Latest / The Dutch Investors / #34 | The highest AUV restaurant you've never heard of w/ Brett Schafer | Portillo's Deep Dive

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#34 | The highest AUV restaurant you've never heard of w/ Brett Schafer | Portillo's Deep Dive · The Dutch Investors

• 0:01
  SPEAKER_00: There is a small chain in the United States with fewer than 100 locations, but it makes more money per store than Chipotle, Chick fil A, Texas Roadhouse, and even McDonald's.
• 0:15
  SPEAKER_00: It's not a household name, it's not a tech play.
• 0:18
  SPEAKER_00: It all comes down to people and operations.
• 0:21
  SPEAKER_00: It's a Chicago-style spot called Portillos, mostly known for hot dogs, Italian beef, and chocolate cake shakes.
• 0:31
  SPEAKER_00: In this episode, I'm joined by Brett from Chit Jet Talks.
• 0:35
  SPEAKER_00: He owns the company himself and has done a ton of work on the business.
• 0:39
  SPEAKER_00: We will talk about why Portillo stands out, the key numbers to track if you're looking at a restaurant chain, what could go right, and of course what could go wrong.
• 0:49
  SPEAKER_00: It was a fun conversation, full of insights.
• 0:53
  SPEAKER_00: Whether you're into restaurants, growth stories, or just want to discover a unique new company, I think you'll gain a lot of value from this analysis.
• 1:03
  SPEAKER_00: Let's get into it.
• 1:16
  SPEAKER_00: Before we dig into Portillos, uh, let's set the table for a second.
• 1:20
  SPEAKER_00: For the listeners that don't know you yet, perhaps you could introduce yourself, where you're from, and uh maybe describe your investing style very briefly.
• 1:30
  SPEAKER_01: Okay, yeah, glad to be here.
• 1:32
  SPEAKER_01: Welcome, uh sorry, I host my own podcast.
• 1:34
  SPEAKER_01: So uh, you know, thankful for you having me come on the show.
• 1:38
  SPEAKER_01: Usually I'm saying the opposite uh to guests on my own show.
• 1:42
  SPEAKER_01: But yeah, uh, you know, my name's Brett from the United States, um, host the Chit Chat Stocks podcast where we do a lot of studying of businesses, uh super investors, just discussing stocks that we're interested in.
• 1:55
  SPEAKER_01: I do it with my host uh co-host Ryan, and we do two episodes each week, and we do also some written stuff as well.
• 2:02
  SPEAKER_01: So I've you know, from a background perspective, this investing stuff that we did, Ryan and I essentially for the last five to seven or eight years have pretty much turned it from a hobby into you know, the podcast isn't a full-time job, but we've turned it into our own careers.
• 2:22
  SPEAKER_01: You know, Ryan works in the industry right now uh as a at a I'm sure a lot of listeners have heard it, one of the new software companies called FinChat, and I do writing for the Motley Fool and some other um companies as well.
• 2:36
  SPEAKER_01: So yeah, you know, my job revolves around talking about stocks, writing about stocks, and excited to talk about one today in Portillos.
• 2:46
  SPEAKER_00: Yeah.
• 2:47
  SPEAKER_00: Obsessed with stocks just like us and uh turning our hobby into into a into a business.
• 2:52
  SPEAKER_00: And we actually had Braden Dennis on the show last week.
• 2:55
  SPEAKER_00: It it didn't come out yet, but uh spoiler.
• 2:59
  SPEAKER_00: And uh Ryan is coming on the show in a few weeks as well, so uh pretty excited about that and uh nice to meet you as well.
• 3:05
  SPEAKER_00: I actually first heard about Portillos on the Chit Chat uh Stocks podcast.
• 3:10
  SPEAKER_00: I don't listen to it every week, but I try to.
• 3:13
  SPEAKER_00: It's uh it's it's it's good fun and actually get a lot of new insights from it.
• 3:17
  SPEAKER_00: So I do recommend people checking it out.
• 3:19
  SPEAKER_00: Uh and what really caught my attention was when you or Ryan mentioned that this Chicago style spot was doing around 10 million in AUV.
• 3:30
  SPEAKER_00: And as some of our members know, I've got a soft spot for restaurant chains from an investing point of view.
• 3:36
  SPEAKER_00: And last time I checked, Chipotle had an AUV around 3 million and Texas Roadhouse about 6 million.
• 3:43
  SPEAKER_00: So hearing that Portillos was putting up 10 million per unit, that just sounded ridiculous and uh sparked my interest.
• 3:51
  SPEAKER_00: So, how did Portillos end up on your radar?
• 3:54
  SPEAKER_01: Oh, that's a good question.
• 3:55
  SPEAKER_01: I think it must have been around the IPO because I remember discovering it when it went public, I believe in 2021.
• 4:03
  SPEAKER_01: Um, the city I live in, Seattle, doesn't have a Portillos, so I never I don't I don't think I've actually ever visited the restaurant, but when it came public, I like you are interested in restaurant companies.
• 4:17
  SPEAKER_01: It is one of those industries where there are major successes.
• 4:22
  SPEAKER_01: You know, you can have hundred baggers like Domino's, like Starbucks, like McDonald's over the you know, the long long term there for McDonald's, but you can also have a lot of companies that struggle and uh the stocks don't do very well.
• 4:35
  SPEAKER_01: So I'm interested in following the industry and hopefully trying to find that.
• 4:39
  SPEAKER_01: And as we titled the episode last year, you know, the next Chipotle, the one that is that chain that has a good following, as you mentioned, very strong unit volumes, and can maybe expand around the country.
• 4:54
  SPEAKER_01: And who knows, maybe in uh the long, long term there'll be one in the Netherlands someday, but that would be quite the optimistic bull scenario.
• 5:03
  SPEAKER_01: But I also think you mentioned those AUVs, which for anyone that doesn't know, that's just the average amount of revenue each restaurant is doing.
• 5:12
  SPEAKER_01: That number is highly impressive for Portillos, where I believe the number for Chipotle is around three million dollars per year.
• 5:21
  SPEAKER_01: If you look at that Texas Rhodes, as you mentioned, that's even a sit-down restaurant, so it should have higher uh order vol or not order volumes, uh just average unit volumes compared to a fast casual chain or a fast food chain.
• 5:34
  SPEAKER_01: But Portillos is up there, and especially with their Chicago area locations, which have tons of cash flow generated each year that they've generated year after year after year, eight, nine, ten million dollar AUVs at each of these locations.
• 5:50
  SPEAKER_01: They're replicating that somewhat along their Sunbelt locations, but this is one of the only, and I think maybe besides Chick-fil-A, the only restaurant concept in the United States that has these high levels of AUVs, which I think just gives them tons of potential as they expand around the country.
• 6:11
  SPEAKER_00: Yeah, we'll talk about that more later because I do have some questions uh around that.
• 6:16
  SPEAKER_00: How would you explain portillos to someone who's never been?
• 6:20
  SPEAKER_00: Uh I I just heard you you never visited yourself, but maybe Ryan has or someone in your circle has.
• 6:27
  SPEAKER_01: Yeah, I I've talked to people that have visited before.
• 6:29
  SPEAKER_01: I've talked to people, I think either friends or online investing people that are from the Chicago area that have visited, just asking about the brand.
• 6:37
  SPEAKER_01: I actually have some family from over there, so that helped as well.
• 6:42
  SPEAKER_01: But I would describe it as Chicago style street food packaged as more of a national brand.
• 6:49
  SPEAKER_01: So think about it, you know, Chipotle is kind of American-style Mexican food.
• 6:53
  SPEAKER_01: Uh, I know there, if there's some Mexican listeners out there, they wouldn't say it's true Mexican food, but again, it's similar.
• 6:59
  SPEAKER_01: And uh, if you look at kava with Mediterranean food, it's taking that and you know, standardizing the process.
• 7:07
  SPEAKER_01: So the core of their menu is going to be that uh what is it, the the the roast beef sandwich with the peppers and stuff like that, and then the Chicago style hot dog, which for any international listeners, there's different styles of you know American hot dogs from different cities, even though the city I live in has a Seattle-style dog.
• 7:27
  SPEAKER_01: So there's the Chicago dog, which is famous, and they sell that a lot.
• 7:30
  SPEAKER_01: And then as well as that, they sell you know sides like salads, fries, and what's very popular for them are their milkshakes, which is chocolate cake shakes, stuff like that.
• 7:41
  SPEAKER_01: And I think they also sell the hamburgers and chicken sandwiches, but they're actually streamlining their menu a bit, which I think to focus more on that Chicago style food and not competing with the McDonald's and the Chick-fil-A's of the world with the hamburgers and the chicken sandwich, which simplifies things for everyone.
• 7:56
  SPEAKER_01: But to sum it all up, it's someone that if you're in Chicago, you can get a at a reasonable price, a pretty standardized, you know, it's not gonna be the best beef sandwich, Chicago-style beef sandwich you've ever had, but it's also not gonna be the worst.
• 8:09
  SPEAKER_01: And then for expanding to uh their Sunbelt expansion, which would be, you know, states like Texas, states like Georgia, Florida, or Arizona, someone out there that wants a Chicago-style food, who maybe lived in the area or wants to try something new.
• 8:25
  SPEAKER_01: This is a concept that they can get that, that they might not, you know, Texas is not going to have many of those options, if at all, which is why when they open locations, they actually have to tamper down demand because of the Chicago uh transplants that have moved from Chicago to say Dallas, Texas.
• 8:44
  SPEAKER_01: They are clamoring in the first few weeks to at least try Portillas for the first time in a few years, and they actually have to tell people they have to make sure fewer people show up to the restaurants to not overwhelm their locations, which I think is a good sign for the brand demand as they open up around the uh around the country.
• 9:04
  SPEAKER_00: That's pretty uh that's pretty nuts.
• 9:06
  SPEAKER_00: Is is the food the only thing that makes Portillos like uh very different from chains like Shake Shack, Five Guys, Chipotle?
• 9:15
  SPEAKER_01: I would say so.
• 9:16
  SPEAKER_01: Again, it's the Chicago style food.
• 9:19
  SPEAKER_01: The key is you know, everyone has sides and salads and stuff like that.
• 9:23
  SPEAKER_01: You want that to be high quality, but it is the the beef sandwiches, the Chicago style hot dogs, where you know, for similar, if you're going to a Chipotle, you have the burritos and you have the bowls, and this is kind of the similar thing you would get at Portillos.
• 9:39
  SPEAKER_01: I can care compare them to a Chipotle or a Kava or something like that because that's around where their price point is, similar to a Shake Shack with burgers, but again, it's just going to be a little bit different there.
• 9:49
  SPEAKER_01: And that's why I like Portillos because they have the unique offering, and we've seen with uh Chipotle and Kava when there is this unique type of offering, and you can see that people actually enjoy it where Kava is Mediterranean.
• 10:04
  SPEAKER_01: We haven't really seen a scaled brand uh within that category in the United States.
• 10:09
  SPEAKER_01: I think there is potential for it to grow around the country compared to you know the traditional style uh food concepts in the United States, which could be, you know, pizza, the hamburgers and uh the hamburger stand style ones like uh McDonald's and Burger King and others, or uh what am I missing the third ones?
• 10:28
  SPEAKER_01: The sandwich shops like uh Subway.
• 10:31
  SPEAKER_01: So there's opportunities for these new niche ones to grow, and that really is the differentiator.
• 10:38
  SPEAKER_01: What makes Portillos a little bit different than other restaurants, and is this this is actually something that they're trying to change a little bit as they scale, is that they're much bigger restaurants, and they do have much more volume there, but it's not like a smallish Chipotle location where you have a little bit of a sit-down area, but it's just kind of that assembly line of people coming through as fast as possible.
• 11:03
  SPEAKER_01: And they also used to do unique designs for each uh city that they're in.
• 11:09
  SPEAKER_01: So Detroit, automotive focused, Arizona, desert focused, stuff like that.
• 11:14
  SPEAKER_01: They're changing that a bit, but they try to be maybe I would describe it as if there's a spectrum of on the one side you have the quick service restaurants like a Chipotle, which is just speed and getting through as fast as possible.
• 11:28
  SPEAKER_01: And then you also have at the high end, like a sit-down restaurant, or maybe not the high end, but like a Texas Roadhouse, a sit-down restaurant, Portillas is probably riding the middle of that line where they want to be affordable, like a Chipotle, but they're also a little bit more of uh, okay, I have kids, I'm gonna take you here for Sunday dinner, something like that.
• 11:48
  SPEAKER_00: Yeah, I kind of came to the same conclusion.
• 11:50
  SPEAKER_00: I think I'll uh I'll I'll agree with you here.
• 11:53
  SPEAKER_00: Since we're not from the United States, do most people know what Chicago style type food is?
• 11:59
  SPEAKER_00: And do you think the Chicago style flavor will be liked in other states or perhaps even internationally one day?
• 12:06
  SPEAKER_00: What do you think?
• 12:08
  SPEAKER_01: Internationally might be a different question, but I think most people know what a Chicago beef sandwich is and a Chicago hot dog is.
• 12:17
  SPEAKER_01: It's something that in the United States, I guess, is well known.
• 12:21
  SPEAKER_01: It's almost like probably not as famous, but you know, New York style pizza or southern fried chicken.
• 12:28
  SPEAKER_01: I'm trying to come up with other stuff on the top of my brain, or or Texas barbecue or stuff like that.
• 12:32
  SPEAKER_01: It is well known.
• 12:34
  SPEAKER_01: And I do think now, this is the big question with the company, can it expand to other parts of the country?
• 12:42
  SPEAKER_01: I think that and the question is being answered currently when they get their new Sunbelt markets and they're still seeing quite high uh average unit volumes at these locations in Texas, Arizona, and Florida and Georgia, I believe, are the other states that they're going into right now, where they're seeing five, six, seven million dollar AUVs at launch or even higher, which is much better than uh again, I'll use the them again since they're one of the best run restaurants in the whole world, Chipotle.
• 13:12
  SPEAKER_00: Yeah, so I think that's a great leap towards the business model.
• 13:16
  SPEAKER_00: I think most people will know that they make money by selling food and drinks, right?
• 13:21
  SPEAKER_00: But um, what can you tell us about how Portillos makes its money?
• 13:25
  SPEAKER_00: I think you mentioned they make around 50% from revenue from sandwiches, burgers, hot dogs, and fries.
• 13:32
  SPEAKER_00: So it's not really a healthy chain.
• 13:34
  SPEAKER_01: No, no, that is that is for sure.
• 13:36
  SPEAKER_00: Yeah.
• 13:37
  SPEAKER_00: Uh do you think that hurts them long term or possibly?
• 13:41
  SPEAKER_01: Possibly, but I don't think it's a big factor.
• 13:44
  SPEAKER_01: There's the kind of Ozempic stuff, there's the the narrative around that, but I I would say the threat there is more of the at-home stuff now.
• 13:53
  SPEAKER_01: If this is something that if someone visits Portillo's, like I'm saying at home, more of like picking up candy and chips at the grocery store.
• 14:02
  SPEAKER_01: Where if someone goes to Portillos once a week, I I don't think that's gonna be part of the the health food conscious stuff.
• 14:10
  SPEAKER_01: And for the people that are already health conscious, I don't think they were going to be visiting Portillos in the first place.
• 14:15
  SPEAKER_01: If we look at some of the other restaurants out there that would also be described as unhealthy, they seem to be doing just fine at the moment.
• 14:23
  SPEAKER_01: And if Portillo scales and brings in this new concept, that is potential for market share gain.
• 14:29
  SPEAKER_01: So I don't think the the general health concept will hurt them too much.
• 14:32
  SPEAKER_01: But if we want to dive into their business model, it's fairly simple.
• 14:37
  SPEAKER_01: They sell those sell the food items, but they want to essentially and the the the activist that owns part of the company now is trying to push for a little bit of a change here, but they own their own stores, so instead of fully leasing it or uh trying to be as capital-eyed as possible, they invest a lot of capex into new restaurants, and the way it seems to be working well so far, but that is you know hurting their free cash flow a bit.
• 15:08
  SPEAKER_01: But it's it's no different than a typical restaurant, they want to you know put up some cash up front for the pre-opening costs, and when they operate, you're really looking at I think I was glancing at it earlier, but their major costs are going to be food inputs and labor, and they're going to try to get, and if we look at what their key metric is, it's restaurant-level profit margins, which I think they do a good job at.
• 15:37
  SPEAKER_01: Um, and if we find their, and you are as well someone that doesn't like adjusted EBITDA numbers, but if we look at their definition of restaurant level adjusted EBITDA, I think it's fine because all they're doing there is excluding corporate level expenses and then excluding depreciation and amortization.
• 15:53
  SPEAKER_01: And you can add back the DNA if you want, but when looking at that figure, I think that is a pretty good uh metric for restaurant level, let's say operating cash flow.
• 16:08
  SPEAKER_01: Now there might be some maintenance capex that needs to be put in there, but a lot of the capital expenditures will be put in up front.
• 16:15
  SPEAKER_01: So I think this number is not bad for operating cash flow.
• 16:20
  SPEAKER_01: And if we look at them, their Chicago area businesses, which have very, very strong AUVs of$10.8 million dollars, they have restaurant level margins of 31.1%.
• 16:31
  SPEAKER_01: Now, this was as their September 2023 investor day, and then if we look at the Sun Belt, it's gonna be a little bit lower, but that's kind of how I look at their business model.
• 16:41
  SPEAKER_01: It's not anything too complicated.
• 16:43
  SPEAKER_01: You have the top line figure, which is again why we talk about AUV being so important, because you need that high enough revenue to get through your labor costs, which are gonna be generally fixed until you know maybe you give some people some raises, that's gonna steadily grow, but on a day-to-day basis, it's fixed, and then your input costs, which are food, is gonna be fixed on a day-to-day basis, and then you have general overhead and stuff like that, as well as marketing.
• 17:08
  SPEAKER_01: So you just bring it down to that and you see the restaurant level margin.
• 17:13
  SPEAKER_01: Um, I don't think it's much more complicated, it's not some crazy tech model, it's not some crazy, you know, big tech company that we need to analyze with so many moving parts.
• 17:24
  SPEAKER_01: It's a pretty simple restaurant concept.
• 17:26
  SPEAKER_01: They're going to try to grow around the country, and if they can keep up solid AEVs and solid restaurant level uh profit margin, I hope and I think they will get good returns on invested capital over the long term.
• 17:43
  SPEAKER_00: Yeah, it's basically just food, people, and operations, right?
• 17:48
  SPEAKER_00: So it's pretty straightforward.
• 17:49
  SPEAKER_00: What is a bit more interesting, I suppose, is that they do have more like access points, uh, where they also do catering, which I don't really hear that often, and even nationwide shipping.
• 18:02
  SPEAKER_00: So you can order like in bulk, and I think they send you frozen or frozen packages or something.
• 18:08
  SPEAKER_00: Do you think that really helps long term, or is it just like a like a side hustle thingy?
• 18:15
  SPEAKER_01: I think the uh nationwide shipping was only there because they used to really just focus on the Chicago market when they were kind of a family-run business, and for the people that were diehard fans of the brand, they could get the national shipping.
• 18:29
  SPEAKER_01: It's not gonna be an important thing over the long term, but I do think it shows that there are fans of this brand and that there are people that would like a Portillos in the city that they live in, and that's simply gonna be, you know, that's a good thing because instead of a concept like Kava, which is relatively unknown until they someone goes and you know opens up a Kava in in your city.
• 18:57
  SPEAKER_01: If you have these existing fans of the brand that will pay a ton of money to have the product shipped across the country and probably not even be that high quality in the first place because of that, that's a really good indicator that your concept can scale uh across the country.
• 19:15
  SPEAKER_01: Yeah, I mean the catering is also good.
• 19:19
  SPEAKER_01: Uh, I think it's again similar to Chipotle.
• 19:22
  SPEAKER_01: Chipotle does catering and stuff like that.
• 19:24
  SPEAKER_01: Uh, it can help as much as possible to keep those AUVs high.
• 19:29
  SPEAKER_01: Um, because again, they have a pretty big restaurant.
• 19:33
  SPEAKER_01: Now they're working with uh over not with, they're working to bring down the size of the restaurant, bring down the size of the kitchen, and bring down the actual build cost for the restaurants to increase the basically return on invested capital they can get from each one.
• 19:48
  SPEAKER_01: But AUVs are still important.
• 19:50
  SPEAKER_01: So if you look at things like catering, we look at the national shipping, which I'm sure is a pretty small number.
• 19:54
  SPEAKER_01: But if you look at things like the drive-thru, where they've had, I wouldn't say major problems, but that's probably been their number one hiccup in the last few years is the drive-thru, given the fact that they're very popular, has had very, very long lines, and they've been, they've said, I don't know what the optimal figure is, but they said that are about a minute, their wait time in the drive-thru is about a minute higher than they would like.
• 20:20
  SPEAKER_01: And if they they brought it down by about 15 seconds, but implementing just standard industry practices as they kind of become a scaled brand outside of this family-owned, you know, transitioning to hopefully being a more professionally run, nationally run brand, uh, they will hopefully get that better.
• 20:36
  SPEAKER_01: And I don't think that's something that's impossible to do because we've seen other companies such as Chick-fil-A deal with that.
• 20:43
  SPEAKER_01: And if you just have to, you know, copy their best practices, I think they can get that as well, and that will help again with profitability, stuff like that, and just keep those AUVs, uh, maintain those AUVs at at these high levels.
• 20:57
  SPEAKER_00: Yeah, they don't have to reinvent the wheel, right?
• 20:59
  SPEAKER_00: Um, exactly.
• 21:00
  SPEAKER_00: They can they can look at the proof and concepts and just implement what works for them.
• 21:04
  SPEAKER_00: I'd like to talk a little bit about the industry and market position.
• 21:09
  SPEAKER_00: The United States restaurant industry is pretty competitive and fragmented.
• 21:16
  SPEAKER_00: Um, even the largest chains have single-digit market share, from what I've found and read.
• 21:22
  SPEAKER_00: Like you mentioned before, uh Portillos blends volume with fast casual quality, I think you said.
• 21:29
  SPEAKER_00: Yep.
• 21:30
  SPEAKER_00: Where do you think Portillos fits in this broader industry?
• 21:33
  SPEAKER_01: Is it more like a like a chipotle or is it more like a Chick-fil-A or I would say Chick-fil-A is probably the best comp given the fact that Chick-fil-A does the same level of average unit volumes at their restaurants, and they have you know the the drive-thru that's supposed to do, you know, Chick-fil-A does it more successfully than Portillo's at the moment, but it's supposed to do very, very high uh throughput every day.
• 22:00
  SPEAKER_01: I would compare it to that because when and they talk about this at the investment conferences, they are trying to be that affordable, not necessarily upscale, but affordable food that's better than fast food.
• 22:16
  SPEAKER_01: It's gonna be better than the low quality and very, very cheap stuff you might get at a Subway or a Domino's pizza or a McDonald's or something like that.
• 22:25
  SPEAKER_01: Uh and they compare themselves, I believe the figures are, you know, Chipotle, Shake Shack, the ones we've already talked about, Chick-fil-A, uh, what would the other ones be?
• 22:35
  SPEAKER_01: Raising canes, similar ones out there.
• 22:37
  SPEAKER_01: And as you mentioned, there's plenty of opportunity within this space.
• 22:40
  SPEAKER_01: I don't think uh any describing competition is kind of difficult because it's not like they're competing against one competitor, it's almost uh competing against every other restaurant option out there, and you want to be within that.
• 22:58
  SPEAKER_01: Let's say if you're if someone is a regular, you know, they go out to eat once, twice, three times a week.
• 23:07
  SPEAKER_01: You just want Portillos to be in that rotation of restaurants that someone visits and becoming a regular customer, whether it's once a week, once a month, what have you.
• 23:17
  SPEAKER_01: And the way they pitch themselves again is from that affordability mindset where we want it you, you're not gonna, it's not gonna be the cheapest thing you can get out here.
• 23:26
  SPEAKER_01: If you want to do the cheapest restaurant, it would probably be a Domino's pizza that you can, you know, feed multiple people for a very, very cheap price.
• 23:33
  SPEAKER_01: But they want to be, and I think on average, you know, it's different in different markets because of the cost of living, uh, you know, a$10 to$15 meal in US dollars, and they don't want to price gouge people, they're trying not to, as best as possible, raise prices at an aggressive rate, they don't force people to have the custom tip, and they seem to hope hopefully, you know, have kept customers happy because of that.
• 24:02
  SPEAKER_01: I I don't know if that's this is a thing internationally because tipping culture is a little bit different, but there is a giant, I wouldn't say problem, but arising complaints from customers in the United States where essentially, even if you're at a restaurant like a Portillos, you get the default option of a 20% tip, even if you're picking it up at the counter.
• 24:26
  SPEAKER_01: And a lot of people have gotten consistently upset about that.
• 24:29
  SPEAKER_01: I can see you're confused.
• 24:30
  SPEAKER_01: This makes no sense, right?
• 24:31
  SPEAKER_01: It makes zero sense to me.
• 24:33
  SPEAKER_01: Whereas Portillo's is saying, look, we could price gouge our customers and add this tip, and we'd make a little bit of money in the short run.
• 24:41
  SPEAKER_01: But what I like is that they are saying, look, this is not a nice thing to do.
• 24:46
  SPEAKER_01: They're going to be upset with us, and we're not going to force them to tip or have this default option to tipping at a fast food pickup location.
• 24:54
  SPEAKER_01: So I do like how they position themselves of the affordability, uh, generally affordable for going out to eat.
• 25:00
  SPEAKER_01: You know, it's better than a Domino's or a McDonald's, and they take care of their customers.
• 25:04
  SPEAKER_01: They're trying to provide value to their customers and not just, you know, leach as much out of them every each year, and then the the customers don't return.
• 25:16
  SPEAKER_00: Yeah, the tipping is quite different here in Europe.
• 25:19
  SPEAKER_00: Uh, actually, tipping is very it's it's very uncommon.
• 25:24
  SPEAKER_00: Um, you just have pretty good salaries here.
• 25:28
  SPEAKER_00: Um, it's included in the salaries.
• 25:31
  SPEAKER_01: You can tip, especially at a street at a street vendor or a a basic at a at a fast food restaurant, right?
• 25:38
  SPEAKER_01: Like that.
• 25:39
  SPEAKER_00: I think I've tipped twice in my life.
• 25:41
  SPEAKER_00: Really?
• 25:42
  SPEAKER_00: Yeah, yeah, yeah.
• 25:43
  SPEAKER_00: It's just not common here, but that's the that's that's a difference.
• 25:46
  SPEAKER_00: And like you just said, it does make sense where the restaurant chains don't really fight or compete with each other.
• 25:55
  SPEAKER_00: It's a bit like social media or entertainment companies that don't necessarily compete with each other, but mostly compete on time, right?
• 26:03
  SPEAKER_00: Right.
• 26:03
  SPEAKER_00: Same as restaurants where they don't directly compete, but you just want to be in the mix and gain market share.
• 26:08
  SPEAKER_00: I think that's what you're saying.
• 26:10
  SPEAKER_01: Yeah, exactly.
• 26:11
  SPEAKER_01: I mean, there's only so many meals someone has per day, and there's uh only so many that they're gonna eat out of out of home.
• 26:18
  SPEAKER_00: You can only eat portillos once a week, or you'll get very fat.
• 26:23
  SPEAKER_01: Yeah, exactly.
• 26:24
  SPEAKER_01: Hey, that might not stop uh some Americans, but the yeah, there's just only so much you can do to expand like the total addressable market, and uh for them, they are such a small portion of you know food spending in the United States.
• 26:42
  SPEAKER_01: I don't think any market share discussion is too important, where it's almost the most important thing is making sure when they expand to these new states that the concept is appreciated outside of Chicago, and I think we are seeing that in Texas, but it it's it's early days, and that's uh the big question over the next few years.
• 27:08
  SPEAKER_00: Yeah, that's that's what you're betting on, right?
• 27:10
  SPEAKER_00: So, what separates a good restaurant chain from like the great ones?
• 27:16
  SPEAKER_00: What's the difference?
• 27:18
  SPEAKER_01: Ooh, yeah, that's a good question.
• 27:20
  SPEAKER_01: I think at the end of the day, it comes down to your comp store sales growth, which for any listener, that's just uh revenue growth from existing locations, like over the last 12 months compared to 12 months prior, or you can do it on a quarterly basis, and it's just measuring the same store sales growth within your restaurant.
• 27:42
  SPEAKER_01: I think a good restaurant concept is able to grow their comp store sales at or hopefully above their inflationary inputs.
• 27:51
  SPEAKER_01: And if we look at Bortillos, one of the reasons why the stock is cheap, and I have this their fiscal 2025 financial targets here, is that they need to make there is some progress to be made in their same store sales growth compared to their inflationary inputs because their guidance for 2025 is for same restaurant sales to grow 0% to 2%, but their commodity inflation is expected to be 3% to 5%.
• 28:17
  SPEAKER_01: So for that, that would be beef and you know, bonds and their food inputs, and then their labor inflation is expected to grow 3% to 4%, so that's just wages at restaurants.
• 28:27
  SPEAKER_01: That needs to be fixed over the long term, and I think they're making progress to do that.
• 28:33
  SPEAKER_01: But a well-run restaurant such as Chipotle or Kava, their comp store sales are much higher, and it comes down to driving volume to the restaurants, drive making you know food quality standards higher, like everything else, uh feeds into increasing that comp store sales.
• 28:56
  SPEAKER_01: Where again, like you can't just say when you're running a restaurant, we need high comp store sales.
• 29:02
  SPEAKER_01: You have to have good food quality, you have to have consistency, you have to have uh happy employees.
• 29:07
  SPEAKER_01: So there's a lot of stuff that comes into that, but from an investor perspective, what we can look at, because we don't need to go to every Portillo's restaurant and interview all the employees, what we can look at generally when analyzing the company is that same store sales growth.
• 29:21
  SPEAKER_01: However, with Portillos, I think they may have an artificial headwind in ComStor sales growth because as we talked about, they're opening AUVs can be quite high.
• 29:34
  SPEAKER_01: So when they open a restaurant in Texas, those first few quarters may have it in a new city, may have nine million dollar AU AUVs for the year, but it'll normalize down to a six-seven million dollar one over the next couple of years, and that can look bad from a Com store sales perspective, but they are still generating operating cash flow from this restaurant, and they are getting good returns on invested capital.
• 30:02
  SPEAKER_01: Where I don't know if I have the one in front of me on their what they're aiming to do with their new restaurants.
• 30:10
  SPEAKER_01: I wish I had the numbers, but that's alright.
• 30:13
  SPEAKER_01: Either way, the AUVs that they are aiming for to get like I think 20 to 30 percent uh returns on invested capital from their restaurants each year compared to their uh you know capital expenditures, what they put into it, they don't need that you know first few quarters AUV of nine million dollars, let's say, at a Dallas location, but they are still going to maintain that if they get to six, seven million dollars.
• 30:38
  SPEAKER_01: And that again, I think listeners can understand that that's a headwind to comp store sales.
• 30:44
  SPEAKER_01: But if you only cared about comp store sales growth, you would want the restaurant to start with you know a million dollars in AUV and then to steadily grow over time.
• 30:53
  SPEAKER_01: But I I personally would rather have one start out with nine million dollars, even though it makes that comp store sales growth uh more difficult uh over the first few years after opening.
• 31:04
  SPEAKER_00: It does make sense, right?
• 31:06
  SPEAKER_00: Where if you have a lot more AUVs, it's a lot more difficult to keep growing it.
• 31:11
  SPEAKER_00: And I believe you said most restaurant chains want to increase their prices or be able to increase their prices by at least in the inflation.
• 31:23
  SPEAKER_00: There's one example that doesn't do this.
• 31:25
  SPEAKER_00: I think it's Texas Roadhouse that even mentions in their tankhead that they want to be one or two percent below the inflationary rate.
• 31:34
  SPEAKER_01: Right.
• 31:34
  SPEAKER_00: I think that's pretty cool.
• 31:36
  SPEAKER_00: Uh, and it does give you some, I don't know, goodwill from customers, maybe.
• 31:41
  SPEAKER_00: You said that most companies or restaurant chains rather don't fail because the food is bad.
• 31:48
  SPEAKER_00: Uh they fail because the business model doesn't really scale.
• 31:51
  SPEAKER_00: Either the unit economics don't hold up, or customer demand doesn't translate outside the core market, which I think perhaps could apply to Portillos, or even operational complexity gets out of control as more locations open, right?
• 32:07
  SPEAKER_00: Portillos so far seems to avoid those traps, but Portillos doesn't have a proprietary product.
• 32:14
  SPEAKER_00: Anyone can make a beef sandwich, right?
• 32:17
  SPEAKER_00: Maybe you and I can't make it as well as Portillos, but anyone can make it.
• 32:21
  SPEAKER_00: So, does Portillos have a moat, you think?
• 32:25
  SPEAKER_00: And if so, what is it?
• 32:27
  SPEAKER_01: Oh, yeah, it's it's hard to do mode analysis for a restaurant, and it comes down to the brand.
• 32:34
  SPEAKER_00: I agree.
• 32:34
  SPEAKER_00: I'm sorry, I put you on the spot.
• 32:37
  SPEAKER_01: Yeah, no, no, no, it's hard.
• 32:38
  SPEAKER_01: I'm saying, uh, even myself, like looking at the company, it's not uh it's it's it's hard to put them into the classic categories of economies of scale.
• 32:48
  SPEAKER_01: Maybe at a large enough scale, you could have economies of scale.
• 32:52
  SPEAKER_01: Is there network effect?
• 32:54
  SPEAKER_01: Eh, no.
• 32:55
  SPEAKER_01: Is there switching costs?
• 32:57
  SPEAKER_01: No, no, anyone can go to the restaurant next door.
• 33:01
  SPEAKER_01: It comes down to the brand quality and it's the trust from the customers that you're going to get a consistent product over you know, every time you visit the store.
• 33:12
  SPEAKER_01: So I think really the the moat is hope hopefully they can have consistent product quality.
• 33:18
  SPEAKER_01: Um, the restaurants are well run.
• 33:20
  SPEAKER_01: It's just the nuts and bolts of each day at the restaurant making sure you're doing all of the little things right.
• 33:29
  SPEAKER_01: You have all the items on your menu available to order, all of the items are up to the quality standards you want.
• 33:36
  SPEAKER_01: The restaurants are clean, you have enough people actually showing up to work for there, um, you have the drive-thru working correctly.
• 33:43
  SPEAKER_01: All of these things, if you do them year after year after year, you get the brand quality of a McDonald's or a Domino's.
• 33:55
  SPEAKER_01: But if you're what's a good example, Jack in the Box, you might not have the same brand appeal as someone that again, if you go to Domino's, you go to McDonald's, you know what you're getting, you know, high you're highly confident that you're going to get that, and that's what just Portillas needs to do over the long term.
• 34:17
  SPEAKER_01: They definitely don't have a moat now, but I think one thing investors maybe beginning a lot of investors understand this, but beginning investors don't understand as much.
• 34:30
  SPEAKER_01: It's not about the existing moat per se, but it's about whether that moat and competitive advantage can grow as you own the stock.
• 34:40
  SPEAKER_01: And I think as Portillos grows around the country, gets more scale, consistently provides that brand quality uh to the customers year after year after year.
• 34:51
  SPEAKER_01: I think over the next decade they can expand their moat, and brand modes are weak, but I don't think in restaurants it can prevent you from having a very successful uh stock in your portfolio being a restaurant.
• 35:08
  SPEAKER_01: You there are plenty of examples of that in the United States of restaurant concepts doing well if run correctly.
• 35:15
  SPEAKER_01: And I think looking at the case studies, which I've brought them up plenty of times, the Chipotle's, the McDonald's, the Domino's, the Starbucks, looking at those case studies, you know, even you have uh the Taco Bells, the KFCs, and oh, what's the third company that Yum Brands owns?
• 35:32
  SPEAKER_01: I forget.
• 35:33
  SPEAKER_01: Yeah, uh, it doesn't matter.
• 35:36
  SPEAKER_01: Looking at those case studies, seeing what works, it is driving consistency and consistent comp store sales growth.
• 35:45
  SPEAKER_00: Yeah, I I agree with you here.
• 35:47
  SPEAKER_00: The fact that restaurant chains don't really have a mode, which I already said in my analysis from Chipotle and Texas Roadhouse, other than maybe a brand, it comes down to, like you said, execution, uh, consistency.
• 36:01
  SPEAKER_00: I mean, that's the reason that that the barriers uh to entry are so low.
• 36:06
  SPEAKER_00: Anybody could open a restaurant, right?
• 36:08
  SPEAKER_00: Um, you could argue, I guess, perhaps you have a local mode where you have a store in a busy street and it'll be difficult for others to just steal customers, but locations are important, yeah.
• 36:21
  SPEAKER_00: Yeah, definitely.
• 36:22
  SPEAKER_00: But still, yeah, uh you don't really fit into the bucket of like the uh Hamilton Seven Powers modes, right?
• 36:29
  SPEAKER_00: Uh other than brands, maybe.
• 36:32
  SPEAKER_00: Before we go to the financials, do you have any insights or opinions on Portillo's culture?
• 36:38
  SPEAKER_01: I'd say it's solid, but something that is maybe not my favorite thing about the company.
• 36:46
  SPEAKER_01: Uh they have and it seems like it was well run when it was owned by private equity, but they have the private equity ownership, they're shareholders.
• 36:56
  SPEAKER_01: Um, they used to be owned by Berkshire Partners, which is not associated with Berkshire Hathaway.
• 37:01
  SPEAKER_01: I think they just took a name that is well known in the financial industry.
• 37:05
  SPEAKER_01: Um but they have I guess that overhang, which can present some concerns of they have the tax-receivable liability that seems to be paying out the private equity, uh, even as we've had the IPO.
• 37:21
  SPEAKER_01: We have a lot of debt on the balance sheet, which can make things a little bit shaky in that regard.
• 37:26
  SPEAKER_01: But in general, I think the culture is good.
• 37:30
  SPEAKER_01: They've been flexible to work with this activist investor to maybe change some of their uh pre-opening strategies to you know take operating leases instead of trying to own the actual restaurant.
• 37:42
  SPEAKER_00: Um have you ever talked to uh an employee, maybe?
• 37:46
  SPEAKER_01: I have not.
• 37:47
  SPEAKER_01: Um that's one where I think it's gonna show up in the financials.
• 37:53
  SPEAKER_01: I worry about talking with a single employee because I think if you talk with any employee, they will complain about their boss.
• 38:00
  SPEAKER_01: Uh I I really think yeah, there's there's not a single employee out there that won't.
• 38:06
  SPEAKER_00: I agree.
• 38:06
  SPEAKER_00: Yeah, yeah, definitely.
• 38:07
  SPEAKER_00: Yeah, I mean that's the problem with next uh with uh what's it called?
• 38:11
  SPEAKER_00: Glassdoor, right?
• 38:12
  SPEAKER_00: Exactly.
• 38:12
  SPEAKER_00: I mean, everybody's gonna complain.
• 38:15
  SPEAKER_01: Uh that's where if you have an avenue to complain, but one uh I do think they professionalized their management team and brought in uh I can bring up the management bios right now.
• 38:27
  SPEAKER_01: If we just look at like their leadership team, the CEO is Michael, apologies, Michael, if I'm pronouncing your last name incorrectly, Osano Blue.
• 38:36
  SPEAKER_01: Uh he worked at PF Chang's, was the CEO there, uh, managing a restaurant base that is much bigger than Portillo's right now, which I think is a good thing.
• 38:50
  SPEAKER_01: He has experience within the industry.
• 38:52
  SPEAKER_01: We also have Michelle Hook as the CFO, and she worked at Domino's uh for many years in the financial department, which I think is a great sign because they were a really, really well-run balance sheet, and just from a financial perspective, extremely well run.
• 39:06
  SPEAKER_00: Perhaps the the best company to learn from.
• 39:09
  SPEAKER_01: Yeah, exactly.
• 39:10
  SPEAKER_01: Exactly.
• 39:11
  SPEAKER_01: Uh, they have someone like Mike Ellis, who was the chief development officer who worked again, has a ton of industry experience at a place uh called Cracker Barrel.
• 39:21
  SPEAKER_01: Um and never heard of it.
• 39:24
  SPEAKER_01: Yeah, it's an American-style chain, but again, there's plenty like he he has a lot of years in in the uh industry experience, and if we look at the board of directors, a huge positive, I think, was the fact that Jack Hartung was just brought on as a director of the company, and now he was um the former, I think, chief, yeah, chief financial officer, so second most powerful person at Chipotle since 2002.
• 39:54
  SPEAKER_01: I like him on the board in for you know just for how to advise how to grow a national restaurant chain from something that's small to much bigger, as Chipotle is a well-known brand around the whole country today.
• 40:07
  SPEAKER_01: But I also like it for the fact that if this existing management team doesn't maybe get the job done, and we have this activist in here that I think helped bring hard tongue to the board.
• 40:20
  SPEAKER_01: And for anyone that doesn't know, it's um the activist is called Engaged Capital, so you can look up any of their stuff.
• 40:26
  SPEAKER_01: He could be a great candidate to take over.
• 40:28
  SPEAKER_01: So I think they have a great bench, they have a good board of directors, the management team is experienced.
• 40:34
  SPEAKER_01: Um, and I think they can get this, I wouldn't necessarily call it a turnaround story, but the improvement in comp sales probably needs to arrive uh you know within the next few years.
• 40:47
  SPEAKER_00: I think they can get it done, and I like their culture, but management is not a mode on its own, uh I would say, but over the long term, I would argue that management is a lot more important than an existing mode, and I think the management team from Portillos is actually a pretty green flag, if you ask me.
• 41:10
  SPEAKER_00: I like looking at the management a lot because they determine where the company is going, for example.
• 41:17
  SPEAKER_00: The CEO has a base salary of just 900k.
• 41:20
  SPEAKER_00: It sounds quite a lot, but I think that's pretty reasonable.
• 41:24
  SPEAKER_00: They also have a lot of skin in the game.
• 41:26
  SPEAKER_00: The CEO, for example, owns roughly 50 million in stock or 53 times his base salary, and the CEFO owns around 260 times her base salary, I believe.
• 41:38
  SPEAKER_00: So that's I I really do like that.
• 41:41
  SPEAKER_00: Um, and it shows that the incentives are aligned, right?
• 41:44
  SPEAKER_01: Oh, I yeah, I agree on that front, um, for sure.
• 41:48
  SPEAKER_01: And I and they are making some progress in trying to, and as you mentioned, management team over the long term is so important because they're gonna take, you know, the cash flows coming into the balance sheet, they have to decide what to do with it.
• 41:59
  SPEAKER_01: And the fact that they're trying to be much more efficient in their build-out costs, which I would say were more like less efficient because they were family run back in the day, and now they're trying to become a little bit more cost conscious with their new store buildouts and the fact that for a long time they didn't really open many new stores uh at all.
• 42:16
  SPEAKER_01: They just kind of stayed in their bread and butter in the Chicago area.
• 42:19
  SPEAKER_01: So they're bringing down those costs, they're considering the operating leases like the activist has talked about.
• 42:25
  SPEAKER_01: And if they can do that and maintain their current AEVs, we should see increases in return on invested capital.
• 42:32
  SPEAKER_01: And given their reinvestment runway, that is just a potentially fantastic development for shareholders.
• 42:38
  SPEAKER_00: Absolutely, yeah.
• 42:40
  SPEAKER_00: Do you think it's a good time to talk about the financials uh real uh real briefly?
• 42:44
  SPEAKER_00: Let's do it.
• 42:45
  SPEAKER_00: Uh let's focus only on the highlights because as a as a podcast listener myself, it's very difficult to follow all these numbers in an audio, yeah, in an audio format.
• 42:54
  SPEAKER_00: So let's keep it short and sweet.
• 42:56
  SPEAKER_01: Yeah, too many numbers, yeah.
• 42:58
  SPEAKER_00: What are some financial highlights of Portillos you you could share with with uh our listeners?
• 43:03
  SPEAKER_01: Okay, just for context, so$710 million in revenue in 2024 that has steadily grown since they've opened up new restaurants, they've been operating income positive at 8% operating margin,$57 million in operating income.
• 43:18
  SPEAKER_01: Okay, and cash flow is gonna be a bit choppy because they're investing into new stores.
• 43:24
  SPEAKER_01: But the way I like to look at it is the potential of say how many restaurants they have and what their global AU or not global, just their average AU or unit volume can be.
• 43:36
  SPEAKER_01: So that AUV number that we talked about.
• 43:38
  SPEAKER_01: So last year they ended with 94 uh restaurants, and of those 94 restaurants, their average unit volume was 8.7 million dollars.
• 43:50
  SPEAKER_01: Now their plan is to open up stores at about a 12 to 15 percent rate per year.
• 43:55
  SPEAKER_01: If we look at their plan for 2025, let me get the exact number here.
• 44:00
  SPEAKER_01: Here.
• 44:00
  SPEAKER_01: Let's see.
• 44:01
  SPEAKER_01: Oh god, I gotta do some that's 12, I believe.
• 44:04
  SPEAKER_00: Yeah, yeah.
• 44:05
  SPEAKER_01: One, three plus five, eight.
• 44:07
  SPEAKER_01: Yeah, yeah.
• 44:08
  SPEAKER_01: Let's just say 12, maybe a little bit higher if some fall into the Q4 of 2025.
• 44:15
  SPEAKER_01: So, yeah, 12 new units given their little plan here that could roughly change, but let's just say 12.
• 44:21
  SPEAKER_01: So they're gonna open up 12, they're gonna hit a little over a hundred in by the end of this year.
• 44:26
  SPEAKER_01: And their plan over the long term is to have hundreds of stores across the country.
• 44:31
  SPEAKER_00: So I think Yeah, I believe they said nine hundred and sixty.
• 44:35
  SPEAKER_01: Yeah, they they they see plenty of new cities that have the potential to hold up Portillos or like the Dallas area, which is one of the biggest cities in the country, as well as Houston, another Texas one, they could have 10 to 15 in that market.
• 44:48
  SPEAKER_01: But the way I look at it is okay, if the AUV of 8.7 million, right now there's a lot of the Chicago area restaurants holding that up, and that's going to be a lower percentage of the total restaurant base over time.
• 45:01
  SPEAKER_01: So given the fact the Sunbelt ones are kind of in that six to eight million range, the AUV is going to fall, which is not the end of the world.
• 45:09
  SPEAKER_01: Um let's say it falls to 8 million, and we get to 200 uh restaurants.
• 45:16
  SPEAKER_01: If we do some math, I guess I should probably pull out the calculator here.
• 45:19
  SPEAKER_01: I can't necessarily do that in my head.
• 45:21
  SPEAKER_01: But if we have 200, 200 times what, eight, that would be 1.6 billion.
• 45:28
  SPEAKER_01: 6 billion.
• 45:29
  SPEAKER_01: Yeah.
• 45:29
  SPEAKER_01: So 1.6 billion dollars in revenue.
• 45:32
  SPEAKER_01: If we keep, let's say, a 10% operating margin.
• 45:36
  SPEAKER_01: Okay, that's 160 million in operating earnings per year.
• 45:42
  SPEAKER_01: Right now, the company trades at market cap of$736 million.
• 45:48
  SPEAKER_01: Uh, enterprise value when you add back on the debt, and the tax receivable liability is going to be closer to$1.25 billion.
• 45:57
  SPEAKER_01: I still think that's pretty cheap.
• 46:01
  SPEAKER_01: And they have such a long runway to grow.
• 46:04
  SPEAKER_01: So the way I look at the financials is again coming back to, you know, given the price today, which I think is not too demanding, it comes back to maintaining that return on invested capital, maintaining the average unit volumes, and maintaining the restaurant level margin at these new locations.
• 46:24
  SPEAKER_01: So that's really what I'm tracking uh each quarter and each year as they expand around the country.
• 46:29
  SPEAKER_00: Those are the KPIs you track specifically.
• 46:32
  SPEAKER_01: Those would be the most important ones, yes.
• 46:34
  SPEAKER_01: I mean, comp store sales growth falls into that, but they they they all relate together.
• 46:38
  SPEAKER_01: You know, if your AUV goes to 12 million, well, that restaurant level margin is going to increase.
• 46:43
  SPEAKER_01: So it all relates together, but there there are a few that are going to determine what the return on invested capital is for this company.
• 46:50
  SPEAKER_01: And yeah, those are the ones uh I care about most when looking at their quarterly results.
• 46:56
  SPEAKER_00: You already mentioned the balance sheet.
• 46:58
  SPEAKER_00: Uh, we don't have to go any further into that, but is it uh is it a concern to you or is it just something you keep in mind uh and just keep track of?
• 47:08
  SPEAKER_01: Well, they run lean, they are free cash flow positive, which is good.
• 47:15
  SPEAKER_01: I would like to see that continue.
• 47:18
  SPEAKER_01: Yeah, things could get difficult in a downturn, uh, but uh they aren't generating more cash flow because they are opening so many new restaurants.
• 47:28
  SPEAKER_01: If you look at their guidance for 2025, they're guiding upwards of$100 million in capital expenditures.
• 47:34
  SPEAKER_01: If they pull back a little bit, they'll generate more cash flow and be able to deal with their debt more.
• 47:38
  SPEAKER_01: And if we go down to their balance sheet, we have let's see, okay, this is at the end of 2024,$275 million in long-term debt.
• 47:48
  SPEAKER_01: They have the tax-receivable agreement liability, which is not as potentially something that they would have to deal with a bit more, but they have short-term debt of$25 million, current portion of long-term debt of$11.2 million.
• 48:01
  SPEAKER_01: Not too difficult, I would say, if things got if the business fell apart, yeah, these would be tough to deal with.
• 48:10
  SPEAKER_01: But given the fact that their restaurant level adjusted even to margin, their let's say operating cash flow can get to$100 million or more.
• 48:22
  SPEAKER_01: I I don't think this is too much leverage for a company like this to deal with, and it should be less and less of a concern as they scale more and more and more.
• 48:33
  SPEAKER_01: And the fact that they can point out that they are, you know, gap profitable, they've been consistently gap profitable, that's not going to be something that, or sorry, I think they will have minimal trouble refinancing this debt.
• 48:50
  SPEAKER_01: I I forget the exact details of the debt, but it it's not a huge concern for me.
• 48:54
  SPEAKER_01: But obviously, a company that has debt on the balance sheet doesn't run too conservatively.
• 48:59
  SPEAKER_01: Well, if we go into a global depression, yeah, look, it's gonna be tough, but it's gonna be tough for almost every company in that standpoint.
• 49:07
  SPEAKER_00: Definitely.
• 49:09
  SPEAKER_00: So let's head on over to the risks and opportunities.
• 49:11
  SPEAKER_00: I think you already I'll skip my question over the adjusted EBITDA.
• 49:15
  SPEAKER_00: I think you already said that you think it's fine for Protillos.
• 49:19
  SPEAKER_00: Kind of answered my question already, so that that's alright.
• 49:22
  SPEAKER_00: I just have a real I don't know.
• 49:24
  SPEAKER_00: I just hate, I just hate adjusted EBITDA because so many companies kind of misuse it or they pile in so many adjustments, like stock-based compensation, pre-opening cost.
• 49:37
  SPEAKER_00: I've even read somewhere brand building investments, whatever that means.
• 49:41
  SPEAKER_00: So to credit Portillo, they don't really do it.
• 49:45
  SPEAKER_00: It's pretty clean compared to others.
• 49:47
  SPEAKER_00: So let's talk about the risks for a second.
• 49:50
  SPEAKER_00: How about we flip the order here?
• 49:52
  SPEAKER_00: And I'll start with the risks first, and you can jump in to expand, push back, or add your own perspective, and then we'll uh do the same for opportunities.
• 50:03
  SPEAKER_00: Sounds good?
• 50:04
  SPEAKER_00: Let's do it.
• 50:05
  SPEAKER_00: So I see three main risks.
• 50:07
  SPEAKER_00: I think the first one being the uh well, you kind of already said that the AUV decline shouldn't be a risk um in the long term.
• 50:18
  SPEAKER_00: I think it could also lead to lower restaurant margins uh and weaker cash flow per store.
• 50:24
  SPEAKER_00: So I think it's something to keep in mind.
• 50:26
  SPEAKER_00: It's not the biggest risk, perhaps.
• 50:30
  SPEAKER_00: I think the execution risk is the biggest one.
• 50:33
  SPEAKER_00: So choosing bad locations, um not operating in the right states, perhaps if they ever decide to go international, um that could be a pretty big risk if that doesn't work out.
• 50:47
  SPEAKER_00: And actually that's basically it.
• 50:49
  SPEAKER_00: I don't really think competition is a is a huge risk, like we already talked about, right?
• 50:55
  SPEAKER_01: No one's gonna replicate this model anytime soon.
• 50:57
  SPEAKER_00: Exactly.
• 50:58
  SPEAKER_00: So it actually is not that bad.
• 51:00
  SPEAKER_00: If it I think the the biggest risk is execution, yeah, I I agree.
• 51:05
  SPEAKER_01: It's it's getting just maintaining that restaurant level margin.
• 51:08
  SPEAKER_01: And for anyone that so if you look at their restaurant level margin, it's come down a bit.
• 51:13
  SPEAKER_01: And as you mentioned, the AUV has come down a bit.
• 51:15
  SPEAKER_01: I mean, we can't have AUV decline forever.
• 51:17
  SPEAKER_01: There's eventually going to be a floor where the Chicago one becomes less relevant.
• 51:21
  SPEAKER_01: But if you look at their Sunbelt, this is 2023, their Sunbelt store restaurant level margins were 20%.
• 51:31
  SPEAKER_01: And the Sunbelt, for anyone that is listening, uh that doesn't know, I guess, the the slang for the geographical locations of the United States, the southern kind of part, which would be the states of Texas, uh, with a lot of population, Texas, Florida, Georgia, Arizona.
• 51:47
  SPEAKER_01: Now these had 20% restaurant level margins.
• 51:50
  SPEAKER_01: Now that I think is the maybe the number I would want to track or make sure that it if Bortillas' restaurant level margins fell significantly below that, that would be something that would concern me.
• 52:05
  SPEAKER_01: And it could happen if the we've talked about how comp sales is a bit difficult for them because they have the big openings, but if comp sales consistently are below labor inflation and commodity inflation, eventually your margins are going to get hit.
• 52:23
  SPEAKER_01: The math just works that way.
• 52:25
  SPEAKER_01: So that that would probably be the biggest concern for me.
• 52:29
  SPEAKER_01: I I again I don't think competition is too much to worry about.
• 52:34
  SPEAKER_01: Again, restaurants are a bit unique, it's not like you have a copycat coming up every day, but you just have, especially in a bigger city, well, there's hundreds of options for the consumers, so they gotta hopefully you're in their rotation of restaurants they visit.
• 52:51
  SPEAKER_00: Let me let me add one more and get your thoughts on it.
• 52:54
  SPEAKER_00: Uh, during my research, I came across something called the TRA, the tax receivable agreement.
• 52:59
  SPEAKER_00: It was buried on page 60, I believe, of the annual report.
• 53:02
  SPEAKER_01: Yeah, they don't like to show that too much.
• 53:05
  SPEAKER_00: No, uh, please correct me if I'm wrong, but in simple terms, when Portillos went public, it gained access to valuable tax benefits from its pre-IPO, what is it, LLC structure, I believe.
• 53:17
  SPEAKER_01: You have the private equity stuff, yeah.
• 53:19
  SPEAKER_00: Yeah, like uh depreciation and operating losses.
• 53:23
  SPEAKER_00: Apparently, private equity firms can structure these kinds of agreements.
• 53:28
  SPEAKER_00: These reduce future taxes, but under the TRA, Portillos must pay 85% of those tax savings in cash back to the original LLC owners over time.
• 53:44
  SPEAKER_00: I mean, this could potentially be hundreds of millions of dollars over the coming decades.
• 53:50
  SPEAKER_00: What are your thoughts on this?
• 53:51
  SPEAKER_01: Do you think that's a risk or uh I would not necessarily qualify it as a risk, but just something that an investor needs to include in their enterprise value.
• 54:01
  SPEAKER_01: So when I do the enterprise value calculation, look, uh, I'm not the activist investor or anything.
• 54:05
  SPEAKER_01: I can't really change the governance.
• 54:07
  SPEAKER_01: And yeah, is this would I rather there not be$300 million plus in tax receivable liabilities that they're gonna pay out to, I believe it would be the Berkshare partners or the original owners.
• 54:19
  SPEAKER_01: Yeah, I would much rather it not be there, but it is there, so let's just include it in the enterprise value.
• 54:24
  SPEAKER_01: And I just add that um I treat it the same as debt.
• 54:28
  SPEAKER_01: Maybe if you wanted to get complicated, you could treat it as something else or try to value it however you'd want.
• 54:34
  SPEAKER_01: But I think at the end of the day, using the stated value on the balance sheet and adding that to your enterprise value will help you get a more realistic assumption of what you're buying as an individual investor.
• 54:47
  SPEAKER_00: I think that's pretty conservative.
• 54:49
  SPEAKER_01: Either way, it's cheap though.
• 54:51
  SPEAKER_01: Either way, I think it's cheap.
• 54:52
  SPEAKER_00: Well, we'll get to the valuation uh after the opportunities.
• 54:57
  SPEAKER_00: Let's mention some opportunities.
• 54:59
  SPEAKER_00: What I think it's pretty clear what the biggest opportunity is, like the runway.
• 55:05
  SPEAKER_00: There's a huge, I mean it's 10x from what they currently have, right?
• 55:09
  SPEAKER_00: I think they have like 96 now.
• 55:11
  SPEAKER_00: Let's say they can open 960 uh if we believe management.
• 55:15
  SPEAKER_00: I mean, that's quite the runway.
• 55:18
  SPEAKER_01: Oh, yeah.
• 55:19
  SPEAKER_01: Uh yeah, the way I modeled it when doing uh the report I did, I think almost exactly a year ago at this point, is just took them at their word and said that they're gonna grow, let's see, yeah, 10% per year, which is a little bit below their number, but still reasonable.
• 55:36
  SPEAKER_01: And we get to I think it was about 250, 264 locations by 2035.
• 55:43
  SPEAKER_01: So that's over 10 years from now, or maybe 10 to 11 years from now, depending on how you calculate it.
• 55:49
  SPEAKER_01: So 10 to 11 years from now, they only have 264 locations, and that that point they could be doing 600 million dollars in restaurant level Ibada, and would as we've talked about that should translate give or take to restaurant level operating cash flow.
• 56:07
  SPEAKER_01: And if we I just think that's just a huge runway for growth, like it there could be even past that, if they have 264 locations, there is a chance that they could still double their locations over the next five to ten years after that.
• 56:26
  SPEAKER_01: So the opportunity here and the upside is really really promising, and it's what kind of draws me into this investment the most because if things go well, and I'm not sure they're guaranteed to go well, but if things go well and they turn around Com Stores, they maintain these high AUVs, and they're able to open stores across the entire United States and maybe even Canada and other countries someday.
• 56:55
  SPEAKER_01: We're at a Chipotle style growth, uh not inflection really, but just consistent growth potential from a unit standpoint, as Chipotle would have been in the early 2000s, which if you look at how Chipotle has done with its stock price, that it it's there's just a lot of a lot of potential upside uh for this company.
• 57:19
  SPEAKER_00: Yeah, I I basically did the same nepkin calculations as you did.
• 57:23
  SPEAKER_00: Um and I think I went a little bit more conservative.
• 57:28
  SPEAKER_00: I just used 12 new locations each year, so not even including that once they open more restaurants, they could open more.
• 57:37
  SPEAKER_00: Um, and even using these assumptions, I I arrive at like a 13% kegger annually, which is pretty attractive.
• 57:46
  SPEAKER_00: I think the risk reward is pretty uh attractive here.
• 57:49
  SPEAKER_00: And if you just look at like a price to sells ratio, maybe it's a lot cheaper than basically every other competitor.
• 57:56
  SPEAKER_00: And yeah, uh even a price to operating cash flow looks very attractive uh compared to like a Chipotle or a Kava.
• 58:04
  SPEAKER_00: They are really expensive if you compare it to Portillos.
• 58:08
  SPEAKER_01: Yeah, if you look at, and I was gonna pull up Kava, yeah, because the stocks come down a bit, but Kava trades at 10 times price to sales.
• 58:18
  SPEAKER_01: Portillas is about one now.
• 58:20
  SPEAKER_01: Kava is they have much better comp store sales than Portillas.
• 58:26
  SPEAKER_01: But I would remind listeners that part of that comes back to the fact that Portillas opens with already high average unit volumes.
• 58:34
  SPEAKER_01: And if we look at hopefully uh with our friends at Finchhat here, they have the same number for Kava.
• 58:42
  SPEAKER_01: Kava's average unit volumes are below three million dollars across the country.
• 58:47
  SPEAKER_01: So, yes, their comp store sales are going to look better because they're not doing seven million dollars in volume at uh when they open.
• 58:55
  SPEAKER_00: Yeah, and I don't know Kafka well enough, but I don't know if they lease their locations or um put in the capital up front to buy uh and build.
• 59:06
  SPEAKER_00: I mean, that that also uh helps keep things lean.
• 59:10
  SPEAKER_00: But I think in the long run, it helps to own your locations uh like Texas Roadhouse does as well.
• 59:15
  SPEAKER_00: But who knows, right?
• 59:17
  SPEAKER_00: If you put valuation aside completely and just focus on, I don't know, um, brand strength, management, quality, the food offering, uh, growth potential.
• 59:29
  SPEAKER_00: Does Portillos crack your top three restaurant chains, or would you still prefer to own something like uh Chipotle, uh a Kava, uh Texas Roadhouse?
• 59:39
  SPEAKER_01: All else equal, I would rather own Kava because they are doing the comp store sales that I would like Portillos to eventually get to.
• 59:50
  SPEAKER_01: Uh, and I think that they have proven much more that they've been able to expand compared to Portillos.
• 59:57
  SPEAKER_01: So there's a lot more that's to be determined with Portillos, which I think gives them an opportunity, but at a similar valuation, let's say, yeah, again, like you mentioned, valuation all else equal, I would much rather own a Chipotle or a Kaaba.
• 1:00:13
  SPEAKER_01: But I don't think Portillos is too far behind because if we look at a lot of the other publicly traded restaurants, Starbucks, Domino's, uh the Yum Brands, Pizza Hut, I guess is the other one.
• 1:00:25
  SPEAKER_01: I forgot about their Pizza Hut KFC Taco Bell, uh, McDonald's, Burger King, I believe, is owned under a conglomerate.
• 1:00:32
  SPEAKER_01: All of those are, in my mind, the maturity of the businesses is not going to make them durable growers.
• 1:00:40
  SPEAKER_01: Well, they they might be they're just gonna be very slow growers from a top-line perspective, where when I look at Portillos, that growth potential similar to a Kava is is so attractive comparatively, and that just puts them over the edge.
• 1:00:54
  SPEAKER_01: So maybe I would put them as as number three.
• 1:00:57
  SPEAKER_01: Uh, but valuate valuation does matter.
• 1:01:00
  SPEAKER_01: So kava again, 10 times price sales versus one times, it's not gonna be not gonna be a question.
• 1:01:08
  SPEAKER_00: Interesting.
• 1:01:09
  SPEAKER_00: Okay.
• 1:01:09
  SPEAKER_00: What will make you sell or etu portellos?
• 1:01:12
  SPEAKER_01: I think I would sell if restaurant level margin continued to fall.
• 1:01:19
  SPEAKER_01: Uh again, it's gonna fall a little bit because sun belts aren't doing as well as Chicago area ones where Chicago has 30 plus percent margin, so they're gonna fall a little bit, but if it falls below 20%, if we see uh consistently negative free cash flow, which is actually fixed, so they're running like slight free cash flow positive, which I think will help them become much more self-funding going forward.
• 1:01:42
  SPEAKER_01: And I think a long, let's say consistently bad comp store sales, where as I mentioned, it's a little bit misleading, but consistently high or low comp store sales are just it's not gonna do it, and that would cause me to sell.
• 1:02:01
  SPEAKER_00: And are you talking about quarters or years?
• 1:02:04
  SPEAKER_01: Uh, you would probably be it's hard to say.
• 1:02:10
  SPEAKER_01: Not it's not one quarter.
• 1:02:12
  SPEAKER_01: I I'd say it probably would be able to tell within a year, year and a half, I would hope, but it it depends.
• 1:02:19
  SPEAKER_01: Like if it's just slightly bad, maybe it's not the end of the world, but it's I don't think it's black and white.
• 1:02:24
  SPEAKER_01: Where I I think three years you would definitely know, and you probably wouldn't know before that um whether the the strategy is just not working.
• 1:02:34
  SPEAKER_00: Yeah.
• 1:02:35
  SPEAKER_00: Yeah, restaurant chains like Portillos aren't the most exciting stocks out there, but it's definitely an interesting one.
• 1:02:42
  SPEAKER_00: I mean, the unit economics are strong, uh, the brand has legs, uh, the valuation looks reasonable, and if they can keep executing on it, it's going to be a good investment.
• 1:02:54
  SPEAKER_00: Um, that said, it's still capital-intensive business in a pretty tough industry, pretty low margin.
• 1:03:01
  SPEAKER_00: I haven't seen the food or the brand up close myself, which makes me hesitant.
• 1:03:08
  SPEAKER_00: I am quite intrigued.
• 1:03:10
  SPEAKER_00: I just don't know the brand experience and food well enough to be fully convinced at this point.
• 1:03:18
  SPEAKER_00: I think I'm going to add it to my watch list and I just wanna yeah, I just wanna keep my eye on it and see w what it does.
• 1:03:25
  SPEAKER_00: And perhaps if I miss it, well, that's going to be a lesson, but uh I don't know.
• 1:03:31
  SPEAKER_01: Yeah, the way I look at it is I think if it's you know unsuccessful and then kind of stay in the same uh like struggling a bit but still generating a little bit positive cash flow and positive operating earnings, I don't think the stock's gonna get crushed.
• 1:03:47
  SPEAKER_01: But if they turn things around, I think there is a ton of upside.
• 1:03:50
  SPEAKER_01: So you know, uh famous last words, but I think there's low downside, a lot of upside here.
• 1:03:56
  SPEAKER_00: Hypothetically, if this company was operating in the Netherlands or somewhere in Europe, and you couldn't visit it, you couldn't taste the food, you couldn't really talk to employees, would you still invest in it?
• 1:04:14
  SPEAKER_00: Because it's also a different climate, it's a different culture, perhaps.
• 1:04:17
  SPEAKER_00: Yeah, and that also makes me hesitant.
• 1:04:19
  SPEAKER_00: What do you think if the uh if the rules were reversed?
• 1:04:22
  SPEAKER_01: I think that does make that does make sense.
• 1:04:24
  SPEAKER_01: Yeah.
• 1:04:25
  SPEAKER_01: I I think of the one that popped to mind for me, and I guess it's not Netherlands, but uh hopefully I'm pronouncing the name right, Dino Polska.
• 1:04:33
  SPEAKER_00: Yeah, we we own it, yeah.
• 1:04:34
  SPEAKER_01: That the the grocery store chain, that one I've been hesitant to invest in because I don't understand, and it's not like I even again I haven't visited a Portillo's, but I kind of understand what works for restaurants in the United States.
• 1:04:47
  SPEAKER_01: Yeah, exactly.
• 1:04:48
  SPEAKER_01: And I don't necessarily understand, you know, in Poland what works for grocery stores, even though they seem to be quite a successful one.
• 1:04:55
  SPEAKER_01: So yeah, I think it makes sense to be a little bit more hesitant there.
• 1:04:58
  SPEAKER_00: Yeah.
• 1:04:59
  SPEAKER_00: All right.
• 1:05:00
  SPEAKER_00: Well, thank you so much.
• 1:05:02
  SPEAKER_00: That wraps up today's episode.
• 1:05:04
  SPEAKER_00: Uh a huge thanks to Brett for coming and sharing his insights.
• 1:05:08
  SPEAKER_00: It's always great to hear your take, especially on a name as well, unique as Portillos.
• 1:05:14
  SPEAKER_00: It's uh we really appreciate the thoughtfulness and the detail you brought to uh to this conversation.
• 1:05:20
  SPEAKER_00: Where can people find you?
• 1:05:22
  SPEAKER_01: Yeah, appreciate you having me on.
• 1:05:23
  SPEAKER_01: And I would just say to listeners, check out the Chit Chat Stocks podcast on YouTube, Spotify, Apple Podcasts, or for any of the smaller players, wherever you get your podcast.
• 1:05:34
  SPEAKER_01: You can also subscribe to the Chit Chat Stocks Podcast newsletter on Substeck.
• 1:05:38
  SPEAKER_01: I would say those are the four main places to stay apprised of what we're doing over at the show.
• 1:05:44
  SPEAKER_00: Great.
• 1:05:44
  SPEAKER_00: I'll drop the links in the show notes.
• 1:05:47
  SPEAKER_00: Hopefully we can do this again sometime.
• 1:05:50
  SPEAKER_00: I've got a feeling that there are plenty of there are plenty more businesses we could dig into together.
• 1:05:54
  SPEAKER_00: So thank you so much and uh bye everybody.