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Financing

Newly public Portillo’s feels the margin squeeze

The fast-casual chain’s margins dropped more than four percentage points over last year due to higher labor and commodity costs. But the company said its new restaurants are far exceeding expectations.
Portillo's
Photo courtesy of Portillo's

Portillo’s, in its first earnings release as a public company Thursday, showed it is certainly not immune to the margin pressures hitting nearly every restaurant brand right now.

High labor cost plus rising commodity prices led the fast casual to post 24.8% restaurant-level adjusted margins for the quarter ended Sept. 26. That’s compared to 28.9% margins for the same period a year ago.

Labor for the quarter was 26.8% of the chain’s revenue, up from 24.3% during the period last year. Portilo’s has raised its average hourly wage by about 20%.

“We’re significantly above minimum wage across the country because we believe people are the heart of the business,” Michael Osanloo, the chain’s president and CEO, told analysts Thursday.

Despite higher pay, the Oak Brook, Ill.-based chain’s restaurants remain about 10% understaffed versus ideal numbers, Osanloo said.

“We certainly plan on staffing fully as those opportunities avail themselves,” he said. “Fully staffed restaurants perform better.”

Some of those fully staffed restaurants are among the class of five new locations Portillo’s has opened in the past year—all of which are seeing AUVS of roughly $8.4 million. That’s about 35% above the chain’s expectations, he said. The brand said it intends to open seven new restaurants in 2022.

Given those margin pressures, Portillo’s increased its menu prices about 3% at the beginning of the fourth quarter.

“Our business, we believe, is healthy when it’s driving transaction growth,” Osanloo said. “Pricing is an important lever to deal with idiosyncratic cost increases. You have no choice but to price some of that away.”

The average Portillo’s customer spends $9.60 every visit—a low number given the chain’s quality, he said. The 58-year-old chain is known for its regional Chicago favorites such as hot dogs and Italian beef sandwiches.

“We have latent pricing power,” Osanloo said. “We have an incredibly sharp value proposition. We continue to be price laggards.”

For Q3, Portillo’s reported same-store sales growth of 6.8%, attributed to a 7.9% increase in average check that was offset by a COVID-spurred decline in dine-in traffic, the chain said.

Total revenue increased 15.3%, to $138 million.

Portillo’s went public less than a month ago, raising more than $405 million with its offering of over 20 million shares. The chain used much of its proceeds to pay down debt. The company has $49.4 million in cash on hand.

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