• Brett Schafer

Not So Deep Dive: Portillo's Stock



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Show Notes



(Ryan) What they do: Portillo’s is the owner and operator of a restaurant chain that serves iconic Chicago street food. The menu includes items like Chicago-style hotdogs and sausages, Italian beef sandwiches, chopped salads, burgers, fries, cake, and milkshakes (similar to Sweetgreen) and no one item accounts for more than a quarter of sales. And they currently operate 69 locations across the US, with most of those being in the midwest (Illinois and Indiana), but they’ve also added some in AZ and CA lately.


The thing that I think most caught my eye, is that Portillo’s generates the highest per-store revenue of any fast casual restaurant concept in the United States. (Second is Chick-fil-A). From everything I can tell, Portillo’s has a complete cult-like following. Almost all their store layouts consist of two lane drive thru’s, but also accommodate for dine-in, carryout, curbside, delivery, and catering. For reference, in 2019, about 41% of their sales came from the drive-thru, 53% from dine-in, and 6% came from delivery. And an interesting note, for moe than 20 years Portillo’s has actually operated a direct shipping business to all 50 states. So if you’re an absolute Portillo’s die-hard, you can buy 20 Italian Beef sandwiches online and have them shipped to you.


(Ryan) History: In 1963, Dick Portillo returned frmo serving in the Marine’s and used money from his savings + an investment from his brother to open a hot dog stand known as the “dog house”. He invested $1,100 in total into this initially, and all it was was this 6x12 trailer with no running water that sold hot dogs. 4 years later after some success Dick Portillo changed the look of the building and renamed the company Portillo’s. By 1970 Dick Portilo added a partner to the company to help expand into a second location.


It wasn’t until 1983 that they added their first drive thru and figured out how great of an addition that would be. But between 1972-1989, Dick Portillo started opening up a new restaurant concept called Barney’s that specialized in more BBQ meals. And in 1993, Portillo decided to blend the two concepts and Barnelli’s was introduced. This was a huge expansion of its menu including items like pastas, sandwiches, and salads, which are still very popular today. The company continued to add locations throughout the country, and after 50 years of success, Portillo sold the Portillo’s brand to a private equity firm called Berkshire Partners in 2014 (no connection to Berkshire Hathaway). And about 6 months ago, the company came public.


(Brett) Industry/Landscape/Competition:

  • Fast casual restaurant chains hit $125 billion in sales in 2019 and expected to grow at 10%+ rate

  • Competitors: All restaurants really. Hard to pin down one but maybe something like In-in-Out, your local burger/hot dog joint. Those healthy lunchtime options less of a competitor here.

  • Only place with any sort of saturation is Chicago area. They are expanding around the Midwest and into Arizona and Florida.


(Ian) Management and Ownership:

  • Michael Osanloo (oh-sand-loo) is the CEO

  • He is the former CEO of PF Changs and worked at Kraft-Heinz, was a partner at Bain

  • On the board

  • Berkshire funds own 63.7% of shares outstanding

  • It has many seats on the board



(Brett) Valuation:

  • Market cap of $732 million, ticker PTLO (lot of aggregators have wrong market cap)

  • Enterprise value of close to exactly $1 billion with quite a bit of debt

  • EV/s of 1.9

  • EV/OI of 33.3

  • EV/OI of 15 assuming reversion to 2020 operating margin level

  • Lots of potential dilution incoming. 6 million stock options vs. 36 million share count. Granting pace not too crazy though.


(Ryan) Earnings:

  • For the full-year 2021, Portillo’s had $535M in revenue, up 17.5% vs. 2020 and even up from 2019

  • Same restaurant sales increased 10.5% YoY

  • And they had operating income of $30M, but a lot of that was bogged down by the opening of 7 new locations.

  • Restaurant level adj. EBITDA margin (basically how much each store is making individually) was 27%.

  • They had $42M in OCF, but paid out a lot in SBC related to the IPO

  • And they increased their store count by 8% in the year.

  • Just generally, LT they’re targeting 10% unit growth.


(Ian) Balance sheet and liquidity:

  • $39mm in cash

  • $394mm in goodwill

  • About $260mm in trade names and other intangible assets

  • $326mm in debt

  • A one percentage point increase in interest rates correlates to $3.3mm of additional interest expense on an annual basis

  • Most principal due in 2024 (want the company in a strong position to get strong rates)


Anecdotal Evidence:

  • (Ryan) Never been, I’ve only heard good things though

  • (Brett) Downloaded the app, which was ok. Prices seemed good they are trying to be hesitant to raise prices because of inflation but that indicates to me given their AUV and same-store sales growth that they could raise prices if they wanted and get better operating margins.

  • (Ian) I’ve been a couple of times. Really enjoyed the food, and think that the prices are totally reasonable. Not any close to me, though. Right now, they are on the outskirts of Phoenix and not in the central valley


Future growth opportunities:

  • (Ryan) One development I think is interesting is that in 2021 they began to markup 3rd party delivery prices, that’s probably a good way to go. Sounds like part of the portillo’s value prop is the differentiated experience you get when you go there. I don’t see any harm in making it really expensive to have Portillo’s through 3P. Make people come to the store. And just generally, it seems like they’re already maximizing per-store revenue and they currently expect SSS to be in the low-single digits moving forward, so all the growth is pretty much going to come from unit growth.

  • (Brett) Store count growth. That’s really the entire story here.

  • (Ian) Menu additions. Slow to make changes, but added spicy chicken sandwich. “First, it tested off the chart with our consumers. Our guests simply love it. Second, it's been incremental to our business. And third, it's operationally very simple to execute.” 4.1% increase in transactions YoY


Highlights and lowlights:

  • (Ryan) Highlights: Seems like this model could work everywhere. It has an absolute cult-like following (on the s-1 it shows some interesting quotes from fans like, “I’m gonna baptize my first born child in Portillo’s melted cheese” or “My healthiest and most stable relationship is with an italian beef sandwich from Portillo’s”.) Plus it’s just a really cool story. Lowlights: Tough operating environment for restaurants right now. They’re expecting commodity costs to rise 13-15% this year.

  • (Brett) Highlights: Seems like there is room for this concept, rational ideas around what a restaurant should be, impressive volume per store, major room for store expansion. Lowlights: uncertainty on input costs, inflationary store buildout costs, executive and board compensation seems high. Will this idea translate to all areas in the U.S? How will they deal with debt coming due in 2024? Tough time to refinance

  • (Ian) Highlights: Great brand, I think there is a path to store growth Lowlights: Restaurant business is hard due to macro environment, minority shareholder


Bull case:

  • (Ryan) This model works everywhere. They hit their LT guidance of 10% unit growth + low single digit SSS growth, and can reach low teens FCF margins. Was just under 10% OCF margin in 2019.

  • (Brett) 10% store growth (internal goal) + steady AUV gains. At 150 stores, $10 million AUV, and 10% operating margin is $150 million in operating profit. Probably worth a $3 billion EV(?).

  • (Ian) Store growth with stable margins. Competent operators execute well. Generates $130mm in EBITDA ~10% 5-Year CAGR I would expect leads to a double in 5 years


Bear case:

  • (Ryan) I always struggle with restaurant growth stories because a lot of the thesis falls on subjective assessments. If this doesn’t translate well to other areas of the country, they’ll have an obvious problem especially with the debt load. Valuation doesn’t strike me as a huge concern here.

  • (Brett) Input costs, debt, high executive pay, drive margins down and make it tough for the company to generate cash for shareholders. I don’t have much concern on what the income statement will look like but the cash flow statement and share count.

  • (Ian) The concept doesn’t translate to the rest of the country. Growth numbers aren’t there causing the debt load to become more troublesome over time.




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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.

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