Earnings Call Transcript - PTLO Q1 2022

Operator, Operator

Hello, and thank you for joining us. Welcome to Portillo's Fiscal First Quarter 2022 Conference Call and Webcast. The conference is being recorded. I would now like to hand it over to Barbara Noverini, Director of Investor Relations at Portillo's, to begin.

Barbara Noverini, Director of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to our fiscal first quarter 2022 earnings call, which is also my first call as Portillo's new Director of Investor Relations. I'm looking forward to working with our analysts and shareholders, both current and future, and learning more about what resonates with you. With me on the call today is Michael Osanloo, President and Chief Executive Officer; and Michelle Hook, the company's Chief Financial Officer. And before we begin our formal remarks, let me remind everyone that part of today's discussion will include forward-looking statements. These statements are not guarantees of future performance and should not be unduly relied upon. We do not undertake to update these forward-looking statements unless required by law and refer you to today's earnings press release and our SEC filings for more detailed discussions of the risks that could impact Portillo's future operating results and financial condition. Our remarks also include non-GAAP financial measures such as adjusted EBITDA and restaurant level adjusted EBITDA. We direct you to our earnings release issued this morning which is available on our website for the reconciliations of these non-GAAP measures to the most comparable GAAP measures. Any non-GAAP financial measures should not be considered as an alternative to GAAP measures such as net income or operating income or any other GAAP measure of our liquidity or financial performance. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Let me now turn the call over to Michael Osanloo, President and Chief Executive Officer.

Michael Osanloo, President and Chief Executive Officer

Thank you, Barb, and welcome to the Portillo's family. Barb joins us after spending over 10 years in equity research and Investor Relations at Morningstar. Barb is also a lifelong Chicagoan, so she's going to be a great resource to help our analysts and our shareholders better understand Portillo's and our growth journey. And what a journey it continues to be. I'm pleased with Portillo's strong top line performance in the quarter. We grew total sales 14.6% to $134.5 million. Same restaurant sales grew 8.2%, which reflects strong demand for Portillo's, demand that comes from our continued focus on delivering a great experience and amazing food at an unbelievable value. We continue to produce healthy profitability, generating almost 21% restaurant level EBITDA margins, which puts us in a unique class in the restaurant industry. Michelle will provide a lot more detail on our most recent quarterly results in a moment. But I'd first like to remind everyone where we're headed as a company. We're on track to grow same restaurant sales. We've got the runway to sustain long-term adjusted EBITDA growth and, more importantly, we're a growth company. We're on track for 10% annual unit growth and we're excited about it. While we may be new to the public markets, we're a 59-year-old brand with a long history of success and a solid foundation upon which we'll continue to build. Let's talk a little bit about that growth pipeline. We're proud of the in-restaurant Portillo's experience and are thrilled to see guests return into our dining rooms this year. But we're also really excited about the direction of our off-premise business. Our first Portillo's pickup location in Joliet, Illinois just celebrated its 3-month anniversary and continues to perform above our expectations. That's despite opening in the dead of winter in Chicago. This small box footprint has managed to impress us and continues to impress. We also recently celebrated the opening of a beautiful restaurant in St. Petersburg, Florida. It's absolutely gorgeous. We used our retro diner style design, but it fits into the local environment. It's early, but we're thrilled about how this restaurant is performing and how guests in St. Pete have responded to us. Similar to Joliet, it's also performing above our underwriting expectations. We now have 4 restaurants in Central Florida, and we'll continue to build that market in '22 and beyond. We're also on track to continue growing in the Sun Belt. We're scaling operations in Arizona with another restaurant in the Phoenix suburb of Gilbert and our first entry into Tucson, both slated to open later this year. And of course, we can't wait to open in Texas at Grandscape in The Colony. That's the name of the town, The Colony. We opened that restaurant in the fourth quarter and will continue to grow in Dallas-Fort Worth in 2023. We've already identified some of our next sites and, even more importantly, we've identified the operators who will grow and build that market for us. And you may have noticed recently that we've announced openings in the Orlando suburb of Kissimmee and Schererville, Indiana. That will take us to 7 restaurants this year, meeting our 10% commitment. I can't talk about our exciting development pipeline without sending my thanks to Sherri Abruscato, our inspiring Chief Development and Supply Chain Officer who's retiring this summer after 44 years of service. Sherri started with Portillo’s as a teenager and her hard work, dedication and ambition led her to the C-suite. We want all of our team members to realize that kind of success is possible here. To fill her shoes, we're actively searching for a Chief Development Officer who will execute our rapid growth pipeline with the same unwavering commitment to our values. It's those values, family, greatness, energy and fun, that allow us to be this confident about our growth trajectory. People are the heart of Portillo’s, and we know they're the linchpin to our success so we prioritize our team members' experience. We know that our teams are more engaged when in a fun, supportive and efficient work environment. And you can see the proof of this in our retention statistics. Our hourly turnover rate is 20 to 30 percentage points below the current industry average. This is a reflection of the work we put into being an employer of choice. We're creating unrivaled team member experiences, treating them like family, and it's working. So how do we win in the long term beyond having beautiful well-staffed restaurants? Today, I want to highlight 3 main points about our resilience both as a company and as a high-growth restaurant concept. First, we have very attractive profitability predicated on great revenue. We generated $8.3 million in AUV in the 12 months ended Q1 '22. That revenue drives plus-sized profitability, which gives us the financial flexibility we need to continue investing for growth. Second, we focus on what we can control. As experienced restaurant operators, we're able to categorize cost pressures into those we see as transient versus those that are likely more permanent. We see commodity market volatility as a transient pressure brought on by external market shocks. Our response is to continue to limit the magnitude, duration, and timing of input cost increases through fixed-price contracts. We're now covered for over half of our spend throughout the rest of the year. Michelle will talk more about this. Occasionally, we do see a stair-step change in cost that signals a more permanent change. And as you know, wages in the restaurant industry are resetting to reflect the more demanding, competitive labor environment, and that's not changing anytime soon. So again, focusing on what we can control, we ensure that as a company, one, we offer our team members a compelling opportunity they can only get at Portillo’s; and two, our team members are as productive as possible. In fact, we've implemented some operational efficiencies this year that have had a measurable impact. Third, we don't wait until times are tough to look for efficiencies across our business. We're an operations company. And it's our operators who oftentimes help us come up with and implement great ideas. One of the more recent developments comes from streamlining our digital ordering experience. By upgrading the user interface, guests who order through our app or website can now customize their orders in just a few clicks. The early results show a significant upward trend in order completion with our cart conversion rates already improved by 50%. What that means is we now have more guests who complete their orders instead of abandoning their carts. Bottom line, this translates into more digital sales, and this improvement is holding. We see this as early evidence that we've successfully reduced friction in that experience for our digital guests. And finally, as I mentioned in the past, the commitment to our Portillo's family is why our turnover continues to trend better than the industry average. At the start of the first quarter, we were still understaffed at a few locations. Now, we're very proud to say that we're back to pre-COVID staffing levels. The importance of that is that well-staffed restaurants on average produce higher guest satisfaction scores. We see better order accuracy, speed of service and overall satisfaction. And we know guest satisfaction scores act as a leading indicator of same restaurant sales. When you have a good experience, you'll be back. It's that simple. In March, we achieved the highest order accuracy and the highest customer satisfaction scores that we've seen in the past 24 months. This is not an accident. This has everything to do with the attention our managers and team members have been giving the overall guest experience. On last quarter's call, we talked about being an oasis for our guests. We want to be that respite even in the face of high inflation, high gas prices, and increased concern over global volatility. We will remain that fun, welcoming place that our guests can take their family for a convenient, delicious, high-quality meal at a great price point. But I want to be clear about something. This doesn't mean we're not taking pricing. It means we're being very thoughtful and methodical about how we take pricing. While we've raised prices to counteract some of the input cost pressures we've seen, we're still mindful of preserving value for our guests. As I said earlier, we have healthy margins. We don't have to overshoot inflation to shore up our profitability. That said, when we have taken price, there's been little to no resistance or elasticity effect. We are very confident in our pricing power. At the end of the day, we're on track. We're executing the playbook we shared with you during our IPO. We're confident in our long-term growth algorithm. The restaurant industry is cyclical. It's going to have its ups and downs, but we know how to manage our business for that. With that, I'll hand it off to Michelle to share more details of the quarter.

Michelle Hook, Chief Financial Officer

Great. Thank you, Michael, and good morning, everyone. During the first quarter, we saw strong top line growth, but cost pressures did impact our bottom line. However, we remain confident in the fundamentals of our business model and remain committed to our long-term strategy. Let's discuss the details of our first quarter results. Revenues were $134.5 million, reflecting an increase of $17.2 million or 14.6% compared to the first quarter of '21. This was driven by an 8.2% increase in same-restaurant sales, combined with the opening of new restaurants in '22 and '21. The same-restaurant sales increase of 8.2% was primarily driven by a 7.5% increase in average check and a 2.9% benefit from the change in recording third-party delivery pricing. This was partially offset by a decline in traffic of 2.2%. The higher average check was primarily driven by a 7.1% increase in menu prices combined with a 0.4% increase due to menu mix. As previously mentioned on our last call, we did see a negative impact on our sales during the first several weeks of January as a result of Omicron. Sales trends and transactions improved from January to February. In March, our same-restaurant sales grew 2.5% as we began to roll over a tougher comp of 24.6% in March of '21. This tougher comp will continue as we will lap a 25% comp in the second quarter. When you look at our first quarter cap on a 3-year stack basis, we grew by 6.8%, which is in line with our long-term target and speaks to the consistency and durability of our brand. Cost of goods sold excluding depreciation and amortization as a percentage of revenues increased to 34.4% in the first quarter of '22 from 29.9% in the first quarter of '21. This increase was largely driven by a 15.7% average increase across all commodity prices with higher impacts in pork, chicken, and beef prices. Additionally, cost of goods sold was negatively impacted by 1.9%, resulting from the change in recording third-party delivery pricing. These increases were partially offset by the increase in our average check. As Michael stated earlier, we ultimately view commodity market volatility as transient, but we are taking measures to limit the magnitude, duration, and timing of cost increases in key input categories. We have locked in pricing on almost 80% of our beef flats, and we continue to actively look to fix pricing in other areas when opportunities arise. As of today, we have almost 55% of our commodity basket locked in for '22. As a reminder, in March, I provided a range of 13% to 15% expected increase in our commodity basket in '22, and we are currently forecasting to be at the higher end of that range in the second quarter and for the full fiscal year. Now moving on to labor. Labor as a percentage of revenues increased to 27.7% in the first quarter of '22 from 26.5% in the first quarter of '21. This increase was primarily driven by hourly rate increases. Rates were up approximately 13% versus Q1 of '21. New restaurant openings in '21 and the first quarter of '22 and continued expansion of our dine-in capacity also drove higher investments in labor. This was partially offset by an increase in our average check. All told, we are doing a lot to mitigate the more permanent labor cost pressures that Michael described earlier. Labor does continue to be more productive versus pre-COVID levels, and more recently, we have put additional efficiencies in place to further optimize our labor. We staff our restaurants with exceptional team members who live our values each and every day. We do this by prioritizing our culture. Other operating expenses increased $0.5 million or 3.1% in the first quarter of '22, and occupancy expenses increased $1 million or 14.3%, both the result of new restaurant openings in '21 and '22. Restaurant level adjusted EBITDA decreased 6% to $28 million in the first quarter of '22 from $29.8 million in the first quarter of '21. Restaurant level adjusted EBITDA margins were 20.8% in the first quarter of '22 versus 25.4% in the first quarter of '21. The decrease of 460 basis points was driven by the impact of increased commodity costs, which we believe to be transient and, to a lesser extent, labor inflation. To combat these headwinds, during the first quarter, we increased menu prices approximately 1.5%, and we expect additional menu price increases during the second quarter of '22. As you may recall, we had taken 2.5% of price last April. And if we did nothing in Q2, we would be at approximately 4.5% pricing for most of Q2, which in this environment does not meet our objectives. So we will strategically be taking pricing in the next few weeks. Our goal is to remain a great value for our guests while mitigating some of these cost increases. Our G&A expenses increased $3.9 million to 11.7% in the first quarter of '22 from 10.1% in the first quarter of '21. This $3.9 million increase was due primarily to a $3.3 million increase in equity-based stock compensation expense and approximately $0.7 million of transaction-related expenses. The majority of our G&A increase was due to these specific items, and we are carefully managing underlying expenses in this inflationary environment. Preopening expenses decreased $0.7 million to 0.4% in the first quarter of '22 from 1.1% in the first quarter of '21. This decrease was due to the timing and geographic location of restaurant openings in the first quarter of '22 versus '21. All this led to adjusted EBITDA of $17.6 million in the first quarter of '22 versus $18.5 million in the first quarter of '21, a decrease of 4.9%. Below the EBITDA line, interest expense was $6.1 million in the first quarter of '22, a decrease of $4.6 million from the first quarter of '21. This decrease was driven by the payoff of our second lien term loan in the fourth quarter of '21 and lower outstanding borrowings under our first lien term loan. We ended the quarter with $32.2 million in cash. We will be using our cash balance plus operating cash flow to support our continued growth in new restaurant openings. So like Michael said, we're on track. The structure of our business allows us to grow same-restaurant sales by low single digits on average, check. Our solid development pipeline is on track to deliver 10% unit growth this year, check. Our revenue growth is in the high single to low double digits, check. And while our EBITDA performance is a bit wonky this year and is under some industry-wide pressures, we haven't had to slow down and we certainly feel confident in our long-term growth algorithm. We're pressing on so that we can continue to lay the groundwork that will sustain that low teens adjusted EBITDA growth over the long run. Thank you for your time. And with that, I'll turn it back to Michael.

Michael Osanloo, President and Chief Executive Officer

Thanks, Michelle. Before we open for questions, I just want to revisit our commitment to our guests. As experienced operators, we understand what it takes to build and sustain an obsessed fan base. We know it's crucial to deliver our delicious menu, our value-driven price point, and our unrivaled experience. We prioritize quality and strive for consistency. This foundation has allowed Portillo's to be a success for the last 59 years through multiple recessions, oil embargo, the dot-com bust, 9/11, housing market crashes, wars, pandemics, et cetera. Portillo’s has not only survived, we have thrived. We have persevered through all of these challenges and uncertainties. And we're confident in our ability to weather the pressures we face today. Like we said in March, we have demand. Consumers are choosing Portillo's. Thank you. And with that, let's turn it over to the operator for questions.

Operator, Operator

Our first question is from John Glass with Morgan Stanley.

John Glass, Analyst

Can you talk a little bit about the performance of the stores that were opened in the fourth quarter Indiana, and I think it's West Madison? How are those trending versus your initial expectations? You talked about a very successful operation down in St. Pete. How do you think operations are doing from a speed of service standpoint or retention? Maybe just talk a little bit about how that opening has gone from an operations standpoint.

Michael Osanloo, President and Chief Executive Officer

Yes. Let me give you an overview, John, and then I'll let Michelle provide more details. Overall, we are very pleased with all of our openings. Even our winter opening in Westfield has been a success. We have changed significantly how we open new restaurants to ensure that we provide thorough training for management, so they understand the Portillo's way and what our guests expect. Our training for team members focuses on managing the high volume we experience, which can reach $5,000 to $6,000 in sales, typically considered a good day in other businesses. We place a strong emphasis on speed and management training. Our openings have been exceptional, and I think St. Pete may be our best yet. We offered competitive salaries to attract fantastic team members who are highly engaged in our operations. We manage large volumes effectively, and that location is thriving. This success is crucial as Central Florida represents a significant growth opportunity for us. Each successful opening strengthens our brand and expands our potential.

Michelle Hook, Chief Financial Officer

Yes, John, just to add on to what Michael was saying. So in terms of Westfield, West Madison and Joliet, when you think about when those restaurants opened during the winter months and given the locations, there's definitely some seasonality we saw during the first part of those openings. But to Michael's point, what I will tell you is that they are performing above our underwriting expectations and we feel really good about that. With St. Pete, having their grand opening on April 5, early indications are very good there as well.

John Glass, Analyst

And Michelle, just on wages, I understand there's pressure industry-wide. You took a big step up last year, though. Do you think the wage inflation therefore should moderate to your business in the back half of this year, just given that? Or do you think maybe there's another round of bigger increases needed just to continue that high retention that you have?

Michelle Hook, Chief Financial Officer

Yes, John. And we did obviously signal this in the filing this morning that we do expect additional rate increases later this year. But to your point, we put substantial increases in place in June of last year. And so I do expect, as you look at the comparability year-over-year when you get towards that back half of the year for that comparability to ease some. But we do expect to put in some more rate increases this year, but not to the extent that we had to do in June of last year.

Operator, Operator

The next question is from Nicole Miller with Piper Sandler.

Nicole Miller, Analyst

If you've done this, and I'm not sure you have, but if you can look at the performance of the fully staffed stores versus those that have lagged a little bit of late, what could we expect in the model going forward as the enterprise is now fully staffed? Would that produce like a higher comp on the demand you're seeing? Or would it produce a better margin with operational excellence? What might happen?

Michael Osanloo, President and Chief Executive Officer

I don't think we have specifically looked at that, but it's a great insight from you, and we will investigate it. Anecdotally, I can tell you that when our restaurants are fully staffed, we observe improvements in guest satisfaction metrics such as order accuracy and speed of service. These enhancements lead to better comparable sales and increased profitability. Your intuition is absolutely correct, and we will definitely check that number.

Nicole Miller, Analyst

Okay. Great. I know it's kind of detailed, so thanks. And then just wondering if there was any purposeful reason on calling out 1Q comp on a 3-year basis? Essentially, maybe start with 1Q, could you talk a little bit about price mix and traffic? And then do you want us to look at the rest of the year on a 3-year basis? Because that could be kind of interesting and helpful knowing that things ease as you go through 2Q.

Michelle Hook, Chief Financial Officer

Yes. Absolutely, Nicole. The reason why I wanted to make sure to call out a 3-year stack was because if you go back and even look sequentially, when you look at what the 3-year stack was in '21, I think you truly do see the consistency of our performance on a 3-year stack basis. And so it does take out some of that noise when you look at the comparability on a 2-year stack and then rolling over the COVID period in '20. And so that's where we wanted to really look at that consistency of the brand. So for me, I'm going to continue to look at all metrics, Nicole. We're going to look at, obviously, the cap, the 2-year stack to 3-year stack. But yes, I think that, for me, is a good metric that kind of removes some of that noise, and to me, looks at what we want to deliver on a long-term comp basis and us being able to do that and deliver that.

Nicole Miller, Analyst

And how is price and mix in 1Q again?

Michelle Hook, Chief Financial Officer

Price in the first quarter, we were up 7.1%, and the next was 0.4%, Nicole.

Operator, Operator

The next question is from David Tarantino with Baird.

David Tarantino, Analyst

Michelle, just kind of revisiting the commentary on the 3-year comps. I was wondering if you could comment specifically on what you saw in March. You gave the number on a 1-year basis. Our math would indicate it might have been a little lower than the full quarter on a 3-year comp, but I know there's all kinds of wonky comparisons. So wondering if you could clarify that for me.

Michelle Hook, Chief Financial Officer

Yes, David, I wanted to emphasize that on a 3-year basis, as I mentioned to Nicole earlier, we aimed to convey the importance of consistency. Regarding March, it's important to note that we began comparing against tougher metrics starting in that month, which will carry over into Q2. However, if you look solely at March, the 3-year comparison remains strong, around 9%.

David Tarantino, Analyst

Got it. Our calculations were incorrect. The second question I have is about pricing; I don't believe you mentioned the amount you're planning for the second quarter. Could you provide some context or direction on how much that might be? Additionally, is the pricing strategy aimed at addressing the inflation that has occurred since our last discussion, or is it more about catching up on what you haven't implemented due to the inflation observed in the first quarter? In other words, do you expect the pricing you take in Q2 to lead to better margins than what you experienced in the first quarter?

Michelle Hook, Chief Financial Officer

Yes, David, we didn't provide the Q2 pricing as it's still to be determined at this point. We're continuing those discussions and the situation is still evolving. We haven't implemented those price increases yet, which is why we didn't share the numbers. I'll keep you updated on that next quarter. Our aim remains consistent with what Michael mentioned; we want to ensure that we price at or below inflation. If we did nothing, we would see about a 4.5% pricing adjustment as previous pricing starts to expire. Therefore, we want to align back to the levels we had before, keeping the guiding principle of being at or below inflation.

Operator, Operator

The next question is from Sara Senatore with Bank of America.

Sara Senatore, Analyst

I have a couple of clarifying questions. First, regarding the traffic, I understand that you mentioned the value proposition remains strong. It seems that Omicron affected mobility, but I'm trying to grasp the idea of negative traffic this quarter, especially since Omicron appeared to wane by mid-January. Is this shift possibly between channels, such as more drive-through or delivery options that could lead to order aggregation? That’s my first question, and I also have a quick question about labor.

Michael Osanloo, President and Chief Executive Officer

Thank you for your question, Sara, and you're absolutely correct. It remains an issue of order aggregation. To clarify, when we discuss traffic, we're really referring to transactions. The key metrics I focus on to gauge the health of our business are the sales of entree sandwiches and salads. Consumer behavior hasn't shifted significantly; for instance, people typically don't order two burgers instead of one. So, I look at the sales of burgers, chicken sandwiches, and beef sandwiches, and our total sales of these entrees increased by about 1.7% this quarter. This increase reassures me that we're serving more customers. The fluctuations in transactions relate to the nature of how customers order; drive-through visits often result in feeding more people per transaction, while dine-in visits tend to mean fewer people per transaction. Therefore, our slight decline in dine-in traffic indicates that our transactions are somewhat artificially low. The 1.7% increase in sales of our entrees gives me confidence that we're reaching more customers. Does that make sense?

Sara Senatore, Analyst

Yes. And then just on labor, Michelle, can you just help me think through, like going forward, if I look at the change in your labor as a percentage of sales, it kind of looks like exactly what I would expect in terms of high single-digit pricing and low double-digit labor inflation. So when should we see productivity? Is the issue that the productivity improvements are being offset by having it fully staffed versus last year? I guess when might we start to see that delta be a little different than just kind of net pricing or net inflation?

Michelle Hook, Chief Financial Officer

Yes. No, Sara, we started to put things in place in March and started to see in March some, what I would describe as meaningful improvement in labor efficiencies. And so I would expect us to continue to see those trends within Q2 and beyond, but understand too that, like I mentioned before, there are additional rate increases that we do have to put in place yet this year. But we are definitely seeing improvements in labor through the efficiencies we put in in March.

Operator, Operator

The next question is from Andy Barish with Jefferies.

Andy Barish, Analyst

I wanted to ask about the presentation you shared regarding the quarter. It seems that there might be one unit opening in the third quarter, with more anticipated later on. Is this due to the supply chain issues and equipment concerns?

Michael Osanloo, President and Chief Executive Officer

Yes, that's correct. However, I wouldn't attribute it mainly to the supply chain equipment. It's more related to the permitting process. Municipalities have been slow to recover, which is causing delays for us. A couple of weeks ago, we had one slide that coincided with the transition from the third quarter to the fourth quarter. So we are either actively building or have started construction on the other five locations, Andy. We remain confident about achieving seven for the year.

Andy Barish, Analyst

Got you. And then to ask directly, regarding the April comparisons, are you willing to share a number or if you're still feeling positive given the ramp?

Michael Osanloo, President and Chief Executive Officer

Yes. We're going to acknowledge the significant challenge. It's important to remember that we're comparing against very high numbers from last year. We are looking at over 25 percent comparable sales growth. Our objectives for the year remain unchanged. We are confident in our business performance and in the consumer demand we are experiencing, but it's crucial to recognize that we are dealing with some substantial figures from previous periods.

Michelle Hook, Chief Financial Officer

Yes. In April, we were comparing against a challenging comp of over 34%. While April was tough, it becomes a bit easier to reach the 25% comp later on. As Michael mentioned, we want you to keep in mind the tougher comparisons we'll face in Q2.

Andy Barish, Analyst

Got you. Appreciate the color there. And anything, Michelle, on sort of more kind of onetime costs hitting the labor line in the 1Q with Omicron still there on overtime or even COVID exclusion, pay, or stuff like that, that was noticeable?

Michelle Hook, Chief Financial Officer

Yes. We had a little bit of that in there, Andy, that did impact us in terms of some labor pressures in Q1. And nothing that I would call significant on the margin. But definitely a little bit of that in Q1 that we don't expect to see in Q2 and beyond.

Operator, Operator

The next question is from Chris O'Cull with Stifel.

Chris O’Cull, Analyst

I was hoping you could dig in a bit more in the wage investments you plan to make later this year. Is there anything you can share in terms of around the magnitude of the investment and whether there are certain positions in the field that you want to address or support?

Michael Osanloo, President and Chief Executive Officer

Here's what I'd say, Chris, is we want to take wage off the table for employees as they make decisions on where to work. And we see pockets in our system where we might be a hair behind some of our competitors, and so we are going to make some investments. It's certainly less than what we've made in the last 24 months. So I definitely feel like the pace of inflation is slowing. But there are places where we need to make some modest investments. The key to our success, our algorithm when it comes to labor is take wage off the table as they come in and then provide fantastic culture, training, and development so that our turnover is lower than everybody else's in the industry. That creates really great outcomes on labor. When you have turnover that's just higher than average, you're spending a lot of money to recruit, train, and bring in new people. And so that's how we're approaching this situation. Take wage off the table. There are some pockets where we have to make some small investments and then train the heck out of people, make sure that they are loved and appreciated and are enjoying their experiences at Portillo’s.

Chris O’Cull, Analyst

That's very helpful insight. And then, Michael, you mentioned measurable efficiency improvements. Can you review what those initiatives were and then what were you able to drive in terms of productivity gains?

Michael Osanloo, President and Chief Executive Officer

I'll give you one example and I credit our operators for this. A traditional Portillo’s has L-shaped production lines. The long side of the L handles the traditional sandwiches, burgers, hot dogs, and beef, while the short side has what we call our salad bowl, where we prepare amazing scratch salads. Our team members suggested that we would be more efficient if we moved the salad bowl to the main part of the L, as there’s some space in the back near the drive-through lanes. We implemented this change and relocated the salad bowl area to the back of the line in several restaurants. This adjustment has led to labor efficiencies since if one group is slow, they can assist at another station. Additionally, it improves the guest experience; in a typical Portillo’s, ordering a burger and a salad meant picking them up at two different locations. Now, we are able to staff the salad bowl with two fewer people than before. We've experienced a slight increase in our items per labor hour productivity as a result. While it's early days, we have some creative plans for the space we freed up that we believe will drive further efficiencies for our business. This is a clear example of real, tangible savings.

Operator, Operator

The next question is from Sharon Zackfia with William Blair.

Sharon Zackfia, Analyst

Just a question on the restaurant level margins. Can you talk about kind of where March was relative to the full quarter given some of those Omicron-related disruptions early in the quarter? And then if I look at 2018 and 2019 before the pandemic, typically, you would seasonally see a couple of hundred basis points or more lifts second quarter relative to first quarter. Is that going to be the pattern this year? Is there something we should think about to temper that? And then last question, can you talk about Chicago and kind of what you saw when the vaccine mandate lifted on, on-premises?

Michelle Hook, Chief Financial Officer

Yes, Sharon, I don't want to discuss intra-period margins, so I'll avoid that topic. However, I can tell you that when you examine the trends, particularly our performance in the second quarter, we typically experience increased revenues in both the second and fourth quarters, which allows us to leverage a bit more during those times. Considering this and what Michael mentioned regarding labor efficiency, I expect that we will see an improvement in margins in the second quarter. What was your third question, Sharon? Sorry.

Michael Osanloo, President and Chief Executive Officer

I think you were asking about the situation in Chicagoland with the lifting of the vaccine mandate. We're seeing positive momentum. In Q1, our inside sales reached 40% of our mix, compared to the 20s a year ago. We're pleased with this trend. While it's not back up to the low 50s it used to be, it has improved. We're cautiously optimistic that there will be further improvement and more people returning to restaurants. However, there are still concerns, as some places are wary of a new variant of COVID. So, while we're optimistic, I hesitate to fully rely on this trend or plan around it.

Sharon Zackfia, Analyst

Okay, we'll try to order in today to help you out at Chicago. On the G&A line, Michelle, you had originally, I think, expected $70 million to $75 million this year. You were kind of well below that run rate in the first quarter. Is $70 million to $75 million still the right number for the year?

Michelle Hook, Chief Financial Officer

I'm not ready to commit to that just yet, Sharon, because we have investments to consider. We are definitely in growth mode and we have plans for investments in the latter half of this year. If we continue to trend at those levels, we're managing that line very carefully as I mentioned, and I will provide an update next quarter. We still have investments planned for the back half of the year, so that range remains valid for now. However, to your point, we are trending lower than that, but I still believe that range is appropriate for the full year.

Operator, Operator

Our next question is from Dennis Geiger with UBS.

Dennis Geiger, Analyst

Michael or Michelle, I'm curious if you could touch a bit on kind of what you're seeing from customers of late. Any changes in behaviors, perhaps how they're using the menu? I know, Michael, you mentioned no pushback on the pricing at all. But any other changes or shifts in behavior or purchase shifts to call out? I assume customers can't do without their cake shakes, but if there's anything notable that you would mention of late, be interested there.

Michael Osanloo, President and Chief Executive Officer

Overall, there has been very little change in the mix and sales patterns. We are noticing a slight increase in customers opting for bigger portion sizes, like moving from a regular beef sandwich to a big beef sandwich or from a regular burger to a double burger. Delivery continues to expand, with growth in both our own self-delivery and third-party delivery services. This trend is ongoing. However, the core consumer demand, including how frequently they visit and how much they eat, remains quite stable.

Dennis Geiger, Analyst

That's helpful. And then just one other as it relates to the new units and the returns. And I know last quarter, I think we talked about the higher build costs that you and the industry are seeing, and despite all that, your ability to kind of continue to see those solid returns. So I'm just curious, as we think about the strength, early days that you're seeing in Joliet and St. Petersburg, is it sort of stronger sales? Is it better margins, a combination of the two things that even in this kind of elevated new build environment support those really solid returns?

Michael Osanloo, President and Chief Executive Officer

Yes. I think both Joliet and St. Pete had relatively low construction costs. We have been careful about discussing our new builds. Joliet was on the low end in terms of cost considering its size, and St. Pete also had an appealing construction cost for us. The build costs were not an issue. The consumer response has been very strong for both locations. Joliet, as most know, is a drive-through-only concept with three lanes, serving as a pilot program that has been fantastic so far. We believe there is potential in the drive-through-only model. St. Pete has also been executed really well; it is located in a prime area and is a beautiful restaurant that fits the local environment. We hired effectively and provided excellent training for our staff, who are very happy to be there. The sales volumes have been strong, and we managed that volume well. St. Pete demonstrates our effective execution of our strategy, and when we do that, we expect to exceed our targets.

Operator, Operator

Next question is from Gregory Francfort with Guggenheim Securities.

Gregory Francfort, Analyst

I have a question regarding the recent openings, particularly the four or five that Michael was involved with prior to the latest ones. How are those performing? Were you able to maintain good sales and margin on those stores?

Michael Osanloo, President and Chief Executive Officer

Yes, we're very pleased with the classes of 2020 and 2021. Overall, they are performing exceptionally well and exceeding our underwriting expectations. While some are achieving impressive revenue levels, others have experienced a slight slowdown. Nevertheless, we remain very enthusiastic about the classes of 2021 and the early 2022s.

Gregory Francfort, Analyst

Got it. And then maybe just on the labor side. I think you touched on staffing improving. How has turnover been? Has turnover started to tick down at all? Or is that kind of staying at elevated levels?

Michael Osanloo, President and Chief Executive Officer

Yes. So obviously, turnover in the restaurant industry are some lofty numbers. So what we like to do is we very assiduously track ourselves against the rest of our industry. I can tell you that we are 20 to 30 percentage points lower than the rest of our industry, right? You see some restaurant companies, very, very high turnover levels approaching 200%. We're still in the low 100%, which in this industry and at this time, represents a 20 to 30 percentage point benefit versus others. So we think that we're a little bit more sticky than others in the restaurant industry.

Gregory Francfort, Analyst

Got it. Can I ask one more question about the hedging you mentioned, Michelle? You indicated that you were at 50% for the remainder of the year. Are you significantly below or above the futures curve as we look ahead to 2023 and 2024 in terms of the potential commodity impact?

Michelle Hook, Chief Financial Officer

Yes, Greg, to clarify, for the full year, we're secured at nearly 55% of our market basket. I want to emphasize that our strongest focus, beef, is locked in at a rate below our internal budget estimates, which makes us optimistic. Most other commodities are also locked in for Q2. As we consider the locks for Q3 and Q4, we assess the costs associated with locking in at certain prices. When favorable opportunities arise, we will take action to lock in. However, regarding your question on forward projections, I’m hesitant to commit to any numbers now, given that future opportunities may emerge. We anticipate some easing in the market conditions, and we've mentioned that these pressures are more temporary. Therefore, we prefer not to secure long-term numbers as we believe that by '23 and '24, we should see some relief.

Operator, Operator

And with that, we will conclude today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.