Greetings, and welcome to Portillo's third quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Chris Brandon, Vice President of Investor Relations. Thank you, Chris. You may begin.
Thank you, operator. Good morning, everyone, and welcome to Portillo's Q3 2026 earnings call. With me today are Brett Patterson, President and Chief Executive Officer, and Kevin Kalicak, joining for his first call with Portillo's as Chief Financial Officer. You can find our 10-Q and earnings press release at investors.portillos.com. Any commentary made here about our future results and business conditions are forward-looking statements, which are based on management's current expectations and are not guarantees of future performance. We do not update these forward-looking statements unless required by law. Our 10-Q identifies risk factors that may cause our actual results to vary materially from these forward-looking statements. Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials.
After we deliver our prepared remarks, we will be happy to take questions from our covering sell-side analysts. Lastly, we will be attending the upcoming Stephens Conference on Tuesday, November 17th, as well as the Morgan Stanley Conference on Tuesday, December 1st. We look forward to seeing many of you there. With that, I will turn the call over to Brett.
Thanks, Chris. Good morning, everyone, and thank you for joining us. Before I begin, I want to welcome Kevin to his first earnings call with Portillo's. Kevin is an excellent leader, and I am glad to have him on the team as we guide Portillo's into its next chapter. Our third quarter results came in ahead of expectations. Same-restaurant sales increased 1.4%, a 260 basis point improvement from the second quarter. Adjusted EBITDA grew 23.7% to $26.5 million versus the prior year quarter. Kevin will walk through the details and our full-year outlook shortly. I am encouraged by the early progress, but let me be clear, one quarter is not a trend. We have significant work ahead, and our focus is simple: run great restaurants and run this company with the discipline to deliver durable sales and profitable growth.
As a leadership team, we have taken an honest look at our business over the past several months and confronted a hard reality. Portillo's has not delivered the returns our investors expected. Those lessons are already shaping our actions. We have strengthened key parts of our leadership team, right-sized our corporate structure, deepened our understanding of our guests through formalized research, identified meaningful operational and supply chain savings, and implemented a more rigorous site selection process, which we have already used to exit several future real estate agreements that lack sufficient return potential. I also want to update you on two commitments that I made to you in August. First, we remain on track to deliver $10 million-$15 million in annualized run rate efficiencies. We will share more specifics on these savings when we provide 2027 guidance in January.
Second, as part of our ongoing portfolio assessment, we expect to close a mid to high single-digit number of underperforming restaurants outside of Chicagoland, most of them in the fiscal fourth quarter. These are very difficult decisions, but they are the right ones for the long-term health of the business. Together, these actions are shaping our focus, improving our cost structure, and building the foundation for a much stronger company. Now, let me turn to the growth strategy we introduced this morning, which lays out how we will strengthen Portillo's and build a more sustainable, profitable path forward. The full detail is in our earnings release, so I will focus on the key elements. Kevin, Chris, and I will also use this strategy to frame our conversations with investors in the weeks ahead across several forums, including a webcast conference appearance in mid-November.
At its core, this strategy is grounded in one belief: the right to grow must be earned. It builds on the lessons I just described while protecting the distinctive food, hospitality, and experience that make Portillo's special. The strategy rests on the three pillars I have shared with you before: operational excellence, integrated marketing, and disciplined development, all underpinned by a renewed commitment to financial rigor. Together, they are designed to strengthen our business fundamentals and create sustainable long-term shareholder value. Our brand research gives us a strong place to start. It confirmed that Portillo's strength goes well beyond the food. Our guests have a powerful emotional connection to this brand, both in Chicagoland and beyond. That connection is the foundation we will build on as we bring more discipline to the decisions that shape our future. Let me walk through each pillar. First, operational excellence.
Running great restaurants is the foundation of everything we do. We have refined our regional leadership structure so field leaders oversee fewer restaurants and can give our teams more focused, hands-on support. We are raising standards, strengthening accountability, and improving tools so our teams consistently deliver great food, accurate orders, faster service, and genuine hospitality. We are also updating hourly and management training, supported by certified trainers, and evaluating restaurant technology and equipment to improve reliability, product quality, and consistency. Second, integrated marketing. Our recent brand perception, customer segmentation, and menu satisfaction studies are now guiding our brand positioning and the guests we target and our menu priorities. The brand study highlighted a clear opportunity: use the strength of the Portillo's brand to drive profitable transactions and more frequent visits. We are acting on that with refined brand positioning and an integrative creative and media strategy.
Our segmentation work identified two distinct millennial audiences where Portillo's is uniquely positioned to win. Focusing on these guests creates meaningful growth potential and allows us to invest marketing dollars more effectively. We are also building digital capabilities that match the strength of our brand. A new technology roadmap will guide our decisions on building out a modern marketing technology platform to improve the experience and drive conversion and sales. As part of that work, we are fully assessing our Perks loyalty program to simplify it, increase engagement, and drive frequency. We are also putting culinary excellence back at the center of the business. Our menu satisfaction study reinforced a clear priority: protect and improve the food our guests already love, then use thoughtful innovation to create new reasons to visit, as you recently saw with our Char'diniera Dog, Dr Pepper Shake, and our recent Oreo dessert launch.
Our new executive chef is now leading menu strategy, core menu quality, and a more strategic innovation pipeline. Third, disciplined development. This may be the most significant change in how we approach growth. We are implementing stricter data-driven standards for site selection and underwriting. A new restaurant will move forward only if we believe it will generate cash-on-cash returns consistent with our new restaurant targets and pass its rigorous market and site reviews. A site will not advance simply because we want another restaurant. The economics have to work. We will balance infill opportunities in existing markets with expansion into strategically adjacent new markets. This will enable us to leverage our regional leadership, operating infrastructure, and brand awareness as we pursue the significant white space opportunity ahead of us. We are also introducing a more efficient prototype.
Our 2028 prototype is approximately 4,600 sq ft, more than 40% smaller than our previous average restaurant, and requires approximately 1.5 acres compared with 3 acres historically. Smaller does not mean less Portillo's. The new design preserves the character and experience our guests expect, along with the potential for high volumes. Today, nearly 15% of the restaurants in our system generate over $1,500 in sales per square foot, with a few surpassing $2,000. We believe the optimized kitchen, more standardized design, and greater site flexibility can improve throughput and productivity while targeting a lower capital investment. Across all three pillars, financial rigor will shape how we operate and allocate capital. We are reinforcing restaurant-level accountability for sales and profit and aligning incentives with those outcomes. Kevin will cover our capital allocations priorities in more detail. Looking to 2027, we plan to open four to six new restaurants.
Guests will begin to see this strategy come to life through more consistent execution, refined brand positioning, and new creative, a better digital experience, and more food news from our culinary team. We will be clearer about our priorities, more rigorous in how we operate and allocate capital, and more accountable for the results we deliver. That is how we will protect what makes Portillo's special, build a stronger business, create long-term shareholder value, and earn the right to grow. I also want to thank the entire Portillo's team, most importantly our restaurant managers and team members, for the hard work and dedication behind our strong third quarter performance. With that, I will turn it over to Kevin to discuss the quarter in more detail.
Thank you, Brett, and good morning, everyone. I am excited to be here with you today on my first earnings call at Portillo's. Since joining in September, I have spent time in our restaurants, with the team at the Restaurant Support Center, and with our Board, listening and learning. What drew me to Portillo's is simple. It is an exceptional brand with a strong foundation. It has a differentiated and craveable menu, passionate guest base, and high-volume operating model. What also excited me about this opportunity was the chance to work with Brett and the rest of the leadership team on the work underway to sharpen the company's direction. That work culminated in the strategy we shared today, which builds on Portillo's strengths and positions us well with commitment to responsible growth and a clear focus on shareholder returns.
After three decades in the restaurant industry, I know firsthand how the three pillars of our strategy, operational excellence, integrated marketing, and disciplined development, matter to creating value for both guests and shareholders. Going forward, you can expect me to be disciplined on capital allocation with a focus on creating long-term shareholder value. I look forward to partnering with the team to execute our plan. Now to the third quarter. Our overall results were stronger than anticipated, with positive same-restaurant sales. We achieved this while facing over 200 basis points of traffic headwinds from last year's breakfast test and heavy promotional discounting, while also continuing to experience cannibalization from new restaurant growth. Partially offsetting these headwinds was a strong performance of two new limited-time offers, the Char'diniera Dog and Dr Pepper Shake. These limited-time offers brought news and innovation, supporting transactions without the need for deep discounting.
Revenues increased 7% in the third quarter to $194.1 million. This was driven by $10.3 million from the addition of non-comp restaurants. And by positive same-restaurant sales of 1.4%, consisting of a 2.1% increase in average check and a 0.7% decrease in transactions. Higher average check was driven by a 2.1% increase in menu price, while transactions improved 270 basis points sequentially from last quarter. Turning to our margin analysis compared to last year, food, beverage, and packaging costs decreased 10 basis points to 34.4% of revenues. This improvement was driven by an increase in average check and improved food waste, and was partially offset by a 2.2% increase in commodity inflation, led by continued elevated beef costs. Labor expense of 26% improved 60 basis points, primarily due to hourly labor efficiencies and an increase in average check.
This favorability was partially offset by higher incentive compensation expense and sales deleverage from lower transactions and lower average weekly sales for non-comp restaurants. Other operating expenses remained flat year-over-year at 12.9% for the quarter. Occupancy expense of 6% increased 20 basis points versus last year. This was primarily driven by sales deleverage from non-comp restaurants. Our Restaurant-Level Adjusted EBITDA increased to $40.1 million, with margins increasing 50 basis points to 20.7%. Our G&A expense decreased to $19.8 million, or 10.2% of revenue in the quarter, compared to 11% the prior year. This decrease was primarily driven by $3.3 million of lower dead site costs resulting from our 2025 strategic reset, as well as salary and benefit savings from our workforce reduction at the Restaurant Support Center.
This was partially offset by a $1.4 million restructuring charge associated with the workforce reduction and the absence of a $1.1 million net benefit recognized in connection with the CEO transition last year. Our pre-opening expenses were $2.6 million lower, driven by fewer restaurant openings in the third quarter versus last year. Adjusted EBITDA increased $5.1 million to $26.5 million, or 13.6% of revenue compared to 11.8% last year. Income tax expense was $1.8 million, and our effective tax rate for the quarter was 27.4%. Cash provided by operating activities increased 26.8% to $61.8 million year- to- date. We reduced our revolver by $12 million in the quarter, resulting in $85 million outstanding and $24.8 million in cash to end the quarter. We now have approximately $61 million of remaining revolver capacity and net debt of $300 million.
We will continue to utilize our cash available to pay down debt. In the fourth quarter, we plan to open one additional restaurant on North Michigan Avenue in downtown Chicago. This will be our second in-line restaurant and will bring our total openings to eight in 2026. As announced this morning, we plan to close a number of underperforming restaurants outside of Chicagoland, with most of these closures occurring in the fourth quarter of this year. We are not able to share the exact timing, locations, or cost with you today as we continue to evaluate lease options for these restaurants. We expect the closures to result in material cash and non-cash charges, mostly in the fourth quarter of fiscal 2026. Now, turning to our expectations for fiscal 2026, which factor in the expected closures in the fourth quarter, we anticipate total revenue of $768 million-$773 million.
Based on our outperformance this quarter and estimates for the remainder of the year, we are raising our full-year Adjusted EBITDA outlook to between $98 million and $101 million, including mid-single-digit commodity inflation, low single-digit labor inflation, Restaurant-Level Adjusted EBITDA margin of 20%-20.5%, and G&A expense between $80 million- $82 million. Finally, Brett shared with you the highlights of our growth strategy. Building on this, I would like to highlight our capital allocation priorities. We plan to first reinvest in improved technology and maintenance of our existing restaurant portfolio. Second, invest in qualified new restaurant growth. Finally, use excess cash to reduce debt and leverage, strengthening our long-term financial stability.
Based on the collective actions of this strategy, we expect to deliver annual same-restaurant sales of 2%-3%, and in the next three years, new restaurant growth to a high single-digit percentage while expanding margins by leveraging sales growth and efficiencies. New restaurants are expected to deliver cash-on-cash returns greater than 20%. Thank you for your time today. Now let us open it up for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Excuse me. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Margaret- May Binshtok with Wolfe Research. Please proceed with your question.
Hi, guys. Thank you for taking my question. It's encouraging to hear the sequential improvement in same restaurant sales this quarter. So I just wanted to ask first how same-restaurant sales are trending so far in the fourth quarter. On another note, I know your plan now calls for that 2%-3% same-store sales growth. How long do you think it takes to get to that range? As you think about the parts of the plan, which are you most excited about and you think is the strongest lever to drive traffic in the near term? Thank you.
Hey, Margaret- May, this is Brett, and thank you for the question. I'll take the second part first and then turn it over to Kevin, and he can talk to you about the sequential improvement. We believe what needs to happen really is, as we laid out the strategy and the three pillars, there's got to be synergies between all three. It's not going to be one of those pillars getting better, the other two not getting better, that will drive traffic. But I believe what we'll see and kind of what we saw through quarter three is innovation is really important to Portillo's because as we learn more about our customer, the fanaticism of this brand is pretty remarkable. When you give them good news and you give them news that resonates with the brand, they'll come visit.
It doesn't have to be at a discount. Actually, it shouldn't be at a discount. So I would say as we continue to ramp up our innovation pipeline, put really quality food out there, and our operations gets more consistent across the board, we'll start to see that kind of natural transition to transaction growth, and then on top of that, leverage our price increase, which we anticipate kind of keeping at inflation or better to make sure that we focus on our value proposition.
Yeah, as it relates to the fourth quarter, I think you talked a little bit about the sequential improvement that we saw in the third quarter. Certainly, we are excited about that. As it relates to the fourth quarter, the guidance for our same-restaurant sales is embedded in the total sales guidance of $768 million-$773 million. But I will tell you that quarter four to- date, we are running ahead of third-quarter same-restaurant sales, and that is in part driven by strong performance from the Oreo desserts, which has been running for period 10 and continues to run the rest of this week and into next week. Although similar to the third quarter, we continue to face headwinds from last year, most of which were deeply discounted. For instance, like this week, we are wrapping on a free beef sandwich offer, which is a big headwind for the fourth quarter.
Thank you.
Thank you. Our next questions come from the line of Gregory Francfort with Guggenheim. Please proceed with your question.
Hey, thanks. I had two questions. The first is maybe just what the margin implications might be for slowing growth, exiting some of the stores, and just because I look at in the next year, what sort of comp maybe would you need to have margins flatter up? Just a rough framing there. Thanks.
Hey, Greg. This is Kevin. I think with the closures, you will likely see an improvement in margins given that these are underperforming restaurants, and so those will lift the base naturally. I think as we continue to look at what is ahead in 2027 beyond, if we are targeting that 2%-3% same-store sales growth, margins should be flat to slightly improve as we talked about leveraging same-restaurant sales, leveraging G&A, those factors particularly as we begin to ramp up new unit growth in the next three years.
Okay, great. My second question is, Brett, I mean, you have now had a couple quarters here. As you keep digging into the business and kind of increasing your learnings, what has shifted in your thinking? Any major opportunities that maybe presented yourself from the last time we spoke? I am just curious how you are thinking about it. Thanks.
Yeah. Thanks, Greg. I do not know how much has really shifted since the last call. I think my first call was obviously, I was just still drinking from a fire hose and learning the brand. But if I had to tell you, probably the most surprising thing that really occurred last quarter is when we got our research back, Greg, honestly, the research kind of confirmed what we believed, but I would say it was almost amplified about how much passion there is for this brand and love the brand. It was really interesting because it was outside of Chicagoland as well. When we did these studies, we went really deep to all of our markets, talked to lapsed users, new users, loyal fans, and I would say the brand love stands out. It is a towering strength for us.
We learned a lot about our food, and so I would say those kind of crystallized maybe some thoughts. But how we approach the strategy going forward is, when you have got the type of fanaticism, our job is to shepherd the brand a little bit differently than if we are trying to convince people why to love us. I said, really continuing on, you hear us use rigor and discipline a lot as we speak. I would say that is what we really need to focus on this organization is really commitment to really good processes that will manufacture better outcomes for the business. I think you are starting to see that in quarter three, and you should see that continue on to quarter four in 2027.
Thank you. Appreciate it.
Thank you. Our next question has come from the line of Sara Senatore with Bank of America. Please proceed with your questions.
Hi, this is Aisling on for Sara. Congrats on a really nice quarter. Restaurant margins, they were up 40 basis points on the 1.4% comp, and beef was still inflationary, so overall very impressive. Could you just help us unpack what drove that between the labor model changes and the lower volume units and the early supply chain savings? How much do you think carries into next year as the saving program builds?
Yeah, thanks for the question, Aisling. As it relates to the margins in the quarter specifically, clearly, our improvement in labor was the big driver, being 60 basis points favorable year-over-year. A lot of that was labor model improvements, particularly in some of our lower volume restaurants, and adjusting to accommodate the demand that is more the expectation there now. I think that's the biggest one. In terms of the commodities were relatively benign in total at 2.2%, which was in line with our pricing, despite elevated beef costs. Pretty straightforward there. As far as their cost savings, none of the cost savings initiatives have materialized in the food cost line. They're more on the G&A savings line at this point.
Yet to come on some of those savings, and we will probably talk more about that in the fourth quarter as we tee up the 2027 outlook.
Thanks. Just on catering, it has always been a nice differentiator for Portillo's, and 4Q is the biggest season for it. Could you just give us some color on how catering is trending into the holiday season, and how big a piece of the business do you see in the newer markets where the brand is still building awareness?
Yeah, thank you for the question. One of the things that I think Kevin and I, as being new to the brand, are realizing how, like your comment, how powerful catering is for us, particularly in the fourth quarter. But right now, we are feeling good. We are on track, if not a little ahead of where we were last year in catering. We have amplified our plans this year with our operations teams being ready for it. We have got a really strong playbook that existed from our prior teams, and they do a really good job. We see that as not necessarily a headwind or tailwind, but if we can hold serve in quarter four, that is kind of baked into our assumptions for guidance.
Thank you. Our next question comes from the line of Chris O'Cull with Baird. Please proceed with your question.
Yeah, good morning, guys, and congrats, Kevin, on the new role. I had a follow-up question, Brett, about the consumer research that you guys have conducted and you were talking about earlier. I am just curious what the research tells you about why people try Portillo's but don't become regular customers, particularly outside of Chicago.
Yeah. So, that is a really good question, and I don't know how you are stating it as fact. What we really learned is we do generate the same type of loyalty and regulars. What you find outside of Chicago, it becomes more of a it is a longer destination. If you look at, for instance, you look at some of our sites in Texas, for people to travel to us, it is a long way, right? When you look at Chicagoland, your frequency is going to be higher because you have one every couple of miles. What we learned was, yes, we love Portillo's just as much as somebody in Chicago, but destination, it is much harder. They are not as readily available for us to dine.
You are not going to have the same frequency with somebody that is having to drive 10 mi or 15 mi to a Portillo's as you would a couple miles. So, we continue to see our Perks penetration increase. We see our membership increase, and a lot of that is driven by outside of the Chicagoland market. So, I think as part of that is, as we look at our future real estate, and that is what we talked about as adjacent growth markets and the right infills that don't really cannibalize, we will start to build more of that awareness and more of the access to the brand more so than we have now.
Since the repeat visits aren't as frequent as they are in Chicago, is there an opportunity or is there a plan to maybe expand the customer base or try to reach more people in these markets outside of Chicago?
Yeah, I think so. When we talk about, we did that guest segmentation work, Chris, and that was specifically designed to do exactly what you said, is to understand who uses us, why they use us, and then where are those white space opportunities so we can be much more effective in communicating with them. That is, Denise and her team on the marketing side are working through that now to create the personas. We will leverage a different type of communication based on those two audiences. We do believe that is going to drive trial and more frequency once we can tap into those audiences. Because prior to that, our communication has been very broad, right, and not specific to certain targets. This will really help us refine exactly who we go after and bring into the brand.
Thank you. Our next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.
Hey, guys. Maybe one for Kevin just as he gets settled in, having come from an organization with vast resources and insights and support. I mean, as you look at 2027 for Portillo's, in terms of technology, infrastructure, things, is it an investment year, or there are just ways to implement processes to make what is there more efficient, again, after kind of the G&A saves from the workforce reductions this year.
Hey, Andy. Thanks for the question. Yeah, I think it is two-fold, right? I think when we think about some of the things that happen here in the Restaurant Support Center, I think certainly there is not quite the investment. Certainly, there is a little bit in the marketing stack and what Brett talked about in terms of the highlights and the strategy. As we think about going out into the restaurants, there is a decent amount of tech out there that we need to look at and see, are there ways to improve operations, make it smoother for our teams? I know the iPad, the tablets for our drive-through operators is a little bit of a pain point. It is looking at all of those.
I do not know that I would call it necessarily an investment year, but as I mentioned, as we look at our fourth quarter and talking about our guide into 2027, I think we will have a little bit more content for you going into that.
Gotcha.
Hey, Andy-
Oh, go ahead.
-Andy, this is Brett. I was just going to Kevin makes some really good points. I think one of the things Kevin and I really began to align on, and we mentioned in the script, is kind of the rigor behind how and where we spend money. So, we are really committed to anything we spend money is going to have to have a return on it, right? So, if we say, operational investments and training and food quality, some of those will take a little longer to see the return on that. But there are some, like we are talking about with technology and marketing, that, to Chris's earlier question, that will have a much quicker return because we are going to target a specific group of people.
So, we're balancing that of how much do we need, and the strength in operations will have a little bit of a lag time on the return versus what are some of those immediate returns. But Kevin nailed the priorities for how and where we're going to invest.
Okay. Very helpful. And then, I'm happy to hear about the good start to the 4Q. I think there's like a half a dozen units maybe entering the comp base in the 4Q. I want to say a bunch of those are Texas. Are there any just thoughts on how we should take that into account in terms of the 4Q?
Yeah, I think as it relates to the fourth quarter, certainly, as it relates to the closures, there's a level of total sales guide that is in reduction that is embedded in the guidance related to those closures. And then as you look at some of those new restaurants that are entering the comp base, I think they're generally going to be on the lower end of volumes and seeing some continued slide in comp performance as they continue to roll off their honeymoon.
Thank you. Our next question comes from the line of Jim Salera with Stephens. Please proceed with your questions.
Hey, guys. Good morning. Thanks for taking our questions. I wanted to start by just walking through the decision to close some of the underperforming restaurants outside Chicagoland. Is there anything you can take away from what specifically about the locations that made them underperform initial expectations, and as you've continued to densify outside of Chicagoland, why there wasn't maybe the pickup that you initially expected?
Yeah, Jim, this is Brett. Thank you for the question. I tell you, there's a few factors. I mentioned the first call I was on, and before I joined, I had an opportunity to fully drive a lot of those markets and visit the restaurants. My comments then were, a lot of the sites were very, A, very green, B, very casual dining-like. What I would say we've really learned about Portillo's and the new model we've created is we have a much deeper understanding now of really what drives the volumes to our restaurants. Again, there's this fanaticism where people are willing to drive a long way, but at some point, they're not going to come once or twice a week when they live 15 mi, 20 mi away. I would say one is sites played a huge role into what we're seeing there.
Number two is that infill cannibalization. We ramped up so quickly in those markets and plugged in a lot of infills, as all we did is redistributed sales from those geographic areas. That put a lot of pressure on the business models. Then third is, when you're going to new markets, how do you really create awareness? We did a little bit of damage to ourselves with how we branded the restaurants. In some of them, we just have the name Portillo's. We took off what we do, what we serve. For new market penetration, if they don't know what you do, it's kind of hard for people to figure out. I think there was some of those awareness opportunities.
That's why the new strategy is, one, we feel really good about our new sales forecast model because it's rooted in all the data. We have a really clear understanding of what drives volumes in Chicago and outside of Chicago. Two, being very selective on infills so we don't have a strong cannibalization. Then third, having those adjacent markets where you start to create awareness. For example, Florida, where we're opening a new one in Lutz next year. We've got one in St. Pete, one in Brandon, one in Tampa. Can you potentially look at adjacent markets in Florida and start to build out another core market? That's how we're thinking about it a little bit differently now.
Great. How should we think about the long-term unit TAM? I know you guys previously, I think it was 900+ . Sounds like that is probably too high at this point, but maybe you can just help us kind of size up what that opportunity looks like. Also, could we think about markets that are maybe closer to the core in the Upper Midwest or places that have, I will say, a similar palette to where you guys are most successful in Chicagoland?
Yeah, look, it is a really good question. I do not want to give you an answer right now. We have not done the work to say, okay, across the continental U.S., what is our total white space? Because to your second point, what we have focused on with our new strategy for real estate right now is those adjacent markets and infills, including the Chicagoland area. So ideally, what we would like is to have a growth model that continues to expand our core market as well as go into markets we know that we have a higher chance of success. We do well. We know we have got another one coming in Buford, Georgia. We will see how that does because Kennesaw still does very well for us. We perform well in Florida.
But how many do we put there and how many do we put in the Chicagoland area is what we are determining now just based on the site selection. Because as we said before, we are to the point now is, we will get to the growth number we mentioned on the call, but more importantly, we need to make sure that we de-risk the capital investment and make sure we go in sites that do the volumes and give us the cash-on-cash returns. So I know there was this belief that, can you still do Chicagoland volumes in the new prototype, or can you do Chicago? I am not so sure that doing Chicagoland volumes would be something that we put as a goal. If we can drive 21% restaurant-level margins in a $5 million restaurant, that would put us in the top decile of fast casual.
Thank you. Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your questions.
Hi, good morning. Can you talk about the simplification of the loyalty program and what you think works well currently and what you would like to change?
Hey, Sharon. This is Brett. Thank you. I would say it is premature to comment on where we see the Perks program going. I would say what we do like about it now is it does give us access to data and to our loyal fans that we really had not had another opportunity to get at. We do know that it is a lever that we can pull to engage a group of people to visit us. It is really our kind of top form of communication for whether it is launching these LTOs we mentioned. The second, the surprise and delight is interesting because there is another brand that recently launched a loyalty program that kind of had the same program with the surprise and delight.
I am not sure we completely run away from that, but I think it is just too early to say what is the best use of that loyalty program for us and how do we compare it to others in the marketplace. For now, I would say it is something we focus on, continue to grow that base, because their frequency is higher than our normal guest. We know if we can continue to drive higher frequency and expand the loyal guests, then we benefit from a transaction standpoint.
I am sorry if I missed this, but for the smaller format locations that you will begin to open in 2028, what are the targeted AUVs for those locations?
Yeah, the target AUV, I would guess I am a little bit different than maybe how we communicated before. I do not believe in you create a prototype for a targeted AUV. As mentioned, we have roughly 15% of our restaurants that do over $1,500 in sales per square foot. I do not believe we should put a governor on a 4,600 sq ft restaurant. Chick-fil-A's, they have those size restaurants, and we know the volumes they do. I do not see it as a governor. I see the site selection as what will drive our sales volume and believe we can do the volumes we see in our higher volume restaurants at a smaller prototype. Again, because we have a large percentage of drive-through, we have a large percent of off-premise and dine-in, right, and catering. We have four really unique channels that are very strong for us.
As long as you can get people in and out of a drive-through, you can get food out quickly and accurately on time, I do not see sales as a governor. I see it is the site selection that will be the governor on sales.
Thank you. Our final questions will come from the line of J.P. Wollam with Roth Capital Partners. Please proceed with your questions.
Great. Appreciate you guys taking my questions today. Maybe just kind of starting on the Restaurant-Level Adjusted EBITDA margin. I think there was some commentary in the press release about evaluating and investing in additional tech, and I just kind of want to square that with the labor savings that you have already made and kind of some of the COGS improvements that are still yet to come. Brett, as you think about the business and identifying Chicagoland separately from then kind of your remaining new market or other markets, where are we inning-wise with just how you are seeing in-store operations, and what is still kind of an opportunity there as we look forward?
Yeah. Thanks, J.P. Really good question. I would say, we're in the early innings, and I'm not saying that's because our operators don't do a good job. We're in the early innings because we need to provide better resources and tools for our operators to do their job. Right now, at these volumes and more than a 50-year history of executing the same way, it's important that we understand why that works, how it works, but also understand if I can get a piece of equipment that can make my fries more hot, more crispy, and last longer, why wouldn't I do that, right? Some of those things are what we're really trying to work through now.
If we look at tablet technology in our drive-through that actually has a screen on it to where the guest can confirm that's the order that they ordered, then it comes out more accurately. I think it's a lot of those type of things we're looking through. The other piece on operations is, look, candidly, we didn't have a very strong training culture at all. We are going to over-index on having well-trained team members and managers leading our restaurants. I would say that part of it's in the really early innings. But I can say with confidence is, we execute very well compared to the industry. I'd say we just have more inconsistency across the fleet, and that's what we really need to tighten up.
Ladies and gentlemen, thank you so much. That does conclude our question and answer session. With that, we have reached the end of our teleconference. We appreciate your participation. You may disconnect your lines at this time, and enjoy the rest of your day.