Portillo's Inc. Q2 FY2025 Earnings Call

Greetings, and welcome to Portillo's Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Brandon, Vice President of Investor Relations. Thank you, sir. You may begin.

Thanks, operator, and good morning, everyone, and welcome to our second quarter 2025 earnings call, my first since joining this outstanding team and exciting investor story. With me on this call today is Michael Osanloo, President and Chief Executive Officer; and Michelle Hook, Chief Financial Officer. You can find our 10-Q, earnings press release and supplemental presentation on investors.portillos.com. 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 be happy to take questions from our covering sell-side analysts. And with that, I will turn the call over to our President and Chief Executive Officer, Michael Osanloo.

Thanks, Chris, and good morning, everyone. Before we begin today's call, I want to take a moment to address what has been a very difficult few days for the Portillo's family. As you may have seen in the news, the front entrance of our restaurant in Oswego, Illinois was the site of a tragic car accident. We pride ourselves on being a special part of the local communities we serve. And right now, we are deeply hurting for the entire Oswego community and the families affected. We stand with them during this difficult time, and we will continue to offer our support in any way we can. With that, I'll now turn today's call to our second quarter results. I would first like to thank our dedicated restaurant team members, managers and company leaders. Their hard work in a still challenging economic environment continues to allow us to bring the Portillo's experience to life for our guests every day. This is the foundation for our future growth. We continue to manage the flow-through elements of our business effectively in the second quarter, delivering restaurant-level adjusted EBITDA of $44.5 million with a margin of 23.6%. While there are bright spots, we know we have areas to improve within our overall performance. Specifically, our noncomparable restaurants in Texas have gotten off to a slower start and continue to pressure overall top line revenue performance. We remain focused on building awareness and driving transactions while staying true to what makes Portillo's special, our craveable, high-quality food and one-of-a-kind guest experience. At the same time, we're playing offense. We're testing new ideas, growing our loyalty and tech platforms and reducing build costs, all in pursuit of industry-leading unit economics. I'm proud of the progress we're making and confident these actions will drive sustained growth and long-term shareholder value. We had an active start to the second quarter with two strong initiatives. First, we celebrated Italian beef month in May with a buy one, get one offer for our Portillo's Perks loyalty members. Then in a moment of perfect timing, the Vatican named a Chicago native as the new Pope. Our team acted quickly, launching The Leo, a nod to the new Pope Leo XIV with a version of our signature Italian beef sandwich. It was a great example of our company's agility and nimbleness to jump on a cultural moment creatively and with speed. We're proud of that ability, and that's a competitive advantage for Portillo's versus the rest. Both initiatives drove meaningful engagement and positive transactions in May, giving us valuable insights on how we use Perks as a promotional and customer acquisition tool. As anticipated, we saw performance level off some in June. While transactions were negative 1.4% for the quarter, we did deliver 170-basis-point sequential improvement in transactions over Q1. It's a step forward, and we're encouraged by the early traction from actions designed to strengthen traffic as well as our favorable management of margins in Q2. We remain committed to overcoming near-term industry traffic pressures and are focused on our four key initiatives. First, multichannel marketing. Our ongoing campaigns in key markets like Phoenix and Dallas led to sales lifts in both markets. Second, continuous operational improvement, especially within speed and hospitality. For example, our AI-powered drive-thru technology is getting strong feedback from operators for real-time execution and training benefits. We're actively expanding that test now. Third, kiosk adoption. In-restaurant usage now exceeds 33% with clear benefits to average check and mix. And fourth, evolving Portillo's Perks. Now with over 1.9 million members and counting, our May performance highlighted its growing power as a nimble, scalable platform for guest engagement, acquisition and retention. These four initiatives are building a stronger foundation for transaction growth now and in the future. Shifting to restaurant development. We remain on track to open 12 restaurants in the back half of 2025, and our build cost reduction plan is delivering results, tracking in the range of our projected net cost average of $5.2 million to $5.5 million per restaurant. This represents well over $1 million in per restaurant build cost savings versus our class of 2024 openings. We just opened our third restaurant of the Future 1.0 with two more to follow next week and are encouraged by what we're seeing. The combination of build cost reduction and operational efficiencies gives us even more confidence in our 2.0 restaurant design. This next iteration, which will debut in the back half of 2026, will reduce build costs further, streamline labor and unlock incremental site opportunities due to a more consolidated design. I'm really excited about our class of 2026 pipeline. It's the most diverse lineup of formats in Portillo's history, including multiple 2.0s and a great mix of new prototypes. Progress on new formats is equally encouraging. Later this week, we'll open our first in-line restaurant in The Villages in Florida, followed by our debut airport restaurant at Dallas-Fort Worth Airport in 2026. We believe these in-line and nontraditional format restaurants could play a meaningful part of our development future. As we grow, we're continuing to refine our new market playbook. We saw early traction in Dallas, and Houston has been a little bit slower to ramp up. In hindsight, we probably overcorrected at times in Texas to manage volumes and maintain service. We've since learned the importance of sustained marketing investment and have beefed up our efforts to accelerate awareness and drive revenue in Texas, which includes multichannel campaigns and new local field marketers on the ground to lead grassroots efforts. Every market is different, but we're learning quickly and adapting to build a more scalable, consistent approach for new market entries. Atlanta is our next big opportunity this fall, and we look forward to sharing those updates next quarter. At Portillo's, there are some nonnegotiables: craveable made-to-order food and fast, friendly service. If we do these two things well, we will drive exceptional value for our guests while building restaurants that deliver industry-leading unit economics. In the restaurant business, growth follows strong four-wall returns. Our average unit volume, coupled with our expedited efforts to reduce build costs positions us to deliver top-tier cash-on-cash returns across diverse formats, geography and stages of market maturity. To level set, we know we're a bit of a show-me story within the investment community. It's an opportunity that we actually embrace. We're putting the right energy, investments and resources into what matters most: improving transactions, driving consistent new market performance, strengthening unit economics that support growth and continuously evolving our strategy without losing what makes Portillo's one-of-a-kind. I believe in the work we're doing, the strength of our team and in our ability to create long-term value for both our guests and our shareholders. With that, I'll hand it over to Michelle.

Great. Thank you, Michael, and good morning, everyone. Before we dive into the financial results, I wanted to recap an equity transaction by Berkshire Partners. In the quarter, Berkshire redeemed 7.3 million LLC units for newly issued shares of Class A common stock. As of the end of the quarter, Class A shares represent 95.4% and Class B shares represent the remaining 4.6% of the 75.3 million in total outstanding shares. Berkshire's beneficial ownership after this transaction is approximately 5.2% of the company, down from over 60% at the time of the IPO. Now moving on to the second quarter. Revenues were $188.5 million, reflecting an increase of $6.6 million or 3.6% compared to last year. Our revenue growth in the quarter was driven by both noncomparable restaurants and same-restaurant sales. Restaurants not in our comp restaurant base contributed $6.1 million in revenue during the quarter. Same-restaurant sales increased 0.7%, which drove revenues up approximately $1.1 million in the quarter. The same-restaurant sales growth was attributable to an increase in average check of 2.1%, partially offset by a 1.4% decrease in transactions. The higher average check was driven by an approximate 3.4% increase in menu prices and a 1.3% decrease in product mix. Same-restaurant sales on a 2-year stack basis were flat. We are currently forecasting our comp sales for the full year at the low end of our 1% to 3% range. To address inflationary cost pressures, we increased menu prices by approximately 1.5% in January, 1% in April and 0.7% in late June. Our effective price increase for the third quarter is estimated to be approximately 3.3%. We will continue to assess pricing in relation to our costs, the competitive environment and our value proposition to our guests as the year progresses. Moving on to our costs. Food, beverage and packaging costs as a percentage of revenues decreased to 33.8% in the second quarter of 2025 from 33.9% in the prior year. This decrease was the result of an increase in our average check, partially offset by a 1.9% increase in our commodity prices. In the quarter, we experienced increases in chicken, hamburger and dairy products. We continue to forecast commodity inflation of 3% to 5% in 2025, with the most significant pressures coming from beef. Labor as a percentage of revenues increased to 25.7% in the second quarter of 2025 from 25.5% in the prior year. The increase was primarily due to lower transactions, increased benefit costs and incremental wage increases, partially offset by labor efficiencies and an increase in our average check. Hourly labor rates were up 2.9% in the second quarter of 2025. We continue to estimate labor inflation of 3% to 4% for the full year. Other operating expenses increased $2 million or 9.8% in the second quarter of 2025 compared to the prior year, which was primarily driven by the opening of new restaurants and an increase in repair and maintenance and utilities expense. As a percentage of revenues, other operating expenses increased to 11.6% from 11% in the prior year. Occupancy expenses increased $0.8 million or 8.2% in the second quarter of 2025 compared to the prior year, 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 margins decreased 90 basis points to 23.6% in the second quarter of 2025 versus 24.5% in the prior year. We continue to estimate our restaurant-level adjusted EBITDA margins to be in the range of 22.5% to 23% in 2025. Our general and administrative expenses increased by $0.9 million to $18.8 million or 10% of revenue in the second quarter of 2025 from $17.9 million or 9.9% of revenue in the prior year. The increase was primarily due to higher professional fees and higher advertising expenses driven by ad campaigns in the Phoenix market. Preopening expenses decreased by $0.4 million to $1.7 million in the second quarter of 2025 compared to $2.1 million in the prior year, primarily due to the number and timing of activities related to our planned restaurant openings. All this led to adjusted EBITDA of $30.1 million in the second quarter of 2025 versus $29.9 million in the prior year, an increase of 0.7%. Below the EBITDA line, interest expense was $5.7 million in the second quarter of 2025, a decrease of $0.9 million from the prior year. This decrease was driven by a lower effective interest rate of 6.9% versus 8.3% for 2024. At the end of the quarter, we had $70 million drawn on our revolving credit facility. Our total net debt at the end of the quarter was $317 million compared to $312 million at the end of last year. We have approximately $75 million of available capacity on the revolver, and we'll continue to use our cash generated from operations and the capacity on the revolver to fund our new restaurant growth this year. Income tax expense was $3.7 million in the second quarter of 2025, an increase of $0.2 million from the prior year. Our effective tax rate for the second quarter was 26.8%. We expect the full year tax rate to be approximately 25% to 27%. Cash from operations decreased by 31.1% year-over-year to $28.7 million year-to-date. We ended the quarter with $16.6 million in cash. Lastly, let's turn to our financial outlook for 2025. We have updated certain metrics to reflect our year-to-date results and expectations for the remainder of the year. We expect our total revenue growth to now be in the range of 5% to 7%. Two key factors from our noncomparable restaurants are driving this revenue change. First, the class of 2024 restaurants have seen a slower ramp-up, specifically in Texas. Second, our Stafford, Texas opening originally scheduled for Q1 has been delayed for several months due to local permitting challenges, driving lower sales weeks versus our forecast. During the third quarter, we plan to open 4 to 6 new restaurants out of our 12 targeted this year, with the remainder opening later in the fourth quarter. On the cost side, we are now estimating G&A expenses in the range of $78 million to $80 million. Given the change in our revenue and G&A outlook, we now estimate adjusted EBITDA growth to be flat to low-single digits. We remain confident in the long-term financial targets we have previously provided. Thank you for your time. And with that, I'll turn it back to Michael.

Thanks, Michelle. In closing, Portillo's is a place people want to be a part of. In a recent report by William Blair, Portillo's was named in the top 10 of nearly 90 restaurant companies in employee satisfaction. And in April, Newsweek ranked us 25th out of 700 companies in its America's most trusted companies list. I believe it's because of the amazing experience we strive to create for anyone who enters our restaurants. Whether it be in our restaurants or amongst field operators, restaurant support team members and the management team, the Portillo's culture is something we're very proud of and thrilled to share with our guests each and every day. Look no further than the talent that has joined our company, particularly in Q2 as we put the finishing touches on what is undoubtedly the strongest Board of Directors in the restaurant industry. I'm proud of the work we're doing to evolve the Portillo's investor story, some of which is tangible and some of which has yet to hit the scoreboard. But we're getting there and the foundation in place is exciting. Thank you all for your time today, and we're happy to take some questions.

Our first question comes from Sharon Zackfia with William Blair.

I guess two questions. First, on the mix in the quarter. I was a little surprised to see it go negative just given the kiosk usage increasing. So maybe if we could get some clarity on what's going on with the mix. And then separately, I think the bigger question that investors have is just kind of the path to get to that mid-teens revenue growth that is the longer-term goal here. Is that something that you think can be achievable in '26? And what are the key kind of strategies to get there?

Sharon, let me address your second question, and then I’ll have Michelle take the first one. We remain confident in achieving mid-teens revenue growth. We have established some excellent restaurants in Texas that have started off slowly, but we haven't lost hope. We believe there is significant potential in that market, and we are beginning to see some momentum. We have completed much of the foundational work necessary for Texas to continue growing and evolving. We have field marketers in both locations, active marketing campaigns, and we are developing a loyalty database that we will continue to utilize. Targeting mid-teens growth for 2026 is quite reasonable for us. Now, I'll let Michelle discuss the mix.

Yes, Sharon, in terms of mix, so you’re absolutely right. The benefit we see on kiosks is definitely benefiting that. So there are two components to the mix. The first is the items per transaction and then the next is true mix in terms of what people are buying. So where you're seeing the kiosk benefit is the lift on the items per transaction. But where we're really seeing pressures is on the other part of mix where people are still buying the item, but they're trading down. So think of it as instead of buying a big beef, they're buying just a regular beef instead of buying a large fry, they're buying a small fry, et cetera. And so that's really where we're seeing the pressures on the mix is that true mix being offset not fully by the benefits that we're seeing on kiosk. And obviously, we believe that's an indicator of what's going on in the broader macro in terms of the trade-downs that we're seeing there. But we clearly, as Michael said in his prepared remarks, want to drive the business through transaction growth and other mechanisms. But we're definitely seeing pressures in mix on the trade-downs.

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

I did have a follow-up on new stores. And I mean the annualized sales contribution from the 10 locations that you guys opened last year was lower this quarter than in the prior quarter, which I believe you guys expected it to improve. So just can you give us a little more detail of what you did this quarter to try to improve the performance of those stores? And what's planned for the rest of the year?

Yes, absolutely, Chris. So when you think about the class of 2024, some of those restaurants are getting into being in their second year. So you're starting to see some of a honeymoon effect to certain of those restaurants. Some of the later restaurants that were open in the class of 2024 later in the year, such as the Houston restaurants that we've mentioned. And so the things that we're doing are what Michael mentioned, which is continuing to pump the markets with marketing and advertising. And so as we've talked about previously, we ran a campaign in Dallas in the first quarter. In the second quarter, we were on with a campaign in the Phoenix market, but then also hired a field marketer within the Houston market and continue to do some advertising within that market as well. So we're going to continue to invest in those newer markets to make sure that we continue to grow the top line. And as we go into the back half of the year, we'll continue to look at advertising efforts. We'll run another campaign in Dallas in the fourth quarter as well to continue to pump that market with additional awareness and trial.

Yes, Chris, I would just add to what Michelle said that it's a little bit of pick-and-shovel work. We're building awareness every week. It takes a little bit of time. And you're right, I think that the essentially flattish performance in Q2 versus Q1 for some of those Texas restaurants was disappointing to us. But we're active and very aggressive in building awareness. We've got field marketers out there, making sure that people know who we are. We do really well once people try our food. So we're being very aggressive at getting our food in people's mouths, sampling, doing things with local communities and embedding ourselves in local communities. So it does take a little bit of time. I'm not daunted by the fact that it hasn't picked up aggressively, but I do expect it to improve over the next few quarters.

Okay. And then, Michael, just given the weak year-to-date comp and new store performance, why does it make sense to continue opening units beyond the current signed leases, especially when it will likely require the company to increase borrowings to kind of fund those openings?

Yes, that's a great question. We are closely examining the performance of new restaurants and our expansion strategy. We are not expanding just for the sake of it; our approach is very deliberate. There is a balance to strike. We notice that once we achieve a certain level of awareness and scale, our business excels. For example, Arizona is performing exceptionally well, demonstrating what Portillo's can achieve with adequate awareness and scale. Indiana is also doing well, and Wisconsin is starting to gain momentum. We need enough density to build awareness and ensure that the new restaurants complement each other. Currently, we might have more restaurant supply than demand in Dallas, and while we have a few more openings planned, we are not aggressively pursuing rapid growth. We want to ensure we are expanding thoughtfully in areas with significant growth potential. Additionally, we are focused on generating strong cash-on-cash returns. The projections for the class of '25 are between $5.2 million and $5.5 million, which marks a notable decrease in costs compared to the class of '24, which was $6.8 million. We also have other promising investments, such as an in-line restaurant we are set to open soon in The Villages, Florida, which is expected to cost under $4 million. If it performs as we anticipate, it will be very beneficial for investors. We are not looking to rush growth; we are taking a prudent and thoughtful approach, targeting growth where we can achieve the best cash-on-cash returns.

And just to add on to borrowing in the short term, Chris, we've talked about the fact that we're getting ahead of the pipeline for '26. And so we're going to have a lot of spend this year that's going to be for the class of '26. And so that's going to come into play in some of the capital needs this year. But our goal is what we continue to say, which is as we go into '26, we don't want to have any net new borrowings on the revolver. But yes, we're going to continue to borrow this year because we have to fund some of that growth as we move into '26.

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

I had two questions. The first is maybe just looking at Texas versus the rest of the Sunbelt, how much of the Texas performance do you think is just how many stores in the industry are opening up in the state right now? And can you maybe talk about how Arizona and Florida have been performing? I think you touched on it a little bit, Michael, but if you could just expand.

I believe that's an important point. Texas is not unique in its development challenges. The state's growth, along with its population increase, is well-known in the restaurant industry. As we expand, we find that our competitors are also establishing locations nearby, which likely contributes to the slower start we've experienced. Other restaurant companies are likely facing similar challenges as Texas accommodates the influx of new restaurants. I'm uncertain about the timeline for Texas to reach the same maturity as markets like Arizona and Florida, but I find reassurance in Arizona's performance. We've discussed previously that when we expanded from two to four restaurants there, we observed significant improvements in awareness, revenue, and especially in our margin profile. I'm confident that as Texas develops, we will witness a similar trend, with demand eventually catching up to the number of our restaurants. There is always a delicate balance to maintain; when someone craves Portillo's, we want to be able to meet that need. Research indicates that the top reasons for people not visiting us regularly are a lack of awareness and convenience. This is why we have such a strong presence in Chicago—most people in the area can find a Portillo's within five miles. We’re not quite there in other markets yet, which adds to this balancing act.

That's helpful. Michelle, could you discuss the outlook for labor inflation and food inflation? It seems like beef might be moving against you a bit, but the labor market appears to be becoming easier.

Yes, definitely, Greg. As we entered this year, we anticipated some pressure on beef, particularly in the latter half. Starting with commodities, we experienced a 3.4% increase in Q1 and a 1.9% rise this quarter. I expect Q3 to pose the greatest challenges for commodities, but Q4 should perform better than the first half of the year. This leads us to our forecast of 3% to 5%. We do expect some additional pressures in the latter half, mainly due to beef. However, I'm confident in our strategies to mitigate this risk, as we are nearly 90% hedged on our beef flaps for the year. For our overall commodity portfolio, we are over 70% secured. Therefore, we feel quite positive about our commodity outlook as we progress through the year.

Yes, Greg, I want to expand on that. I'm very proud of our team and under Michelle's leadership, we anticipated this situation towards the end of last year. You'll remember that early on we experienced higher beef inflation numbers than most. We believed that beef prices would continue to rise this year and took several actions to address this forward buying. We are actively working to reduce conversion costs and ensure we are managing this situation effectively. I'm very proud of our team's efforts to prevent our guests from experiencing the same inflation that others are facing. We remain committed to providing incredible value to our guests despite the inflationary pressures on beef. We are not engaging in any practices that would unfairly increase prices. Our burgers remain a substantial one-third of a pound, and our beef sandwiches are generous and satisfying. We are focused on ensuring our guests receive the value they deserve, and we've managed these challenges responsibly.

Yes. And Greg, just on the labor front, you saw in both quarters, we were up 2.7% and 2.9% in Q2. I don't expect that to be materially different in the back half of the year. We've continued over the course of the last several years to make meaningful labor investments within our system. And so I feel good about that guide at 3% to 4% for the full year. We don't see that changing.

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

Just a question about maybe unit economics and then a follow-up on maybe the line items. So, you mentioned build costs are $1 million lower maybe with this new prototype. But as I think about the shift to some of these maybe smaller boxes, I think you mentioned in-line. Presumably, those are more of the build-to-suit approach. And I guess, as I think about that model, presumably, it would lower your build costs even more. I mean, optically, you'll be paying more rent. So, your margins might look lower, but presumably, the ROI would be much higher. So, I guess the question is, can you give me a sense of what that might look like for restaurant-level margins and also for the invested capital associated with it? And I guess, confirm that, that is kind of the complexion, maybe lower margins, but a higher ROI?

Let me begin with that and allow Michelle to elaborate on it. I think I mentioned that the Class of '26 has us particularly excited. We have some 1.0 locations, which are smaller restaurants, that have come in this year between $5.2 million and $5.5 million. We also have some 2.0 restaurants set to open in the latter half of next year, and these will be even smaller and should have lower costs, though we haven't yet discussed those costs. Additionally, we have some unique restaurant locations, including one at the Dallas Fort Worth Airport, and a few others whose locations I can't disclose yet, but they should provide great financial returns for us. You are absolutely correct that, as a group, we expect to see lower build costs overall. We are currently assessing the impact on margins if we proceed with more build-to-suit options. It's important to note that some of these smaller restaurants, particularly the 2.0s, feature a different kitchen configuration. I don’t want to get too technical, but traditionally, our kitchens are linear. The new layout might be U-shaped or E-shaped, which allows for better collaboration, reduces energy capacity requirements, and lessens HVAC needs. Therefore, we anticipate some operational improvements in labor costs and operating expenses. However, I’m uncertain how much margin we might sacrifice with smaller kitchens if we choose build-to-suit and incur higher rent, so this aspect is still developing. Nonetheless, I can confidently say we are aiming for lower capital expenditures. You can envision a scenario where we reach a certain capital threshold alongside our typical revenues by year three, which would lead to highly attractive cash-on-cash returns.

That's very helpful. And then just on the line items, when I look at your P&L, your cost of goods is probably higher than almost any other fast-casual restaurant. That reads as very good value on the plate. But I'm not sure if consumers really recognize that. I mean, I would think in this current environment, that would translate into a lot of traffic share gains. So, I guess on that front, do you get credit for that? And also whether or not you do, is there any opportunity, whether it's from a supply chain or distribution or something else to maybe lower that cost of goods line?

That's a great question. To start with the second part, everything is being considered. We are currently assessing our distribution costs, which are quite high for delivering some of our products nationally, so we need to improve in that area. It's essential for us to enhance our distribution and overall supply chain. Your inquiry touches on the 34 percent commodity cost and how much of that actually provides value to our customers, as well as any potential waste involved. There is likely some room for us to increase efficiency, and we will continuously seek ways to achieve that. However, I want to emphasize our pride in delivering exceptional value to our guests. For instance, our burgers are a third of a pound, and our beef sandwiches are substantial. We're committed to quality, as evidenced by our fries being larger than many competitors' large fries and cooked in tallow. I truly believe our guests recognize this value. Change in consumer behavior doesn’t happen overnight; it takes time. We are currently pleased with our position of offering great value, as reflected in our internal value scores. Ultimately, it’s just a matter of time before consumer behavior aligns with their sentiments towards us.

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

I just want to ask about the breakfast testing in Chicago. Can you talk about how that's going? What you are seeing on incrementality, which I think was a really important factor that you were watching?

Yes. Breakfast is a focus for us, and I appreciate your inquiry. Overall, it's performing better than I anticipated. It seems to be attracting new guests, and it's not negatively impacting our lunch or dinner sales or guest satisfaction. There's a lot of positive feedback about breakfast, and those who have tried it find it delicious. Some feedback I've received suggests our egg sandwiches might be a bit too large, but they are well-received. We're assessing its sustainability for our teams and management, as we want to avoid burnout and stay focused on our core business. We'll continue the test until the end of the year, at which point we will evaluate our options. If we find that the test is a distraction, we'll discontinue it. While we're aware that other restaurant companies have attempted breakfast multiple times without success, we hope for a different outcome. Alternatively, breakfast might be specific to the Chicago market, where we have the credibility to offer a great meal that customers want. Lastly, there's the possibility that breakfast could have national potential, but we would need to test its relevance outside of Chicago. Overall, it's going well, and we want to ensure it's sustainable.

Okay. And then I wanted to ask about the limited menu you went with in Houston. It doesn't seem like it would be right to equate the slow start just to that. So, would you agree with that? And then if so, what are some of the merits to the limited menu? And are you still exploring the idea of trying that in other geographies potentially?

Yes, that's a good question. We are confident in moving away from the limited menu as we open new locations. However, we believe there are unique aspects of the Portillo's experience that we shouldn't have removed and are already in the process of reintroducing. With any effective test, we gain insights into what worked and what didn't. Simplifying our menu is beneficial; for example, cutting down from eight to three salads enhances freshness, speeds up service, reduces the training needed for staff, and minimizes errors. We've learned from this reduction in salad variety. Additionally, we excluded some unique items from our Chicago menu in Houston, which didn't seem to be missed. We also chose not to offer beer in Houston, which turned out to be a mistake because customers enjoy having a beer with their meal. We've brought that back after learning from the experience. It's all about finding the right balance.

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

Michael, I wanted to ask a little bit about the Portillo's Perks and that you guys said you're almost at 2 million members now. Are you able to give us any insight? Presumably, those are all predominantly in the Chicago land area, but just kind of the geographic breakdown of the rewards program? And is that possibly a lever that could be willing to do a little bit more in some of the expansion markets to maybe drive repeat and frequency?

Yes, great question about Perks. I wish I could say we had 2 million members, but we're just over 1.9 million, and it's growing. Keep in mind that we launched Perks in March, so it's still very early for us. Initially, we aimed for 1.5 million to 1.7 million members by mid-summer, and being at 1.9 million makes me feel really positive. It's exceeding my expectations in many ways. It's important to remember that we only have 95 restaurants, and our loyalty members per restaurant puts us in a unique position with engaged customers who want to be part of our brand. I encourage you to look into loyalty members per restaurant across leading companies; that's a strong metric. We're still discovering what Perks can do for us, like a new toy. We’ve found that food promotions resonate well, and people respond enthusiastically to offers like freebies, buy-one-get-one deals, or bringing in friends. We're also seeing good engagement with badges and an enthusiastic community sharing fun content on social media, turning them into advocates for us. I believe we haven't fully realized the potential of Perks yet. It will be a valuable tool for our future CMO to enhance guest acquisition and frequency. It's early days, and I'm excited about what we can achieve with it over the next 18 months.

Great. And then I apologize if you guys touched on this already, but if we think about DFW average unit volumes and the expansion market average unit volumes, is there a scenario if the consumer kind of stabilizes that we could see an acceleration there in '26? Or are we still kind of trying to find a stabilization point for some of those market AUVs?

Yes, I think we have experienced a slower start in Texas. However, as we approach 2026, we will remain focused on growth in the Sunbelt, which includes expanding in Texas, particularly in Dallas and Houston. We are also looking at entering new markets like San Antonio and Austin. Increasing our presence will help drive awareness and boost revenue in those areas. We are still analyzing market behavior and understanding the learning curves involved. It’s important to consider that most of our restaurants are still in a honeymoon phase. Remember, we will be opening 12 new restaurants through 2025, and our expectations remain high. In terms of our goals, we are aiming for our third-year average unit volumes to be in the 5.9% to 6.3% range, which remains our target. The performance of these classes will influence the behavior of the average unit volumes. As we look at Houston, we do not anticipate a significant curve and expect continued growth there, with three more openings this year. We will implement our new market strategies and remain focused on improving our approach. With the new CMO coming on board, we are excited about the resources available to us. Both Michael and I are enthusiastic about the Class of 2026 and, while we are still focused on the Class of 2025, we are genuinely excited about the future.

I would like to add a follow-up to what Michelle mentioned. It's not unusual for us when new restaurants start off a bit slow. We've seen this in the past. For instance, we had restaurants in Wisconsin that began slowly but are now performing very well. Similarly, in Arizona, we experienced slow starts with some locations that are now doing admirably. Currently, our newest restaurants in Florida are likely performing even better than some of our initial locations. This situation isn't uncommon for us, and we are well-prepared to handle it. We are confident about increasing sales in Dallas.

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

I didn't hear much on kind of operations and drive-thru speed. And can you kind of give us an update on that channel vis-a-vis the rest of the business, just kind of given the persistent promos and discounts in the broader QSR world?

Yes, that's an important topic. We are consistently working to improve speed in the drive-thru, which is crucial because faster service leads to increased customer frequency and transactions. However, I want to be honest that the drive-thru typically serves customers who are more economically pressured, presenting significant challenges for us. Improving speed will help alleviate some of this pressure on our guests. We are not considering value menus or dollar menus, as customers may choose those alternatives if necessary. We continue to see improvements in both speed and accuracy, and I'm quite pleased with our drive-thru performance overall. The AI tests we are implementing are exciting. We have installed cameras that connect to intuitive monitors within the restaurant, allowing our team to be aware of wait times. This has helped us significantly reduce delays, especially during late-night hours. I believe this technology will enable our team to perform better, and we are observing positive changes in real-time. This is still a test, and we expect to conclude it by the end of the third quarter, with plans for deployment in the fourth quarter. By the first half of '26, we aim to see substantial improvements in drive-thru times.

Got it. Appreciate it. And then, Michelle, just on the revenue guidance change of kind of the mid-single-digit reduction, I guess, just thinking about that, is it sort of evenly balanced between a point or so of lower comp as well as new restaurant openings and then fewer operating weeks? Kind of how do you parse that out?

Yes. I'd say it's primarily driven by more of the non-comp pressures, Andy, that I mentioned. You'll get a little bit on the comp. Like you said, we're trending to the lower end of the 1% to 3% range that we previously guided to. And so I think about it as more heavily weighted on the non-comp side, specifically as we talked about the Class of '24 continuing to see a little bit of headwinds there as well as timing. I think that the timing issue is real for what we came into the year thinking in terms of timing for the Class of '25 versus what we're seeing. I mentioned our Stafford, Texas restaurant, which is in Houston, the delay of that, which was months of delays. And then for our Q4 openings, it's more back-end weighted in the quarter as well. So it's the timing component, the Class of '24 component that's primarily the driver, but you do get a little bit of comp in there.

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

I wanted to ask another one just on the new stores and specifically the new stores outside of Texas. I guess just kind of clarifying the stores outside of Texas, newer stores outside of Texas, generally all or mostly performing well or consistent with expectations? Or Michelle, I couldn't tell if you were alluding to maybe some other markets a little softer albeit. Anything on the non-Texas newer stores to call out?

Yes, primarily in Texas, particularly with the Dallas locations included. For the Class of '24, we opened three restaurants in Dallas and three in Houston out of the ten. Michael also noted that there's a restaurant in Florida, one in Arizona, and another in Michigan, all of which are largely meeting expectations. However, none of these can be labeled as standout locations. The main pressures we face are specific infill restaurants in the Dallas market, while the Arizona market remains strong for us after over ten years, and we are working to build awareness there. Our second Michigan location faces challenges due to lack of awareness, and we need to focus on overcoming those issues. Other than that, there are no significant concerns to mention.

Yes. And I think that it’s fair to say, as we build the differentiated strategies in new markets, what we plan on doing in Atlanta is a great plan. In Houston, we have additional restaurant openings that will help fill in the gaps there. We’re continuously evolving and understanding how to build awareness over time, and I believe we’ll see improvement there in the coming quarters.

Great. Helpful. Could you share your thoughts on the four key priorities or initiatives that drive sales? Which of these do you believe will have the greatest impact on transaction or comp gains in the latter half of this year and into next year? I’m sure all four are working together, but are there any specific initiatives you think will be particularly significant for driving comps in the upcoming quarters?

That's a great question, Dennis. I believe the focus of our strategies varies between our core markets and those beyond. In markets like Chicagoland, continuous improvement in operations and enhancing drive-thru efficiency significantly benefits us. Every second we shave off service time has a massive impact in Chicago. Outside of Chicago, particularly in Dallas and Houston as we expand into Atlanta, we need to build awareness about our brand. That's where our multichannel marketing comes into play. We currently have field marketers sampling food, organizing fundraisers, and participating in local baseball games. In Texas, our Beef Bus is going to high school football games this fall, which is a fantastic way to increase visibility, as these stadiums can hold 10,000 to 20,000 people. This outreach is essential. Additionally, I'm particularly excited about our Perks program, which isn't fully rolled out yet. As it develops, we plan to use it strategically to attract new guests outside of Chicago and increase visit frequency in Chicago. This tool allows us to engage in highly targeted marketing. I feel confident about our prospects for 2026 and beyond. Also, I didn't mention the kiosks. We've made excellent progress with them and our data indicates that we are nearing best-in-class status. The kiosks create a seamless experience for our guests. There’s a whole generation that prefers to order digitally and appreciates being able to see food pictures when they visit the restaurant. Overall, our advancements with kiosks are contributing to a frictionless experience for our customers.

I would just add on to what Michael is saying in terms of the menu. And when you think about Perks, I think there's some cool fun things we can do with the menu when you talk about secret menu items, an exploration of what we're going to do with the menu as we move forward. I think there's some things that are potentially in the pipeline for us that we're exploring for menu innovation that could be fun and exciting, not so much in the short term in terms of the third quarter. But as we go into '26, I think menu innovation can play a role as well in helping to drive some transactions, whether it's in our core or outside.

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

What are the in-line locations going to look like? I mean, how big are those? Like what's the experience going to be like there relative to kind of a typical Portillo's?

Yes. I’m not sure if we have posted them online yet, but we will share them on social media soon. Our Villages restaurant is stunning and offers a beautiful experiential dining environment. While we refer to it as in-line, it is technically an end cap, making it a fantastic location in The Villages, one of the largest retirement communities in America. We will ensure these restaurants maintain high standards. They need to offer an experiential element so that guests enjoy their visits to Portillo's and feel positive about the experience. Our goal is to impress customers with great value, quality, and speed, and we want them to become lifelong fans. When we mention in-line, don’t visualize a small box that could be anything. It will still embody the Portillo's brand, beautifully decorated, with visible kitchen activity and that signature Portillo's look and feel.

Yes, I want to expand on that, Brian. Not all options are the same. As Michael mentioned, The Villages may differ from some of the in-line locations we're considering for our pipeline, whether that's for next year or beyond. We're all excited about the potential returns these in-line units might offer when we consider the investment costs and the average unit volumes we expect. This approach could really enhance our cash-on-cash return targets. The unit economic story is crucial for us, and maintaining strong unit economics in this category of restaurants is essential as we progress. I believe these in-lines will contribute significantly to that as we think about the different restaurant classes in the future.

Our final question comes from the line of David Tarantino with Baird.

One more on the performance of new units. And I guess, Michael, I know you've learned a lot as you've kind of opened some of these locations in Texas. And I wondered if you could just comment on whether you're thinking differently about how you enter new markets in the future. And I know you've talked in the past about marketing support, but also, I guess the nature of my question is you added a lot of locations in a fairly short window. And I'm wondering if you're rethinking whether that sort of pace of openings in the new markets should be adjusted going forward. So, any thoughts you have on that question would be great.

Absolutely, David. It's great to hear from you. I want to emphasize that we're always learning and striving to improve daily, aiming to be better than we were the day before. Our experience has taught us how to successfully launch new locations. The success of The Colony gave us a sense of security that we shouldn't have had since we invested heavily in pre-marketing for that restaurant, resulting in an overwhelming opening. This led us to scale back marketing efforts afterward. In Houston, for instance, we started off slowly, and in Dallas, we faced a slow buildup due to limited marketing activities. The key takeaway for us is that while we want a significant launch to generate excitement and engagement with the brand, we also need to maintain consistent marketing over the following year. Atlanta will serve as a great test for this approach, particularly in Kennesaw, a highly appealing market. We're implementing effective grassroots strategies to build momentum and collaborating with Coca-Cola to enhance our marketing initiatives at that location. The pace of growth remains a critical consideration for us. Your question about whether we expanded too quickly in Dallas is valid. I don’t have a straightforward answer, but it’s evident that, without marketing support, we may have expanded too fast. However, building awareness is crucial, so it might be about finding a balance between expansion and ongoing marketing to create demand. We'll keep assessing the situation in Dallas and its implications for Houston and other locations.

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