Portillos Stock

Greetings, and welcome to Portillo's Third Quarter 2026 Earnings Conference Call. [Operator Instructions]

Please note that this conference is being recorded. I will now turn the conference over to Chris Brandon, Vice President of Investor Relations. Thank you, Chris. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Portillo's Third Quarter 2026 Earnings Call. With me today are Brett Patterson, President and Chief Executive Officer; and Kevin Kalicak joining for his first call with Portillo's as Chief Financial Officer.

You can find our 10-Q and earnings press release at 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-Q 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. After we deliver our prepared remarks, we will be happy to take questions from our covering sell-side analysts.

And lastly, we will be attending the upcoming Stephens Conference on Tuesday, November 17. as well as the Morgan Stanley Conference on Tuesday, December 1. We look forward to seeing many of you there.

And with that, I will turn the call over to Brett.

Thanks, Chris. Good morning, everyone, and thank you for joining us. Before I begin, I want to welcome Kevin to his first earnings call with Portillo's. Kevin is an excellent leader, and I'm glad to have him on the team as we guide Portillo's into its next chapter.

Our third quarter results came in ahead of expectations. Same-restaurant sales increased 1.4%, a 260-basis point improvement from the second quarter. Adjusted EBITDA grew 23.7% to $20.65 million versus the prior year quarter. Kevin will walk through the details and our full-year outlook shortly.

I'm encouraged by the early progress, but let me be clear, 1 quarter is not a trend. We have significant work ahead, and our focus is simple: run great restaurants, and run this company with a discipline to deliver durable sales and profitable growth. As a leadership team, we have taken an honest look at our business over the past several months and confronted a hard reality.

Portillo's has not delivered the returns our investors expected. Those lessons are already shaping our actions. We have strengthened key parts of our leadership team, rightsized our corporate structure, deepened our understanding of our guests through formalized research, identified meaningful operational and supply chain savings and implemented a more rigorous site selection process, which we have already used to exit several future real estate agreements that lack sufficient return potential.

I also want to update you on 2 commitments that I made to you in August. First, we remain on track to deliver $10 million to $15 million in annualized run rate efficiencies. We will share more specifics on these savings when we provide 2027 guidance in January. Second, as part of our ongoing portfolio assessment, we expect to close a mid- to high single-digit number of underperforming restaurants outside of Chicagoland, most of them in the fiscal fourth quarter. These are very difficult decisions, but they're the right ones for the long-term health of the business. Together, these actions are shaping our focus, improving our cost structure and building the foundation for a much stronger company.

Now let me turn to the growth strategy we introduced this morning, which lays out how we will strengthen Portillo's and build a more sustainable, profitable path forward. The full detail is in our earnings release, so I'll focus on the key elements. Kevin, Chris and I will also use this strategy to frame our conversations with investors in the weeks ahead across several forums, including a webcast conference appearance in mid-November.

At its core, this strategy is grounded in one belief: the right to grow must be earned. It builds on the lessons I just described while protecting the distinctive food, hospitality and experience that make Portillo's special. The strategy rests on the 3 pillars I've shared with you before: operational excellence, integrated marketing and disciplined development, all underpinned by a renewed commitment to financial rigor. Together, they are designed to strengthen our business fundamentals and create sustainable long-term shareholder value.

Our brand research gives us a strong place to start. It confirmed that Portillo's strength goes well beyond the food. Our guests have a powerful emotional connection to this brand, both in Chicagoland and beyond. That connection is the foundation we will build on as we bring more discipline to the decisions that shape our future.

Let me walk through each pillar. First, operational excellence. Running great restaurants is the foundation of everything we do. We have refined our regional leadership structure so field leaders oversee fewer restaurants and can give our teams more focused hands-on support. We are raising standards, strengthening accountability and improving tools so our teams consistently deliver great food, accurate orders, faster service and genuine hospitality. We are also updating hourly and management training supported by certified trainers and evaluating restaurant technology and equipment to improve reliability, product quality and consistency.

Second, integrated marketing. Our recent brand perception, customer segmentation and menu satisfaction studies are now guiding our brand positioning and the guests we target and our menu priorities. The brand study highlighted a clear opportunity: use the strength of the Portillo's brand to drive profitable transactions and more frequent visits. We are acting on that with refined brand positioning and an integrated creative and media strategy.

Our segmentation work identified 2 distinct millennial audiences where Portillo's is uniquely positioned to win. Focusing on these guests creates meaningful growth potential and allows us to invest marketing dollars more effectively. We're also building digital capabilities that match the strength of our brand. A new technology road map will guide our decisions on building out a modern marketing technology platform to improve the experience and drive conversion and sales.

As part of that work, we are fully assessing our Perks loyalty program. To simplify it, increase engagement and drive frequency. We are also putting culinary excellence back at the center of the business. Our menu satisfaction study reinforced a clear priority: protect and improve the food our guests already love, then use thoughtful innovation to create new reasons to visit as you recently saw with our Char'diniera Dog, Dr Pepper Shake and our recent OREO dessert launch. Our new executive chef is now leading menu strategy, core menu quality and a more strategic innovation pipeline.

And third, disciplined development. This may be the most significant change in how we approach growth. We are implementing stricter, data-driven standards for site selection and underwriting. A new restaurant will move forward only if we believe it will generate cash-on-cash returns, consistent with our new restaurant targets and passes rigorous market and site reviews. A site will not advance simply because we want another restaurant. The economics have to work.

We will balance infill opportunities in existing markets with expansion into strategically adjacent new markets. This will enable us to leverage our regional leadership, operating infrastructure and brand awareness as we pursue the significant white space opportunity ahead of us. We are also introducing a more efficient prototype. Our 2028 prototype is approximately 4,600 square feet, more than 40% smaller than our previous average restaurant and requires approximately 1.5 acres compared with 3 acres historically.

Smaller does not mean less Portillo's. The new design preserves the character and experience our guests expect along with the potential for high volumes. Today, nearly 15% of the restaurants in our system generate over $1,500 in sales per square foot with a few surpassing $2,000. We believe the optimized kitchen, more standardized design and greater site flexibility can improve throughput and productivity while targeting a lower capital investment.

Across all 3 pillars, financial rigor will shape how we operate and allocate capital. We are reinforcing restaurant-level accountability for sales and profit and aligning incentives with those outcomes. Kevin will cover our capital allocation priorities in more detail.

Looking to 2027, we plan to open 4 to 6 new restaurants. Guests will begin to see this strategy come to life through more consistent execution, refined brand positioning and new creative, a better digital experience and more food news from our culinary team. We will be clear about our priorities: more rigorous in how we operate and allocate capital and more accountable for the results we deliver. That is how we will protect what makes Portillo's special, build a stronger business, create long-term shareholder value and earn the right to grow. I also want to thank the entire Portillo's team, most importantly, our restaurant managers and team members for the hard work and dedication behind our strong third quarter performance.

With that, I'll turn it over to Kevin to discuss the quarter in more detail.

Thank you, Brett, and good morning, everyone. I'm excited to be here with you today on my first earnings call at Portillo's. Since joining in September, I spent time in our restaurants, with the team at the restaurant support center and with our Board listening and learning. What drew me to Portillo's is simple. It's an exceptional brand with a strong foundation. It has a differentiated and craveable menu, passionate guest base and high-volume operating model.

What also excited me about this opportunity was a chance to work with Brett and the rest of the leadership team on the work underway to sharpen the company's direction. That work culminated in the strategy we shared today, which builds on Portillo's strengths and positions us well with commitment to responsible growth and a clear focus on shareholder returns.

After 3 decades in the restaurant industry, I know firsthand how the 3 pillars of our strategy, operational excellence, integrated marketing and disciplined development matter to creating value for both guests and shareholders. Going forward, you can expect me to be disciplined on capital allocation with a focus on creating long-term shareholder value. I look forward to partnering with the team to execute our plan.

Now to the third quarter. Our overall results were stronger than anticipated with positive same-restaurant sales. We achieved this while facing over 200 basis points of traffic headwinds from last year's breakfast test and heavy promotional discounting while also continuing to experience cannibalization from new restaurant growth. Partially offsetting these headwinds was a strong performance of 2 new limited time offers, the Char'diniera Dog and Dr Pepper Shake. These limited time offers brought news and innovation, supporting transactions without the need for deep discounting.

Revenues increased 7% in the third quarter to $194.1 million. This was driven by $10.3 million from the addition of noncomp restaurants and by positive same-restaurant sales of 1.4%, consisting of a 2.1% increase in average check and a 0.7% decrease in transactions. Higher average check was driven by a 2.1% increase in menu price, while transactions improved 270 basis points sequentially from last quarter.

Turning to our margin analysis compared to last year. Food, beverage and packaging costs decreased 10 basis points to 34.4% of revenues. This improvement was driven by an increase in average check and improved food waste and was partially offset by a 2.2% increase in commodity inflation led by continued elevated beef costs.

Labor expense of 26% improved 60 basis points, primarily due to hourly labor efficiencies and an increase in average check. This favorability was partially offset by higher incentive compensation expense, and sales deleverage from lower transactions and lower average weekly sales for noncomp restaurants.

Other operating expenses remained flat year-over-year at 12.9% for the quarter. Occupancy expense of 6% increased 20 basis points versus last year. This was primarily driven by sales deleverage from noncomp restaurants. Our restaurant-level adjusted EBITDA increased to $40.1 million with margins increasing 50 basis points to 20.7%. Our G&A expense decreased to $19.8 million or 10.2% of revenue in the quarter compared to 11% in the prior year. This decrease was primarily driven by $3.3 million of lower dead site costs, resulting from our 2025 strategic reset as well as salary and benefit savings from our workforce reduction at the restaurant support center.

This was partially offset by a $1.4 million restructuring charge associated with the workforce reduction and the absence of a $1.1 million net benefit recognized in connection with the CEO transition last year. Our preopening expenses were $2.6 million lower, driven by fewer restaurant openings in the third quarter versus last year, and adjusted EBITDA increased $5.1 million to $26.5 million or 13.6% of revenue compared to 11.8% last year.

Income tax expense was $1.8 million, and our effective tax rate for the quarter was 27.4%. Cash provided by operating activities increased 26.8% to $61.8 million year-to-date. We reduced our revolver by $12 million in the quarter, resulting in $85 million outstanding and $24.8 million in cash to end the quarter. We now have approximately $61 (sic) [ $61 million ] of remaining revolver capacity and net debt of $300 million. We will continue to utilize our cash available to pay down debt.

In the fourth quarter, we plan to open one additional restaurant on North Michigan Avenue in downtown Chicago. This will be our second in-line restaurant and will bring our total openings to 8 in 2026. As announced this morning, we plan to close a number of underperforming restaurants outside of Chicagoland, with most of these closures occurring in the fourth quarter of this year. We are not able to share the exact timing, locations or cost with you today as we continue to evaluate lease options for these restaurants. We expect the closures to result in material cash and noncash charges, mostly in the fourth quarter of fiscal 2026.

Now turning to our expectations for fiscal '26, which factored in the expected closures in the fourth quarter, we anticipate total revenue of $768 million to $773 million. Based on our outperformance this quarter and estimates for the remainder of the year, we are raising our full year adjusted EBITDA outlook to between $98 million and $101 million, including mid-single-digit commodity inflation, low single-digit labor inflation, restaurant-level EBITDA margin of 20% to 20.5% and G&A expense between $80 million to $82 million.

And finally, Brett shared with you the highlights of our growth strategy. Building on this, I'd like to highlight our capital allocation priorities. We plan to first, reinvest in improved technology and maintenance of our existing restaurant portfolio; second, invest in qualified new restaurant growth; and finally, use excess cash to reduce debt and leverage, strengthening our long-term financial stability.

Based on the collective actions of this strategy, we expect to deliver annual same-restaurant sales of 2% to 3% and in the next 3 years ramp new restaurant growth to a high single-digit percentage while expanding margins by leveraging sales growth and efficiencies. New restaurants are expected to deliver cash-on-cash returns greater than 20%. Thank you for your time today.

Now let's open it up for questions.

[Operator Instructions] Our first questions come from the line of Margaret-May Binshtok with Wolfe Research.

It's encouraging to hear the sequential improvement in same-restaurant sales on this quarter. So I just wanted to ask first, how same-restaurant sales are trending so far in the fourth quarter? And then on another note, I know your plan now calls for that 2% to 3% same-store sales growth. How long do you think it takes to get to that range? And as you think about the parts of the plan, which are you most excited about and you think is the strongest lever to drive traffic in the near term?

Margaret-May, this is Brett, and thank you for the question. I'll take the second part first and then turn it over to Kevin, and he can talk to you about the sequential improvement. We're -- we believe what needs to happen really is as we laid out the strategy and these 3 pillars, right, is there's got to be synergies between all 3. It's not going to be one of those pillars getting better, the other 2 not getting better that will drive traffic. But I believe what we'll see and kind of what we saw through quarter 3 is innovation is -- it's really important to Portillo's because as we've learned more about our customer, the fanaticism of this brand is pretty remarkable.

And so when you give them good news and you give them news that resonates with the brand, they'll come visit. It doesn't have to be at a discount. Actually, it shouldn't be at a discount. So I would say, as we continue to ramp up our innovation pipeline, put really quality food out there and our operations gets more consistent across the board, we'll start to see that kind of natural transition to transaction growth and then on top of that, leverage our price increase, which we anticipate kind of keeping at inflation or better to make sure that we focus on our value proposition.

Yes. And as it relates to the fourth quarter, I think you talked a little bit about the sequential improvement that we saw in the third quarter. Certainly, we're excited about that. As it relates to the fourth quarter, the guidance for our same-restaurant sales is embedded in the total sales guidance of $768 million to $773 million. But I'll tell you that quarter 4 to date, we're running ahead of third quarter same-restaurant sales.

And that is in part is driven by strong performance from the OREO desserts, which has been running for period 10 and continues to run the rest of this week and into next week. Although similar to the third quarter, we continue to face headwinds from last year, most of which were deeply discounted. For instance, like this week, we're wrapping on a free beef sandwich offer, which is a big headwind for the fourth quarter.

Our next questions come from the line of Gregory Francfort with Guggenheim.

I had 2 questions. The first is maybe just what the margin implications might be for slowing growth, exiting some of the stores. And just as I look out into next year, what sort of comp maybe would you need to have margins flat or up, just a rough framing there?

Greg, this is Kevin. I think with the closures, you'll likely see an improvement in margins given that these are underperforming restaurants. And so those will lift the base naturally. And then I think as we continue to look at what's ahead in '27 and beyond, if we're targeting that 2% to 3% sales growth -- same-store sales growth, margins should be flat to slightly improve as we talked about, leveraging same-restaurant sales, leveraging G&A, those factors, particularly as we begin to ramp up new unit growth in the next 3 years.

Okay. Great. And my second question is, Brett, I mean, you've now had a couple of quarters here. Like as you keep getting -- digging into the business and kind of increasing your learnings, what has shifted in your thinking, kind of any major opportunities that maybe presented yourself from the last time we spoke? I'm just curious how you're thinking about it.

Yes. Thanks, Greg. I don't know how much has really shifted since the last call. I think my first call, it was obviously, I was just still drinking from a fire hose and learning the brand. But if I had to tell you, probably the most surprising thing that really occurred last quarter is when we got our research back, Greg, honestly, the research kind of confirmed what we believe, but I would say it was almost amplified about how much passion there is for this brand and love the brand. And it was really because it was outside of Chicagoland as well.

And so when we do these studies, we went really deep to all of our markets, talk to lapsed users, new users, loyal fans. And I would say that the brand love stands out. It's a towering strength for us. We learned a lot about our food. And so I'd say those kind of crystallize maybe some thoughts and -- but how we approach the strategy going forward is when you get the type of fanaticism, our job is to shepherd the brand a little bit differently than if we're trying to convince people why to love us.

And so I said, really continuing on, you hear us use like rigor and discipline a lot as we speak. I would say that's what we really need to focus on this organization is really commitment to really good processes that will manufacture better outcomes for the business. And I think you're starting to see that in quarter 3, and you should see that continue on in quarter 4 and 2027.

Our next questions come from the line of Sara Senatore with Bank of America.

This is Ashley on for Sara. Just congrats on a really nice quarter. Restaurant margins, they were up 40 bps on the 1.4% comp, and beef was still inflationary. So overall, very impressive. Could you just help us unpack what drove that between the labor model changes in the lower volume units and the early supply chain savings? And just how much do you think carries into next year as the savings program builds?

Yes. Thanks for the question, Ashley. So as it relates to the margins in the quarter specifically, clearly, our improvement in labor was the big driver being 60 basis points favorable year-over-year. And a lot of that was labor model improvements, particularly in some of our lower volume restaurants and adjusting to accommodate the demand that is more the expectation there now. So I think that's the biggest one in terms of the commodities.

Commodities were relatively benign in total at 2.2%, which was in line with our pricing, despite elevated beef costs. So pretty straightforward there. As far as the cost savings, none of the cost savings initiatives have materialized in the food cost line. They're more on the G&A savings line at this point. So yet to come on some of those savings, and we'll probably talk more about that in the fourth quarter as we tee up the '27 outlook.

Just on catering, it's always been a nice differentiator for Portillo's, and 4Q is the biggest season for it. Can you just give us some color on how catering is trending into the holiday season? And how big a piece of the business come in the newer markets where the brand is still building awareness?

Yes. Thank you for the question. One of the things that I think Kevin and I as being new to the brand are realizing how -- like your comment on how powerful catering is for us, particularly in the fourth quarter. But right now, we're feeling good. We're on track, if not a little ahead of where we were last year in catering. And we've amplified our plans this year with our operations teams being ready for it. And so we've got a really strong playbook that existed from our prior teams, and they do a really good job. So we see that as not necessarily a headwind or tailwind, but if we can hold serve in quarter 4, that's kind of baked into our assumptions for guidance.

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

Congrats, Kevin, on the new role. I had a follow-up question, Brett, about the consumer research that you guys have conducted and you were talking about earlier. I'm just curious why -- what the research tells you about why people try Portillo's but don't become regular customers, particularly outside of Chicago?

Yes. So that's a really good question. I don't know how you're stating it is fact. And so what we really learned is we do generate the same type of loyalty and regulars. What you find outside of Chicago, it becomes more of a -- it's a longer destination. So if you look at -- for instance, you look at some of our sites in Texas, for people to travel to us, it's a long way, right? You look at Chicagoland, your frequency is going to be higher because you have one every couple of miles. And so what we learned was, yes, we love Portillo's just as much as somebody in Chicago, but destination, it's much harder. They're not as readily available for us to dine.

And so you're not going to have the same frequency with somebody that's having to drive 10 or 15 miles to a Portillo's as you would a couple of miles. So we continue to see our Perks penetration increase. We see our membership increase, and that's -- a lot of that's driven by outside the Chicagoland market. So I think as part of that is as we look at our future real estate, and that's what we talked about as adjacent growth markets and the right infills that don't really cannibalize, we'll start to build more of that awareness and more of that kind of the access to the brand more so than we have now.

Is there -- since the repeat visits aren't as frequent as they are in Chicago, is there an opportunity? Or is there a plan to maybe expand the customer base or try to reach more people in these markets outside of Chicago?

Yes. I think -- so when we talk about -- we did that guest segmentation work, Chris, and that is -- that was specifically designed to do exactly what you said, is to understand who uses us, why they use us and then where those white space opportunities so we can be much more effective in communicating with them. And that is Denise and her team on the marketing side are working through that now to kind of create the personas. We'll create -- we'll leverage a different type of communication based on those 2 audiences. So we do believe that's going to drive trial and more frequency once we can tap into those audience. Because prior to that, our communication has been kind of just very broad, right, and not specific to certain targets. And this will really help us refine exactly who we go after and bring into the brand.

Our next questions come from the line of Andy Barish with Jefferies.

And yes, maybe one for Kevin, just as you get settled in, having come from an organization with vast resources and insights and support. I mean, as you look at '27 for Portillo's in terms of like technology infrastructure, things, is it an investment year? Or are there just ways to kind of implement processes to make what's there more efficient, again, after kind of the G&A saves from the workforce reductions this year?

Andy, thanks for the question. Yes, I mean, I think it's twofold, right? I think when we think about some of the things that happen here in the Restaurant Support Center, I think certainly, there's not quite the investment. Certainly, there's a little bit in the marketing stack and what Brett talked about in terms of the highlights and the strategy. As we think about going out into the restaurants, there's a decent amount of tech out there that we need to look at and see are there ways to improve operations, make it smoother for our teams. I know the iPad, the tablets for our drive-thru operators is a little bit of a pain point. And so it's looking at all of those. I don't know that I would call it necessarily an investment year. But as I mentioned, as we look at our fourth quarter and talking about our guide into '27, I think that will -- we'll have a little bit more content for you going into that.

Andy, this is Brett. I was going to -- Kevin made some really good points. I think one of the things Kevin and I really began to line on, and we mentioned in the script, is kind of the rigor behind how and where we spend money. And so we're really committed to anything we spend money is going to have to have a return on it, right? And so if we say operational investments in training and food quality, some of those will take a little bit longer to see the return on that.

But there are some like we're talking about with technology and marketing that, to Chris' earlier question, that will have a much quicker return because we're going to target a specific group of people. So we're balancing that of how much do we need and the strength in operations will have a little bit of a lag time on the return versus what are some of those immediate returns. But Kevin nailed the priorities for how and where we're going to invest.

Okay. Very helpful. And then I'm happy to hear about the good start to the 4Q. I think there's like a half a dozen units maybe entering the comp base in the 4Q. I want to say a bunch of those are Texas. Are there any just thoughts on how that's -- we should take that into account in terms of the 4Q?

Yes. I think as it relates to the fourth quarter, certainly, as it relates to the closures, there's the level of total sales guide that is in reduction, that is embedded in the guidance related to those closures. And then as you look at some of those new restaurants that are entering the comp base, I think they're generally going to be on the lower end of volumes and seeing some continued slide in comp performance as they continue to lap their or roll off their honeymoon.

Our next questions come from the line of Jim Salera with Stephens.

I wanted to start by just walking through the decision to close some of the underperforming restaurants outside Chicagoland. Is there anything you can take away from what specifically about the locations that made them underperform kind of initial expectations and as you've continued to densify outside of Chicagoland, why there wasn't maybe the pickup that you initially expected?

Yes, Jim, this is Brett. Thank you for the question. I would -- I'll tell you there's a few factors. And I mentioned my first -- the first call I was on and I had before I joined, had an opportunity to fully drive a lot of those markets and visit the restaurants. And my comments then were a lot of the sites were very, a, very green; b, very casual dining like. And so what I would say we've really learned about Portillo's and the model -- the new model we've created is we have a much deeper understanding now of really what drives the volumes to our restaurants. And there -- again, there's this fanaticism where people are willing to drive a long way. But at some point, they're not going to come once or twice a week when they live 15, 20 miles away.

So I would say one is sites played a huge role into what we're seeing there. Number two is that infill cannibalization. I mean we ramped up so quickly in those markets and plugged in a lot of infills as all we did is redistributed sales from those geographic areas. And so that put a lot of pressure on the business models. And then third is when you're going to new markets is how do you really create awareness. And we did a little bit of damage to ourselves with how we branded the restaurants.

We took -- in some of them, we just have the name Portillo's. We took off what we do, what we serve. And for new market penetration, they don't -- if they don't know what you do, it's kind of hard for people to figure out. And so I think there are some of those awareness opportunities. And that's why the new strategy is, one, we feel really good about our new sales forecast model because it's rooted in all the data. We have a really clear understanding of what drives volumes in Chicago and outside of Chicago. And two, being very selective on infills, so we don't have a strong cannibalization. And then third, having those adjacent markets where you start to create awareness.

So for example, Florida, where we've got -- we're opening a new one in Lutz next year. We've got one in St. Pete, one in Brand and one in Tampa. Can you potentially look at adjacent markets and kind of Florida and start to build out another core market. So that's how we're thinking about it a little bit differently now.

Great. And then how should we think about the long-term unit TAM? I mean I know you guys previously, I think it was 900 plus. It sounds like that's probably too high at this point, but maybe you can just help us kind of size up what that opportunity looks like? And also, could we think about markets that are maybe closer to the core in the upper Midwest or places that have, I'll say, a similar talent to where you guys are most successful in Chicagoland?

Yes. Look, it's a really good question. I don't want to give you an answer right now. We haven't done the work to say, okay, across the Continental U.S., what's our total white space? Because to your second point, what we've focused on with our new strategy for real estate right now is those adjacent markets and infills, including the Chicagoland area. So ideally, what we'd like to have a growth model that continues to expand our core market as well as go into markets we know that we have a higher chance of success.

And so we do well. We know we've got another one coming in Buford, Georgia. We'll see how that does because Kennesaw still does very well for us. We performed well in Florida. And so take -- but how many we put there and how many we put in the Chicagoland area is what we're determining now just based on the site selection? Because as we said before, we're at the point now is we'll get to the growth number we mentioned in the -- on the call.

But more importantly, we need to make sure that we derisk the capital investment and make sure we go in sites that do the volumes and give us the cash-on-cash returns. So I know there was this belief that can you still do Chicagoland volumes in the new prototype or can you do Chicago -- I'm not so sure that doing Chicagoland volumes would be something that we put as a goal. If we can drive 21% restaurant-level margins in a $5 million restaurant, that would put us in the top decile of fast casual.

Our next questions come from the line of Sharon Zackfia with William Blair.

Can you talk about the simplification of the loyalty program and kind of what you think works well currently and what you'd like to change?

Sharon, this is Brett. Thank you. We are just -- I would say it's premature to comment on where we see the Perks program going. I would say what we do like about it now is it does give us access to data and to our loyal fans that we really hadn't had another opportunity to get at. And we do know that it is a lever that we can pull to engage a group of people to visit us. And so it's really our kind of top form of communication for whether it's launching these LTOs we mentioned. The second, the surprise and delight is, it's interesting, because there's another brand that recently launched a loyalty program that kind of had the same program with the surprise and delight.

So I'm not sure we completely run away from that, but I think it's just too early to say what is -- what's the best use of that loyalty program for us and how do we compare it to others in the marketplace. So for now, I'd say it's something we focus on and continue to grow that base because the frequency is higher than our normal guest. And so we know if we can continue to drive higher frequency and expand the loyal guests, then we benefit from a transaction standpoint.

And I'm sorry if I missed this, but for the smaller format locations that you'll begin to open in '28, what are the targeted AUVs for those locations?

Yes. the target AUV -- and I would guess I'm a little bit different than maybe how we communicated before. I don't believe in you create a prototype for a targeted AUV. As mentioned, we have roughly 15% of our restaurants that do over $1,500 in sales per square foot. So I don't believe we should put a governor on a 4,600 square foot restaurant, Chick-fil-As, they've got those sized restaurants, and we know the volumes they do. So I don't see it as a governor.

I see the site selection as what will drive our sales volume and believe we can do the volumes we see in our higher-volume restaurants at a smaller prototype, again, because we have a large percentage of drive-thru. We have a large percent of off-premise and dine-in, right? So we have -- and catering. So we have 4 really unique channels that are very strong for us. And so I don't -- as long as you get people in and out of drive-thru, you can get food out quickly and accurately on time, I don't see sales as a governor. I say it's the site selection that will be the governor on sales.

Our final questions will come from the line of JP Wollam with ROTH Capital Partners.

Maybe just kind of starting on the restaurant-level margin. I think there was some commentary in the press release about evaluating and investing in additional tech. And I just kind of want to square that with the labor savings that you've already made and kind of some of the COGS improvements that are still yet to come. Brett, as you think about the business, and identifying Chicagoland separately from then kind of your remaining new market or other markets, like where are we, inning-wise, with just how you're seeing in-store operations? And what's still kind of an opportunity there as we look forward?

Yes. Thanks, JP. Really good question. I would say we're in the early innings, and I'm not saying that's because our operators don't do a good job. We're in the early innings because we're -- we need to provide better resources and tools for our operators to do their job. Right now, it's at these volumes and more than a 50-year history of executing in the same way. It's important that we understand why that works, how it works, but also understand if I can get a piece of equipment that can make my fries more hot, more crispy and last longer, why wouldn't I do that, right?

And so some of those things are what we're really trying to work through now. If we look at tablet technology and our drive-thru that actually has a screen on it to where the guest can confirm that's the order that they order, then it comes out more accurately. So I think it's a lot of those type of things we're looking through. The other piece on operations is, look, candidly, we didn't have a very strong training culture at all.

And we are going to over-index on having well-trained team members and managers leading our restaurants. And so that will be -- I would say that part of it is in the really early innings. But I can say with confidence is, we execute very well compared to the industry. I'd say we just have more inconsistency across the fleet, and that's what we really need to tighten up.

Ladies and gentlemen, thank you so much. That does conclude our question-and-answer session. And with that, we have reached the end of our teleconference. We appreciate your participation. You may disconnect your lines at this time, and enjoy the rest of your day.

Good afternoon. Welcome to Portela's. Second quarter, 2026 earnings conference call. All participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please key in star and then zero on your telephone keypad. Please note that this event is being recorded. I will now hand you over to the Vice President of Investor Relations, Chris Brandon. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and welcome to the Portillo's second quarter 2026 earnings call. With me today are Brett Patterson, President and Chief Executive Officer, and Pamela Smith, Interim Chief Financial Officer. You will find our 10Q and earnings press release at 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-Q identifies risk factors that may cause our actual results to vary materially from these forward-looking statements. earnings call will make reference to non-gap financial measures which are not an alternative to gap measures. Reconciliations of these non-gap measures to their most comparable gap 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 cell site analysts. And with that, I will turn the call over to Brett.

Thanks, Chris, and good afternoon, everyone. Quarter two demonstrated the strength and resilience of the Portillo's brand. While we lapped significant prior year promotional and one-time activities that we chose not to repeat, underlying sales remain resilient, reinforcing the enduring appeal of our brand and the strength of our restaurant teams. Thank you. Over the past several months, we have taken meaningful steps to strengthen operations, improve our business model and unit economics, and build a more sustainable platform for profitable new unit growth. This work is grounded in three strategic pillars we introduced last quarter. Operational excellence, integrated marketing, and disciplined development. I'll cover the progress we've made, how we're approaching the next six months, and the key takeaways from the second quarter before Pam Smith walks through our results in more detail.

Before we get into that, I'm excited to provide an update on our finance leadership transition. As you may have seen yesterday, we announced that Kevin Kalacak will join Portillo's as Chief Financial Officer. We are thrilled to welcome such an accomplished leader to the team. His leadership will be essential as we continue strengthening our financial rigor and executing our growth strategy. I also want to thank Pam for stepping in to lead our finance function over the last quarter. She has been a great stabilizing force throughout this transition, and I'm grateful for her steady hand and partnership. Turning to the business, the work we completed in recent months was part of a broader strategic reset designed to strengthen our foundation, improve operating discipline, and support long-term profitable growth, all while running great restaurants.

The actions we took across our cost structure, development model, and operating approach are connected by a common objective, building a more focused and scalable platform for the future. First, we made the purposeful decision to simplify our G&A structure so we can operate with greater focus, move more nimbly, and better support our restaurant teams. After the quarter, we implemented a reduction in force that reduced our corporate headquarters with no direct impact on restaurant-level team members. While this action will create G&A savings, the primary objective was to align our team's resources and decision-making more directly with the priorities that matter most to our operators and guests. Pam will discuss the financial impact in more detail. Second, we launched an initiative to capture meaningful efficiencies across our supply chain and indirect spending categories. expect those savings to begin contributing this year and build over time, supporting improved profitability as we scale the business. Third, we reviewed our development function end-to-end and identified opportunities to simplify processes, reduce costs, and improve capital discipline.

These changes will begin benefiting the class of 2027 restaurants, while our future prototype design work will support a significantly more efficient development model for 2028 and beyond. We also built a stronger and more robust real estate forecast model to improve site selection, better understand new restaurant performance, and guide future capital deployment. Early learning is already helping us understand actual performance against prior expectations for recent restaurant classes and will also sharpen future development decisions. decisions. Taken together, these actions are expected to generate annualized run rate savings of approximately $10 to $15 million while creating a more rigorous platform for future unit growth. As we discussed last quarter, our strategy is anchored in three pillars, operational excellence, integrated and targeted marketing, and discipline development. Together, these pillars are designed to improve restaurant level performance, engage guests by leveraging sharper insights, and create value through better site selection, right size prototypes, and lower build costs. To support these pillars, we commissioned formal studies in three areas.

Customer segmentation, brand perception, and positioning and menu satisfaction. Those insights combined with feedback from our operators are sharpening our approach to operations, targeted customer engagement, and future restaurant design. One key takeaway is clear. Portillo's has exceptional brand affinity in Chicago and beyond, along with differentiated brand positioning that we believe can travel well across existing and new markets. I'd also like to highlight a few other actions from the court that support this broader strategy. We strengthen our culinary function by adding Christopher Hansen as Executive Chef. Christopher brings deep restaurant experience in culinary strategy and development, and his leadership will help us advance menu innovation as well as culinary creativity, quality, and consistency. We also restructured our development team and processes and engaged a design firm to advance our next prototype.

That work is guided by our brand research and focused on three priorities, lowering build costs, improving returns, and amplifying the elements that matter most to the Portillo's experience. Lastly, we opened our first airport location at Dallas-Fort Worth International Airport. At under 3,100 square feet and a kitchen 25% smaller than our former prototypes, this location incorporates equipment enhancements that will allow us to operate more efficiently within a smaller footprint. Before I turn it over to Pam, I want to briefly touch on our second quarter results and how we are thinking about the business as we move through the back half of the year. Regarding sales performance, several items created meaningful same restaurant sales headwinds in the quarter. Our decision to not repeat last year's buy one get one beef promotion. the discontinuation of the prior year breakfast initiative, and cannibalization represented approximately 250 basis points of headwind. we move through the back half of the year, we will remain focused on profitable transaction growth and avoid aggressive discounted activity as we lap significant prior year promotions, including 50% off burgers and buy one get one free sandwiches. With that backdrop, we now expect adjusted EBITDA of 92 million to 96 million for the year.

This updated outlook reflects deliberate choices to protect guest value by underpricing inflation, avoiding aggressive low-margin promotional activity, and re-forecasting our non-comp restaurants based on recent performance and realistic expectations. In summary, over the last quarter, we aligned the organization to better support our restaurants, We took meaningful actions to strengthen the business and sharpen our focus on profitable growth. We captured savings with immediate impact, completed brand research that is shaping our future roadmap, improved capital discipline for the 2027 pipeline and beyond, and advanced prototype redesign work to support stronger cash-on-cash returns. I am confident that our sharper focus and more deliberate execution will position Portillo's for more durable, profitable growth over time. look forward to sharing more detail on our strategy soon. Lastly, I want to thank our operators and team members who bring Portillo's energy, hospitality, and culture to life every day. Their focus and execution are what makes this progress possible. With that, I'll turn it over to Pam to walk through our second quarter results in more detail.

Pam?.

Thanks, Brett. As Brett noted, second quarter sales were resilient even with the lap of breakfast, BOGO beef, and cannibalization while the team executed meaningful work to position the company for a strategic reset. Perks continued to perform well with Q2 delivering the high-quality, sales penetration in Perks history at 15.1%. This platform will continue to be used for surprise and delight offers to reward our most loyal customers. Now on to our Q2 results. Revenues were 199 million, reflecting a 5.6% increase versus last year. Revenue growth was driven by the addition of non-comp restaurants, which contributed 13.3 million of the year-over-year increase. Same restaurant sales declined 1.2%, reflecting a 3.4% decrease in transactions, partially offset by a 2.0% decrease in sales. 2.2% increase in average check.

Higher average check was driven by an approximate 2.6% increase in menu prices, partially offset by a 0.4% decrease in product mix. As previously mentioned, Q2 had combined traffic headwinds of approximately 250 basis points from emotional activity, the breakfast pilot in the prior year, and cannibalization from new restaurants. Thus far into the third quarter, we are running slightly positive same restaurant sales, and We are mindful of expected headwinds from promotional activity and cannibalization throughout August and September. We entered the second quarter with approximately 1.7% of carryover pricing from 2025. Approximately 1% of this carryover pricing rolled off in early April, and the remaining 0.7% lapsed in June. In mid-April, we implemented a 2% price increase across select menu categories. Absent further pricing actions, we expect approximately a 2% menu pricing benefit in the third quarter and anticipate that offers within PERCS could have a modest impact on realized pricing.

Turning to costs, food, beverage, and packaging costs increased to 35% of revenue in the quarter from 33.8% last year. This increase was driven primarily by the addition of new restaurants and higher commodity costs of 7%, led by beef and produce, partially offset by an increase in average check. We still expect commodity inflation to be consistent with our original guidance for the fiscal year of mid-single digits. Labor expense was flat versus prior year at 25.7%, primarily due to wage inflation and deleverage from our newer restaurant openings, partially offset by labor efficiencies. Other operating expenses increased 1.4 million, or 6.5%, primarily driven by the opening of new restaurants, partially offset by lower utilities and insurance costs. percentage of revenue, other operating expenses were 11.7%, slightly up from 11.6% last year. Occupancy expenses increased 60 basis points or 1.7 million versus last year. This was driven by the opening of new restaurants, higher occupancy costs, and deleverage from new restaurant openings.

Restaurant-level adjusted EBITDA decreased $1.2 million to $43.2 million, with margins declining approximately 190 basis points to 21.7%. was mainly driven by food cost inflation not being fully offset by pricing and non-comp restaurant underperformance in the second quarter. G&A expenses increased to $19.6 million, or 9.8% of revenue in the quarter. is up from $18.8 million or 10% of revenue in the prior year. This increase was driven by higher professional fees, including $0.9 million of dead site costs. Pre-opening expenses were $0.9 million in the quarter compared to $1.7 million last year. This reflects the timing and scale of activities related to our planned restaurant openings, including expansion into new markets. Adjusted EBITDA of $29.8 million or 15% of revenue is slightly below last year's result of $30.1 million or 16% of revenue. Interest expense was $5.7 million in the quarter, flat to prior year.

Q2 income tax expense was $1.8 million, a decrease of $1.9 million from last year. Our effective tax rate for the quarter was 19.8% versus 26.8% in the prior year, reflecting changes in our valuation allowance related to equity-based compensation expense. We expect to open one additional location in the fourth quarter of 2026, which will be in downtown Chicago and is our second in-line format restaurant. This will bring our total restaurant openings in 2026 to eight, in line with our original guidance for the fiscal year. Cash provided by operating activities increased 22.4% year-over-year to $35.1 million year-to-date, primarily reflecting favorable timing of operating assets and liabilities. We ended the quarter with $21.3 million in cash. We had $97 million outstanding on our revolver, total net debt of $338 million, and approximately $49 million of remaining revolver capacity.

We are pleased to see the balance sheet in a much healthier position and will utilize our cash available from the recent shift toward free cash flow positivity to pay down debt and reduce our revolver. Thank you for your time today. Operator, please open the line for questions.

Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. Just note, for participants making use of speaker equipment, it may be necessary to press it before pressing the star keys. If you'd like to ask a question please key in star and then one on your telephone keypad. A confirmation turn will indicate that your line is in the question queue. Cue my key in star and then 2 to leave the question queue. Our first question comes from Margaret May Binstock of Wolf Research. Please go ahead.

Hey, guys, thanks for taking my question. Brett, I just want to ask, on the last call, you talked a little bit about the brand work as the input that's needed to come back before, you know, the strategy starts to take shape. Now that you've done some of that, can you tell us a little bit about the initial learnings coming out of it? And then I also wanted to follow up your five months into the job now. Are there any kind of broader observations on the brand and the business from the time that you've spent now in the restaurants and with the team? Thank you.

Hey, Margaret Mae. Thank you for the question. Yes, so, you know, as it relates to the research, you know, going back to what we talked last time, we had, you know, three really landmark studies for the brand that we haven't done. The first one was on guest segmentation to really identify, you know, who our target customer is and who we need to activate against. We did a quant and qual study on brand perception that led to our brand positioning work. And the third piece of work was our menu satisfaction study that we hadn't done. So, look, I will tell you without giving away the full strategy, because our plan is in the very near future to have a fulsome rollout, is one, we've clearly identified who our target segmentation is for our customers. We've got, you know, we believe real growth opportunity in a couple of different target areas.

The second, I'm very excited because we got very clear brand positioning. It was very clear to us after this research and what we know intuitively in talking to our operators and teams, what are our brand strengths really are and those competitive advantages. So we've now really locked in on what we believe is a really solid brand positioning. And the third piece, and this is still kind of coming in as we speak, but looking at our food to make sure that we kind of honor what matters most to the Portillo's guests and our legacy legacy items and innovation of the future is quality and abundance. And so we've got really clear line of sight now to where we're really winning on that and then where we have opportunities. And so bringing on Christopher as our culinary lead chef will be really imperative as we move forward to, you know, going after some of that work. So again, I think we've I would say to sum it up, we've got really strong clarity now around the brand, and that'll take shape in our growth strategy work we'll roll out soon.

As far as how, after my first five months, I would say still, like I mentioned last time, very few surprises. It was to see the brand research and realize that we've got a brand that many of you know and people certainly that are familiar with the brand is a very special brand. The guest loyalty, I would say fanaticism, kind of brand love or net promoter score is as high as anybody in the industry once they get to know the brand. And so we know outside of Chicago, it actually is. absolutely just as strong. It's just how we, how we get them in the door the first time to hook them. Um, so that was, that was more clarity. Um, and, It was good to see that outside of Chicago that we've got that resonance as well.

And I would say, so not surprising, but I think where the work really has to be is we just have to continue to build better business disciplines and make sure Make sure that, look, we have a very clear strategy, a focused strategy, and very resilient disciplines towards achieving that strategy. And we'll be a very bright future for this brand.

Thanks, Brown. The next question comes from Sarah Sinatore of Bank of America. Please go ahead.

Hi, good afternoon. This is Aisling on for Sarah. My question is just on the guidance. You lowered restaurant-level margin guidance roughly 75% to the midpoint. I just wanted to get your thoughts on what changed versus the prior view, and is this lower margin outlook more of a function of weaker-than-expected sales leverage or commodity pressure? Or is this just kind of the lower near-term margin baseline as you work through the reset? Just any color here would be helpful. Thanks.

Yes, great. Thank you for your question. What I would say is that with the guidance and I, when my first earnings call, the question was asked and we kind of we reaffirmed at that point with an understanding. I hadn't had much time to really get under the hood of the brand and look at it. And we certainly had an opportunity that over the last 13 weeks. So I'd say the guidance adjustment was really, it was a good thing. it was a couple of areas, and one is the non-comp restaurants. We just had to reset and adjust the non-comp locations based on what was in kind of the original guidance versus where we see them today from a performance standpoint and be more realistic. So there was a non-comp adjustment, particularly in our Texas, Arizona market.

You know, and the other piece was, yes, there's been a little bit more commodity inflation in the second quarter. However, we do think that will moderate Q3 and Q4 and will be on our guidance. So, I would say it had more to do with just kind of resetting that non-comp base and what we've seen thus far and giving ourselves some room there to make sure that we have time to operate those a little bit differently than maybe we have in the past, which will come to light more later this year and early next year.

Great, thank you. You're welcome. The next question comes from the line of Gregory Frankfurt of Guggenheim. Please go ahead.

Hi, this is Ariane Rezaei for Greg. I wanted to ask your thoughts on beef market and the outlook into the next year. And I'm sorry if I missed that. It looks like a two-year stack is decelerating. And how much of the miss is actual the beef lap, the buy one, get one beef lap, versus the structural traffic softness? I'm just trying to kind of get.

engage the underlying trend X promotional distortions? Thank you. So just want to clarify, is that two separate questions, one on beef commodity and the other on underlying trends or those together? Yes, correct. okay two separate yes thank you got you okay yes thank you just wanted clarity on that.

a higher impact in the second quarter, but we are 85% hedged in Q3 and Q4, and the rest of our basket is about 63% locked. And so we are feeling very comfortable about where costs will be for the rest of the year and expect to hit guidance.

by the end of this year? Yes, I'll take the underlying trends and what were reported for quarter two. We talked about there's really three significant headwinds we were lapping. One was the buy one, get one beef in May, and that was a significant headwind at a time a deep discount that we chose that, you know, that's not part of our strategy going forward. The second one was we're lapping the breakfast initiative for last year. which is anywhere between 70 to 100 basis points, depending on the period for the company. And the third was, I mentioned in the script that we have a new kind of real estate forecast model. And then out of that model, we've learned a lot about our newer markets, as well as cannibalization impact. And I think one of the great things about this brand is, as you all know, is people will drive a long way to come to Portillo's.

And, you know, we see it when we open Kennesaw. We see it in a lot of our openings. You know, the downside of that is if you impact a restaurant with another location fairly close by, there's significant cannibalization. And that's really what we've seen to. great detail in a couple of markets. So those three things had a pretty profound headwind in quarter two. But to give some solace that this is an underlying trend, as we mentioned in July, with less noise from last year. We still have the breakfast lap and a few other things, but we are positive quarter to date and some markets that are performing really well.

Thank you.

Thank you. The next question comes from the line of Brian Mullen of Piper Sandler. Please go ahead.

Hello, this is Alison Arfstrom on for Brian. Thanks for the question. I wanted to ask about the ongoing operational improvements around throughput and labor. What have you seen working so far in the first half? Has anything surprised you? And how did these learnings inform the second half and beyond plans? Thank you.

Hey, Allison. Thanks for the question. I would say the focus, we mentioned this on the last call of our Texas market or some of our lower volume restaurants that we had some productivity initiatives that we were working towards. We've seen those come to fruition as evidenced by our labor percent of total sales stayed flat the last year. even with wage inflation and non-comp restaurants. So we've seen productivity in those markets. What I could tell you is we're now getting learning from our Dallas-Fort Worth location where we've got a much smaller kitchen, We've designed it differently from a layout standpoint, and we have new equipment, which will generate future efficiencies in the back house productivity. going to take the next step with that and we're going to continue to deploy that model into some of our Texas locations and the, you know, the kind of current prototype to see what kind of benefit we can get there. So that's how we're looking at productivity is really, we've got, I'd say, very good productivity in most of our locations. It's just when we heard certain volume bands, we've got some opportunities to tighten that up and we'll take those learnings from what we've done earlier in the year as well as the Dallas-Fort Worth Airport.

Thank you. Thank you. The next question comes from the line of Dennis Geiger of UBS. Please go ahead.

Hey, good afternoon, guys. This is Nick Yelon for Dennis. Thanks for taking my question. So I know you briefly touched on menu innovation and the prepared remarks. Just on that topic, we saw the limited time Dr. Pepper shake was available starting yesterday, if I'm not mistaken. So we're just curious on the appetite to beverages and expand the offering to include refreshers, dirty sodas, or energy drinks. Has that been tested before? Is it in test? And I guess.

Is that something that's within the plan? Yes, thanks for the question, Akhil. I would say one of the reasons we brought on Christopher, Chef Christopher, was exactly that. We know beverages are certainly really popular across the industry right now. They're turning well with a lot of different cohorts. And so we've got that opportunity because we have equity in beverages with the shakes, the cake shakes. And coming off our recent menu set, we know those score very well from a satisfaction standpoint. That's why we leaned in on this innovation with Dr.

Pepper, which has been trending. So you'll see over time, there'll be further innovation around that beverage platform, and I think it will link very well to the customer segments that we're going to be, you know, attached to and building towards.

Awesome. Thank you. Thank you. The next question comes from the line of Jim Zalera of Stevens Inc. Please go ahead.

Hi, this is Tyler Prowse. I'm for Jim. Thanks for taking our question. With the transaction softness broad-based across your entire footprint, are there areas of outperformance? And to what extent are elevated gas prices driving demand headwinds across your markets? If so, are there any ways to offset that impact?.

I'll speak a little bit to transaction. As Brett mentioned before, we were lapping a bugled beef promotion last year. And so, as we chose not to chase a deep discount promotion this year, our transactions are down and that's essentially what we expected because we were not going to chase the deep discounts. In regard to the overall market in terms of what consumers are facing, I believe it is very difficult for consumers these days, but that's part of the reason why we are hopefully trying to focus on giving them the proper value equation and a proper and consistent guest performance. experience every time they enter one of our restaurants. Yes, and I would say to you,.

As far as transactions go, we did see markets that were certainly stronger, and one thing we're proud about right now is our Chicago land is performing very well. You know, it's, you know, and I would say there are markets outside of Chicago, but as we know, with the size of our business and what percentage of it's Chicago, you know, they perform very well in quarter two and continue to perform very well at the beginning of quarter three. I think those markets that have been a little more challenged, we talked about those headwinds, but they also face... a heavier cannibalization than maybe some of our core markets have.

Jim, does that conclude your questions? Yes, thank you. Thank you. The next question comes from the line of JP Woolham of Roth Capital Partners. Please go ahead.

Great. Thanks for taking my question. I want to maybe focus on kind of non-Chicagoland, but, Brett, you mentioned sort of right-sizing the expectations for the non-comp-based units. I'm just wondering if, can you quantify sort of where the more tenured Texas, and maybe you can include Arizona and that unit economics sit today relative to the Chicago base. Just trying to get an understanding of, you know, your expectations and whether that's shifted from kind of the former team's expectations for new markets.

And I have one follow-up. Thank you. Yes, no, let me, I'll talk about the non-comp a little a little bit broader, right? I think when we look at, and this is particular in Texas and now part of Arizona, part of Phoenix, I would say there's three factors that are really contributing to the underperformance. One is, look, candidly, we just built too many too quickly. In Dallas, we built 12 in three and a half years. In Houston, we built six in 16 months. With this brand, as the more we learn and the model we're using now, know is quite a bit more accurate, that's not something that we would repeat going forward. Number two, I mean, full-canned are locations and sites that we've opened in those markets.

They don't model appropriately right now for sales and returns. So based on what we know today, there's certainly... we would look at both those markets in a very different way in Dallas and Houston. And third, the build cost, that we went in those market with are truly prohibitive to generating a reasonable return based on those sales. And again, that's something that we, as we move forward with development, we can't do. So I would tell you, yes, it's had a profound impact by having that many restaurants in that size market and it happened so quickly. that it's certainly put pressure on our restaurant-level margins. And as I mentioned on the last call, in order for us to solve this, we're doing a full assessment of all of our real estate locations, and we'll make the right strategic decision for the business that's going to support our shareholders and the company.

Great. And maybe that kind of leads into just a quick follow-up. But I think last quarter you talked about actually pruning some of the leases you had signed. And just curious if there's any update as we think about kind of 27. But have you cut further in that pipeline? Or are you and Jennifer actively beginning to add to the pipeline?.

Yes, we feel good about where we're at in 27 when we came out and said 4 to 6 last time. So, we're still finalizing that right now. Obviously, the clock's ticking. I'm sure before next time we get together we'll have that locked. And now we're starting to actively look into 28. So, we do have some sites already identified for 28. which our plan is Q1 of 2028, we will launch the brand new prototype that's being designed right now, which will be, you know, taking our 2.0 and continue to further reduce footprint and also look at the kitchen layout to use new equipment designed to be more efficient and be able to execute. you know, high volumes at a much smaller and cost-sufficient unit.

Great. Thank you, and best of luck going forward. Thanks, JP.

The next question comes from the line of Andrew Tompkins of DA-Davidson. Please go ahead.

Hi, this is Andrew. I was just wondering with a number of additional openings in Texas this year, what have you learned from this year's Texas class regarding site quality, productivity, and awareness?.

Yes, most of our growth, as you know, was Texas this year. And so, again, I mentioned on the last call, right, we brought Jennifer in as our chief development officer. We've done a really an end-to-end scrub of all the processes, Andrew, and one of that was how we were using a forecasting model before. to kind of get to what we believe sales were going to be. And I would say our biggest learning now is that model has absolutely reinforced the performance we're seeing in Texas is what would we expect using this model. So I'd say it's just, it's a much more sophisticated model that we're using today, a lot of different attributes been plugged in, and I'd say we know now much more about why sites work well, such as Kennesaw, Georgia, who continues to perform very well. Shirts are opening in May in San Antonio, is doing very, very well, right? And so when you look at those site attributes, we now know it's not a portability issue, which I know has been a lot. question and the research confirms that as well. It really comes down to a real estate strategy.

So, you know, I would say what we learned is, you know, if we had things to do ever again, we wouldn't, we wouldn't, you know, make a lot of those decisions. But, you know, we were already committed and we're going to figure out the best way to move forward with those locations here.

very shortly. Got it. Thank you. The next question comes from the line of Patrick Johnson of BED. Please go ahead.

Thanks for the question, guys. This is Patrick on for David Tarantino at Baird. Brett, I was encouraged to hear that you're in positive territory to start the quarter, and I was hoping you could delve a bit deeper into the levers you think you have to drive that transaction recovery or sustain a transaction recovery in the second half here. and just how are you thinking about maybe the most impactful initiatives that you guys can deploy? And I know you mentioned that there are continued headwinds in September and October. Is there any way to maybe quantify that relative to what you guys lapped here in the second quarter as well?.

Yes, I'll tell you what we're going to combat some of those headwinds with is when we think about our three pillars of our strategy, the first one is operational excellence. And I would say that Tony Darden and his team are doing a really good job of identifying some very specific KPIs that will help drive traffic in the restaurants. And so his team's narrowed down in a couple that we've done a lot of research to find out where we might have an experience that are creating low satisfaction or low intent to return. And we're buttoning up that now with really intense focus. So I'd say operationally, you've got an opportunity to close gap in some of those areas. The second is the marketing piece. I would say, generally we've been fairly underspent on marketing, we're very fortunate to have a brand, such high awareness and where the majority of our restaurants are that we haven't had to spend a ton of marketing but there's always that Avenue right is to say if we wanted to spend more for high ROI marketing we could we We know with food innovation, the chart and arrow dog that we launched in quarter two performed very well for us.

So because we haven't had a lot of innovation in the past, I think it creates additional visitation for our core consumers. And so there's that opportunity we're working on right now with again bringing on Christopher, we've got some ideas for innovation for the rest of the year. So I'd say that's how we're going to combat it. What we're not going to do right now is we haven't really disclose exactly what our guidance is for sales and what the size of LAF are going to be. But I would say it's probably not as significant as the buy one get one beef and breakfast and cannibalization that we had in quarter two, but it will be fairly significant. If I had to guess, it would be more than 200 basis points.

headwind as we lap those discounts. Great. That's helpful. Thank you. And you mentioned there were some significant opportunities for supply chain savings, and I was hoping maybe you could delve into that a little bit more just in terms of what those specific opportunities are, maybe what the timeline is on execution, and could you clarify if the $10 to $15 million in supply chain savings is going to be a big part of that?.

savings from the actions you cited, if the supply chain savings were included in that or is that incremental to that figure? Yes, the 10 to 15 is the combination of both the G&A reduction as well as the indirect spend and supply chain. So it would be all three of those. And, you know, it's a wide range right now because we're in the early stage. of the indirect spin and supply chain. But what I would tell you is I believe we'll have a real clear line of sight to that before our next call about really what that total is. And look, as you can expect, sometimes when companies grow really quickly and all the focus is really on development and getting new restaurants in the dirt, sometimes there's opportunities that are left behind. I would say my earlier comment on just really having clear priorities and a very disciplined approach to our business processes, the supply chain and indirect spends fall into that category. And so we'll see some immediate benefits even recognizing some in quarter three, but quarter four.

So your annual run rate is going to be that $10 to $15 million right now of pure flow-through from a savings standpoint.

Great. That's helpful. Thanks, guys. Thank you. reached the end of the question and answer session. That concludes this event. Thank you for attending and email us Connect Your Lines.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Hello, and thank you for standing by. Welcome to the Portillo's First Quarter 2026 Conference Call and Webcast. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations at Portillo's to begin.

Thanks, operator. Good morning, everyone, and welcome to the Portillo's First Quarter 2026 Earnings Call. With me today are Brett Patterson, President and Chief Executive Officer; and Michelle Hook, Chief Financial Officer. You can find our 10-Q, earnings press release and supplemental presentation at 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-Q 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 Brett.

Thanks, Chris, and good morning, everyone. I appreciate you joining my first earnings call as President and CEO of Portillo's. It's an honor to lead this special brand and as I've observed these past few weeks, talented group of people. What drew me to this company starts with what makes it unique.

At its core, Portillo's is about creating memorable experiences for our guests, supported by a strong culture of hospitality and a differentiated menu that offers craveable food. I want to take a moment to thank our team members for their candor and insights during my first 2 months as well as offer my deep appreciation to all that bring this brand to life every day. I started my career in restaurants at age 17 working on the front lines. That foundation helped shape my leadership approach and taught me firsthand that the best restaurant brands have great culture with well-trained and committed teams that genuinely care about the guest experience.

My focus now is bringing those elements together into a clear, disciplined strategy that our teams can consistently execute. My key objective of these first 60 days has been to listen and learn, spend time with the teams in our restaurants and understand the business from the ground up. That includes both our new markets as well as here in our backyard of Chicago, where strong performance is important and expected.

Over the next several months, my priority is to partner with the leadership team and lean on formal research and insights to build a strategy that will align the entire organization. Getting there will require relentless focus and rigor to stick to what is most important, and that's how we will deliver the memorable experience that has helped us build some of the most loyal guests in the industry for more than six decades.

At a high level, that foundation centers around three areas: operational excellence as defined by a guest-centric mindset, well-trained team members and high-quality food executed the standard, served accurately and on time. An integrated and targeted approach to marketing, leveraging data and insights while fully utilizing the right platforms to drive awareness, trial, acquisition and frequency.

Lastly, a disciplined development strategy that creates value. When we execute those three pillars, we believe the desired outcomes will follow: consistent year-over-year same-store sales growth and improved restaurant level profitability. Everything starts with operational excellence. It's essential that we consistently deliver a great experience in all our restaurants no matter how guests choose to use us. The best insights come straight from the source, our restaurant teams and managers. That's why I have and will continue to make it a priority to spend time with them listening to what they need to ensure the proper tools and resources are in place to deliver on this imperative.

We have engaged with outside partners to execute several landmark studies for the brand, led by our Chief Marketing Officer, Denise Lauer. This critical research is focused on customer segmentation, brand positioning and menu satisfaction and will give us deeper insights to better inform our marketing strategies in our core markets as well as new and growing territories.

Strong operations and marketing will complement another extremely important initiative, implementing a sound philosophy and approach to ensure a value-creating development strategy. Portillo's has significant long-term growth opportunity, which will be a key piece of our strategic road map, but it must be pursued with discipline. We will be measured in terms of where and how we grow with a clear focus on cash-on-cash returns at the restaurant level.

We're fortunate that Jennifer Pecoraro-Striepling recently joined the team as Chief Development Officer. She brings vast industry experience in multiple categories to this critical function. She will be focused on evolving our new market playbook, selecting sites that drive healthy returns, exploring prototype formats and ensuring a more disciplined use of capital by safeguarding responsible building costs.

Before closing, I want to briefly touch on the first quarter where we showed improvements in transactions and sales. And while I'm encouraged by these results, our teams are putting the focus and energy into building a sustainable long-term plan that will lean on the aforementioned fundamentals to drive consistent results. Michelle will speak about our first quarter and current trends shortly. But as we look ahead to the next few months, our focus is less about short-term tactics and quick hit strategies and more about building the right foundation for long-term profitable sales growth.

As noted in the press release, we're comfortable with reiterating our fiscal year guidance. But as our strategic work progresses and new finance leadership was brought on board, our expectations may evolve. We will continue to provide updates as appropriate throughout the year.

In closing, I developed a passion for operations early in my restaurant career. I've always believed that the top restaurant companies are built on solid fundamentals and disciplined execution led by teams that take pride in delivering best-in-class guest experiences. Bringing that passion to a brand I've admired since my first visit more than two decades ago is incredibly exciting. Our focus now is to sharpen our priorities, strengthen our ability to execute and build a credible growth story.

Before I pass it over to Michelle, I want to address the announcement we made this morning regarding her decision to depart Portillo's. Michelle has been Chief Financial Officer here since 2020, playing a critical role in leading our finance function, supporting the company's IPO in 2021 and helping expand the business into new markets. We appreciate Michelle's leadership, and we will, consistent with our internal succession plan, immediately kick off a search with a leading national executive search firm to identify our next CFO. I'm confident in the long-term opportunity of Portillo's, and I look forward to sharing more as our strategy continues to take shape and drive sustained long-term shareholder value.

And Michelle, I want to thank you for your dedicated service and partnership and wish you all the best in your next chapter. I will now turn it over to you to walk through our quarter 1 results in more detail.

Thanks, Brett. I appreciate the kind words. I believe in the Portillo's brand and its leadership team, and I'll be cheering you all on from the sidelines. Moving on to the company's first quarter performance. During the first quarter, revenues were $182.6 million, reflecting an increase of $6.2 million or 3.5% versus last year.

Revenue growth was driven by non-comp restaurants, which contributed $7.7 million of the year-over-year increase. Same-restaurant sales declined 0.1%, decreasing revenues approximately $0.2 million. The same-restaurant sales decline reflected a 0.9% decrease in average check, partially offset by a 0.8% increase in transactions. Lower average check was driven by an approximate 1% decrease in product mix, partially offset by a 0.1% increase in menu prices, reflecting increased promotional offers.

When assessing our gross pricing, we came into the first quarter with around 3% of incremental pricing from prior pricing actions in 2025. We had approximately 1.5% roll off in January, approximately 1% roll off in April and the remaining 0.7% to lapse in June. We did not take additional pricing actions during the first quarter. However, we did take a 2% pricing action in mid-April across select menu categories. We expect surprise and delight offers within Perks to continue to have an impact on pricing.

In addition to the impact on our net effective pricing in the quarter, our promotional offers and other menu initiatives drove positive transactions. During the quarter, our transactions benefited from our limited time BIG Burger Bundle meal and innovation, including our new birthday cake LTO and the launch of our new sauces. This is in addition to other targeted offers we ran during the quarter on our Portillo's Perks loyalty platform.

During April, we have seen negative comp trends of roughly 1 point, driven primarily by negative transaction and mix trends as we are lapping the benefit of our breakfast pilot from the prior year. We expect to have continued headwinds in May as we will be lapping our BOGO Beef promotion from the prior year. As Brett discussed, we will focus on three foundational areas, which we believe will lead to improved sales and transactions and restaurant level profitability for the long term.

Turning to costs. Food, beverage and packaging costs increased to 34.7% of revenues in the quarter from 34.6% last year. This increase was driven primarily by higher commodity costs of 1.8%, led by beef and produce, partially offset by an increase in certain menu prices, net of promotional offers.

Labor expense increased to 26.9% of revenues from 26.6% in the prior year, primarily due to deleverage from our new restaurant openings, higher benefit costs and wage inflation, partially offset by labor efficiencies. Hourly wage rates increased approximately 1.5% in the quarter compared to prior year.

Other operating expenses increased $2.3 million or 10.7%, primarily driven by the opening of new restaurants and higher repairs and maintenance expenses. As a percentage of revenues, other operating expenses increased to 13.2% from 12.4%. Occupancy expenses increased $1.2 million or 11.6%, also driven by the opening of new restaurants.

As a percentage of revenues, occupancy expenses increased 0.4% compared to the prior year, driven by higher occupancy costs and revenue deleverage at new restaurants.

Restaurant level adjusted EBITDA decreased $1.8 million to $34.8 million, with margins declining approximately 170 basis points to 19.1% in the quarter versus 20.8% in the prior year.

General and administrative expenses increased by $1.5 million to $20.4 million or 11.1% of revenue in the quarter from $18.9 million or 10.7%. This increase was primarily driven by higher equity-based compensation and professional fees, including $0.5 million of dead site costs. As we refine our development strategy, we will continue to evaluate our pipeline.

Preopening expenses were $2.6 million in the quarter compared to $0.5 million last year, reflecting the timing and scale of activities related to our planned restaurant openings, including expansion into new markets. Adjusted EBITDA decreased by $2.8 million to $18.5 million or 10.1% of revenue from $21.2 million or 12% of revenue in the prior year.

Below the EBITDA line, interest expense was $5.6 million in the quarter, down slightly from last year, driven by a lower effective interest rate. Income tax benefit was $0.2 million in the quarter compared to expense of $1.4 million in the prior year. Our effective tax rate for the quarter was 24.4% versus 25.4% in the prior year, reflecting changes in our valuation allowance related to equity-based compensation expense.

Since the end of the quarter, we have opened one additional restaurant in Frisco, Texas and expect to open three additional locations during the remainder of 2026, including our first airport location at DFW International Airport and our second in-line location, which will be in downtown Chicago.

Cash provided by operating activities increased 85.8% year-over-year to $17.6 million year-to-date. We ended the quarter with $24 million in cash. We had $104 million outstanding on our revolver, total net debt of $347 million and approximately $42 million of remaining revolver capacity. Thanks for your time today. Operator, please open the line for questions.

[Operator Instructions] And our first question will come from Margaret-May Binshtok with Wolfe Research.

Michelle, best of luck, for all the collaboration. I just wanted to ask on the first quarter comp. Can you give us a sense of how that progressed through the quarter? I know January had some weather, but did you guys see February and March showing sequential improvement? And then just ex that breakfast lap that you mentioned in April, how are underlying transactions trending in April?

Yes, Margaret-May, I'll take that. Yes, you're absolutely right. We were not immune to the weather conditions that hit in January. So we definitely saw that negativity come into play in January. And then obviously, as the quarter progressed, we saw improvement. And I talked about and Brett talked about some of the things that we did in Q1 that helped to contribute to the results that you saw in the quarter. So yes, we did see some improvement in the quarter.

And then when we look at April, we're seeing negative trends that's primarily coming in the form of transactions. We do continue to see some negative trends in mix as well. And that's primarily driven by what I describe as more trade downs versus items on the ticket. So those are the trends that we're seeing throughout the month of April.

And our next question will come from Gregory Francfort with Guggenheim.

Just maybe the other OpEx line, can you maybe parse out that looks up quite a bit. Is that utilities? Is that maybe delivery fees or something like that? I'm just curious what might have been driving that?

Yes, Greg, we did see some impacts earlier in the quarter from the weather. So we saw some higher utilities, some higher, what I describe as snow maintenance and removal expenses that drove some variability in the repairs and maintenance line. But those are the specifics that we saw. Again, I'd call some of that more attributable to the weather conditions that we saw, but that's the call out I'd make on that.

Got it. And then just with maybe pricing in the quarter, I mean, clearly, Perks is having a big negative impact, but that might be part of just what you're trying to do strategically. Can you maybe parse through like -- do you expect it to have -- I guess you would expect it to have an impact on consumer value perceptions. Is there an expected delay in terms of kind of having more controlled pricing and when the consumer might pick up on that and that impacts traffic on a 6-month delay or a 12-month delay? Any thoughts on that would be great.

Yes, Greg. So we had two things that impacted that net pricing in the quarter. So we had our BIG Burger Bundle meal. That was the burger, fries and a drink meal we were running for $9.99. That definitely impacted the net pricing as well as the Perks offers that we were running in the quarter as well. And so I would say just from a consumer perspective, you're right. As people go into these offers, whether it's the BIG Burger Bundle that we are running or Perks offers, there's definitely a lag in terms of that value perception. But we continue to focus on those value perception scores. But -- as Brett and the team look towards our strategies in the future, I think what plays a role in that could be many things, whether it's continuing to look at value in the form of Perks offers or menu offerings. We're currently running our new Hot & Saucy beef promotion right now, not really a discount, but more of an LTO. So -- but there is a lag to your point that I think as people go into those that they come out with. And the goal is to obviously drive frequency of visits and attract new guests into our brand. And so those were the things that we were looking at post promotion as well to determine if there was success or not.

Greg, this is Brett. I would also just chime in that, as Mel mentioned, Michelle mentioned, we're looking at the numerator of the value equation as well. And if you think about our strategy when we're starting with ops excellence, one of the things we need to do is make sure that we're delivering or exceeding the expectations of the folks coming in that are paying full price. I think the second lever that we'll explore as part of the strategy is going to be the use of food innovation to create value. So not just locking in on a fully discounted value offer, but how do we use innovation to talk about value, how do we use marketing to talk more about value.

We certainly know it's a driver for the business and kind of where the consumer is at today is important, but not locking ourselves into just going after kind of this discounted promotional model.

[Operator Instructions] We'll go next to Sara Senatore with Bank of America.

And sorry, just a quick clarification and then a question about the real estate strategy. So for 2Q, I was trying to follow some of the rolling off of prices. Did you say what the effective price will be in the second quarter? Is it -- could it be negative?

Sarah, so we don't anticipate it being negative. We're not -- the BIG Burger Bundle came off being an offer we were running at the end of Q1. Yes, we're running some various Perks offers as well. But no, we don't expect it to be negative. So just to clarify, we took 2 percentage points of a pricing increase at the beginning of April. We had a point that rolled off midway through April. And then we have around 0.7% that will be in effect until June. So think of it as we sit here today, you had a little bit higher pricing in April, but then the point -- just under 4% in April, and then you had that point that rolled off. So as we sit here in May, we're just under 3%.

Okay. I appreciate that. And then I guess you mentioned, I guess, $0.5 million of dead site costs. So it sounds like you're already making some changes to the sites in terms of what you might have identified before versus where you're deciding to build. I know the Chief Development Officer, just -- she's relatively, I guess, recent. But anything you can sort of address in terms of what changes maybe your -- or what sites you might be abandoning versus how you're thinking about going forward?

Sarah, this is Brett. Yes, I'll take that. As far as -- yes, Jennifer is fairly new, but she's hit the ground running. I think the team and Jennifer have been really focused on kind of just reassessing the entire development strategy. The 2026 sites were locked, and those will be finished after we open the next 3 this year. We did have an opportunity for some of the 2027 class to take a look at where there are some sites we could potentially get out of. I don't want to share specifically what those were, but we have made some decisions to get out of a couple of them. So I would say in 2027, and we're probably going to be in somewhere in the 4 to 6 range for openings, and that's why you'll see some dead site costs coming into last quarter and potentially quarter two as well.

And we'll go next to J.P. Wollam with ROTH Capital Partners.

I was hoping we could just maybe talk in terms of productivity in the new Texas stores. Understanding, Brett, to your point, a lot of those sites were kind of already baked, we could say. But just in terms of the openings, how are you thinking about productivity efficiency in terms of labor and back of house? And just any other new takeaways from this year's Texas openings?

Yes, JP, thank you. I would tell you that the team has done a really good job coming out of 2025 in the first quarter, addressing some of those productivity opportunities. Tony, our Chief Operating Officer, has been very involved with the kind of the Texas turnaround. So I'd say we've seen some improvement, sequential improvement in backhouse labor productivity. There's still opportunity. I think we've got to really take a look at kind of the analogs of similar volumes outside of Texas and how those perform and use that as kind of a benchmark for our Texas teams. And I know Tony and the team are starting to do that work now. So I still think there's opportunities there. Certainly, we've got to drive the top line, and that's more of our focus. We don't want to cut ourselves to the point we can't grow top line.

So Denise is they're still working very actively on a very integrated marketing plan for Texas. But yes, we'll continue to see some productivity improvements in Texas as well as some top line growth.

Moving on to Chris O'Cull with Stifel.

Michelle wish you well and hope to work with you again.

Yes, sure.

Maybe I don't know if this question is for Michelle or Brett, but can you explain the sharp decline in annualized AUVs for the 2025 class during the quarter relative to the fourth quarter?

Yes. So when you look at the class of '25, Chris, so we had openings that were in the back half of the year. One of those openings was a restaurant we were very public about, which was our first in Atlanta in Kennesaw. And so I think we talked about that having a very robust opening when we opened Kennesaw in November. Obviously, you know us, you know there's a honeymoon curve, right, to the performance of those restaurants. So as those volumes start to settle down, specifically for that restaurant, you see some impacts coming in there. So that's part of what you're seeing in some of that. I'd call out that one specifically.

Brett, why isn't -- why don't you think customer retention isn't higher once you get these strong responses to the initial opening? Do you have any assessment of that?

I think it's a really good question, Chris. I think there's a real opportunity for us to learn more about kind of the consumer base when we go into these new markets. Certainly, you do see a pretty steep honeymoon. It's a little more steep than I'm used to in my past. I don't know how much that has to do with our ability to drive quick awareness out of the gate, and that kind of wanes off over time. So I would tell you, I don't have the answer now, but it is certainly something we need to continue to explore to better understand that and how do we prop it up during that kind of down cycle in the honeymoon. I would tell you, the one thing I would add is you generally see though very high metrics still from a customer satisfaction, Net Promoter Score. So there's nothing that jumps off that says you didn't open it well and now you've disappointed a lot of guests. They seem very, very engaged and connected to the brand. So again, that frequency is going to be something we really have to understand.

And our next question comes from Sharon Zackfia with William Blair.

Sorry to see Michelle go. It's been a pleasure working with you. I did want to ask about kind of menu innovation versus Perks. It seems like you're having more success with Perks driving traffic. And I'm curious if there's anything there that you could call out specifically that worked well in the first quarter that you plan to replicate or evolve? And then secondarily, as we think about those non-Chicago markets, how is innovation resonating in those markets?

Yes. I'll speak to the Perks piece. The one thing we have seen is continued growth and penetration. So we -- in quarter one, we saw 3% more penetration from Perks than quarter four. I think the real unlock there is for us to continue to better understand our customer cohorts and how do we tailor messages specific to those cohorts based on their visit frequency.

And I know Denise and the team are really -- there's a lot of test and learn going on for that right now. We did see some -- what we've seen when we do Perks offers around kind of special events or holidays, we do get a really strong reaction like opening Major League Baseball Day with buy one hot dog get one free. And so we've seen those really work well for us, but it's not something that we see as kind of this on everyday type scenario.

We had -- the BIG Burger Bundle was a big driver in quarter one as well for the traffic. So I think it was a combination of both. And so the -- your question on the innovation, I think there's really an opportunity to learn. I wouldn't say we've had significant meaningful innovation yet when we've really introduced new items or new item format. And I do believe once we get out of Chicago and have different understanding in different markets of what those items can be, I think it will play an important role in the future for us.

Moving next to David Tarantino with Baird.

Brett, I'd be interested to hear more about your vision for how Portillo's should grow over time. I know you have a lot of foundational work that you outlined that you need to complete, but once that work is done, what are you going to be looking for to make the decision on reaccelerating the growth? And what type of growth do you think Portillo's can deliver longer term if you get it right?

Yes, David, speaking to the development piece, I would tell you, right now, we're turning over every stone to understand every piece of development and what we can learn from the past and then creating certainly a better future for development. So what I'll share again without having the facts, as you mentioned, we've got a lot of research doing insights. But I will tell you, there's an opportunity. Certainly, number one, we've got to make sure we have the real estate forecast model dialed in because that really informs site selection. I think there's an opportunity -- when we go to new markets with low awareness, the type of site we choose is imperative that it's a site that generates high awareness versus they have to find you. There's prototype work we're going to do. We're going to explore what are the best formats that can generate the best returns to the restaurant and still execute high volume. I know Michelle really led the project with the team to get to the 2.0. We're excited to see that come to life. So I would tell you that everything is under review, including build cost.

And we'll come back to you at a later date with what we think that means for the future, but we're going to try to get to it really be 2028 before we start to see that work. And again, I think getting the brand study, and I mentioned the discipline in the script, right, having the discipline just to wait for the insights and the research to help guide us, not be necessarily just the guide is going to be really important to our future growth.

And if I'm still on, maybe a follow-up is.

Sure.

I think at one point, I guess, in the recent past, Portillo's was targeting double-digit unit growth. I mean I guess my question is whether you think that's an appropriate growth rate for the company longer term. Presuming you get all the foundational elements right, I mean, is that, should we be expecting a path back to that level? Or do you think that maybe a slower growth rate is more appropriate? I guess what are your initial thoughts about that or the…

Yes. Again, I'm anxious to answer that question myself. And I think we've got to -- right now, we've got to do the work, right, to build what I would tell you is what we've done in the past, I wouldn't say is a sustainable double-digit growth model. But developing something for the future that we feel really confident about the level of capital we're spending, the returns we're getting will be the key driver for that.

And moving next to Jim Salera with Stephens.

To switch gears and talk a little bit on the margin front. I know beef prices have continued to grind higher as the year has progressed and you guys flagged some promotional offering you did that obviously had beef-centric items. Can you just walk us through, a, kind of how you're hedged on beef, but then also b, how you're thinking about maybe some of those promotional mix given that you have beef exposure and where that's at on input cost?

Yes, Jim, I can take that. So we're still projecting mid-single-digit commodity inflation for the year. And we did have what I'd describe as a lower inflationary number in Q1. And I think that speaks to the things that we put in place to try and manage that exposure. So as we sit here today, we're hedged on our flats or we forward bought on those. There's about 65% of that specific commodity that we're locked in on for the year. And we have about 30%-ish or so of our total basket that we're locked in on for Q2 through Q4. So we've put some things in place to derisk that. And as we look at what is the future of commodities, yes, we still expect beef to be a pressure point for the remainder of this year.

We do expect our inflation to be higher than what you saw in Q1 in Q2 through 4. I'd say probably Q4, we're just as we sit here today, expect that to be the most pressured quarter of the future quarters. But we still feel good about, again, that mid-single-digit inflationary number that we put out there. And to your point on marketing certain items that relate to beef, I think to Brett's point, as he continues to refine the strategy and we look at what's best for the brand, I think everything is on the table as we move forward. But Portillo's is built on beef items, whether it's our beef sandwich or hotdogs are all beef, our hamburgers, which we ran that promotion in Q1.

And so we're not going to lean away from that, I would say, as we move forward in the future. But I think there's opportunities to lean into other categories as well moving forward.

And moving on to Dennis Geiger with UBS.

Michelle, thanks for all your help and best of luck to you, of course. Quick housekeeping item and then a question from me. On the housekeeping, just curious if anything to share on performance across geographies, thinking about Chicagoland versus outside, et cetera, or performance by channel in the quarter? And then the question really is a bit more on the marketing strategy side of things. And just where things stand there, if it's too early to share about anything on sort of notable shifts in marketing strategy or marketing spend levels? Is it still early until some of those survey insights come back?

Dennis, this is Brett, yes, first, so what we saw in quarter 1, which was really good news, we saw Chicagoland perform really well. They had outsized transaction growth compared to the rest of the fleet. The rest of the concept did well, but it was great to see Chicago pop in the first quarter, which I think speaks to this environment being -- and the way that Chicago uses a brand where you had that value offer BIG Burger Bundle really resonated. So there's learnings for that of how we think about it going forward, but it was nice to see that for Chicago.

Your second question regarding marketing, the brand work is going to be critical for that. I know Denise is -- we're working on the MarTech stack. We're looking at channel usage, media mix usage, offers by customer segmentation. So that work is all in progress. But the brand work is really going to help us inform how and who we target once we get that information back. We did plus up some media around the BIG Burger Bundle, and we saw that really support the message. So we know it works when we have the right offer and the right message. But getting the channels and the mix right is going to be really important as we go forward to maximize our marketing spend.

And we'll go next to Matt Curtis with D.A. Davidson.

Brett, given your casual dining background, I was just wondering if you could share your thoughts on elevating the customer experience, both in-store and at the drive-thru and if perhaps adding labor might be part of that?

Matt, I've gotten the question a lot about coming in from full service to fast casual. What I would tell you is I think there's so many similarities. And one was when you just step back and think about what a customer wants, it doesn't really differ between the two channels. And they want great value created by food service atmosphere divided by price.

And that's what we have to deliver. So as I think about our brand, how do we make sure our food is compelling. It remains high quality. It's something that the brand has been built on. The service aspect, we're different than a lot of other fast casual concepts with our drive-thru where we have people in the drive-thru taking orders and have that face-to-face interaction. So I think those things have been key to Portillo's and will remain key. But I think your point on how do we enhance that to make sure that we put the guest at the center of everything we do is a culture we're going to continue to focus on in this company. So I don't see a difference of being full service or quick service as it relates to how we think about the customer.

And our final question will come from Brian Harbour with Morgan Stanley.

Michelle, best of luck, certainly. The conversation about kind of value perception lagging, I guess, is what you're saying that, look, some of these promotional offers have certainly worked, but they're fairly short-lived. I mean how do you think those kind of play a role in the future? Or is this kind of like a conversation about maybe some everyday value thing is needed? How should we think about that?

Yes. Brian, I think that at the end of the day, we're not looking and Brett and the team are not looking for quick like hitters or fixes for this brand. And so I think doing the work around the brand that Denise is doing on the perception study and what do we want to be over the long term, and it comes back to that value equation that Brett just talked about, which is something over price, whether that's your experience, the quality of the food, the accuracy, the speed, all of that over the price that you're paying for that. So I think as this brand moves forward, that's the way that the team is thinking about it is what's the best over the long term for the brand to continue to provide that "value" to the guest. And those things can come in many forms, whether it's through menu innovation, right?

And menu innovation can be permanent menu items that can be limited time offers, right? Those things you don't necessarily have to put the brand on sale or do things like that and discount to have that value perception. Brett talked about operational excellence, like getting better operationally. So focusing in on those metrics that matter, whether it's accuracy or speed of service or hospitality, right? Those are things that over the long term, carry brands forward versus how can I get these quick wins in the short term. So that I know is the mindset moving forward for Brett and the team versus what can we do for this quarter.

Yes. If I could just add, Brian, one thing is I think the way I would frame it is we have to organizationally make sure we build a much stronger foundation of value -- and then I think as you pause in opportunities, there should be a bump in value. But those to me are very short-term transactional. So if you do a heavy discount over a period of time or an offer, you certainly are going to see your value scores elevate during that time. But generally, what happens as soon as you come off that, your value scores revert back to a base. So our job and our focus is going to be how do we get -- how do we strengthen the base value.

And when we do those offers, it's just incremental, right, to the consumer. So again -- and right now, until we really understand that we keep coming back to the brand work and research, we're not going to spend a lot of time on figuring out what are those short-term levers until we really understand who our customer is and how do we go to market, and that will shape our marketing and go to our strategy.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Hello, and thank you for standing by. Welcome to the Portillo's Fourth Quarter 2025 Conference Call and Webcast. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations at Portillo's to begin.

Thanks, operator, and good morning, everyone. Welcome to the Portillo's Fourth Quarter and Full Year 2025 Earnings Call. With me today are Mike Miles, Chairman of the Board and Principal Executive Officer; and Michelle Hook, Chief Financial Officer. You can find our 10-K, 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 Mike.

Thanks, Chris, and good morning. The fourth quarter reflected the strength and challenges facing Portillo's in 2025. While our core markets continue to have outstanding AUVs and profitability, our Texas market expansion continued to be a headwind for our business.

As we announced last fall, we have reset our development strategy, slowing new store openings and focusing on healthy unit economics. While it will take time for our new approach to bear fruit and a number of restaurants opening in 2026 reflect prior strategy, our entry into the Atlanta market in the fourth quarter confirms the potential in our future growth strategy.

Our restaurant in [indiscernible] opened in November and through its first 8 weeks, registered over $2 million in sales. Portillo's fans drove from all over Metro Atlanta, indeed from all over the Southeast to get a taste of their Portillo's favorites. In addition to the outstanding top line, [ Kennesaw ] is the latest example of our reduced cost restaurant of the Future 1.0 format.

A 6,200 square foot building that is about 20% smaller than most of the restaurants opened over the prior 5 years. For our new philosophy of separating new unit openings with more time and distance, the next restaurant in Atlanta will not open until 2027 and will be about 50 miles from [indiscernible]

We are gratified and, frankly, not really surprised by the results at [ Kennesaw. ] Each time we have entered a new market over the last 10 years, we've seen a similar response with 7 of those restaurants also exceeding $2 million over their first 8 weeks. Our approach over the next several years will consist of more of these types of entries, tapping into the pent-up demand from Portillo's fans to support our first end market openings, then letting awareness and demand build before opening subsequent restaurants.

We will continue to iterate on our prototypes as we look to develop the best possible offering for customers and shareholders with 4-wall profit potential driving each decision. Our Perks program continues to show promise. We now have more than 2 million members enrolled and have seen strong results for promotions delivered through the program.

We are just scratching the surface and have a lot of opportunity to more precisely target offers. I am confident that Perks will play a valuable role in driving traffic improvements in 2026 and while traffic and sales continue to be our primary focus, we also took steps to improve labor management and profitability of the lower-volume restaurants in Texas during the fourth quarter.

I'm also pleased to report, as you likely saw in our announcement 2 weeks ago that Brett Patterson has joined Portillo's as our new Chief Executive Officer. Brett has had a stellar career in the restaurant industry, working his way up from the front lines. He has all the qualities that the Board was looking for to lead Portillo's next phase of growth. operations experience, a strategic mindset and a people-first leadership style.

Most importantly, he is a great cultural fit with Portillo's. The Board and I look forward to working with Brett to provide our customers with the best restaurant experience, our people with a great place to work and our shareholders with a profitable growing business.

Before I hand it to Michelle, I would like to take a moment here to personally thank the Board, our executive team and all of the people at Portillo's for their support and commitment over these last several months. My time as Interim CEO has only strengthened my conviction that this brand has a very bright future.

Thanks, Mike, and good morning, everyone. During the fourth quarter, revenues were $185.7 million, reflecting an increase of $1.1 million or 0.6% compared to last year. Our revenue growth in the quarter was driven by non-comp restaurants. Restaurants not in our comp base contributed $7.8 million of the total year-over-year increase in revenue during the quarter.

Same-restaurant sales declined 3.3% which decreased revenues approximately $5.4 million in the quarter. The same restaurant sales decline was attributable to a 3.3% decrease in transactions. Average check in the quarter was flat due to an approximate 2.3% increase in net effective menu prices, offset by a 2.3% decrease in product mix.

We did not take any additional pricing actions during the fourth quarter, and our net effective price increase was approximately 3.2% for the full year. We will continue to evaluate pricing actions in 2026 but our focus will be on growth via transactions versus pricing.

We do anticipate that perks and other offers will continue to pressure our pricing benefit. Moving on to our costs. Food, beverage and packaging costs as a percentage of revenues increased to 34.6% in the quarter from 34.1% in the prior year. This increase was primarily the result of a 4% increase in our commodity prices, partially offset by an increase in price.

In the quarter, we experienced increases in several categories, including our primary proteins of beef and pork. As we stated in January, we are forecasting mid-single-digit commodity inflation with primary pressures coming from the beef category.

Labor as a percentage of revenues increased to 26% in the quarter from 24.6% in the prior year. The increase was primarily due to lower transactions, incremental wage increases and deleverage from our newer restaurant openings, partially offset by labor efficiencies and an increase in price.

Hourly labor rates were up 3% in 2025. In 2026, we are estimating labor inflation of 3% to 3.5%. Other operating expenses increased $0.4 million or 1.9% in the quarter compared to the prior year which was primarily driven by the opening of new restaurants. As a percentage of revenues, other operating expenses increased to 12.2% from 12% in the prior year.

Occupancy expenses increased $1.2 million or 13.6% in the quarter compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.6% compared to the prior year. Restaurant level adjusted EBITDA decreased $4.7 million to $40.6 million in the quarter from $45.2 million in the prior year.

Restaurant level adjusted EBITDA margins decreased approximately 270 basis points to 21.8% in the quarter versus 24.5% in the prior year. As Mike noted, our Texas market expansion created a headwind. We incurred losses during the year and the impact on consolidated restaurant level margins were 180 basis points in the fourth quarter and 170 basis points for the full fiscal year.

We've taken targeted actions to improve performance in this market. And while we still have a long way to go, we delivered slightly positive results in the final period of the quarter. In 2026, we estimate our restaurant level adjusted EBITDA margins to be in the range of 20.5% to 21%.

This estimate is inclusive of continued headwinds in our Texas restaurants and $4.5 million of additional bonus expense assuming targets are met. Our general and administrative expenses decreased by $0.9 million to $19.4 million or 10.5% of revenue in the quarter from $20.3 million or 11% of revenue in the prior year. This decrease was primarily driven by lower variable-based compensation, partially offset by dead site costs of $1.5 million related to our strategic development reset.

These costs reflect our deliberate decision to move to a more measured pace of new restaurant growth, reemphasizing unit economics and return on investment. Dead site costs for the full year were $5.1 million. In 2026, we expect G&A expense to be $80 million to $82 million, which includes a $4.5 million headwind from bonus expense, assuming targets are met.

Preopening expenses decreased by $0.6 million to $3.3 million in the fourth quarter of 2025 compared to $4 million, primarily reflecting a strategic reset of development activities and the deferral of planned openings into 2026.

Adjusted EBITDA was $24.7 million in the quarter versus $25.2 million in the prior year, a decrease of 2.1%. For 2026, we anticipate adjusted EBITDA to be flat versus 2025. But I want to emphasize that our 2026 estimate includes an expected $9 million headwind from a fully earned bonus at both the restaurant level and support functions.

Below the EBITDA line, interest expense was $5.7 million in the quarter, a decrease of $0.4 million from the prior year. This decrease was driven by a lower effective interest rate of 6.7% versus 7.5% for 2024. At the end of the quarter, we had $90 million drawn on our revolving credit facility.

Our total net debt at the end of the quarter was $334 million. We have approximately $56 million of available capacity on the revolver. For 2026, we expect to open 8 new restaurants and anticipate total capital expenditures in the range of $55 million to $60 million, including investments in our existing restaurants, our commissaries and other corporate initiatives.

Income tax benefit was $0.8 million in the quarter compared to expense of $1.9 million in the prior year. Our effective tax rate for the year was 12.4% and versus 16.2% in 2024. This decrease was primarily driven by changes in Class A equity ownership, our valuation allowance and effective state tax rates.

Cash from operations decreased by 26.7% year-over-year to $71.9 million year-to-date. We ended the quarter with $20 million in cash. In 2026, we expect to generate positive free cash flow and intend to use any excess cash to pay down our revolving credit facility.

Also in 2026, we will focus on executing strategies that strengthen transaction growth across our restaurants while optimizing returns on our new restaurants. We will leverage our perks platform along with other marketing efforts to drive trial and frequency.

We will prioritize operational excellence and invest in our team members. These priorities support our commitment to positive free cash flow and delivering long-term value. Thanks for your time today. And operator, please open the line for questions.

[Operator Instructions] Our first question comes from Sara Senatore with Bank of America.

Maybe I do have a question and a quick clarification. The question is on -- you mentioned the [ Kennesaw ] restaurant opened impressive $2 million in sales, I think, through the first 8 weeks. That's, I think, kind of an annualized run rate of maybe close to $13 million, which isn't that different from, I think, some of what you've seen in some of your Texas stores, for example.

So I guess, I know on 1 -- in 1 case, you have lowered the footprint, so it can accommodate lower AUVs. But as you think through the maturity curve next year, would you expect less of a falloff than perhaps you've seen just because to your point, you're not opening another Atlanta restaurant until 2027 and it will be farther away?

Or just that's been something that I think we've struggled to kind of forecast as a year or 2. So any thoughts you have on what that looks like? And then like I said, just a clarification, Michelle on one of your comments.

Sara, thanks for your question, and I think you answered it pretty well, too. yes, [indiscernible] through its first 100 days did $3.8 million in sales. So we're pretty happy with it. But you're right, we don't expect it to be a $14 million restaurant. I think -- and it's kind of settling in around $200,000 a week right now.

And over time, we'll probably level off somewhere below that. But that's -- I think the main difference is between that and what we saw in Dallas, for instance, is that we're not planning on opening a bunch of more restaurants in the immediate vicinity of [indiscernible] The Colony, which got a lot of attention on this call over the years, was surrounded by other restaurants within the first 3 years of it being open.

We won't open our next restaurant in Atlanta until the spring of '27 and we have plans to separate the other restaurants that we opened in Atlanta with a lot more time and distance than what you saw in Dallas.

Okay. So kind of TBD on maybe what the curve looks like, but less cannibalization. And then just, Michelle, you mentioned that you had EBITDA, I guess, a final period of the quarter slightly positive results. I guess was that margin expansion or EBITDA growth? Or maybe you could just clarify that comment that you made. .

Yes, Sara, no problem. So we saw both. We saw margin expansion when you compile all the Texas restaurants. And when you compile them all, we saw profitability amongst all the restaurants that we had. So it was both. And it primarily comes back to the work we're doing around labor and labor deployment within that market as we're adjusting to the lower volumes.

Our next question comes from Gregory Francfort with Guggenheim Partners.

I had two questions. The first is just the new growth strategy, can you just talk about what it means from a manager and employee hiring perspective, I guess, with things a little bit more spread out you pull from restaurants in other regions more? Does it have any impact on preopening or G&A? Just any thoughts on that would be great.

Yes, Greg, I think the price that we will pay for having more new markets with single stores in it for longer is around new openings, which will be a little less efficient, and it's also a little more difficult from a distribution and oversight standpoint. .

But those are probably tens of basis points in the scheme of things as opposed to having to deal with restaurants that are doing sub-$5 million AUVs for a period of time. So that's the trade-off that we're willing to make. We haven't fully quantified it yet, but it certainly is something that we'll have to work through.

Got it. And then just my second question is just maybe within the comps, anything stand out regionally or by income cohort as kind of places of strength or weakness?

Yes, Greg, when you decompose the comp, it's pretty consistent when you look at Chicagoland versus the outer markets. I think I've mentioned we've seen a little bit more pressure recently in a market like Arizona, but we did open a restaurant there in 2025 that did have some cannibalization.

So you do get some of that impact in that market in particular. But largely speaking, it's not something where we see a wide gap between Chicagoland versus our order market.

Our next question comes from Brian Mullan with Piper Sandler.

Just sticking with Chicago land. Can you give an assessment of the consumer value proposition or the value scores and what has happened with those versus maybe where those were historically and just talk about a path to recovery to where you want to be there for Portillo's.

And I know some of it is dependent on the environment, which is tough, but I'm sure you don't want to wait around for the environment to get better. So just your perspective on that would be great.

Yes, Brian, we've seen improvement in 2025 in our value perception scores. And when you look at some of the catalysts behind that, I think it goes back to when we launched our Perks program in March and the offers that we've run over the course of '25. One of the more aggressive ones being our May [ BOGO ] Beef offer.

We also ran a hotdog offer in July, and then we did a cheeseburger offer in September. So when you look at all of those combined and you look at the sort of peaks within the value scores, that's where you see that coming up as well. So we continue to see good movement on that, and that's based on -- and driven by things that were being in my opinion, front-footed on to make sure that we're giving that value to our guests, not just in the form of price points, but also operationally.

And we've talked about Tony and apps teams focus on hospitality and giving a good guest experience and focusing on accuracy, speed of service. We can bring them in with those offers, but I think -- the key is giving them a good experience to also their perception of value.

So those are the things that we saw in '25, and we feel good about the upward movement in the perception scores.

And Greg, just to give you a little historical perspective on Chicago -- sorry, Brian, I went back at having been here 10 years ago and now coming back. I went back and looked at what the Chicago market looked like when Dick Portillo sold the business back in 2014 and compared it to today.

And back in 2014, there were 34 restaurants in the Chicago market for Portillo's. Since then and going into the end of '25, the number of restaurants have grown by 30% in Chicago. The revenue in Chicago has grown by 60% and the restaurant level margin in Chicago has grown by 80%. So it's a very healthy business here and continues to absolutely deliver for us.

Okay. And then as a follow-up, I just want to come back to Texas. Maybe in the context of -- at ICR you shared in Arizona example, it was very interesting. So you've acknowledged going too fast in Texas. You've got the stores open now. It sounds like you've just made some tweaks to labor.

Maybe can you just talk about the order of priorities from here, how marketing can play a role and maybe what you can or can't take from Arizona just to make sure you grow Texas from here the way you want.

Yes. It's a great question. And for sure, building sales is the #1 job to getting the Texas market to where it ultimately needs to be. The labor efforts are the thing that we were able to execute on first and we've got restaurants in Chicago that do $4 million and $5 million and have for a long time and make money.

And I think we need to get that mentality into the market in Texas as well. But ultimately, it's about building sales. We're pulling a lot of short-term levers that are available, whether it's perks offers or third-party affinity offers. We've had a bundled meal deal going there since the fourth quarter.

And we've ultimately got to find a way to better explain Portillo's to consumers who aren't yet familiar with us. People who know Portillo's love it and people who don't know Portillo's have no idea what it is. And we're still trying to crack the code for how to market to the group of folks who haven't yet figured it out.

And our new CMO [ Denise Lowers ] has got that on her priority list for 2026.

Our next question comes from Andy Barish with Jefferies.

Yes, I wanted to just double-click on kind of I guess, Denise's priority is given there's different strategies in Chicago land versus the outer markets? And then Yes, on the perks as you approach the year, any kind of info you're willing to share on sort of frequency or usage patterns or anything like that.

But yes, just some broader questions around kind of Denise's plans for '26.

Yes. Denise has got a lot on her plate and she's about to have a new boss. So she's going to get some undoubtedly some additional direction there. I would say her priorities are to drive traffic, obviously, first and foremost, in the Perk's program does feel like our near-in best weapon for doing that outside of obviously, great operations, which has always been our #1 traffic driver.

I don't -- we've shared some data on Perk's in terms of the number of people in the program and the activation. We've got a couple of million people in the Perk's program at this a little over that now at this point.

And I think the engagement level has been terrific with the offers that we've made through Perks. But equally, I think Denise is focused on the Texas turnaround that we talked about just a moment ago and finding additional levers to pull to drive trial in Texas because we've seen in Phoenix for sure.

And I think we're seeing in Texas that when we do get people in the door, our conversion to long-term customers is pretty high.

Great. And do you expect that, at this point, kind of the marketing pulses in some of those outer markets that you've done over the past year or 2?

So when we look at the marketing spend, Andy, I think that's one of the things that Denise has been determining. And there is a theory of pulsing and then versus always on type marketing. And so I think in the newer markets, where we're at right now is we need to be always talking about the brand.

And whether that's in the form of traditional advertising with, as Mike mentioned, we have a bundled meal right now, which is probably on more traditional advertising across all of our markets versus digital marketing and those things versus field marketing.

And so regardless of what marketing tactic we use, we need to always be front and center and relevant, particularly in these newer markets. Dallas, Houston, where our awareness is fairly low. And so that's how we're thinking about it today versus, hey, we're going to pulse come out, pulse back in a couple of quarters as we have to be front and center right now on a fairly regular basis.

Our next question comes from Jim Salera with Stephens Inc.

Michelle, you had some commentary around favoring transaction growth versus leaning on price. Can you just give us some color on carryover pricing into 2016, assuming no incremental price.

Yes, absolutely, Jim. So the pricing actions that are going to start to roll off we had 1.5 points at roughly a pricing that rolled off in January of this year. We'll have another point that rolls off in April, so beginning of Q2. And then we'll have another call it, 0.5 point or 70 basis points that rolls off in June.

And so that's the pricing cadence that rolls off from 2025. But as I mentioned in the commentary, we are seeing impacts from perks and other offers to that pricing through the discounts that we're offering through that platform.

And so even when you look at the fourth quarter, Jim, you'll see that our pricing impact was 2.3%. It was 3.2% for the full year. So as we sit here in the first quarter, we're definitely sub-2% pricing. But depending on the offers that we run in that could go below even 1 point of pricing in the first quarter depending on those impacts. But that's the cadence that rolls off in 2025.

Great. And then as a follow-up, could you offer any thoughts on attachment and mix as it pans particularly to some of the purchase program? I know industry-wide, it sounds like kind of down low single-digit transactions. So maybe mix can be kind of a swing factor to the positive or the negative depending on how things progress? Any commentary there would be helpful.

Yes. And for the Perks offers that we've run, Jim, we're not seeing significant ticket degradation. When you look at our average ticket today, it's about $23.60 a for the total company. And so as we run those offers, they haven't been, again, significant degradation to the ticket.

So we like what we're seeing with those that we're running, and we continue to measure those impacts, not just on that. But obviously, on the profitability in total for the offer. But that's generally what we've been seeing.

Our next question comes from Sharon Zackfia with William Blair.

Kind of going back to Perks and it being kind of a more of a surprise and delight program. Is there any thought of maybe we need to convert that to more of a typical points accrual program.

It's certainly a question that gets asked of us a lot and that we've asked ourselves, I think to this point, we're really pleased with the way the Perks program has performed so far and so turning it into a punch card program with all of the attendant costs that go along with the rewards in that kind of a format is not something that we're planning on proceeding with right this incident, but obviously, it would always be an option.

But I have to say that relative to -- you saw a subway the other day, had pulled back on its 4 for 4-foot long thing. We're not looking to get into a situation where we're doing that kind of a punch card deal at this point.

And Sharon, the one thing I'd add on that is the difference between and I know you understand this between us and others is we are an experiential brand.

And part of this surprise and delight program is we can give experiences, whether it's tastings for new menu items, whether it's merchandise we don't view it as, to Mike's point, a traditional punch card program where if you buy X you're going to get X because the nature and the DNA of Portillo's is we are an experiential brand so I think that goes with who we are and aligns with that thought process as well.

Okay. And then on the restaurant level margin guidance, Michelle, does that actually assume you have no price in the back half of the year? And with kind of mid-single-digit COGS inflation, is that more first half weighted because you'll lap some of the beef inflation in the back half?

No problem. So the margin does not assume 0 price. As we move towards the year we do expect the mid-single-digit commodity inflation, but we don't expect that we're going to be able to pull the pricing lever.

Sharon to fully offset that. Having said that though, we continue to do our pricing analytics to see where we have opportunities to take price. And we do expect that in the front half of the year in particular, we are going to see heavier inflation for the first 2 quarters of the year.

Right now, we're projecting higher commodity inflation versus the back half of the year. But at the same time, we haven't made any decisions on pricing and we need to be mindful of, again, growing the business through transactions versus price taking. But the guide assumes a little bit of price actions over the course of 20 problem.

Our next question comes from Dennis Geiger with UBS.

First, I wanted to ask a little bit more on the operational side of things and then maybe where you are with sort of drive-through speed, overall ops and overall speed/customer experience, if there's any latest updates on that front?

Yes, sure. I think we're feeling good about where we are operationally. Staffing is terrific. Hourly turnover is down under 80% for the year. So a really great cultural story. GM turnover at sort of historic lows for us and we want -- we had as a priority last year to get better in the drive-thru.

Those of you who are old enough to remember Joe Paschi's line about what happens to you at the drive-through. No, it's hard to get both speed and accuracy better at the same time. We were able to do that last year with nearly 42nd improvement in our speed of service and a significant improvement in the accuracy measures as well.

So I think that sets us up for a good year in '26. As I said earlier, Marketing is important, but the most important driver for Portillo's of traffic and frequency is great operations and great experiences.

Terrific. And then sort of following up on that. Just kind of looking at performance by channel or sort of anything to highlight around customer behavior changes, whether it's day part, day of the week, off-premise, on-premise delivery.

Any call-outs observations on pattern behavior changes that you're seeing across channels and dayparts, et cetera?

Yes, Dennis, I'll take that one. So we are seeing more of an uptick in our off-premise channels, particularly our pickup channel has been our fastest-growing channel in 2025, and our delivery channel did see some growth as well.

And so that's where we've seen a little bit more of our growth coming from. And so we have to obviously make sure that those channels are equally as important to our guests and their satisfaction. And so that continues to remain a focus of ours because we know those channels are ones that continue to grow for us.

Our next question comes from David Tarantino with Baird.

Michelle, I was hoping I was going to ask a question about the guidance. And specifically, what type of comp framework are you assuming in the guidance outlook for EBITDA? And I guess, the second part of the question is how are you running in Q1 so far relative to that plan.

Yes, David, we're not giving any top line guidance purposefully. And I think I mentioned this that ICR in terms of the visibility around that is not as clear to us in terms of not just where the macro is. Obviously, our new restaurants play a role in the non-comp performance. And so we're purposefully not guiding anything on the top line.

We do feel we have more visibility to that middle of the P&L and feel comfortable with where we're sitting from an adjusted EBITDA guide standpoint and then all the categories that make that up in between.

So that's why we're not guiding to the top line. In terms of Q1, we've had some puts and takes on weather that has been well documented and talked about, specifically in January. So those are known headwinds for everyone in the industry. But what I would say is weather aside, our sales fundamentals are solid, and we feel good about them as we sit here today.

Great. And then I guess a follow-up to the guidance question. I guess -- are there ways to deliver the EBITDA guidance with a wide range of revenue outcomes. I guess, I'm not clear on that point, given the lack of guidance, there must be an underlying assumption on the revenue growth.

I appreciate you not wanting to give it. But I guess the question is, do you have the ability to pull levers throughout the P&L to deliver it at a wide range of revenue outcomes.

Yes, absolutely, David. And so we talked about pricing. We don't want growth to come through pricing, but that is a lever. There's obviously cost headwinds that we're facing. So we have to think about that as a lever. We've talked about the Texas turnaround.

We've talked about that we need to be able to grow the top line in those markets in particular, that's a lever to continue to see growth in the top line. Now that's mostly going to come in the form of non comp versus comp, but obviously, still top line growth.

And then continuing to talk to our guests in our core market as well as another opportunity. We've talked about the value perception scores going up. The use of Perks as a lever, other menu innovation items could be a lever. We've recently launched new sauces as part of our portfolio. So there are other things absolutely that we can do and levers we can pull to drive that top line up.

Our next question comes from Brian Harbour with Morgan Stanley.

Michelle, do you expect marketing spending up substantially this year within that guidance or is it largely similar? And I guess you kind of talked about more of an always-on approach. Is that -- how efficient is that right now? Or how do you think about the efficiency of that?

Yes, Brian, we do expect to see a slight uptick in marketing spend this year, but nothing material within the guide that you see specifically within the G&A guide is where you would see that incremental marketing spend.

And so in terms of the approach of always on, as I mentioned, there's multiple approaches you can take whether it's traditional, is going to be more expensive being on TV and doing commercials and things of that nature. And we frankly don't have a lot of scale in those markets to view that as an extremely efficient use of our advertising dollars.

And so we have to make sure that we're investing in other areas, digital, social, I mentioned field marketing as well. So all those things are going to play a role in the "always on approach" versus the prior approach of pulsing more involved traditional forms of marketing and advertising spend.

Okay. Understood. And the mix component of same-store sales. Can you -- I know that's been a sort of a drag for a while, but how are you thinking about that as you go into this year?

Yes. I think to your point, we've seen mix headwinds over the course of the past several years. Now we've seen that moderate, we even saw that for this year. Our mix was only down 1.2% for the full year, which I think was the lowest it's been in several years.

And kiosks played a big role in that. And so it's helping to mitigate some of those natural headwinds that we see in mix, which is lower items per transaction and then trade downs. So those are the 2 things that are negatively impacting mix. And we are seeing that today, we see continued lower items per transaction, whether it's across all channels and then some trade downs going on.

So we have to be able to mitigate against that. We continue to look at kiosks as how can we increase adoption there? How can we continue to lean into those digital channels, which we know comes with a higher ticket. So I continue to see that, Brian, to answer your question as a headwind in 2026, but there are things that we need to do to continue to moderate those headwinds within mix, like I mentioned.

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

I'm Brian Mullan, restaurant and food distribution analyst at Piper Sandler. Very happy to have the team from Portillo's. We have Mike Miles, who is the Interim CEO. Company is also undergoing a search for a full-time CEO. And we have Michelle Hook, CFO. Portillo's is a small but growing rapidly restaurant brand with 102 restaurants across 11 different states.

Thank you, Brian. Good morning, everybody, and thank you for your interest in Portillo's. As Brian said, I'm going on now 4 months as Interim CEO of Portillo's, but I've been part of the brand as Chairman of the Board going back to 2014 when our founder, Dick Portillo, retired.

Here's our legal stuff, and here's what we'd like to talk to you about today. First, to give you a little bit of a feel for what is special about Portillo's as a restaurant and as a business. Talk a little bit about the lessons that we've learned in 50 years of growing the company and how we're going to take it forward in the years ahead. And then Michelle will add it all up and share how 2025 ended up, and what our outlook is for 2026.

How many of you all by show of hands have been to Portillo's? That's why you're here this morning. To know Portillo's really is to love it. And it's hard to capture in a PowerPoint presentation, the menu, the Italian beef sandwiches, the service, the decor, the energy, the atmosphere, really the entire experience. It's also hard to capture in words how much passion there is for Portillo's among the people who do know us. But for those of you who didn't raise your hand, we have a short video that gives you at least a little bit of a taste for what makes Portillo's as special as it is.

[Presentation]

So J.J. Watt, Candace Parker, Mindy Kaling, the Pope, all among Portillo's promoters, but we have millions of promoters. And that's the reason that we consistently rank at or near the top of the industry in Net Promoter Score, favorite restaurant, customer satisfaction. To know Portillo's, as I said, is to love it. And our raving fans access us through all of our different channels. And we do volumes in each of those channels that rival the total restaurant sales for some competitors in the industry. Better than $3.7 million inside, $3.4 million through our drive-thru, and $1.5 million in our -- from our delivery business and with our catering business.

When you put all that together under one roof, you get exciting industry-leading volumes, $8.6 million in 2025. That passion for Portillo's also shows up in the way our customers engage with our new Perks loyalty program, which is now over 2 million participants only less than a year after it's been launched.

The number of people in the program is exciting. What's really exciting is the way that our customers engage with that when we do something like free rings for Taylor Swift's engagement or free cheese sauce on cheese sauce Fridays. This gives us a clear channel to communicate with our customers in a space where some of our competitors have 9-figure advertising budgets and a way for us to suggest new menu items that they haven't tried, get them to bring a friend or for people who just signed up in a new market to really encourage that second or third visit.

But there's nowhere that the passion that people have for Portillo's shows up more than when we enter a new market. Last November, we opened our first store in Atlanta, Georgia, actually in a suburb called Kennesaw, which is about 30 minutes northwest of the city. What you're looking at is a map of Atlanta. Atlanta, you can't really see the city there. It's there in the A and the center is where the center of city of Atlanta is. And this is Placer.ai data that shows the origin of each of the customers that have come to visit based on where their cell phone spends the night.

You can see that there's a tight cluster of folks who came from a 10-mile radius around the restaurant. But really, people drove from all over Atlanta over an hour in many cases to go get their first fix of Portillo's in years. I talked to many of them in the drive-through that morning, in the restaurant, and folks who have driven over an hour. And in one case, a table of customers who were back for their fourth visit, and we've only been open 6 days, and they drove an hour each way to get there. And in fact, it's not just from all over the Atlanta area, but from all over the Southeast United States from most of Georgia, all of like states of Alabama, Tennessee and the Carolinas. There's a huge amount of passion for Portillo's and pent-up demand for it in every market that we visit -- that we come to.

The results at Kennesaw were pretty strong, $2.2 million of sales in the first 7 weeks open in spite of the fact that we were closed for Thanksgiving and Christmas in that period of time, and we haven't turned on the delivery business there yet. And the store did $300,000 the first week of 2026. As good as those results are, though, they are very consistent with what Portillo's sees whenever we come to a new market. These are the 8 states that we've brought new restaurants to in the last decade. And you can see that with the exception of Michigan, where we opened in COVID with our dining room closed, we averaged $2 million in the 7 weeks -- first 7 weeks that we're open.

Portillo's has got an installed base of really strong fans in every single market in the country that we've been to. And based on the fact that whenever we announce a new restaurant opening, we get tweets and e-mails and text back begging us to come to someone else's home market. We think we've got that in the rest of the country as well.

So let's talk about how we're going to go to the rest of the country and based on the -- what we've learned over the last few years. Portillo's is a long growth story. We've been growing for longer than many of the folks in this room have been alive since Dick opened his second restaurant in 1969. And over the years, have gradually added new restaurants, never closing one and finished 2025 with 102 restaurants.

Dick built the first 30 restaurants in the Chicago area. And then in 2005, got excited to go to California and opened the restaurant there in Buena Park. Followed that in 2006 in Merrillville, Indiana, the first 2 states and then on to Arizona in 2013. In 2016, we went to Florida and Wisconsin and gradually expanded across the adjacent states in the Midwest before we went to Texas in 2023. And then, as I said, to Atlanta and the Georgia market in 2025.

Those first 4 stores that have been opened for more than a decade have matured into strong performers, averaging $9.1 million sales that would look normal in the suburbs of Chicago. Buena Park does over $10 million now. Merrillville, Indiana, $11 million, and the 2 stores in Arizona -- first 2 stores we opened in Arizona, $7 million and $8 million, respectively. Admittedly, we don't have any markets outside Chicago that yet perform like our home base. But the Phoenix market gives you some sense for how Portillo's matures as we get beyond that first pent-up demand of Portillo's maniacs and begin to expand to the broader market. We've now got 8 restaurants in Phoenix after over 12 years in the market.

And you can see at the bottom of the slide how we're beginning to build the awareness that we need and have pretty good trial and even better repeat and adoption among customers who've gotten to know us. The numbers compare decently with some of our better-known competitors. And we now average 5.8 million AUVs in Phoenix. It's still something that we've got a long way to build on. You can see we've only got 49% awareness, but it gives you a sense for how Portillo's can expand beyond that initial installed base, as I call it, of pent-up demand.

But this is a story that was over a decade in the making, as you can see. And over the last several years, we tried to go into new markets and rapidly penetrate them, which led us, frankly, to open too many restaurants too quickly and too close together in Texas. Houston is probably the best or worst example of this. If you look at the map on the left, you can see that we opened 5 restaurants in the space of a year within a circle with a radius of 20 miles. If you remember the -- what I showed you from Kennesaw, you know that people drive a lot further than that to come to Portillo's. And what you -- what we had as a result is the picture you see on the right where each successive restaurant just divided up the demand that we had amongst more and more, each one cannibalizing the last -- until we had 5 restaurants that did about the volume that we would have expected had we only opened 2.

We had a bit of the same situation in Dallas. Our geographical dispersion is better, but they're still open -- we opened more restaurants more quickly than I think we would have liked. We don't need to do this because there's so much white space for Portillo's in the country, and we've got that fan base everywhere we go.

So going forward, we will focus on new markets, first restaurant in, give that time to breathe and allow the demand and the awareness to build before opening the second, third and fourth restaurants as we go.

The other thing that we've learned over the years is that we don't need to build restaurants in new markets at the same size that we have in Chicago. Dick Portillo started out in 1967 with a 4,000 square foot restaurant. That one still does very nicely at $4,000 -- excuse me, $4 million volumes. But over time, as Portillo's grew in popularity in Chicago, the restaurants got bigger and bigger, and we opened the Canal & Taylor restaurant in 2016 at 9,000 square feet. It does $20 million now. But we've taken that -- we took that same approach to new markets, both based on the success we were seeing in Chicago and also those early volumes that I showed you in those other markets and got ourselves too big outside Chicago. We've been working that problem now for several years. And the Kennesaw location that you had, you saw is 6,200 square feet and closer in size to the Villa Park restaurants. Going forward, we will be in boxes like Kennesaw or other new prototypes that include even smaller versions of Portillo's.

So let's show how that all is going to work out going forward for us. We announced a reset of our growth strategy in the fourth quarter, and this is really what it means. We're going to leverage that base of super fans that we talked about in every new market that we get to, but recognize that it's going to take time beyond that first group to build awareness and demand, and then we're going to let the new development follow that demand.

We've got an improved real estate process now. We've been using a real estate model that was over reliant on Chicago observations and was delivering too many false positive reads and causing us to overestimate what the restaurants would do. We now have a real estate model that is just based on stores outside Chicago and does a much better job explaining the variability between $3 million and $10 million of those restaurants. We'll open fewer restaurants in these new markets. And no, I don't -- I'm not promising you all in Louisville, Columbus, Charlotte and Nashville that we'll be there immediately, but that should give you a sense for what we're thinking about and the pace at which we'll develop those markets. And we'll use the smaller format that we talked about.

Importantly, we'll be focused on good shareholder returns with our new real estate development, focused on unit economics and also getting our cost structure in line with the size of the company that we are today and with the growth rate that we're talking about.

Here's why that's going to look over the next couple of years. As all of you know, it takes a while to turn the ship of real estate development. So there are some legacy decisions in this -- in the next couple of years that if we can wave a magic wand, we probably would have postponed for a year or 2. But you'll see us open 8 restaurants in 2026, including in the DFW Airport and an in-line restaurant on North Michigan Avenue in Chicago, and 8 restaurants again in 2027, including our new prototype restaurant of the Future 2.0.

Before I turn it over to Michelle, I do want to say that none of this would be possible without the 8,000 people we've got at Portillo's, great associates who make the food and serve the customers. We've worked hard to make it a Great Place to Work, and we're proud to be recognized again last year as one of the Best Places to Work in the restaurant industry. Our associates have rewarded us with great low turnover and with great service to the customers. We've changed a few things over the last few months at Portillo's, but one thing will not be changing. People are at the heart of Portillo's.

With that, let me turn it over to Michelle to talk through the numbers.

Great. Thanks, Mike. And so what we wanted to do today is provide you with some insights into how 2025 ended and then we'll talk a little bit about '26. So if we look here how we ended the quarter, and we had guided to numbers that were a little bit -- these are better than the numbers that we had guided to. But when you look at how the year progressed, we had a challenging year. That's no different than others within the restaurant industry.

When you look at how we started out the year, the first 2 quarters of 2025, we did have a positive comp. We saw that start to degrade coming into Q3, and we knew that Q4 was going to be a challenging quarter as well. And so that's where you see we came in Q4 with a negative 3.3% comp, and you see the composition of the comp. And so we saw the challenges with negative traffic or transactions within our business all throughout 2025 and frankly, 2024 as well.

So we know that as we go into 2026, the things that we're going to focus on are driving traffic or transactions within our business. And Mike talked about our Portillo's Perks program, our loyalty program that we launched in March of 2025. That's one lever that we have to continue to drive that traffic growth within our restaurants because we know it works. When we've had offers on that platform, we've seen the results of that. So the point being is we still have work to do, obviously, to continue to drive the comp in the right direction, driven by traffic growth.

When you look at our total revenue growth at the $732 million for the year, that's about a 3% growth rate year-over-year. Again, with the negative -- slightly negative comp for the year coming into play, we did get a lift from the 8 restaurants that we opened in 2025.

When you look at our restaurant level margins, you can see how we closed out the year. When you look at it as a percent, so in Q4, 21.8% restaurant level margins and for the full year, 21.6% restaurant level -- 21.6% restaurant level margins for the full year. So we still have healthy margins, but we got to continue to focus on, as Mike mentioned, the new restaurants that we're opening, continue to drive the returns on those restaurants and the unit economics of those restaurants that we're opening.

When you look at the adjusted EBITDA, you can see we ended the year just over $97 million in adjusted EBITDA growth. To put that into perspective, we have 102 restaurants that drive $97 million in adjusted EBITDA growth. So we have a very healthy business here at Portillo's that generates a lot of cash flow that we'll talk about on the next slide, we're going to use to continue to invest back in our business.

So when we look at where do we think '26 is going. So typically or historically, we've given some top line guides. We don't plan to do that this year. I think there is a lot of fluidity going on when you look at the top line, specifically for us as we look at some of the new restaurants that we're opening, and there's just a lot of unknowns. However, we do feel we have better visibility on the middle of the P&L and the new restaurants that we're opening next year, which is why we feel more comfortable as we look at the guides that we have.

So we plan to open, as Mike mentioned, 8 restaurants in 2026. The timing, we see 6 of those coming in the first half of the year. We knew that this class was going to be front-loaded. That's the way we like that. Generally, we don't want to open restaurants later in the year in the November, December time frame. And then we'll have 2 coming in the second half of the year. One of those 2 being the in-line on North Michigan Avenue in Chicago will be coming in the second half of the year.

We are excited for our first airport location to open in the Dallas-Fort Worth Airport. I think that will continue to help build the brand and build the awareness in the Dallas market as an addition there.

We think commodities are still going to be a headwind for us next year. So when we look at where we're at today, we're projecting mid-single digits. Beef is going to continue to be a headwind for us. That's about 30% of our market basket is beef. We think we're still going to see some pressures on pork. That's about 5% of our basket as well. And look, we'll get a little bit of easing on other parts of the commodity basket. But when you add all that up, we're projecting mid-single-digit inflation.

Labor, we still see that continuing to be an investment that Portillo's is going to make in labor. So we're projecting 3% to 5% there.

Then when you get into the profitability metrics, you can see what we're projecting our restaurant level margins. Yes, we're projecting margin degradation because we ended '25 at 21.6%. Having said that, though, I wanted to call out that we do have a known headwind. We're coming into the year assuming a full bonus payment for our restaurants as well as our support center. And so there, I wanted to call out for you the headwinds that we expect to see there within all these numbers.

G&A, we're being very disciplined. And so we know we have the $4.5 million headwind in G&A. And you can see we're being very disciplined on guiding to the $80 million to $82 million as we continue to, I think, run appropriately and efficient business within our G&A and support functions. Within G&A, we do have a portion of our advertising expense. And so within that G&A guide is additional investments that we plan to make in advertising this year as well. So we feel really good about that, that we're investing in the areas of the business that we need to, to continue to grow and build this brand.

When we look at the CapEx, you'll see the guide there at $55 million to $60 million. I've broken down for you where we expect that to be, which is primarily building new restaurants, not just with the Class of '26, the 8, but also we're going to go under construction with the 8 restaurants in the Class of '27 with a portion of those. So there'll be some capital investment for that class this year as well. We got to have some R&M CapEx as well as some investments and some other initiatives on the technology side there.

So when you roll all that up, we expect that our adjusted EBITDA will be flat year-over-year, so around that $97 million that you saw on the prior slide. And the point being that we do plan to be positive free cash flow this year. So we feel very good about that. We're in a very healthy cash position here. We plan to continue to generate a good amount of cash and invest that back in the business.

So with that, I will end with -- it looks like most of you, with raising your hand, have visited our restaurant. We have a restaurant 10 minutes away from here on Palm Parkway. I encourage you all to visit. And as an incentive, we have Sarah, Denise and Beck, I believe they have Portillo's hats, handing out free sandwich cards for everyone as an incentive to come visit us. So please enjoy that, and thank you for your time today.

Hello, and thank you for standing by. Welcome to Portillo's Third Quarter 2025 Conference Call and Webcast. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations at Portillo's to begin.

Thank you, Operator. Good morning, everyone, and welcome to the Portillo's Third Quarter 2025 Earnings Call.

With me today are Mike Miles, Chairman of the Board and Interim 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'll turn the call over to Mike.

Thanks, Chris, and good morning. Although I've had the opportunity to meet many of you over the years at different venues, this is my first time speaking with you as Interim CEO of Portillo's. I was also in this role back in 2014 and '15 after our founder, Dick Portillo, retired.

So, it's not my first time. And as most of you know, I have been Chairman of the Board for the past 10 years. I have been back in the seat for a little over a month, and everything I have seen only reinforces my confidence that Portillo's has a long runway for growth ahead. Each time we enter a new market; our first restaurant is overrun with passionate fans who have been waiting for years for Portillo's to come to town. And the first restaurants opened outside Chicago in California and Arizona, have matured well over the years. We'll do over $10 million in our Buena Park location this year.

I'm also impressed with the capability of the company today compared to 10 years ago from the talent and training we have in our restaurants to the energy and commitment at the restaurant support center to the experience and perspective we have on the Board of Directors.

Although I've had the privilege of seeing all that develop gradually from the Board level over the past decade, it's that much more pronounced being back in the RSC in Oak Brook every day after a 10-year gap. What hasn't changed is the Portillo's experience. Our unique craveable menu, outstanding value, genuine hospitality and lines that move quickly. Those were the ingredients for the success of Portillo's a decade ago, and they are the foundation of our success today. And the reason that our 98 restaurants averaged $8.6 million in annual sales and contributed $163 million of restaurant-level EBITDA over the last 12 months.

Although we have a leadership transition at Portillo's, our first priority remains with our customers and restaurant-level teams. Our operators have rededicated themselves to QSAC, our timeless focus on Quality, Service, Attitude and Cleanliness. And we approach every guest visit with a commitment to make their day.

As you know, in the third quarter, Portillo's announced a strategic reset, slowing development in 2025 and 2026, and refocusing our operations on delivering an outstanding guest experience. As we shared with our second quarter results and when we communicated this reset, we added too many locations too quickly and too close together over the past 24 months, particularly in Texas. This has produced a number of restaurants with initial volumes that are not sufficient to deliver healthy economics.

As a result, we have slowed development to the extent we can, limiting openings in 2025 and 2026 to sites with already signed leases. Quite a few sites in the pipeline were pushed back or dropped. Michelle will speak to the associated costs we recognized in this quarter. We also have to address the low-volume restaurants we opened and are working to drive trial and get the labor equation right at these locations. Going forward, we plan to have more time and distance separating our openings in new markets. We're also deploying a smaller format restaurant that can deliver good unit economics at $4 million or $5 million of sales.

It's worth noting that we already profitably operate several smaller restaurants in Chicago that perform well out of similar footprint and with sales in the $4 million to $5 million range, including Portillo's #1 in Villa Park. It took years of great customer experiences at #1 and dozens of other restaurants like it in the Chicago market to build the Portillo's brand to the point where # 43 opened in 2016 in the South Loop will do over $20 million in sales this year.

So our development strategy will reflect a return to a more gradual pace, avoiding cannibalization and letting great experiences drive more visits and ultimately more restaurants.

And we will design and build new Portillo's that can succeed at today's new market initial volumes, which are industry-leading, but not yet at the level we achieve over time in established markets.

At the same time, we have focused on driving more transactions. Our most important lever remains the Portillo's experience, the Italian beef sandwich, perfect crinkle-cut fries, family recipe chocolate cake, made-to-order salads, all with the speed and at price points that compete with QSR, but served with a genuine hospitality and a fun and unique atmosphere.

It's a powerful customer proposition and executing it well, has always been our formula for same-store sales growth. We're also leveraging our Portillo's Perks loyalty program that we launched earlier this year. Although it's still scaling, we have already had success using it to stimulate visits. And especially in some of our new markets, we're looking to expand our reach by leveraging affiliate marketing and catering and delivery partners to help drive trial and get that first taste of Portillo's into more new mouths.

In closing, I want to thank our team members, especially those in our restaurants for their continued focus on creating outstanding guest experiences during this period of transition. And I'd like to thank our partners and investors for their support and confidence in this beloved brand.

I know I speak for the entire Board in saying that we believe in Portillo's and our ability to create shareholder value more than ever. In a couple of weeks, we will celebrate a major milestone when we cut the ribbon for our 100th restaurant in Kennesaw, Georgia. It will be an exciting moment for all of us and a reminder that while we've accomplished a lot, we're really just getting started.

I will now hand it over to Michelle to review the details of the third quarter results.

Great. Thank you, Mike, and good morning. During the third quarter, revenues were $181.4 million, reflecting an increase of $3.2 million or 1.8% compared to last year.

Our revenue growth in the quarter was driven by non-comp restaurants. Restaurants not in our comp base contributed $5.6 million of the total year-over-year increase in revenue during the quarter. Same-restaurant sales declined 0.8%, which decreased revenues approximately $1.2 million in the quarter. The same-restaurant sales decline was attributable to a 2.2% decrease in transactions, partially offset by an increase in average check of 1.4%.

The higher average check was driven by an approximate 3.2% increase in certain menu prices, partially offset by a 1.8% decrease in product mix. We do not foresee taking any additional pricing actions in the remainder of this year. As such, our effective price increase for the fourth quarter is estimated to be in the range of 2.5% to 3%, pending the impact of our fourth quarter Portillo's Perks offers.

Moving on to our costs. Food, Beverage and Packaging costs as a percentage of revenues increased to 34.5% in the quarter from 33.7% in the prior year. This increase was primarily the result of a 6.3% increase in our commodity prices, partially offset by an increase in our average check.

In the quarter, we experienced increases in several categories, including our primary proteins of beef, chicken and pork. 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 26.6% in the quarter from 25.8% in the prior year. The increase was primarily due to lower transactions, incremental wage increases, higher benefit costs and deleverage from our newer restaurant openings. This was partially offset by an increase in our average check and labor efficiencies.

Hourly labor rates were up 3.3% in the third quarter of 2025. We continue to estimate labor inflation of 3% to 4% for the full year.

Other operating expenses increased $2.3 million or 10.8% in the quarter, compared to the prior year, which was primarily driven by the opening of new restaurants and an increase in repair and maintenance, utilities and advertising expense.

As a percentage of revenues, other operating expenses increased to 12.9% from 11.8% in the prior year. Occupancy expenses increased $1.4 million or 14.7% in the quarter compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.7% compared to the prior year.

Restaurant level adjusted EBITDA decreased $5.3 million to $36.7 million in the quarter from $41.9 million in the prior year. Restaurant level adjusted EBITDA margins decreased 330 basis points to 20.2% in the third quarter versus 23.5% in the prior year. We continue to experience more significant pressures on our margins from our non-comp restaurants.

We currently estimate our restaurant-level adjusted EBITDA margins to be in the range of 21% to 21.5% in 2025. Our General & Administrative expenses increased by $1.7 million to $20 million or 11% of revenue in the quarter from $18.3 million or 10.3% of revenue in the prior year. This increase was primarily driven by $3.3 million in dead site costs.

This increase was partially offset by a $1.1 million net benefit resulting from the CEO transition. This benefit was due to forfeiture of equity awards, offset by other transition costs.

Following CEO transition costs in the third quarter and projected Board-approved retention payments, we have adjusted our G&A target for 2025. Our updated estimate for fiscal year 2025 G&A is now $76 million to $79 million.

Preopening expenses increased by $1.5 million to $3.3 million in the third quarter of 2025, compared to $1.7 million in the prior year, primarily due to the number and timing of activities related to our planned restaurant openings. 

During the quarter, we recorded a noncash impairment charge of $2.2 million related to our legacy Barnelli's trade name, primarily due to an increase in the discount rate. This pasta concept is available at nine co-branded restaurants in our Chicagoland market. Neither the Portillo's trade name nor goodwill was impaired. This impairment charge has been adjusted out of our reported adjusted EBITDA. Please refer to our adjusted EBITDA table in the earnings release and 10-Q for additional adjustments recorded this quarter. Adjusted EBITDA was $21.4 million in the quarter versus $27.9 million in the prior year, a decrease of 23.4%. 

Due to the change in our estimated G&A expenses this year, we now expect adjusted EBITDA of $90 million to $94 million for fiscal year 2025. Below the EBITDA line, interest expense was $5.7 million in the quarter, a decrease of $0.8 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 $77 million drawn on our revolving credit facility. Our total net debt at the end of the quarter was $323 million. We have approximately $69 million of available capacity on the revolver. Income tax benefit was $1.2 million in the quarter compared to expense of $2.5 million in the prior year. 

Our effective tax rate for the third quarter was impacted by a decrease in our valuation allowance. Our effective tax rate year-to-date was 20.4%. We expect the full year tax rate to be approximately 21% to 23%.

Cash from operations decreased by 32.3% year-over-year to $48.7 million year-to-date. We ended the quarter with $17.2 million in cash. We believe our efforts towards simplicity, a revised approach to new market entry, and a restaurant model with healthy unit economics will support our growth potential and drive long-term shareholder returns. 

Thank you for your time. Operator, please open the line for questions. 

[Operator Instructions] Our first question comes from Sara Senatore with Bank of America. 

Isiah on for Sara. Just seeing that other restaurant OpEx saw pressure just due to advertising expense, but the traffic decline seems to have accelerated quarter-on-quarter. Could you guys speak to marketing efficacy in the quarter and just how you think about marketing strategy going forward, especially in the light of Denise joining back in September? 

Yes, Isiah, keep in mind that our marketing, it's in two spots. One, as you mentioned, is in OpEx, but then in G&A as well, we do have marketing spend in there, just more geography for you on the P&L. Yes, absolutely, we continue to believe that we need to drive trial and awareness, specifically in our newer markets. And so as we look at campaigns we have ongoing in Dallas, we're making investments in Houston as well, where we have five restaurants today. And we continue to believe that that's a good investment to make as we drive that trial and awareness. 

Now having said that, here in our core market of Chicagoland, that still is extremely important to us. We need to make sure that we continue to message the brand and look at our value proposition here. And so we make investments here as well. We have a campaign going on in Chicagoland as we speak right now to continue to message the brand here in our core markets. So we continue to believe in that investment and that that's a good payback for us now and as we look into the future. 

I appreciate the clarification. And just as a follow-up, appreciating that you guys aren't taking price or planning to in 4Q, pricing does seem to be running towards the high end of the industry range. How do you guys view your value perception among guests and just your broader value proposition? 

Yes. In terms of pricing, so when we look at where we were at this quarter and then when you look at where the September inflation data was, food away from home was at 3.7%. So we're definitely indexing under that. As I mentioned, we're not planning to take price this quarter. As we go into next year, we'll look at that in relation to our inflationary cost pressures. But as Mike mentioned, we continue to believe that we need to drive traffic into our restaurants. And so we have to be mindful of when and where we take price.

Our next question comes from Brian Mullan with Piper Sandler.

Just a question on development. I guess, one, is there anything you can say around the openings you expect in '26 as you sit here today? Presumably, what will open next year is already underway in some form or fashion has been planned. And then just related to that, if you were going to make any kind of pivot on development beyond next year, I would think it wouldn't be until 2027. So maybe just talk about what scenarios you're contemplating? Is there a world in which you don't build for a while, and you focus on the existing assets? Are there a lot of things just open-ended beyond next year?

Yes, Brian, as we said, we're going to plan to open 8 restaurants next year, and you're spot on that a number of those were already in flight. And so, you'll see some additional restaurants in Dallas and Houston, which if we could do it all over again and wave a magic wand, we might not open in 2026. We've probably pushed them out. But we, we've got some other great sites in the pipeline. And as we look ahead to 2027, it's our intention to continue to grow and to grow gradually, as I discussed. So, you won't see us open a bunch of more restaurants in '27 in either the Dallas or the Houston market, but you'll see us expanding in other markets that are growth opportunities for us. We'll probably have our second opening in the Atlanta market in 2027 and look to other locations for growth beyond that.

Our next question comes from Gregory Francfort with Guggenheim.

This is Arian Razai on for Greg. I wanted to ask about the beef cost. And I know it's early, but can you help frame the early thoughts in commodity into the next year? And also maybe like touch on labor inflation guidance. It seems like a lot of companies like are seeing like below 3% wage like year-over-year, but I'm seeing you guys are still like above that. I don't know if it's regional or any outlook on that or any commentary would be super helpful.

Yes. So in terms of beef cost, obviously, we saw, we've seen pressures on beef all this year. As we go into next year, we don't see any easing on beef costs. We're still putting together plans. I think you've seen other companies who have a more concentrated basket on beef signaled more mid-single digits. We're again putting together that plan. We'll have more information on what we think '26 is going to look like in January for you all. But I imagine what you're hearing today, we're not in any different boat than those folks are. But just for context, about 30% of our basket is beef. So we, that is more heavily weighted for us, but there's still a broader basket for us and with some offsets as we look into next year as well that we think can help mitigate some of those pressures.

On the labor front, year-to-date, we're at about 3%. We came into the year forecasting 3% to 4%. So we're at the lower end of the range. I wouldn't say that there's necessarily more geographical concentration for us. We continue to give increases to our team members within each year. We don't pay minimum wage anywhere. When you look at our average hourly rate, we're above $17 an hour. So we feel really good about where we sit today, but we still need to make investments in markets and existing team members, but nothing I'd call out in terms of concentration of where those increases are.

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

This is Ella on for Chris. Mike, I appreciate your prepared remarks on the quarter, but can you elaborate on what enabled the company to deliver a bit better comp performance than what you guided to in the business update?

The comp performance in the third quarter was helped out some by our Perks program, which we're beginning to scale and are beginning to learn more about how to use. It's great that we have such an engaged customer base, and they, so when we use the Perks program to stimulate visits, we get an immediate response to it. And we did a little bit of that in the third quarter, and it's helpful both with respect to lapsed guest activation, also getting folks to try new things that are on the menu. And then we've also sent a couple of offers to the entire base that have had a really nice response. And that was a bit of an upside for us in the third quarter.

Great. Just a follow-up on the fourth quarter comp. So the full year comp guidance of down 1% to down 1.5% imply a pretty big decrease in the fourth quarter, both on a 1-year and 2-year basis. Curious, how is the quarter-to-date comp look like and any color on that?

Yes. We're not going to comment on any Q4 comp information other than what you just said, Ella. I will say, though, when you look at what we're lapping in Q4 of last year, we did have a positive comp . So we have a little bit tougher lap coming into Q4, and there's still a lot of unknowns. I mean you all see what's going on in the industry. So it's very fluid right now. We do have a large seasonal catering business here in our core as well. So that can be impactful to us in Q4. So still some unknowns for us, but we feel comfortable about the guide that we put out there.

Thank you so much.

Our next question comes from Dennis Geiger with UBS. Please proceed with your question.

Hi. This is Paul Hao on for Dennis. Thank you so much for the question. I guess my first question is more of a clarification. I understand you don't want to talk about anything about 4Q trends. But just curious if you could provide some color on the comp cadence through third quarter and how did sales and traffic trend exiting like towards the end of the quarter?

And then just a follow-up, I'm wondering if you could elaborate a little bit more on what you have seen in terms of consumer behavior and if there's any notable shifts that you'd like to highlight by either age or income cohorts? Thank you.

Yes. When you look at intra-quarter trends, Mike mentioned we pulled some Portillo's Perks levers. So when you look at, in July, we ran $1 hotdog week offer. In September, we ran a 50% cheeseburger week offer. And so those were more impactful versus, say, a August comp performance, but that was obviously driven by levers that we pulled with the Portillo's Perks program. And so that's just a little bit of intra-quarter color.

There's always, in September, you have more pressures, but I think we did a nice job of pulling some of those levers with the Perks program to help mitigate some of those pressures, which is why our comp performance came in a little bit better than what we were projecting.

In terms of the consumer, I think you all see what we see. It continues to be a very fluid situation. It continues to be pressured, but it's something that we've been facing all year, and we continue, like the rest of the industry to do what we can to mitigate some of those headwinds.

Our next question comes from Jim Salera with Stephens Inc. Please proceed with your question.

Good morning, This is Tyler Prause on for Jim. Thanks for taking our questions. Just kind of a follow-up to the last question to get started. Several of your QSR competitors have called out an outsized impact from the Hispanic and younger consumer cohorts. Just curious if you saw any noticeable step change during those cohorts during the quarter.

Yes, Tyler, we did not see anything that I would call out as noticeable. We've continued to call out just some pressures that we've had, specifically in our drive-thru channel. I'd say that was a little bit more pronounced in Q3 versus some of the other channels, but nothing specifically with like a Hispanic or other consumer cohort that I would call out.

Great. That's helpful. And just kind of shifting gears here. You previously called out more of a focused marketing effort in Texas. Can you talk a little bit how that's going? And additionally, with Portillo's now in several unique markets such as Arizona, Texas, Florida and soon to be Georgia, which are effectively at different stages of awareness building, how are you developing a cohesive marketing message to communicate to these different markets effectively?

Yes. It's a great question, Tyler. And I think at a couple of levels. First, tactically, we're pulling just about every lever that we know how in Texas to try and get people to try more Portillo's. It's really the kind of thing where we build our brand by people experiencing it. So everything that we can do to get folks to give us a try from sampling events to offers that we make through the Perks program to some market-wide offers that we're trying in Dallas and we'll be shortly employing in Houston.

All those things help to get us our first visit, and I think that's important to get the ball rolling. And that's really the way that Portillo's has built the brand in every market going back to Chicago for the last 40 or 50 or 60 now years.

I do think there's a germ of a big idea that you also referenced in your question about how we have a cohesive program for new markets. We really have not ever sort of cracked the code on communicating what Portillo's is all about to people who have never heard of us before.

We really rely on the Chicago expatriate community to drive our sales in new markets. And they do a great job. The first couple of restaurants we opened in a market just, we can't keep up with all the demand. People drive for hours to get to those restaurants. But we need to have a clearer way to communicate to folks who have never heard of Portillo's before and don't know somebody from Chicago, what's so great about it.

And you heard somebody mention Denise, who's our new CMO. She's working on that. And it's not the kind of thing that's going to happen overnight, but it is something that we'll be developing over the course of 2026 so that as we go to new markets like Atlanta and beyond, we've got another way to get people to try Portillo's and experience it.

Very helpful. That's all from us now.

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