Portillo's: Weak Same-Store Sales Are Concerning (Rating Downgrade)

seekingalpha11-20

I'm downgrading Portillo's to neutral due to declining same-store sales and disappointing Q3 earnings, despite previous optimism about its regional expansion.Declining same-store sales may finally be ...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nPortillo's: Weak Same-Store Sales Are Concerning (Rating Downgrade)\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-11-20 23:38 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4739021-portillos-weak-same-store-sales-are-concerning-rating-downgrade><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I'm downgrading Portillo's to neutral due to declining same-store sales and disappointing Q3 earnings, despite previous optimism about its regional expansion.Declining same-store sales may finally be ...</p>\n\n<a href=\"https://seekingalpha.com/article/4739021-portillos-weak-same-store-sales-are-concerning-rating-downgrade\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"PTLO","symbol_name":"Portillo’s Inc.","start_time":0,"source_url":"https://seekingalpha.com/article/4739021-portillos-weak-same-store-sales-are-concerning-rating-downgrade","article_id":"2485149006","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1711458528/image_1711458528.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2485149006","pubTimestamp":1732117099,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"I'm downgrading Portillo's to neutral due to declining same-store sales and disappointing Q3 earnings, despite previous optimism about its regional expansion.Declining same-store sales may finally be ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["rate","earning"],"viewcount":null,"language":"en","relate_stocks":{"PTLO":"Portillo’s Inc."},"translate_title":"Portillo's：同店销售疲软令人担忧（评级下调）","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"PTLO":0.9},"content_text":"I'm downgrading Portillo's to neutral due to declining same-store sales and disappointing Q3 earnings, despite previous optimism about its regional expansion.Declining same-store sales may finally be a reaction to recent price increases to combat inflation.The company’s valuation remains attractive compared to peers, but guidance cuts and declining sales trends warrant a cautious “watch and wait” approach.   patty_c/iStock Unreleased via Getty Images  Now more than ever, a sky-high stock market and nervous sentiment over valuations requires us to be more judicious than ever when choosing the stocks that merit being in our portfolios. Active investing is the way to beat the markets right now, and companies that have issued a string of negative news have to be pruned. Portillo’s (NASDAQ:PTLO), in my view, falls into this bucket. The Midwestern-based hot dog chain has struggled with declining same-store sales growth. As a result, shares of the once-popular fast casual joint have slid 30% this year, widely underperforming the S&P 500. Data by YCharts I last wrote a buy opinion on Portillo’s in October, calling out the company’s regional expansion plans as well as improving restaurant margins when the company was still trading closer to $13 per share. I’ve sustained some losses on my call, especially after the company’s horrendous Q3 earnings print that has shaken my confidence in the company. As a result, I’m dropping my rating on Portillo’s to neutral. In my view, new risks have opened up here that render the bull and bear cases for Portillo’s rather balanced. I still see the following positives for the company:   Brand recognition in an underserved category in American fast foods. Hamburger chains are aplenty in the United States, but no brand has a monopoly over the other iconic American staple: the hot dog, which is the product on which Portillo’s built its brand.  Regional chain with plenty of diversification opportunities. Portillo’s concentration of stores is in the Midwest, leaving it plenty of room to expand its concept to the coastal states.  High AUVs. Portillo's doesn't have many locations, but its larger store formats have led to much more substantial AUVs (average volume per location), of ~$9 million per location versus ~$3 million for many fast-casual rivals like Chipotle (CMG).  At the same time, however, we have to be wary of the following risks:   Price increases are starting to take a toll. The company has raised its menu prices by 1.5-2.5% to combat inflation. While these are reasonable increases, the company’s decline in same store sales suggests that traffic is suffering potentially in response to these pricing moves.  Secular tailwinds toward health foods. Especially as U.S. consumers become more health-conscious, including and especially in the coastal markets in which Portillo’s needs to expand its footprint, the company may eventually face a product-market misalignment with its current menu offering.  Of course, we have to take these risks into consideration against Portillo’s valuation. When comparing Portillo’s against a basket of both fast-food and fast-casual restaurant stocks, the company sits on the very low end of both revenue and EBITDA multiples: Data by YCharts This strong value proposition is what keeps me from being too negative on Portillo’s, though the company’s guidance cuts and declining same-store sales trends also keep me nervous. All in all, I’d prefer to move to the sidelines and adopt a “watch and wait” stance here. I wouldn’t buy a Portillo’s until it became more evident that the company has a line of sight to returning to same-store sales growth, or its stock devalued and became significantly cheaper. Q3 recap Let’s now go through Portillo’s latest quarterly results in greater detail. The Q3 earnings summary is shown below:   Portillo's Q3 results (Portillo's Q3 earnings deck) Portillo's revenue grew 7% y/y to $178.3 million, missing Wall Street's expectations of $174.6 million (+5% y/y) by a two-point margin. However, what we have to note is that all of this growth came from the contribution of newly opened restaurants. When we strip out those new locations and compare only the restaurants that were already open last year (same-store or same-restaurant sales growth), we find that SRS actually declined -0.9% y/y in the quarter, which was worse than a -0.6% decline in Q2.   Portillo's same-store sales (Portillo's Q3 results) This is a signal that consumer trends may be shifting away from Portillo's, whether in response to the company's low single-digit price increases or a general preference shift away from eating out and eating unhealthy. Recall that Portillo's began the year with a target of growing same-restaurant sales in the low single digit range. It then revised its target to \"flat to slightly positive\" alongside its Q2 earnings release, and finally after Q3 it dropped its target to a decline of \"approximately 1%.\"   Portillo's guidance revision (Portillo's Q3 results) We note as well that Portillo's retrenched its expansion expectations, previously targeting 10+ new units for the year and now signaling that it will open exactly 10. We note that resources are dwindling for Portillo's, especially amid weaker performance from its restaurants. It has only $19 million of cash remaining on its balance sheet, and that's not to mention $302 million in debt. The company has still kept intact its long-term goal of achieving 12-15% unit growth expansion per year (alongside single digit SRS growth), but these quarter's poorer trends make us more skeptical that these target are truly realistic. Alongside weaker top-line performance, we note that Portillo's profitability has suffered as well. The company's adjusted EBITDA grew only 2% y/y to $27.9 million, representing a 15.7% margin: down 70bps y/y.    Portillo's margins (Portillo's Q3 results) Similarly, restaurant-level profit margins declined -160bps y/y to 23.5%, as Portillo's suffered from both cost inflation (on both commodities and labor) amid top-line deleverage. Key takeaways In my view, trends are starting to slip south for Portillo's. The company has suffered through three consecutive quarters of same-store sales decline. At a company level, Portillo's is still growing, but that's only due to unit expansion: something the company has limited funds to achieve in future years.  The company's substantially lower valuation multiples relative to its peers still keep me hopeful on Portillo's prospects at ~$11 per share, but we'll also have to see fundamentals improve in order to achieve a true rebound. All in all, I don't think the risk-reward profile in Portillo's is compelling enough to merit buying the latest dip, so I'm moving to the sidelines to watch and wait.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485149006"}