and then we provided the range of 7.5% to 8.5% for Q1 of this year. To Michael's point, we are very comfortable with the two-year stack in Q1 of 2022 and how that shapes up.

Okay. And then just one final one from me, looking further back historically, in periods where gasoline prices have been rising, what have some of the long-term operators in the system seen in the Chicagoland market where you've had the longest operating and densest presence?

Yes. When you backtrack and review Portillo's performance during the Great Recession, the recession early 2000s, or even the smaller recessions in the 90s, we are considered a counter-recessionary business; our business tends to perform well. My belief is that, as guests, when they encounter rising prices, our offering provides them with value-based respite while others might be increasing prices. Amid rising fuel prices, we want to capture traffic as a result of that value offering. The margin pressures are idiosyncratic, but demand will increase as we work to enhance guest experiences. We will address margin issues over time, whether it's in Q2, Q3, or whenever, but consumer demand is paramount, and we are fortunate to have a P&L flexible enough to invest in guests right now.

Thank you very much.

Thank you, Andy.

Thank you, Andy.

Our next question is from the line of Dennis Geiger with UBS. Please proceed with your questions.

Thanks. Good morning, Michael and Michelle. It's encouraging to hear that because of how you treated your people, and I assume because of your hiring practices, you've not had to limit service channels or hours of operation. Michelle, you spoke to some certainly nice improvement in staffing levels. Could you give us the latest on staffing relative to where you'd like to be, maybe how short you are, if you're short at all on staffing levels?

It's a great question. It's a little nuanced because I like to think about what an ideal number of team members is for each restaurant versus if we are able to staff all the hours that we want at each restaurant. Because you can staff the hours, you're just asking a lot of your folks; they're working more than you want them to and more than maybe they want to do, and you're paying a little overtime. Current situation is we're probably about 10% light in bodies. There’s a daunting task with entry wages continually rising. This is like a game of musical chairs. I want to ensure Portillo's has a chair when the music stops. We will continue to be smart and thoughtful in investing in our frontline team members. We can live with being 10% down for a while, but I don't want that number to go much lower than that.

That is very helpful. Thank you. Then just another one, as it relates to the new bill passed, I’m sure you spoke to the million dollars or so in higher costs. Could you clarify if that's basically all inflation versus anything unique to the upcoming new build restaurants versus what you've built historically? And I guess the follow-up, which might be next to impossible, is could you share how you think about what's sustainable as it relates to higher costs from the inflation versus maybe where you might have visibility into what's a bit transitory? Thank you, guys.

Yes, that's a great question, Dennis. I wish I could fully and honestly answer it; that would be a tremendous position to be in. So here's what I can say: it is truly inflationary cost. We're seeing increases in steel, masonry, wood, labor associated with construction, and fuel getting it to our site. It's truly inflationary costs; our team is working smart and hard to ensure we’re value engineering the buildings to maintain quality. We didn't anticipate a war in Ukraine, or fuel costs at their current levels, so we must maintain transparency. What will happen in three to six months? I don't know. I would be surprised if cost growth continues; that would be shocking to me. However, we’re still building with certain returns on invested capital targets that we are non-negotiable on. Even now as we're building, we're very comfortable with the return on investment that these buildings will bring and the total cash flow, cash on cash returns generated. That is a non-negotiable for us.

That's great. Thank you.

You bet.

Our next question is from the line of Sharon Zackfia with William Blair. Please proceed with your question.

Hi. Good morning. I appreciate the color on January and February. I guess, I'm curious whether you saw any noticeable impact from the vaccine mandates and Polk County during that timeframe? And concurrently, whether you've seen a benefit that's been lifted? Also, I just want to clarify, I assume you're floating post the kind of contracts for B Class, which I think is through March or April. Are you just using a float on all the proteins? And are you confident there will be enough supply if you don't lock-in?

Yeah. Sharon, good to hear from you. Let me answer the first part of your question and then turn it over to Michelle. You obviously know about the Vax mandates in Chicago in December and January. It was crazy, to put it mildly. As we saw the Vax mandate come off, we observed a significant uptick in our performance. You can see that in underlying demand. Our trajectory is good; our restaurant dining rooms are now revitalized because people want to go out. Chicagoans have expressed their desire to dine out again, and that’s showing in our restaurants right now, which gives Michelle and I confidence about strong consumer demand. The cost-related issues we have will be dealt with but we’re focused on capturing as much consumer demand as possible.

Sharon, in regard to our commodities, we were 100% in our NRB flats in Q1. We have locks in place for the remaining quarters: Q2 is locked at about 40%, Q3 at about 50%, and Q4 around 70%. So when we blend it all together, we would estimate we're looking at about 50% locked on the flat for the year. What we just recently did, due to volatility, was enter into a fixed pricing contract on our hot dogs, which comprise around 6% of our basket. We've locked into this pricing arrangement for April through the rest of the year to dampen volatility. Outside of that, we're floating with the market on our other line items.

Okay. Thank you.

Our next question is from the line of Gregory Francfort with Guggenheim. Please proceed with your question.

Hey, thanks. I have two quick ones. The first one is just on wage inflation. Could you frame where it is right now—either from a total wage inflation perspective or hourly wage inflation perspective? Are applications picking up? Some companies have reported that, and I'm curious if you guys have seen that as well.

Greg, great to hear from you. I think Michelle said it that in Q4 2021 versus Q4 2020, our wages were up about 20% for our frontline hourly workers. We think this pace of growth will slow down, but we're not seeing an end in sight to high-single-digit, low-double-digit wage inflation. We're focused on being surgical in our wage increases—when we add them, where we add them, right? Whether they go to night shifts, weekends, day shifts; which restaurant has what problem. We're trying to be precise and that should help us. Regarding applications, we recently opened Joliet without issue. We had no problem hiring 100 people. We’re now over 120 team members signed for the St. Petersburg restaurant and our operators are reporting high-quality candidates coming in.

Got it, Michael, thanks. The other question was on Texas; it’s great to see the news. Can you detail the plan and whether you plan to encircle Dallas or come in from the suburbs? Just how you're currently thinking about that now that the news is out?

Yes, I just want to say, I don’t know if the folks on the phone are familiar with Grandscape development, but it’s worth visiting. It’s an amazing site featuring a Nebraska Furniture Mart that does $1 billion of sales. It draws in a ridiculous attachment. We're positioned in front of a massive sporting goods store, making for an invite-only venue. We're thrilled to be part of this remarkable undertaking. It’s a tremendous piece of development. It’s within five minutes of Toyota’s North American HQ; it’s an incredible office complex. This is one of the greatest sites I've seen. We're super excited and feel honored to partake in this development. We're focused on building our scale in the Dallas-Fort Worth metroplex rapidly. This strategy will help us build in Dallas without a doubt, as its population is growing and is likely to surpass Chicago’s soon. We envision 30-plus restaurants here, just as we have in the Chicagoland market. Dallas is going to be an amazing market for Portillo's. Once we establish scale there, we can explore other areas within Texas. But we’re committed to Dallas, aiming to make it extremely successful, building our scale there.

Thanks, Michael.

Our final question is from the line of Sara Senatore with Bank of America. Please proceed with your question.

Hey, thank you very much. Just two questions, please. The first is, you mentioned that Joliet's new prototype is serving an unbelievable amount of food through off-premise. Could you give any more color on how we should think about volumes? Is it the type of thing where you actually see volumes that are similar in aggregate to a standard restaurant sort of model or should we think about it more just in terms of the average store x the dining room capacity and the mix?

Yes. We're thrilled with Joliet's performance; it's doing everything we hoped. Keep in mind, it opened in the heart of the winter in Chicago, with terrible weather, yet it's generating over $140,000 weekly at the moment. I believe it will continue to build momentum, and we believe this location has incredible potential. The downside is it's not relieving much pressure from Shorewood, just about five miles away. Shorewood is still bustling. It's early, but I wouldn't model it out yet as it’s providing more than we anticipated.

The second question pertains to your comment about portillo's being countercyclical. I just want to clarify—I think when there's pressure on consumer income, your sales flow like all the restaurants, but less so. I’m just trying to gauge how to think about your concepts in the context of a potentially softening consumer demand or under pressure incomes?

Yes, that was a great question, Sara. Michael mentioned earlier the current inflationary times and how Portillo's provides good value for our consumers with our average per person check under $10. People often seek solid value in times like this, and I think Portillo's offers that. In past recessionary environments, Portillo's has performed well, and our historical performance suggests we are well-positioned to manage through these economic pressures.

That was perfect. Thank you very much.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. This also concludes today's conference. You may disconnect your lines at this time. We thank you for your participation and have a wonderful day.