Portillo's Inc. Q1 FY2024 Earnings Call

Greetings and welcome to the Portillo's First Quarter 2024 Earnings Conference Call. 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 First Quarter 2024 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 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 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. Good morning, everyone. Thank you for joining us for our First Quarter 2024 Earnings Call. It's an exciting time at Portillo's. During the first quarter, we opened our fifth restaurant in the Dallas market; and then just a few days ago, we opened our seventh restaurant in the Phoenix Scottsdale area. We're happy with how quickly we're building scale in the Sunbelt, where there continues to be plenty of room for us to grow. Now, in the first quarter, we grew total sales 6.3% and achieved restaurant-level margins of 21.9%. Our comp was negative 1.2% as we got off to a slow start due to some miserable weather across the Midwest. And please recall, we have 69 restaurants in the comp base, and 60 of them are still in the Midwest. This means the majority of our comp base felt the impact of that cold snap. That said, we've seen top line trends improve going into the second quarter. So far in April, our efforts have mitigated transaction declines, and comp has settled back into the positive low single digits. For the full year of 2024, we're still confident in our ability to deliver low single-digit comp, 23% to 24% restaurant-level margins, and to open at least 9 new restaurants. Before Michelle reviews our Q1 performance, I'd like to take a moment to share with you our strategy. Our strategy is predicated on four pillars that provide guideposts for near-term goals and serve as the foundation for quality long-term growth. You can see a graphic of our strategy in the earnings supplemental. The four pillars are: first, running world-class operations; second, innovating and amplifying the Portillo's experience; third, building restaurants with industry-leading returns; and fourth, taking great care of our teams. And of course, our pillars sit on the foundation of a winning culture. In 2024, we've committed to prioritizing sales and transaction growth, so let's dive into some of the specifics on how each pillar will support our goals in 2024. First, running world-class operations is the single most important tool we have to drive sales. It is the core element of our business that's totally under our control, and it gives us the right to grow. Guests who enjoy the taste of our food and have a great experience see the value in our brand and come back time and time again. Those visits may not look the same each time. Whether they want to dine in with their kids, zip through our drive-thrus, enjoy Portillo's at home, or cater for a big event, our strong multichannel muscle remains a competitive advantage that drives guest engagement and traffic. In 2024, we're specifically focused on improving the drive-thru experience. We're already known for our double lane drive-thrus and friendly order takers, but speed really matters. Throughput matters. Our overall satisfaction scores in the drive-thru have been good, but our service has slowed down a bit and we know we can do better. A 30-second improvement in our drive-thru speed equates to 1 point of comp, so we continue to double down on speed of service by empowering our restaurant leaders with tools and coaching to give real-time feedback based on those key metrics at critical time points during the day. Our second pillar is centered on innovating and amplifying the Portillo's experience through menu innovation, marketing efforts, and digital engagement. Each of these avenues raises brand awareness and reaches guests through the consumer landscape. At the end of Q1, we tested a Spicy Chicken Chopped Salad and a Chicken Pecan Salad. We were so pleased with the initial feedback from the tests of these fresh new salads that we accelerated their launch by a month, a testament to our nimbleness as an organization. And already, sales of these new salads are the highest of any of our new menu launches over the last five years, and that's without the full marketing campaign behind it. Starting this month, you'll see our 'Mix It Up' marketing campaign on digital channels, highlighting the freshness of all our house-made ready-to-order salads. They've also had a positive impact on mix by displacing lower margin items. Simply put, these salads are a win. They are clearly delicious. They add menu variety that appeals to a range of demographics, and they make Portillo's even more irresistible. At the end of Q1, we also made a small investment in some traditional advertising to amplify brand awareness in Arizona, really the only other market outside of Chicago, where we have some scale. We've seen early signs of transaction improvement in this region in conjunction with that campaign. Given that success and the success in general of our advertising, we're planning on another round of advertising in Chicagoland in the third quarter. We'll also continue to innovate our digital advertising approach. In Q2, we increased our advertising on third-party delivery sites outside of Chicagoland to generate trial and raise brand awareness. This is a proven tactic and we'll be doing more of it as we assimilate into new markets. Technology will also continue to play a role in amplifying the Portillo's brand. I'm excited to share that Keith Correia has joined Portillo's as our new Chief Information Officer. A long-time restaurant industry executive, Keith will continue to advance the Portillo's team member and the guest experiences. Under Keith's leadership, we're embracing technology as a business driver in ways that create impact and value at Portillo's. Our IT team is actively partnering with stakeholders throughout the business to identify opportunities for optimization and innovation. And in particular, we're looking at how to improve our digital ordering experience through our app, and we're planning our first testing of kiosks in California that will enhance our signature guest experience. Our third strategic pillar is building restaurants with industry-leading returns. We're focused on maintaining our industry-leading AUVs while optimizing our footprint and lowering our build costs. We're also looking to scale in new markets quickly as we lean on replicable development processes. We're on track to open our first Restaurant of the Future in Texas in Q4. And as a reminder, the Restaurant of the Future is a smaller format prototype with some built-in efficiencies. The early contractor bids suggest that we're well within the estimated build cost range of $5.2 million to $5.5 million. And remember, this saves at least $1 million on each new Restaurant of the Future build, which puts us in a very enviable position when it comes to cash-on-cash returns. Now importantly, even with a 1,500 square foot reduction, these restaurants will still look and feel like a Portillo's. They will have local personality. They will be led by an experienced GM; and most importantly, we expect them to still produce the same industry-leading AUVs as all our other restaurants. We have a few Restaurants of the Future coming online this year, and we're really excited to see what they do. We've built a tremendous development pipeline, and we feel confident in our ability to continue to expand at a faster pace than we have in previous years. We know Portillo's has a long runway for continued growth. Our final strategic pillar, and maybe our most important one, is taking great care of our teams. It wouldn't be possible to serve our fresh, amazing food or create memorable guest experiences without our team members. We're proud of our industry-leading team member retention, which averaged about 20 percentage points better than the rest. We're focused on providing a meaningful work environment, pay, and benefits that matter to the team member and a clear pathway for professional development. We're especially proud of our Ignite Development Program that's been totally built in-house. As you know, a critical component of new restaurant success is having an experienced General Manager. I'm proud to share that because of Ignite, we have a deep leadership bench. We have identified experienced GMs for all of our 2024 pipeline as well as most of the 2025 pipeline already. Nearly all of those GMs are Ignite graduates. I'm more confident than ever in the talent pipeline we have built to support our growth. And beyond the General Manager level, we have team members across this organization who see the potential for long-term careers with Portillo's. In the first quarter of 2024, we promoted 64 team members who went through the Ignite program, continuing to develop that in-house talent. We're thrilled with how many folks raised their hands and want to be a part of Portillo's growth. They can envision the exciting future for us, and they want to be part of it. It's our team members who create the Portillo's experience that keeps our guests coming back, and we're focused on making sure that's what we deliver. With that, let me hand it over to Michelle.

Great. Thank you, Michael, and good morning, everyone. Before we discuss our first quarter results, I want to recap our recent secondary offering. This quarter, we completed the offering of 8 million shares of the company's Class A common stock at an offering price of $14.37 per share. All of the shares sold in the offering represented Class A and B shares owned by pre-IPO members. We used the proceeds to purchase shares from Berkshire Partners, the private equity firm that acquired Portillo's in 2014, and subsequently sponsored our IPO in 2021. As of May 7, 2024, Class A shares represented 84.1% and Class B shares represent the remaining 15.9% of the 73.2 million in total outstanding shares. Since the IPO, there have been four secondary transactions, which have collectively reduced Berkshire's beneficial ownership to approximately 19.3% of the company from over 60% at the time of the IPO. Over this time, we've more than doubled our public float. Now turning to the results for the first quarter. In Q1, revenue growth was driven by the opening of new restaurants. During the first quarter, revenues were $165.8 million, reflecting an increase of $9.8 million or 6.3% compared to last year. New restaurants positively impacted revenues by approximately $14.4 million, which was offset by a 1.2% decrease in same-restaurant sales. This was primarily driven by a decrease in transactions of 3.2%, partially offset by an increase in average check of 2%. The higher average check was driven by an approximate 5.1% increase in certain menu prices, partially offset by product mix. Comp on a 2-year stack basis was 7.8%. Strong same-restaurant sales growth of 9.1% in the first quarter of 2023, ongoing consumer uncertainty, and winter weather give greater context to this quarter's same-restaurant sales performance. In particular, Q1 transactions were heavily impacted by severe weather in the Midwest. This period spans several weeks during which transactions declined by double digits. Same restaurant sales and transactions subsequently improved. As Michael mentioned, we're focused on several initiatives to drive transactions in what continues to be a choppy consumer environment. We are happy that these efforts supported low single-digit same-restaurant sales growth and improved transactions in April versus our first quarter results. For the full year, we are still estimating low single-digit same-restaurant sales growth. Moving on to our costs. Food, beverage, and packaging costs as a percentage of revenues decreased to 34.3% in the first quarter of 2024 from 34.4% in the first quarter of 2023. This decrease was primarily due to an increase in our revenue and lower third-party delivery commissions, partially offset by a 4.8% increase in commodity prices. We experienced commodity pressures on beef, pork, and produce during the first quarter. We are still estimating commodity inflation in the mid-single digits in 2024. Labor as a percentage of revenues increased to 26.1% in the first quarter of 2024 from 25.9% in the first quarter of 2023. The increase was primarily driven by lower transactions and incremental wage rate increases for our team members, partially offset by increases in our average check and lower variable-based compensation. Hourly labor rates were up 3.1% in the first quarter of 2024 versus the prior year period. We are currently estimating labor inflation in the mid-single digits in 2024. Other operating expenses increased $1.2 million or 6.2% in the first quarter of 2024 compared to the first quarter of 2023, which was primarily driven by the opening of new restaurants. As a percentage of revenues, other operating expenses remained flat at 12% compared to the prior year. Occupancy expenses increased $0.9 million or 10.5% in the first quarter of 2024 compared to the first quarter of 2023, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.2% compared to the prior year. Restaurant-level adjusted EBITDA increased 4.5% to $36.4 million in the first quarter of 2024. Restaurant-level adjusted EBITDA margins were 21.9% in the first quarter of 2024 versus 22.3% in the first quarter of 2023. This reflects a modest decline of only 40 basis points despite softer sales and the addition of 9 new restaurants since the first quarter of 2023. Note that Q1 has historically been our lowest revenue and restaurant-level adjusted EBITDA margin quarter. We are currently estimating our restaurant-level adjusted EBITDA margins to be in the range of 23% to 24% in 2024. To offset the inflationary cost pressures noted above, primarily on food and labor, we did take two pricing actions during the quarter. During January and at the end of March, we increased certain menu prices by approximately 1.5% in each period. To offset the implementation of the FAST Act in California and in connection with our new sale of launch, we accelerated the pricing decision we would have made in Q2 to the end of March. These actions, combined with the lapping of previous pricing actions, put us at an effective price increase of approximately 6% at the end of the first quarter. Subsequently, another 3% of prior year pricing just rolled off last week, which puts us at an effective price increase of 3% today. 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 general and administrative expenses decreased by $0.2 million to 11.2% of revenue in the first quarter of 2024 from 12% in the first quarter of 2023. The decrease was primarily driven by lower equity-based compensation and lower variable-based compensation, partially offset by an increase in wages attributable to annual rate increases as well as increases in professional fees, advertising, and marketing expenses. Preopening expenses decreased $0.9 million to 0.9% in the first quarter of 2024 from 1.5% in the first quarter of 2023. The decrease was due to the number and timing of executed and planned new restaurant openings. We continue to expect preopening expenses to be between $8 million to $9 million in 2024. Please keep in mind that our reported preopening expenses include deferred or noncash rent expense as well as actual costs incurred prior to the restaurant's opening. All this led to adjusted EBITDA of $21.8 million in the first quarter of 2024 versus $19.6 million in the first quarter of 2023, an increase of 10.9%. Adjusted EBITDA margin also improved 50 basis points to 13.1% in the first quarter versus the prior period. Below the EBITDA line, interest expense was $6.5 million in the first quarter of 2024, a decrease of $0.9 million from the first quarter of 2023. This decrease was primarily driven by improved lending terms associated with our 2023 term loan and revolver facility, which, as a reminder, was refinanced during February of 2023. As of today, our outstanding borrowings under our revolver are $22 million. Our effective interest rate on the 2023 term loan and revolver facility was 8.4% as of 2024 versus 8.1% for 2023. Income tax benefit was $1.1 million in the first quarter of 2024. Our effective tax rate for the first quarter was negative 27%, driven by a change in our valuation allowance, which was partially offset by an increase in the company's ownership interest. Our future effective tax rate will fluctuate as Class A equity ownership increases and as equity-based awards are exercised. We expect the full year tax rate to be approximately 21% to 24%. Cash from operations increased by 39.9% year-over-year to $9.1 million in the quarter. We ended the quarter with $13.2 million in cash. We are confident that the strength of our brand and our operational execution will continue to deliver on our long-term growth algorithm. Thanks for your time. And with that, I'll turn it back to Michael.

Thanks, Michelle. As I close, I just want to thank the more than 8,000 people who work so hard for us every single day to provide a great experience for our guests. It's that teamwork in our culture that creates our winning formula. I'm excited to share our strategy with you and plan to update on how we're executing against these pillars in the future. We're committed to running world-class operations, innovating and amplifying the Portillo's experience, building great restaurants with industry-leading returns, and taking great care of our teams. This is the strategy that we'll execute against. It's how we'll grow our transactions, it's how we'll grow our comp, and it's how we'll deliver industry-leading returns for our investors. Thank you. With that, let me turn it back to the operator.

Our first question comes from David Tarantino with Baird.

My question starts with the performance for the units that are non-comp base. So when I look at the first quarter performance, it looks by our estimates, down quite a bit versus last year. And I just wanted to know your thoughts on why that happened? I know, you're cycling some very big openings from last year, but perhaps you can comment on what you're seeing on the recent openings? And how those are performing relative to your expectations?

Yes, David. Thanks for the question. So obviously, you hit the nail on the head a bit when you mentioned certain of our restaurants in early 2023 came out of the gate strong. We definitely called out The Colony specifically and how that was performing. I would say, keep in mind, there's two things. One, that as we get into year two with those restaurants, there is the honeymoon curve that we typically have talked about. And so those restaurants that are coming into that year two are going to dip in terms of sales, as we've mentioned before with that curve. So that's the first thing I would point out. The second thing I would say is also, keep in mind that weather does have an impact on restaurants that are not in the comp base. And so, we did have 3 new restaurants that were in our core in Chicagoland that did open in the fourth quarter. And so were those pressured by weather? Absolutely. And so there were those couple of dynamics going on that I would call out specifically.

And Michelle, when you adjust for some of those factors, how would you characterize I guess the class of 2023 openings relative to the targets that you have for new units?

I'd say we're very happy, David, with the performance in terms of the total class, which, as you know, is 8 restaurants. Keep in mind, 6 of those did open late in 2023. So it's still early innings, I would say, David, in terms of us assessing those restaurants, but they're performing at or above our expectations as a class.

Our next question comes from the line of Sharon Zackfia with William Blair.

I wanted to clarify the improving trends you're noticing in June. Does that indicate you're experiencing fewer declines in traffic, or have you managed to stabilize or achieve positive traffic? I was a bit unclear on that point.

Yes. I think, Sharon, when you look at specifics, right, as I mentioned, we were coming out and pricing as we're currently sitting at 3%. I'd still say we're still pressured by both mix and transaction impacts. We use industry data when we look at the industry data. So you can see the industry data as well. I'd say you're still seeing negative trends in that data. We're performing better than the industry, but we haven't gotten quite to positive territory when we think of those two metrics.

Can you discuss how your business differs from others in terms of the extremely high volumes and multichannel approach? We've noticed some pressure from traditional quick-service restaurants, particularly affecting lower-income consumers, which might be reflected more in the drive-thru segment of your operations. I'm curious about the performance of the different sales channels, especially considering your recent efforts in delivery. How is the channel mix doing, perhaps without factoring in the weather impact from the first quarter?

It's a little bit of a continuation of the same story for us, which is when the lower-end consumer is pressured, it tends to impact us a little bit more in the drive-thru where they are going to QSR. Most QSR is largely drive-thru business. So that's why for us, being incredibly quick, efficient, fast, and generating throughput is so important in the drive-thru, and that's why the focus is on speed in the drive-thru. Our dining rooms continue to perform relatively well, and crazy as it is, catering and third-party is still very, very strong for us.

Our next question comes from the line of Dennis Geiger with UBS.

I wanted to ask a little bit more, maybe Michelle on mix, any additional color you could provide. I think it was sort of a menu mix that was the check mix drag there. But any additional color in the quarter and then maybe on the go forward, how you're thinking about mix through the year at a high level?

Yes. Absolutely, Dennis. And so we're still seeing less items per transaction, still seeing a little bit more pressure in the drive-thru versus the dine-in business. As Michael mentioned, we believe that that channel gets more pressured when a lower income consumer is feeling a bit more challenged. I would call out drink attachments specifically, we're seeing a little bit more pressure there, both within the drive-thru and dine-in business. So some of the things that we're doing to combat that. More recently in April, we relaunched our Famous Five, which is our version of a bundled meal. And we did that specifically because we believe that that can help with our mix in terms of highlighting meals that feature a side, a fry, and a drink as well. And so that just relaunched on our digital menu boards in April. And I think it also drives awareness, specifically in our outer markets for some of the menu items we're trying to drive those consumers towards in terms of what Portillo's is known for. So those are some of the specific things that we're doing there in terms of looking at how to combat mix. More things to come in the future, but that's what we're seeing, at least in the short-term and how we're thinking about it.

That's very helpful. Michelle, kind of in that line of thinking, just curious on price as you think about the go forward to your points earlier, still kind of thinking through that. I'm just curious if any additional commentary on the customer response to pricing, value scores, which I think have been very solid, where those are just any other observations around price and sort of the customer response and where the value positioning is right now?

In the two pricing actions we implemented, one in January and another at the end of March, we've experienced minimal resistance to the price increases. A part of this success can be attributed to the variety and depth of our menu, allowing us to adjust prices across different categories. For instance, the launch of our salads at the end of March provided an opportunity for price adjustments, particularly in California where we have two restaurants that are facing labor inflation. We have the ability to adjust prices on our burgers, beef, sides, chicken, and salads. Additionally, we can implement price changes in both our catering and delivery channels. We believe we have considerable flexibility in our pricing strategy moving forward. We are not fixed on either increasing or maintaining prices; instead, we will continue to assess the market conditions. As Michael and I have mentioned, we view pricing adjustments as a way to counter inflationary pressures. So far, we have seen little resistance to the initial price increases this year. However, we recognize that consumers are approaching their limits, so we must be careful in our pricing strategy.

Our next question comes from the line of Chris O'Cull with Stifel.

Michelle, I had a quick follow up on the quarter-to-date comp, and I just was hoping you could maybe give a little bit more color on the traffic improvement versus the price contribution and how we should be thinking about sort of the confidence level of continuing that low single digit level with that 3% pricing rolling off more recently?

Yes, Patrick. I mean, you saw the quarterly comp, and we definitely had some impacts from traffic, and specifically in that we were looking at down just over 3%. We did see intra quarter. We saw improvements from the weather event in January, specifically on transactions. And then as we moved into February and March, we saw improvements on that. We saw improvements going into April on that. But as I answered the question to Sharon, we're still seeing pressures on both transactions and mix. So those necessary, those have not flipped positive as we sit here today, and we're at 3% pricing, but it's definitely mitigated, which as Michael mentioned. And so we feel really good about the trends and our ability to continue to mitigate what we're seeing, because we've seen those trends improve since that point in January into the latter half of Q1 into April. So we have some strategies in place, as Michael mentioned. We are going to invest in advertising in our Chicagoland market in the third quarter. We made a little bit of investment in Q1 into Arizona. So we are continuing to use those tools in our toolkit to combat the trends that we're seeing today. But we're still not out of the weeds, so to speak. And we're still seeing some impacts there from just the macro environment as a whole.

Great. That's helpful. And then, Michael, I know you mentioned excellence in the drive-thru as one of the key strategic pillars this year, or at least one of the underlying points of the key strategic pillars. So, I mean, what are the real pinch points you believe you have right now in the drive-thru, and what are those key areas of focus for your GMs that are going to result in better throughput in that drive-thru channel? Is it a focus on training? Is it something else that you guys have identified that you can really center them in on and allow that to improve the throughput periods?

Yes. You actually answered the question yourself, which is it is a focus on training. I think we got a little complacent in how well we are performing based on guest satisfaction scores. But the reality is that when you actually see what's going on in our drive-thrus and very carefully monitor them, we're being a little slow in deploying that next person as an outside order taker. We're being a little slow in getting food to them. So the focus for our teams is throughput. Make sure that we're getting people in and out of the drive-thrus as quickly as possible. And it does really begin with appropriately staffing and making sure that our folks know what great looks like and what the expectations are.

Our next question comes from the line of Sara Senatore with Bank of America.

I wanted to ask for two clarifications. The first is regarding your note that the second year normalization may be significant. Should we expect the gap between unit growth and comp growth in relation to overall revenue growth to remain quite large throughout the year? Specifically, what insights do you have about the Sunbelt? You mentioned that there is considerable room for growth, but I'm trying to understand how to factor in the second year normalization in that context.

Yes. When looking at how year one and year two perform for a class of restaurants, it's important to consider the metrics we've previously shared regarding the honeymoon curve. This year, only three restaurants will enter the comparable base, with one in the first quarter, one in the second quarter, and one in the fourth quarter. Therefore, we will still have a group of restaurants that will remain in the non-comparable window, experiencing that honeymoon phase. These dynamics are important when thinking about revenue going forward and understanding the distinction between comparable and non-comparable growth. In terms of performance in the Sunbelt, we continue to be very pleased. Historically, those restaurants tend to outperform those in the Midwest, excluding the Chicagoland area. This trend remains, and we are very optimistic about our restaurants in Texas, Arizona, and Florida as we progress.

Yes. Just remember, Sara, that at this time last year, The Colony was the only restaurant open in Texas, and it was performing at an exceptionally high level. I believe I mentioned $17 million back then. However, we noted that this level was unsustainable. It was creating a lot of trial and awareness, which was beneficial because it contributed to the strong performance of the next four restaurants in the DFW market due to that awareness. But we always knew it couldn't maintain that level of performance. It was going to have a natural decline. It will continue to be a fantastic restaurant for us, and it is indeed a fantastic restaurant, but it needed to return to a more sustainable level after the initial opening phase.

Okay. That's helpful. And just to sort of drill a little bit further down into that. Michelle, you said like, look at the previous data or presentations. I guess, so Colony, we should be thinking about the honeymoon curve as like percentages as opposed to dollar values, and so something instead of opening at 6.2 and going to 5.8, it opens at 17 and goes down a similar percentage? Or is the issue that you have the honeymoon plus you have intentional sales transfer for these new restaurants?

Now, I would say the best way for you to think about it, Sara, is as that percentage decline, specifically of the class. I know obviously individual restaurants are going to vary, as Michael mentioned The Colony, but I think the best way to think about it is that percentage decline as a class.

Our next question comes from the line of Brian Harbour with Morgan Stanley.

Michelle, regarding the change in margin we observed in the first quarter, do you anticipate a similar trend as we progress, considering we're comparing it to the additional week in the fourth quarter? Should we expect any fluctuations in margins that we need to consider?

There's nothing specific I would highlight, Brian. As I've mentioned before, as we progress through 2024 with the restaurants that are not included in the comp base, which naturally have lower margin profiles than our other restaurants, you should expect to see some natural margin degradation. However, when comparing quarter-to-quarter, I wouldn't anticipate any specific quarter being more affected than another. The only exception is in Q2, where we expect a bit more pressure on the commodity side, but it shouldn't exceed the mid-single digits we've discussed. Besides that, there might be some variability based on input costs each quarter, but nothing significant to mention. We remain confident that for the full year, we will be within the 23% to 24% range.

Okay. And then G&A, I assume still on track, but maybe you expect more of the year-over-year increase in the third quarter. Is that fair?

Correct because we are going to start to do some advertising, again, in Chicagoland in that third quarter, and that will pressure G&A specifically in that quarter as we spend those dollars on net advertising. But we still expect, as we sit here today, to be in that range of $85 million to $87 million for the year.

Our next question comes from the line of Andy Barish with Jefferies.

Just a clarification on the Famous Fives. I think, last quarter you talked about some Portillo's pairings that you were looking at, at value test. Is that basically the same thing? Or am I remembering something different there?

No, you're remembering correctly. We ended the year last year using having Portillo's pairings on our outside menu boards and inside the restaurant. And we were trying to highlight specifically for guests, great duos that got you under close to $10. Good news, bad news. The good news is that it had an effect on how guests ordered. The bad news is it brought down mix and the number of items they ordered. And so we think that we're better off with the Portillo's Famous Five highlighting our absolute best dishes, which we think work really well, is accretive to the guests and also hopefully picks us up a little bit better mix.

So those are value, but a little bit higher than that $10 price point, maybe?

Yes. Yes, and they typically have a beverage with them where the pairings did not.

Yes. Perfect. And then where are you thus far this year? I think there were going to be another 20 or so kitchen 23 remodels in the Chicagoland area. Have those begun in earnest? Or is it a different time of year that you plan to roll those out?

Yes, Andy. We completed 17 retrofits last year and have 23 planned for this year. I would say that most of these will take place in the second half of the year, so they haven't been fully implemented yet. Many of them will be in our outer markets, as well as some in our core areas, but most will occur in the latter half.

Understood. I wanted to clarify that this year's EBITDA growth is likely to come in slightly below our long-term expectations. Considering the challenging consumer environment, I'm wondering what factors would need to align for us to reach the low-teens, especially with the impact of the extra week factored in.

I believe we need to keep pushing for top line growth, Andy. As you know, the flow-through of additional revenue will significantly impact our bottom line. Besides that, we are continuously seeking efficiencies in our kitchens, which is part of our core philosophy. The retrofits planned for the second half of the year will provide some labor benefits. Also, as Michael pointed out, enhancing drive-thru throughput remains a priority, as it can help drive top line and transaction growth. As we strive to increase our top line, we expect it to yield additional benefits. It's important to note that we see ourselves as a growth organization and do not think cutting costs will lead us to success. Therefore, we will keep investing in the business and making prudent decisions to move forward. Those are some key points I wanted to highlight.

Yes. I don't know if you're referring to general and administrative expenses, but Michelle and I have committed to generating leverage in this area. We have specific goals, and it's essential that we leverage G&A. We are focused on making smart spending decisions, particularly in areas that drive revenue and transactions. This remains a priority for us. Michelle is correct that the additional revenue growth is very appealing; attracting more customers through the drive-thru or dine-in enhances our margins and is a significant benefit for our investors.

Our next question comes from the line of Brian Mullan with Piper Sandler.

Just a follow-up on some of the drive-thru commentary. I don't want to belabor this, but just trying to understand, do you think the drive-thru speed of service today is slower than at other times in Portillo's long history? So you're able to see that in your data and you kind of know there's a high watermark that you're running below? Or conversely, is this just not about being slower than before? It's just, you just believe there's opportunities to get better? Just a clarification on that.

No, it's factually slower. When I look back to 2019, it's slower. It's undeniably slower than we were in 2019. That's what gives us goals in mind and confidence that we can regain our momentum and ensure that our drive-thrus are operating at the speed we desire. Yes, we have a catering team fully deployed that handles both inbound and outbound sales. For instance, around Mother's Day, we reach out to previous customers who haven't made an order recently, asking if they would like to order again. This effort focuses on two key areas of performance. In markets outside of Chicago, it's primarily about generating trial and awareness, which catering is excellent for. While the sales numbers are good, getting customers familiar with how to use Portillo's effectively is even more beneficial for us. Within the Chicagoland area, the emphasis shifts to reminding customers that we facilitate their orders and ensure a flawless execution. While catering is not a massive segment of our business, it exceeds expectations by creating trial and awareness, allowing us to reach many new customers who might not have tried us otherwise.

Our next question comes from the line of Jim Salera with Stephens.

This is Tyler Prause on for Jim. My question was around the permitting environment. Are you seeing any improvement on that front? And additionally, you've talked in the past about smoothing openings throughout the year compared to previous years. Can you talk a little more high-level about the steps you're taking behind the scenes to smooth yearly openings between quarters? And had one follow-up.

It's a great question. I would say we're not noticing significant improvement in the timelines for permitting and other factors that are largely beyond our control. In response, we have significantly extended our development pipeline. For instance, when we aim to open a restaurant in Texas in the fourth quarter of 2024, we actually initiated the entire process 18 months beforehand. Our build cycle now starts 18 months in advance, and we begin the permitting process early so that we can create a more predictable pipeline. Our Chief Development Officer often mentions that it's easier to slow down than to speed up the process. Therefore, we have a robust pipeline for 2024, 2025, and beyond, which is much more predictable due to the extra time we've incorporated.

Very helpful. And just one follow up. You gave some great color at the Investor Day regarding shaping the demand curve in new markets. Can we get an update on how this is trending in the 5 Texas locations as far as activating delivery and catering?

Yes. I don't want to go into the specifics of each restaurant, but we believe that The Colony has been an incredible success from the start. It achieves everything we want, introducing Portillo's to the Dallas Fort Worth community. For the first six months, it had an exceptional catchment area as the only restaurant we had, attracting customers from all over. Now that we have five restaurants in the Dallas Fort Worth area, anyone familiar with the area knows that five isn't enough for scale. We still need to continue expanding in this market. It can take an hour to drive from one Portillo's to another. However, this leads to building latent demand. As we open alternate channels, we're now functioning well with every channel available. We've begun employing the same strategies in Arlington, Allen, Fort Worth, and the recently opened Denton, which is a bit more limited at the moment as we focus on flawless execution inside and in the drive-thru. You can imagine that the first restaurant has a more staged approach, but we plan to be more aggressive in opening alternate channels in restaurants three through ten, and so on.

Does that complete your question?

Yes.

Our next question comes from the line of Gregory Francfort with Guggenheim.

My first question is about the decision to increase advertising. You also mentioned advertising on third-party delivery sites. Have you been doing that before, or is this a new initiative? What prompted that decision? Additionally, could you remind me of the historical advertising strategy for the brand?

So, we're not traditionally heavy spenders on advertising since our strongest marketing comes from exceptional operational execution. Providing a great experience keeps customers returning. However, our finance team acknowledges that the advertising we executed in the second half of last year was effective, particularly in Arizona, where it improved traffic trends. This type of advertising proves to be cost-effective over a short period, boosting our confidence to invest a bit more in advertising without negatively impacting our financials. It generates traffic, increases comparable sales, and offers a good return on investment. We are interested in pursuing this and will selectively test it further. We’re not planning major advertising campaigns, but we believe targeted spending can yield positive results. We know advertising in Chicago is effective, as it reaches many of our restaurants there, so we're keen to explore new ideas from our marketing team for enhancing awareness and engagement. Outside Chicago, we've experienced success with modest digital advertising, especially through third-party delivery services. We believe this will help attract new guests who may not have considered us before and turn them into loyal customers. We plan to test this strategy more vigorously, particularly in markets like Arizona, Texas, and Central Florida, where we're gaining presence but lack the desired awareness. Targeted advertising in these areas should help us build recognition effectively and deliver strong returns.

Got it. Michelle, could you remind us about the differences in the beef markets, particularly between hamburger meat and steaks? I don't have a clear understanding of the current status of beef flat. Can you provide some insight on whether those prices are facing inflation right now or share any thoughts on overall contracting?

Yes. No, it's a good question, Greg. And obviously, as you saw, we were up 4.8% in Q1. But our beef products; our hot dogs, our burgers, and then the beef flats, which we used to make our Italian beef sandwiches. We're seeing inflation in all those line items. The burgers in particular are a little bit more pressured because that's going to use a leaner cut. And so that lean market, we do feel a little bit more pressure on the burgers, which is what I called out as part of the Q1 headwinds. We are hedged on our flats, though, about 60% for the full year. And so I feel good about derisking that line item. We continue to look at ways to mitigate our costs on the other beef products, on our burgers, our hot dogs, but our other line items as well. We saw a little bit of pressure on pork and produce in Q1, but some other items are helping to mitigate some of those pressures. But beef in particular, as we called out at the beginning of the year, we think will be a pressure for us all year.

Our next question comes from the line of John Zolidis with Quo Vadis Capital.

When we look at the restaurant-level margin guidance for this year, it implies a modest decline from 2023. And inclusive in that decline, I imagine, is the impact of a larger number of immature restaurants in the base, compared to a year ago. So I was wondering if you could help us by quantifying how big of a headwind those new restaurants are in the restaurant-level margin? And then as we look multiple years into the future and think about the complexion of the restaurant base changing outside of Chicagoland into newer markets, do you still anticipate restaurant-level margins in that 23% to 24% range? How are you thinking about that?

Yes, John, we haven't quantified the impacts of those newer units on the margin for any specific year, including this one. Ideally, our goal is to maintain our restaurant-level margins within that general range. As Michael mentioned, we aim to scale quickly in the markets where we operate. The strategy is to continue building that scale rapidly in those areas to mitigate the natural margin degradation that occurs when new restaurants open, since we know that scale is important and reduces distribution costs. Michael also talked about leveraging marketing to increase awareness and getting into people's consideration sets early on, which helps establish our presence in those markets. This is how we believe we can maintain margins within that range. That remains our objective.

Thank you. We have reached the end of the question-and-answer session, and with that, the conclusion of today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.