Portillos Aktie

Hello, and thank you for standing by. Welcome to the Portillo's First Quarter 2026 Conference Call and Webcast. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations at Portillo's to begin.

Thanks, operator. Good morning, everyone, and welcome to the Portillo's First Quarter 2026 Earnings Call. With me today are Brett Patterson, President and Chief Executive Officer; and Michelle Hook, Chief Financial Officer. You can find our 10-Q, earnings press release and supplemental presentation 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.

Finally, after we deliver our prepared remarks, we will be happy to take questions from our covering sell-side analysts.

And with that, I will turn the call over to Brett.

Thanks, Chris, and good morning, everyone. I appreciate you joining my first earnings call as President and CEO of Portillo's. It's an honor to lead this special brand and as I've observed these past few weeks, talented group of people. What drew me to this company starts with what makes it unique.

At its core, Portillo's is about creating memorable experiences for our guests, supported by a strong culture of hospitality and a differentiated menu that offers craveable food. I want to take a moment to thank our team members for their candor and insights during my first 2 months as well as offer my deep appreciation to all that bring this brand to life every day. I started my career in restaurants at age 17 working on the front lines. That foundation helped shape my leadership approach and taught me firsthand that the best restaurant brands have great culture with well-trained and committed teams that genuinely care about the guest experience.

My focus now is bringing those elements together into a clear, disciplined strategy that our teams can consistently execute. My key objective of these first 60 days has been to listen and learn, spend time with the teams in our restaurants and understand the business from the ground up. That includes both our new markets as well as here in our backyard of Chicago, where strong performance is important and expected.

Over the next several months, my priority is to partner with the leadership team and lean on formal research and insights to build a strategy that will align the entire organization. Getting there will require relentless focus and rigor to stick to what is most important, and that's how we will deliver the memorable experience that has helped us build some of the most loyal guests in the industry for more than six decades.

At a high level, that foundation centers around three areas: operational excellence as defined by a guest-centric mindset, well-trained team members and high-quality food executed the standard, served accurately and on time. An integrated and targeted approach to marketing, leveraging data and insights while fully utilizing the right platforms to drive awareness, trial, acquisition and frequency.

Lastly, a disciplined development strategy that creates value. When we execute those three pillars, we believe the desired outcomes will follow: consistent year-over-year same-store sales growth and improved restaurant level profitability. Everything starts with operational excellence. It's essential that we consistently deliver a great experience in all our restaurants no matter how guests choose to use us. The best insights come straight from the source, our restaurant teams and managers. That's why I have and will continue to make it a priority to spend time with them listening to what they need to ensure the proper tools and resources are in place to deliver on this imperative.

We have engaged with outside partners to execute several landmark studies for the brand, led by our Chief Marketing Officer, Denise Lauer. This critical research is focused on customer segmentation, brand positioning and menu satisfaction and will give us deeper insights to better inform our marketing strategies in our core markets as well as new and growing territories.

Strong operations and marketing will complement another extremely important initiative, implementing a sound philosophy and approach to ensure a value-creating development strategy. Portillo's has significant long-term growth opportunity, which will be a key piece of our strategic road map, but it must be pursued with discipline. We will be measured in terms of where and how we grow with a clear focus on cash-on-cash returns at the restaurant level.

We're fortunate that Jennifer Pecoraro-Striepling recently joined the team as Chief Development Officer. She brings vast industry experience in multiple categories to this critical function. She will be focused on evolving our new market playbook, selecting sites that drive healthy returns, exploring prototype formats and ensuring a more disciplined use of capital by safeguarding responsible building costs.

Before closing, I want to briefly touch on the first quarter where we showed improvements in transactions and sales. And while I'm encouraged by these results, our teams are putting the focus and energy into building a sustainable long-term plan that will lean on the aforementioned fundamentals to drive consistent results. Michelle will speak about our first quarter and current trends shortly. But as we look ahead to the next few months, our focus is less about short-term tactics and quick hit strategies and more about building the right foundation for long-term profitable sales growth.

As noted in the press release, we're comfortable with reiterating our fiscal year guidance. But as our strategic work progresses and new finance leadership was brought on board, our expectations may evolve. We will continue to provide updates as appropriate throughout the year.

In closing, I developed a passion for operations early in my restaurant career. I've always believed that the top restaurant companies are built on solid fundamentals and disciplined execution led by teams that take pride in delivering best-in-class guest experiences. Bringing that passion to a brand I've admired since my first visit more than two decades ago is incredibly exciting. Our focus now is to sharpen our priorities, strengthen our ability to execute and build a credible growth story.

Before I pass it over to Michelle, I want to address the announcement we made this morning regarding her decision to depart Portillo's. Michelle has been Chief Financial Officer here since 2020, playing a critical role in leading our finance function, supporting the company's IPO in 2021 and helping expand the business into new markets. We appreciate Michelle's leadership, and we will, consistent with our internal succession plan, immediately kick off a search with a leading national executive search firm to identify our next CFO. I'm confident in the long-term opportunity of Portillo's, and I look forward to sharing more as our strategy continues to take shape and drive sustained long-term shareholder value.

And Michelle, I want to thank you for your dedicated service and partnership and wish you all the best in your next chapter. I will now turn it over to you to walk through our quarter 1 results in more detail.

Thanks, Brett. I appreciate the kind words. I believe in the Portillo's brand and its leadership team, and I'll be cheering you all on from the sidelines. Moving on to the company's first quarter performance. During the first quarter, revenues were $182.6 million, reflecting an increase of $6.2 million or 3.5% versus last year.

Revenue growth was driven by non-comp restaurants, which contributed $7.7 million of the year-over-year increase. Same-restaurant sales declined 0.1%, decreasing revenues approximately $0.2 million. The same-restaurant sales decline reflected a 0.9% decrease in average check, partially offset by a 0.8% increase in transactions. Lower average check was driven by an approximate 1% decrease in product mix, partially offset by a 0.1% increase in menu prices, reflecting increased promotional offers.

When assessing our gross pricing, we came into the first quarter with around 3% of incremental pricing from prior pricing actions in 2025. We had approximately 1.5% roll off in January, approximately 1% roll off in April and the remaining 0.7% to lapse in June. We did not take additional pricing actions during the first quarter. However, we did take a 2% pricing action in mid-April across select menu categories. We expect surprise and delight offers within Perks to continue to have an impact on pricing.

In addition to the impact on our net effective pricing in the quarter, our promotional offers and other menu initiatives drove positive transactions. During the quarter, our transactions benefited from our limited time BIG Burger Bundle meal and innovation, including our new birthday cake LTO and the launch of our new sauces. This is in addition to other targeted offers we ran during the quarter on our Portillo's Perks loyalty platform.

During April, we have seen negative comp trends of roughly 1 point, driven primarily by negative transaction and mix trends as we are lapping the benefit of our breakfast pilot from the prior year. We expect to have continued headwinds in May as we will be lapping our BOGO Beef promotion from the prior year. As Brett discussed, we will focus on three foundational areas, which we believe will lead to improved sales and transactions and restaurant level profitability for the long term.

Turning to costs. Food, beverage and packaging costs increased to 34.7% of revenues in the quarter from 34.6% last year. This increase was driven primarily by higher commodity costs of 1.8%, led by beef and produce, partially offset by an increase in certain menu prices, net of promotional offers.

Labor expense increased to 26.9% of revenues from 26.6% in the prior year, primarily due to deleverage from our new restaurant openings, higher benefit costs and wage inflation, partially offset by labor efficiencies. Hourly wage rates increased approximately 1.5% in the quarter compared to prior year.

Other operating expenses increased $2.3 million or 10.7%, primarily driven by the opening of new restaurants and higher repairs and maintenance expenses. As a percentage of revenues, other operating expenses increased to 13.2% from 12.4%. Occupancy expenses increased $1.2 million or 11.6%, also driven by the opening of new restaurants.

As a percentage of revenues, occupancy expenses increased 0.4% compared to the prior year, driven by higher occupancy costs and revenue deleverage at new restaurants.

Restaurant level adjusted EBITDA decreased $1.8 million to $34.8 million, with margins declining approximately 170 basis points to 19.1% in the quarter versus 20.8% in the prior year.

General and administrative expenses increased by $1.5 million to $20.4 million or 11.1% of revenue in the quarter from $18.9 million or 10.7%. This increase was primarily driven by higher equity-based compensation and professional fees, including $0.5 million of dead site costs. As we refine our development strategy, we will continue to evaluate our pipeline.

Preopening expenses were $2.6 million in the quarter compared to $0.5 million last year, reflecting the timing and scale of activities related to our planned restaurant openings, including expansion into new markets. Adjusted EBITDA decreased by $2.8 million to $18.5 million or 10.1% of revenue from $21.2 million or 12% of revenue in the prior year.

Below the EBITDA line, interest expense was $5.6 million in the quarter, down slightly from last year, driven by a lower effective interest rate. Income tax benefit was $0.2 million in the quarter compared to expense of $1.4 million in the prior year. Our effective tax rate for the quarter was 24.4% versus 25.4% in the prior year, reflecting changes in our valuation allowance related to equity-based compensation expense.

Since the end of the quarter, we have opened one additional restaurant in Frisco, Texas and expect to open three additional locations during the remainder of 2026, including our first airport location at DFW International Airport and our second in-line location, which will be in downtown Chicago.

Cash provided by operating activities increased 85.8% year-over-year to $17.6 million year-to-date. We ended the quarter with $24 million in cash. We had $104 million outstanding on our revolver, total net debt of $347 million and approximately $42 million of remaining revolver capacity. Thanks for your time today. Operator, please open the line for questions.

[Operator Instructions] And our first question will come from Margaret-May Binshtok with Wolfe Research.

Michelle, best of luck, for all the collaboration. I just wanted to ask on the first quarter comp. Can you give us a sense of how that progressed through the quarter? I know January had some weather, but did you guys see February and March showing sequential improvement? And then just ex that breakfast lap that you mentioned in April, how are underlying transactions trending in April?

Yes, Margaret-May, I'll take that. Yes, you're absolutely right. We were not immune to the weather conditions that hit in January. So we definitely saw that negativity come into play in January. And then obviously, as the quarter progressed, we saw improvement. And I talked about and Brett talked about some of the things that we did in Q1 that helped to contribute to the results that you saw in the quarter. So yes, we did see some improvement in the quarter.

And then when we look at April, we're seeing negative trends that's primarily coming in the form of transactions. We do continue to see some negative trends in mix as well. And that's primarily driven by what I describe as more trade downs versus items on the ticket. So those are the trends that we're seeing throughout the month of April.

And our next question will come from Gregory Francfort with Guggenheim.

Just maybe the other OpEx line, can you maybe parse out that looks up quite a bit. Is that utilities? Is that maybe delivery fees or something like that? I'm just curious what might have been driving that?

Yes, Greg, we did see some impacts earlier in the quarter from the weather. So we saw some higher utilities, some higher, what I describe as snow maintenance and removal expenses that drove some variability in the repairs and maintenance line. But those are the specifics that we saw. Again, I'd call some of that more attributable to the weather conditions that we saw, but that's the call out I'd make on that.

Got it. And then just with maybe pricing in the quarter, I mean, clearly, Perks is having a big negative impact, but that might be part of just what you're trying to do strategically. Can you maybe parse through like -- do you expect it to have -- I guess you would expect it to have an impact on consumer value perceptions. Is there an expected delay in terms of kind of having more controlled pricing and when the consumer might pick up on that and that impacts traffic on a 6-month delay or a 12-month delay? Any thoughts on that would be great.

Yes, Greg. So we had two things that impacted that net pricing in the quarter. So we had our BIG Burger Bundle meal. That was the burger, fries and a drink meal we were running for $9.99. That definitely impacted the net pricing as well as the Perks offers that we were running in the quarter as well. And so I would say just from a consumer perspective, you're right. As people go into these offers, whether it's the BIG Burger Bundle that we are running or Perks offers, there's definitely a lag in terms of that value perception. But we continue to focus on those value perception scores. But -- as Brett and the team look towards our strategies in the future, I think what plays a role in that could be many things, whether it's continuing to look at value in the form of Perks offers or menu offerings. We're currently running our new Hot & Saucy beef promotion right now, not really a discount, but more of an LTO. So -- but there is a lag to your point that I think as people go into those that they come out with. And the goal is to obviously drive frequency of visits and attract new guests into our brand. And so those were the things that we were looking at post promotion as well to determine if there was success or not.

Greg, this is Brett. I would also just chime in that, as Mel mentioned, Michelle mentioned, we're looking at the numerator of the value equation as well. And if you think about our strategy when we're starting with ops excellence, one of the things we need to do is make sure that we're delivering or exceeding the expectations of the folks coming in that are paying full price. I think the second lever that we'll explore as part of the strategy is going to be the use of food innovation to create value. So not just locking in on a fully discounted value offer, but how do we use innovation to talk about value, how do we use marketing to talk more about value.

We certainly know it's a driver for the business and kind of where the consumer is at today is important, but not locking ourselves into just going after kind of this discounted promotional model.

[Operator Instructions] We'll go next to Sara Senatore with Bank of America.

And sorry, just a quick clarification and then a question about the real estate strategy. So for 2Q, I was trying to follow some of the rolling off of prices. Did you say what the effective price will be in the second quarter? Is it -- could it be negative?

Sarah, so we don't anticipate it being negative. We're not -- the BIG Burger Bundle came off being an offer we were running at the end of Q1. Yes, we're running some various Perks offers as well. But no, we don't expect it to be negative. So just to clarify, we took 2 percentage points of a pricing increase at the beginning of April. We had a point that rolled off midway through April. And then we have around 0.7% that will be in effect until June. So think of it as we sit here today, you had a little bit higher pricing in April, but then the point -- just under 4% in April, and then you had that point that rolled off. So as we sit here in May, we're just under 3%.

Okay. I appreciate that. And then I guess you mentioned, I guess, $0.5 million of dead site costs. So it sounds like you're already making some changes to the sites in terms of what you might have identified before versus where you're deciding to build. I know the Chief Development Officer, just -- she's relatively, I guess, recent. But anything you can sort of address in terms of what changes maybe your -- or what sites you might be abandoning versus how you're thinking about going forward?

Sarah, this is Brett. Yes, I'll take that. As far as -- yes, Jennifer is fairly new, but she's hit the ground running. I think the team and Jennifer have been really focused on kind of just reassessing the entire development strategy. The 2026 sites were locked, and those will be finished after we open the next 3 this year. We did have an opportunity for some of the 2027 class to take a look at where there are some sites we could potentially get out of. I don't want to share specifically what those were, but we have made some decisions to get out of a couple of them. So I would say in 2027, and we're probably going to be in somewhere in the 4 to 6 range for openings, and that's why you'll see some dead site costs coming into last quarter and potentially quarter two as well.

And we'll go next to J.P. Wollam with ROTH Capital Partners.

I was hoping we could just maybe talk in terms of productivity in the new Texas stores. Understanding, Brett, to your point, a lot of those sites were kind of already baked, we could say. But just in terms of the openings, how are you thinking about productivity efficiency in terms of labor and back of house? And just any other new takeaways from this year's Texas openings?

Yes, JP, thank you. I would tell you that the team has done a really good job coming out of 2025 in the first quarter, addressing some of those productivity opportunities. Tony, our Chief Operating Officer, has been very involved with the kind of the Texas turnaround. So I'd say we've seen some improvement, sequential improvement in backhouse labor productivity. There's still opportunity. I think we've got to really take a look at kind of the analogs of similar volumes outside of Texas and how those perform and use that as kind of a benchmark for our Texas teams. And I know Tony and the team are starting to do that work now. So I still think there's opportunities there. Certainly, we've got to drive the top line, and that's more of our focus. We don't want to cut ourselves to the point we can't grow top line.

So Denise is they're still working very actively on a very integrated marketing plan for Texas. But yes, we'll continue to see some productivity improvements in Texas as well as some top line growth.

Moving on to Chris O'Cull with Stifel.

Michelle wish you well and hope to work with you again.

Yes, sure.

Maybe I don't know if this question is for Michelle or Brett, but can you explain the sharp decline in annualized AUVs for the 2025 class during the quarter relative to the fourth quarter?

Yes. So when you look at the class of '25, Chris, so we had openings that were in the back half of the year. One of those openings was a restaurant we were very public about, which was our first in Atlanta in Kennesaw. And so I think we talked about that having a very robust opening when we opened Kennesaw in November. Obviously, you know us, you know there's a honeymoon curve, right, to the performance of those restaurants. So as those volumes start to settle down, specifically for that restaurant, you see some impacts coming in there. So that's part of what you're seeing in some of that. I'd call out that one specifically.

Brett, why isn't -- why don't you think customer retention isn't higher once you get these strong responses to the initial opening? Do you have any assessment of that?

I think it's a really good question, Chris. I think there's a real opportunity for us to learn more about kind of the consumer base when we go into these new markets. Certainly, you do see a pretty steep honeymoon. It's a little more steep than I'm used to in my past. I don't know how much that has to do with our ability to drive quick awareness out of the gate, and that kind of wanes off over time. So I would tell you, I don't have the answer now, but it is certainly something we need to continue to explore to better understand that and how do we prop it up during that kind of down cycle in the honeymoon. I would tell you, the one thing I would add is you generally see though very high metrics still from a customer satisfaction, Net Promoter Score. So there's nothing that jumps off that says you didn't open it well and now you've disappointed a lot of guests. They seem very, very engaged and connected to the brand. So again, that frequency is going to be something we really have to understand.

And our next question comes from Sharon Zackfia with William Blair.

Sorry to see Michelle go. It's been a pleasure working with you. I did want to ask about kind of menu innovation versus Perks. It seems like you're having more success with Perks driving traffic. And I'm curious if there's anything there that you could call out specifically that worked well in the first quarter that you plan to replicate or evolve? And then secondarily, as we think about those non-Chicago markets, how is innovation resonating in those markets?

Yes. I'll speak to the Perks piece. The one thing we have seen is continued growth and penetration. So we -- in quarter one, we saw 3% more penetration from Perks than quarter four. I think the real unlock there is for us to continue to better understand our customer cohorts and how do we tailor messages specific to those cohorts based on their visit frequency.

And I know Denise and the team are really -- there's a lot of test and learn going on for that right now. We did see some -- what we've seen when we do Perks offers around kind of special events or holidays, we do get a really strong reaction like opening Major League Baseball Day with buy one hot dog get one free. And so we've seen those really work well for us, but it's not something that we see as kind of this on everyday type scenario.

We had -- the BIG Burger Bundle was a big driver in quarter one as well for the traffic. So I think it was a combination of both. And so the -- your question on the innovation, I think there's really an opportunity to learn. I wouldn't say we've had significant meaningful innovation yet when we've really introduced new items or new item format. And I do believe once we get out of Chicago and have different understanding in different markets of what those items can be, I think it will play an important role in the future for us.

Moving next to David Tarantino with Baird.

Brett, I'd be interested to hear more about your vision for how Portillo's should grow over time. I know you have a lot of foundational work that you outlined that you need to complete, but once that work is done, what are you going to be looking for to make the decision on reaccelerating the growth? And what type of growth do you think Portillo's can deliver longer term if you get it right?

Yes, David, speaking to the development piece, I would tell you, right now, we're turning over every stone to understand every piece of development and what we can learn from the past and then creating certainly a better future for development. So what I'll share again without having the facts, as you mentioned, we've got a lot of research doing insights. But I will tell you, there's an opportunity. Certainly, number one, we've got to make sure we have the real estate forecast model dialed in because that really informs site selection. I think there's an opportunity -- when we go to new markets with low awareness, the type of site we choose is imperative that it's a site that generates high awareness versus they have to find you. There's prototype work we're going to do. We're going to explore what are the best formats that can generate the best returns to the restaurant and still execute high volume. I know Michelle really led the project with the team to get to the 2.0. We're excited to see that come to life. So I would tell you that everything is under review, including build cost.

And we'll come back to you at a later date with what we think that means for the future, but we're going to try to get to it really be 2028 before we start to see that work. And again, I think getting the brand study, and I mentioned the discipline in the script, right, having the discipline just to wait for the insights and the research to help guide us, not be necessarily just the guide is going to be really important to our future growth.

And if I'm still on, maybe a follow-up is.

Sure.

I think at one point, I guess, in the recent past, Portillo's was targeting double-digit unit growth. I mean I guess my question is whether you think that's an appropriate growth rate for the company longer term. Presuming you get all the foundational elements right, I mean, is that, should we be expecting a path back to that level? Or do you think that maybe a slower growth rate is more appropriate? I guess what are your initial thoughts about that or the…

Yes. Again, I'm anxious to answer that question myself. And I think we've got to -- right now, we've got to do the work, right, to build what I would tell you is what we've done in the past, I wouldn't say is a sustainable double-digit growth model. But developing something for the future that we feel really confident about the level of capital we're spending, the returns we're getting will be the key driver for that.

And moving next to Jim Salera with Stephens.

To switch gears and talk a little bit on the margin front. I know beef prices have continued to grind higher as the year has progressed and you guys flagged some promotional offering you did that obviously had beef-centric items. Can you just walk us through, a, kind of how you're hedged on beef, but then also b, how you're thinking about maybe some of those promotional mix given that you have beef exposure and where that's at on input cost?

Yes, Jim, I can take that. So we're still projecting mid-single-digit commodity inflation for the year. And we did have what I'd describe as a lower inflationary number in Q1. And I think that speaks to the things that we put in place to try and manage that exposure. So as we sit here today, we're hedged on our flats or we forward bought on those. There's about 65% of that specific commodity that we're locked in on for the year. And we have about 30%-ish or so of our total basket that we're locked in on for Q2 through Q4. So we've put some things in place to derisk that. And as we look at what is the future of commodities, yes, we still expect beef to be a pressure point for the remainder of this year.

We do expect our inflation to be higher than what you saw in Q1 in Q2 through 4. I'd say probably Q4, we're just as we sit here today, expect that to be the most pressured quarter of the future quarters. But we still feel good about, again, that mid-single-digit inflationary number that we put out there. And to your point on marketing certain items that relate to beef, I think to Brett's point, as he continues to refine the strategy and we look at what's best for the brand, I think everything is on the table as we move forward. But Portillo's is built on beef items, whether it's our beef sandwich or hotdogs are all beef, our hamburgers, which we ran that promotion in Q1.

And so we're not going to lean away from that, I would say, as we move forward in the future. But I think there's opportunities to lean into other categories as well moving forward.

And moving on to Dennis Geiger with UBS.

Michelle, thanks for all your help and best of luck to you, of course. Quick housekeeping item and then a question from me. On the housekeeping, just curious if anything to share on performance across geographies, thinking about Chicagoland versus outside, et cetera, or performance by channel in the quarter? And then the question really is a bit more on the marketing strategy side of things. And just where things stand there, if it's too early to share about anything on sort of notable shifts in marketing strategy or marketing spend levels? Is it still early until some of those survey insights come back?

Dennis, this is Brett, yes, first, so what we saw in quarter 1, which was really good news, we saw Chicagoland perform really well. They had outsized transaction growth compared to the rest of the fleet. The rest of the concept did well, but it was great to see Chicago pop in the first quarter, which I think speaks to this environment being -- and the way that Chicago uses a brand where you had that value offer BIG Burger Bundle really resonated. So there's learnings for that of how we think about it going forward, but it was nice to see that for Chicago.

Your second question regarding marketing, the brand work is going to be critical for that. I know Denise is -- we're working on the MarTech stack. We're looking at channel usage, media mix usage, offers by customer segmentation. So that work is all in progress. But the brand work is really going to help us inform how and who we target once we get that information back. We did plus up some media around the BIG Burger Bundle, and we saw that really support the message. So we know it works when we have the right offer and the right message. But getting the channels and the mix right is going to be really important as we go forward to maximize our marketing spend.

And we'll go next to Matt Curtis with D.A. Davidson.

Brett, given your casual dining background, I was just wondering if you could share your thoughts on elevating the customer experience, both in-store and at the drive-thru and if perhaps adding labor might be part of that?

Matt, I've gotten the question a lot about coming in from full service to fast casual. What I would tell you is I think there's so many similarities. And one was when you just step back and think about what a customer wants, it doesn't really differ between the two channels. And they want great value created by food service atmosphere divided by price.

And that's what we have to deliver. So as I think about our brand, how do we make sure our food is compelling. It remains high quality. It's something that the brand has been built on. The service aspect, we're different than a lot of other fast casual concepts with our drive-thru where we have people in the drive-thru taking orders and have that face-to-face interaction. So I think those things have been key to Portillo's and will remain key. But I think your point on how do we enhance that to make sure that we put the guest at the center of everything we do is a culture we're going to continue to focus on in this company. So I don't see a difference of being full service or quick service as it relates to how we think about the customer.

And our final question will come from Brian Harbour with Morgan Stanley.

Michelle, best of luck, certainly. The conversation about kind of value perception lagging, I guess, is what you're saying that, look, some of these promotional offers have certainly worked, but they're fairly short-lived. I mean how do you think those kind of play a role in the future? Or is this kind of like a conversation about maybe some everyday value thing is needed? How should we think about that?

Yes. Brian, I think that at the end of the day, we're not looking and Brett and the team are not looking for quick like hitters or fixes for this brand. And so I think doing the work around the brand that Denise is doing on the perception study and what do we want to be over the long term, and it comes back to that value equation that Brett just talked about, which is something over price, whether that's your experience, the quality of the food, the accuracy, the speed, all of that over the price that you're paying for that. So I think as this brand moves forward, that's the way that the team is thinking about it is what's the best over the long term for the brand to continue to provide that "value" to the guest. And those things can come in many forms, whether it's through menu innovation, right?

And menu innovation can be permanent menu items that can be limited time offers, right? Those things you don't necessarily have to put the brand on sale or do things like that and discount to have that value perception. Brett talked about operational excellence, like getting better operationally. So focusing in on those metrics that matter, whether it's accuracy or speed of service or hospitality, right? Those are things that over the long term, carry brands forward versus how can I get these quick wins in the short term. So that I know is the mindset moving forward for Brett and the team versus what can we do for this quarter.

Yes. If I could just add, Brian, one thing is I think the way I would frame it is we have to organizationally make sure we build a much stronger foundation of value -- and then I think as you pause in opportunities, there should be a bump in value. But those to me are very short-term transactional. So if you do a heavy discount over a period of time or an offer, you certainly are going to see your value scores elevate during that time. But generally, what happens as soon as you come off that, your value scores revert back to a base. So our job and our focus is going to be how do we get -- how do we strengthen the base value.

And when we do those offers, it's just incremental, right, to the consumer. So again -- and right now, until we really understand that we keep coming back to the brand work and research, we're not going to spend a lot of time on figuring out what are those short-term levers until we really understand who our customer is and how do we go to market, and that will shape our marketing and go to our strategy.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Hello, and thank you for standing by. Welcome to the Portillo's Fourth Quarter 2025 Conference Call and Webcast. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations at Portillo's to begin.

Thanks, operator, and good morning, everyone. Welcome to the Portillo's Fourth Quarter and Full Year 2025 Earnings Call. With me today are Mike Miles, Chairman of the Board and Principal Executive Officer; and Michelle Hook, Chief Financial Officer. You can find our 10-K, earnings press release and supplemental presentation on 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-K identifies risk factors that may cause our actual results to vary materially from these forward-looking statements.

Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials. Finally, after we deliver our prepared remarks, we will be happy to take questions from our covering sell-side analysts.

And with that, I will turn the call over to Mike.

Thanks, Chris, and good morning. The fourth quarter reflected the strength and challenges facing Portillo's in 2025. While our core markets continue to have outstanding AUVs and profitability, our Texas market expansion continued to be a headwind for our business.

As we announced last fall, we have reset our development strategy, slowing new store openings and focusing on healthy unit economics. While it will take time for our new approach to bear fruit and a number of restaurants opening in 2026 reflect prior strategy, our entry into the Atlanta market in the fourth quarter confirms the potential in our future growth strategy.

Our restaurant in [indiscernible] opened in November and through its first 8 weeks, registered over $2 million in sales. Portillo's fans drove from all over Metro Atlanta, indeed from all over the Southeast to get a taste of their Portillo's favorites. In addition to the outstanding top line, [ Kennesaw ] is the latest example of our reduced cost restaurant of the Future 1.0 format.

A 6,200 square foot building that is about 20% smaller than most of the restaurants opened over the prior 5 years. For our new philosophy of separating new unit openings with more time and distance, the next restaurant in Atlanta will not open until 2027 and will be about 50 miles from [indiscernible]

We are gratified and, frankly, not really surprised by the results at [ Kennesaw. ] Each time we have entered a new market over the last 10 years, we've seen a similar response with 7 of those restaurants also exceeding $2 million over their first 8 weeks. Our approach over the next several years will consist of more of these types of entries, tapping into the pent-up demand from Portillo's fans to support our first end market openings, then letting awareness and demand build before opening subsequent restaurants.

We will continue to iterate on our prototypes as we look to develop the best possible offering for customers and shareholders with 4-wall profit potential driving each decision. Our Perks program continues to show promise. We now have more than 2 million members enrolled and have seen strong results for promotions delivered through the program.

We are just scratching the surface and have a lot of opportunity to more precisely target offers. I am confident that Perks will play a valuable role in driving traffic improvements in 2026 and while traffic and sales continue to be our primary focus, we also took steps to improve labor management and profitability of the lower-volume restaurants in Texas during the fourth quarter.

I'm also pleased to report, as you likely saw in our announcement 2 weeks ago that Brett Patterson has joined Portillo's as our new Chief Executive Officer. Brett has had a stellar career in the restaurant industry, working his way up from the front lines. He has all the qualities that the Board was looking for to lead Portillo's next phase of growth. operations experience, a strategic mindset and a people-first leadership style.

Most importantly, he is a great cultural fit with Portillo's. The Board and I look forward to working with Brett to provide our customers with the best restaurant experience, our people with a great place to work and our shareholders with a profitable growing business.

Before I hand it to Michelle, I would like to take a moment here to personally thank the Board, our executive team and all of the people at Portillo's for their support and commitment over these last several months. My time as Interim CEO has only strengthened my conviction that this brand has a very bright future.

Thanks, Mike, and good morning, everyone. During the fourth quarter, revenues were $185.7 million, reflecting an increase of $1.1 million or 0.6% compared to last year. Our revenue growth in the quarter was driven by non-comp restaurants. Restaurants not in our comp base contributed $7.8 million of the total year-over-year increase in revenue during the quarter.

Same-restaurant sales declined 3.3% which decreased revenues approximately $5.4 million in the quarter. The same restaurant sales decline was attributable to a 3.3% decrease in transactions. Average check in the quarter was flat due to an approximate 2.3% increase in net effective menu prices, offset by a 2.3% decrease in product mix.

We did not take any additional pricing actions during the fourth quarter, and our net effective price increase was approximately 3.2% for the full year. We will continue to evaluate pricing actions in 2026 but our focus will be on growth via transactions versus pricing.

We do anticipate that perks and other offers will continue to pressure our pricing benefit. Moving on to our costs. Food, beverage and packaging costs as a percentage of revenues increased to 34.6% in the quarter from 34.1% in the prior year. This increase was primarily the result of a 4% increase in our commodity prices, partially offset by an increase in price.

In the quarter, we experienced increases in several categories, including our primary proteins of beef and pork. As we stated in January, we are forecasting mid-single-digit commodity inflation with primary pressures coming from the beef category.

Labor as a percentage of revenues increased to 26% in the quarter from 24.6% in the prior year. The increase was primarily due to lower transactions, incremental wage increases and deleverage from our newer restaurant openings, partially offset by labor efficiencies and an increase in price.

Hourly labor rates were up 3% in 2025. In 2026, we are estimating labor inflation of 3% to 3.5%. Other operating expenses increased $0.4 million or 1.9% in the quarter compared to the prior year which was primarily driven by the opening of new restaurants. As a percentage of revenues, other operating expenses increased to 12.2% from 12% in the prior year.

Occupancy expenses increased $1.2 million or 13.6% in the quarter compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.6% compared to the prior year. Restaurant level adjusted EBITDA decreased $4.7 million to $40.6 million in the quarter from $45.2 million in the prior year.

Restaurant level adjusted EBITDA margins decreased approximately 270 basis points to 21.8% in the quarter versus 24.5% in the prior year. As Mike noted, our Texas market expansion created a headwind. We incurred losses during the year and the impact on consolidated restaurant level margins were 180 basis points in the fourth quarter and 170 basis points for the full fiscal year.

We've taken targeted actions to improve performance in this market. And while we still have a long way to go, we delivered slightly positive results in the final period of the quarter. In 2026, we estimate our restaurant level adjusted EBITDA margins to be in the range of 20.5% to 21%.

This estimate is inclusive of continued headwinds in our Texas restaurants and $4.5 million of additional bonus expense assuming targets are met. Our general and administrative expenses decreased by $0.9 million to $19.4 million or 10.5% of revenue in the quarter from $20.3 million or 11% of revenue in the prior year. This decrease was primarily driven by lower variable-based compensation, partially offset by dead site costs of $1.5 million related to our strategic development reset.

These costs reflect our deliberate decision to move to a more measured pace of new restaurant growth, reemphasizing unit economics and return on investment. Dead site costs for the full year were $5.1 million. In 2026, we expect G&A expense to be $80 million to $82 million, which includes a $4.5 million headwind from bonus expense, assuming targets are met.

Preopening expenses decreased by $0.6 million to $3.3 million in the fourth quarter of 2025 compared to $4 million, primarily reflecting a strategic reset of development activities and the deferral of planned openings into 2026.

Adjusted EBITDA was $24.7 million in the quarter versus $25.2 million in the prior year, a decrease of 2.1%. For 2026, we anticipate adjusted EBITDA to be flat versus 2025. But I want to emphasize that our 2026 estimate includes an expected $9 million headwind from a fully earned bonus at both the restaurant level and support functions.

Below the EBITDA line, interest expense was $5.7 million in the quarter, a decrease of $0.4 million from the prior year. This decrease was driven by a lower effective interest rate of 6.7% versus 7.5% for 2024. At the end of the quarter, we had $90 million drawn on our revolving credit facility.

Our total net debt at the end of the quarter was $334 million. We have approximately $56 million of available capacity on the revolver. For 2026, we expect to open 8 new restaurants and anticipate total capital expenditures in the range of $55 million to $60 million, including investments in our existing restaurants, our commissaries and other corporate initiatives.

Income tax benefit was $0.8 million in the quarter compared to expense of $1.9 million in the prior year. Our effective tax rate for the year was 12.4% and versus 16.2% in 2024. This decrease was primarily driven by changes in Class A equity ownership, our valuation allowance and effective state tax rates.

Cash from operations decreased by 26.7% year-over-year to $71.9 million year-to-date. We ended the quarter with $20 million in cash. In 2026, we expect to generate positive free cash flow and intend to use any excess cash to pay down our revolving credit facility.

Also in 2026, we will focus on executing strategies that strengthen transaction growth across our restaurants while optimizing returns on our new restaurants. We will leverage our perks platform along with other marketing efforts to drive trial and frequency.

We will prioritize operational excellence and invest in our team members. These priorities support our commitment to positive free cash flow and delivering long-term value. Thanks for your time today. And operator, please open the line for questions.

[Operator Instructions] Our first question comes from Sara Senatore with Bank of America.

Maybe I do have a question and a quick clarification. The question is on -- you mentioned the [ Kennesaw ] restaurant opened impressive $2 million in sales, I think, through the first 8 weeks. That's, I think, kind of an annualized run rate of maybe close to $13 million, which isn't that different from, I think, some of what you've seen in some of your Texas stores, for example.

So I guess, I know on 1 -- in 1 case, you have lowered the footprint, so it can accommodate lower AUVs. But as you think through the maturity curve next year, would you expect less of a falloff than perhaps you've seen just because to your point, you're not opening another Atlanta restaurant until 2027 and it will be farther away?

Or just that's been something that I think we've struggled to kind of forecast as a year or 2. So any thoughts you have on what that looks like? And then like I said, just a clarification, Michelle on one of your comments.

Sara, thanks for your question, and I think you answered it pretty well, too. yes, [indiscernible] through its first 100 days did $3.8 million in sales. So we're pretty happy with it. But you're right, we don't expect it to be a $14 million restaurant. I think -- and it's kind of settling in around $200,000 a week right now.

And over time, we'll probably level off somewhere below that. But that's -- I think the main difference is between that and what we saw in Dallas, for instance, is that we're not planning on opening a bunch of more restaurants in the immediate vicinity of [indiscernible] The Colony, which got a lot of attention on this call over the years, was surrounded by other restaurants within the first 3 years of it being open.

We won't open our next restaurant in Atlanta until the spring of '27 and we have plans to separate the other restaurants that we opened in Atlanta with a lot more time and distance than what you saw in Dallas.

Okay. So kind of TBD on maybe what the curve looks like, but less cannibalization. And then just, Michelle, you mentioned that you had EBITDA, I guess, a final period of the quarter slightly positive results. I guess was that margin expansion or EBITDA growth? Or maybe you could just clarify that comment that you made. .

Yes, Sara, no problem. So we saw both. We saw margin expansion when you compile all the Texas restaurants. And when you compile them all, we saw profitability amongst all the restaurants that we had. So it was both. And it primarily comes back to the work we're doing around labor and labor deployment within that market as we're adjusting to the lower volumes.

Our next question comes from Gregory Francfort with Guggenheim Partners.

I had two questions. The first is just the new growth strategy, can you just talk about what it means from a manager and employee hiring perspective, I guess, with things a little bit more spread out you pull from restaurants in other regions more? Does it have any impact on preopening or G&A? Just any thoughts on that would be great.

Yes, Greg, I think the price that we will pay for having more new markets with single stores in it for longer is around new openings, which will be a little less efficient, and it's also a little more difficult from a distribution and oversight standpoint. .

But those are probably tens of basis points in the scheme of things as opposed to having to deal with restaurants that are doing sub-$5 million AUVs for a period of time. So that's the trade-off that we're willing to make. We haven't fully quantified it yet, but it certainly is something that we'll have to work through.

Got it. And then just my second question is just maybe within the comps, anything stand out regionally or by income cohort as kind of places of strength or weakness?

Yes, Greg, when you decompose the comp, it's pretty consistent when you look at Chicagoland versus the outer markets. I think I've mentioned we've seen a little bit more pressure recently in a market like Arizona, but we did open a restaurant there in 2025 that did have some cannibalization.

So you do get some of that impact in that market in particular. But largely speaking, it's not something where we see a wide gap between Chicagoland versus our order market.

Our next question comes from Brian Mullan with Piper Sandler.

Just sticking with Chicago land. Can you give an assessment of the consumer value proposition or the value scores and what has happened with those versus maybe where those were historically and just talk about a path to recovery to where you want to be there for Portillo's.

And I know some of it is dependent on the environment, which is tough, but I'm sure you don't want to wait around for the environment to get better. So just your perspective on that would be great.

Yes, Brian, we've seen improvement in 2025 in our value perception scores. And when you look at some of the catalysts behind that, I think it goes back to when we launched our Perks program in March and the offers that we've run over the course of '25. One of the more aggressive ones being our May [ BOGO ] Beef offer.

We also ran a hotdog offer in July, and then we did a cheeseburger offer in September. So when you look at all of those combined and you look at the sort of peaks within the value scores, that's where you see that coming up as well. So we continue to see good movement on that, and that's based on -- and driven by things that were being in my opinion, front-footed on to make sure that we're giving that value to our guests, not just in the form of price points, but also operationally.

And we've talked about Tony and apps teams focus on hospitality and giving a good guest experience and focusing on accuracy, speed of service. We can bring them in with those offers, but I think -- the key is giving them a good experience to also their perception of value.

So those are the things that we saw in '25, and we feel good about the upward movement in the perception scores.

And Greg, just to give you a little historical perspective on Chicago -- sorry, Brian, I went back at having been here 10 years ago and now coming back. I went back and looked at what the Chicago market looked like when Dick Portillo sold the business back in 2014 and compared it to today.

And back in 2014, there were 34 restaurants in the Chicago market for Portillo's. Since then and going into the end of '25, the number of restaurants have grown by 30% in Chicago. The revenue in Chicago has grown by 60% and the restaurant level margin in Chicago has grown by 80%. So it's a very healthy business here and continues to absolutely deliver for us.

Okay. And then as a follow-up, I just want to come back to Texas. Maybe in the context of -- at ICR you shared in Arizona example, it was very interesting. So you've acknowledged going too fast in Texas. You've got the stores open now. It sounds like you've just made some tweaks to labor.

Maybe can you just talk about the order of priorities from here, how marketing can play a role and maybe what you can or can't take from Arizona just to make sure you grow Texas from here the way you want.

Yes. It's a great question. And for sure, building sales is the #1 job to getting the Texas market to where it ultimately needs to be. The labor efforts are the thing that we were able to execute on first and we've got restaurants in Chicago that do $4 million and $5 million and have for a long time and make money.

And I think we need to get that mentality into the market in Texas as well. But ultimately, it's about building sales. We're pulling a lot of short-term levers that are available, whether it's perks offers or third-party affinity offers. We've had a bundled meal deal going there since the fourth quarter.

And we've ultimately got to find a way to better explain Portillo's to consumers who aren't yet familiar with us. People who know Portillo's love it and people who don't know Portillo's have no idea what it is. And we're still trying to crack the code for how to market to the group of folks who haven't yet figured it out.

And our new CMO [ Denise Lowers ] has got that on her priority list for 2026.

Our next question comes from Andy Barish with Jefferies.

Yes, I wanted to just double-click on kind of I guess, Denise's priority is given there's different strategies in Chicago land versus the outer markets? And then Yes, on the perks as you approach the year, any kind of info you're willing to share on sort of frequency or usage patterns or anything like that.

But yes, just some broader questions around kind of Denise's plans for '26.

Yes. Denise has got a lot on her plate and she's about to have a new boss. So she's going to get some undoubtedly some additional direction there. I would say her priorities are to drive traffic, obviously, first and foremost, in the Perk's program does feel like our near-in best weapon for doing that outside of obviously, great operations, which has always been our #1 traffic driver.

I don't -- we've shared some data on Perk's in terms of the number of people in the program and the activation. We've got a couple of million people in the Perk's program at this a little over that now at this point.

And I think the engagement level has been terrific with the offers that we've made through Perks. But equally, I think Denise is focused on the Texas turnaround that we talked about just a moment ago and finding additional levers to pull to drive trial in Texas because we've seen in Phoenix for sure.

And I think we're seeing in Texas that when we do get people in the door, our conversion to long-term customers is pretty high.

Great. And do you expect that, at this point, kind of the marketing pulses in some of those outer markets that you've done over the past year or 2?

So when we look at the marketing spend, Andy, I think that's one of the things that Denise has been determining. And there is a theory of pulsing and then versus always on type marketing. And so I think in the newer markets, where we're at right now is we need to be always talking about the brand.

And whether that's in the form of traditional advertising with, as Mike mentioned, we have a bundled meal right now, which is probably on more traditional advertising across all of our markets versus digital marketing and those things versus field marketing.

And so regardless of what marketing tactic we use, we need to always be front and center and relevant, particularly in these newer markets. Dallas, Houston, where our awareness is fairly low. And so that's how we're thinking about it today versus, hey, we're going to pulse come out, pulse back in a couple of quarters as we have to be front and center right now on a fairly regular basis.

Our next question comes from Jim Salera with Stephens Inc.

Michelle, you had some commentary around favoring transaction growth versus leaning on price. Can you just give us some color on carryover pricing into 2016, assuming no incremental price.

Yes, absolutely, Jim. So the pricing actions that are going to start to roll off we had 1.5 points at roughly a pricing that rolled off in January of this year. We'll have another point that rolls off in April, so beginning of Q2. And then we'll have another call it, 0.5 point or 70 basis points that rolls off in June.

And so that's the pricing cadence that rolls off from 2025. But as I mentioned in the commentary, we are seeing impacts from perks and other offers to that pricing through the discounts that we're offering through that platform.

And so even when you look at the fourth quarter, Jim, you'll see that our pricing impact was 2.3%. It was 3.2% for the full year. So as we sit here in the first quarter, we're definitely sub-2% pricing. But depending on the offers that we run in that could go below even 1 point of pricing in the first quarter depending on those impacts. But that's the cadence that rolls off in 2025.

Great. And then as a follow-up, could you offer any thoughts on attachment and mix as it pans particularly to some of the purchase program? I know industry-wide, it sounds like kind of down low single-digit transactions. So maybe mix can be kind of a swing factor to the positive or the negative depending on how things progress? Any commentary there would be helpful.

Yes. And for the Perks offers that we've run, Jim, we're not seeing significant ticket degradation. When you look at our average ticket today, it's about $23.60 a for the total company. And so as we run those offers, they haven't been, again, significant degradation to the ticket.

So we like what we're seeing with those that we're running, and we continue to measure those impacts, not just on that. But obviously, on the profitability in total for the offer. But that's generally what we've been seeing.

Our next question comes from Sharon Zackfia with William Blair.

Kind of going back to Perks and it being kind of a more of a surprise and delight program. Is there any thought of maybe we need to convert that to more of a typical points accrual program.

It's certainly a question that gets asked of us a lot and that we've asked ourselves, I think to this point, we're really pleased with the way the Perks program has performed so far and so turning it into a punch card program with all of the attendant costs that go along with the rewards in that kind of a format is not something that we're planning on proceeding with right this incident, but obviously, it would always be an option.

But I have to say that relative to -- you saw a subway the other day, had pulled back on its 4 for 4-foot long thing. We're not looking to get into a situation where we're doing that kind of a punch card deal at this point.

And Sharon, the one thing I'd add on that is the difference between and I know you understand this between us and others is we are an experiential brand.

And part of this surprise and delight program is we can give experiences, whether it's tastings for new menu items, whether it's merchandise we don't view it as, to Mike's point, a traditional punch card program where if you buy X you're going to get X because the nature and the DNA of Portillo's is we are an experiential brand so I think that goes with who we are and aligns with that thought process as well.

Okay. And then on the restaurant level margin guidance, Michelle, does that actually assume you have no price in the back half of the year? And with kind of mid-single-digit COGS inflation, is that more first half weighted because you'll lap some of the beef inflation in the back half?

No problem. So the margin does not assume 0 price. As we move towards the year we do expect the mid-single-digit commodity inflation, but we don't expect that we're going to be able to pull the pricing lever.

Sharon to fully offset that. Having said that though, we continue to do our pricing analytics to see where we have opportunities to take price. And we do expect that in the front half of the year in particular, we are going to see heavier inflation for the first 2 quarters of the year.

Right now, we're projecting higher commodity inflation versus the back half of the year. But at the same time, we haven't made any decisions on pricing and we need to be mindful of, again, growing the business through transactions versus price taking. But the guide assumes a little bit of price actions over the course of 20 problem.

Our next question comes from Dennis Geiger with UBS.

First, I wanted to ask a little bit more on the operational side of things and then maybe where you are with sort of drive-through speed, overall ops and overall speed/customer experience, if there's any latest updates on that front?

Yes, sure. I think we're feeling good about where we are operationally. Staffing is terrific. Hourly turnover is down under 80% for the year. So a really great cultural story. GM turnover at sort of historic lows for us and we want -- we had as a priority last year to get better in the drive-thru.

Those of you who are old enough to remember Joe Paschi's line about what happens to you at the drive-through. No, it's hard to get both speed and accuracy better at the same time. We were able to do that last year with nearly 42nd improvement in our speed of service and a significant improvement in the accuracy measures as well.

So I think that sets us up for a good year in '26. As I said earlier, Marketing is important, but the most important driver for Portillo's of traffic and frequency is great operations and great experiences.

Terrific. And then sort of following up on that. Just kind of looking at performance by channel or sort of anything to highlight around customer behavior changes, whether it's day part, day of the week, off-premise, on-premise delivery.

Any call-outs observations on pattern behavior changes that you're seeing across channels and dayparts, et cetera?

Yes, Dennis, I'll take that one. So we are seeing more of an uptick in our off-premise channels, particularly our pickup channel has been our fastest-growing channel in 2025, and our delivery channel did see some growth as well.

And so that's where we've seen a little bit more of our growth coming from. And so we have to obviously make sure that those channels are equally as important to our guests and their satisfaction. And so that continues to remain a focus of ours because we know those channels are ones that continue to grow for us.

Our next question comes from David Tarantino with Baird.

Michelle, I was hoping I was going to ask a question about the guidance. And specifically, what type of comp framework are you assuming in the guidance outlook for EBITDA? And I guess, the second part of the question is how are you running in Q1 so far relative to that plan.

Yes, David, we're not giving any top line guidance purposefully. And I think I mentioned this that ICR in terms of the visibility around that is not as clear to us in terms of not just where the macro is. Obviously, our new restaurants play a role in the non-comp performance. And so we're purposefully not guiding anything on the top line.

We do feel we have more visibility to that middle of the P&L and feel comfortable with where we're sitting from an adjusted EBITDA guide standpoint and then all the categories that make that up in between.

So that's why we're not guiding to the top line. In terms of Q1, we've had some puts and takes on weather that has been well documented and talked about, specifically in January. So those are known headwinds for everyone in the industry. But what I would say is weather aside, our sales fundamentals are solid, and we feel good about them as we sit here today.

Great. And then I guess a follow-up to the guidance question. I guess -- are there ways to deliver the EBITDA guidance with a wide range of revenue outcomes. I guess, I'm not clear on that point, given the lack of guidance, there must be an underlying assumption on the revenue growth.

I appreciate you not wanting to give it. But I guess the question is, do you have the ability to pull levers throughout the P&L to deliver it at a wide range of revenue outcomes.

Yes, absolutely, David. And so we talked about pricing. We don't want growth to come through pricing, but that is a lever. There's obviously cost headwinds that we're facing. So we have to think about that as a lever. We've talked about the Texas turnaround.

We've talked about that we need to be able to grow the top line in those markets in particular, that's a lever to continue to see growth in the top line. Now that's mostly going to come in the form of non comp versus comp, but obviously, still top line growth.

And then continuing to talk to our guests in our core market as well as another opportunity. We've talked about the value perception scores going up. The use of Perks as a lever, other menu innovation items could be a lever. We've recently launched new sauces as part of our portfolio. So there are other things absolutely that we can do and levers we can pull to drive that top line up.

Our next question comes from Brian Harbour with Morgan Stanley.

Michelle, do you expect marketing spending up substantially this year within that guidance or is it largely similar? And I guess you kind of talked about more of an always-on approach. Is that -- how efficient is that right now? Or how do you think about the efficiency of that?

Yes, Brian, we do expect to see a slight uptick in marketing spend this year, but nothing material within the guide that you see specifically within the G&A guide is where you would see that incremental marketing spend.

And so in terms of the approach of always on, as I mentioned, there's multiple approaches you can take whether it's traditional, is going to be more expensive being on TV and doing commercials and things of that nature. And we frankly don't have a lot of scale in those markets to view that as an extremely efficient use of our advertising dollars.

And so we have to make sure that we're investing in other areas, digital, social, I mentioned field marketing as well. So all those things are going to play a role in the "always on approach" versus the prior approach of pulsing more involved traditional forms of marketing and advertising spend.

Okay. Understood. And the mix component of same-store sales. Can you -- I know that's been a sort of a drag for a while, but how are you thinking about that as you go into this year?

Yes. I think to your point, we've seen mix headwinds over the course of the past several years. Now we've seen that moderate, we even saw that for this year. Our mix was only down 1.2% for the full year, which I think was the lowest it's been in several years.

And kiosks played a big role in that. And so it's helping to mitigate some of those natural headwinds that we see in mix, which is lower items per transaction and then trade downs. So those are the 2 things that are negatively impacting mix. And we are seeing that today, we see continued lower items per transaction, whether it's across all channels and then some trade downs going on.

So we have to be able to mitigate against that. We continue to look at kiosks as how can we increase adoption there? How can we continue to lean into those digital channels, which we know comes with a higher ticket. So I continue to see that, Brian, to answer your question as a headwind in 2026, but there are things that we need to do to continue to moderate those headwinds within mix, like I mentioned.

We have reached the end of our question-and-answer session, which now concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

I'm Brian Mullan, restaurant and food distribution analyst at Piper Sandler. Very happy to have the team from Portillo's. We have Mike Miles, who is the Interim CEO. Company is also undergoing a search for a full-time CEO. And we have Michelle Hook, CFO. Portillo's is a small but growing rapidly restaurant brand with 102 restaurants across 11 different states.

Thank you, Brian. Good morning, everybody, and thank you for your interest in Portillo's. As Brian said, I'm going on now 4 months as Interim CEO of Portillo's, but I've been part of the brand as Chairman of the Board going back to 2014 when our founder, Dick Portillo, retired.

Here's our legal stuff, and here's what we'd like to talk to you about today. First, to give you a little bit of a feel for what is special about Portillo's as a restaurant and as a business. Talk a little bit about the lessons that we've learned in 50 years of growing the company and how we're going to take it forward in the years ahead. And then Michelle will add it all up and share how 2025 ended up, and what our outlook is for 2026.

How many of you all by show of hands have been to Portillo's? That's why you're here this morning. To know Portillo's really is to love it. And it's hard to capture in a PowerPoint presentation, the menu, the Italian beef sandwiches, the service, the decor, the energy, the atmosphere, really the entire experience. It's also hard to capture in words how much passion there is for Portillo's among the people who do know us. But for those of you who didn't raise your hand, we have a short video that gives you at least a little bit of a taste for what makes Portillo's as special as it is.

[Presentation]

So J.J. Watt, Candace Parker, Mindy Kaling, the Pope, all among Portillo's promoters, but we have millions of promoters. And that's the reason that we consistently rank at or near the top of the industry in Net Promoter Score, favorite restaurant, customer satisfaction. To know Portillo's, as I said, is to love it. And our raving fans access us through all of our different channels. And we do volumes in each of those channels that rival the total restaurant sales for some competitors in the industry. Better than $3.7 million inside, $3.4 million through our drive-thru, and $1.5 million in our -- from our delivery business and with our catering business.

When you put all that together under one roof, you get exciting industry-leading volumes, $8.6 million in 2025. That passion for Portillo's also shows up in the way our customers engage with our new Perks loyalty program, which is now over 2 million participants only less than a year after it's been launched.

The number of people in the program is exciting. What's really exciting is the way that our customers engage with that when we do something like free rings for Taylor Swift's engagement or free cheese sauce on cheese sauce Fridays. This gives us a clear channel to communicate with our customers in a space where some of our competitors have 9-figure advertising budgets and a way for us to suggest new menu items that they haven't tried, get them to bring a friend or for people who just signed up in a new market to really encourage that second or third visit.

But there's nowhere that the passion that people have for Portillo's shows up more than when we enter a new market. Last November, we opened our first store in Atlanta, Georgia, actually in a suburb called Kennesaw, which is about 30 minutes northwest of the city. What you're looking at is a map of Atlanta. Atlanta, you can't really see the city there. It's there in the A and the center is where the center of city of Atlanta is. And this is Placer.ai data that shows the origin of each of the customers that have come to visit based on where their cell phone spends the night.

You can see that there's a tight cluster of folks who came from a 10-mile radius around the restaurant. But really, people drove from all over Atlanta over an hour in many cases to go get their first fix of Portillo's in years. I talked to many of them in the drive-through that morning, in the restaurant, and folks who have driven over an hour. And in one case, a table of customers who were back for their fourth visit, and we've only been open 6 days, and they drove an hour each way to get there. And in fact, it's not just from all over the Atlanta area, but from all over the Southeast United States from most of Georgia, all of like states of Alabama, Tennessee and the Carolinas. There's a huge amount of passion for Portillo's and pent-up demand for it in every market that we visit -- that we come to.

The results at Kennesaw were pretty strong, $2.2 million of sales in the first 7 weeks open in spite of the fact that we were closed for Thanksgiving and Christmas in that period of time, and we haven't turned on the delivery business there yet. And the store did $300,000 the first week of 2026. As good as those results are, though, they are very consistent with what Portillo's sees whenever we come to a new market. These are the 8 states that we've brought new restaurants to in the last decade. And you can see that with the exception of Michigan, where we opened in COVID with our dining room closed, we averaged $2 million in the 7 weeks -- first 7 weeks that we're open.

Portillo's has got an installed base of really strong fans in every single market in the country that we've been to. And based on the fact that whenever we announce a new restaurant opening, we get tweets and e-mails and text back begging us to come to someone else's home market. We think we've got that in the rest of the country as well.

So let's talk about how we're going to go to the rest of the country and based on the -- what we've learned over the last few years. Portillo's is a long growth story. We've been growing for longer than many of the folks in this room have been alive since Dick opened his second restaurant in 1969. And over the years, have gradually added new restaurants, never closing one and finished 2025 with 102 restaurants.

Dick built the first 30 restaurants in the Chicago area. And then in 2005, got excited to go to California and opened the restaurant there in Buena Park. Followed that in 2006 in Merrillville, Indiana, the first 2 states and then on to Arizona in 2013. In 2016, we went to Florida and Wisconsin and gradually expanded across the adjacent states in the Midwest before we went to Texas in 2023. And then, as I said, to Atlanta and the Georgia market in 2025.

Those first 4 stores that have been opened for more than a decade have matured into strong performers, averaging $9.1 million sales that would look normal in the suburbs of Chicago. Buena Park does over $10 million now. Merrillville, Indiana, $11 million, and the 2 stores in Arizona -- first 2 stores we opened in Arizona, $7 million and $8 million, respectively. Admittedly, we don't have any markets outside Chicago that yet perform like our home base. But the Phoenix market gives you some sense for how Portillo's matures as we get beyond that first pent-up demand of Portillo's maniacs and begin to expand to the broader market. We've now got 8 restaurants in Phoenix after over 12 years in the market.

And you can see at the bottom of the slide how we're beginning to build the awareness that we need and have pretty good trial and even better repeat and adoption among customers who've gotten to know us. The numbers compare decently with some of our better-known competitors. And we now average 5.8 million AUVs in Phoenix. It's still something that we've got a long way to build on. You can see we've only got 49% awareness, but it gives you a sense for how Portillo's can expand beyond that initial installed base, as I call it, of pent-up demand.

But this is a story that was over a decade in the making, as you can see. And over the last several years, we tried to go into new markets and rapidly penetrate them, which led us, frankly, to open too many restaurants too quickly and too close together in Texas. Houston is probably the best or worst example of this. If you look at the map on the left, you can see that we opened 5 restaurants in the space of a year within a circle with a radius of 20 miles. If you remember the -- what I showed you from Kennesaw, you know that people drive a lot further than that to come to Portillo's. And what you -- what we had as a result is the picture you see on the right where each successive restaurant just divided up the demand that we had amongst more and more, each one cannibalizing the last -- until we had 5 restaurants that did about the volume that we would have expected had we only opened 2.

We had a bit of the same situation in Dallas. Our geographical dispersion is better, but they're still open -- we opened more restaurants more quickly than I think we would have liked. We don't need to do this because there's so much white space for Portillo's in the country, and we've got that fan base everywhere we go.

So going forward, we will focus on new markets, first restaurant in, give that time to breathe and allow the demand and the awareness to build before opening the second, third and fourth restaurants as we go.

The other thing that we've learned over the years is that we don't need to build restaurants in new markets at the same size that we have in Chicago. Dick Portillo started out in 1967 with a 4,000 square foot restaurant. That one still does very nicely at $4,000 -- excuse me, $4 million volumes. But over time, as Portillo's grew in popularity in Chicago, the restaurants got bigger and bigger, and we opened the Canal & Taylor restaurant in 2016 at 9,000 square feet. It does $20 million now. But we've taken that -- we took that same approach to new markets, both based on the success we were seeing in Chicago and also those early volumes that I showed you in those other markets and got ourselves too big outside Chicago. We've been working that problem now for several years. And the Kennesaw location that you had, you saw is 6,200 square feet and closer in size to the Villa Park restaurants. Going forward, we will be in boxes like Kennesaw or other new prototypes that include even smaller versions of Portillo's.

So let's show how that all is going to work out going forward for us. We announced a reset of our growth strategy in the fourth quarter, and this is really what it means. We're going to leverage that base of super fans that we talked about in every new market that we get to, but recognize that it's going to take time beyond that first group to build awareness and demand, and then we're going to let the new development follow that demand.

We've got an improved real estate process now. We've been using a real estate model that was over reliant on Chicago observations and was delivering too many false positive reads and causing us to overestimate what the restaurants would do. We now have a real estate model that is just based on stores outside Chicago and does a much better job explaining the variability between $3 million and $10 million of those restaurants. We'll open fewer restaurants in these new markets. And no, I don't -- I'm not promising you all in Louisville, Columbus, Charlotte and Nashville that we'll be there immediately, but that should give you a sense for what we're thinking about and the pace at which we'll develop those markets. And we'll use the smaller format that we talked about.

Importantly, we'll be focused on good shareholder returns with our new real estate development, focused on unit economics and also getting our cost structure in line with the size of the company that we are today and with the growth rate that we're talking about.

Here's why that's going to look over the next couple of years. As all of you know, it takes a while to turn the ship of real estate development. So there are some legacy decisions in this -- in the next couple of years that if we can wave a magic wand, we probably would have postponed for a year or 2. But you'll see us open 8 restaurants in 2026, including in the DFW Airport and an in-line restaurant on North Michigan Avenue in Chicago, and 8 restaurants again in 2027, including our new prototype restaurant of the Future 2.0.

Before I turn it over to Michelle, I do want to say that none of this would be possible without the 8,000 people we've got at Portillo's, great associates who make the food and serve the customers. We've worked hard to make it a Great Place to Work, and we're proud to be recognized again last year as one of the Best Places to Work in the restaurant industry. Our associates have rewarded us with great low turnover and with great service to the customers. We've changed a few things over the last few months at Portillo's, but one thing will not be changing. People are at the heart of Portillo's.

With that, let me turn it over to Michelle to talk through the numbers.

Great. Thanks, Mike. And so what we wanted to do today is provide you with some insights into how 2025 ended and then we'll talk a little bit about '26. So if we look here how we ended the quarter, and we had guided to numbers that were a little bit -- these are better than the numbers that we had guided to. But when you look at how the year progressed, we had a challenging year. That's no different than others within the restaurant industry.

When you look at how we started out the year, the first 2 quarters of 2025, we did have a positive comp. We saw that start to degrade coming into Q3, and we knew that Q4 was going to be a challenging quarter as well. And so that's where you see we came in Q4 with a negative 3.3% comp, and you see the composition of the comp. And so we saw the challenges with negative traffic or transactions within our business all throughout 2025 and frankly, 2024 as well.

So we know that as we go into 2026, the things that we're going to focus on are driving traffic or transactions within our business. And Mike talked about our Portillo's Perks program, our loyalty program that we launched in March of 2025. That's one lever that we have to continue to drive that traffic growth within our restaurants because we know it works. When we've had offers on that platform, we've seen the results of that. So the point being is we still have work to do, obviously, to continue to drive the comp in the right direction, driven by traffic growth.

When you look at our total revenue growth at the $732 million for the year, that's about a 3% growth rate year-over-year. Again, with the negative -- slightly negative comp for the year coming into play, we did get a lift from the 8 restaurants that we opened in 2025.

When you look at our restaurant level margins, you can see how we closed out the year. When you look at it as a percent, so in Q4, 21.8% restaurant level margins and for the full year, 21.6% restaurant level -- 21.6% restaurant level margins for the full year. So we still have healthy margins, but we got to continue to focus on, as Mike mentioned, the new restaurants that we're opening, continue to drive the returns on those restaurants and the unit economics of those restaurants that we're opening.

When you look at the adjusted EBITDA, you can see we ended the year just over $97 million in adjusted EBITDA growth. To put that into perspective, we have 102 restaurants that drive $97 million in adjusted EBITDA growth. So we have a very healthy business here at Portillo's that generates a lot of cash flow that we'll talk about on the next slide, we're going to use to continue to invest back in our business.

So when we look at where do we think '26 is going. So typically or historically, we've given some top line guides. We don't plan to do that this year. I think there is a lot of fluidity going on when you look at the top line, specifically for us as we look at some of the new restaurants that we're opening, and there's just a lot of unknowns. However, we do feel we have better visibility on the middle of the P&L and the new restaurants that we're opening next year, which is why we feel more comfortable as we look at the guides that we have.

So we plan to open, as Mike mentioned, 8 restaurants in 2026. The timing, we see 6 of those coming in the first half of the year. We knew that this class was going to be front-loaded. That's the way we like that. Generally, we don't want to open restaurants later in the year in the November, December time frame. And then we'll have 2 coming in the second half of the year. One of those 2 being the in-line on North Michigan Avenue in Chicago will be coming in the second half of the year.

We are excited for our first airport location to open in the Dallas-Fort Worth Airport. I think that will continue to help build the brand and build the awareness in the Dallas market as an addition there.

We think commodities are still going to be a headwind for us next year. So when we look at where we're at today, we're projecting mid-single digits. Beef is going to continue to be a headwind for us. That's about 30% of our market basket is beef. We think we're still going to see some pressures on pork. That's about 5% of our basket as well. And look, we'll get a little bit of easing on other parts of the commodity basket. But when you add all that up, we're projecting mid-single-digit inflation.

Labor, we still see that continuing to be an investment that Portillo's is going to make in labor. So we're projecting 3% to 5% there.

Then when you get into the profitability metrics, you can see what we're projecting our restaurant level margins. Yes, we're projecting margin degradation because we ended '25 at 21.6%. Having said that, though, I wanted to call out that we do have a known headwind. We're coming into the year assuming a full bonus payment for our restaurants as well as our support center. And so there, I wanted to call out for you the headwinds that we expect to see there within all these numbers.

G&A, we're being very disciplined. And so we know we have the $4.5 million headwind in G&A. And you can see we're being very disciplined on guiding to the $80 million to $82 million as we continue to, I think, run appropriately and efficient business within our G&A and support functions. Within G&A, we do have a portion of our advertising expense. And so within that G&A guide is additional investments that we plan to make in advertising this year as well. So we feel really good about that, that we're investing in the areas of the business that we need to, to continue to grow and build this brand.

When we look at the CapEx, you'll see the guide there at $55 million to $60 million. I've broken down for you where we expect that to be, which is primarily building new restaurants, not just with the Class of '26, the 8, but also we're going to go under construction with the 8 restaurants in the Class of '27 with a portion of those. So there'll be some capital investment for that class this year as well. We got to have some R&M CapEx as well as some investments and some other initiatives on the technology side there.

So when you roll all that up, we expect that our adjusted EBITDA will be flat year-over-year, so around that $97 million that you saw on the prior slide. And the point being that we do plan to be positive free cash flow this year. So we feel very good about that. We're in a very healthy cash position here. We plan to continue to generate a good amount of cash and invest that back in the business.

So with that, I will end with -- it looks like most of you, with raising your hand, have visited our restaurant. We have a restaurant 10 minutes away from here on Palm Parkway. I encourage you all to visit. And as an incentive, we have Sarah, Denise and Beck, I believe they have Portillo's hats, handing out free sandwich cards for everyone as an incentive to come visit us. So please enjoy that, and thank you for your time today.

Hello, and thank you for standing by. Welcome to Portillo's Third Quarter 2025 Conference Call and Webcast. I would now like to turn the call over to Chris Brandon, Vice President of Investor Relations at Portillo's to begin.

Thank you, Operator. Good morning, everyone, and welcome to the Portillo's Third Quarter 2025 Earnings Call.

With me today are Mike Miles, Chairman of the Board and Interim Chief Executive Officer; and Michelle Hook, Chief Financial Officer. You can find our 10-Q, earnings press release and supplemental presentation on 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-K identifies risk factors that may cause our actual results to vary materially from these forward-looking statements. Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials. Finally, after we deliver our prepared remarks, we will be happy to take questions from our covering sell-side analysts.

And with that, I'll turn the call over to Mike.

Thanks, Chris, and good morning. Although I've had the opportunity to meet many of you over the years at different venues, this is my first time speaking with you as Interim CEO of Portillo's. I was also in this role back in 2014 and '15 after our founder, Dick Portillo, retired.

So, it's not my first time. And as most of you know, I have been Chairman of the Board for the past 10 years. I have been back in the seat for a little over a month, and everything I have seen only reinforces my confidence that Portillo's has a long runway for growth ahead. Each time we enter a new market; our first restaurant is overrun with passionate fans who have been waiting for years for Portillo's to come to town. And the first restaurants opened outside Chicago in California and Arizona, have matured well over the years. We'll do over $10 million in our Buena Park location this year.

I'm also impressed with the capability of the company today compared to 10 years ago from the talent and training we have in our restaurants to the energy and commitment at the restaurant support center to the experience and perspective we have on the Board of Directors.

Although I've had the privilege of seeing all that develop gradually from the Board level over the past decade, it's that much more pronounced being back in the RSC in Oak Brook every day after a 10-year gap. What hasn't changed is the Portillo's experience. Our unique craveable menu, outstanding value, genuine hospitality and lines that move quickly. Those were the ingredients for the success of Portillo's a decade ago, and they are the foundation of our success today. And the reason that our 98 restaurants averaged $8.6 million in annual sales and contributed $163 million of restaurant-level EBITDA over the last 12 months.

Although we have a leadership transition at Portillo's, our first priority remains with our customers and restaurant-level teams. Our operators have rededicated themselves to QSAC, our timeless focus on Quality, Service, Attitude and Cleanliness. And we approach every guest visit with a commitment to make their day.

As you know, in the third quarter, Portillo's announced a strategic reset, slowing development in 2025 and 2026, and refocusing our operations on delivering an outstanding guest experience. As we shared with our second quarter results and when we communicated this reset, we added too many locations too quickly and too close together over the past 24 months, particularly in Texas. This has produced a number of restaurants with initial volumes that are not sufficient to deliver healthy economics.

As a result, we have slowed development to the extent we can, limiting openings in 2025 and 2026 to sites with already signed leases. Quite a few sites in the pipeline were pushed back or dropped. Michelle will speak to the associated costs we recognized in this quarter. We also have to address the low-volume restaurants we opened and are working to drive trial and get the labor equation right at these locations. Going forward, we plan to have more time and distance separating our openings in new markets. We're also deploying a smaller format restaurant that can deliver good unit economics at $4 million or $5 million of sales.

It's worth noting that we already profitably operate several smaller restaurants in Chicago that perform well out of similar footprint and with sales in the $4 million to $5 million range, including Portillo's #1 in Villa Park. It took years of great customer experiences at #1 and dozens of other restaurants like it in the Chicago market to build the Portillo's brand to the point where # 43 opened in 2016 in the South Loop will do over $20 million in sales this year.

So our development strategy will reflect a return to a more gradual pace, avoiding cannibalization and letting great experiences drive more visits and ultimately more restaurants.

And we will design and build new Portillo's that can succeed at today's new market initial volumes, which are industry-leading, but not yet at the level we achieve over time in established markets.

At the same time, we have focused on driving more transactions. Our most important lever remains the Portillo's experience, the Italian beef sandwich, perfect crinkle-cut fries, family recipe chocolate cake, made-to-order salads, all with the speed and at price points that compete with QSR, but served with a genuine hospitality and a fun and unique atmosphere.

It's a powerful customer proposition and executing it well, has always been our formula for same-store sales growth. We're also leveraging our Portillo's Perks loyalty program that we launched earlier this year. Although it's still scaling, we have already had success using it to stimulate visits. And especially in some of our new markets, we're looking to expand our reach by leveraging affiliate marketing and catering and delivery partners to help drive trial and get that first taste of Portillo's into more new mouths.

In closing, I want to thank our team members, especially those in our restaurants for their continued focus on creating outstanding guest experiences during this period of transition. And I'd like to thank our partners and investors for their support and confidence in this beloved brand.

I know I speak for the entire Board in saying that we believe in Portillo's and our ability to create shareholder value more than ever. In a couple of weeks, we will celebrate a major milestone when we cut the ribbon for our 100th restaurant in Kennesaw, Georgia. It will be an exciting moment for all of us and a reminder that while we've accomplished a lot, we're really just getting started.

I will now hand it over to Michelle to review the details of the third quarter results.

Great. Thank you, Mike, and good morning. During the third quarter, revenues were $181.4 million, reflecting an increase of $3.2 million or 1.8% compared to last year.

Our revenue growth in the quarter was driven by non-comp restaurants. Restaurants not in our comp base contributed $5.6 million of the total year-over-year increase in revenue during the quarter. Same-restaurant sales declined 0.8%, which decreased revenues approximately $1.2 million in the quarter. The same-restaurant sales decline was attributable to a 2.2% decrease in transactions, partially offset by an increase in average check of 1.4%.

The higher average check was driven by an approximate 3.2% increase in certain menu prices, partially offset by a 1.8% decrease in product mix. We do not foresee taking any additional pricing actions in the remainder of this year. As such, our effective price increase for the fourth quarter is estimated to be in the range of 2.5% to 3%, pending the impact of our fourth quarter Portillo's Perks offers.

Moving on to our costs. Food, Beverage and Packaging costs as a percentage of revenues increased to 34.5% in the quarter from 33.7% in the prior year. This increase was primarily the result of a 6.3% increase in our commodity prices, partially offset by an increase in our average check.

In the quarter, we experienced increases in several categories, including our primary proteins of beef, chicken and pork. We continue to forecast commodity inflation of 3% to 5% in 2025 with the most significant pressures coming from beef.

Labor as a percentage of revenues increased to 26.6% in the quarter from 25.8% in the prior year. The increase was primarily due to lower transactions, incremental wage increases, higher benefit costs and deleverage from our newer restaurant openings. This was partially offset by an increase in our average check and labor efficiencies.

Hourly labor rates were up 3.3% in the third quarter of 2025. We continue to estimate labor inflation of 3% to 4% for the full year.

Other operating expenses increased $2.3 million or 10.8% in the quarter, compared to the prior year, which was primarily driven by the opening of new restaurants and an increase in repair and maintenance, utilities and advertising expense.

As a percentage of revenues, other operating expenses increased to 12.9% from 11.8% in the prior year. Occupancy expenses increased $1.4 million or 14.7% in the quarter compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.7% compared to the prior year.

Restaurant level adjusted EBITDA decreased $5.3 million to $36.7 million in the quarter from $41.9 million in the prior year. Restaurant level adjusted EBITDA margins decreased 330 basis points to 20.2% in the third quarter versus 23.5% in the prior year. We continue to experience more significant pressures on our margins from our non-comp restaurants.

We currently estimate our restaurant-level adjusted EBITDA margins to be in the range of 21% to 21.5% in 2025. Our General & Administrative expenses increased by $1.7 million to $20 million or 11% of revenue in the quarter from $18.3 million or 10.3% of revenue in the prior year. This increase was primarily driven by $3.3 million in dead site costs.

This increase was partially offset by a $1.1 million net benefit resulting from the CEO transition. This benefit was due to forfeiture of equity awards, offset by other transition costs.

Following CEO transition costs in the third quarter and projected Board-approved retention payments, we have adjusted our G&A target for 2025. Our updated estimate for fiscal year 2025 G&A is now $76 million to $79 million.

Preopening expenses increased by $1.5 million to $3.3 million in the third quarter of 2025, compared to $1.7 million in the prior year, primarily due to the number and timing of activities related to our planned restaurant openings. 

During the quarter, we recorded a noncash impairment charge of $2.2 million related to our legacy Barnelli's trade name, primarily due to an increase in the discount rate. This pasta concept is available at nine co-branded restaurants in our Chicagoland market. Neither the Portillo's trade name nor goodwill was impaired. This impairment charge has been adjusted out of our reported adjusted EBITDA. Please refer to our adjusted EBITDA table in the earnings release and 10-Q for additional adjustments recorded this quarter. Adjusted EBITDA was $21.4 million in the quarter versus $27.9 million in the prior year, a decrease of 23.4%. 

Due to the change in our estimated G&A expenses this year, we now expect adjusted EBITDA of $90 million to $94 million for fiscal year 2025. Below the EBITDA line, interest expense was $5.7 million in the quarter, a decrease of $0.8 million from the prior year. This decrease was driven by a lower effective interest rate of 6.9% versus 8.3% for 2024.

At the end of the quarter, we had $77 million drawn on our revolving credit facility. Our total net debt at the end of the quarter was $323 million. We have approximately $69 million of available capacity on the revolver. Income tax benefit was $1.2 million in the quarter compared to expense of $2.5 million in the prior year. 

Our effective tax rate for the third quarter was impacted by a decrease in our valuation allowance. Our effective tax rate year-to-date was 20.4%. We expect the full year tax rate to be approximately 21% to 23%.

Cash from operations decreased by 32.3% year-over-year to $48.7 million year-to-date. We ended the quarter with $17.2 million in cash. We believe our efforts towards simplicity, a revised approach to new market entry, and a restaurant model with healthy unit economics will support our growth potential and drive long-term shareholder returns. 

Thank you for your time. Operator, please open the line for questions. 

[Operator Instructions] Our first question comes from Sara Senatore with Bank of America. 

Isiah on for Sara. Just seeing that other restaurant OpEx saw pressure just due to advertising expense, but the traffic decline seems to have accelerated quarter-on-quarter. Could you guys speak to marketing efficacy in the quarter and just how you think about marketing strategy going forward, especially in the light of Denise joining back in September? 

Yes, Isiah, keep in mind that our marketing, it's in two spots. One, as you mentioned, is in OpEx, but then in G&A as well, we do have marketing spend in there, just more geography for you on the P&L. Yes, absolutely, we continue to believe that we need to drive trial and awareness, specifically in our newer markets. And so as we look at campaigns we have ongoing in Dallas, we're making investments in Houston as well, where we have five restaurants today. And we continue to believe that that's a good investment to make as we drive that trial and awareness. 

Now having said that, here in our core market of Chicagoland, that still is extremely important to us. We need to make sure that we continue to message the brand and look at our value proposition here. And so we make investments here as well. We have a campaign going on in Chicagoland as we speak right now to continue to message the brand here in our core markets. So we continue to believe in that investment and that that's a good payback for us now and as we look into the future. 

I appreciate the clarification. And just as a follow-up, appreciating that you guys aren't taking price or planning to in 4Q, pricing does seem to be running towards the high end of the industry range. How do you guys view your value perception among guests and just your broader value proposition? 

Yes. In terms of pricing, so when we look at where we were at this quarter and then when you look at where the September inflation data was, food away from home was at 3.7%. So we're definitely indexing under that. As I mentioned, we're not planning to take price this quarter. As we go into next year, we'll look at that in relation to our inflationary cost pressures. But as Mike mentioned, we continue to believe that we need to drive traffic into our restaurants. And so we have to be mindful of when and where we take price.

Our next question comes from Brian Mullan with Piper Sandler.

Just a question on development. I guess, one, is there anything you can say around the openings you expect in '26 as you sit here today? Presumably, what will open next year is already underway in some form or fashion has been planned. And then just related to that, if you were going to make any kind of pivot on development beyond next year, I would think it wouldn't be until 2027. So maybe just talk about what scenarios you're contemplating? Is there a world in which you don't build for a while, and you focus on the existing assets? Are there a lot of things just open-ended beyond next year?

Yes, Brian, as we said, we're going to plan to open 8 restaurants next year, and you're spot on that a number of those were already in flight. And so, you'll see some additional restaurants in Dallas and Houston, which if we could do it all over again and wave a magic wand, we might not open in 2026. We've probably pushed them out. But we, we've got some other great sites in the pipeline. And as we look ahead to 2027, it's our intention to continue to grow and to grow gradually, as I discussed. So, you won't see us open a bunch of more restaurants in '27 in either the Dallas or the Houston market, but you'll see us expanding in other markets that are growth opportunities for us. We'll probably have our second opening in the Atlanta market in 2027 and look to other locations for growth beyond that.

Our next question comes from Gregory Francfort with Guggenheim.

This is Arian Razai on for Greg. I wanted to ask about the beef cost. And I know it's early, but can you help frame the early thoughts in commodity into the next year? And also maybe like touch on labor inflation guidance. It seems like a lot of companies like are seeing like below 3% wage like year-over-year, but I'm seeing you guys are still like above that. I don't know if it's regional or any outlook on that or any commentary would be super helpful.

Yes. So in terms of beef cost, obviously, we saw, we've seen pressures on beef all this year. As we go into next year, we don't see any easing on beef costs. We're still putting together plans. I think you've seen other companies who have a more concentrated basket on beef signaled more mid-single digits. We're again putting together that plan. We'll have more information on what we think '26 is going to look like in January for you all. But I imagine what you're hearing today, we're not in any different boat than those folks are. But just for context, about 30% of our basket is beef. So we, that is more heavily weighted for us, but there's still a broader basket for us and with some offsets as we look into next year as well that we think can help mitigate some of those pressures.

On the labor front, year-to-date, we're at about 3%. We came into the year forecasting 3% to 4%. So we're at the lower end of the range. I wouldn't say that there's necessarily more geographical concentration for us. We continue to give increases to our team members within each year. We don't pay minimum wage anywhere. When you look at our average hourly rate, we're above $17 an hour. So we feel really good about where we sit today, but we still need to make investments in markets and existing team members, but nothing I'd call out in terms of concentration of where those increases are.

Our next question comes from Chris O'Cull with Stifel.

This is Ella on for Chris. Mike, I appreciate your prepared remarks on the quarter, but can you elaborate on what enabled the company to deliver a bit better comp performance than what you guided to in the business update?

The comp performance in the third quarter was helped out some by our Perks program, which we're beginning to scale and are beginning to learn more about how to use. It's great that we have such an engaged customer base, and they, so when we use the Perks program to stimulate visits, we get an immediate response to it. And we did a little bit of that in the third quarter, and it's helpful both with respect to lapsed guest activation, also getting folks to try new things that are on the menu. And then we've also sent a couple of offers to the entire base that have had a really nice response. And that was a bit of an upside for us in the third quarter.

Great. Just a follow-up on the fourth quarter comp. So the full year comp guidance of down 1% to down 1.5% imply a pretty big decrease in the fourth quarter, both on a 1-year and 2-year basis. Curious, how is the quarter-to-date comp look like and any color on that?

Yes. We're not going to comment on any Q4 comp information other than what you just said, Ella. I will say, though, when you look at what we're lapping in Q4 of last year, we did have a positive comp . So we have a little bit tougher lap coming into Q4, and there's still a lot of unknowns. I mean you all see what's going on in the industry. So it's very fluid right now. We do have a large seasonal catering business here in our core as well. So that can be impactful to us in Q4. So still some unknowns for us, but we feel comfortable about the guide that we put out there.

Thank you so much.

Our next question comes from Dennis Geiger with UBS. Please proceed with your question.

Hi. This is Paul Hao on for Dennis. Thank you so much for the question. I guess my first question is more of a clarification. I understand you don't want to talk about anything about 4Q trends. But just curious if you could provide some color on the comp cadence through third quarter and how did sales and traffic trend exiting like towards the end of the quarter?

And then just a follow-up, I'm wondering if you could elaborate a little bit more on what you have seen in terms of consumer behavior and if there's any notable shifts that you'd like to highlight by either age or income cohorts? Thank you.

Yes. When you look at intra-quarter trends, Mike mentioned we pulled some Portillo's Perks levers. So when you look at, in July, we ran $1 hotdog week offer. In September, we ran a 50% cheeseburger week offer. And so those were more impactful versus, say, a August comp performance, but that was obviously driven by levers that we pulled with the Portillo's Perks program. And so that's just a little bit of intra-quarter color.

There's always, in September, you have more pressures, but I think we did a nice job of pulling some of those levers with the Perks program to help mitigate some of those pressures, which is why our comp performance came in a little bit better than what we were projecting.

In terms of the consumer, I think you all see what we see. It continues to be a very fluid situation. It continues to be pressured, but it's something that we've been facing all year, and we continue, like the rest of the industry to do what we can to mitigate some of those headwinds.

Our next question comes from Jim Salera with Stephens Inc. Please proceed with your question.

Good morning, This is Tyler Prause on for Jim. Thanks for taking our questions. Just kind of a follow-up to the last question to get started. Several of your QSR competitors have called out an outsized impact from the Hispanic and younger consumer cohorts. Just curious if you saw any noticeable step change during those cohorts during the quarter.

Yes, Tyler, we did not see anything that I would call out as noticeable. We've continued to call out just some pressures that we've had, specifically in our drive-thru channel. I'd say that was a little bit more pronounced in Q3 versus some of the other channels, but nothing specifically with like a Hispanic or other consumer cohort that I would call out.

Great. That's helpful. And just kind of shifting gears here. You previously called out more of a focused marketing effort in Texas. Can you talk a little bit how that's going? And additionally, with Portillo's now in several unique markets such as Arizona, Texas, Florida and soon to be Georgia, which are effectively at different stages of awareness building, how are you developing a cohesive marketing message to communicate to these different markets effectively?

Yes. It's a great question, Tyler. And I think at a couple of levels. First, tactically, we're pulling just about every lever that we know how in Texas to try and get people to try more Portillo's. It's really the kind of thing where we build our brand by people experiencing it. So everything that we can do to get folks to give us a try from sampling events to offers that we make through the Perks program to some market-wide offers that we're trying in Dallas and we'll be shortly employing in Houston.

All those things help to get us our first visit, and I think that's important to get the ball rolling. And that's really the way that Portillo's has built the brand in every market going back to Chicago for the last 40 or 50 or 60 now years.

I do think there's a germ of a big idea that you also referenced in your question about how we have a cohesive program for new markets. We really have not ever sort of cracked the code on communicating what Portillo's is all about to people who have never heard of us before.

We really rely on the Chicago expatriate community to drive our sales in new markets. And they do a great job. The first couple of restaurants we opened in a market just, we can't keep up with all the demand. People drive for hours to get to those restaurants. But we need to have a clearer way to communicate to folks who have never heard of Portillo's before and don't know somebody from Chicago, what's so great about it.

And you heard somebody mention Denise, who's our new CMO. She's working on that. And it's not the kind of thing that's going to happen overnight, but it is something that we'll be developing over the course of 2026 so that as we go to new markets like Atlanta and beyond, we've got another way to get people to try Portillo's and experience it.

Very helpful. That's all from us now.

We have reached the end of our question-and-answer session, which concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to Portillo's Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Chris Brandon, Vice President of Investor Relations. Thank you, sir. You may begin.

Thanks, operator, and good morning, everyone, and welcome to our second quarter 2025 earnings call, my first since joining this outstanding team and exciting investor story.

With me on this call today is Michael Osanloo, President and Chief Executive Officer; and Michelle Hook, Chief Financial Officer. You can find our 10-Q, earnings press release and supplemental presentation on 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-K identifies risk factors that may cause our actual results to vary materially from these forward-looking statements.

Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials.

Finally, after we deliver our prepared remarks, we will be happy to take questions from our covering sell-side analysts.

And with that, I will turn the call over to our President and Chief Executive Officer, Michael Osanloo.

Thanks, Chris, and good morning, everyone.

Before we begin today's call, I want to take a moment to address what has been a very difficult few days for the Portillo's family. As you may have seen in the news, the front entrance of our restaurant in Oswego, Illinois was the site of a tragic car accident. We pride ourselves in being a special part of the local communities we serve. And right now, we are deeply hurting for the entire Oswego community and the families affected. We stand with them during this difficult time, and we'll continue to offer our support in any way we can.

With that, I'll now turn today's call to our second quarter results. I'd first like to thank our dedicated restaurant team members, managers and company leaders. Their hard work in a still challenging economic environment continues to allow us to bring the Portillo's experience to life for our guests every day. This is the foundation for our future growth.

We continue to manage the flow-through elements of our business effectively in the second quarter, delivering restaurant-level adjusted EBITDA of $44.5 million with a margin of 23.6%. While there are bright spots, we know we have areas to improve within our overall performance. Specifically, our noncomp restaurants in Texas have gotten off to a slower start and continue to pressure overall top line revenue performance. We remain focused on building awareness and driving transactions while staying true to what makes Portillo's special, our craveable, high-quality food and one-of-a-kind guest experience.

At the same time, we're playing offense. We're testing new ideas, growing our loyalty and tech platforms and reducing build costs, all in pursuit of industry-leading unit economics. I'm proud of the progress we're making and confident these actions will drive sustained growth and long-term shareholder value.

We had an active start to the second quarter with 2 strong initiatives. First, we celebrated Italian beef month in May with a buy one, get one offer for our Portillo's Perks loyalty members. Then in a moment of perfect timing, the Vatican named the Chicago native as the new Pope. Our team acted quickly, launching The Leo, a nod to the new Pope Leo XIV with a version of our signature Italian beef sandwich. It was a great example of our company's agility and nimbleness to jump on a cultural moment creatively and with speed. We're proud of that ability, and that's a competitive advantage for Portillo's versus the rest.

Both initiatives drove meaningful engagement and positive transactions in May, giving us valuable insights on how we use Perks as a promotional and customer acquisition tool. As anticipated, we saw performance level off some in June. While transactions were negative 1.4% for the quarter, we did deliver 170-basis-point sequential improvement in transactions over Q1. It's a step forward, and we're encouraged by the early traction from actions designed to strengthen traffic as well as our favorable management of margins in Q2.

We remain committed to overcoming near-term industry traffic pressures and are focused on our 4 key initiatives. First, multichannel marketing. Our ongoing campaigns in key markets like Phoenix and Dallas led to sales lifts in both markets. Second, continuous operational improvement, especially within speed and hospitality. For example, our AI-powered drive-thru technology is getting strong feedback from operators for real-time execution and training benefits. We're actively expanding that test now. Third, kiosk adoption. In-restaurant usage now exceeds 33% with clear benefits to average check and mix. And fourth, evolving Portillo's Perks. Now with over 1.9 million members and counting, our May performance highlighted its growing power as a nimble, scalable platform for guest engagement, acquisition and retention. These 4 initiatives are building a stronger foundation for transaction growth now and in the future.

Shifting to restaurant development. We remain on track to open 12 restaurants in the back half of 2025, and our build cost reduction plan is delivering results, tracking in the range of our projected net cost average of $5.2 million to $5.5 million per restaurant. This represents well over $1 million in per restaurant build cost savings versus our class of 2024 openings. We just opened our third restaurant of the Future 1.0 with 2 more to follow next week and are encouraged by what we're seeing. The combination of build cost reduction and operational efficiencies gives us even more confidence in our 2.0 restaurant design. This next iteration, which will debut in the back half of 2026, will reduce build costs further, streamline labor and unlock incremental site opportunities due to a more consolidated design.

I'm really excited about our class of 2026 pipeline. It's the most diverse lineup of formats in Portillo's history, including multiple 2.0s and a great mix of new prototypes. Progress on new formats is equally encouraging. Later this week, we'll open our first in-line restaurant in the villages in Florida, followed by our debut airport restaurant at Dallas-Fort Worth Airport in 2026. We believe these in-line and nontraditional format restaurants could play a meaningful part of our development future.

As we grow, we're continuing to refine our new market playbook. We saw early traction in Dallas, and Houston has been a little bit slower to ramp up. In hindsight, we probably overcorrected at times in Texas to manage volumes and maintain service. We've since learned the importance of sustained marketing investment and have beefed up our efforts to accelerate awareness and drive revenue in Texas, which includes multichannel campaigns and new local field marketers on the ground to lead grassroots efforts. Every market is different, but we're learning quickly and adapting to build a more scalable, consistent approach for new market entries. Atlanta is our next big opportunity this fall, and we look forward to sharing those updates next quarter.

At Portillo's, there are some nonnegotiables, craveable made-to-order food and fast, friendly service. If we do these 2 things well, we will drive exceptional value for our guests while building restaurants that deliver industry-leading unit economics. In the restaurant business, growth follows strong 4-wall returns. Our AUV strength, coupled with our expedited efforts to reduce build costs positions us to deliver top-tier cash-on-cash returns across diverse formats, geography and stages of market maturity.

To level set, we know we're a bit of a show-me story within the investment community. It's an opportunity that we actually embrace. We're putting the right energy, investments and resources into what matters most, improving transactions, driving consistent new market performance, strengthening unit economics that support growth and continuously evolving our strategy without losing what makes Portillo's one of a kind. I believe in the work we're doing, the strength of our team and in our ability to create long-term value for both our guests and our shareholders.

With that, I'll hand it over to Michelle.

Great. Thank you, Michael, and good morning, everyone.

Before we dive into the financial results, I wanted to recap an equity transaction by Berkshire Partners. In the quarter, Berkshire redeemed 7.3 million LLC units for newly issued shares of Class A common stock. As of the end of the quarter, Class A shares represent 95.4% and Class B shares represent the remaining 4.6% of the 75.3 million in total outstanding shares. Berkshire's beneficial ownership after this transaction is approximately 5.2% of the company, down from over 60% at the time of the IPO.

Now moving on to the second quarter. Revenues were $188.5 million, reflecting an increase of $6.6 million or 3.6% compared to last year. Our revenue growth in the quarter was driven by both noncomp restaurants and same-restaurant sales. Restaurants not in our comp restaurant base contributed $6.1 million in revenue during the quarter. Same-restaurant sales increased 0.7%, which drove revenues up approximately $1.1 million in the quarter. The same-restaurant sales growth was attributable to an increase in average check of 2.1%, partially offset by a 1.4% decrease in transactions.

The higher average check was driven by an approximate 3.4% increase in menu prices and a 1.3% decrease in product mix. Same-restaurant sales on a 2-year stack basis were flat. We are currently forecasting our comp sales for the full year at the low end of our 1% to 3% range. To address inflationary cost pressures, we increased menu prices by approximately 1.5% in January, 1% in April and 0.7% in late June. Our effective price increase for the third quarter is estimated to be approximately 3.3%. We will continue to assess pricing in relation to our costs, the competitive environment and our value proposition to our guests as the year progresses.

Moving on to our costs. Food, beverage and packaging costs as a percentage of revenues decreased to 33.8% in the second quarter of 2025 from 33.9% in the prior year. This decrease was the result of an increase in our average check, partially offset by a 1.9% increase in our commodity prices. In the quarter, we experienced increases in chicken, hamburger and dairy products. We continue to forecast commodity inflation of 3% to 5% in 2025 with the most significant pressures coming from beef.

Labor as a percentage of revenues increased to 25.7% in the second quarter of 2025 from 25.5% in the prior year. The increase was primarily due to lower transactions, increased benefit costs and incremental wage increases, partially offset by labor efficiencies and an increase in our average check. Hourly labor rates were up 2.9% in the second quarter of 2025. We continue to estimate labor inflation of 3% to 4% for the full year.

Other operating expenses increased $2 million or 9.8% in the second quarter of 2025 compared to the prior year, which was primarily driven by the opening of new restaurants and an increase in repair and maintenance and utilities expense. As a percentage of revenues, other operating expenses increased to 11.6% from 11% in the prior year.

Occupancy expenses increased $0.8 million or 8.2% in the second quarter of 2025 compared to the prior year, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses increased 0.2% compared to the prior year.

Restaurant-level adjusted EBITDA margins decreased 90 basis points to 23.6% in the second quarter of 2025 versus 24.5% in the prior year. We continue to estimate our restaurant-level adjusted EBITDA margins to be in the range of 22.5% to 23% in 2025.

Our general and administrative expenses increased by $0.9 million to $18.8 million or 10% of revenue in the second quarter of 2025 from $17.9 million or 9.9% of revenue in the prior year. The increase was primarily due to higher professional fees and higher advertising expenses driven by ad campaigns in the Phoenix market.

Preopening expenses decreased by $0.4 million to $1.7 million in the second quarter of 2025 compared to $2.1 million in the prior year, primarily due to the number and timing of activities related to our planned restaurant openings. All this led to adjusted EBITDA of $30.1 million in the second quarter of 2025 versus $29.9 million in the prior year, an increase of 0.7%.

Below the EBITDA line, interest expense was $5.7 million in the second quarter of 2025, a decrease of $0.9 million from the prior year. This decrease was driven by a lower effective interest rate of 6.9% versus 8.3% for 2024.

At the end of the quarter, we had $70 million drawn on our revolving credit facility. Our total net debt at the end of the quarter was $317 million compared to $312 million at the end of last year. We have approximately $75 million of available capacity on the revolver, and we'll continue to use our cash generated from operations and the capacity on the revolver to fund our new restaurant growth this year.

Income tax expense was $3.7 million in the second quarter of 2025, an increase of $0.2 million from the prior year. Our effective tax rate for the second quarter was 26.8%. We expect the full year tax rate to be approximately 25% to 27%.

Cash from operations decreased by 31.1% year-over-year to $28.7 million year-to-date. We ended the quarter with $16.6 million in cash.

Lastly, let's turn to our financial outlook for 2025. We have updated certain metrics to reflect our year-to-date results and expectations for the remainder of the year. We expect our total revenue growth to now be in the range of 5% to 7%. Two key factors from our noncomp restaurants are driving this revenue change. First, the class of 2024 restaurants have seen a slower ramp up, specifically in Texas. Second, our Stafford, Texas opening originally scheduled for Q1 has been delayed for several months due to local permitting challenges, driving lower sales weeks versus our forecast.

During the third quarter, we plan to open 4 to 6 new restaurants out of our 12 targeted this year, with the remainder opening later in the fourth quarter. On the cost side, we are now estimating G&A expenses in the range of $78 million to $80 million. Given the change in our revenue and G&A outlook, we now estimate adjusted EBITDA growth to be flat to low-single digits. We remain confident in the long-term financial targets we have previously provided.

Thank you for your time. And with that, I'll turn it back to Michael.

Thanks, Michelle.

In closing, Portillo's is a place people want to be a part of. In a recent report by William Blair, Portillo's was named in the top 10 of nearly 90 restaurant companies in employee satisfaction. And in April, Newsweek ranked us 25th out of 700 companies in its America's most trusted companies list. I believe it's because of the amazing experience we strive to create for anyone who enters our restaurants. Whether it be in our restaurants or amongst field operators, restaurant support team members and the management team, the Portillo's culture is something we're very proud of and thrilled to share with our guests each and every day.

Look no further than the talent that has joined our company, particularly in Q2 as we put the finishing touches on what is undoubtedly the strongest Board of Directors in the restaurant industry. I'm proud of the work we're doing to evolve the Portillo's investor story, some of which is tangible and some of which has yet to hit the scoreboard. But we're getting there and the foundation in place is exciting.

Thank you all for your time today, and we're happy to take some questions.

[Operator Instructions] Our first question comes from the line of Sharon Zackfia with William Blair.

I guess 2 questions. First, on the mix in the quarter. I was a little surprised to see it go negative just given the kiosk usage increasing. So maybe if we could get some clarity on what's going on with mix. And then separately, I think the bigger question that investors have is just kind of the path to get to that mid-teens revenue growth that is the longer-term goal here. Is that something that you think can be achievable in '26? And what are the key kind of strategies to get there?

Sharon, let me tackle your second question, and then I'll let Michelle take the first one. I think we're -- we remain confident on mid-teens revenue growth. We have built some great restaurants in Texas, and they've just started off slow. And we're not -- we haven't given up on them. We think that there's a lot of potential there. We're seeing some momentum. We've done, I think, a lot of the foundational work to make sure that Texas continues to grow and evolve. We've got field marketers in both places. We have active marketing campaigns. We're building a loyalty database, and we'll keep using the loyalty database. So mid-teens growth is very reasonable to target for us for '26.

And I think that -- I'll let Michelle talk about the mix.

Yes, Sharon, in terms of mix, so you're absolutely right. The benefit we see on kiosks is definitely benefiting that. So there's 2 components to the mix. The first is the items per transaction and then the next is true mix in terms of what people are buying. So where you're seeing the kiosk benefit is the lift on the items per transaction. But where we're really seeing pressures is on the other part of mix where essentially people are still buying the item, but they're trading down.

So think of it as instead of buying a big beef, they're buying just a regular beef instead of buying a large fry, they're buying a small fry, et cetera. And so that's really where we're seeing the pressures on the mix is that true mix being offset not fully by the benefits that we're seeing on kiosk. And obviously, we believe that's an indicator of what's going on in the broader macro in terms of the trade downs that we're seeing there. But we clearly, as Michael said in his prepared remarks, want to drive the business through transaction growth and other mechanisms. But we're definitely seeing pressures in mix on the trade downs.

Our next question comes from the line of Chris O'Cull with Stifel.

I did have a follow-up on new stores. And I mean the annualized sales contribution from the 10 locations that you guys opened last year was lower this quarter than in the prior quarter, which I believe you guys expected it to improve. So just can you give us a little more detail of what you did this quarter to try to improve the performance of those stores? And what's planned for the rest of the year?

Yes, absolutely, Chris. So when you think about the class of 2024, some of those restaurants are getting into being in their second year. So you're starting to see some of a honeymoon effect to certain of those restaurants. Some of the later restaurants that were open in the class of 2024 later in the year, such as the Houston restaurants that we've mentioned. And so the things that we're doing are what Michael mentioned, which is continuing to pump the markets with marketing and advertising. And so as we've talked about previously, we ran a campaign in Dallas in the first quarter.

In the second quarter, we were on with a campaign in the Phoenix market, but then also hired a field marketer within the Houston market and continue to do some advertising within that market as well. So we're going to continue to invest in those newer markets to make sure that we continue to grow the top line. And as we go into the back half of the year, we'll continue to look at advertising efforts. We'll run another campaign in Dallas in the fourth quarter as well to continue to pump that market with additional awareness and trial.

Yes, Chris, I would just add to what Michelle said that it's a little bit of pick and shovel work. We're building awareness every week. It takes a little bit of time. And you're right, I think that the essentially flattish performance in Q2 versus Q1 for some of those Texas restaurants was disappointing to us. But we're active and very aggressive in building awareness. We've got field marketers out there, making sure that people know who we are. We do really well once people try our food. So we're being very aggressive at getting our food in people's mouth, sampling, doing things with local communities and embedding ourselves in local communities. So it does take a little bit of time. I'm not daunted by the fact that it hasn't picked up aggressively, but I do expect it to improve over the next few quarters.

Okay. And then, Michael, just given the weak year-to-date comp and new store performance, why does it make sense to continue opening units beyond the current signed leases, especially when it will likely require the company to increase borrowings to kind of fund those openings?

Yes. That's a great question. I would tell you that we are taking a hard look at the performance of new restaurants and how actively we're building. So we're not building for the sake of just building. We're building, I think, in a very thoughtful way. There is this balancing act. We see that when we reach a certain level of awareness and scale, our business performs very well. And we have those proof points.

Arizona performs really well for us. It's a great testament to what Portillo's can do once it has a certain level of awareness and once we have a certain level of scale. Indiana actually performs well for us. Wisconsin is starting to pick up some speed. So there is this balancing act between getting a sufficient density so that you start to build awareness and then those restaurants fill in. So we probably are a little bit ahead of demand with the supply that we have of restaurants in Dallas. And that's -- and we've got a couple more in flight, but we're not pushing the gas there. We're making sure that we're filling in, in other places where there's a lot of growth ahead for us.

And the other thing that I would just reiterate, we're really being focused on generating the right cash-on-cash returns. So that number that Michelle and I have talked about, class of '25 thus far is coming in at that $5.2 million to $5.5 million. I'm not -- that's a material decline in cost versus the class of '24, which is I'm sure you recall, came in at $6.8 million. And we have other examples of really great investments. We just built an in-line that we're opening in the next few weeks in the villages in Florida. And that thing is going to come in at sub-$4 million in investment costs. If it can do anywhere near what we think, it's a home run for investors. So we're not trying to like step on the gas and grow crazy. We're being very prudent. I think we're being thoughtful, and I think we're targeting growth where we think we can get best-in-class cash-on-cash returns.

And just to add on to borrowing in the short term, Chris, we've talked about the fact that we're getting ahead of the pipeline for '26. And so we're going to have a lot of spend this year that's going to be for the class of '26. And so that's going to come into play in some of the capital needs this year. But our goal is what we continue to say, which is as we go into '26, we don't want to have any net new borrowings on the revolver. But yes, we're going to continue to borrow this year because we have to fund some of that growth as we move into '26.

Our next question comes from the line of Gregory Francfort with Guggenheim Partners.

I had 2 questions. The first is maybe just looking at Texas versus the rest of the Sunbelt, how much of the Texas performance do you think is just how many stores in the industry are opening up in the state right now? And can you maybe talk about how Arizona and Florida have been performing? I think you touched on it a little bit, Michael, but if you could just expand.

Well, I think that's a great insight. Texas is not unique to us in development. I think Texas continues to be -- especially with all of the growth, all of the development, the population growth, it's no secret to the restaurant industry. So there -- wherever we're building, there's -- all of our competitors are building right near us. So I'm sure that has a little bit to do with the slower start. And I'm sure that there are other restaurant companies that need to get up sort of that curve in Texas as Texas digests all of these restaurants.

I don't know what the time line is for Texas to become as great as Arizona and Florida and other markets are for us. I just have -- I take solace in seeing the performance in Arizona. We've talked about this in the past. When we went from 2 to 4 restaurants, we saw a material improvement in both awareness, in revenues, but most importantly, in our margin profile in Arizona. And I'm really confident that we're going to see the same dynamic as Texas matures and that as the demand for us catches up with the supply of restaurants. And I think that there's just this balancing act always between having restaurant -- when somebody has a craving for Portillo's, we'd like to be able to satisfy it. All of the research that we do, when we ask people, why did you not -- if you don't regularly visit us, why don't you visit us? The top 2 things are awareness, I didn't know you're here and then inconvenience.

There's a reason why we are so dominant in Chicago. If you're in the Chicagoland area in any of the suburbs, pretty much within 5 miles of you, there's a Portillo's. So if you have a craving for Portillo's, you can go. We're not there yet really in any other market. And so I think there's this balancing act.

That's helpful. And then maybe my second question is for you, Michelle. The -- just as I look at labor inflation and food inflation, it feels like you have beef moving maybe a little bit against you, but it also seems like the labor market might be a little bit easier. Can you just talk about the outlook for both of those going forward?

Yes, absolutely, Greg. So as we came into this year, we knew we were going to be pressured on beef. We knew it was going to be back half loaded. So I'll start with commodities. So you saw we were up 3.4% in Q1, 1.9% this quarter. I expect Q3 to be the most pressured quarter for commodities. And then Q4 will be higher as well than what we saw in the first half of the year. So that's how we get to our 3% to 5%.

But we -- yes, we absolutely expect the back half to be a little bit more pressured, and that is primarily related to beef. But I feel really good about our ability to derisk this and get in front of it. We're almost 90% hedged on our beef flaps for this year. For our overall commodity basket, we're over 70% locked in. And so I feel really good about us coming into this year having derisked that line item for us. So we feel very comfortable with the commodity outlook.

Yes. Greg, let me just build on that. I'm very proud of our team and under Michelle's leadership that we saw this coming towards the end of last year. And early, you'll recall, we did -- we had higher beef inflation numbers than most everybody else. And we took that -- we believe that beef was going to be inflationary this year, and we've taken a number of actions to mitigate that forward buying, making sure that we're pushing every lever that we can to minimize conversion costs and making sure that we are on top of this. And so I'm very proud of the team because we've done all those things so that our guests will not experience that inflation like they see elsewhere.

We still are really focused on making sure that despite the inflationary pressure on beef that we're providing amazing value to our guests. We're not playing any games with shrink inflation. We're not gouging people. We're still -- our burgers are still 1/3 of a pound. Our beef sandwiches are huge and indulgent. So, we're making sure that the guest gets all the value that we want, and we have managed that behind the scenes like a prudent company should.

Yes. And Greg, just on the labor front, you saw in both quarters, we were up 2.7% and 2.9% in Q2. I don't expect that to be materially different in the back half of the year. We've continued over the course of the last several years to make meaningful labor investments within our system. And so I feel good about that guide at 3% to 4% for the full year. We don't see that changing.

Our next question comes from the line of Sara Senatore with Bank of America.

Just a question about maybe unit economics and then a follow-up on maybe the line items. So, you mentioned build costs are $1 million lower maybe with this new prototype. But as I think about the shift to some of these maybe smaller boxes, I think you mentioned in line. Presumably, those are more of the build-to-suit approach. And I guess, as I think about that model, presumably, it would lower your build costs even more.

I mean, optically, you'll be paying more rent. So, your margins might look lower, but presumably, the ROI would be much higher. So, I guess the question is, can you give me a sense of what that might look like for restaurant-level margins and also for the invested capital associated with it? And I guess, confirm that, that is kind of the complexion, maybe lower margins, but a higher ROI?

Let me start with that and give Michelle a chance to build on that. We have -- I think I mentioned just briefly that the Class of '26 is going to be the most -- we're excited by it. So, we have some of these 1.0s. They're smaller restaurants. Those are the ones that have come in this year between 5.2 and 5.5. We have some 2.0 restaurants, and they'll start opening up in the back half of next year. Those are another order of magnitude smaller. They should be lower costs. We haven't talked about the costs yet. And then we have some atypical restaurants. We have obviously a restaurant opening up at the Dallas Fort Worth Airport. And we have a couple of other in-line restaurants that I can't talk about the locations yet, but should be fantastic economics for us. So, you're 100% right, Sara, that as a class, we're going to see reduced build costs across the board.

We're actively determining what the margin impact is if, in fact, we do more build-to-suits. Keep in mind that some of these smaller restaurants, especially the 2.0s because it's a different configuration in the kitchen. I don't want to get super technical, but our kitchens are historically very linear. That kitchen is either U-shaped or a little E, which creates a lot more work sharing, reduces overall energy load capacity needs and reduces HVAC needs. So, we expect to see some operating improvement in terms of labor costs and OpEx. I'm not sure how much margin you give up with those smaller kitchens if, in fact, you do, do a build-to-suit and pay more rent. So we're still -- it's still evolving. But for certainty, I can tell you that we are targeting lower capital -- not lower capital and you can imagine a world where you get to a certain capital point with our typical revenues that we target by year 3, the cash-on-cash returns get really, really attractive.

That's very helpful. And then just on the line items, when I look at your P&L, your cost of goods is probably higher than almost any other fast-casual restaurant. That reads as very good value on the plate. But I'm not sure if consumers really recognize that. I mean, I would think in this current environment, that would translate into a lot of traffic share gains. So, I guess on that front, do you get credit for that? And also whether or not you do, is there any opportunity, whether it's from a supply chain or distribution or something else to maybe lower that cost of goods line?

Yes. It's a great question. I mean, let me start with the second part. Everything is on the table for us. We are actively looking at distribution costs. It is expensive for us to get our -- some of our products across the nation. And so we need to evolve that. We need to get better at distribution and the entire supply chain motion. I mean, your question really is a, call it, the 34-ish percent in commodity cost, how much of that is really value to the guest and is there some waste in there? The reality is there's probably a little bit of efficiency that we can do, and we'll always keep looking at improving efficiency. But I want to anchor back to your first point, we're very proud of the fact that we give that kind of value to our guests, right?

It's important to -- our burgers are 1/3 of a pound. Our beef sandwiches are really big. They're beefy. We're not playing games with fries. Our small fry, our regular fry is bigger than most people's large fries, and it's cooked in tallow. So, we're very proud of the quality and the value that we give guests. I believe that guests notice this. I don't think it's one of those things where they move in a herd week-to-week. I think it takes a little bit of time. And I think right now, we like being in a position where we're providing great value. Our value scores are really good internally. We're very happy with it. And I think it's just a question of time when the consumer behavior catches up to the consumer sentiment for us.

Our next question comes from the line of Brian Mullan with Piper Sandler.

I just want to ask about the breakfast testing in Chicago. Can you talk about how that's going? What you are seeing on incrementality, which I think was a really important factor that you were watching?

Yes. Look, breakfast is -- we're trying to be very cautious with breakfast, Brian. I appreciate you asking about it. It's, frankly, going as well as I could have hoped. It appears that it is incremental. It appears that our guests really love it. And it's not negatively affecting in any way our lunch or dinner business at those restaurants, either in terms of guest satisfaction or sales. So, there's a lot to like about breakfast. And if you haven't tried it, it's absolutely delicious. I think we have the best -- I've gotten feedback from one investor that they're too big. Our egg sandwiches are just too big in decadence, but it's delicious. And we're continuing to evaluate it. We want to make sure that it's sustainable for our teams and our management.

We don't want to burn people out. We don't want to take our eye off the ball. So, we're going to run this test through the end of the year. And then we'll have options. We'll -- if we decide that the test is a distraction, we'll kill it. I don't know if that's going to happen, but none of us are obtuse in seeing that there's a lot of other great restaurant companies that have tried breakfast multiple times and failed. I don't know. I don't think that -- I hope that's not going to happen to us, but that happens.

Second option is we decide that breakfast is really just a Chicago thing and that in Chicagoland, we have the credibility and the right with consumers to give them an amazing breakfast meal that they will buy in. And then the third test -- the third option is that we think breakfast has potential for us as a national thing, at which point we would have to test outside Chicago to see if we can also be relevant in breakfast. But it's going really well. We're happy about it, and we just want to make sure that it's sustainable.

Okay. And then I wanted to ask about the limited menu you went with in Houston. It doesn't seem like it would be right to equate the slow start just to that. So, would you agree with that? And then if so, what are some of the merits to the limited menu? And are you still exploring the idea of trying that in other geographies potentially?

Yes. It's a great question. There's definitely a tail on that limited menu that we're really confident in eliminating across the board as we open new restaurants. So that's for sure. But I do think that there are other things that we think create some uniqueness and experiential vibe at Portillo's that maybe we should not have taken off, and we've already been adding back. So like any good test, there's learnings. There's learnings on what you did right, and there's learnings on what you didn't do. So, simplification is healthy for us, right? It -- when you can -- you go from 8 to 3 salads, that's a great dynamic because everything is fresher. It's being made faster. It requires less training on your team. You're less likely to screw things up. So, that's a great example.

I think we went with a reduced fleet, a reduced variety of salads. And I think that's a great -- that was a great takeaway. There's a couple of things like quirky things that we sold in Chicago that we didn't put into Houston, no one's missed. We didn't -- we decided to test not selling beer in Houston. I think that was a mistake. I think there's a dynamic where people love coming to a Portillo's and having a frosty stein of beer with a burger or a beef sandwich, we missed that occasion. That was a mistake, and we've added that back now and we learned. So, I think it's a balancing act.

Our next question comes from the line of Jim Salera with Stephens Inc.

Michael, I wanted to ask a little bit about the Portillo's Perks and that you guys said you're almost at 2 million members now. Are you able to give us any insight? Presumably, those are all predominantly in the Chicago land area, but just kind of the geographic breakdown of the rewards program? And is that possibly a lever that could be willing to do a little bit more in some of the expansion markets to maybe drive repeat and frequency?

Yes. So great question about Perks. Let me sort of -- I wish I could tell you it was 2 million. It's a little over 1.9 million, but it's growing. Here's what I'd say. Let's keep in mind, Perks, we literally rolled this out in March. So, it's super early days for us. Our aspiration, I think back when we talked about it was we would be at 1.5 million to 1.7 million members by mid-summer. We're at 1.9 million. So, I feel really good about that. And in almost every way, it's exceeding my expectations. It's really easy to forget that we only have 95 restaurants.

If you look at loyalty members per restaurant, I think that the 1.9 million puts us in pretty rarefied air in terms of people who are engaged with our brand and want to be part of our brand. So, I'd encourage you to pop that into your ChatGPT and ask it, loyalty members per restaurant across all leading restaurant companies. That's a really good place to be. We're still learning what it can do for us. And it's like a brand-new toy that we're playing with. We're learning that food promotion works really well. People love our food. When we offer something for free or a BOGO or bring in a friend and sign up, when we do that kind of stuff, it really works well. People love our -- it's -- but we're also -- we get a lot of engagement with badges. We get engagement with people who want to be loyalty members. We have people who are posting all kinds of fun stuff in social media. So, they're becoming an army of evangelist for us. I don't think we have plumbed the depths of what Perks can do for us. I don't think we fully appreciate it yet. It's going to be a great gift that we give to a new CMO who will be able to use Perks to generate activation, guest acquisition and improve frequency. So, I think that it's very early days, and I'm super excited by what we're going to do with this over the course of the next 18 months or so.

Great. And then I apologize if you guys touched on this already, but if we think about DFW AUVs and the expansion market AUVs, is there a scenario if the consumer kind of stabilizes that we could see an acceleration there in '26? Or are we still kind of trying to find stabilization point for some of those market AUVs?

Yes, I think, Jim. I'll take that one. So, we've talked about how we've gotten out of the gate a little slower in Texas. But I think as we get into '26, we're still going to be heavily focused on growth in the Sunbelt. That's going to include, continuing to grow the markets that we're in, in Texas and Dallas and Houston. We'll likely go into -- we've talked about going into San Antonio, Austin. So, we need to continue to drive that awareness, which is going to continue to drive the top line in those AUVs. And so we're learning. Like we're still learning how these curves are behaving in these markets. And so I think that's one of the things for us as we move forward. And there still is a honeymoon curve to what we see in some of our restaurants -- actually in most of our restaurants. And so you have to play that into consideration, right?

Remember, we're still going to have 12 restaurants that are going to open into '25. Our expectations continue to remain high. But in terms of what we're targeting, we are still targeting by year 3 as a class to be in that 5.9% to 6.3% range. That is still our target goal. Now the composition of the classes will determine how the behavior of those AUVs are because as Michael and I sit here today, I don't think that we expect Houston to have a significant curve. We expect that market to continue to grow. And we'll have 3 more opening in Houston this year as well.

And so we're going to continue to put that new market playbook into play, and we're going to continue to get tighter on that. And as Michael mentioned, new CMO coming on board, they're going to have great tools to work with. But I can't reiterate the excitement that myself and Michael and the rest of the team have about the Class of '26. I think it's going to be fantastic. We're still on the Class of '25, but we're really excited about that class as well.

And I would just -- one other follow-up on what Michelle said. This is not -- it's not totally unusual for us when fill-in restaurants start off a little slow. We've experienced this in the past. We had restaurants in Wisconsin that started off slow that are performing admirably. We've had restaurants in Arizona, fill-in restaurants that started off slow that are performing admirably. So, our newest restaurants in Florida right now are probably performing better than some of our first few restaurants. So it's not an uncommon thing that happens. This is not something that we're ill-equipped to deal with. We're not daunted by the notion of driving some sales in Dallas.

Our next question comes from the line of Andy Barish with Jefferies.

I didn't hear much on kind of operations and drive-thru speed. And can you kind of give us an update on that channel vis-a-vis the rest of the business, just kind of given the persistent promos and discounts in the broader QSR world?

Yes, that's a great question. We continue to grind and slowly but inexorably improve on speed in the drive-thru, Andy. So, thank you for bringing that up. And that's hugely important because speed very quickly converts into frequency and transactions, et cetera. At the same time, to be totally transparent, the drive-thru is where you typically see the most economically pressured guests, and it probably has the place that has some of the most challenging dynamics for us. So we have to get faster, and that's a way of mitigating some of the pressure for the guest. We can't -- we're not going to go to value menus or dollar menus or any of that stuff. And that guest will choose those other options if they have to. So, speed continues to improve.

Accuracy continues to improve. I'm really happy overall with how we're performing in the drive-thru. And the test we mentioned it, the AI tests that we're using, we've got, I think, the right -- it's really fun to watch. We have these cameras. The cameras translate into highly intuitive monitors inside the restaurant so that the team knows exactly what's going on. The individual anecdotes that I'm hearing about we had times that were ridiculously long late in the evening because we just weren't aware of people waiting. Now we are. It immediately has changed.

We've shaved minutes off at different day periods. So, I love it. It's helping us train our teams better. We're putting tools in the hands of the team so that they can be more successful. And we're seeing that real time. It's a test. My expectation is that we will wrap up this test sometime in the third quarter. And all things going well, we will deploy it in the fourth quarter and in the first half of '26, we'll see material improvement on drive-thru times.

Got it. Appreciate it. And then, Michelle, just on the revenue guidance change of kind of the mid-single-digit reduction, I guess, just thinking about that, is it sort of evenly balanced between a point or so of lower comp as well as new restaurant openings and then fewer operating weeks? Kind of how do you parse that out?

Yes. I'd say it's primarily driven by more of the non-comp pressures, Andy, that I mentioned. You'll get a little bit on the comp. Like you said, we're trending to the lower end of the 1% to 3% range that we previously guided to. And so I think about it as more heavily weighted on the non-comp side, specifically as we talked about the Class of '24 continuing to see a little bit of headwinds there as well as timing. I think that the timing issue is real for what we came into the year thinking in terms of timing for the Class of '25 versus what we're seeing.

I mentioned our Stafford, Texas restaurant, which is in Houston, the delay of that, which was months of delays. And then for our Q4 openings, it's more back-end weighted in the quarter as well. So it's the timing component, the Class of '24 component that's primarily the driver, but you do get a little bit of comp in there.

Our next question comes from the line of Dennis Geiger with UBS.

I wanted to ask another one just on the new stores and specifically the new stores outside of Texas. I guess just kind of clarifying the stores outside of Texas, newer stores outside of Texas, generally all or mostly performing well or consistent with expectations? Or Michelle, I couldn't tell if you were alluding to maybe some other markets a little softer albeit. Anything on the non-Texas newer stores to call out?

Yes. I would say, Dennis, that it is primarily Texas. And when we say Texas, we have the Dallas restaurants in there as well. So when we think about the Class of '24, there's 3 restaurants that are in Dallas. There's 3 restaurants that are in Houston of the 10 that we opened. And so the other restaurants that you have in that class, Michael mentioned Florida. There's a Florida restaurant in there. There's an Arizona restaurant. There's a restaurant in Michigan. Those are largely performing near expectations.

I wouldn't say that there's any one of those restaurants that's I would call a home run restaurant. But the pressures that we're seeing are primarily the infill restaurants within the Dallas market, not all the Dallas infill restaurants, a certain -- a handful of those as well as Houston. So, that's why we called that out specifically. We're not -- the Arizona market continues to be, as Michael mentioned, a very strong market for us as we continue to infill that market, and we've been in that market for over 10 years. And so we're beginning to continue to build awareness. And then our second restaurant in Michigan is one that, again, is challenged by awareness. So, we got to continue to work through some of those challenges. But there's nothing outside of that, that I would call out that we're concerned about.

Great. Helpful. And then just one more either for Michael or Michelle. As you think about sort of those 4 key priorities or initiatives to drive sales, how do you think about maybe the most impactful to support either transaction or comp gains in the back half of this year into next? And I'm sure it's all 4 and then some working in tandem, but are there any kind of particular call-outs? I know you've given some color on the initiatives individually, but just what you think could be more impactful for that -- for the base, driving that comp over the coming quarters?

That's a great open-ended question, Dennis. Here's what I'd say. I think that the priority of those tactics is slightly different in the core versus outside the core. So when you think about in the -- like the continuous improvement on operations, getting great at drive-thru, that really benefits us in Chicagoland. So, every second that we can improve speed dramatically helps us in Chicago. We need awareness outside Chicago, particularly in Dallas and Houston as we open in Atlanta. We need people to know who we are. And that's where all that multichannel marketing.

We've got field marketers deployed right now who are sampling food, setting up fundraisers, going to local baseball games. In Texas, they're going to -- we're sending our Beef Bus to high school football games in the fall. That's a thing. They're stadiums with 10,000, 20,000 people. That's a great way of building awareness. So, you've got to do that. And then the sort of my favorite thing, which is not fully deployed yet is Perks. I think that as Perks matures, as we learn more, we will use it very surgically to drive guest acquisition outside Chicago and frequency in Chicago. That tool allows us to do basically one-to-one marketing, and it allows us to be very segmented in our approach. And that's, I think, what gives me the most confidence for '26 and beyond.

And of course, like I didn't mention the kiosks. I think we've done a great job with the kiosks. Our data and our partners' data would say we're awfully close to best-in-class already with the kiosks. But what I love about the kiosk is that it's just creating a frictionless environment for guests. There's a whole generation of people who just want to order digitally. They want to come into the restaurant. They want to see pictures of food. They want to order it on the kiosk. We've made great strides on kiosks. They haven't even been deployed yet a year. And we're rolling out the next innovations over the next 6 months on kiosk. Already, if you come to one of our kiosks, you can see your order history. If you have something that's pretty specific, you can put it in once, you don't have to recreate it every time. So we're getting really good with kiosks, and I think that's another way of becoming frictionless for our guests.

I would just add on to what Michael is saying in terms of the menu. And when you think about Perks, I think there's some cool fun things we can do with the menu when you talk about secret menu items, an exploration of what we're going to do with the menu as we move forward. I think there's some things that are potentially in the pipeline for us that we're exploring for menu innovation that could be fun and exciting, not so much in the short term in terms of the third quarter. But as we go into '26, I think menu innovation can play a role as well in helping to drive some transactions, whether it's in our core or outside.

Our next question comes from the line of Brian Harbour with Morgan Stanley.

What are the in-line locations going to look like? I mean, how big are those? Like what's the experience going to be like there relative to kind of a typical Portillo's?

Yes. So I would -- I don't know if we post them online yet. I'm sure we will in social media soon. But our Villages restaurant is gorgeous. It's a beautiful experiential restaurant. I mean, we call it an in-line. The truth is, I think, technically, it's an end cap. So it's a beautiful location. It's in -- I don't know how familiar you are with The Villages. It's one of the largest retirement communities in America. So it's a beautiful restaurant. We're not going to make them anything less than that. They still need to be experiential.

We want people to enjoy coming to Portillo's feel good about that dynamic. And then we want to win them over forever with amazing value, quality and speed. So, we're not -- when we say an in-line, don't think of a tiny little box that could be anything. It's still a Portillo's. It's still decorated to the 9s. It looks beautiful. You're still going to see people cooking in the kitchen. You're going to see action in the kitchen, and it's going to have that Portillo's look and feel.

Yes. And I'll just add on to that, Brian. Not all are created equal. So as Michael said, The Villages may be different than a few in-lines that we're exploring for the pipeline, whether it's next year or in the future. I think what we're all excited about is the potential -- the return potential of these in-line units when you look at the investment cost and what we believe that the AUVs can do, what we believe that this can provide to the cash-on-cash return targets. I think as we sit here, the unit economic story for us is extremely important. And as we think about that class of restaurants, continue to drive that industry-leading unit economics is something that is paramount for us as we move forward. And I think the in-lines play a role in driving that for us when we think about the composition of classes as we move forward.

Our final question comes from the line of David Tarantino with Baird.

One more on the performance of new units. And I guess, Michael, I know you've learned a lot as you've kind of opened some of these locations in Texas. And I wondered if you could just comment on whether you're thinking differently about how you enter new markets in the future. And I know you've talked in the past about marketing support, but also, I guess the nature of my question is you added a lot of locations in a fairly short window. And I'm wondering if you're rethinking whether that sort of pace of openings in the new markets should be adjusted going forward. So, any thoughts you have on that question would be great.

You bet, David. Good to hear from you. I would tell you that there's -- you're always learning and trying to get better every single day, trying to get a little bit better than you were yesterday. And so our perspective is that we've learned a lot about how to open and how to open successfully. I think we're lulled into a false sense of security with the success of The Colony. It was just -- we put a lot in, in pre-marketing that restaurant. And it was just an enormous opening that almost broke the restaurant. So, we quickly then tamped down all marketing. And Houston was the result of that. We started off slow in Houston. And the fill-ins in Dallas were slow because we didn't really have a lot of active marketing going on.

So, I think the biggest lessons for us is we are -- we do want a big opening because we do want to get some excitement and momentum and get people engaged with the brand early on. And then we need to keep a steady drip of marketing going on during the course of the next, call it, 12 months. I think we'll see that in Atlanta. I think Atlanta is going to be an exciting good test for us. We're opening in Kennesaw, which is a very, very attractive market. It's a great location. We're doing all of the good grassroots things that we should do to build momentum. We're partnering with Coca-Cola who -- you don't get better at marketing than Coca-Cola. And we'll get some great activation in that restaurant.

I think the pace of growth is something that we continue to think about and learn from. I think implicit in your question is, did you build too many restaurants too quickly in Dallas? I think it's a very fair question. And I don't know if I have a clean answer for that. I think that clearly, without the marketing support, that was -- it was too many too quickly. The flip side is that we need to build awareness. And so maybe it's a combination of building and doing marketing to continue to build awareness and drive demand. So, I think that's more of a nuanced balancing act. And we'll continue to evaluate, look at what's happening in Dallas and figure out what the impact of that is in Houston, et cetera.

Thank you. We have reached the end of our question-and-answer session, and this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.