A Member of Pat McKeough’s Inner Circle recently asked for his advice on a 67-outlet restaurant chain that also runs a catering business to all 50 states.
Pat likes the company’s rising revenues and dedicated fan base, which should help support its ambitious growth plans. However, he notes the company is facing rising costs in a highly competitive industry.
Portillo’s Inc. (Symbol PTLO on Nasdaq; www.portillos.com), is a Chicago-based restaurant chain that got its start in 1963 when founder Dick Portillo opened the restaurant “The Dog House” in a small trailer. Today, the business has 67 restaurant locations in nine U.S. states. The company also ships food to all 50 states via its website.
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Portillo’s is best known for its Chicago-style hot dogs, Italian beef sandwiches, char-grilled burgers, fresh salads and “famous” chocolate cake. Portillo’s Home Kitchen is the company’s fast-growing catering business. That unit also ships food to all 50 states via its website.
After suffering through COVID-19 for nearly two years, Portillo’s went public on October 20, 2021, selling shares to the public at $20 each. On the first day of trading, the company’s shares closed 45.5% higher. They reached a high of $57.73 in November 2021, but they have dropped since and are currently trading for just below the IPO price.
Private-equity firm Berkshire Partners (no connection to Warren Buffett/Berkshire Hathaway) bought Portillo’s in 2014. It held on to the majority of the company’s shares after last year’s IPO.
In 2020, Portillo’s revenue fell by 5.0%, to $455.5 million from $479.4 million in 2019. The decrease was due to the onset of the pandemic. However, the company earned $12.3 million, or $0.37 a share, in 2020. That was up 120.8% from $5.6 million, or $0.17. Profits rose, despite the lower sales, because the company incurred much lower labour expenses in 2020. That’s because it closed restaurants and was able to cut back on staff needed to serve drive-thru, curbside pickup, and delivery customers.
Inner Circle: Revenues rise as the cult following keeps on growing
Over the next decade, the company hopes to open more than 530 stores in the U.S. Most of the near-term growth will be in the Midwest, near its Chicago base. After that, it plans to open locations in warmer climates such as Texas. Florida and Arizona.
Over the years, Portillo’s has gained something of a cult following among loyal customers. It recently began putting its brand on a wide range of new merchandise, including Portillo’s-themed swimsuits, pool floats and a “G is for Giardiniera” alphabet book. (Giardiniera is an Italian relish of pickled vegetables in vinegar or oil.)
Fast-casual restaurants like Portillo’s haven’t suffered as much as the overall restaurant industry during the pandemic and have been bouncing back. Nearly all of Portillo’s locations have double-lane drive-thrus, as well as sizable parking lots that let them handle large volumes.
And while most of Portillo’s new units will be traditional locations, the company is experimenting with nontraditional stores as well. This includes a “ghost kitchen” in Chicago focused on taking delivery orders in dense urban locations.
Ghost kitchens are stripped-down commercial cooking spaces with no dine-in option. Functioning as hubs for online delivery and catering orders, they circumvent the need for costly restaurants in premium locations. Less prime real estate also means more space to accommodate delivery and catering vehicles that would otherwise compete with customers for parking space.
As well, the company recently opened its first drive-thru-only location in Joliet, Illinois. The 3,750-square-foot restaurant will not have a dining room but will have an area for pick-up orders. It will also offer delivery and catering.
Portillo’s operates in a highly competitive industry. In addition, the company continues to face industry-wide challenges, including labour shortages, supply chain disruptions and cost increases. In fact, the company has had to raise hourly wages 18% to 20% over last year.
Recommendation in Pat’s Inner Circle: Portillo’s Inc. is a hold.
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