Portillo's Inc. Q4 FY2023 Earnings Call

Greetings and welcome to the Portillo's Fourth Quarter and Year End 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Barbara Noverini, Portillo's Director of Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning everyone and welcome to our fourth quarter and full year 2023 earnings call. Our 10-K, 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 you may hear 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 identifies 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 of Portillo's.

Thank you, Barb, and good morning everyone. I appreciate you joining us for our fourth quarter and full year 2023 earnings call. I'm pleased to report that we had a successful fourth quarter, finishing the year on a positive note. In the fourth quarter, total sales rose by 24.5% to about $188 million. Same-restaurant sales increased by 4.4%, driven by a 1.3% rise in transactions. Restaurant-level adjusted EBITDA grew by 42.7% to $46 million, and restaurant-level adjusted EBITDA margins increased by 310 basis points to 24.3%. For fiscal year 2023, total sales went up by 15.8% to roughly $680 million. Same-restaurant sales increased by 5.7%, and we ended the year with average unit volumes of $9.1 million per restaurant. Restaurant-level adjusted EBITDA grew by 24.7% to $165 million, and for the full year, we expanded restaurant-level margins by 170 basis points to 24.3%. Importantly, we saw a 24.4% increase in operating cash flow, reaching a record level for Portillo's. Let’s explore the factors that contributed to this success. First, we maintained operational excellence. We believe that delivering the outstanding experience our guests expect is the best way to drive revenue and traffic sustainably. We accomplished this in the fourth quarter, resulting in robust revenue and margin performance, record-high guest satisfaction, and a current Net Promoter Score of nearly 70, which exceeds many of our competitors. We know our strategy: providing generous, delicious food at an excellent price in an engaging atmosphere. This approach is our primary method of creating value for our guests and encouraging repeat visits. In Q4, we utilized our multichannel capabilities effectively. Our dine-in service thrived, drive-thrus were busy, and pickup and delivery orders surged. We also made significant strides in our catering business. For instance, in 2023, we dedicated resources to catering, including a new concierge service to enhance our guests' ordering experience. We also improved our capacity to manage large-scale catering events, serving holiday meals to frontline workers at a major airline in both Chicago and Arizona. These investments are generating strong catering sales and will contribute to future growth in this area. Currently, catering accounts for about 5% of our total revenue, and we see potential for much more growth in this channel by promoting additional catering opportunities and expanding into new markets. Turning to marketing, leading up to the holiday season, we launched an advertising campaign in Chicago that highlighted the unique offerings at Portillo's. Rather than relying on discounts to attract customers, we reminded our loyal fans of the reasons they love Portillo's. If you haven’t seen our advertisements, we have one available on our Investor Relations website that shows how an uncomplicated message can effectively drive traffic. As we move into the New Year, we will continue to implement initiatives aimed at boosting traffic. One exciting development is the upcoming addition of two new salads to our permanent menu. We take menu innovation very seriously; new items must fill a gap, make operational sense, and be utterly craveable. Portillo's already sees over $650,000 in annual salad sales per restaurant, with our popular Chopped Salad as the top seller. Analysis of consumer preferences indicates there is room to diversify this already attractive menu category, so we created a Spicy Chicken version of our signature Chopped Salad and tested a Chicken Pecan Salad with a new Honey Peppercorn dressing. Like all our salads, these are made fresh to order and customizable. Both test salads are performing well, and we look forward to rolling them out nationwide soon. Now, regarding our development progress, we opened 12 restaurants in 2023, including six in the fourth quarter. This total comprises eight planned openings for 2023 plus four that were carried over from the previous year, marking our highest annual openings to date. I’m thrilled about what this indicates for the future as we head into 2024 with considerable momentum. We’re committed to at least nine new restaurant openings in 2024, five of which are already under construction. Importantly, we self-fund all growth, meaning our new restaurants generate cash flow immediately, which we reinvest into the business for further expansion. In terms of unit performance, I know some may be tired of hearing about our Colony restaurant in Texas, so let’s focus on other successful locations from our class of 2023. I’m very pleased with the outcomes from our growth markets, specifically Fort Worth, Texas, and Claremont, Florida, both of which have opened strongly with our new efficient kitchen layout. We also launched our second pickup location in Rosemont, Illinois, and we’re learning valuable insights from this model, which essentially operates as a drive-through without dine-in capacity. Our class of 2023 finished strongly, and we look forward to entering the Houston market in 2024. Overall, we are very pleased with our fourth quarter performance and how the year concluded. We executed our business fundamentals well and made incremental investments to enhance brand awareness. In 2024, we will continue to prioritize operational excellence and protect our value proposition, building on the attributes that have contributed to Portillo's success for 60 years. Delivering great food and an exceptional experience at a competitive price is our strategy, and it's how we achieve the financial results you've seen from us in 2023. With that, I’ll hand it over to Michelle.

Great. Thank you, Michael and good morning everyone. In Q4, we saw strong top line revenue growth. During the fourth quarter, revenues were up $187.9 million, reflecting an increase of $37 million or 24.5% compared to last year, driven by a 4.4% increase in same-restaurant sales combined with the opening of new restaurants. The same-restaurant sales increase of 4.4% was primarily driven by an increase in average check of 3.1% and a 1.3% increase in transactions. The higher average check was driven by an approximate 6% increase in certain menu prices, partially offset by product mix. We had 14 weeks this fiscal quarter versus 13 weeks last year. Excluding the 14th week, revenue in the fourth quarter increased approximately 15.3%. The 14th week and fiscal 2023 included Christmas Day resulting in six operating days. You have all seen choppy performance during the first quarter due to winter weather and consumer headwinds in our industry. We are not immune to that, but we don't expect that to derail the rest of our year. Our long-term growth algorithm reflects low single-digit comps. Now there will be years when unexpected things happen in any given quarter and years when we outperform. But on average, we have confidence we can hit that target on an annual basis. And we feel no different as we sit here today. On the development front, we expect to open at least nine new restaurants in the class of 2024. We currently expect one new opening later in the first quarter of this year with two to three openings in each of the subsequent quarters. We remain committed to delivering on our long-term mid-teens revenue growth target, primarily through new restaurant growth while continuing to deliver positive comp growth. We updated our long-term outlook in September at our development day increasing our restaurant growth and revenue targets. These are also outlined in our earnings release issued this morning. Moving on to our costs, food beverage and packaging costs as a percentage of revenues decreased to 34.8% in the fourth quarter of 2023 from 35% in the fourth quarter of 2022. This decrease was primarily due to an increase in our revenue and lower third-party delivery commissions, partially offset by a 4.4% increase in commodity prices. We estimate overall commodity inflation to stay consistent with recent trends and are currently estimating commodity inflation in the mid-single digits in 2024. Labor as a percentage of revenues decreased to 25.4% in the fourth quarter of 2023 from 26.5% in the fourth quarter of 2022. The decrease was primarily driven by an increase in our revenue partially offset by higher labor utilization and incremental investments in our team members, including hourly rate increases and variable-based compensation. Hourly labor rates were up 2.4% in the fourth quarter of 2023, and up 4.3% year-to-date versus the prior periods. We are currently estimating labor inflation in the mid-single digits in 2024. Other operating expenses increased $2.4 million or 13.5% in the fourth quarter of 2023 compared to the fourth quarter of 2022, which was primarily driven by the opening of new restaurants, as well as higher credit card fees, utilities, and repair and maintenance expenses. Occupancy expenses increased $0.6 million or 7.4% in the fourth quarter of 2023 compared to the fourth quarter of 2022, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses decreased 0.7% compared to the prior year driven by an increase in our revenue. Restaurant-level adjusted EBITDA increased 42.7% to $45.7 million in the fourth quarter of 2023. Restaurant-level adjusted EBITDA includes an impact of approximately $3.5 million due to the 14th week. Restaurant-level adjusted EBITDA margins were 24.3% in the fourth quarter of 2023 versus 21.2% in the fourth quarter of 2022, a strong improvement of 310 basis points quarter-over-quarter. For the full year 2023, our restaurant-level adjusted EBITDA margins were also 24.3%, which was an improvement of 170 basis points versus fiscal year 2022. As we said at the beginning of the year, increasing our margins was a focus in 2023 and we delivered. Our improvement in restaurant-level adjusted EBITDA margins is on top of opening a record level of new restaurants in 2023, which all have a lower margin profile to start. This improvement was the result of our ongoing efforts to deploy strategic pricing actions, elevate guest experiences and implement operational efficiencies. We will continue to focus on driving long-term shareholder value by focusing on our operational execution and a disciplined development strategy on pricing. On pricing. As a reminder, in 2023, we took two pricing actions in January and May. We recently announced an additional pricing action in January of 2024 of approximately 1.5% 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. This recent action puts us as an effective price increase of nearly 5% in the first quarter of 2024. Our general and administrative expenses increased by $3.8 million to 11.5% of revenue in the fourth quarter of 2023 from 11.7% in the fourth quarter of 2022. The increase was primarily driven by higher variable-based compensation, higher advertising expenses due to our Chicago land ad campaign, increased wages and benefits attributable to annual rate increases and the filling of open positions to execute our growth plans, partially offset by a decrease in equity-based compensation expense and insurance. In 2024, we currently expect general and administrative expenses to be between $85 million to $87 million. Pre-opening expenses increased $1 million to 2.1% in the fourth quarter of 2023 from 2% in the fourth quarter of 2022. The increase was due to the number and timing of executed and planned new restaurant openings. We expect pre-opening expenses to be between $8 million to $9 million in 2024. Please keep in mind that our reported pre-opening expenses as well as our estimate for 2024 includes deferred or non-cash rent expense as well as actual costs incurred prior to the restaurant openings. All this led to adjusted EBITDA of $26.1 million in the fourth quarter of 2023 versus $18.1 million in the fourth quarter of 2022, an increase of 44.5%. Adjusted EBITDA includes an impact of approximately $2.4 million due to the 14th week for the full year 2023. Our adjusted EBITDA margins were 15% compared to 14.5% for 2022. Below the EBITDA line, interest expense was $6.9 million in the fourth quarter of 2023, a decrease of $1.4 million from the fourth quarter of 2022. This decrease was primarily driven by improved lending terms associated with our 2023 term loan and revolver facility. As of today, our outstanding borrowings under the revolver are $13 million. Our effective interest rate was 8.4% for 2023 versus 10.4% for 2022. Income tax benefit was $0.4 million in the fourth quarter of 2023, and we had an income tax expense of $3.2 million for the year. Our effective tax rate for the fourth quarter of 2023 was negative 3.8% driven by a change in our valuation allowance. Our effective tax rate for the year was 11.5% versus 9.6% in 2022. The increase in our effective income tax rate was primarily driven by an increase in the company's ownership interest in Portillo OpCo partially offset by a decrease in the valuation allowance and the recording of net operating loss carryforwards. Our future effective tax rate will fluctuate as Class A equity ownership increases and as equity-based awards are exercised and vest. As a reminder, we invest our strong operating cash flows into our future by self-funding our new restaurant growth. Cash from operations increased by 24.4% year-over-year to $70.8 million for the year. This was primarily driven by solid revenue growth across the existing base of restaurants, the record number of new restaurant openings in 2023 and margin expansion. Note that in the fourth quarter of 2023, we pulled forward some capital expenditures to support activity for the 2024 pipeline. We are motivated to capture as many operating weeks as possible from our new restaurant openings in any year. You may see quarterly CapEx spend flex based on timing of new restaurant openings. Having said that, we are committed to staying within the $6.2 million to $6.5 million average build cost range for the class of 2024. We previously shared that we have accelerated our timeline to bring the restaurant of the future into Q4 of this year. And remember, these are expected to carry an even lower build cost. In 2024, we estimate the CapEx range to be $90 million to $93 million, which will fund our 2024 openings and the first wave of our 2025 pipeline in addition to other operational CapEx needs. We are currently estimating that 85% of our 2024 projected CapEx will be spent on new restaurant builds, including early 2025 builds, 10% on investments in existing restaurants and 5% on other discretionary capital, including investments in our commissaries. We are confident in the strength of our brand, our operational execution and look forward to continuing to deliver on our long-term outlook that was provided in our earnings release this morning. Thank you for your time. And with that, I'll turn it back to Michael.

Thanks, Michelle. Before we open for questions, I want to reiterate how pleased we are with the progress our teams made in 2023. We grew revenue and adjusted EBITDA by double digits. We generated record operating cash flow. We opened 12 new restaurants. We ended the year with positive traffic and multiyear highs in guest satisfaction. None of this is possible without our great team members. I'm extremely proud of them and thankful to our frontline folks who delight our guests every single day. I feel great about these results, and I've never been more confident about our future. Thank you.

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Sharon Zackfia with William Blair. Please proceed with your question.

Hi. Good morning. Two questions.

Good morning, Sharon.

Good morning, Michelle. It seems that you may not be able to fully offset the labor and commodity inflation expected this year. Could you share your thoughts on how restaurant-level margins may fluctuate throughout this year? That would be helpful. Additionally, Michael, given the success of marketing in Chicago, can you discuss what marketing plans you have for Chicago this year and if there are other markets where you have a strong presence that could also benefit?

Yeah, Sharon. So I'll address the first question. On pricing, we haven't made any decisions yet. It's still early in the year and how we're going to approach pricing as we go into this year. As you know, we always take an approach that generally, we want to offset our inflationary pressures with price. Having said that, though, you all know that the consumer right now is a little shaky, and so we need to be careful on how we approach pricing. And so we're going to continue to assess how that consumer is, what the competitive landscape looks like before we make any decisions further on pricing. In terms of your restaurant level margin question, when we look at the portfolio and bringing in 12 new restaurants into the base this year plus the 9 plus that we're going to open this year, we do expect to see some margin degradation from those restaurants, as they don't come out of the gate doing 20%-plus margins generally in year one. They're going to be in that high-teens. And so we do expect to see those restaurants impact restaurant level margins as we approach this year.

Yes, regarding your question, it's about marketing, specifically traffic generation. We definitely have a strategy that we employ, but we apply it selectively when it comes to TV and advertising campaigns to drive traffic. This approach has proven very effective in Chicago. We believe we are nearing a level of scale that could make it successful in markets like Arizona and Indiana as well. We have that option available to us and will not hesitate to utilize it if necessary. However, I believe that the most effective way to increase traffic is through operational excellence. We're already making investments in this area and compensating people to enhance it. The distinction between good and great service is determined by whether a guest returns frequently or less often. Therefore, we believe that excelling operationally is probably the most crucial factor for driving traffic. That said, we do have advertising, new menu innovations, and our public relations efforts as additional tools to ensure we effectively balance driving traffic and managing expenses.

Great. Thank you.

Our next question comes from Sara Senatore with Bank of America. Please proceed with your question.

Great. Thank you. And just, I guess a little bit more of a deeper dive into that comp. I guess you talked about catering and so I was curious if that was an outsized driver for the fourth quarter, but I know that's a big bigger share of the mix in the fourth quarter, but just trying to understand to what extent that a driver in the fourth quarter versus over time. And then, as we think about the advertising in the Chicagoland, I guess the sort of perception has always been that your new markets tend to comp better than the core market. One, is that fair? And two, should we think about the fourth quarter being just maybe less of a drag from the Chicagoland comp or did you actually see traffic improve sequentially across all your markets?

Yes. I'll address the catering question, Sara. When comparing catering this year to last year, we experienced some weather challenges as we approached our busy catering season in the fourth quarter last year. While there was growth in catering on a quarter-over-quarter basis, it was not significantly apparent in the fourth quarter. However, as Michael mentioned, we see a genuine opportunity to promote catering, especially in our outer markets. Therefore, our focus will be on ensuring that our guests are aware of this service outside of the Chicagoland area.

Yes, let me end up with two little builds. One is, I think the catering theme is part of a broader theme for us which is we are incredibly proud of our multichannel capabilities and it's important to us that we are masters at flexing each one of those channels. There's a lot of folks right now who are trying to learn how to do drive-through, people trying to get better catering. We're really good at all of these channels. And so, our goal is that catering, we think there's more opportunity, more tailwind. And we look at the catering performance in the core versus in our growth markets and we know that we can get better. And so that's one of the reasons I think we're excited about catering. We want that to be as strong a channel for us as drive-through is dine-in and delivery. So that's sort of the big picture. Your second theme of questions here about the trends. The trends were pretty consistent for us across all of our markets. I would say that we probably saw a little bit of an acceleration with the advertising campaign in the Midwest. So that certainly helped. But we had very, very positive trends across all of our markets for the fourth quarter.

Got it. Thank you very much.

Our next question comes from Chris O'Cull with Stifel. Please proceed with your question.

Thanks for taking my question and congratulations on a strong quarter. I had a follow-up question just on advertising. And Michael, I appreciate the need to drive frequency by delivering on the experience inside the store. But just curious, why not have a more consistent advertising strategy in Chicago that keeps the brand top of mind really during important seasons for the brands?

Thank you for the compliment. I believe we do have a plan, but we're not ready to share the specifics with everyone. We have entered and exited the Chicago market as needed and will continue to do so. Advertising during an election cycle is challenging because of the potential backlash from local politicians. Therefore, if we choose to advertise, it will be done selectively and strategically to ensure we achieve good returns on our investment. I prefer not to set a rigid advertising budget for each quarter. Instead, we aim to be more opportunistic with our ad spending.

Okay, that's fair. When you look at the early sales trends of the 2022 and 2023 class of new units, do they continue to perform better than your previous classes at a similar stage, especially those new units outside of the Chicagoland area?

Yes, Chris, as you know we put out at our development day how the class of '22 was trending from in that 1st year that $8 million AUV level. Class of 23 frankly Chris is really very new and young. So, we opened six of the eight just in Q4 alone. So, it's really too early to tell. But I'll point to what Michael said which is we're very happy about the performance, particularly when you look at those outer markets you called out Fort Worth and Claremont. But really it's too early for me to make any commentary on the class of 2023 because it's just so new right now.

Yes, fair enough. Thanks, guys.

Thanks Chris.

Our next question comes from Brian Mullan with Piper Sandler. Please proceed with your question.

Hey, thank you. Just a question on Texas, you're off to a great start in that market. Can you just speak to how the Arlington and Fort Worth openings went? And out of curiosity, do you see any cannibalization effect that at the Colony or at Allen that you could observe? And then a related but separate just talk about the entrance into Houston this year kind of what's the roadmap?

Yes, we are very excited about Texas. Our response from people in the Dallas-Fort Worth area has been fantastic. We’ve gone from having no restaurants a little over a year ago to opening four, with a fifth one on the way, which makes us really happy. The Colony had an incredibly successful first year, which isn’t surprising given our strong brand and established customer base. There was significant demand for us, leading to a lot of visitors from beyond the usual area, including people driving 30 to 40 miles, and even from Houston and Austin. While we anticipate a bit of a slowdown this year at The Colony, it is still performing exceptionally well. Arlington and Fort Worth have also had great starts. However, Allen has been somewhat slower. You may remember that there was a shooting at the mall we are in about eight or nine months ago, which has affected performance there. It’s still doing well, just not at the same pace as Arlington, Fort Worth, or The Colony. We're very enthusiastic about DFW and continue to expand there. We will be opening a few restaurants in Houston this year and expect strong launches similar to our experience in Dallas-Fort Worth. Our modeling indicates that Houston will perform just as well as Dallas for us, thanks to our careful selection of top-tier locations with great visibility, accessibility, demographics, and population growth trends. I’m looking forward to seeing our growth in Houston and achieving scale quickly in that market.

Okay. Thank you for all that color. And then just a follow-up question on the Rosemont, Illinois location. I think you touched on it a little in the prepared remarks, but just elaborate a little how that second location is doing and maybe anything you're learning there relative to the first one? And then when might you start to expect to deploy these formats a little more broadly across the system? I mean could that be next year or should we be thinking a little bit longer term for that type performance?

Yes, Julia was fantastic. It exceeded all of our expectations when we built it. That was the very first Portillo's pickup, and Rosemont is doing well. From our experience with Julia, we realized that we overbuilt the kitchen, making it a bit larger than necessary while underestimating the amount of space needed for our teams. We also did not anticipate how many people would come in to order food and were not fully prepared for walk-in business. We have made adjustments in Rosemont, and I want to ensure that we learn everything we need to. Do we have the right kitchen setup? Is there enough space for our team members? Are we welcoming enough for walk-up customers who want to get their food and eat at a counter? We are learning all of this, and I expect that we will likely have one more iteration to perfect the model before we aggressively scale up.

Thanks a lot.

Our next question comes from Andy Barish with Jefferies. Please proceed with your question.

Hey guys, good morning. Yes, it was kind of more on sort of explicit guidance versus implied guidance. Michelle, you noted a couple of things on same-store sales. Margins may be down a little bit on new units are a little bit below the 12 to 15, but clearly kind of distilling it down to adjusted EBITDA growth in the low double digits. Is that a reasonable starting point kind of adjusting out you know the extra week for 2023? Just trying to kind of get a little bit closer to what really matters there.

Yes, I think Andy as you know we don't give short-term guidance, but we as I mentioned in terms of a long-term growth algorithm, right? We're always going to be aiming to hit that as we look at any given year. And I will say on the margins though, that yes, we have a lot of new units coming in and obviously we still have a lot of year to play out here. But our operational teams are phenomenal in terms of just continuing to look for ways that we can become more efficient as we have these new kitchens coming online. As Michael mentioned in his prepared remarks Kitchen 2023 as we build restaurant of the future even as we retrofit another 20 plus restaurants within 2024 I think we continue to look for operational efficiencies so that we can combat some of that margin pressures that we see from the new units as well as getting to scale as quickly as possible. And I know we've talked to you all about that and in continuing to do that. So we can again buffer against any margin degradation, but that's just a fact right with the 12 from last year and the nine plus this year. But look I think if you if you look at how you expect the units to perform when you layer in the nine units et cetera. Obviously, I'm not going to give short-term guidance, but it’s something that we're always going to aim for.

Yes, that's very helpful. And sort of dovetails into my follow-up. I was going to ask the last couple of years. You've kind of had a handful of really effective operational changes and productivity measures. You know that Derek and the team have put in place and anything you're willing to share with us kind of you know in your back pocket for 2024 or is it really kind of around the you know the labor deployment with the new kitchens and the remodels and things like that?

I think you're right, Andy. You definitely made a good point. Michelle likely provided more insight than she intended. Last year, we introduced 17 new restaurants in the Chicago area, focusing on grab-and-go options and streamlining our kitchens to improve efficiency for our team members. This year, we plan to open another 20, which is quite beneficial and helps safeguard our profit margins. With each new kitchen we roll out, we are learning and growing more excited. We're seeing enhancements in our kitchen lines, and every aspect of our staffing and productivity is improving. Moving forward from what we implemented in 2023, we are committed to efficiency. We embrace the principles of lean Six Sigma, and our goal is to excel in this area within our restaurants.

Thanks.

Thanks, Andy.

Our next question comes from Dennis Geiger with UBS. Please proceed with your question.

Great. Thanks guys and congrats on the results. I was wondering if you could talk a little bit more about the traffic strength that you saw in the quarter? And what that means for this year? Michael, I know you talked about a bunch of key traffic drivers. I assume all those are in play for 2024. Is there anything else to add on how you're thinking about traffic this year given those drivers, given the momentum you had in the 4Q? Michelle, I know you kind of spoke to the long-term low single-digit company. Any other considerations and how you're thinking at a high level about that traffic momentum broadly going into this year or for this year?

Traffic is very important, and we take traffic trends extremely seriously; it is likely the most crucial health metric for an organization. In my experience, when people choose to visit a restaurant, it’s often because of a previous great experience. Think about where you go for lunch or dinner; you choose places where you had a wonderful experience before, where the food was delicious and craving-worthy. This is the best way to maintain consistent traffic. However, you need a comprehensive toolkit. While delivering a great experience is essential, we also utilize channel flexibility. For instance, if the weather is poor, we have a strong drive-thru, excellent delivery, and catering services. When the weather is nice, our restaurants provide beautiful outdoor settings. Therefore, having this channel flexibility is vital for driving traffic. Additionally, we have some entertaining and quirky marketing campaigns lined up for our new salads, which I believe will be fantastic. These campaigns should increase visitation and contribute incrementally to salad orders. We are introducing two new salads that our guests have responded positively to in test panels and kitchens, and our investors will appreciate them as well due to their higher price point and better margins. These are the types of strategies that a company should implement. There isn't a single magical lever to pull consistently; it’s about maintaining a balance among various strategies. We are committed to using all necessary strategies to ensure healthy transaction growth.

And I'll just add onto that Dennis. One of the things that we know is very powerful is having digital menu boards in our restaurants, and so to Michael's point earlier on you don't have to have a massive ad campaign but we found that to be effective whether it's in the core or outside of the core how we market. Portillo’s as our markets, certain things on those menu boards, I think matters and we talked to you all about Portillo's classics and Portillo's pairings, and how we pivoted into that advertising within the back half of last year. And I think there's some opportunities to utilize those assets within our restaurants to drive home whatever messaging we want whether that's the new salads or other things. So, I think that's a powerful tool as well.

That's great. Thanks, everyone. Michael, you mentioned that guest satisfaction scores have reached all-time highs, which is fantastic, and that there is strength across channels. Is there anything else regarding customer behavior changes that might have supported that traffic, such as specific dayparts or days of the week? Was there anything else that stood out to you as a shift in the fourth quarter compared to previous quarters? Thank you.

Dennis, it's a great question but I think that I would say, it was a broad-based improvement. It was not dinner versus lunch or weekend versus weekday or anything like that. It was at no unique segments of consumer. It was pretty broad-based and we feel really good about that.

Terrific. Thanks again.

Our next question comes from David Tarantino with Baird. Please proceed with your question.

Hi, good morning. Two different questions. Actually, one sort of dovetails off some of the comments you're just making Mike. I was just wondering on traffic whether you think speed of service is a big opportunity for Portillo's? And is that something you're focused on more so going forward than in the past or just wondering what your thoughts are on that as a potential traffic driver?

Definitely, David, it's true that we've faced challenges, but I wouldn’t want to delve too deeply into the specifics. What I can say is that we place a significant emphasis on the speed of service. For instance, we closely monitor our drive-thru service times, and a 30-second reduction in that time can lead to a 1% increase in same-store sales, especially during busy periods, which significantly boosts our revenue. Our operators are currently very focused on achieving the fastest possible service in the drive-thru. While speed is still important for dine-in customers, it doesn't have quite the same effect as it does in the drive-thru. Therefore, speed of service is crucial; getting guests in and out quickly impacts not just their experience and satisfaction but also the efficiency of our operations. The drive-thru can accommodate nearly endless demand if we can serve customers rapidly.

And I guess…

Yes. Huge emphasis for us. We don't like to talk about it. We'd like to just do that.

I thought that was going to be your answer. But I guess, my follow-up to that is, I guess where are you on speed of service now versus maybe where you were previously? And is this a bigger opportunity now that you have more new locations and new markets that maybe have less experienced operators so to speak? I guess, how do you think about where you are now and maybe where you want to be at the end of this year or next year or the following year so to speak?

I think it's important to differentiate how we think about speed of service. One aspect is the customer's perspective on their satisfaction regarding speed, which significantly affects their happiness. The other aspect is the actual time it takes to move through our drive-throughs. We have significant room for improvement in this area, as we are not yet reaching our highest performance levels. It's a balancing act because focusing solely on speed can negatively impact our accuracy and other crucial elements. What’s important for us is that we can do both; we need to be quick, but we also have to maintain accuracy and friendliness. At times, we may have prioritized accuracy and friendliness at the expense of speed. Our goal is to find that balance again, and I hope that will help drive more traffic for us this year.

Thank you. Good morning. I had just a couple of margin questions. Was the timing of the openings in the fourth quarter consistent with what you planned, or could you shed any light on what the timing looked like? And was there any impact on 4Q versus like what you might expect in 1Q 2024 from a margin perspective?

Yeah, Brian, no, it was as expected, our openings. You can look whether it's in the K or the earnings release, we give the bond that we open those restaurants. So you can see heavy into November and December when you look at the openings there. And so, yeah, as you look at again those coming into the first quarter, always within that first call it, six month time period Brian. You're still going to be heavy on the training, heavy on the labor side, heavier on the inefficiency side, whether it's labor or on the food side. And so that's where you'll see, I think a little bit more of the impact would be in that first part of 2024 versus the back half. But then remember we start to layer and then write the new class of restaurants, one in Q1 towards the tail end of Q1 of this year, and then two to three in Q2 et cetera. So yeah, I think you'd see a little bit more outweighted impact from those six particularly in the class of 2023 coming into Q1 and Q2.

Okay. That makes sense. And then just on your food cost ratio, I think it was a little bit higher than I would have thought in the fourth quarter relative to what you said inflation was, were there any product mix drivers of that, or anything we should keep in mind? And then into coming year, would you expect pretty even inflation throughout the year? Anything we should keep in mind, just with regards to food costs?

Yeah, I'd say Brian, the 4.4% in Q4 was right about where we thought it would be, maybe just a hair higher but nothing that I would call out in terms of what we were thinking versus where Q4 came in at. When we look at 2024, I think Q2 looks to be a little bit more heavily impacted for us just based on again these are projections based off of our basket of goods and where we think some of the pressures might come into play in Q2, and then Q3 and Q4 be a little bit more moderated, but yeah, I'd call it more Q2 as maybe being a little bit heavier impacted at least that's what we're seeing today.

Our next question comes from Gregory Francfort with Guggenheim Securities. Please proceed with your question.

Hey, thanks. I have two questions. First, I know you don't like to talk short-term, but Michelle maybe can you address what the 53rd week is? Is there a comp impact to the first quarter just based on that? And any thoughts on kind of rightsizing expectations for how much weather might be impacting you early in the quarter?

Yes, Greg. There is no impact on our comparable sales. Our comparable sales reflect a 53-week period at 4.4%. We chose this because the 53rd week includes Christmas. If we were to calculate a 52-week comparable sales, it would have inflated the numbers slightly higher in the fourth quarter. Thus, we reported a 53-week comparable sales figure in the fourth quarter, as we believe it more accurately represents the true performance of the business during that period. Moving into Q1, there will be no impact, as we will be comparing like-for-like weeks, starting January 1, 2024, against the week starting January 2, 2023. Therefore, holidays should not affect the comparable sales. Regarding your question about Q1 this year, we are indeed not immune to the weather-related challenges and the overall consumer sentiment affecting performance in both January and February. Nonetheless, we are optimistic about the health of the business, as Michael mentioned, and despite the variability in comparable sales that we and the industry may experience in Q1, we remain confident in the underlying trends we observed in January, excluding weather impacts. That sums up my thoughts on Q1.

Got it. Thanks. Michael, I understand you now have five stores in the Phoenix market. Can you discuss the Phoenix market? What has changed since you reached maturity there? What advantages are you gaining as you expand in that market? Are you now on a path where other markets are looking to follow? Thanks.

Yes, we currently have seven restaurants in Arizona, with six located in the Valley area and one in Tucson. We are getting closer to achieving scale. Michelle discussed the impact of scale in Arizona, particularly when we expanded from two to four locations and experienced a noticeable improvement in margins. Achieving scale allows us to quickly leverage costs on the profit and loss statement. It's a positive dynamic because it provides benefits in supply chain, distribution, and even some staffing efficiencies. Additionally, scale creates revenue synergies, as customers craving a Portillo's beef sandwich dip with hot peppers on crusty bread can now find one nearby rather than having to travel 45 minutes to the only location they know. This proximity can enhance our revenue potential once we reach scale. We are in the early stages of achieving that scale in Phoenix and are actively planning more restaurants in the area. We have publicly announced our intention to build additional locations in that market to fully leverage the scale we are developing. You will see the effects of this across the profit and loss statement in terms of both revenue and margin improvement, which are both very exciting developments.

We have reached the end of our question-and-answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.