10-K: Portillo's Inc. Reports 4.5% Revenue Increase in Fiscal Year 2024, Plans Expansion

Portillo's Inc. announces a 4.5% revenue increase for fiscal year 2024, driven by new restaurant openings and strategic growth initiatives, while outlining plans for further expansion and menu innovation.

Summary

• Portillo's Inc. reported a 4.5% increase in total revenue for fiscal year 2024, reaching $710.6 million, compared to $679.9 million in fiscal year 2023.
• The revenue growth was primarily driven by the opening of 10 new restaurants in fiscal year 2024 and 12 new restaurants in fiscal year 2023.
• Same-restaurant sales decreased by 0.6% in fiscal year 2024.
• Operating income increased to $58.0 million, and net income rose to $35.1 million.
• The company opened 10 new restaurants in fiscal year 2024 and plans to open 12 new restaurants in fiscal year 2025, focusing on the Sunbelt region.
• Portillo's aims to increase its number of restaurants by approximately 12% to 15% annually over the long term.
• The company is actively sourcing sites in Georgia, Colorado, Nevada, North Carolina, and South Carolina.
• The company's team member base consisted of 8,512 team members as of December 29, 2024.
• The company is pursuing litigation to set aside union election results at its commissaries in Addison, IL and Aurora, IL.
• The company estimates its obligation for future payments under the Tax Receivable Agreement totaled $324.6 million as of December 29, 2024.

Sentiment

Score: 7

Explanation: The document presents a balanced view with positive growth metrics offset by risks and challenges. The company is expanding and innovating, but also faces economic and competitive pressures.

Positives

• Total revenue, operating income, and net income all improved versus the prior year.
• Commodity inflation stabilized compared to 2023 levels.
• The company is targeting 11% to 12% revenue growth and flat to 2% growth in same-restaurant sales in fiscal year 2025.
• The company is prioritizing strategies to drive higher traffic and mix at its restaurants while optimizing returns and retaining top talent.
• The company is enhancing its benefits package by transitioning its 401(k) plan and upgrading medical, dental, and vision plans.
• The Heart of Portillos Fund raised over $200,000 to provide emergency assistance to team members.

Negatives

• Same-restaurant sales decreased by 0.6% in fiscal year 2024.
• The company is pursuing litigation to set aside union election results at its commissaries in Addison, IL and Aurora, IL.

Risks

• The company is vulnerable to changes in economic conditions, increases in food and commodity costs, and consumer preferences.
• The company may fail to open new restaurants or establish new markets, or its new restaurants may not perform as well as anticipated.
• The company faces significant competition for guests, and its inability to compete effectively may affect its traffic, sales, and operating profit margins.
• Damage to the company's reputation and negative publicity could have a material adverse effect on its results.
• The digital and delivery business, and expansion thereof, is uncertain and subject to risk.
• The company has a limited number of suppliers and distributors for certain key ingredients.
• Any prolonged disruption in the operations of the company's two commissaries could harm its business.
• The company depends on its executive officers and certain other key team members, the loss of whom could have a material adverse effect on its business.
• Failure to maintain the company's corporate culture as it grows could have a material adverse effect on its business.
• Matters relating to employment and labor law could have a material adverse effect, result in litigation or union activities, add significant costs, and divert management attention.
• The company is exposed to risks associated with leasing property, including long-term, non-cancelable leases and potential inability to renew expiring leases.
• The company's business is subject to risks related to its sale of alcoholic beverages.
• An impairment in the carrying value of the company's goodwill, indefinite-lived intangible assets, or long-lived assets could have a material adverse effect on its business.
• Natural disasters, unusual weather conditions, pandemic outbreaks, political events, war, and terrorism could disrupt the company's business and result in lower sales, increased operating costs, and capital expenditures.
• The increasing focus on environmental sustainability and social initiatives could increase the company's costs, harm its reputation, and adversely impact its results.
• The company's inability or failure to execute on a comprehensive business continuity plan at its Restaurant Support Center following a disaster or force majeure event could have a material adverse impact on its results.
• The company's level of indebtedness could have a material adverse effect on its business and limit its ability to plan for or respond to changes in its business.
• The interests of Berkshire may conflict with the company's interests or the interests of the holders of its Class A common stock in the future.
• Delaware law and the company's organizational documents, as well as its existing and future debt agreements, may impede or discourage a takeover, which could deprive investors of the opportunity to receive a premium for their shares.
• The company is a holding company, and its principal asset is its ownership of LLC Units in Portillos OpCo.
• In certain circumstances, Portillos OpCo will be required to make distributions to the company and the other holders of LLC Units, and those distributions may be substantial.
• The company's organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the TRA Parties that will not benefit holders of its Class A common stock to the same extent that it will benefit the TRA Parties, including substantial cash payments.
• The company will not be reimbursed for any payments made to the TRA Parties under the Tax Receivable Agreement in the event that any tax benefits are disallowed.
• The company's business and operations could be negatively affected if it becomes the target of any securities litigation or shareholder activism efforts, which could cause it to incur significant expenses, hinder execution of its growth strategy, and impact its stock price.
• The failure to protect and maintain the company's intellectual property, including its trademarks, could have a material adverse effect on its business.
• Security breaches, system interruptions, material failure of the company's system, or complications with the implementation or usage of its new enterprise resource planning system could disrupt its operations, compromise confidential personally identifying information, subject it to loss, harm its business, and have a material adverse impact on its business, financial condition, and results of operations.
• The rapid development and integration of artificial intelligence ('AI') and emerging technologies into the company's processes poses risks to its business.
• Failure to comply with existing and new federal and state laws and regulations relating to privacy, data protection, advertising, and consumer protection could have a material adverse effect.
• The company is subject to many federal, state, and local laws with which compliance can be both costly and complex.
• Tariffs and other trade policies could have a substantial impact on the company's business.
• The company can incur liabilities arising from environmental laws, and compliance with environmental laws could increase its operating expenses.
• The company could be party to litigation that could distract management, increase its expenses, or subject it to material monetary damages or other remedies.
• As a public company, the company incurs significant costs to comply with the laws and regulations affecting public companies, which could harm its business and results of operations.
• If the company fails to maintain effective internal controls over financial reporting, or if its internal controls are ineffective, its ability to produce timely and accurate financial information or to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could be impaired.
• Fluctuations in the company's tax obligations, effective tax rate, and realization of its deferred tax assets may result in volatility of its results of operations.
• The company's insurance may not provide adequate levels of coverage against claims.
• Changes in accounting principles applicable to the company could have a material adverse effect on its results.
• The company's amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions that may be initiated by its shareholders, and designates the federal district courts of the United States as the sole and exclusive forum for claims arising under the Securities Act, which, in each case, could limit its shareholders' ability to obtain a favorable judicial forum for certain disputes.
• The company's annual and quarterly results of operations may fluctuate, and if its operating and financial performance in any given period does not meet the guidance that it has provided to the public or the expectations of its investors and securities analysts, the trading price of its Class A common stock may decline.

Future Outlook

In fiscal 2025, the company is targeting 11% to 12% revenue growth and flat to 2% growth in same-restaurant sales. The company expects overall commodity inflation to stay consistent with recent trends and is currently estimating commodity inflation to be 3% to 5%. Additionally, the company anticipates additional wage investments and is currently estimating 3% to 4% hourly wage inflation.

Management Comments

• We believe this improvement stemmed from maintaining concentration on our four strategic pillars, which guide our short-term objectives and form the basis for long-term growth as discussed in Part I. Item 1. Business.

Industry Context

The restaurant industry is highly competitive and fragmented. The company competes primarily with quick service and fast casual concepts, and to a lesser extent, full-service restaurants. The number, size and strength of competitors vary by region.

Comparison to Industry Standards

• The average Portillos generates per-restaurant sales that sit far atop the fast-casual and limited-service restaurant segments.
• The company aims to keep its average unit volumes ('AUVs') high via discerning market and site selection.
• The company is continuously refining its restaurant prototypes while investing in existing restaurants to drive great guest experiences and great returns.
• The company aims to have minimum efficient scale (6-8 restaurants) in new markets within 24 months of its first opening.

Legal Proceedings

• Certain of the company's team members at its commissaries in Addison, IL and Aurora, IL voted in favor of being represented by a union.
• The company filed objections to the 2023 election with the National Labor Relations Board ('NLRB') on April 19, 2023, asserting that the union and its agent's promises prevented a free and fair election.
• The company filed an objection to the 2024 election with the NLRB on May 7, 2024, asserting that the promises made by the union and its agents prevented a free and fair election.

Related Party Transactions

• In connection with the secondary offering, the company purchased LLC Units and shares of Class A common stock using the proceeds of the secondary offering at a price equal to the public offering price less the underwriting discounts and commissions from certain pre-IPO LLC Members and shareholders of the Blocker Companies, including from funds affiliated with Berkshire Partners LLC, which is its controlling shareholder that beneficially owns approximately 18.8% of the company as of December 29, 2024.

Stakeholder Impact

• The company's performance and strategic decisions impact shareholders, employees, customers, suppliers, and creditors.
• The company's growth plans and investments in team members aim to create value for shareholders and a positive experience for employees and customers.

Next Steps

• The company plans to open 12 new restaurants in fiscal year 2025.
• The company will continue to strategically offset expense increases through menu price increases and operational efficiencies.
• The company will launch its Portillo's Perks TM loyalty program in 2025.

Key Dates