Good afternoon again. Dennis Geiger, Restaurants Analyst at UBS, I'm pleased to welcome and excited to have here with us Michael Osanloo, CEO of Portillo's, and Michelle Hook, CFO. Also representing Portillo's today is Barbara Noverini, Director of Investor Relations. Portillo's is best known for its Chicago-style hot dogs, Italian beef sandwiches, char-grilled burgers, and famous chocolate cake, among other delicious menu items. Portillo's now has more than 70 restaurants across 10 states while maintaining basically the best growth story within the restaurant industry. With that, welcome, Michael, Michelle, and Barbara. Thanks a lot for being with us today.
Our pleasure.
Thanks.
Thanks for having us.
Terrific. You know, for investors maybe that might be a little bit less familiar with Portillo's, can we start just first off, a little bit of a brief overview about the craveable food and sort of the experience that ultimately has helped to drive industry-leading sales volumes, industry-leading margins?
it's an, it's actually a bit of a American success story, right? D Portillo founded this company almost 65 years ago now. it's, he was just a kid, sold hot dogs literally out of a trailer with no running water or electricity. built it up over time, sold it to Berkshire Partners in 2014. What's iconic about the experience is it's Chicago street food, so we have Italian Beef sandwiches. Now it sounds, for those of you who are not familiar with Portillo's, that might sound exotic or strange. It's a roast beef sandwich on crusty French bread. It's amazing. You know, in some places in America, we call it French dip when it's got au jus. it's really simple.
We have Chicago-style hot dogs, which comes with. It's a very specific thing. You know, it's got tomatoes, a big pickle wedge, chopped onion, pickle relish, mustard, celery salt, sport peppers, and never ketchup. It tastes amazing. We have fries that are unbelievable. We have salads. Like, people don't know this about us. We sell $900,000 of salad per restaurant per year. That. I mean, we could be a salad concept based on that number. Those salads are not like kidded. They're fresh made every single day. We have something great for everyone. We work really hard to have a very sharp value proposition, right? The average person at Portillo's spends about $10. We work very hard to have an engaging, inviting environment.
If you're a family of four on a budget, times are tough, you come to Portillo's 'cause you feel like a rock star taking your kids to Portillo's. You have a fantastic meal for probably half the price of what it would cost you with tip at casual dining chains. We occupy a really unique space on a price-value curve. We've got a diverse menu of highly craveable foods at really amazing prices.
That's terrific. You know, for anyone that has not been or has not had sort of the tasting menu opportunity, one of each, it is an experience.
Yeah.
I would highly recommend it, especially next time the beef, the beef truck comes to town.
Right.
I wanna talk about the unique growth opportunity here. You know, one of the leading, if not the leading, unit expansion story within restaurants, a targeted 600+ restaurant TAM over time...
Yeah
... contributing to at least 10% annual growth per year. Can you talk about some of the drivers that give you the confidence in that impressive algorithm?
Yeah. I mean, you know this, Dennis, and so some of you may know this. It's the first question that Michelle Hook and I get asked by every investor is, "Are you really a regional concept, or will your food travel," right? That's the bet. That's why both Michelle Hook and I are here 'cause we're really confident that this food travels, and it's gonna be a national concept with a ridiculously high ceiling. Our strategy has been to grow, originally it was simply to grow in the Midwest. The problem is that doesn't prove anything, right? Because if we're doing well in neighboring states, people say, "Yeah, sure, you're a Chicago brand. You're doing well in Indiana or whatever." Those states don't necessarily have a lot of strong macroeconomic factors supporting growth, right?
we have pivoted, we're targeting largely what I call the Sun Belt. we're growing across Florida, Texas, and Arizona. Why those states in particular? It's because those states have the fastest population growth in the United States. This isn't like a recent thing. It's been a 20-year trend. America is moving to warmer weather, and those states are getting a lot of people. Those states are very friendly business climate. It's rich in labor, and there's a lot of new development. There's a ton of places being built. I'm excited. You know, we bragged about this a bit in our most recent analyst call. We went into Texas, and we had a lot of detractors, right? People questioning, "Well, why do you think a Chicago restaurant chain will do well in Texas? Texas already has a ton of great restaurants.
Texas is a barbecue place. Texas has Whataburger." I mean, and these are all true statements. Our restaurant in Texas, we opened it a little over two months ago, is, and I've publicly announced this, is doing $48,000 a day. It's the number one restaurant in our system. It's annualized to do $17 million for. It's not gonna do it. It's gonna slow down. I feel like, okay, so maybe people in Texas will eat Italian Beef and hot dogs. I feel like that's a very important proof point for us. I think it demonstrates that the brand is portable, the food is portable, and we don't need to rely on Chicago expats to build new restaurants.
Terrific. Impressive numbers for sure. I wanna talk about the visibility that you have into the development pipeline.
Yeah.
You know, sort of whether, you know, site selection, et cetera. Maybe we can just touch on that as we kinda look ahead a little bit.
Yeah. That's one of the functions when I joined the company, four and a half years ago, I felt was candidly not a well-run process. I think we've spent a lot of time professionalizing this. I'm a big believer in a combination of data and experience and savvy. We use both Form Analytics and eSite to help us find sites based on multivariate regression data, et cetera. I don't necessarily just trust that data point. I also want smart people with experience looking at sites. We're very picky outside Chicagoland. In Chicagoland, we can build anywhere, we're gonna do well. Outside Chicagoland, we're still a new concept, we want great co-tenancy, we want great visibility, we want A+ sites.
Our, you know, our restaurants are big, they're busy. We need great ingress and egress. We have big drive-throughs. We work very hard. I've got a team of great deal makers, we hunt down real estate. I personally have committed to my board that I will visit every single site before I approve a site. Even if I like a site, I like what I call a Hegelian dialectic. Okay? That's like, take an idea, smash another idea against it, you get a better idea. I am not right all the time. Far from it. Ask my spouse. We have this real estate committee where I look at Michelle, my CFO, and I say, "Michelle, do you buy these numbers that they're pitching to us?
Do you think we can do this?" I look to the HR leader and say, "Jill, can you hire people for this restaurant? Will we be able to hire this?" I look to the operator and I say, "Can you run this and do these numbers?" Everybody on the team has got to agree. It's a very tough screen for us to build our restaurants. We weed out stuff that I might have liked. My team vetoes me occasionally, which I think is a healthy, smart dynamic. I'd rather them tell me I'm wrong than the market tell me I'm wrong. We have a very deliberate, thoughtful process in picking sites, and I feel we've made tremendous improvements there.
On that point, let's talk a little bit about, you talked about Texas just now.
Yeah.
Either Texas, you know, that might be an anomaly from a strength perspective, as you mentioned. What has that done to your underwriting expectations now? More so, just the performance of opens over the last couple of years, which have been.
Yeah.
Quite impressive. Just the added confidence there in what you can do as we think about the importance of that performance.
Yeah. We I think are appropriately conservative in what we committed to in our IPO roadshow and to what we say. I'll let Michelle expound on this a little bit. We, you know, we commit to every class of new restaurants that we build, we commit that by year three, they're doing $6 million of revenue and they're doing 20%, low 20% restaurant-level EBITDA margins. That's our commitment. We commit that it's gonna cost us X to build, but we're gonna get you 25% cash on cash return. We're kinda sticking with that commitment. Look, we're not, we're not fools. We're making a commitment that I'm 80% confident I'm gonna beat. Within a class, we might have one or two restaurants that don't really perform quite as well.
We might have one or two of these restaurants like The Colony in Texas that are spectacular. By and large, we think that we have commitments that are doable, achievable, and that leave room for upside for our investors. Michelle, you wanna?
Yeah. I think since that point in time, Dennis, we've seen some elevation in our build costs, right? That's a question that comes up frequently. We saw the high inflation in 2022. Build costs were not immune to that, and so we're still targeting that 25% cash on cash return. The restaurants that we approve, as Michael described, during our real estate committee process, have to hurdle at that rate, right? To still deliver those returns that we promised during our IPO process. We feel extremely confident we can do that. Michael and I aren't gonna sit here and say we're gonna be happy if we just hit those numbers for a class.
Right.
Our goal is to hit them, but outperform them, right? We're telling you what we're going to do, but meet those commitments and then hopefully-
Right.
you know, have a really good chance to outperform.
Michelle, on that point, it's a great point. Build costs are up for the industry.
Mm-hmm.
Obviously, your return's still around that 25% cash on cash.
Mm-hmm.
What you're seeing is sort of maybe a bit of strength from a top-line perspective.
Yeah.
relative to the...
Absolutely. Michael gave the stats on The Colony in Texas.
Yeah.
When we look at our most recent openings as part of the class of 2022, you know, we've talked about opening restaurants in Schererville, Indiana, opening in Tucson, Arizona, opening in Kissimmee in Florida. That class of restaurants are all outperforming our underwriting expectations. We feel really good about that, and we're gonna continue to provide data points on the performance of our class of restaurants as they continue to mature and get to that three year mark. We know we need proof points, right, as Michael said, to prove that we can grow outside of our core market of Chicago. We know that we can, but those proof points are gonna continue to come.
Great. 2023 will be another proof point year for you.
Mm-hmm.
Four restaurants kinda carrying over from last year.
Mm-hmm.
plus another seven from
nine new ones.
-from the class of 2023.
Yeah.
Sorry.
Excuse me. Can we just talk about the confidence there? It's obviously a difficult development environment for the industry with timing delays, et cetera. Maybe we could just touch on 2023 specifically, that'd be helpful.
Yeah. Like, historically, once we made a decision and had a restaurant approved from RESAC committee, it took us roughly a year to get it built. A lot of different reasons for this, but we expanded that to 18 months now 'cause it's, and a lot of this, a big chunk of that is permitting and dealing with local municipalities, et cetera. A little bit of that is some growing pains. You know, historically, we were building one or two restaurants and we're self GC-ing. We're building it ourselves. We've now partnered with very large national GC companies that allow us to be able to build restaurants and scale. We, you know, we went from 16-18 weeks build cycle to 18-22 weeks. Added, call it a month on the build cycle, but added five months on the permitting cycle.
In 2023, you know, earlier, a year ago this time, I thought 2023 would be better balanced. Unfortunately, it's not. It's all back end this year. We're targeting, you know, 3-4 in the third quarter and the remainder in the fourth quarter. Going forward, what looks, you know, what looks good to me is that we get all of our restaurants built by the end of October, and that from a new opening standpoint, November and December are dark. Our restaurants are super busy November, December, as are almost everybody's restaurants. We don't wanna be trying to open new restaurants at the end of the year.
How about as far as new store prototypes go? You have one relatively new pickup and delivery only location in Joliet, Illinois.
Yeah.
Can you talk about what you're seeing at that location and really, what's, what the potential is for that unit over time? I know there's a lot of investor excitement about that potential, maybe we could touch on that a bit.
Yeah. It is an exciting thing. You know, the backstory of that one is we had a restaurant about five miles away in Shorewood, Illinois, that was just bursting at the seams. It was doing literally too much revenue, it couldn't handle it, and it had started to underperform in terms of guest satisfaction, speed of service, et cetera. We literally did it as a pressure release valve, and boy, has it done that. It's a format, it's a drive-through only. Our typical restaurant requires, you know, two and a quarter, two and a half acres. This thing's on three quarters of an acre. It costs about half of what a restaurant costs to build, a full restaurant, and its productivity is more like 80%, 90% of a full restaurant.
We, and so it's a home run on paper. That said, I'm a bit of a perfectionist, and I can tell you like five things that we did wrong in building it. We overbuilt the kitchen. We did this, we did that. We'll get better. We've committed, we're gonna build another one in 2023. Part of the 2023 pipeline is a second drive-through location. The mayor announced it, unbeknownst to me, in Rosemont, Illinois. It's out in the public sphere. We're building a second one there. I think it's gonna be a home run. Our strategy on that format, though, is that is a fill-in strategy once you have density and scale. You know, Portillo's, we have beautiful restaurants that are inviting. There's stuff going on.
You know, the one in Texas, we've got like an antique Toyota pickup truck hanging from the ceiling, right? Toyota's North American headquarters are a mile and a half from our restaurant. We wanted to be friendly to the Toyota folks. They're really cool. I want your first experience at Portillo's to be in a flagship restaurant like that. Once you've experienced us, you know us, you're used to using us, then we want to be prolific and allow you to use us however you want. In Chicagoland, there's plenty of people who they know Portillo's, I just wanna get my Portillo's, and I like the drive-through. Imagine we can do a bunch more of those in Chicago, and then as we achieve density and scale in other markets, this is a great way of fortifying and fortressing.
Just on that opportunity and maybe other non-traditional prototype opportunities, relative to your 600+ target.
Yeah.
What's included there for those that are not as familiar?
Yeah. I'll talk about that, but I also now want Michelle to talk about our Restaurant of the Future. You know, when I got here four and a half years ago now, I brought in some outside advisors to use Form Analytics actually, to tell us, like, what do you think full potential is for Portillo's? I gave them two guardrails. I said, "I don't want restaurants within five miles of each other. I don't wanna cannibalize ourselves, and I don't want boxes that are gonna do less than $6 million, $6.5 million or something. By the way, and then I don't want you to include alternative formats, airports, universities, or international franchising. Flagship restaurants at a certain size, certain distance.
They came back with a number, you know, over 600, but we just call it 600. That was the TAM four and a half years ago. I think something we need to refresh, because we are looking at drive-through. We are considering other formats, and eventually we will franchise internationally. One of the other formats I'm excited about is the Restaurant of the Future.
The drive-through only concept is exciting, but actually what's more exciting for this brand moving forward is we're working on a project Michael asked me to lead with our head of marketing, which is our Restaurant of the Future. It's, you know, basically take a whiteboard and say, "How would you build a full-size Portillo's in the future?" For those that probably have not been in our restaurants, our kitchens are very linear. They're very long kitchens. They're big kitchens. Our restaurants were built for a very robust dine-in business. Pre-COVID, we were doing 50% plus dine-in business. Today, a third of our business is dine-in. COVID accelerated the trends we all knew were happening in the industry, which is more people are dining off-premise, right?
How do we build that Restaurant of the Future for where the guest is and also where we can get more efficiencies in our kitchen? Because there's opportunities to use more standardized equipment. A lot of our equipment in our kitchens today are very customized, there's opportunity to get the kitchens more in line, to have more efficient usage of your labor. Also, I think shrink the dining rooms as well. Build some dedicated entrances for the delivery folks to come into your restaurants, you know, for pickup shelves, things like that I think can significantly reduce the size of what we're building. We build about 70-800 sq ft today for a full-size Portillo's. I think we can get that size down and not hinder the guest experience.
Still deliver the Portillo's experience to our guests, and we're doing that work as we speak, Dennis. The goal would be to, at some point during the class of 2024, to build a Restaurant of the Future.
Right.
I think when you think about what we just talked about in terms of build costs being elevated in 2022, we're not seeing significant easing on that. It's not getting any worse, which is good, but I think that could provide massive opportunity for us to build the Portillo's of the future. To Michael's point, that could be more than 600 restaurants.
Very, very exciting. I wanna shift over to sales drivers and maybe start with satisfaction metrics.
Yeah.
Across the industry, we've probably seen in a lot of cases those going the other way. For you folks, though, I'll let you talk about it, Michael, but your satisfaction metrics look very good. What does that tell you about the momentum in the business, how the brand is positioned right now?
Yeah. Look, maybe I'm a caveman in my mindset, but I think in the restaurant industry, the best marketing you can do is give people a great experience when they come to your restaurant, right? Think about when you visit a restaurant, I've got the data, by the way, on this, but you're not going to a restaurant because there was an ad or a coupon or marketing offer. You're going because, man, the food is really good, and I had a good experience last time. That's why people go to restaurants. I'm a huge believer that you take care of every single guest like your life and business depend on it. We have aggressively worked to delight our guests. Our guest satisfaction scores, and this is we, you know, we work with SMG.
Many of you are probably familiar with it. They do all the customer surveys, et cetera. Our guest satisfaction scores are at three-year highs. Our speed of service scores are at three-year highs. Our value perception scores are at three-year highs, and our order accuracy is at three-year highs. Those are all sort of autocorrelated metrics, right? If you're accurate and fast, you're gonna get good scores. That gives us a lot of confidence that things are tracking well for us. Michelle and I also talked about this at our earnings call, year to date in 2023, we're positive transactions, and we're positive sandwich count. I talk about sandwich count because I think that's the truest barometer of people are coming to your restaurant or not. Transactions can get noisy, right? One transaction might be multiple people.
Our sandwich count is up year to date as well as our transaction count. We're very excited about the momentum of the business.
Great. On value, you touched on it kinda with some of the metrics there. The value scores look good.
Yeah.
Maybe we could talk about the solid relative value that the brand provides, particularly as investors are so focused on a tougher macro right now. What kind of resiliency does the brand and all brands have?
Right.
If we could touch on that value proposition, I think that'd be helpful.
Yeah. We're just under $10 per person on average. We look at our pricing relative to our competition in a lot of different ways. We like to compare ourselves to a number of other high-quality fast-casual chains. We pick an indicative restaurant. We look at our competitors within five miles, see how they price. We price our most popular bundle against their bundles. Our most popular bundle is a beef sandwich with peppers, fries, and a drink. We compare ourselves against... I think I've said it before, so I-
Yeah, yeah.
Against, like, Chipotle, Panera, Five Guys, Shake Shack, Potbelly. Against that group, we're anywhere between $1 and $6 less on a like-for-like best bundle. We feel really good about that positioning. We consciously have followed a price laggard strategy. You know, commodity costs are up 15% for us. Labor costs are up 11%. We priced 8%. In a normal year, 8% sounds like a lot. Last year, 8% was on the low end for restaurants and food in general. We think that that positioned us very, very strongly against our competition.
We, you know, we think that whether or not the company is technically in a recession or not, there's certain segments of the population that feel a recessionary bite. We wanna be a value oasis for those customers. I think it's working. Our strategy is working.
Can I get a salad for less than $18 at Portillo's?
You can.
Good.
You get a really good one that's fresh made to your specifications.
That works pretty well then.
You can add a drink on.
Yeah.
-for under 18.
Right. I.
With a chocolate shake, Dennis.
Great. I wanna touch a bit more on the operational improvement potential.
Yeah.
I think, Michelle, you touched on-
Yeah.
a lot of it with,
Yeah.
With the Restaurant of the Future. Beyond that, biggest opportunities to improve operations within the four walls of the restaurant, if you could just touch on that a little bit?
Yeah. I think one of the exciting things we're doing in 2023 is we are tweaking the kitchen a little bit. We have an initiative called Kitchen 2023 where, you know, I described that linear kitchen, right? Well, we've shrunk that by about 60 feet in the restaurants we're gonna build in 2023. We've changed around some of the flow of the equipment. Like, these things all sound small, but they mean something. Like, just simply turning the fryer station to where you're expediting to both drive through and dine in and pick up, just it creates this labor efficiency within your kitchen that we believe can reduce two FTEs of labor within our kitchen just by making this kitchen more efficient.
Mm-hmm.
Today, Our drinks.
Are served to you. We're taking the drink station, putting it into the dine-in area, having self-serve drinks. We're creating a grab-and-go area where, as you walk in and order, you can, you know, see the great desserts that we make fresh daily. You can, you know, grab some beverages, you can have some Portillo's swag. There's a lot of things that we're doing within our 2023 builds that are tweaking some of the design elements of what we're building today that are gonna get us some labor efficiencies. We'll build on top of that as part of Restaurant of the Future, but, those are some efficiencies that we have going forth this year. We put a lot of efficiencies in our kitchens last year.
Again, just little things like buying pre-chopped onions and sausages, et cetera, that weren't any more expensive but provided those efficiencies for our team members within our restaurants. We saw that come through. Michael mentioned labor rates were up 11%. You know, we took 8% price, but the some of the efficiencies we got on our labor allowed us to buffer some of those cost increases a little bit more within that 2022 timeframe.
Great. I wanna shift over to omni-channel. You've got sizable businesses across multiple channels.
Mm-hmm.
Strength and good momentum in several of them. Can you talk a little bit about that, the advantages that plays in your business?
Yeah. I, this is, this is one of the magic of Portillo's. We were multi-channel before it became a thing, right? We have, obviously, dine-in, takeout. We have drive-throughs that are not the traditional QSR drive-through. It's a double lane drive-through. Somebody comes up, helps you curate your order, put a sticker on your car. A food runner comes and runs out your order to you. That way, if you're five cars back but you just wanted a shake, you can pop out into that second lane and leave right after you get your shake. It allows much faster service.
Mm.
A more curated experience, et cetera. We have a big delivery business. It keeps growing. We partner with all the third-party delivery people. Despite the price deltas, that business keeps growing. We're margin neutral on that business. We charge more, obviously. We have our own delivery mechanism, Dennis. Anybody who orders over $100 of delivery, Portillo's delivers on its own. Our team members love doing that. You know, they're certified, we train them, but they love doing it 'cause they're getting a big tip on a delivery, and the guest loves it 'cause it's much more of a white shoe delivery experience for them.
We have a very robust delivery, catering business, and then we have a shop and ship business where, you know, I mean, if you're not a Chicagoan, you won't appreciate this, but, like, shipping Portillo's to people at holidays is a thing. We have a very, very big business where we ship Portillo's.
Great. How about from a digital perspective, thinking about, you know, the contribution there...
Yeah.
where that can go ultimately, the opportunity that still exists for the brand on digital.
We You know, about 30% of all of our sales are through a digital channel. I'm gonna sound a little snarky about this. I think there's people who tout digital as the be all and end all because it's Digital is a great way to access off-premise. If you don't have a drive-through, if you don't have a good delivery mechanism, if you're losing money with the third party guys, then yeah, you should brag about digital. We have so many different ways for a consumer to engage with us and take the business off-premise, that it's not like We don't need to be pioneers in digital. We have a fantastic app. It's the low cost way of using Portillo's.
We've been really smart about managing the app so that anybody who goes on, you know, now they're like 70% likely to get to a sale as opposed to there's some industry standards on start and finish that are lower. I like to think we're fast followers on the technology stuff, but it's because we already have so many great mechanisms to engage with us and take the business off-premise, take the food off-premise.
Great. You touched on the impressive traffic and entree momentum to start the year.
Yeah.
Can we talk a little bit about how you think about that moving through the year? Maybe we talk about mix a little bit within that context, again, particularly given the macro that's out there and thinking about pricing, just how you're thinking about that as we move through the year.
I think, you know, Michelle and I talked about this last year. We reemphasized this. Last year, we have three constituents. I've got my team members, our guests, and our investors. You have to balance the needs of three constituents at all times. Last year, we did really well by our team members. We did really well by our guests 'cause we lagged on pricing. We eroded a little bit of margin. This year, I think it's gotta be more balanced, and we're committed to... We already have great, you know, restaurant, we're embarrassed that we ended the year at 22.6% restaurant level margins, which is kind of silly. We think we can improve it.
I think that we're gonna balance pricing but still maintaining traffic momentum, and we're gonna make sure that we're improving margins while doing our best to maintain that traffic momentum.
Great. Then just on pricing, you've spoken to this on earnings calls in recent quarters. What have you seen as it relates to the pricing levels, as it relates to resistance from the customer, and then how that's kind of guiding what you've kind of talked about for the year so far from a pricing perspective?
Yeah. I kind of go back to where I started, what we talked about with the guest satisfaction metrics. Guests are telling us that they're more satisfied with us than they have been a long time, that the value perception is as high as it's been in three years. Keep in mind, we priced 8%, we priced, whatever, 6%. It's, there's a lot of pricing embedded in that, and our value perception scores have improved. And so... you know, we're $1 to $6 cheaper than our competitors. I think we have... And we have positive traffic and positive transaction count. I think it goes without saying, we feel like we have a lot of pricing power.
Yeah, I think the one thing, Dennis, that, you know, we do see in this environment, which it started for us in the second quarter of last year and has continued to trend, is we are seeing a little bit of negative mix, and you mentioned that in your commentary. We're still getting people to come into Portillo's, but you're seeing maybe they're not adding that side of cheese sauce or maybe that extra drink. That dynamic has not changed as we come into, like, the first part of this year. What Michael and I want is traffic growth, right? That's the healthy way to grow this business.
Yes, we see a little bit of negative mix that will obviously work its way through, but we're gonna continue to pull the pricing lever in 2023 to offset the inflationary pressures and grow margins. That's gonna be the primary lever.
Again, traffic and entree growth, which Michael, you spoke to, which some might have the positive traffic now, but maybe not the entree. I think that's an encouraging data point and an encouraging trend for sure. Michelle, another one for you maybe as we think about margins shifting over there for 2023. Despite cost pressures, macro pressures, you've talked about expansion for the year. Can you talk a little bit about what goes into that? You know, unpack that a little bit for us.
Yeah, absolutely. As most of you know, our biggest costs are gonna be food and labor, right? As Michael mentioned, food was up 15%, labor 11% on our hourly rates last year. We think both of those are gonna be mid-single digits this year, as we have, you know, visibility to the extent that we do on our commodity costs. Our biggest input costs are gonna be beef, chicken, and pork, primarily beef. Those three proteins are about 50% of our commodity basket. We think mid-single digits on both those input costs is, you know, reasonable inflation this year, and we can pull that pricing lever, Dennis, to not just offset those inflationary pressures, but continue to grow margins.
That is despite the fact, as we talked about earlier, we have 13 new restaurants coming online into the Portillo's portfolio in our fiscal year 2023. Those restaurants don't immediately start, you know, doing low 20%, right? The first couple of years, they're in the high teens in terms of margin, and then the goal is by year three, that low 22%, that 22%-ish. Despite that, mixing those into the portfolio, Michael and I are very committed to growing margins 2023 versus 2022.
Obviously, with a little bit of a back-end weighted year that probably puts a little more pressure on that margin number, perhaps, as you talk about the pressure from new store inefficiencies to some extent. As it relates to food, just remind investors if you could where, you know, where you're locked there as it relates to the visibility that you have on the basket right now.
Yeah, no problem. Our, our basket is about a third locked for the full year. Most of that is gonna come on that beef line item. Beef's about 35% of our total commodity basket. We've taken fixed pricing positions on our beef flaps, which are the big roasts essentially that we use to make our Italian Beef, and some other positions on some other line items. We're generally floating with the market on chicken and pork. We think we'll actually see deflation on chicken and pork this year with beef seeing increases, but not as much as we've seen in the prior years. A little bit of pressure possibly in the back half of this year on beef.
We think we'll see some pressure on our french fries, and that's about 7%, 8% of our total market basket. When you blend all that together, that's where we get to the mid-single digits. As I mentioned, we feel good about where we're at today, the visibility that we have. Again, you never know what the world's gonna bring. I didn't think we would be at 15% early part of last year, you know, but things happen. That's what we think as we sit here today.
Great. How about staffing? A bit more on where you are staffing-wise versus where you were in 19 versus maybe where you wanna be. Then you've talked in recent quarters about investment in staffing, given the importance of your employee to the overall experience. Maybe we could touch on that a little bit.
Yeah.
I mean, this is gonna sound crazy, but we're thrilled with where we're staffed. We're better staffed today than we were in 2019. Now I feel like we've earned this because we've worked very, very hard on culture. We have values. We're a values-based we hire people based on values. We evaluate them based on values. You know, we pay above average now. For our hourly folks, we pay at the 60th to 75th percentile. We have a great benefits package for our hourly team members, right? Like, you know me, I want health insurance. They want pet insurance and gym pass memberships. It's like, okay, you can, you know, use your benefits however you want. We have great training programs. We're in an industry that in many ways is a transitionary industry.
Look, you can make a great living in this industry. I've got GMs that make, you know, well, darn close to $200,000, right? They make a lot of money. It's an industry that you can make a great living at. We will train you. We will help you get successful. We will help you be the best version of you. We work really hard at all that. That's why when you compare our hourly... You know, according to Black Box, when you compare our hourly turnover to the rest of fast-casual industry, we're about 40 percentage points better on turnover than they are. That's improved. It was 30% last year, so we've gotten better. Our management turnover has become exceptionally low.
It's like 8% right now, which is 20%+ lower than the rest of the industry. By the way, those turnover numbers, right, there's hard costs, but there's a lot of soft costs associated with that. When you're constantly churning hourly staff, they're just less efficient. They don't know. It negatively affects the vibe. When you're constantly churning management. It negatively affects the restaurant. We feel really good about where we are from a team member standpoint.
That's great. Michelle, another one for you, just given all the focus on balance sheet over the last.
Yeah
-week or so, maybe we could talk a little bit about balance sheet leverage, how you're thinking about it, and maybe highlight your most recent refi transaction, which, you know, unlike I think the expectation that most are gonna be seeing expenses go up from an interest perspective, you guys.
Yeah
got a nice little benefit there, so.
Yeah, we were excited that we were able to get a refinancing done in this environment. We completed that on February second, and we currently are at $310 million of debt. Basically the old debt that we took out, Dennis, was at 550 basis points plus LIBOR. The new debt is at 275 plus SOFR. We feel really good about, you know, when you take like for like rates at the closing, you know, saving $8.5 million annualized interest expense, which we can put towards building more Portillo's restaurants.
Right.
I feel really good about getting that done, considering the environment that we sit here today. We feel good about the capital structure that's in place, you know, for the next five years if we so choose. I see us, you know, refinancing that at some point, not in the near future, but in the future. Yeah, our leverage ratio sits probably at around 3.5 times right now. We were at a much higher leverage ratio before our IPO, and I know you know this, but for those that don't, we used the proceeds to pay down debt from the IPO and de-lever.
I feel good about our ability to service the debt, invest in our business, and it just provides even more opportunities to do that. We increased our revolver from $50 million to $100 million. It gives Michael and I and the rest of the company a little bit more financial flexibility that, look, if we wanna dial up growth, I feel comfortable doing that. We're funding our growth right now through free cash flow. I don't expect that we're gonna need to take on more debt, raise capital to fund our growth. Look, if we wanna dial up growth a little bit and I need to tap into the revolver, I have plenty of now flexibility on that to do it.
Our restaurants cash flow immediately.
Yeah.
it's not like, you know, when you're building new restaurants, Portillo's, you don't need to wait a couple years to get the cash out of them. They literally cash flow immediately, so the engine keeps getting stronger.
Yeah.
That's great. Couple from the audience, one that I wanna work in. Just one, LTO philosophy, how you think about that. I have a good sense, but.
Yeah
You can kinda share that.
I hate them. Here's the problem with LTOs, right? The problem is from an operator standpoint, I gotta learn a whole new thing that you're gonna do for a short period of time, and then it goes away. It's a pain in the ass. I find that guests are frequently frustrated by an LTO. It's like, "Hey, I came in for that. I'm back two, three months later, and it's gone." You know, we believe, I believe personally, in a more Darwinian exercise on the menu. If it's good enough to get on your menu, then put it on your menu and kill something that's not as good. We have great examples of that, right? We had a, we had a vegetarian vegan dish. It was a portobello mushroom sandwich, okay? When executed perfectly, it was really good.
We executed it perfectly like 10% of the time. We replaced it with a vegan hotdog called a Garden Dog. It's a fantastic product. It's clean ingredients. It's pea protein and spices. It tastes great. Guests love it. They're buying it up at like 5, 6 times the rate of the other thing. My investors love it because I removed four unique SKUs with the portobello thing that were slow-moving. I replaced it with one SKU. My operators love it because it's the exact same motion. The other reason my investors love it is I improved my penny profit significantly. That is the kind of innovation, food innovation, that makes sense to me.
That hotdog is a great product. I think I had it three times at RLC.
Yeah.
I mean, it was delicious.
Most people can't tell the difference between that and meat.
It was really good. Wanna ask about dine-in and sort of where that sits now?
Yeah
-versus where it was, where it's going perhaps. I know there's, it's a little bit of a tricky question where it's going-
Yeah
how you think about it.
I think I mentioned this before. We were over 50% dine-in before COVID hit. Obviously our dine-ins got shut down, so we were at 0% at one point during COVID. It's, you know, gradually bounced back to we're at, you know, I'd say around 35% dine-in mix today, Dennis Geiger. It started to really stabilize in 2022, and I think what we've already talked about, which is the trend towards more off-prem dining, was definitely accelerated, and we're seeing that. I don't expect we're ever going to get up to 50%. It's the reason why as we look at Restaurant of the Future, I think we can do some things in the dining room to shrink that a little bit. Could it get up, you know, above 35%, somewhere in the 35%-40% range?
Yeah, I think it can. I think that would be largely incremental for us. I will say this about one of the dynamics that does exist for Portillo's, and Michael talks about, you know, people experiencing Portillo's for the first time coming into our restaurants. We do actually have a higher dine-in mix in the outer markets than we do in our core markets because people do wanna come in. They wanna see the brand. They wanna see us make the food, experience us that way. That is a dynamic we have noticed in outer restaurants, and they learn that our drive-throughs actually move quickly. They need to learn that as we go into some of these newer markets. A little bit heavier mix on outer markets.
That's great. Any other differences Chicagoland versus non-Chicagoland markets customer behavior-wise, how the customer uses the brand? You touched on something a little bit there, but-
Yeah
anything else you would highlight from that perspective?
I would just say that. It's not surprising to us, but it's surprising to other people that, how our menu mixes is eerily similar. As an example, Italian Beef is the number one seller in every market that we operate. Texas is actually more heavily outweighted on Italian Beef sandwiches in the beginning. I mean, these are. It's only been open two months. Italian Beef, our hot dogs, our french fries one, two, and three, with our hamburgers to follow. The menu mix is about the same in outer markets. Michael said this publicly, for The Colony, our restaurant in Texas, we don't even have any digital capabilities turned on right now.
The only way that you can access Portillo's in Texas is by coming into the restaurant or going through the drive-thru, because we're doing $17 million. It's already not meant to handle $17 million.
Right.
could you imagine if you turned on delivery-
Yeah.
digital pickup? You just can't do it right now. There are those things like channel mix that you see in outer markets that are different than the core just because of those unique dynamics.
As far as turning that on and that or those channels on, that'll just be something, let's see where the sales volumes are and what the staff can handle at the end of the day.
Yeah. That's a best practice that we learned in Orlando. Our Orlando restaurant opened up today. I said it publicly.
Yeah.
Like did $10 million its first year without any of those channels turned on. Now it's almost finishing its second year. We recently turned on digital, et cetera. We're seeing, you know, we've seen immediate pop there. We think it can handle a certain level of volume. Early on, when it's flooded with guests inside in the drive-thru, you don't want to distract the team from taking care of the people coming in.
Terrific. I have a couple more, but you know what? I think we're out of time, so I'm gonna leave it there. I wanna thank all of you very much for sharing your insights and your time with us today. Much appreciated. I'm sure investors know how to get in touch with you if they need to, but this has been great. Thank you, guys.
Thank you for having us.
Thank you. Appreciate it.
Thank you.