Q3 2026 Portillo's Inc. Earnings Conference Call - PORTILLO'S INC

Explicit Guidance:

• FY2026 Revenue: $768 million to $773 million (includes expected closures of underperforming restaurants outside Chicagoland).
• FY2026 Adjusted EBITDA: Raised to $98 million to $101 million (previously lower guidance, now includes mid-single-digit commodity inflation, low-single-digit labor inflation).
• FY2026 Restaurant-Level Adjusted EBITDA Margin: 20% to 20.5%.
• FY2026 G&A Expense: $80 million to $82 million.
• FY2027 Guidance: To be provided in January 2027; currently targeting annualized run-rate efficiencies of $10 million to $15 million.
• Share Count/Dividends/Buybacks: No specific guidance provided; priority is debt reduction using excess cash.

Business-Segment Outlook:

• Unit Growth: 4 to 6 new restaurant openings planned for 2027; total of 8 openings expected in FY2026.
• Portfolio Rationalization: Expect to close a mid-to-high single-digit number of underperforming restaurants outside Chicagoland, with most closures occurring in FY2026 Q4; expected to generate material cash and non-cash charges in Q4 2026.
• New Prototype: Introduction of 2028 prototype (approx. 4,600 sq ft, >40% smaller than previous average, requiring ~1.5 acres) designed to lower capital investment and improve throughput.
• Same-Store Sales (SSS): Targeting 2% to 3% annualized SSS growth; FY2026 Q4 SSS embedded in total sales guidance, with Q4 YTD running ahead of Q3.
• Unit Growth Ramp: Plan to ramp new restaurant growth to a high-single-digit percentage over the next three years.
• Unit Economics: New restaurants expected to deliver cash-on-cash returns >20% and target 21% restaurant-level EBITDA margins.
• Catering: Q4 expected to be strong, running ahead of or in line with prior year; strategy assumes holding Q4 catering performance steady in guidance.
• Loyalty & Marketing: Full assessment of "Perks" loyalty program underway to simplify and increase engagement; targeting two distinct millennial audience segments to drive frequency.

Market and Competitive Outlook:

• Demand Trends: Brand research confirms strong emotional connection and "fanaticism" among guests, particularly outside Chicagoland; focus on "earned" growth rather than discount-driven volume.
• Pricing Strategy: Anticipating menu price increases at inflation or better; reliance on innovation (e.g., LTOs like Chardonnay dog, Dr. Pepper Shake) to drive transactions without deep discounting.
• Competitive/Operational: Addressing cannibalization risks by implementing stricter site selection to avoid infill over-density in new markets; moving away from broad marketing to targeted segmentation.
• Supply Chain: Continued elevated beef costs expected to drive mid-single-digit commodity inflation in FY2026; recent food cost improvements driven by higher average checks and waste reduction rather than price cuts.

Macro / Industry Outlook:

• Commodities: Expecting mid-single-digit inflation, primarily driven by beef.
• Labor: Expecting low-single-digit labor inflation; improvements expected through hourly labor efficiencies and model adjustments in lower-volume units.
• Real Estate: Shift to rigorous, data-driven site selection; abandoning growth for growth's sake; focusing on adjacent markets and high-probability sites rather than rapid expansion in "green" or casual dining-like areas.
• FX/Tariffs: No specific mentions regarding FX or tariff impacts.

Strategic Initiatives:

• Cost Efficiencies: On track to deliver $10 million to $15 million in annualized run-rate efficiencies; specific details to be shared in 2027 guidance.
• Leadership/Structure: Workforce reduction at Restaurant Support Center completed; new executive chef leading culinary strategy; refined regional leadership structure for better field support.
• Technology: Implementing modern marketing technology platform; evaluating tablet tech for drive-through accuracy and equipment for food quality consistency; reinvesting in tech and maintenance of existing portfolio.
• Capital Allocation: Priorities are 1) Reinvest in tech/maintenance, 2) Invest in qualified new restaurants, 3) Use excess cash to reduce net debt (current net debt: $300M; $85M revolver outstanding).
• Expansion Strategy: Balancing infill in existing markets with expansion into strategically adjacent new markets; specific new market examples include Florida (Tampa, St. Pete, Lutz, Brandon) and Georgia (Beaufort).

Risks and Headwinds to Outlook:

• Closures: Expected material cash and non-cash charges in Q4 2026 due to restaurant closures; exact costs and locations not yet finalized.
• Traffic Headwinds: Facing headwinds from last year's breakfast test and heavy promotional discounting; current Q4 facing headwinds from prior year's promotional activities (e.g., free beef sandwich offer).
• New Unit Performance: New restaurants generally entering comp base at lower volumes with expected "honeymoon" period slide.
• Execution Risks: Operational inconsistency across the fleet and lag times on returns for training and operational investments.
• Cannibalization: Risk of sales redistribution from rapid infill in new markets without sufficient brand awareness creation.
• Forward-Looking Statement Caveats: Management does not update forward-looking statements unless required by law; actual results may vary materially due to risk factors identified in the 10-Q.

Management Tone on the Future:

• Confidence Level: Cautiously optimistic but disciplined; "One quarter is not a trend" regarding Q3 outperformance.
• Strategic Shift: Emphasis on "confronting hard realities" and "earning the right to grow"; significant focus on financial rigor and de-risking capital investment.
• Hedges: Explicitly stating that growth will be balanced with profitability and site economics; no commitment to specific long-term unit counts (previously ~900) until data is finalized.
• Responsiveness: Management acknowledges previous over-extension in new markets and signals a fundamental change in site selection rigor and marketing precision.

Miscellaneous:

• Conference Dates: Stevens Conference (Nov 17) and Morgan Stanley Conference (Dec 1).
• New Hire: Kevin Kalachak joins as CFO; Brett Patterson (CEO) and new leadership team leading strategic reset.
• Innovation Pipeline: Culinary team launching new items (e.g., Chardonnay dog, Oreo dessert) to drive traffic without discounting.
• Revenue Driver: Q3 revenue growth driven by $10.3M from non-comparable new restaurants and 1.4% SSS.