New Restaurants And Digital Innovations Set To Boost Market Presence And Margins

Key Takeaways

• Expansion plans and operational efficiencies, such as faster drive-through services and kiosk prototypes, aim to boost revenue and enhance customer satisfaction.
  
• Focused advertising campaigns and structural adjustments to reduce capital expenditures by opening smaller footprint restaurants are expected to improve net margins and increase brand awareness.
  
• Portillo's faces risks from drive-through reliance, fluctuating commodity prices, decreasing same-restaurant sales, rising preopening expenses, and labor inflation affecting margins and operating income.

Catalysts

Owns and operates fast casual restaurants in the United States.

• Expansion plans with at least 10 new restaurants opening in fiscal 2024, aiming for a unit growth percentage close to 12%, will likely boost revenue and market presence.
  
• Introduction of operational efficiencies, such as improvements in drive-through service speed, which is crucial for customer satisfaction and could drive transactions and sales.
  
• Launch of the kiosk prototype to enhance the customer experience and possibly increase sales through digital engagement and menu innovation.
  
• Focused advertising campaigns, especially around the NFL season, are expected to increase brand awareness and drive traffic, potentially uplifting revenue.
  
• Structural adjustments to reduce capital expenditures for the year by opening smaller footprint restaurants, which lowers build costs while maintaining capacity, could improve net margins through reduced expenses.

Assumptions

• Analysts are assuming Portillo's's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 4.2% in 3 years time.
• Analysts expect earnings to reach $40.0 million (and earnings per share of $0.49) by about September 2027, up from $23.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.4x on those 2027 earnings, up from 33.9x today. This future PE is greater than the current PE for the US Hospitality industry at 19.8x.
• Analysts expect the number of shares outstanding to grow by 1.19% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

Risks

• The reliance on the drive-through channel as a core part of the business operation introduces risk if any disruptions occur or customer preferences shift away from drive-through usage, potentially impacting revenue streams.
  
• Fluctuating commodity prices, particularly noted increases in beef, pork, and produce, directly affect food, beverage, and packaging costs as a percentage of revenues, which could squeeze margins if not well-managed.
  
• The same-restaurant sales decrease, driven by a reduction in transactions, indicates challenges in maintaining customer footfall, which is critical for consistent revenue growth.
  
• Preopening expenses for new restaurant openings are increasing, indicating potential risk in capital expenditure management that could impact net margins if new locations do not perform as expected.
  
• Labor inflation, anticipated to be in the mid-single digits, alongside a flat labor cost as a percentage of revenues despite an increase in average check, suggests wage pressures that could impact operating income if not offset by productivity gains or higher sales growth.

Valuation

• The analysts have a consensus price target of $15.0 for Portillo's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $13.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $954.1 million, earnings will come to $40.0 million, and it would be trading on a PE ratio of 36.4x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $12.71, the analyst's price target of $15.0 is 15.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.