Portillo's Inc. Q3 FY2023 Earnings Call

Thank you, operator. Good morning, everyone, and welcome to our fiscal third quarter 2023 earnings call. Our 10-Q earnings press release and supplemental presentation are posted at investors.portillos.com. With me on the call today is Michael Osanloo, President and Chief Executive Officer; and Michelle Hook, Chief Financial Officer. Any commentary made here about our future results and business conditions are forward-looking statements, which are based on management's current expectations and are not guarantees of future performance. We do not update these forward-looking statements unless required by law. Our 10-K and our quarterly 10-Qs identify risk factors that may cause our actual results to vary materially from these forward-looking statements. Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Now, let me turn the call over to Michael Osanloo, President and Chief Executive Officer.

Thank you, Barb. Good morning, everyone. Thank you for joining our third quarter 2023 earnings call. We demonstrated excellent operating leverage this quarter as total sales growth of 10.4% translated into restaurant-level EBITDA growth of 22.9%. These results highlight the benefit of our throughput, operational efficiency, and labor utilization even as we continue to expand our restaurant base. Our ability to sustain profitable growth is a key differentiator for Portillo's. The strength of our brand, the consistency of our operations, and the ongoing execution of a disciplined development strategy all support our fantastic business model. At our Development Day in September, we talked about how profitable unit growth is the key driver for our valuation. We also shared our plans for accelerating that growth and expanding our markets, which we know fans across the country are excited about. In fact, we've already had a great reaction from fans in our new frontiers of Colorado, Nevada, and Georgia. We can confidently play the long game because of the financial strength of our business. It continues to carry us through the ebbs and flows of the current economic environment. As a growth company, we expect the contributions of our newly opened restaurants to increase that momentum. And in Q3, we can already see the impact of new restaurant development as a countercyclical factor. Revenue contribution from our newly opened restaurants meaningfully drove year-over-year growth. The bulk of that improvement comes from our class of 2022 restaurants, which continue to outperform our underwriting expectations. We're opening and operating our new restaurants incredibly well, and our early read on the class of 2023 is that it will also continue this strong performance. In the third quarter, same restaurant sales grew 3.9%, despite an industry-wide transaction sluggishness. The good news is that we've already seen improvements going into the fourth quarter. Comps will fluctuate as they've always done in this industry. What's different for us now is the growing strength of our development engine. Keep in mind that we entered this year with 72 restaurants and we'll end the year with 84 restaurants. So, investors can count on our self-funded development to drive revenue growth in the near term not just in some far-flung future. Our third quarter restaurant-level margin of 25.1% increased 250 basis points year-over-year. We're also well on track to deliver year-over-year margin expansion for full-year 2023. We're doing this even as we add more restaurants in a single year than we ever have throughout our 60-year history. Again, this is a testament to our profitable business model. We generate enough operating cash flow to self-fund all of the development plans we shared with you several weeks ago and few growth companies can say that. Speaking of growth, let's talk about what's left for the class of '23. In Q3, we successfully opened Queen Creek, Arizona and Allen, Texas, both of which feature our more efficient modern kitchen design. And we've since opened in Cicero, Illinois and will open next week in Arlington, Texas. The other four restaurants in the class of 2023 Fort Worth, Texas; Clermont, Florida; Rosemont and Algonquin, Illinois are on track to open in the fourth quarter. As a reminder, we will have opened 12 restaurants this year. Nine of those are in the Sunbelt, four in Texas, three in Arizona, and two in Florida, and we're still growing the Midwest with three in our home state of Illinois. As we continue to grow, I'd like to thank our amazing team members for bringing Portillo's to life. They're the reason why Portillo's is an experiential brand with a growing fan base. Guests can rely on Portillo's for a delicious meal at a great price point in a vibrant environment. I'm certain that by taking care of our guests, our team members make a meaningful impact on driving long-term shareholder value. So, with that, let me hand it over to Michelle to discuss the quarter's financial performance.

Great. Thank you, Michael. In Q3, we continue to see strong top line revenue growth. Revenues were $166.8 million, reflecting an increase of $15.7 million or 10.4% compared to the third quarter of 2022. This increase in revenues was primarily due to the opening of new restaurants in 2022 and 2023 and an increase in our same restaurant sales. New restaurants contributed approximately $11 million to revenue growth in the quarter. Same restaurant sales increased 3.9% during the third quarter, which was attributable to an increase in average check of 7.4%, partially offset by a 3.5% decrease in transactions. Higher check was driven by an average 9.1% increase in menu prices, partially offset by product mix. As Michael mentioned earlier, we have seen improvements going into the fourth quarter on our combined transactions and mix. We are committed to delivering on our long-term revenue growth targets primarily through new restaurant growth, while continuing to deliver positive comp growth. Food, beverage, and packaging costs as a percentage of revenues decreased to 33.3% in the third quarter of 2023 from 35.3% in the third quarter of 2022. This was primarily due to an increase in our revenue and lower third-party delivery commissions, partially offset by a 3.5% increase in commodity prices. We continue to estimate mid-single digit commodity inflation for the full year. Labor as a percentage of revenues decreased to 25.5% in the third quarter of 2023 from 25.9% in the third quarter of 2022. This decrease was primarily driven by an increase in our revenue, partially offset by higher labor utilization, incremental investments in our team members, including hourly rate increases and variable-based compensation. Hourly labor rates were up 1.9% in the third quarter of 2023 and up 4.8% year-to-date versus the prior-year periods. In the third quarter, we made additional wage investments in our team members and remain committed to providing a compelling compensation and benefits package. We continue to estimate mid-single digit labor inflation for the full year. Other operating expenses increased $1.7 million or 10% in the third quarter of 2023. This was primarily due to the opening of new restaurants, higher credit card fees as our transition to cashless drive-thrus drove an increase in credit card transactions, as well as an increase in utilities and insurance expenses. Occupancy expenses increased $0.6 million or 7.4%, primarily driven by the opening of new restaurants in 2022 and 2023. As a percentage of revenues, occupancy expenses decreased 0.2% compared to the prior year, driven by an increase in our revenue. Restaurant-level adjusted EBITDA increased 22.9% to $41.9 million in the third quarter of 2023 from $34.1 million in the third quarter of 2022. Restaurant-level adjusted EBITDA margins were 25.1% in the third quarter of 2023 compared to 22.6% in the third quarter of 2022. The improvement of restaurant-level adjusted EBITDA is on top of opening six new restaurants in the first three quarters of 2023, which all have a lower margin profile to start. We believe this improvement was a result of our ongoing efforts to deploy strategic pricing actions, elevate guest experiences, and implement operational efficiencies. The strength of our brand, the consistency of our operations, and the ongoing execution of a disciplined development strategy all drive long-term shareholder value creation. Near term, we do anticipate pressure on restaurant-level adjusted EBITDA margins from the planned openings of six new restaurants in the fourth quarter and the ongoing roll-off of pricing. On pricing, as a reminder, we have taken two pricing actions this year. In January, we increased menu prices by approximately 2%. At the beginning of May, we increased menu prices by approximately 3%. These increases continue to combat inflationary cost pressures and contribute towards our goal of restaurant-level adjusted EBITDA margin expansion for fiscal 2023. We did have 3.4% of pricing that rolled off in October, which puts us at an effective 5.5% price increase the last few months of this year. We will continue to monitor our cost pressures, the competitive landscape, as well as consumer sentiment to inform our pricing decisions in the coming quarters. Our G&A expenses increased $0.8 million to 11.3% in the third quarter of 2023 from 12% in the third quarter of 2022. This increase was primarily driven by higher variable-based compensation and an increase in wages and related costs, partially offset by decrease in professional fees and insurance expenses. We are currently estimating G&A to be in the range of $78 million to $80 million for the full fiscal year. Pre-opening expenses increased $1.6 million to 1.4% in the third quarter of 2023 from 0.5% in the third quarter of 2022. The increase was due to the timing and geographic location of activities related to our planned new restaurant openings. All of this led to adjusted EBITDA of $27.3 million in the third quarter of 2023 versus $21.6 million in the third quarter of 2022, an increase of 26.2%. Below the EBITDA line, interest expense was $6.6 million in the third quarter of 2023, a decrease of $0.5 million from the third quarter of 2022. This decrease was primarily driven by improved lending terms associated with our 2023 term loan and revolver facility. As of the end of Q3, the effective interest rate on the term loan and revolver was 8.5%. Income tax expense was $2.6 million in the third quarter of 2023, an increase of $1.6 million from the third quarter of 2022. Our effective tax rate for the quarter was 28.6% versus 23.9% in the third quarter of 2022. Our effective tax rate increased versus the third quarter of 2022, primarily driven by an increase in Class A equity ownership, which increases our share of taxable income or loss. We expect the full-year tax rate to be approximately 21% to 23%. We ended the quarter with $12.9 million in cash. As a reminder, we invest our operating cash flows and available cash into our future by self-funding our new restaurant growth. We currently estimate the CapEx range to be $75 million to $80 million versus the previous range of $70 million to $75 million. We increased this range based on capital being deployed ahead of the 2024 pipeline. Our average net build cost per restaurant remains in the range we disclosed at Development Day in December. We remain committed to delivering healthy top line and bottom line growth in 2023 and beyond. Thank you for your time. And with that, I'll turn it back to Michael.

Thanks, Michelle. And before we open for questions, I just like to reiterate how proud I am of Portillo's, our teams, and all we have to offer. We're a growth company and we continuously earn the right to grow because we manage our core business profitably. Q3 was another quarter with really great margins. Our investors can count on us to deliver on both the top and bottom line to keep funding that growth. This starts with efficient operations which our engaged team members drive every single day. Their dedication and hard work creates a fantastic experience for our guests and keeps them coming back. This is our flywheel and you'll see that it's really starting to spin. We expect our momentum to last long into the future. And with that, let's open the line for questions. Thank you.

Hi, good morning. I know you don't normally talk about recent trends, but you did bring it up on the call and I think a lot of others have had to evolve just given kind of what seemed to be a return to more normal seasonality in the quarter. I guess, do you concur that part of the slowdown that you saw in the third quarter was more normal kind of pre-pandemic seasonality or do you think there's something else happening in the business? And as you think about the rebound here in October, how do you think about pricing power value proposition as you look towards 2024?

Good morning, Sharon. Thank you for your question. While we usually prefer not to discuss ongoing situations, we believed it was appropriate given the current context and others' opinions. We are experiencing strong momentum in October, and I agree that we are returning to a more typical rhythm in the restaurant industry reminiscent of 2019. The third quarter has traditionally been slower for restaurants, but we typically rebound strongly in the fourth quarter. We're observing a more consistent trend compared to the past, which is encouraging, and we are optimistic about our fourth quarter. Regarding your second question, we are very diligent in monitoring our pricing against our competitors. We analyze our typical basket price in comparison to others, considering not just fast casual but also quick-service restaurants. We believe we hold a strong pricing position, but we're being cautious and will assess the situation as we move forward. We decided not to implement any pricing changes in October. As Michelle mentioned, we will have a 2% price increase to contend with in January, and we are still evaluating our options for that. We are confident we can adjust our prices, but it is essential for us to maintain our price position and provide great value to our customers. This is the balance we are trying to achieve.

Thanks. And I guess, I don't want to labor the point, but I hear all the time from investors like, how does Portillo's stack up as a long-term investment if traffic is slightly negative, which has been for a couple of quarters. So, it would be great if you could help contextualize maybe what's happening in traffic and I know you're burdened by this big Chicago base where you got kind of declining population. But if you could help frame kind of why the optimism on the long term when investors look at the near term and they think, well, what's the consumer saying with that traffic number.

Yeah. I think you actually said it well and thank you for teeing up the answer. But, look, the Midwest and particularly in Chicago, we're in a negative population state, right? So, as population declines, that makes transaction growth very, very challenging. You effectively have to steal share from other people. As I enumerated, the bulk of our growth is Texas, Florida, Arizona, all states with significant population growth. And so, we are putting ourselves in a position where, just from a transaction standpoint, it's almost transaction arbitrage. We are repurposing capital to states with transaction tailwind and we will be a beneficiary of that along with all the other restaurant companies that are in those markets. What we like to think is that in Chicagoland and in the Midwest, we can fight the negative macro trends with the strength of our brand and steal share where appropriate. But in these growth markets where we're repotting ourselves and putting all of our capital, we can rise with the rest of the tide there. So, that's the play for us. That play is going to have some quarterly fluctuation. We're not frankly too torqued up about that. But over the quarters, the years, we're very confident in Portillo's transaction strength, in Portillo's traffic strength, in Portillo's comp strength, and especially our margin strength.

Sharon, I'll just jump in for a minute and reiterate our long-term growth algorithm right of that low-single digit comp growth and the revenue growth that we're going to generate from the new units. As we talked about on the call, that's really going to drive that revenue growth as we go forward. And we're definitely not saying, I know how important comp is and as Michael said in his prepared remarks, that will ebb and flow. But that new unit growth and the development that we see in the pipeline, I think is really going to propel us. And so, I'd say that's definitely the investment thesis for Portillo's.

Hey, good morning, guys. On the labor line, some nice leverage there, again where seasonality maybe goes against you a little bit. I think you quoted the wage increases were only around 2% for the quarter. So, should we read into that that the wage investment that you took kind of picked up steam in the latter part of the 3Q, just trying to drive those comments with the results.

No, I think, Andy, you're right. Q3 labor was up 1.9% and we did make the investments in late June, early July in terms of those wage increases and they were normal increases. So, there was nothing with the increases that was out of the ordinary, I call it. And as we go into Q4, I expect that the Q4 inflation rate will be very similar to what we saw in Q3. So, nothing I would call out, Andy, that indicates that Q4 would look any different than Q3 from an inflationary standpoint.

Keep in mind, Andy, year-to-date number on wage inflation is 4.8%. So, that's something to just have in your head.

Yeah. We started to lap, Andy, some of the wage increases that we had given in prior years that started to roll off. And, again, to Michael's point, we're up just under 5% year-to-date. And when you look it even versus 2021, we're up just under 17% and actually up 30% when you go back versus 2020. So, yes, we've made significant investments in labor over the past three years, but we're starting to see that normalize.

Great. And then just with the number of openings in the fourth quarter, any kind of guardrails or guidance on that restaurant-level margin sequentially or year-over-year, I'm assuming it's going to be down sequentially with all those new openings. But anything there that does kind of help us with those six openings in the quarter?

I would say that Cicero opened in October and Arlington will open soon. The remaining restaurants will open later in the fourth quarter. Yes, this will have some impact on margins, as the 3.4% pricing that rolls off will also affect the margin picture in Q4. Therefore, I anticipate a sequential decline in margins from Q3 to Q4. However, I do expect to see margin improvement when comparing Q4 2022 with Q4 2023.

I understand. I just have one last question. I'm glad to hear the fourth quarter is starting off in line with what we've been hearing from others and the industry data. Last year, your catering business was significantly impacted by the weather and the holiday week. Is there anything else we should keep in mind as the fourth quarter progresses compared to last year?

Yeah. Excellent recollection, Andy. We had Winter Storm Elliott, a name that will live in infamy for me. But it ruined the Christmas holiday season. It was the week right after Christmas and that's a really big week for us from a catering standpoint. So, it really pulled the rug out from under our catering business. We're hoping for more mild weather, I guess, in the Midwest. So, knock on wood for that. But that did pull the rug out from underneath us. And you will recall that this is a unique year in that we have a 53rd week. So, we obviously will report like-for-like numbers 52-week, but we do have a 53rd week, which will create a little bit of extra kind of momentum for the year.

Hi. Good morning, Michael. For what it’s worth, I'm also hoping for more mild weather in the Midwest.

Amen, David.

So, yeah. I had a couple of questions, one is on the October order trend that you referenced. I was hoping maybe you could give us some sense of magnitude of the improvement from what you saw in the third quarter, just so that we're all on the same page here.

Michelle is giving me a serious look along with my investor relations person. Let's say we are definitely seeing positive growth in transactions, and that's about all I can share at the moment. We're quite optimistic about this. Additionally, part of our general and administrative spending included some advertising in the Chicagoland area. If you're a Bears fan and you've been watching Bears games or Monday Night Football or the World Series, you may have noticed some Portillo's ads. Whenever we engage in brand-boosting marketing like that, it usually yields positive results for us. We've already observed some of that impact and I wouldn't be surprised if this helps generate additional momentum going into the fourth quarter. Therefore, we're hopeful and actively working to ensure that the traffic trends remain favorable.

Great. Thank you for that context. The other question I had is on new unit contribution. So, I guess the way we model it, it came in a little light of what we had modeled and it looked like maybe the average weekly sales for the new units was a little lower than what you saw in prior quarters. So, I just wanted to understand that dynamic and whether it might be related to kind of coming off some of the honeymoons in the early part of the year.

Yeah. I would encourage you to double-check your models and adjust timing because I think that it depending on if you assume the mid-quarter convention for each new unit, we honestly didn't do that. Most of our units are opening up towards the end of each quarter. And like the ones in the fourth quarter, you should be modeling them late in the fourth quarter. Obviously, we're already into the fourth quarter, but it's not a function of they're coming in softer. It's a function of when they're opening and when you model them within a quarter.

Perfect. And any comment, Michael, on the second Texas location, how that's opened so far?

We're very pleased with Allen and excited about Texas. I am looking forward to the opening of Arlington, which is a beautiful restaurant, and the team is ready to go. We also have Fort Worth coming soon and have already announced Denton for early 2024. I'm thrilled to reach five restaurants in the Dallas Metro area within 12 months, which is a significant challenge that we have successfully undertaken.

Great. Thank you very much.

Thanks. Good morning, guys.

Good morning, Chris.

Good morning. Michael, the industry has started to get more promotional. I think you mentioned incremental advertising here recently, but what other initiatives can the company take to keep traffic flat to positive if it needs to?

The industry has become more promotional, but Portillo's does not engage in discounts. We will not introduce a dollar menu or shrinkflation; that’s simply not our approach. I support promoting our brand through activities that remind customers of who we are, which includes marketing that showcases our delicious food. Our advertising creatively highlights the sounds of Portillo's, such as the crunch of our onion rings, making it truly effective. We are benefiting from macro trends, as our dining rooms are bustling. Customers view us as a refuge amid rising casual dining prices, as we offer fantastic food in a welcoming environment. Our drive-thrus did experience a slight slowdown in the third quarter due to aggressive discounting by quick-service restaurants. While some shoppers might choose a $1 or $2 burger instead of ours, we believe they will return when the economy improves or when they want a family meal in our dining rooms. We are comfortable with our position. We will not promote or discount, but we will consistently remind customers of the craveable nature of our food in a brand-centric way. Another important factor for us is excellent execution. We might not discuss this often, as it's a long-term strategy, but providing great guest experiences every day is the primary reason customers choose to return. It's about having a positive experience, not just about coupons or discounts. This is a medium- to long-term strategy to differentiate and drive consistent traffic through operational excellence, which is our internal mantra. We aim to be the most operationally sound restaurant company possible, and that will drive our performance.

Okay, that's fair. The margin performance this quarter was clearly impressive, and I'm wondering if there might be an opportunity to give back some of that margin improvement to enhance the value proposition, possibly by making changes to some of the menu items.

I think that's a great question. It's one of the reasons we decided not to implement any pricing changes for the rest of this year. Our pricing is coming down to 5.5%, which is one way to provide value to our customers. We have not engaged in shrinkflation or lowered quality in any way over the past couple of years. Instead, we've focused on adding value. We spend more on bacon, and I believe we offer the best bacon in the restaurant industry right now. Our bacon burgers are amazing, and we've consistently worked on improving quality. Rather than reducing prices and offering lower-value meals, we prefer to enhance other aspects of value. We want to improve the quality and quantity of what customers receive, enhance their experience, and maintain prices instead of raising them.

Great. Thanks. Good morning, guys. Wanted to ask if anything additional to highlight on the sort of observed customer behavior changes perhaps, whether it's day parts, days of the week, off-premise versus on, delivery, anything discernible over the last several months there, Michael or Michelle you would call out?

I think our channel mix is quite stable. Our drive-thrus are facing some pressure due to promotional activities in the quick service restaurant sector, while our dining rooms have gained some momentum due to challenges in casual dining. This creates a favorable dynamic for us. We're also pleasantly surprised that our third-party delivery partners continue to perform well. We are seeing growth in third-party delivery, which is encouraging, especially considering the current consumer challenges. Overall, we feel confident about our position.

That's great. Thanks, Michael. And then just one maybe two-part question. First, I guess maybe I missed this, but as it relates to cannibalization, anything there that you saw in the quarter, even if modest were some worth calling out. And then, the second sort of unrelated part of the question, I know we just spent a month, a month and a half ago spent some time on development, of course. But any kind of latest update on timing, permitting, etc., I assume it's probably steady as you go since a month and a half ago. But any update there? A lot of folks have been shifting into next year, you guys obviously are going to get these open. So, just curious if anything has shifted with the open environment on some of that timing stuff.

Yeah. Dennis, I'll take the cannibalization. There's been no changes since we gave the impact last quarter, the 60 basis points to 80 basis points. We're seeing roughly the same impact in Q3. So, it continues to be fairly insignificant for us. So, we don't expect that to be a significant headwind for us as we move forward. But it was roughly the same as it was in Q2.

Regarding permitting and related issues, I don't want to make it sound too casual, but it's pretty much the situation we're in—things are often chaotic. We're still experiencing delays with last-minute details like getting utilities connected. We've accepted that this is our new reality. As a result, we've been adding extra hours and even months into our construction schedule to maintain control over what we can, building the restaurants as efficiently as possible. For the aspects we can't control, we're allowing enough buffer time to avoid disappointment in budgeting and timelines.

Thank you. Michelle, I wanted to ask you a little bit about the idea of like sort of what flow-through margins should look like. And I think in specifically, you took sort of a fair amount of price, most of the margin expansion seemed to come from food. So, as I think through like labor and occupancy, particularly or other operating, I should say, in the context of maybe additional drags from new units coming on in fourth quarter, do you have any sort of framework for like what's the right comp number to get margin expansion on some of those six lines? And similarly, in the same vein like G&A is creeping up a little bit, so just trying to kind of calibrate incremental revenues or same-store sales versus flow-through margin on the restaurant line and also G&A. And then I'll have one follow-up question.

Sure. When comparing Q4 2022 to Q4 2023, you're right about the changes. In terms of commodities and how they affect our food line, that's where we're seeing some improvement. However, if we look at Q3 compared to Q4, the pricing adjustments will present a challenge. The new units we're adding will come online later in the quarter, which might influence our labor costs. I anticipate improvements year-over-year and quarter-over-quarter mainly due to commodities. Labor costs between Q4 2022 and Q4 2023 should remain fairly consistent, but the pricing adjustments will create a sequential impact.

Okay. Yeah, I was more thinking year-over-year just this idea that 3Q versus 3Q, you had some improvement, but mostly it seemed from commodity. So, is that sort of the same.

If you compare Q3 of last year, we were at just over 35% compared to 33% this year. I don't anticipate much change in Q4 compared to Q3 as I expect inflation to remain similar to what we experienced in Q3 from a commodity perspective.

Okay. And so, as we think about the complexion of margin, year-over-year 4Q should look similar to 3Q in the sense of most of the tailwind coming from the commodities?

Correct.

Okay. And then even with perhaps better transaction trends.

As Michael mentioned in October, we are seeing better trends. And I said in my prepared remarks, when we look at transactions mix combined, yes, we're seeing improved trends versus what we saw in Q3.

Right, but still thinking about the margin construct similarly even though trends, okay.

Yeah.

Hey, thanks. I just had a couple of quick ones. The first is, I know you guys have not historically wanted to comment a lot about trends regionally, but just given the traffic declines, I'm curious any big differences between either Chicago and non-Chicago or regional things to call out?

No, I mean Greg, first, good morning. I wouldn't say so. I think that we obviously look very carefully at our traffic trends and transaction trends. We compare ourselves within Chicagoland and outside of it. Overall, I would say the trends are pretty consistent and the improvements are consistent as well. So, I don't think there's anything unique about our performance in this market.

Got it. And then Okay. Got it. And then we've seen a few companies start to talk about 2024 labor inflation in the.

Yeah.

I find it interesting that you are operating below the mid-single digit range. I'm curious if this could be related to your regional position or if you believe this will remain consistent with your expectations for next year, even though it might be a bit early to determine.

So, I have a few thoughts to share. Our labor inflation has reached 4.8% year-to-date. I'll allow Michelle to discuss the future outlook, but there is quite a bit of variability in this situation. Overall, our labor expenses are being negatively impacted by wage inflation. However, on the staffing front, we are in a much better position compared to last year. This is a mix of good and bad news. The positive aspect is our guests are enjoying great experiences since our restaurants are fully staffed and able to manage volume effectively. The downside is that it increases pressure on our labor costs because we are spending more money. Nonetheless, it's a worthwhile investment that will pay off over time. I'm proud of our operations team for achieving better labor leverage through operational efficiencies. We have implemented a new kitchen design in Queen Creek and Allen, Texas, aimed at minimizing wasted effort. This design helps reduce unnecessary movements, such as employees walking long distances to retrieve items. Our kitchens are now more efficiently organized to decrease such conveyance, and we've also worked on reducing prep work. Therefore, three key factors are influencing our labor expenses: increasing wage rates, optimal staffing levels, and enhancing efficiency by eliminating non-value-added efforts. The combination of these elements will guide how we manage our labor costs, and we are still aiming to counterbalance most of the wage inflation. Michelle?

Yeah. Greg, I would just add, as we look at 2024, obviously we're putting those plans together. Nothing that I'm seeing today indicates that we're going to be different than what we saw this year, which when you think about that mid-single digit wage inflation, I don't anticipate us being outside of that range as I sit here today.

Got it. And maybe just one last one. I know this is kind of more model focused than I would like for this call. The last week between Christmas and New Year's, I think it shifts between 1Q and 4Q the coming two quarters.

Yeah.

Is that a big sales volume week for you and just in terms of right sizing both the impact on 4Q, but also potentially the impact on 1Q of next year?

Yeah. That's generally the week after Christmas. And so, as Michael mentioned, we see a lot of catering leading up to that Christmas time, Greg, as he mentioned. And so, I would say what we saw last year, Michael mentioned Elliott and we saw like an immediate pickup in sales last year right after the year ended in 2022. So, that first week in fiscal 2023, we saw big a pickup. So, as we're lapping that week, that 53rd week, let me just say it, could be year-over-year a little bit pressured because you had the pickup from Elliott last year versus this year, if that makes sense to you. So, long story short, I don't say it's like a huge blowout week for us I think the week prior. When you look at that Christmas Eve, Christmas timing is a lot of the bigger catering volume that we see.

Yes, thank you. Good morning.

Good morning.

Good morning, Brian.

Michelle, just to kind of follow-on those comments about 2024, do you have any kind of early thoughts on commodities next year at this point or even on the beef side, do you think there could be a little less inflation in 2023 or maybe something similar?

I don't think beef is going to lighten up, Brian, into next year. So, I think that will still be pressured. I mentioned on the last call we're taking positions into 2024. And so, when we look at the beef flats, we're trying to derisk some of that line item. And we have taken some positions into both Q1 and Q2 of next year to derisk that. But, no, I expect that to continue to be pressured. But when we look at the overall basket, I'll say the same thing I said about labor. As I sit here today, I don't expect to be outside of that mid-single digit range. We'll update you all as we get into the New Year at ICR with what we're seeing for the full 2024 fiscal year. But I'm not seeing anything today that would indicate anything beyond that mid-single digit for 2024 as well on the commodity line.

Okay. Yeah, sounds good. Just on four wall margins, I mean, they have been quite strong year-to-date, so you're kind of comfortably higher as you've suggested. Do you think that's mainly influenced by just strong new store openings, maybe they're kind of ramping a bit quicker than you thought or anything else broadly that you'd characterize has really helped store margins?

I want to acknowledge my team because the labor efficiencies we've achieved by placing people in the right positions and minimizing conveyance have made a significant difference. Without these changes, labor costs would have spiraled out of control. Michelle and her team have excelled in forward purchasing beef and implementing other innovative strategies to ensure we are not excessively impacted by beef prices. We closely monitor our beef costs compared to the market, and we are pleased with what we're spending in relation to market rates, thanks to my team’s efforts. There is a considerable amount of behind-the-scenes work that goes into maintaining strong margins. Of course, having new restaurants open that exceed our expectations is beneficial, but a lot of hard work is involved in keeping those margins healthy. Our team is doing an excellent job of safeguarding our shareholders' interests and supporting our growth.

Thank you.

Thanks, Brian.

Hi, good morning. This is Ashlyn on behalf of Brian. I'm curious if you could provide some insights on the mix. It appears to be negative again this quarter, though it has shown some sequential improvement. I understand that this negative mix situation isn't exclusive to Portillo's, but I'm interested to know if there have been any changes influencing this and what the outlook may be as we move into 2024. Thanks.

Yeah, no problem. Yeah, absolutely we did see improvements to your point in the mix going from negative 2.7% in Q2 to about negative 1.8% in Q3. I think answering to Michael's point, in Q4 we're seeing improvements on both transactions and mix. So, we're seeing some improvements of that into Q4. I'd say nothing's change underlying that in terms of we're still seeing the lower attachment, the less items per transaction, that's the main component of that mix change. So, nothing I would call out that's changed from what we previously discussed on that line item. Yeah.

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