Portillo's: Texas Troubles

"We were lulled into a false sense of security"

From “Portillo’s: A Growth Story” (March 2024):

“There’s execution risk as they ramp to mid-teens unit growth. Portillo’s success in Chicagoland is undeniable, but the ‘Cheese Sauce Spill’ markets tell us a different story. The optimistic interpretation is that this wasn’t indicative of a limited ability for the brand to travel; instead, it reflected growing pains as they learned how to successfully grow outside Chicagoland. Portillo’s paid their dues over the past decade, and they’ll reap the rewards throughout the Sunbelt over the next 20 years. (‘In some ways, we were like a four or five year old company; we were really immature on a lot of our processes… There’s been a lot of pick and shovel work, just building these foundations.’) Over time, if I decide to invest in Portillo’s, it will likely happen because I have seen clear evidence to support that theory.”

In January 2023, Portillo’s opened a ~7,900 square foot location in The Colony, Texas; it was their first location in the state, and it was an immediate success. As CEO Michael Osanloo noted on the Q2 FY23 call, “The Colony, year-to-date, has already done over $8.5 million in sales; that's not an annualized number, that's a year-to-date number.” For context, average unit volumes, or AUV’s, across the Portillo’s chain were ~$8.7 million in 2023; their first location in the Lone Star State was on track to double that output.

Following the success of The Colony, management set out to ramp new unit growth throughout Texas. The company ended 2024 with 10 units in the state, primarily in the Dallas-Fort Worth (DFW) market; including locations that are set to open this year, the company is on pace for 16 Texas restaurants at the end of 2025, accounting for ~15% of its total units. (Portillo’s home state of Illinois remains its largest by far, accounting for roughly 50% of the unit mix.)

Achieving the company’s long-term financial targets, most notably 12% - 15% annualized unit growth, requires a reception in cities throughout Texas and Florida that is directionally similar to the response at The Colony. That is a dream scenario, one that supports management’s long-term goal of more than 900 U.S. locations (i.e. another ~25 years of ~10% annualized growth).

But today’s business realities are challenging those long-term ambitions.