Portillo's Inc.

and welcome to the Portillo's third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Kyle Nelson, Vice President of Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our fiscal third quarter 2024 earnings call. You can find our 10Q earnings press release and supplemental presentation on investors.portillos.com. With me on the call today is Michael O'Sonlu, President and Chief Executive Officer, and Michelle Hook, Chief Financial Officer. Any commentary made here about 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 open the lines for your questions. Now, let me turn the call over to Michael Osunlu, President and Chief Executive Officer at Portillo's. Thank you, Kyle.

Good morning, everyone, and thank you for joining today's call. We grew the top line by 7% as we continued expanding in Texas and the Sun Belt. We sustained margins, and our earnings engine remains strong. But like others in the industry, we're up against macroeconomic headwinds, and the price wars in quick service, fast casual, and even casual dining are very real Q3 comp sales growth was challenged by this rampant discounting and Portillo's doesn't play the discount game we compete on great everyday pricing for our craveable food and abundant portions and we know this approach will benefit us in the medium and long term we also know every time we've invested in advertising we've seen a benefit to traffic this was again evident in our recent Chicagoland advertising campaign But the noise created by the restaurant price wars and the election season reduced the overall positive impact. As a result, this campaign didn't achieve the same incrementality we saw in Q4 of last year. Based on everything we've observed, we now expect full year comp sales to be approximately negative 1%. While challenged on the top line, I'm very proud of how our team is protecting margins and driving cash flow. They did a great job of controlling labor and food costs to achieve 23.5% restaurant level margins. And I'm especially proud of how we've managed G&A to achieve adjusted EBITDA growth. Our adjusted EBITDA of 27.9 million reaffirms that we know how to pull the right levers to protect the bottom line. But we also know we need to reverse the negative comp sales trend and drive momentum in our business. And the path forward always comes back to our strategic pillars. First, let's talk about how we're innovating and amplifying the Portillo's experience through technology. Last quarter, we announced a pilot program for kiosks. We deployed and tested them in two restaurants in August. Now, this test was a resounding success with minimal upfront costs and immediate guest adoption. We were so pleased with the results that we quickly expanded the program And as of today, we now have kiosks deployed in all of our restaurants, and we'll get that benefit going forward. I love making Portillo's more frictionless. It's undeniable that our guests love using the kiosks. At the same time, it's undeniable we have guests who love ordering with our front cashiers. No matter how guests want to interact with Portillo's, we're meeting them where they want. It's early. but we're already seeing similar benefits from kiosks as other brands have experienced. As we continue to learn and grow with them, we aim to enhance these benefits even further. We expect to be able to quantify the kiosk impact early next year. Also next year, we'll pulse advertising in Dallas-Fort Worth as we scale up. The ad campaigns will educate and reintroduce even more guests to Portillo's. Previous ad campaigns and new markets have all driven meaningful traffic lifts, and we're confident Dallas will respond similarly. Our second strategic pillar focuses on building restaurants with industry-leading returns. I'm excited to share that last month, we opened our first Houston-area restaurant in Richmond, Texas. This marks a significant milestone as we expand further into Texas in the Sun Belt. The reception in Houston has been incredible. Richmond sales are in line with what we observed two years ago in The Colony, our first Dallas area restaurant. It's clear guests are just as excited to see us in Houston as they were in Dallas. And we remain on track to open 10 restaurants this year. We have an exciting pipeline next year that will grow our restaurant count by 12 to 15%. It's equally exciting is how we're refining our development model. We've already made strides to reduce the size of our restaurants. Later this quarter, our first two Restaurant of the Future builds at 6,200 square feet will open in Texas. These smaller, more efficient restaurants will still look beautiful and maintain their local flair, but they will be 1,500 square feet smaller. We expect them to come in at the low end of our net construction cost range of 5.2 to 5.5 million, and we will be using this prototype for all of our 2025 bills. As we continue to expand, our priority remains finding great locations where new restaurants can thrive. To further optimize our cash on cash returns, we'll explore different building and real estate structures. We'll continue to take square footage out of our restaurants. We'll seek increased tenant allowances on our leases And we'll explore build-a-suit and reverse-build-a-suit opportunities. Ultimately, we build great restaurants in the best locations for Portillo's while bolstering our returns. Our other strategic pillars remain just as crucial, running world-class restaurants with great people and continuing to refine operations to support long-term success. We're committed to developing our teams, strengthening operations, and creating memorable guest experiences that differentiate us in the crowded restaurant landscape. That's how we win. Despite the top-line challenges we encountered this quarter, I want to reiterate that we control the levers that matter most. We know how to weather difficult periods while staying focused on profitability. We will not compromise our long-term health for short-term benefit, and we're confident in the actions we're taking to address current trends. We're excited about the future, whether it's the benefit of kiosks, our real estate momentum, or the improvements we're making to our restaurant operations. There's still work to do, no question, but I remain confident we're on the right path. In this tumultuous environment, we're still generating cash flow, we're still funding all of our own growth, and we're still in a strong financial position. Our team is focused, energized, and ready to drive the business forward. Thank you. And with that, I'll turn it over to Michelle to walk through the financials in more detail.

Great. Thank you, Michael, and good morning, everyone. In Q3, revenue growth was driven by the opening of new restaurants. During the third quarter, revenues were $178.3 million, reflecting an increase of $11.4 million, or 6.9% compared to last year. Restaurants not in our comparable restaurant base contributed $13.6 million of the total year-over-year increase. These increases in revenues were partially offset by a same restaurant sales decrease of 0.9%, which drove revenues down 1.4 million in the quarter. The same restaurant sales decrease was driven by a decrease in transactions of 3.5%, partially offset by an increase in average check of 2.6%. The higher average check was driven by an approximate 4.4% increase in certain menu prices, partially offset by product mix. Revenue was also negatively impacted by $1 million in the third quarter due to the shifting of comparable weeks. Comp on a two-year stack basis was 2.9%. Despite softer comp sales during the quarter, the kiosk rollout has been a win. We see a positive impact on our ticket driven by higher attach rates, especially on add-ons such as cheese sauce, peppers, fries, and drinks. We did not take any pricing actions this past quarter and we're at an effective price increase of just over 4%. We have no plans to take pricing during the fourth quarter, which will keep our pricing levels consistent with the third quarter. As we look to the fourth quarter, we expect our revenue growth to continue to be driven by the opening of new restaurants. We opened our first restaurant in Houston in October and plan to open five additional restaurants this year, all in December. Given the softer comp trends and the discounting environment, we are now targeting negative comparable sales of approximately 1% for full year 2024. Moving on to our costs. Food, beverage, and packaging costs as a percentage of revenues increased to 33.7% in the third quarter of 2024 from 33.3% in the third quarter of 2023. This increase was primarily due to a 3.6% increase in commodity prices partially offset by increases in our average check. In the third quarter, we experienced increases in produce, chicken, and dairy products. We are still estimating commodity inflation in the mid-single digits in 2024. Labor as a percentage of revenues increased to 25.8% in the third quarter of 2024 from 25.5% in the third quarter of 2023. The increase was due to lower transactions and incremental wage and benefits to support our team members, partially offset by an increase in our average check. Hourly labor rates were up 2.8% in the third quarter of 2024 and 3% year to date versus the prior year periods. We now project labor inflation to be approximately 3% for full year 2024. Other operating expenses increased 2.5 million or 13.4% in the third quarter of 2024 compared to the third quarter of 2023, which was primarily driven by the opening of new restaurants and an increase in repairs and maintenance, partially offset by a decrease in insurance expense. As a percentage of revenues, other operating expenses increased to 11.8% from 11.1% in the prior year. Occupancy expenses increased 1 million, or 11.7% in the third quarter of 2024, compared to the third quarter of 2023, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.2% compared to the prior year. Restaurant-level adjusted EBITDA increased 0.1% to 41.9 million in the third quarter of 2024. Restaurant-level adjusted EBITDA margins were 23.5% in the third quarter of 2024 versus 25.1% in the third quarter of 2023. This reflects a decline of 160 basis points year over year. Year to date, restaurant level adjusted EBITDA margins were 23.4%, which is 90 basis points lower than prior year. Despite softer sales, these margins reflect how disciplined we've been with managing our costs. We are still estimating our restaurant level adjusted EBITDA margins to be in the range of 23 to 24% in 2024. Our general and administrative expenses decreased by $0.6 million to $18.3 million or 10.3% of revenue in the third quarter of 2024 from $18.9 million or 11.3% of revenue in the third quarter of 2023. The decrease was primarily driven by lower variable and equity-based compensation, partially offset by an increase in advertising expense of $1.1 million. We will continue to invest in advertising in the fourth quarter this year, as well as other strategic initiatives, but we'll remain disciplined in our investment approach. We are now estimating G and A expenses to be between 78 million to 80 million in 2024. Pre-opening expenses decreased 0.7 million to 1% in the third quarter of 2024 from 1.4% in the third quarter of 2023. The decrease was due to the number and timing of executed and planned new restaurant openings. All this led to adjusted EBITDA of $27.9 million in the third quarter of 2024 versus $27.3 million in the third quarter of 2023, an increase of 2.3%. Below the EBITDA line, interest expense was $6.5 million in the third quarter of 2024, a decrease of $0.1 million from the third quarter of 2023. This decrease was driven by a lower effective interest rate, partially offset by additional borrowings on the revolver facility. As of today, our outstanding borrowings under the revolver are 22 million. Our effective interest rate on the 2023 term loan and revolver facility is 8.3% versus 8.5% for 2023. Income tax expense was 2.5 million in the third quarter of 2024. Our effective tax rate for the third quarter was 22.4%. We continue to expect the full year tax rate to be approximately 21 to 23%. Cash from operations increased by 34.3% year over year to 72 million year to date. We ended the quarter with 18.5 million in cash. Despite the sales softness we experienced during the quarter, We continue to deliver healthy margins and generated more adjusted EBITDA than the prior year, highlighting the durability and cash generation of our brand. We continue to believe that we are well positioned with our balance sheet to support our growth and new restaurant openings this year and beyond. Thank you for your time. And with that, I'll turn it back to Michael.

Thanks, Michelle. We're operating in a tough market. Brands are discounting heavily and engaging in price wars to chase short-term sales. That's not the path we will take. We're focused on protecting our margins and preserving cash by staying disciplined and pulling the right levers. We know who we are, and we won't compromise our brand by going on sale or compromising on quality. Our strategy is rooted in long-term success, not quick fixes. We'll continue to invest in our amazing people, strengthen operations, and fuel smart growth. We're profitable, we're controlling what we can, and we're positioned to emerge from this economic cycle even stronger. We're very confident in our ability to turn momentum in our favor and deliver lasting, long-term results. Thank you.

Thank you. We will now be conducting a question and answer session.

If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Your first question comes from Sharon with William Blair. Please go ahead. Hi, good morning.

I guess, Tina, as you were talking, Michael, clearly one way to communicate value would be through a loyalty program, and I think I think last call you were talking about some initial forays into exploring that. So if you could maybe update your thoughts on loyalty. And also, I don't think you updated any comments around kind of speed of service at the drive-through, which I know is also a focus. So if you could give us some update on that. Thanks.

You bet. Thanks, Sharon. So on loyalty, great question. We are continuing to work on this behind the scenes. I'm very fortunate. pleased with the progress the team is making. And I look forward to making an announcement early next year on loyalty. Our philosophy is we'd rather announce something when it's done and we're rolling it out as opposed to sort of pre-announce that we're doing something. But early next year, we're looking forward to making an announcement. And then with regard to ops, I feel great about the progress. I think we've captured most of the low-hanging fruit and we're seeing that benefit. But I think it's undeniable that the pressure for us is there's a lot of pressure in the drive-through. That's where we primarily compete against QSR. And so I want more out of our drive-throughs. So I do want to see continued progress and continued momentum on the little things that we can do to be better. So in this environment, it's all the little things that we have to get better at. Over the last three or four months, the low-hanging fruit, good. Now it's a little bit more of the complicated stuff that we've got to fix.

Thank you. Next question, David Tarantino with Baird. Please go ahead.

Hi. Good morning. Just a clarification question on how you're thinking about the fourth quarter. So, you know, I know the full year guidance implies not much improvement in the comps and you mentioned having kiosks now fully rolled out. So just wondering if you could reconcile those two things since it sounds like the kiosks is adding some positive benefits to the comps. So, you know, could you help us kind of understand the puts and takes around the implied fourth quarter outlook?

Yeah, David, it's a good question and you're absolutely right. We aren't anticipating in that guide, significant improvement in Q4, particularly as we have a month under our belt. And so we are seeing improvement in the mix. You saw a little bit of that in Q3 with the improvement in mix from prior quarters. But we're still seeing the impacts of the macro and the discounting on the traffic. And so as we sit here today, we don't see that significantly improving. And so I think it's largely you know, what you're seeing and what you saw in Q3, maybe a little bit improvement. On next in Q4 is we have that kiosks, the kiosks rolled out now. You know, but as Michael and I sit here, there's still a lot of unknowns, David, as we roll into November and December. As you know, you know, we have a heavily dependent catering business. You know, our comp is still, we still have 70 restaurants in the comp base. Most of those are in the Midwest. And so we had really good weather last year. We were rolling over our advertising campaign in Q4. So we just want to be a little bit cautious as we go into November and December, knowing that we have those unknowns out there as well in Q4. But that's some of the context around why the guide to negative one for the year.

Got it. Thank you for that. And then, Michael, you mentioned advertising in Dallas, which sounds awfully early in the brand's life cycle to be adding advertising to that market. So can you just maybe talk about why you think that's necessary and what your vision for the impact of that looks like and whether you're reacting to anything or whether this is more proactive brand building?

Yeah, I would characterize it as opportunistic in brand building. So, you know, the reality is that when we turn on the spigot and do some marketing in Dallas. We're going to be looking at eight restaurants. We're going to have, you know, at the back half of the year, it's going to be closer to 10 restaurants. And that is definitely a viable scale to justify advertising and get attractive returns on it. And as thrilled as I am with the performance of our Dallas business, of our Dallas Fort Worth business, it's undeniable that we're still a relative unknown. And so One of the things that's important is as we're growing these markets is to generate trial and awareness. And so I'm thrilled with the direction of Dallas. I love the fact that we're getting to a scale where we can, you know, throw some gasoline on that fire and watch it take off. So that is purely the strategy.

Great. Thank you very much. You bet, David.

Next question, Jim Solera with Stevens. Please go ahead.

Thanks for taking our questions. First, I wanted to ask about, Michael, you mentioned some flexibility on the sizes for some of the new store builds. Can you just talk about what you think would change? Is that shrinking the dining area? Is there reductions in the back of the house that you can make? And just kind of what that would look like.

Yeah, it's a great question, Jim. I'm excited. We're opening the first of what we've been calling Restaurant of the Future restaurants. We're opening those in the next month, and there's three of them coming online. And here's the difference. We went from what's called a standard prototype of 7,800 square feet to now 6,250. We've shaved a bunch of money out of this. And I would say that this restaurant is pivoting towards what consumers want today and tomorrow and in the years to come. It's less reliant on dine-in. We go look at our restaurants. We've done time motion studies, looked at how many cars are in the parking lot at lunchtime and dinnertime. And the truth is that people are pivoting to more and more off-premises dining. So I want these restaurants to still do Portillo's AUVs, but I don't need it all to be in the dining room. More and more people want to take the food off-site. So for Portillo's to be successful, we need a great drive-thru. You need a great momentum for third party and order pickup and digital. And so we have doors on the side of the building with pickup shelves just inside and parking spots dedicated to that. We're pivoting the restaurant to be a slightly different mix than it has been historically. That opens up, we don't need quite as much dining room space. We're being way smarter and more thoughtful about the kitchen. We think that we can continue to consolidate the kitchen, but I don't want it to be a stainless steel box where you're taking hot food out of cabinets. You still want all the excitement of a Portillo's kitchen. You want that food theater. You want to see flames shooting out of the broiler. You want to see people assembling the hot dogs. You want to see the beef coming out of the steam well. And so the balancing act is take away dead space while still providing a Portillo's experience Portillo's vibe, overall, all of those things that note fresh, delicious food made to order. And that's really the 1,600 square feet. We grew up founder-led, some dead space in the kitchen, dead space in the dining room, and I think we've gotten way more efficient. And the important thing is, Jim, we're not done with that. I think one of the things that is clear to me is the amount of dollars that we put into our buildings is still relatively high, and I want to bring that down. And so we're looking at a version 2.0 of Restaurant of the Future that we think can be smaller, and I think we're looking at doing some smart things with landlord financing and other forms of financing so that Portillo's is not necessarily putting all of the capital into the building, but it's more of a shared mindset with our landlords.

That's great. I appreciate all the detail there. Maybe one follow-up question as we're thinking about flexibility on the restaurant side, maybe also on some of the communications to consumers. Typically, your marketing has really been centered on the high quality and really the unique flavor experience of Portillo's. Do you feel that you need maybe more price point marketing or maybe like a value menu or something that can still capitalize on the high-quality consumption experience, but maybe have some everyday value offerings that could also appeal to the lower-end consumer without having to discount the whole menu?

You know, it's funny. We've done a lot of consumer segmentation to understand who our consumer is and why they come to Portillo's. We, unsurprisingly probably, we have a lower percentage of that true value consumer. So we're not quite as reliant on them. And when they come, they tend to come through the drive-through. I think it would be false to who we are to go in that direction. I don't want to get into the discounting business. I don't want a value menu. I think that would be a very, very ugly path for Portillo's. I think that where we have to stick to our guns is we have everyday great value. We have fantastic, high-quality food. We never skimp on quality, and we have abundant portions. Our guests know that, and we continue to reiterate that in all of our marketing. So whether it's digital and whether it's the PR we do, you know, in new markets, Jim, we put a lot of food in people's mouths because I think maybe I'm a dinosaur, but I think that trying our food is the best marketing you can do. And so we spend a lot of time and energy trying putting Portillo's beef sandwiches and hot dogs and burgers and fries and shakes in people's mouths, that's being true to who we are. So I don't want to do short-term things because of short-term economic cycles. I want to make sure we're protecting this brand for the medium and long-term and just avoid like the plague discounting.

Great. I appreciate all the color. I'll back into you.

Next question, Brian Harber with Morgan Stanley. Please go ahead.

Yeah, thanks. Good morning, guys.

Good morning, Brian.

Some of the advertising you did in the third quarter, was that sort of, you didn't change that or anything with regards to timing or amount, did you? Or I don't know if there was any shift there. You know, why do you think that was sort of perhaps, I guess it was just the value environment, but any other reasons you think it might have been less effective?

No, I think it's, I mean, honestly, it's as simple as that. We did all the testing. The media buy was excellent. The placements were fantastic. Every sort of objective test we did on the advertising said it's phenomenal, it's breakthrough, et cetera, et cetera. It's just that in a landscape where everybody is screaming, here's a bag of food for five bucks, here's a bag of food for six bucks, all of that, and then with the plethora of political campaigns, I think it just muted the positive impact of it a little bit. And I don't want to lose focus. It was still positive, and it was still a very rational, good business decision. It just wasn't quite as positive as the marketing that we did last year, despite the fact that I think objectively it was better by better creative, better marketing. So I think that that's just That's an idiosyncratic thing that I'm not going to get too torqued up about.

Okay. Yeah, it makes sense. Michelle, I don't know if as we go into next year, if you have sort of a view yet on cost inflation, if it's sort of status quo and, you know, where you think what you think margins will look like directionally next year.

Yeah, Brian, I'll give a little bit more color in January when we're at ICR and what our guides look like for 25. We're obviously putting together plans as we speak. But on the surface, I don't expect it to be significantly inflationary compared to this year as we go into 25. I think on the food side, we'll still see some pressures on the beef. And as you know, you know, that's over 30% of our basket. And so I think that'll still apply some pressure to us next year. I think labor will continue to be, you know, relatively moderate as we go into next year. But I'll give you some more color in January. Thank you.

Yep. Next question, Chris O'Call with Stiefel. Please go ahead.

Hey, good morning, guys. This is Patrick on for Chris. Michael, I was hoping you could outline and hopefully prioritize how you're thinking about the levers you have to drive improvements in the transaction performance from here, you know, just particularly as we get into next year.

Yeah, I think it's honestly fairly consistent with what I said just a few minutes ago. The number one thing is we need to be more efficient in throughput. And so We've made some great progress on the drive-thru. There's more to go. We've made some progress inside. There's more to go. I love the kiosks. I think that the kiosks are undeniably going to improve both mix and transaction. And I'm just so proud of our team for getting them all rolled out so quickly. So I think those fundamentally will drive transaction volume. You know, one of the things we've always got to be cautious about is Our AUVs in Chicagoland are over $11 million. So just let's think about that for a second. In a marketplace that has negative population growth. So that's the bulk of my comp base. And trying to grow transactions on an $11 million box and a negative population growth is a very tall task. So flattish transactions in Chicagoland are great. and it's one of the reasons why we're so aggressively growing across the Sun Belt, markets like Texas, Florida, Arizona, where there's latent population growth, and it's a little bit easier to capture some transaction growth, but the fundamentals of our business are really simple. Be fast and efficient. Make sure that you're doing a great job both in the drive-through and dine-in operationally, and then be very, very smart about deploying technology and capabilities to help. I think Kiosks are going to help. I think Sharon asked a while ago about a loyalty program. I'm excited to do something in that space early next year. I think that will help. And I also think that prudent, timely marketing. So, you know, doing some creative marketing in Texas, and especially as those restaurants start to hit the comp base, that will help.

Great. That's helpful. And then I had a follow up on the new unit question that was asked a few minutes ago. I mean, it's great that the company has been able to reduce the investment in new units. And I understand that you're shifting the square footage around to maximize the channels that are becoming incrementally more relevant or more used. But can you dig a bit deeper into how confident you are that the changes don't lead to lower sales volumes? And just how have you gotten comfortable with the idea that you still got the productive capacity you need in the units?

It's a great question, and it's one of the things that we spent a lot of time working out before we started building this particular version of Restaurant of the Future. When we do this, we mock up a kitchen. We set a bunch of operators in there, and for us, maybe it's audacious, but we like to think that our restaurant's have the capacity of doing $200,000 a week, right? That gets you to a fully matured Portillo's that does 10 million AUVs. That to us is what we need to be able to do. $200,000 a week, what that means is you're doing a $40,000 Friday. It means you're doing $5,000 hours at 11, 12, and 1. $5,000 hour means this many beef sandwiches, this many fries, this many hot dogs, this many burgers. We mock up the kitchen. We work it. And we go back and forth and our operators ultimately have a veto on whether or not the space they have, the equipment they have, can allow them to produce at a level that is necessary for Portillo's. And so what I'm really thrilled about is we've gone through that exercise, we had a healthy, constructive tension on what we need in the kitchen, and we landed at a place where the operators are happy, my CFO is happy, and my marketing and strategy team who represent the voice of the customer, they're all happy. They say, yeah, this kitchen's gonna be beautiful. Michelle tells me that the kitchen's gonna make great economic sense for our investors, and my operators say, yeah, we can run this kitchen, and we can do the volumes that we need to do. So I'm thrilled to see how they perform, because they're opening up in the next weeks, and they're gonna be, they're in great locations in Texas, So it's going to be interesting to see what they do.

Yeah, I'll just jump in real quick, Patrick. So we put these numbers out there before. So we've, as you know, been targeting a 25% cash on cash return. So with the build cost for those restaurants down to five, two to five and a half, the sales required to get that 25% cash on cash return is And so I just want to make sure everyone understands the economics around that and the sales that are required to get the return. But to Michael's point, we believe that a Portillo's is going to be able to achieve beyond that, right? And so that's why, you know, I was very involved with the project and just making sure that we were not limiting the volumes that we could do. because we've even seen, and we put this stat out there, in the Sunbelt markets, we're doing above $6 million AUVs. So we don't want to limit ourselves, and as these restaurants continue to grow, which they are, to Michael's point, we believe that they can do Portillo's volumes.

Appreciate the color. Thanks, guys. You bet.

Next question, Brian Mullen with Piper Sandler. Please go ahead.

Thank you. Can you just talk a little bit more about the entrance into Houston, how that's going so far? And is there anything you learned from either the initial Dallas opening or even subsequent openings that you will be thinking about or that will inform you as you continue to scale in that Houston market?

Yeah. I mean, look, we're thrilled with the first restaurant in Houston in Richmond. As I said earlier, it's performing exceptionally well, frankly, above our expectations. But it's the first in market. We know that it's going to do that. We know that it's got... The first Portillo's in market tends to have an extraordinarily large catchment. People come from everywhere. One of the things I think that we have improved in how we're doing things is we're opening two more in Houston in the next month and a half. And that's actually important because I don't want to kill this restaurant with extraordinary volumes. I'd like to spread it out a little bit and have momentum as we build in Houston so that all the restaurants are growing sort of organically, and I have less of a spike come down, the others come in. And so we're doing that. We, I think, have gotten really smart and sharp in our field marketing tactics and how we generate awareness in local markets. We're being very thoughtful about generating sort of nonprofit activities, local activities, really becoming a part of the fabric of the community. And so that's really, those are the keys to success. Richmond is great. It's not going to be our best Houston location. We're opening in Katy and other places in Houston shortly, which will actually, I think, outperform Richmond. It's just better real estate, better location, better densities, better population. So we're really excited by Houston. And I guess it's worth saying that Houston is also a little bit of a menu test right now. We are looking at a slightly rationalized menu to take a lot of complexity out of our kitchens and see how that performs in Houston. And thus far, we're learning a lot, but it's working really, really well. Thank you.

Next question, Sarah Sanatori with Bank of America. Please go ahead.

Thank you. Just a couple of follow-ups. The first is, I guess, to clarify, Michael, your comments about Houston and the idea of trying to make the, I think what you're saying, sort of the curve for the new restaurant in Richmond look a little bit less steep or perhaps different from the colony. So I guess that's one question, which is, are you broadly seeing, um, you know, similar curves over the first couple of years of the stores outside of Chicagoland and in particular with Richmond is the expectation that maybe you don't get quite as much, um, you know, that's maybe, uh, you, you've sort of, um, flattened the curve a little bit or, or that's the goal. Uh, just because I know in, in the past, sometimes it's been hard for us to, to, uh, to model that. And then, You mentioned, you know, next year restaurant count growing by 12 to 15%. I guess, you know, it's been a little bit of a struggle to get unit growth to accelerate the last couple of years. And I think that this year, maybe, you know, instead of 10 plus, you'll have 10. Could you just talk a little bit about what, you know, what, if anything, has changed in development pipeline that sort of allows that now? And then I have one last question for Michelle.

Yeah, good questions. On the second part of your question, what gives me great confidence about next year in particular is that I've got a deal pipeline and leases signed that make me very, very comfortable with the numbers that we've quoted. And when I'm now visiting sites and looking at restaurants, I'm looking at restaurants for the back half of 26 and 27. And The development team that we have is farther ahead than we've ever seen in terms of the pipeline. So I feel great about that. I feel great about where we are from a people and HR standpoint. For us, sort of the most important de-risking of a new restaurant is to have an experienced Portillo's GM there. And our learning and development team have done heroic work in having an amazing pipeline of talent that we can use to populate these restaurants. So I'm excited about 25. And I think that's a fair call out, Sarah, that we are eager to accelerate the growth curve. We are not eager to do it poorly. So we want to make sure we've got great locations and great people, and we're accelerating with the right box size and the box economics. And I think we're awfully close to being able to do that. So- On your first question about the curves, yeah, absolutely. We don't want the crazy spike coming down, stabilizing. I think it was funny having to apologize for the colony doing 10, 12 million because it started off at such a ludicrously high rate. And it caused all kinds of wonkiness in how people looked at our new restaurant revenues. And so I think that we would like to mitigate the volatility of that curve as much as possible, knowing full well that a first-in market to a major market is still going to have a crazy opening. But we do like to mitigate. And I know Michelle wanted to say something about that.

Yeah, I think, Sarah, we're learning curves ourselves, right? And so as the pipeline continues to ramp up specifically, right, when you look at the number of restaurants that we opened in 22, then in 23. You know, 23 obviously was a significant ramp up. You know, we opened three restaurants in 22, and then 12 last year, and then obviously 10 this year. So we're learning these curves as well. And to Michael's point, there's different curves, whether it's a Chicagoland restaurant, as he mentioned, a first in market, it's going to have a steeper honeymoon. Then there's restaurants that we've been very transparent about that are built ahead of growth. that have a very different curve, right? As the markets grow around them, it doesn't really have a curve. And then there's fill-in restaurants. As Michael said, Houston is an example. Richmond is first in markets and they have a steeper curve. But then as we add these restaurants, quote, unquote, that fill in in that market, those have a different curve to them. And so really we're just starting to learn. We have six restaurants in Dallas. It's really the first true market where we're seeing how some of these curves are shaping up. as well as in Arizona as we see some fill-in restaurants there. So we're going to continue to be transparent. We provided some information on how we believe those curves are starting to look, but we'll continue to provide that as we learn more about how these curves are looking.

Understood. Thank you. And then just a quick clarification on that. I know you mentioned you're not giving guidance, but I guess if the assumption is like next year, inflationary trends look similar to this year. I mean, would it be fair to assume that the competitive environment in terms of pricing also looks similar? I mean, I think historically lower inflation has translated into, you know, lower pricing or even discounting. And so I guess I'm just trying to think about, you know, as you talk about not being a sort of a promo driven brand.

Yeah, I think as we think about next year, Sarah, whatever the inflationary costs, which, again, I don't think are going to be significant, but there'll be inflation next year. We're going to use the pricing lever to offset the inflationary cost pressures. I think we continue to believe that we provide good value. We've provided the data points as we benchmark our most ordered bundle against competitors. So I think as we sit here today, we do think that there is some pricing power that we have. We have a, as you know, a pretty expansive menu where it's not like you have to take price on everything. So you as a consumer may not feel it each and every time we take price. But we're going to use that lever next year. But it's going to be more moderate, right? We saw pricing up 8.5% in 23. We're going to see it up just over, you know, 4% as we end this year. So I think depending on the inflation environment next year, that's where you'll see the pricing come into play for us. But I think you'll see us pull that lever as we have those pressures.

Thank you very much.

Next question, Gregory Frankfort with Gupenheim Partners. Please go ahead.

Hey, thanks for the question. I just had two. The first maybe is for Michael. You've been shrinking kind of the box size for a few iterations. What do you think is the ultimate maybe path to where that could be three, four, five years from now? How big would the menu look in that scenario?

You know, I don't want to speculate on that one, Greg. I think that there's a, I'm more concerned, honestly, about generating excellent cash on cash returns for our investors. So it's a combination of getting the right box that can still provide a great experience, that can generate the revenues and the margins that we want at a capital investment that makes sense for our investors. So That's kind of our goal, and it's calculus. It's not straight math.

Yeah, yeah, yeah. I didn't do well on calculus, so I don't believe you. I had a question for Michelle. Just on the G&A, I think you've now at this point lowered the guidance by about 7 million so far over the last few quarters. Yeah. Where are the buckets that's come from? How much of that's just been incentive comp that reloads next year? I'm just trying to think about the bridge from three or four quarters ago to today.

Yeah, Greg. So primarily it's the two buckets I mentioned on the call, which is your variable with your bonus compensation as well as your stock-based compensation. Those are the two levers. But I will say that we've also controlled our ongoing run rate for wages just as we continue to be disciplined on adding positions. within this given year. And so that comes into play, but it's more heavily weighted on the bonus comp and equity-based comp. So yeah, depending on how you do next year, that could pressure GNA as we go into next year. But I will say this, and I said this on the call, we are going to remain disciplined in terms of how we invest GNA and putting GNA to work on strategic priorities is of the utmost important to us. So as we put incremental GNA to work next year, it has to be on things that provide a good return on investment that we believe are gonna move the brand forward. But yes, those lines, particularly on the variable base comp or bonus comp line, could provide some pressure into next year because that line item is based on the company's performance in a given year, and that's where it can vary in each year. But I'll give more guides in January on where we think G&A's gonna come in for 25.

If you comp well, you reload the GNA, but that's something we should want. So thank you for the perspective. I appreciate it.

Yeah, no problem. Thank you. This concludes today's teleconference. We thank you for your participation. You may now disconnect your lines.