Good day, ladies and gentlemen, and thank you for standing by. Welcome to Portillo's Third Quarter 2021 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Please note that this conference is being recorded today, November 18th, 2021. I would now like to turn the call over to your host, Mr. Fitzhugh Taylor, Managing Director at ICR. Thank you. You may begin.
Thank you, Rob, and good morning, everyone. With me on the call today is Michael Osanloo, President and Chief Executive Officer of Portillo's, and Michelle Hook, the company's Chief Financial Officer. Before we begin our formal remarks, let me remind everyone that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and should not be unduly relied upon. We do not undertake to update these forward-looking statements unless required by law, and we refer you to today's earnings release in our SEC filings for more detailed discussion of the risks that could impact Portillo's future operating results and financial condition. Our remarks also include non-GAAP financial measures such as adjusted EBITDA and restaurant-level adjusted EBITDA.
We direct you to our earnings release issued this morning, which is available on our website for reconciliations of these non-GAAP measures to their most comparable GAAP measures. Any non-GAAP financial measure should not be considered as an alternative to GAAP measure, such as net income or operating income, or any other GAAP measure of our liquidity or financial position. Finally, after we deliver our prepared remarks, we will open the lines for your questions. Let me now turn the call over to Michael Osanloo. Michael?
Thank you, Fitzhugh, and good morning, everyone. We appreciate you all joining us for what is our inaugural quarterly earnings call as a public company. It's an incredibly exciting time for Portillo's. We are so proud of the successful completion of our IPO, and we're pleased with our performance so far this year, which has reflected continuing improvement in guest traffic as our business is evolving into a new normal. Our teams continue to pivot in a smart, efficient way to serve our loyal guests in a safe environment. I couldn't be more pleased with our performance led by our amazing teams and their ability to successfully adjust and continue to improve. Importantly, they're doing all this while living our values of family, greatness, energy, and fun.
Before I let Michelle review the quarter results in more detail, since this is our first earnings call since our IPO, I wanna take a few minutes to talk about Portillo's and just share what makes our brand so special. Our story began in 1963 when Dick Portillo invested $1,100 in a trailer in Villa Park, Illinois. The Dog House, as he called it, sold hot dogs, fries, and tamales. A few years later, Dick opened his first freestanding restaurant and named it Portillo's, and that was just the beginning of this great American success story. After gradual expansion over multiple decades, Berkshire Partners acquired Portillo's in 2014 and has since accelerated our growth, adding 29 restaurants across six additional states.
Most people think of Portillo's as a Chicago institution, but the reality is we've burst our seams to become a national brand with 68 restaurants today, soon to be 69 across nine states. Even as we've grown, we've maintained that iconic status with our fans, who are truly obsessed. We do this with our unique menu of unrivaled Chicago street food and all-American favorites that has something craveable for everyone. We've got Italian Beef Sandwiches, Chicago-style Hot Dogs, char-grilled third-pound burgers, fresh made salads, and much more, all at a remarkable price point. In addition to this amazing menu, I also wanna stress Portillo's operational excellence across numerous order channels. We've been multi-channel since before it was even a thing. While other brands have been chasing this, especially since the outset of the pandemic, this is what Portillo's has done from early on in our history.
Just to give you an idea of our business, both pre-pandemic and now, our annual drive-thru sales represented $3.4 million per restaurant in 2019, and $4.9 million in the twelve months ending Q3 2021. That's just our drive-thru. Our dine-in sales represented $4.4 million per restaurant in 2019 and $2.1 million in the 12 months ending Q3 2021. Although dine-in has decreased because of the pandemic, traffic remains healthy. That's in part because our restaurants are beautiful and they're engaging. They're thoughtfully designed to handle incredible volume while still providing a memorable and differentiated experience, with each having its own locally inspired decor. There's delivery. We started delivery in 2017, and it accounted for about $500,000 per restaurant in 2019, and nearly $900,000 in the 12 months ending Q3 2021.
Our other channels are also growing. We cater literally tons and tons of food in convenient formats that fit any occasion. I already mentioned that our fans are obsessed. People love catering Portillo's for their gatherings and events. We also have a really strong direct shipping business that not only gives us sales, but provides key insights into where there's latent demand for our business. This multi-channel approach allows us to achieve best-in-class unit economics, including the highest average unit volumes in the fast casual space. Adjusted EBITDA margins that put us in an elite class of restaurants. We are committed to continuing to be a world-class multi-channel restaurant brand with incredible sales from all of our channels. Switching to development.
By the end of Q4, we will have added two new restaurants to the portfolio, opening location number 68 in the Indianapolis market in the city of Westfield, and location number 69 opening in about two weeks in Madison, Wisconsin. Both new locations demonstrate our strategy to open new restaurants outside of our core Chicagoland market. The Westfield location on the north side of Indy adds to an already strong presence as our fourth restaurant in Indianapolis and the seventh in the state. The new Madison location will be a second entry to Madison and the fourth in the state. Each of these serves a separate and distinct trade area. With these two, we will have added five new restaurants in 2021, including two new markets having opened our first, which includes Orlando, Florida, and Sterling Heights, Michigan.
As we move into next year and beyond, we're excited about our massive white space opportunity. As we've previously stated in our IPO filings with the SEC, there's potential for over 600 Portillo's restaurants throughout the country. This is obviously a long-term growth number, and we plan to expand at about 10% growth annually. Our current plan is to open seven restaurants in 2022, and we're targeting to expand our presence in Florida, Arizona, Indiana, and Michigan, as well as an initial expansion into Texas. Strategy allows us to tap into our two-pronged approach to expansion. First, continuing to expand our presence in our core market across the Midwest. Second, targeting national markets across the Sun Belt for opportunistic growth.
One specific new location plan for 2022 that I wanna highlight is what we're calling a Portillo's Pickup, which will be located in Joliet, Illinois. Unlike our other restaurants, this off-premise only spot features a smaller footprint than the traditional Portillo's, and it will not have a dining room. Instead, it'll feature three drive-thru lanes as well as a pickup area, catering, and delivery. This is the first prototype, and if successful, gives us a great option to fill in mature markets. Finally, as we grow our unit count, we continue to be focused on our talent pipeline. We will continue to invest in our training programs, develop leaders, and live our values of family, greatness, energy, and fun each and every day. All of these efforts are reflected and drive our financial performance.
With that, I'm gonna turn it over to Michelle to cover more details about our financial results.
Thank you, Michael. Before we discuss our third quarter results, let me briefly recap our recent IPO. On October 25th, following the end of the quarter, we completed our IPO by issuing approximately 23.3 million shares, including approximately 3 million shares sold to our underwriters as part of the over-allotment option at an offering price of $20 per share. We received net proceeds of approximately $429.9 million after underwriting discounts and commissions and estimated offering expenses, which we used along with cash on hand to, one, repay the redeemable preferred equity in full, including the redemption premium, all totaling $221.7 million. Two, repay all of the outstanding borrowings under the second lien credit agreement, including prepayment penalties, all totaling $158.1 million.
Three, purchasing LLC units or shares of Class A common stock from certain pre-IPO LLC members for $57 million. Also in connection with the IPO in the fourth quarter, each option under the 2014 Equity Incentive Plan that was outstanding, whether vested or unvested, was substituted for an option to purchase a number of shares of Class A common stock under the 2021 Equity Incentive Plan. The option holders received a cash payment in respect of their options, whether vested or unvested, in an aggregate amount of approximately $6.3 million. In addition, as a result of modifications to the terms of certain pre-IPO performance vesting awards, we will record a compensation expense based on the fair value of the modified awards.
We will expect to recognize a cash compensation expense of approximately $1.3 million and a non-cash compensation expense of approximately $23.3 million, each in the fourth quarter. Now, turning to our results for the third quarter. Revenues were $138 million, reflecting an increase of $18.3 million or 15.3% compared to the third quarter of 2020. This was driven by a 6.8% increase in our same-restaurant sales, combined with the opening of two new restaurants in the fourth quarter of 2020 and 3 new restaurants opened the first three quarters of 2021. The same-restaurant sales increase of 6.8% was primarily driven by a 7.9% increase in average check. Partially offset by a decrease in our traffic.
Our higher average check was due to increases in our menu prices, mix of items sold, and more items per order. The decrease in traffic reflected continued pressures from COVID as we have fewer people dining in our restaurants versus pre-pandemic levels. This was partially offset by more people going through our drive-thru channels. While all our dining rooms were open during the third quarter, we continue to be subject to local mask mandates for indoor dining in many of our locations. We aim to continue to provide exceptional service to our loyal guests in a safe environment for both our team members and guests. Now turning to our cost of goods sold. Cost of goods sold, excluding depreciation and amortization as a percentage of revenues increased to 32.1% from 30.6% last year, primarily due to an increase in commodity prices, specifically beef.
This was offset by an increase in our average check. We, along with others in the industry, continue to navigate through disruption in our supply chain, and we continue to work hard to maintain inventory. When it comes to supply chain, we're confident in both our distribution partners and suppliers. We have outstanding relationships that we believe will allow us to continue to procure products needed, and we feel extremely confident in our distribution strategy. Moving on to labor. Labor as a percentage of revenues increased to 26.8% from 24.3% last year, primarily due to an increase in hourly rates, investments made in training costs and discretionary bonuses. All these costs were partially offset by an increase in our average check. As you are all aware, the labor market is extremely tight right now and everybody is competing for talent.
We've made a substantial investment in team member pay in the second quarter as part of an ongoing enhancement to our pay, benefits, training, and talent development, and we are seeing the impact flow through in the third quarter labor expenses as our average hourly rates are up nearly 20% quarter over quarter. While the current labor market challenges have hindered our ability to be fully staffed, our restaurants have not had to limit service channels or hours of operation, and we are proud of our committed team members that service our guests each and every day. We remain committed to investing in our Portillo's family and as a result, would expect elevated year-over-year labor costs to continue in the near future.
Even with increases in food and labor costs, we continue to produce strong margin results when you look at both restaurant-level margins and the adjusted EBITDA margins within the quarter. Now turning to our other operating expenses. Those expenses increased $2.5 million or 19.5%, which was primarily due to the opening of five new restaurants since the third quarter of 2020, in addition to incremental costs for cleaning and utilities as dining capacity has expanded since the third quarter of last year. All this was combined with an increase in our direct marketing expenses as well as repair and maintenance costs. Looking at our occupancy costs, those decreased as a percent of sales, primarily due to the year-over-year sales increase previously described and is inclusive of the opening of the five new restaurants since the third quarter of 2020.
When you look at our restaurant-level adjusted EBITDA, that metric decreased 1.1% to $34.2 million, largely a result of the impact of commodity and labor inflation. We did not take any incremental pricing during the third quarter and have increased certain prices to reflect an approximately 3% price increase in the early part of the fourth quarter to combat both the commodity and labor headwinds we're seeing. Our G&A expenses as a percentage of revenues increased to 8.5% from 8.1% versus last year's third quarter, primarily due to higher wages resulting from annual rate increases, filling open positions, higher training program costs for future restaurant leadership, and higher costs associated with becoming a publicly traded company.
When you roll all of this up, it led to adjusted EBITDA of $24.2 million versus a prior year of $26.4 million, a decrease of 8.4%. Now, from a balance sheet perspective, as I previously mentioned, we used the proceeds from our IPO along with cash on hand to repay the redeemable preferred equity in full, repay outstanding borrowings on our second lien credit agreement, and purchase LLC units or shares of Class A common stock from certain pre-IPO members. After making those payments, our cash on hand today is over $40 million and remains healthy. Additionally, our debt has decreased by $155 million, and the full balance of redeemable preferred equity has been extinguished in connection with the completion of our IPO. With that concludes our financial results.
I'll now turn it over to Michael for closing remarks.
Thank you, Michelle. We've talked a lot about Portillo's growth. Across the landscape of fast casual and quick service restaurant chains, Portillo's really is a standout when it comes to unit economics. There's one major component that makes our brand so special. It is our people-centric, values-driven culture. Our purpose is central to everything that we do, and we use our values of family, greatness, energy and fun as our guiding principle. We care for and invest in our team members, and they in turn care for and invest in Portillo's. For example, when Portillo's completed its IPO last month, we awarded all restaurant managers one-time restricted stock unit grants. We know our over 500 managers work hard every single day, and I am proud that we take care of our leaders.
By nurturing our connections as a family of team members, our teams are motivated to work even harder for one another and to take amazing care of our guests. It's palpable to our guests. It's why they are obsessed. They aren't just coming to Portillo's for the craveable food at a fantastic price point. They're coming for the experience, and that's an experience that translates across the country. Thank you. Operator, back to you.
That concludes our formal remarks. As always, thank you for your interest in Portillo's. At this time, we'll open the line for questions. We ask that you limit your inquiries to one question and one follow-up question, please. Our first question comes from Andy Barish with Jefferies. Please proceed with your question.
Hey, good morning, guys. Just a quick question on trying to, you know, sort of conceptualize the near -term, you know, margin challenges and how much, you know, we should be looking at third quarter, you know, being a base, or do you expect, you know, some near -term pressures as the industry has been talking about, and then, you know, sort of seeing things reach more of an equilibrium as you move through 2022? Just trying to get a sense of, you know, some near -term color on the margins there.
Yeah. First, nice to hear from you, Andy. Hope you're doing well. Before I turn it over to Michelle, there's one thing that I think I don't want anyone to gloss over, is that the Q3, we kinda took the full brunt of all of the commodity and wage inflation, and there was no pricing to mitigate some of that. So, keep in mind, we took pricing at the very beginning of Q4, and obviously, we think that will mitigate some of the margin pressure. But I'll let Michelle expand.
Yeah. Andy, I think when you look at the pressures we're seeing in the back half of this year, we expect them to continue into the fourth quarter. When we think about 2022 as well, I don't think we see an end in sight in terms of commodity inflation. To Michael's point, I think I mentioned the pricing action we took at the beginning of Q4, which was around 3% pricing. We're gonna continue to evaluate that as we look into 2022 based on what that outlook continues to look like. We'll make decisions on if we need to look at adjusting pricing further. We know that the healthy way to grow this business is through transaction growth.
We'll continue to evaluate both those key lines of food and labor and see if we need to again adjust price as we move into 2022.
Just as a follow-up on pricing, when is your typical, you know, kind of annual price increase, and how do you look at that, as you mentioned, you know, over the next few months or so?
Yeah, what we like to do, Andy, as part of our strategy is typically be price laggards versus the rest of the industry. We carefully evaluate what the rest of fast casual and QSR is doing, and we try to make sure that we maintain an exceptionally strong value proposition, but we also feel that we have very, very sharp price points, and we have some pricing power at our disposal. We evaluate it on an ongoing basis. I don't think we live in a typical environment right now when it comes to commodity inflation, so we're treating, you know, this year as somewhat idiosyncratic, and we're looking at pricing constantly. We're evaluating where we need to be, we're evaluating where the rest of the market is, and we're evaluating what the consumer's appetite is.
Okay, very helpful. Thank you.
Thanks, Andy.
Thanks.
Our next question is from John Glass with Morgan Stanley. Please proceed with your question.
Hi. Good morning. Hey, Michael, you gave some color around, you know, the drive-thru performance pre-COVID and post-COVID in the dine-in business. As you look through the first three quarters of 2021, how has the dine-in improved? What I'm trying to get at is, as dine-in does improve, are you seeing any diminution in the drive-thru sales, or do you think you can hold those when you think about volumes in the future? Is it a possible state where, you know, you've got the dine-in back, but those elevated drive-thru levels remain relatively constant?
Yeah. Great to hear from you, John. Hope you're well.
Thank you.
You know what? It's an interesting dynamic. I think you know, our dine-in used to be, you know, low 50% of our mix. Right now, it's about 32% of our mix, and it's been slow in coming back. I think there's two factors to that. I think one is that dine-in in general across America has been a little bit slow in rebounding with COVID. But also, you know, our restaurants in Chicago, which are still under a mask mandate, have, I think, been even more affected by that. Now the good news is that our drive-thru traffic actually remains incredibly strong and resilient. As our dine-in has slowly inched back up towards mix, it has not negatively affected our drive-thru channel.
I don't, you know, I don't know where this will stabilize. I think that there's a lot of opportunity for us, but, you know, it would be foolish of me to hazard a guess on how much of it is incremental versus how much of it is shifting.
Thank you for that. Can you talk about you mentioned Texas as a next year event? When do you think the timing of that is? What's the city you selected? Why did you select that city? Or was it maybe just location-based, not necessarily city-based? How did you think about Texas?
Here's what I'll tell you. Everybody in the room is vigorously shaking their head no that I can't tell you the city. We are super excited about the location, about where we're going. I am so eager to talk to you and others about where we're going because I think it's gonna be a flagship restaurant that should be a really strong performer for us. It's gonna be our first foray into the great state of Texas, and we want it to be a home run. We believe that that's what it is. It will open in the fourth quarter. When I can, I will certainly tell everyone exactly where it is and build up excitement and momentum. Unfortunately, John, I can't tell you specifically where it is.
Got it. Thank you.
You bet.
Our next question comes from, Dennis Geiger with UBS. Please proceed with your question.
Great. Good morning, and thanks, folks. First, just wondering if you could share or maybe remind folks sort of what you're seeing in the most recently opened stores in some of the newer markets, Michael. You know, perhaps highlighting the performance of those stores on comp or profitability or other metrics relative to the rest of the system or just any kind of commentary you could share on how you've been feeling about those new stores in those newer markets?
Yeah, I'll tell you. I'm gonna let Michelle give you the specifics, but qualitatively, we're thrilled with them. We think that as a class, the five restaurants that we have, actually six now that we've opened up, are all meeting or beating our expectations. We feel exceptionally good about them. There's a nuance to this too, other than just the financials. What I really love is that we open these restaurants up 100% with values-based hires, right? We hired people who represented our values of family, greatness, energy, fun. The experience that they are providing our guests from the get-go is exceptionally good. From a qualitative perspective, that thrills the heck out of me. That's setting up a restaurant for long-term success. That's taking gret care of our teams, great care of our guests.
Michelle can highlight for you the financials.
Dennis, I think this was outlined in the S-1 as well. When you look at the five restaurants that we've opened since the third quarter of 2020, they're performing above our expectations. Typically, where our expectations are in year one for a new restaurant would be around averaging $6.4 million AUVs. The five restaurants that I mentioned that we opened since the third quarter are performing roughly 35% above that metric. To Michael's point, we're extremely proud of the performance. Most of those restaurants are outside of our Chicagoland market. Our flagship restaurant in Michigan and Sterling Heights, a restaurant near Arizona in Glendale, and then our first restaurant in Orlando, Florida.
We're proud about that performance and the fact that they're, like I mentioned, roughly 35% above what we were targeting in that year one AUV.
Great. Thank you. Then just a second question, just as it relates to supply chain, you know, labor shortages, et cetera, any thought there with respect to impacting opens over the next 12 months or so? You know, it doesn't sound like, and I think, Michelle, you spoke to the strength of your relationships, but just curious if there's anything to note there as it relates to, you know, challenges opening stores over the next 12 months or any impact on build costs, et cetera. Thank you.
There was a lot in that second question of yours, Dennis. Let me tease out some of the different parts. We just recently opened in Westfield, Indiana. We're opening in two weeks in West Madison, Wisconsin, and we're in the process of training those teams up. I'm knocking on wood because we were pleasantly surprised at the relative ease of attracting talent and hiring up for both of those restaurants. We are opening those restaurants fully staffed. You know, I don't know if this is a canary in a coal mine dynamic that the labor markets are freeing up, but we're thrilled with our ability to open those restaurants fully staffed, get those folks trained, and get going.
While there are certainly some supply chain hiccups, and that's how I would describe it's in no way negatively affecting our business or our ability to run our business. It's just, you know, we see some idiosyncratic spikes in costs, and they come back down, then something else spikes, and then it comes back down. I think the next six to nine months requires us to just be super agile and responsive to the supply chain dynamics, but also keep. When it comes to labor, you know, we're just gonna keep doing what we do, which is we provide a differentiated opportunity for people. We hire people based on values. We provide them a lifetime of opportunity if they so choose.
I know you know this, Dennis, but we don't pay minimum wage at any of our restaurants. We're significantly above minimum wage across the country because we truly believe that people are the heart of our business, and we take care of our teams.
Great. Thanks, guys, and congrats.
Thank you, Dennis.
Thanks.
Our next question comes from Nicole Miller with Piper Sandler. Please proceed with your question.
Thank you. Good morning. Labor costs are challenging, but if you flip it around and think about efficiency, how is labor efficiency? I think you measure that by items sold per labor hour.
Yeah. First of all, hi, Nicole. Nice to hear from you. You are 100% right. It's one of the things that we take a lot of pride in, and I think, you know, I don't know if everybody remembers this or is aware of this, but during the pandemic year, we did not lay off a single person. We actually invested in our people, and we saw a massive increase in 2020 in labor efficiency. You're 100% right, we look at it in terms of items per labor hour. We, you know, 2020 was an incredible year. It was probably too much, to be honest with you. Our people worked a little too hard.
The good news is that the investments that we've made in our people, the love that we've showed them and the learnings and the cross-training that we did yields for us about a 10% improvement in IPLH in 2021 versus 2019. You know, it is absolutely part of what's mitigating some of the cost pressures, is that our folks are just more efficient, and they work incredibly diligently. We think that that's a learning that we got in the COVID year that will continue to bear fruit, for us, our team members, and our investors for years to come.
Can you just run through where you stood on a debt-to-EBITDA ratio at the end of the quarter and why you're comfortable with that level? Ideally, does the ratio taper as EBITDA increases, or would you be proactively paying down debt?
Yeah, Nicole, I'll comment on our post-debt structure, which after we paid off the second lien, the $155 million, we're roughly around a 3.5x debt-to-EBITDA ratio. Our expectation is that as we continue to grow that EBITDA line, we're naturally gonna de-lever. The capital structure is in a stronger position post-IPO. At the end of the quarter, that ratio is obviously higher, just given that the payoff of the second lien occurred post Q3, as part of the IPO proceeds.
All right. Thank you so much, and good luck.
Thank you, Nicole.
Thanks, Nicole.
Our next question is from Sara Senatore with Bank of America. Please proceed with your question.
Hi. Thank you. I have a question about labor and then just a quick follow-up on the pricing comment. The labor investments you made were partially offset by, you said, lower staffing levels, but also increased productivity, as you were just discussing. I guess, can you talk about the extent to which not having as much staff as you would like might have hindered top line? I know you said you didn't have to close restaurants, but presumably, you know, lines were longer and perhaps you lost some sales from that perspective. So any insights you might have on whether that actually affected your sales and also to the extent that there's more productivity.
Can you just remind me, you know, is that some of the technology that you've invested in or what's been driving that in terms of systems?
Great. First, great to hear from you. Thank you very much. There's a lot again in that question of yours. When you think about the labor algorithm, there's a bunch of things going on. The first thing is that we are sort of slightly understaffed versus ideal, right? That has flexed a little bit, but think of it as we're roughly 10% understaffed versus ideal over the course of the third quarter. The second element of that is we are more productive than historical during that quarter. The third component is that the hourly wage in the third quarter was significantly higher than the third quarter in the prior year. There's three different elements working against one another.
Intuitively, you're absolutely right that when you are understaffed, you are providing a less than perfect experience to guests and it slows things down. It slows down your drive-thru, it slows down your line. Intuitively, it would be hard to argue with your premise that better staffing results in better performance, which results in better guest repeat and frequency. We certainly plan on staffing fully as those opportunities avail themselves because we intuitively believe that fully staffed restaurants perform better and that there's some comp opportunity there. 100% agree with the way you're thinking about it and that logic.
Great. Thank you. Just on, you mentioned on pricing. I know you talked about.
Yeah.
You know, really being cognizant of your customer and thoughtful about it. You know, as I think about going forward, though, you know, should I be thinking about kind of stable trends? You've added some price, maybe you give some of that back in traffic. You know, if I think about kind of the two-year, I know there are all kinds of puts and takes, but as I think about elasticity, is the right way to sort of see it as just sort of a one-to-one traffic price trade-off or you think you have the ability to take price and again hold more of that traffic, so we might actually see an acceleration in comp?
Yeah. You know, I'll tell you, this is a remarkable business in that, as I've looked at it, our pricing does not have the same elasticity effect as I've seen in other restaurant businesses or consumer businesses. We have more inelastic demand than I think people would expect. I think there's a lot of the pricing that is incremental. That being said, we also need to be really, really careful and smart about how we price. Michelle said it earlier, and I wanna reiterate it, right? Our business, we believe, is healthy when it's driving transaction growth. That's hugely important to us and our team. We want more people coming through our restaurant. That's healthy. I think pricing is an important lever to deal with what I will describe as idiosyncratic cost increases, right?
Some of the craziness that we saw in the last 12 months, on commodities and the labor markets, you really have no choice but to price some of that away. Our healthy business is run by driving transaction growth. That is our intent. The good news is that we have a very sharp value price proposition. We are pricing, you know, after most of fast casual and QSR have priced. You know, from a cross-elasticity effect, we look really good. We will continue to make sure that we're managing that great value proposition, while still covering idiosyncratic cost increases in commodities and labor.
Thank you.
Thank you, Sara.
Our next question is from Alton Stump with Loop Capital. Please proceed with your question.
Great. Thank you. Good morning. You know, just wanted to ask, you know, in your S-1, you know, of course, you talked about a target of 25% cash-on-cash return by year three, but, you know, clearly you've outperformed that with your openings over the last couple of years, even amidst the, you know, pandemic outbreak. You know, is it just simply being a bit conservative or is there some reason why, you know, you know, we should see cash-on-cash returns, you know, kind of going forward below what you have been able to do over the last couple of years?
First, very nice to hear from you, Alton. I feel like you're jinxing us with that comment.
Sorry.
Look, we're really cautiously optimistic that the performance that we're generating from these last couple classes of restaurants are you know exactly what we expect going forward. We are you know we expect to be our you know as a management team, as a leadership team, we are building restaurants where we feel like there's a lot of upside and very little downside. It's certainly our hope and our expectation, but I would not tell you to necessarily bank on it. Is that fair?
Yeah. No, absolutely. That definitely makes sense. You know, thank you for that. You know, just as, you know, as I follow up, you know, I just kinda think about actually building outside of, you know, what you call your Chicagoland market, you know, whether it's Indiana, you know, Michigan, et cetera. You know, if I assume that probably the average cost of those is a bit lower than your existing, you know, builds that you've done in your core market, you know, obviously AUV is of course a bit lower, but still awfully, you know, high industry leading of course.
Yeah.
You know, I'm just curious more on kind of, you know, how the average returns in your core versus non-core markets are trending.
Yeah. You know, there's so much noise in that. I mean, it's a great question. The problem is there's so much noise in answering that question because, yes, historically, Chicago was more expensive to build. No doubt about that. You know, if I'm comparing historical Chicago builds to the cost today to build outside Chicago, it's kind of a wash because everything has gotten so much more expensive. What we're spending today to build is probably what we would've spent in Chicago a couple years ago to build. That's why there's noise. Your intuition that as we go to places like Florida and Texas and Arizona and Michigan and Indiana, fundamentally the cost to build is less than it is in dense Chicago market.
There's a good argument to be made that we can perform from a cash return standpoint really, really well outside Chicago.
Great. Thanks so much, Michael. I'll hop back in the queue.
You bet. Nice talking.
Our next question is from David Tarantino with Baird. Please proceed with your question.
Hi. Good morning. My first question's about staffing levels, Michael. I think you mentioned this third quarter you were 10% below where you'd ideally like to be. My question is whether you're starting to see progress on narrowing that gap in the fourth quarter, and whether you've set any goals internally on getting back to fully staffed by a certain timeframe.
A great question, David. What I would guide you towards is that, you know, the two new restaurants that we just opened up in Westfield, Indiana, and we'll open in two weeks in Madison, Wisconsin, those two restaurants are fully staffed. We are all like got our fingers and toes crossed. We're pleasantly surprised, and we're hoping that that's an indication of staffing in general. We are staffing up across the system, in general. You know, for us, the holidays are really a big deal. We do a ton of catering. We have a lot of seasonal staff, you know, a lot of kids who've gone off to college that come back and wanna grab a few hours.
We are seeing some staffing improvement, but I'm not ready to declare a victory or even. I'm just not ready to declare that yet. I would say there's more positive signs than negative signs, but in no way do we feel confident to declare victory on labor.
Got it. Thanks for that. I had a question about how you're thinking about prototype design on a long-term basis. I mean, you've seen a very big change in the mix in your business, and I realize that may not have fully settled out yet. To the extent you have a lot less dine-in business going forward and more drive-thru and digital and delivery business, you know, are you thinking about changing how the prototype is designed, and is there an opportunity to optimize the cost of the box when you're building out new units? Any thoughts on that would be great.
That's another great question. You're gonna allow me to wax on about one of my favorite topics. We are going to quote the great one, we're going where the puck is going, not where the puck is. Where the puck is going is exactly what you described, which is a bigger percentage of our sales will continue to be off-premise versus on-premise. The prototypes that we are building, including what we built in Glendale and Orlando, in Addison and Kimball in Chicago, and Sterling Heights, we are gearing towards increased off-premise sales. What you see in these restaurants is less formal dining space. The dining rooms are getting a little smaller.
Now we're kinda cheating a little bit because we're supplementing them with outdoor patio spaces that are really highly desirable from guests and very flexible. We're being very thoughtful in creating a dedicated entrance and vestibule for third-party delivery. We're creating special format, special access for off-premise. I mean, we've done a bunch of things where curbside is now. I think we've cracked the code on it. We're doing this racking system right by a door, right by parking spots, so people can come in and get out super quickly. As we've mentioned, we're building that drive-thru only concept in Joliet. You know, I didn't say this, but West Madison has a third lane drive-thru lane.
It's essentially we're kind of toying with the idea of calling it a fast pass lane, and it's for people who have ordered via the app or want a curbside type experience, where you don't have to get out of your car, you can zip through that third drive-thru lane, and the food gets brought out to you. So kind of my long-winded way of saying 100%, we are moving towards where the consumer is, which is the consumer says, "We want more off-premise access and availability, and the need to sit in the restaurant is coming down." That's how all of our new prototypes are being built.
Great. Thanks for the context.
You bet, David. Nice to talk to you.
Our next question is from Chris O'Cull with Stifel. Please proceed with your question.
Yeah, thanks. Good morning, guys. Now that we're
Good morning, Chris.
Hello. Now that we're in mid-November, I wanted to ask about catering and large group orders. I know the holidays typically provide-
Yeah.
or bring a sizable volume list. I was just curious what kind of visibility you have at this point into how that's shaping up for the year. I had a follow-up.
Yeah. Right. You get this, right? There's this whole e-commerce and catering business that is just a monster for us in the fourth quarter. A lot of people won't know this, but Christmas Eve is our single biggest day of the year. It is a massive day, all hands on deck. We have team members from the restaurant support center out at all of our restaurants helping because catering Portillo's is a thing, and it's a huge thing in the Chicago area on Christmas Eve. Catering the e-commerce business take off during the fourth quarter. I would tell you, but I'm not gonna tell you anything on a forward-looking basis. I would tell you that the last few weeks have been extraordinarily strong from a catering business, significantly a positive comp over last year.
You know, I would be loath to tell you the numbers 'cause I don't want you to plan on those numbers. We feel really, really good about the way our catering business is performing right now. We're cautiously optimistic and think that it should be a really nice bounce back from last year for us.
Great. Can you please speak a little bit more about the third order ahead drive-thru lane that's being tested? I'm just wondering how that's being received by consumers and if you think that's a format or I guess a design change that you'd look to implement going forward.
Yeah. Just to be precise, I'm sorry if I misspoke, but it's going to be in West Madison, which opens in two weeks. If anybody, your guess is as good as mine on how it will be received by consumers. I honestly think it's gonna be received really well because more and more consumers are asking for restaurant companies to be flexible in how a consumer interacts with you. There's all kinds of almost micro channels, right? There's like a need for somebody who wants. You know, if you're a mom with three screaming kids in the back, you don't wanna wait in line, you've ordered ahead on the app and you've paid, you just wanna pick up your food.
We have made that super easy, and we're gonna see how that performs in West Madison, and we'll see how that performs in Joliet when we open that up in the first quarter of 2022. I think it's a very, very important learning for us because, you know, if consumers continue to ask for and require these sort of nuances in how you engage with them, I think the restaurant companies that respond to that and can acquiesce to that kind of consumer demand are gonna be in a better position. I think that's us. I think we, you know, as I said in my opening remarks, we were multi-channel before it's a thing. We're always going to be super responsive to what the consumer wants and how they wanna interact with us.
If there's a way of making that third lane work institutionally, then heck yeah, we'll do that.
Makes sense. Thanks, guys.
Thank you.
Our next question is from Gregory Francfort with Guggenheim Securities. Please proceed with your question.
Hey, thanks for the question. I had two. Just the first one, just on pricing. Like I think historically you guys have taken pricing once per year, and this year you're basically taking it twice. Can you please tell me when you evaluate that and when you normally take it, just as we think about next year and what might happen? Thanks.
I think, Greg, first of all, good to hear from you. I would tell you the last couple years we've been a little bit more, and I like to think of it as agile on pricing. Yeah, we certainly do a pricing event late in the third quarter, early in the fourth quarter, and that's sort of the primary annual rhythm on pricing. We like to look at pricing late in the third quarter, early in the fourth quarter, set the price, and then go through the year. In the last couple years, where there has been either a need or, you know, some sort of inflationary demand, we've also done a smaller pricing in the late spring, early summer. I don't think I want us tied down to a specific rhythm on pricing.
We look at pricing on a weekly basis. We scrape competitor data. We look at what the elasticity impact is of our existing pricing. We are analyzing it on a regular weekly basis. Now we're not gonna price that frequently, but I think it's really important to know what your competition is doing, it's really important to know what consumers are experiencing, and it's really important to gauge consumer response to ongoing pricing. It would not, I mean, you know, I don't think it should surprise anyone if we take a small pricing sometime in the next year, right? Because as Michelle mentioned, we're looking at commodities, we're looking at labor. Where we see idiosyncratic issues, we may need to price. Where we're seeing pockets of inflation, we may need to price.
Got it. It seems like the two sort of themes investors are most focused are is on that labor, the ability to kind of staff restaurants as well as the price increase. Can you maybe talk about why you, like Portillo's, has greater pricing power than some of your competitors out there? Is it just the absolute level of check or how you're thinking about why Portillo's is a differentiation on that ability? Thanks.
I mean, I think, Greg, it starts with the fact that the average ticket per person at Portillo's is $9.60. Right? I mean, it's just, let's just start with that. You obviously know, right? That number is not like pulled out of my rear end. That is a number that is validated, it's vetted, it's gone through SEC scrutiny. That's a real number. And that is a surprisingly low number for the quality of our food, for the abundance of our food and the experience that we provide. I think it starts with we have an incredibly sharp value proposition.
That is one of the reasons why we, you know, why we perform as well as we do and why we have the revenues per unit that we do, because we have an incredibly sharp value proposition. You know, it certainly seems to me like we have latent pricing power. I see where our competitors are pricing. I see how aggressively they're pricing. Our pricing, you know, if you go through all the details, we continue to be price laggards, right? We don't price as much or as frequently as our competition and I think it means that when we need the price, people accept it and they've already been inured to the price points that have gone up everywhere else.
Thank you.
You bet, Greg. Nice talking to you.
Our next question is from Sharon Zackfia with William Blair. Please proceed with your question.
Hi, it's actually Matthew Curtis on for Sharon. I have a question on your menu evolution. You've recently done a lot of menu simplification while you were private. I was just wondering about going forward, how you think about the menu evolving in terms of new products or specific categories you may be looking to expand.
It's a great question. Yes, we have been assiduously simplifying the menu. You know, on average, we took, I think 75 SKUs out of each restaurant during the pandemic. There were some restaurants that we took 150 SKUs-200 SKUs out. We have taken menu items out. We have dramatically improved menu items. We have, you know, if we constantly are evaluating our menu and seeing what sells and what guests like. If there's stuff that sells but guests don't like, we've worked hard to improve them, right? I mean, I'll tell you, we've improved our Caesar salad. We had a cold chicken on it that just wasn't really good. I was embarrassed. We dramatically improved the quality of the chicken. The salad is better.
We dramatically improved the quality of our fish sandwich. I think the first priority for us is to always make sure that every single item on our menu is amazing. You know, we're kind of ruthless in that sense that we look for things that we don't think are as good as they should be, and we either make them much better or we replace them with something else that's much, much better. A perfect example of that is our Spicy Chicken Sandwich, right? We had a chicken sandwich, a broiled chicken sandwich on a croissant. It just wasn't very good. We killed it. We brought in the Spicy Chicken Sandwich, which was amazing. It's actually pushed up our chicken category by 27% year-over-year. That is awesome. It's a great win for our guests 'cause they love it.
The chicken sandwich is unique because it's got a spicy giardiniera sauce on it. You know, I'll give you free Portillo's if you can all pronounce giardiniera correctly. But it's really a unique thing that's ownable to us. It's not like what any other restaurant company does. We're not trying to be like everybody else. We wanna be Portillo's. I think that's a perfect example of menu innovation. There are other things on our menu that our culinary team is taking a hard look at. I tease 'cause I call it a Darwinian exercise with the menu. We have the strong kill the weak, and that's what we do.
Okay, great. I guess just another question on G&A. Obviously, you're gonna have the incremental public company costs for the next little while. It also sounds like some of your investments in training and things like technology perhaps are likely to continue. I'm just wondering if you could talk about the company's ability to leverage G&A, that is, on an underlying basis going forward.
Yeah. No, it's a good question. I think when you look at, to your point, in the future quarter and years to come, we're gonna have incremental public company G&A. I also mentioned in my prepared remarks, we're going to have incremental stock-based compensation expense as a result of some of the modifications and changes to our equity incentive plan. You're gonna see that come through. Once you strip out, I'd say, those two big buckets, we do expect to leverage G&A as we move forward. It's not gonna be at the expense of not investing in the training, particularly around the folks that we need to run our restaurants in the future. We're gonna continue to make investments in training our future restaurant leaders.
I can tell you that Michael and I are committed to definitely leveraging that line as we move forward when you pull out those two line items.
Okay, terrific. Thanks very much, and congratulations on the IPO.
Thank you.
Thank you.
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