Earnings Call Transcript - PTLO Q3 2022

Operator, Operator

Greetings, and welcome to Portillo's Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Barbara Noverini. Ms. Noverini, you may begin.

Barbara Noverini, Host

Thank you, operator. Good morning, everyone, and welcome to our fiscal third quarter 2022 earnings call. With me on the call today is Michael Osanloo, President and Chief Executive Officer; and Michelle Hook, the Company's Chief Financial Officer. Before we get started, let me remind everyone that we are hosting our Inaugural Investor Day on Tuesday, November 8, with management presentations beginning at 9:00 a.m. Eastern Time. You may register for the live webcast by visiting our Investor Relations website at investors.portillos.com. In addition to viewing our presentations, webcast participants are welcome to submit questions during the live Q&A session with our management team. We look forward to continuing the conversation with you on November 8. Let me also 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 a more detailed discussion 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 measure. 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. Now let me turn the call over to Michael Osanloo, President and Chief Executive Officer.

Michael Osanloo, President and CEO

Thank you, Barb. We are incredibly proud to share the results of another great quarter with you. Our dedicated team members proved time and again that delivering an exceptional guest experience drives our solid financial performance. We have some of the best team members in the industry, and I want to thank them for living our values and making operational excellence a top priority at Portillo's. In the third quarter of 2022, total sales increased 9.5% to $151.1 million. Same-restaurant sales grew 5.8%, showing resilience in this macroeconomic backdrop. We ended the quarter with average unit volumes of $8.4 million per restaurant. Our throughput continues to show up in our restaurant-level adjusted EBITDA margin, which was 22.6% for the quarter. Now Michelle will go over our financial results in more detail, but let me discuss the underlying drivers of our performance in the quarter. First, our strong comps serve as evidence that our pricing approach is working. Our pricing philosophy is to slightly lag inflation and our competitors. Let me be clear, we do take price. We just aren't going to be the first to do so. That's the crux of our price laggard strategy. The power of our value proposition is especially apparent during times of economic uncertainty. Our guests expect a high-quality meal at a great price point. This is something we carefully protect. So we've surgically taken price across our menu to keep up with inflationary trends, while ensuring our guests feel that relative value in the quality and abundance of our food. We have two solid indicators that suggest our tactics have been prudent, guest survey data and our guest counts. So first, our guest satisfaction scores have continued to trend higher in Q3. One component of that is a relative value score, which captures guest sentiment with respect to our value proposition. Even in this inflationary period where consumers have undoubtedly felt pinched, we continue to score high with our guests. Our value scores are the highest they've been in three years. We've seen that inflation for food at home has outpaced food away from home year-to-date. And further, we've deliberately priced less aggressively than other restaurant companies. Our guests can feel that value, and we're thrilled that they continue to tell us exactly that. Second, our guest count, which we calculate as the number of sandwiches and entree salads sold in the quarter, ticked up slightly. In other words, we served more people in Q3. This is proof that our price strategy is working. Next, our team members handle unbelievable volumes on a daily basis, which drives our restaurant-level margins. It's the energy of our people and the consistency of our operating model that translate into the attractive margin profile we enjoy at Portillo's. We see high contribution margins from every incremental beef sandwich, every incremental fry, every incremental hot dog sold, and we wouldn't be able to do that without the incredible frontline team members who rock our busy shifts and handle our ridiculous volume. Because focus on operational excellence matters, we implemented another round of pay increases in the quarter. For us, attracting and retaining engaged team members is key to our continued success. In an environment where talent is hard to come by, our staffing levels are now over 100%, and our turnover has consistently been 20 to 30 percentage points better than the industry average. Investing in our team members is consistent with our values-driven culture, and our team members in turn take care of our guests, who in turn take care of our investors. Finally, we're gearing up to open five new restaurants over the next few months. The first of these openings will be in Schererville, Indiana. Schererville is our eighth restaurant in Indiana, a market in which we continue to build out local scale. We've already invited fans to get a sneak peek before the soft opening next week. We'll open four more restaurants across the Sunbelt. We're continuing to build out Central Florida with West Kissimmee and we're also on track to open our first location at the Grandscape development in The Colony in Texas. We will add two more restaurants in Arizona, in Tucson and Gilbert. We continue to face lengthy permitting processes, which were largely responsible for clustering these builds into the fourth quarter. Our teams have been preparing well in advance to open the last five restaurants, but there is a chance that one of them moves into 2023 by a few weeks. We already have line of sight toward opening at least nine additional restaurants in 2023. Preparations are underway for three to five new restaurants in Texas, three to four in Central Florida, one to two in Arizona, one to two in Chicagoland and one to two in Michigan over this time frame. We had a great third quarter, and we're excited about the future of Portillo's. As we grow, we remain committed to the strategy that's driving these strong financial results. We will continue to take great care of our team members who we treat like family. We will continue to maintain our value proposition by serving abundant portions of our delicious food at a great price. We will continue to focus on operational excellence, and we will continue to build beautiful restaurants in high-growth markets. With that, let me hand it off to Michelle to share a few more details of the quarter.

Michelle Hook, Chief Financial Officer

Great. Thank you, Michael, and good morning, everyone. Before we discuss our third quarter results, I want to briefly recap our recent secondary offering. This quarter, we completed the offering of approximately 8 million shares of the Company's Class A common stock at an offering price of $23.75 per share. All of the shares sold in the offering represented Class A and B shares owned by pre-IPO members. The Company did not receive any proceeds from the sale of shares of Class A common stock, but rather used the net proceeds to purchase Class A and B shares from the pre-IPO members. Total number of shares remain the same. To reiterate, this transaction did not dilute any existing PTLO shareholders. Now turning to the results for Q3, our third quarter results prove again that our dedicated team members are delivering an exceptional guest experience, which is driving our consistently high average unit volumes and strong restaurant level adjusted EBITDA margins. This shows that we are resilient in the face of a tough macroeconomic environment. Let's now dive into the details. Revenues were $151.1 million, reflecting an increase of $13.1 million or 9.5% compared to the third quarter of 2021. This increase was driven by the opening of two new restaurants in the third and fourth quarters of 2021 and two new restaurants in 2022, combined with a 5.8% increase in same-restaurant sales. The same-restaurant sales increase of 5.8% was driven by a 6.3% increase in average check and a 2.8% benefit from the change in recording third-party delivery pricing. This was partially offset by a decline in transactions of 3.3%. The higher average check was driven by an 8.2% increase in menu prices, partially offset by lower items sold per transaction. When you look at our third quarter comp on a three-year geometric basis, we grew 10.7%, which is in line with our long-term target of low-single-digit annual growth. Cost of goods sold, as a percentage of revenues, increased to 35.3% in the third quarter of 2022 from 32.1% in the third quarter of 2021. This increase was largely driven by a 15.4% average increase across all commodities. We saw higher impacts in beef and chicken in the quarter. Additionally, cost of goods sold was negatively impacted by 1.8%, resulting from the change in recording third-party delivery pricing. These increases were partially offset by the increase in our average check. The commodity market continues to remain volatile, and we have and are taking measures to mitigate our risk within key input categories. We have locked in pricing on approximately 57% of our commodity basket for the fourth quarter of 2022. We believe our commodity basket will increase at 15% for fiscal 2022, the higher end of our previously guided range. Now moving on to labor. Labor as a percentage of revenues decreased to 25.9% in the third quarter of 2022 from 26.8% in the third quarter of 2021. This decrease was primarily driven by the increase in our average check and operational efficiencies. Partially offsetting these favorable variances was labor inflation. We continue to invest in our incredible team members with additional hourly rate increases put in place at the beginning of the third quarter. Other operating expenses increased $1.3 million or 8.5% in the third quarter of 2022. Occupancy expenses increased $0.6 million or 9.2%. Both increases were largely the result of new restaurant openings in 2021 and 2022. Restaurant level adjusted EBITDA decreased 0.5% to $34.1 million in the third quarter of 2022 from $34.2 million in the third quarter of 2021. Restaurant level adjusted EBITDA margins were 22.6% in the third quarter of 2022 versus 24.8% in the third quarter of 2021. The decrease of 220 basis points was driven by the continued impact of increased commodity costs and to a lesser extent, labor inflation. We are partially offsetting these expense increases through menu price increases and operational efficiencies. During the first and second quarters of 2022, we increased menu prices on certain items by approximately 1.5% and 3.5%. In mid-October, we increased menu prices on certain items by approximately 3%. These increases, combined with pricing actions taken in 2021, resulted in an effective increase in price of approximately 8.2% in the third quarter of 2022 and 7.4% year-to-date. As Michael mentioned, our philosophy is to lag inflation and our competitors. By not taking aggressive pricing, we are preserving our value proposition. We will continue to monitor the current environment and remain flexible and strategic in our pricing approach moving forward. Our focus remains providing a great value for our guests. Our G&A expenses increased $6.3 million to 12.0% in the third quarter of 2022 from 8.5% in the third quarter of 2021. This increase was primarily driven by increases in equity-based compensation expense of $3.2 million, an increase in insurance of $0.7 million, and transaction fees related to our secondary offering of $0.6 million. Pre-opening expenses increased $0.4 million to 0.5% in the third quarter of 2022 from 0.3% in the third quarter of 2021. The increase was due to preparation for the planned restaurant openings in the fourth quarter. All this led to adjusted EBITDA of $21.6 million in the third quarter of 2022 versus $24.2 million in the third quarter of 2021, a decrease of 10.7%. Below the EBITDA line, interest expense was $7.1 million in the third quarter of 2022, a decrease of $3.6 million from the third quarter of 2021. This decrease was driven by the payoff of our second lien term loan in the fourth quarter of 2021 and lower outstanding borrowings under our first lien term loan. This decrease was partially offset by $0.9 million of additional interest expense on our current term loan due to an increased interest rate. As of the end of Q3, the effective interest rate on the term loan was 8.8%. Income tax expense was $1.0 million in the third quarter of 2022, and our effective tax rate for the quarter was 23.9%. We ended the quarter with $46.7 million in cash. We will be using our cash balance plus operating cash flow to support our continued growth in the near-term and beyond. We remain focused on our strategy, which is driving our strong financial results. We care about our team, who in turn care for our guests. We prioritize our value proposition through strategic price management. We focus on operational excellence, and we will continue to build beautiful restaurants. Thank you for your time. And with that, I'll turn it back to Michael.

Michael Osanloo, President and CEO

Thank you, Michelle. Portillo's is a brand that has persevered through a wide range of external pressures throughout the past six decades without ever closing a restaurant. The broader macro environment is highly unpredictable, but getting a great meal from Portillo's is not. No matter what's going on in the world, we are committed to delivering our delicious menu at a value-driven price point. This is what makes Portillo's special. It's what we excel at. We do this by leading with our people-centric culture and focusing on operational excellence. Our guests can taste it, they can feel it, and it keeps them coming back. Thank you. With that, let's just turn to Q&A. Operator, can you please open the line for questions.

Operator, Operator

Our first question comes from Andy Barish with Jefferies.

Andy Barish, Analyst

Understanding the challenges in the development world, trying to hone in on just opening that many units coming up in the 4Q, sort of how we should think about that impact on restaurant level margins, just with all the kind of moving pieces and dates and stuff like that?

Michael Osanloo, President and CEO

Yes. I anticipated that people would have questions about this, so I'll share my thoughts before passing it to Michelle for insights on the potential impact. First, the clustering of these restaurants this late in the year has taught us a lot about the permitting time we need to allocate and how it's a longer process than before. We are being very conservative in our budgeting for permitting and overall construction time for next year. The good news is that all of the restaurants are currently under construction. Schererville is nearly finished, and we are set to open for soft sales next week. I did mention that one restaurant might delay until 2023. To be transparent, we want to ensure you are aware because many of you will be at an investor conference in early January, and if the restaurant isn't open, I don’t want you to think we could have informed you back in November. So, we are being very clear that it might slip a couple of weeks. For 2023, we are significantly ahead of where we were in previous years regarding our development pipeline. We are on track to meet our targets, though it may still be more concentrated in the second and third quarters than we would ideally prefer. I’m not certain we'll have any openings in the first quarter, but we are committed to continuing our progress. Development is going very well, and we have a strong pipeline for 2023 and an even stronger one for 2024. Michelle, do you have any thoughts on this?

Michelle Hook, Chief Financial Officer

Yes, I would just add, Andy, as Michael mentioned, with the openings this year being back-loaded Schererville next week, but then the other restaurants planning to open later in December. And so when you think about the impacts on margins this year, it's really going to be not much of an impact because you're not going to have really that many weeks for the remaining restaurants that you're going to be operating with in fiscal 2022. So that will be more something as we move forward in '23. That will be impactful versus $22 million.

Andy Barish, Analyst

Got you. And then along the same lines, can you just give us a quick update on sort of building investment costs? I know that's been an industry-wide issue. Any kind of value engineering that you're looking at to get some efficiencies like you've done on the operations side, which is obviously helping on the labor line as we've seen here in the last couple of quarters?

Michael Osanloo, President and CEO

Yes. There are three key points that I want to highlight. First, we have an initiative called Kitchen 23, which involves reconfiguring our kitchen. We will test it in the 2023 builds, and we are excited about it. This new design aims to increase efficiency in labor utilization and reduce equipment costs. We believe this initiative will help lower costs while also improving operational efficiency. Our operators are doing an excellent job with this grassroots effort, and we've gathered some of the best ideas from our frontline team members who work in the kitchen every day. Secondly, we are focusing on adapting to guest expectations in the restaurant experience rather than just cutting costs. Guests are increasingly looking for better off-premises access. We want to provide an exceptional drive-through experience and make takeout easy. We have noted a shift in how many guests prefer dining inside, so we are thoughtfully right-sizing our dining rooms while enhancing off-premises access and kitchen efficiency. This approach allows us to reduce space in the restaurant while creating a venue that better meets the changing needs of consumers. Michelle will also discuss improvements we are seeing in costs.

Michelle Hook, Chief Financial Officer

Yes, I would just add to that, Andy. Yes, my expectation heading into '23 is that we should see some easing on the costs that we saw this year, obviously, to be determined, but that's my expectation heading into '23.

Operator, Operator

Next question comes from Sharon Zackfia with William Blair.

Sharon Zackfia, Analyst

When you think about the value positioning that you've been able to maintain even in this very inflationary environment, I'm curious on how that impacts both new customer acquisition as well as frequency of returning guests, if there's a disproportionate impact on one of those buckets? And then separately, we've heard from a lot of other companies that trends improved quite a bit in September into October. I'm just wondering if that's something as well that Portillo's has seen.

Michael Osanloo, President and CEO

Let me address the first part of your question, and I will let Michelle respond to the second. I appreciate your insight, Sharon. We have a very loyal customer base in all our locations, including Arizona, Florida, California, and Chicagoland, making repeat visits and retaining both our ultra-heavy and heavy users extremely important. It's crucial to have a strong value proposition, especially in light of the price increases our guests are noticing elsewhere. Our dedicated customers recognize these factors and are choosing to frequent Portillo's more often. When it comes to acquiring new customers, our initial marketing approach isn't to claim that we're cheaper than others, as there are certainly quick-service restaurants that offer lower prices. Instead, we focus on providing exceptional food and an outstanding guest experience. Additionally, we offer an incredible value proposition that encourages customers to return. We aim to attract them with our delicious food and great experiences, and then ensure they keep coming back by maintaining those aspects along with great value.

Michelle Hook, Chief Financial Officer

Yes, I can answer in terms of trend, Sharon. I mean, it's early on. We just ended our period 10 on Sunday. And so in terms of how we're looking at things in October, I think, I don't all of a sudden expect that we're going to flip the calendar and you see our numbers. Mix has been pretty consistently negative Q2 and Q3. I think items per transaction have been consistently down; I don't think that trend will all of a sudden flip. And then we did see some transaction improvement as you saw in the numbers, Q2 to Q3. And so I think that's the one thing I'd point to that at least within the quarter, within Q3 that we saw improvement on and then early innings on Q4 right now.

Operator, Operator

Next question comes from David Tarantino with Baird.

David Tarantino, Analyst

I wanted to follow up on Sharon's question about urban recovery and the mobility improvements in larger cities like Chicago. Could you share your thoughts on how this might be affecting your business and if it's related to the traffic improvements noted in the third quarter compared to the second? Additionally, regarding the upcoming fourth quarter, I know your catering business tends to be significant during the holidays, but it seems to be less strong than in previous years. How do you expect this to unfold this year?

Michael Osanloo, President and CEO

Yes. In general, David, I would say that our trends are quite positive overall. From the second to the third quarter, while we saw improvements in Chicagoland, we also experienced significant improvements in Arizona, Wisconsin, and Florida. The trends have improved all across the country. Therefore, we are very optimistic about the overall pace of improvement and the trends in our business.

Michelle Hook, Chief Financial Officer

I believe that looking at the fourth quarter in catering, it's still to be determined. As you're aware, we faced impacts due to Omicron last year. Assuming no further issues arise, I expect that we could outperform compared to last year. However, we won't have clarity until we reach period 12, which is when most of our catering activities take place. Therefore, I won't make any assumptions until we see actual results. Nevertheless, I am hopeful that we will observe some improvement in trends compared to 2021.

David Tarantino, Analyst

Great. And Michael, if I could squeeze one more in, just could you give us an update on the most recent unit openings? I know you've only done a couple this year, but how they're performing relative to your plan?

Michael Osanloo, President and CEO

Yes, I think both locations are exceeding our initial expectations. We are very pleased with Joliet and particularly happy with St. Pete, which has had a fantastic opening. We believe it is affirming much of our strategic thinking. Joliet serves as a test for our drive-through-only concept, Portillo's pickup, and while it is doing very well, we acknowledge there's significant potential for improvement in its performance. As we explore more pickup-only locations, I believe the next versions will perform even better than this one.

Operator, Operator

Next question comes from Gregory Francfort with Guggenheim Securities.

Gregory Francfort, Analyst

I had two quick ones. The first is, Michelle, I think you talked about CapEx per restaurant maybe coming down in next year. Can you maybe give us what you think that's going to be in the fourth quarter? And then I don't know if there's a chance that maybe roughly framing up how much that could come down in '23, but that would be helpful.

Michelle Hook, Chief Financial Officer

Yes, Greg, we're not going to see any easing in 2022 builds. As Michael mentioned, everything is under construction. We're incurring those costs today. It would be more in the '23 builds as we look out to that. We're still putting those exact figures together, I'll probably have more information for you when we talk in January on how '23 is looking and shaping up from a build cost standpoint. But right now, I wouldn't expect significant easing on '22, because we're incurring everything as we speak. And a lot of the materials going into those builds, we're already purchased and bought well in advance before we started putting shovels in the ground.

Gregory Francfort, Analyst

Got it. And then maybe just the other question. As we look out to 2023 in commodities and pricing, I'm curious how you guys are thinking about that relationship. We've heard a few companies talk about mid-single-digit-ish commodities in 2023. Are you guys still looking at maybe doing two pricing actions a year? Are you trying to underprice wherever commodities shake out? Just how you're thinking about that framework?

Michelle Hook, Chief Financial Officer

Yes. I'll take that one, Greg. We're putting together plans for '23. Again, I think we'll have more to share with you in January when we speak then. But absolutely, the way we're thinking about it is we don't expect it to be 15% inflation next year. I think more mid-single digits is probably more reasonable a lot of what you're hearing from other concepts as well. We're seeing the same types of things as we look at the data right now. And then as we've always stated, we're going to remain flexible in our pricing approach. So as you know, coming into the year, I mentioned, we took the 1.5% price in Q1, another 3.5% in May and then 3% in mid-October. We're going to continue to evaluate and remain true to our strategies and look at how that's looking and how inflation is looking at that point in time. But we're not set on two or three actions a year.

Operator, Operator

Next question comes from Nicole Miller with Piper Sandler.

Nicole Miller, Analyst

There was a comment earlier about labor efficiencies, and I appreciate the complexity of the business. I'm curious about the labor efficiencies you mentioned; are they due to reduced turnover with increased training and more time in those roles, or are you managing to simplify something operationally?

Michael Osanloo, President and CEO

First, Nicole, it's a great question. The reality is that there is a lot that goes into labor efficiency. Everyone knows there are hard costs associated with turnover, such as recruiting and onboarding new employees. However, there are also many soft costs tied to labor turnover that impact efficiency. Tenured employees tend to be quicker and work better, particularly in our environment, leading to a significant advantage when turnover trends improve and when we invest in training and have engaged team members. We are being very thoughtful about the tasks in the kitchen that make sense for us to handle versus those that we should outsource. As I've mentioned before, it's often the small details that accumulate. For instance, sourcing pre-sliced red onions can enhance labor efficiency by eliminating the need for an employee to spend hours cutting onions. Instead, we have fresh onions that are ready to use. We are also reconfiguring some of our older restaurants, which will streamline operations by reducing unnecessary movement for our team members. This creates numerous labor efficiencies. Moving forward, I assure you that we will continuously seek ways to eliminate low-value tasks from our kitchens, allowing our team members to concentrate on more valuable activities.

Nicole Miller, Analyst

Turning to price, assuming you didn't realize perhaps all of the 3% October price. Could you talk about what fourth quarter prices and then its impact on fourth quarter store level margin? There are some seasonal factors. And I'm just trying to think about year-over-year commodities, the seasonality and at store level margin with that price could be higher than the third quarter and also higher year-over-year.

Michelle Hook, Chief Financial Officer

Yes, Nicole. I expect Q4 pricing to be similar to Q3. I'm estimating that pricing will maintain consistency based on our actions so far. I also want to highlight that the impact of our third-party delivery pricing on comparisons will be less in Q4 since we implemented that change in P12. Previously, we've seen an impact around 2.7% to 2.8%, but that should decrease to about 2% in Q4. Regarding margins, I anticipate continued pressure from commodities in Q4, likely landing around the midpoint of our 13% to 15% range, which means roughly 15% for the year when considering the Q4 outlook for commodities.

Operator, Operator

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

Chris O'Cull, Analyst

Sorry about that, I was on mute. I had a follow-up question about development. First, how many new projects have signed leases? And then Michelle, you mentioned that investments for new units have increased, but how do you anticipate the margin maturation curve to change for these new units?

Michael Osanloo, President and CEO

We prefer not to discuss specifics about the lease agreements or letters of intent. However, I can say that we have a strong pipeline of opportunities that we are enthusiastic about and actively pursuing. As you can imagine, to achieve our goal of opening nine restaurants, we are working on around 15 or 16 projects, and that is our current focus.

Michelle Hook, Chief Financial Officer

Yes, Chris, in terms of the build cost, my expectation is that we will continue to get the returns that we talked about a year ago during the IPO process, right? And so yes, the equation has changed slightly in the current environment where your build costs are higher, but I expect that we're going to continue to generate the top lines to get the returns that we discussed back then. When you look at by year three, getting into that low 20% margin profile is my current expectation as we continue to build new restaurants. And as you know, we have a very rigorous process that each new restaurant goes through, through our real estate committee. And I will not sign off, and I know Michael will not sign off on any restaurant build that does not deliver those returns.

Chris O'Cull, Analyst

Perfect. Michelle, you mentioned earlier that there won't be much contribution from the fourth quarter earnings or from new stores during that quarter. However, I suspect there will be some costs related to opening those stores. Can you help us quantify the additional costs you might incur in the quarter, possibly from pre-opening, general and administrative expenses, labor training, and so on?

Michelle Hook, Chief Financial Officer

Yes. Yes, Chris, I still expect, and that's why I didn't come off of the pre-opening expense guide, we'll be at the low end of the $6 million to $6.5 million range. So you're absolutely right. We're still going to incur those pre-opening expenses, because as Michael said, we're running really hard to get all of those up and running with the potential that one does flip, but we're going to run real hard. And so we'll still incur those pre-opening expenses.

Operator, Operator

Next question comes from John Glass with Morgan Stanley.

John Glass, Analyst

Michael, the first question is about average unit volumes in Chicago compared to the non-Chicagoland area. In your filing this summer, you mentioned updated average unit volumes. I found it interesting that it seems Chicago is now performing well above pre-COVID levels, whereas non-Chicago is not quite there yet. I understand there are various factors at play, such as new stores. Can you elaborate on the situation, particularly regarding whether some of the older stores are still not fully recovered while newer stores are exceeding expectations? Can you explain the non-Chicago AUVs in relation to pre-COVID levels and why they might still be lagging behind when Chicago has surpassed them?

Michael Osanloo, President and CEO

That's a great question, John. I believe the data might be slightly inaccurate. Over the past twelve months, our restaurants in the Chicagoland area are definitely performing better than they did in 2019. In the non-Chicagoland areas, we're very close to 2019 figures. Specifically, California, Arizona, and Florida are performing significantly better than in 2019, which highlights the success of our concept in those markets. Overall, we're seeing strong performance. In markets where the average unit volumes haven't quite reached 2019 levels, it's largely due to newer restaurants that are still establishing themselves. Overall, we're very optimistic about the recovery of our restaurants nationwide. While Chicago is thriving, we're also pleased with the performance in California, Arizona, and Florida as they have not only recovered but surpassed their 2019 results.

John Glass, Analyst

I want to clarify your comments on entree count. When you said it kicked up, were you referring to a year-over-year improvement or a comparison to last quarter? I believe entree counts were slightly down last quarter. So, was your comment about sequential performance or year-over-year performance?

Michael Osanloo, President and CEO

In the first quarter, our entree counts increased by 1.7%. To clarify, we track entrees, sandwiches sold, and entree salads as indicators of customer traffic at Portillo's. Many discussions about transactions or checks can be misleading due to various factors. In the first quarter, entree counts rose by 1.7%, but in the second quarter, they dropped by 1.9%. However, in the third quarter, entree counts saw a slight increase of 0.1%. Overall, we are essentially flat for the year, with a strong first quarter, challenges in the second quarter, and a recovery in the third quarter, particularly during a tough period for the restaurant industry.

Operator, Operator

In the first quarter, our entree counts increased by approximately 1.7%. In the second quarter, they decreased by around 1.9%. However, in the third quarter, we saw a slight recovery with an increase of 0.1%. Overall, we are essentially flat for the year. The first quarter was strong, the second quarter faced some challenges, but we managed to improve our entree counts in the third quarter during a period that has been quite difficult for the restaurant industry as a whole.

Michael Osanloo, President and CEO

All right. Well, operator, it looks like there's no more questions. So thanks everyone for attending our earnings call. And we'll see many of you in early January in Florida. Take care.

Operator, Operator

This concludes today's teleconference call. You may disconnect your lines at this time. Thank you for your participation.