Portillo's Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Cautionary Statements Concerning Forward-Looking Statements” in this report and under the heading “Risk Factors” in Part I, Item IA of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and Part II, Item 1A of this Form 10-Q. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years. Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. We assume no obligation to provide revisions to any forward-looking statements should circumstances change. The following discussion summarizes the significant factors affecting the condensed consolidated operating results, financial condition, liquidity and cash flows of our Company as of and for the periods presented below. We have prepared the unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Overview Portillo’s serves iconic Chicago street food through high-energy, multichannel restaurants designed to ignite the senses and create a memorable dining experience. Since our founding in 1963 in a small trailer which Dick Portillo called “The Dog House,” we have grown to become a treasured brand with a passionate (some might say obsessed) nationwide following. Our diverse menu features all-American favorites such as Chicago-style hot dogs and sausages, Italian beef sandwiches, char-broiled burgers, chopped salads, crinkle-cut fries, homemade chocolate cake and our signature chocolate cake shake. We create a consumer experience like no other by combining the best attributes of fast casual and quick service concepts with an exciting, energy-filled atmosphere and restaurant model capable of generating tremendous volumes. Nearly all of our restaurants were built with double lane drive-thrus and have been thoughtfully designed with a layout that accommodates a variety of access modes including dine-in, carryout, delivery, and catering in order to quickly and efficiently serve our guests. No matter how our guests order from us, our highly productive kitchens and team members consistently serve high quality food and deliver a memorable guest experience. We believe the combination of our craveable food, multichannel sales model, dedication to operational excellence, and distinctive culture driven by our team members gives us a competitive advantage. As of March 31, 2024, we owned and operated 85 Portillo’s restaurants across ten states, including a restaurant owned by C&O Chicago, L.L.C. ("C&O") of which Portillo’s owns 50% of the equity. Secondary Offering In the first quarter of 2024, the Company completed a secondary offering of 8,000,000 shares of the Company's Class A common stock at an offering price of $14.37 per share ("Q1 2024 Secondary Offering"). The Company granted BofA Securities, Inc., the underwriter (the "Underwriter"), a 30-day option to purchase up to an additional 1,200,000 shares of Class A common stock. The underwriter did not exercise its overallotment option within the 30-day period. We used all of the net proceeds from the Q1 2024 Secondary Offering to purchase LLC Units and corresponding shares of Class B common stock from certain pre-IPO LLC Members and to repurchase shares of Class A common stock from the shareholders of the entities treated as corporations for U.S. tax purposes that held LLC Units prior to the Transactions ("Blocker Companies") at a price per LLC Unit or share of Class A common stock, as applicable, equal to the public offering price per share of Class A common stock, less the underwriting discounts and commissions. The proceeds from the Q1 2024 Secondary Offering were used to (i) purchase 2,167,629 existing shares of Class A common stock from the shareholders of the Blocker Companies and (ii) redeem 5,832,371 LLC Units held by the pre-IPO LLC Members. In connection with the redemption, 5,832,371 shares of Class B common stock were surrendered by Portillo's Inc. Form 10-Q | 20 the pre-IPO LLC Members and canceled and the Company received 5,832,371 newly-issued LLC Units, increasing the Company's total ownership interest in Portillo's OpCo. As a result, Portillo’s did not receive any proceeds from the offering, and the total number of shares of Class A common stock and Class B common stock did not change; however, the number of outstanding shares of Class A common stock increased by the same number of the canceled shares of Class B common stock. Financial Highlights for the Quarter Ended March 31, 2024 vs. Quarter Ended March 26, 2023: • Total revenue increased 6.3% or $9.8 million to $165.8 million; • Same restaurant sales* decreased 1.2%; • Operating income increased $1.6 million to $10.1 million; • Net income increased $6.6 million to $5.3 million; • Restaurant-Level Adjusted EBITDA** increased $1.6 million to $36.4 million; and • Adjusted EBITDA** increased $2.1 million to $21.8 million. * For the quarter ended March 31, 2024, same-restaurant sales compares the 13 weeks from January 1, 2024 through March 31, 2024 to the 13 weeks from January 2, 2023 through April 2, 2023. ** Adjusted EBITDA and Restaurant-Level Adjusted EBITDA are non-GAAP measures. Definitions and reconciliations of Adjusted EBITDA to net income (loss) and Restaurant-Level Adjusted EBITDA to operating income the most directly comparable financial measures presented in accordance with GAAP, are set forth under the section "Key Performance Indicators and Non-GAAP Financial Measures". Recent Developments and Trends In the quarter ended March 31, 2024 total revenue grew 6.3% or $9.8 million. Same-restaurant sales declined 1.2% during the quarter ended March 31, 2024, compared to 9.1% same-restaurant sales growth during the same quarter in 2023. During the quarter ended March 31, 2024, we opened one new restaurant in Denton, Texas for a total of 85 restaurants, including a restaurant owned by C&O, of which Portillo's owns 50% of the equity. The twelve restaurants opened in 2023 and one restaurant opened during the quarter ended March 31, 2024 positively impacted revenues by approximately $14.4 million in the quarter ended March 31, 2024. We opened one restaurant subsequent to March 31, 2024 and plan to open at least seven additional restaurants during the remainder of 2024. In the quarter ended March 31, 2024, commodity inflation was 4.8%, compared to 8.9% for the quarter ended March 26, 2023. For the quarter ended March 31, 2024, we experienced an increase in labor expenses, as a percentage of revenue, compared to the quarter ended March 26, 2023 primarily due to lower transactions and incremental wage rate increases to support our team members, partially offset by increase in our average check and lower variable-based compensation. We increased certain menu prices by approximately 1.5% during both January of 2024 and at the end of March 2024 to offset inflationary cost pressures. We will continue to monitor cost pressures, the competitive landscape, and consumer sentiment to inform our pricing decisions in the future quarters. In the quarter ended March 31, 2024, operating income, operating margin, net income, Restaurant-Level Adjusted EBITDA, Adjusted EBITDA and Adjusted EBITDA margin all improved versus the prior year. We believe this improvement was the result of our ongoing efforts to elevate guest experiences, deploy strategic pricing actions, implement operational efficiencies, and grow our restaurant base. Further, we intend to continue focusing our efforts on running world class operations, innovating and amplifying the Portillo's experience, building restaurants with industry-leading returns and taking great care of our teams. We also launched two new salads to our menu in late March as a result of guest feedback. The Spicy Chicken Chopped Salad and the Chicken Pecan Salad with Bacon are fresh, made-to-order salads that joined our menus nationwide alongside other fan-favorite salads, including the Greek Salad, Caesar Salad and our famous original Chopped Salad. Additionally, to promote our new salads we will introduce a new brown paper bag with green stripes for a limited time in May and June. Like our prior bag, the new bag is also 100% recyclable, does not need to be bleached, and is made from fibers certified by the Sustainable Forestry Initiative. Portillo's Inc. Form 10-Q | 21 Development Highlights During the quarter ended March 31, 2024, we opened one restaurant in the Texas market. Subsequent to March 31, 2024, we opened one additional restaurant, bringing our total restaurant count to 86, including a restaurant owned by C&O of which Portillo’s owns 50% of the equity. Below are the restaurants opened since the beginning of fiscal 2024 : Location Opening Date Fiscal Quarter Opened Denton, Texas March 2024 Q1 2024 Surprise, Arizona May 2024 Q2 2024 Portillo's Inc. Form 10-Q | 22 Table of Contents Consolidated Results of Operations The following table summarizes our results of operations for the quarter ended March 31, 2024 and March 26, 2023 (in thousands): Quarter Ended March 31, 2024 March 26, 2023 REVENUES, NET $ 165,831 100.0 % $ 156,061 100.0 % COST AND EXPENSES: Restaurant operating expenses: Food, beverage and packaging costs 56,961 34.3 % 53,626 34.4 % Labor 43,302 26.1 % 40,459 25.9 % Occupancy 9,340 5.6 % 8,451 5.4 % Other operating expenses 19,857 12.0 % 18,704 12.0 % Total restaurant operating expenses 129,460 78.1 % 121,240 77.7 % General and administrative expenses 18,540 11.2 % 18,778 12.0 % Pre-opening expenses 1,423 0.9 % 2,344 1.5 % Depreciation and amortization 6,944 4.2 % 5,670 3.6 % Net income attributable to equity method investment (205) (0.1) % (207) (0.1) % Other income, net (428) (0.3) % (257) (0.2) % OPERATING INCOME 10,097 6.1 % 8,493 5.4 % Interest expense 6,530 3.9 % 7,444 4.8 % Interest income (79) — % — — % Tax Receivable Agreement liability adjustment (561) (0.3) % (584) (0.4) % Loss on debt extinguishment — — % 3,465 2.2 % INCOME (LOSS) BEFORE INCOME TAXES 4,207 2.5 % (1,832) (1.2) % Income tax benefit (1,137) (0.7) % (559) (0.4) % NET INCOME (LOSS) 5,344 3.2 % (1,273) (0.8) % Net income (loss) attributable to non-controlling interests 782 0.5 % (759) (0.5) % NET INCOME (LOSS) ATTRIBUTABLE TO PORTILLO'S INC. $ 4,562 2.8 % $ (514) (0.3) % Revenues, Net Revenues primarily represent the aggregate sales of food and beverages, net of discounts. Sales taxes collected from customers are excluded from revenues. Revenues in any period are directly influenced by, among other factors, the number of operating weeks in the period, the number of open restaurants, restaurant traffic, our menu prices, third-party delivery platform prices and product mix. Revenues for the first quarter ended March 31, 2024 were $165.8 million compared to $156.1 million for the first quarter ended March 26, 2023, an increase of $9.8 million or 6.3%. The increase in revenues was primarily attributed to the opening of twelve restaurants in 2023 and one restaurant during the quarter ended March 31, 2024, partially offset by a decrease in our same-restaurant sales. New restaurants positively impacted revenues by approximately $14.4 million in the quarter ended March 31, 2024. Same-restaurant sales decreased 1.2% during the first quarter ended March 31, 2024, which was attributable to a 3.2% decrease in transactions, partially offset by an increase in average check of 2.0%. The higher average check was driven by an approximate 5.1% increase in certain menu prices partially offset by product mix. For the purpose of calculating same-restaurant sales for March 31, 2024, sales for the 69 restaurants that were open for at least 24 full fiscal periods were included in the Comparable Restaurant Base (as defined in "Selected Operating Data" below). Portillo's Inc. Form 10-Q | 23 Table of Contents Food, Beverage and Packaging Costs Food, beverage and packaging costs include the direct costs associated with food and beverages, including paper products and third-party delivery commissions. The components of food, beverage and packaging costs are variable by nature, change with sales volume, are impacted by product mix and are subject to increases or decreases in commodity costs . Food, beverage and packaging costs for the first quarter ended March 31, 2024 were $57.0 million compared to $53.6 million for the first quarter ended March 26, 2023, an increase of $3.3 million or 6.2%. This increase was primarily driven by the opening of twelve restaurants in 2023 and one restaurant during the quarter ended March 31, 2024 and a 4.8% increase in commodity prices. As a percentage of revenues, net, food, beverage and packaging costs decreased 0.1% during the quarter ended March 31, 2024. The decrease was primarily due to an increase in average check and lower third-party delivery commissions, partially offset by an increase in certain commodity prices. Labor Expenses Labor expenses include hourly and management wages, bonuses and equity-based compensation, payroll taxes, workers’ compensation expense, and team member benefits. Factors that influence labor costs include wage inflation and payroll tax legislation, health care costs and the staffing needs of our restaurants . Labor expenses for the first quarter ended March 31, 2024 were $43.3 million compared to $40.5 million for the first quarter ended March 26, 2023, an increase of $2.8 million or 7.0%. This increase was primarily driven by the opening of twelve restaurants in 2023 and one restaurant during the quarter ended March 31, 2024, and incremental investments to support our team members, including annual rate increases, partially offset by lower variable-based compensation. As a percentage of revenues, net, labor increased 0.2% primarily due to a decrease in transactions and the aforementioned incremental wage rate increases to support our team members, partially offset by an increase in our average check and lower variable-based compensation. Occupancy Expenses Occupancy expenses primarily consist of rent, property insurance and property taxes. Occupancy expenses for the first quarter ended March 31, 2024 were $9.3 million compared to $8.5 million for the first quarter ended March 26, 2023, an increase of $0.9 million or 10.5%, primarily driven by the opening of twelve restaurants in 2023 and one restaurant during the quarter ended March 31, 2024. As a percentage of revenues, net, occupancy expenses increased 0.2% primarily due to a decrease in transactions.. Other Operating Expenses Other operating expenses consist of direct marketing expenses, utilities and other operating expenses incidental to operating our restaurants, such as credit card fees and repairs and maintenance. Other operating expenses for the first quarter ended March 31, 2024 were $19.9 million compared to $18.7 million for the first quarter ended March 26, 2023, an increase of $1.2 million or 6.2%, primarily due to the opening of twelve restaurant in 2023 and one restaurant during the quarter ended March 31, 2024 and an increase in cleaning expenses, credit card fees and utilities, partially offset by lower advertising expenses and a decrease in operating supplies. As a percentage of revenues, net, operating expenses was consistent with the comparable prior quarter. General and Administrative Expenses General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations, including marketing and advertising costs incurred as well as legal and professional fees. General and administrative expenses also include equity-based compensation expense. General and administrative expenses are impacted by changes in our team member count and costs related to strategic and growth initiatives. General and administrative expenses for the first quarter ended March 31, 2024 were $18.5 million compared to $18.8 million for the first quarter ended March 26, 2023, a decrease of $0.2 million or 1.3%. This decrease was primarily driven by lower equity-based compensation and lower variable-based compensation, partially offset by an increase in salaries and wages attributable to annual rate increases, increases in professional fees, and increases to advertising and marketing expenses. Portillo's Inc. Form 10-Q | 24 Table of Contents Pre-Opening Expenses Pre-opening expenses consist primarily of wages, occupancy expenses, which represent rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date, travel for the opening team and other supporting team members, food, beverage, and the initial stocking of operating supplies. All such costs incurred prior to the opening are expensed in the period in which the expense was incurred. Pre-opening expenses can fluctuate significantly from period to period, based on the number and timing of openings and the specific pre-opening expenses incurred for each restaurant. Additionally, restaurant openings in new geographic market areas will experience higher pre-opening expenses than our established geographic market areas, such as the Chicagoland area, where we have greater economies of scale and incur lower travel and lodging costs for our training team. Pre-opening expenses for the first quarter ended March 31, 2024 were $1.4 million compared to $2.3 million for the first quarter ended March 26, 2023, a decrease of $0.9 million or 39.3%. The decrease was due to the number and timing of activities related to our planned restaurant openings for the quarter ended March 31, 2024 as compared to the quarter ended March 26, 2023. Depreciation and Amortization Depreciation and amortization expenses consist of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of recipes. Depreciation and amortization expense for the quarter ended March 31, 2024 was $6.9 million compared to $5.7 million for the first quarter ended March 26, 2023, an increase of $1.3 million or 22.5%. This increase was primarily attributable to incremental depreciation of capital expenditures related to the opening of twelve restaurants in 2023 and one restaurant during the quarter ended March 31, 2024. Net Income Attributable to Equity Method Investment Net income attributable to equity method investment consists of a 50% interest in C&O, which runs a single restaurant located within the Chicagoland market. We account for the investment and financial results in the condensed consolidated financial statements under the equity method of accounting as we have significant influence but do not have control. Net income attributable to equity method investment for both the first quarters ended March 31, 2024 and March 26, 2023 was $0.2 million. Other Income, Net Other income, net, includes among other items, income resulting from discounts received for timely filing of sales tax returns, management fee income associated with our investment in C&O, trading gains or losses on our deferred compensation plan and gains or losses on asset disposals. Other income, net, for the first quarter ended March 31, 2024 was $0.4 million compared to $0.3 million for the first quarter ended March 26, 2023, an increase of $0.2 million or 66.5%. This increase was primarily due to an increase in trading gains in the rabbi trust used to fund our deferred compensation plan and a decrease in loss on sale of assets. Interest Expense Interest expense primarily consists of interest and fees on our credit facilities and the amortization expense for debt discount and deferred issuance costs. Interest expense for the first quarter ended March 31, 2024 was $6.5 million compared to $7.4 million for the first quarter ended March 26, 2023, a decrease of $0.9 million or 12.3%. This decrease was primarily driven by the improved lending terms associated with our 2023 Term Loan and 2023 Revolver Facility. Our effective interest rate on the 2023 Term Loan and 2023 Revolver Facility was 8.37% and 8.09% as of March 31, 2024 and March 26, 2023, respectively. Portillo's Inc. Form 10-Q | 25 Table of Contents Interest Income Interest income primarily consists of interest earned on our cash and cash equivalents. Interest income for the quarter ended March 31, 2024 was $0.1 million. There was no interest income in the quarter ended March 26, 2023. Tax Receivable Agreement Liability Adjustment We are party to a Tax Receivable Agreement liability with certain members of Portillo's OpCo that provides for the payment by us of 85% of the amount of tax benefits, if any, that Portillo's Inc. actually realizes or in some cases is deemed to realize as a result of certain transactions. The tax receivable agreement liability adjustment was $0.6 million for the quarter ended March 31, 2024 related to a remeasurement primarily due to activity under equity-based compensation plans. The tax receivable agreement liability adjustment, was $0.6 million for the quarter ended March 26, 2023. Loss on Debt Extinguishment There was no loss on debt extinguishment for the quarter ended March 31, 2024. Loss on debt extinguishment for the quarter ended March 26, 2023 was $3.5 million due to the write-off of debt discount and deferred issuance costs associated with the payoff of the 2014 Credit Agreement as described in Note 8. Debt. Income Tax Benefit Portillo's OpCo is treated as a partnership for U.S. federal, as well as state and local income tax purposes and is not subject to taxes. Rather, any taxable income or loss generated by Portillo's OpCo is allocated to its members in relation to their respective ownership percentage of Portillo's OpCo. We are subject to U.S. federal, as well as state and local, income taxes with respect to our allocable share of any taxable income or loss of Portillo's OpCo, as well as any stand-alone income or loss generated by Portillo's Inc. Income tax benefit for the first quarter ended March 31, 2024 was $1.1 million compared to $0.6 million for the first quarter ended March 26, 2023, a decrease of $0.6 million or 103.4%. Our effective income tax rate for the quarter ended March 31, 2024 was (27.0)%, compared to 30.5% for the quarter ended March 26, 2023. The decrease in our effective income tax rate for the quarter ended March 31, 2024 compared to the quarter ended March 26, 2023 was primarily driven by a decrease in the valuation allowance recorded against a portion of the Company's deferred tax assets as a result of the Q1 2024 Secondary Offering, partially offset by an increase in the Company's ownership interest in Portillo's OpCo, which increases its share of taxable income (loss) of Portillo's OpCo. Net Income Attributable to Non-controlling Interests We are the sole managing member of Portillo's OpCo. We manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and we also have a substantial financial interest in Portillo’s OpCo. Accordingly, we consolidate the financial results of Portillo’s OpCo, and a portion of our net income is allocated to non-controlling interests to reflect the entitlement of the pre-IPO LLC Members who retained their equity ownership in Portillo's OpCo (the "pre-IPO LLC Members"). The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) to Portillo's Inc. and the non-controlling interest holders. Net income attributable to non-controlling interests for the first quarter ended March 31, 2024 was $0.8 million, compared to net loss attributable to non-controlling interests of $0.8 million for the first quarter ended March 26, 2023, an increase of $1.5 million or 203.0%. The increase in net income attributable to non-controlling interests for the quarter ended March 31, 2024 was primarily due to an increase in net income compared to the quarter ended March 26, 2023, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, from 31.4% for the quarter ended March 26, 2023 to 21.4% for the quarter ended March 31, 2024. Portillo's Inc. Form 10-Q | 26 Table of Contents Key Performance Indicators and Non-GAAP Financial Measures In addition to the GAAP measures presented in our financial statements, we use the following key performance indicators and non-GAAP financial measures to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. These key measures include restaurant openings, average unit volume ("AUV"), same-restaurant sales, Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. The Company includes these measures because management believes that they are important to day-to-day operations and overall strategy and are useful to investors in that they provide for greater transparency with respect to supplemental information used by management in its financial and operational decision-making. Quarter Ended March 31, 2024 March 26, 2023 Total Restaurants (a) 85 75 AUV (in millions) (a) $ 9.0 $ 8.7 Change in same-restaurant sales (b) (c) (1.2)% 9.1% Adjusted EBITDA (in thousands) (b) $ 21,777 $ 19,634 Adjusted EBITDA Margin (b) 13.1% 12.6% Restaurant-Level Adjusted EBITDA (in thousands) (b) $ 36,371 $ 34,821 Restaurant-Level Adjusted EBITDA Margin (b) 21.9% 22.3% (a) Includes a restaurant that is owned by C&O, of which Portillo’s owns 50% of the equity. AUVs for the quarters ended March 31, 2024 and March 26, 2023 represent AUVs for the twelve months ended March 31, 2024 and March 26, 2023, respectively. Total restaurants indicated are as of a point in time. (b) Excludes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity. (c) For the quarter ended March 31, 2024, same-restaurant sales compares the 13 weeks from January 1, 2024 through March 31, 2024 to the 13 weeks from January 2, 2023 through April 2, 2023. Change in Same-Restaurant Sales The change in same-restaurant sales is the percentage change in year-over-year revenue (excluding gift card breakage) for the comparable restaurant base, which is defined as the number of restaurants open for at least 24 full fiscal periods (the “Comparable Restaurant Base”). For the quarter ended March 31, 2024 and March 26, 2023, there were 69 and 63 restaurants in our Comparable Restaurant Base, respectively. The Comparable Restaurant Base excludes a restaurant that is owned by C&O, of which Portillo’s owns 50% of the equity. A change in same-restaurant sales is the result of a change in restaurant transactions, average guest check, or a combination of the two. We gather daily sales data and regularly analyze the guest transaction counts and the mix of menu items sold to strategically evaluate menu pricing and demand. Measuring our change in same-restaurant sales allows management to evaluate the performance of our existing restaurant base. We believe this measure provides a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of restaurant openings and enables investors to better understand and evaluate the Company’s historical and prospective operating performance. Average Unit Volume ("AUV") AUV is the total revenue (excluding gift card breakage) recognized in the Comparable Restaurant Base, including C&O, divided by the number of restaurants in the Comparable Restaurant Base, including C&O, by period. This key performance indicator allows management to assess changes in consumer spending patterns at our restaurants and the overall performance of our restaurant base. Portillo's Inc. Form 10-Q | 27 Table of Contents Non-GAAP Financial Measures To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: Adjusted EBITDA and Adjusted EBITDA Margin, and Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. Accordingly, these measures are not required by, nor presented in accordance with, GAAP, but rather are supplemental measures of operating performance of our restaurants. You should be aware that these measures are not indicative of overall results for the Company and that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. These measures are supplemental measures of operating performance and our calculations thereof may not be comparable to similar measures reported by other companies. These measures are important measures to evaluate the performance and profitability of our restaurants, individually and in the aggregate, but also have important limitations as analytical tools and should not be considered in isolation as substitutes for analysis of our results as reported under GAAP. Adjusted EBITDA and Adjusted EBITDA Margin Adjusted EBITDA represents net income before depreciation and amortization, interest expense, interest income and income taxes, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of net income, the most directly comparable GAAP measure to Adjusted EBITDA. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of revenues, net. We use Adjusted EBITDA and Adjusted EBITDA Margin (i) to evaluate our operating results and the effectiveness of our business strategies, (ii) internally as benchmarks to compare our performance to that of our competitors and (iii) as factors in evaluating management’s performance when determining incentive compensation. We believe that Adjusted EBITDA and Adjusted EBITDA Margin are important measures of operating performance because they eliminate the impact of expenses that do not relate to our core operating performance. The following table reconciles net income to Adjusted EBITDA and Adjusted EBITDA margin (in thousands): Quarter Ended March 31, 2024 March 26, 2023 Net income (loss) $ 5,344 $ (1,273) Net income (loss) margin 3.2 % (0.8) % Depreciation and amortization 6,944 5,670 Interest expense 6,530 7,444 Interest income (79) — Loss on debt extinguishment — 3,465 Income tax benefit (1,137) (559) EBITDA 17,602 14,747 Deferred rent (1) 1,170 1,225 Equity-based compensation 2,827 3,537 ERP implementation costs (2) 125 — Other income (3) 75 117 Transaction-related fees & expenses (4) 539 592 Tax Receivable Agreement liability adjustment (5) (561) (584) Adjusted EBITDA $ 21,777 $ 19,634 Adjusted EBITDA Margin (6) 13.1 % 12.6 % (1) Represents the difference between cash rent payments and the recognition of straight-line rent expense recognized over the lease term. (2) Represents non-capitalized third party consulting and software licensing costs incurred in connection with the implementation of a new ERP system. (3) Represents loss on disposal of property and equipment. Portillo's Inc. Form 10-Q | 28 Table of Contents (4) Represents certain expenses that management believes are not indicative of ongoing operations, consisting primarily of certain professional fees. (5) Represents remeasurement of the Tax Receivable Agreement liability. (6) Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Revenues, net. Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin Restaurant-Level Adjusted EBITDA is defined as revenue, less restaurant operating expenses, which include food, beverage and packaging costs, labor expenses, occupancy expenses and other operating expenses. Restaurant-Level Adjusted EBITDA excludes corporate level expenses and depreciation and amortization on restaurant property and equipment. Restaurant-Level Adjusted EBITDA Margin represents Restaurant-Level Adjusted EBITDA as a percentage of revenues, net. We believe that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are important measures to evaluate the performance and profitability of our restaurants, individually and in the aggregate. The following table reconciles operating income to Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin (in thousands): Quarter Ended March 31, 2024 March 26, 2023 Operating income $ 10,097 $ 8,493 Operating income margin 6.1 % 5.4 % Plus: General and administrative expenses 18,540 18,778 Pre-opening expenses 1,423 2,344 Depreciation and amortization 6,944 5,670 Net income attributable to equity method investment (205) (207) Other income, net (428) (257) Restaurant-Level Adjusted EBITDA $ 36,371 $ 34,821 Restaurant-Level Adjusted EBITDA Margin (1) 21.9 % 22.3 % (1) Restaurant-Level Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Revenues, net Liquidity and Capital Resources Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, and availability under our 2023 Revolver Facility. As of March 31, 2024, we maintained a cash and cash equivalents and restricted cash balance of $13.2 million and had $63.8 million of availability under our 2023 Revolver Facility, after giving effect to $4.2 million in outstanding letters of credit. Our primary requirements for liquidity are to fund our working capital needs, operating lease obligations, capital expenditures, and general restaurant support center needs. Our requirements for working capital are not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening of new restaurants, existing capital investments (both for remodels and maintenance), as well as investments in our restaurant support center infrastructure. Based upon current levels of operations and anticipated growth, we expect that cash flows from operations will be sufficient to meet our needs for at least the next twelve months, and the foreseeable future. Portillo's Inc. Form 10-Q | 29 Table of Contents Tax Receivable Agreement In connection with the IPO, we entered into a Tax Receivable Agreement ("TRA") with certain of our pre-IPO LLC Members, pursuant to which we will generally be required to pay 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that we actually realize or are deemed to realize, as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in the IPO, (ii) certain favorable tax attributes acquired by the Company from entities treated as corporations for U.S. tax purposes that held LLC Units prior to the Transactions ("Blocker Companies") (including net operating losses and the Blocker Companies' allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with the IPO and (y) future redemptions or exchanges of LLC Units by pre-IPO LLC Members for Class A common stock and (iv) certain other tax benefits related to entering into the TRA, including payments made under the TRA. As of March 31, 2024, we estimate that our obligation for future payments under the TRA totaled $328.5 million. Amounts payable under the TRA are contingent upon, among other things, (i) generation of future taxable income over the term of the TRA and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the TRA to utilize the tax benefits, then we would not be required to make the related TRA payments. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us, but we expect the cash tax savings we will realize to fund the required payments. Assuming no material changes in relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the TRA, we estimate that the tax savings associated with all tax attributes described above would aggregate to approximately $386.5 million as of March 31, 2024. Under this scenario, we would be required to pay the TRA Parties approximately 85% of such amount, or $328.5 million, primarily over the next 15 years, substantially declining in year 16 through year 47. For the quarters ended March 31, 2024 and March 26, 2023, we made TRA payments of $4.4 million relating to tax year 2022 and $0.8 million relating to tax year 2021, respectively. We expect a payment of $7.2 million relating to tax year 2023 to be paid within the next 12 months. Summary of Cash Flows The following table presents a summary of our cash flows from operating, investing and financing activities (in thousands): Quarter Ended March 31, 2024 March 26, 2023 Net cash provided by operating activities $ 9,077 $ 6,486 Net cash used in investing activities (16,939) (20,190) Net cash provided (used) in financing activities 10,608 (16,112) Net increase (decrease) in cash and cash equivalents and restricted cash 2,746 (29,816) Cash and cash equivalents and restricted cash at beginning of period 10,438 44,427 Cash and cash equivalents and restricted cash at end of period $ 13,184 $ 14,611 Operating Activities Net cash provided by operating activities for the quarter ended March 31, 2024 was $9.1 million compared to net cash provided by operating activities of $6.5 million for the quarter ended March 26, 2023, an increase of $2.6 million or 39.9%. This increase was primarily driven by the increase in net income of $6.6 million, partially offset by the change in operating assets and liabilities of $0.3 million and the change in non-cash items of $3.7 million. The $0.3 million change in our operating assets and liabilities balances was primarily driven by operating assets and liabilities being a use of net cash of $4.3 million in the quarter ended March 31, 2024, compared to a use of net cash of $4.0 million in quarter ended March 26, 2023 driven by the change in inventory, other current assets, accrued expenses and other liabilities, and trade receivables in the quarter ended March 31, 2024. The $3.7 million change from the quarter ended March 31, 2024 in non-cash charges is primarily driven by the loss on debt extinguishment in the prior year, lower equity-based compensation expense, and higher income tax benefit, partially offset by higher depreciation and amortization in the current year. The increase in net income for the quarter ended March 31, 2024 was primarily due to the factors driving the aforementioned change in revenues and expenses as described in the condensed consolidated results of operations in the quarter ended March 31, 2024 compared to the quarter ended March 26, 2023. Portillo's Inc. Form 10-Q | 30 Table of Contents Investing Activities Net cash used in investing activities was $16.9 million for the quarter ended March 31, 2024 compared to $20.2 million for the quarter ended March 26, 2023, a decrease of $3.3 million or 16.1%. This decrease was primarily due to the number of restaurant openings and buildings in process during the quarter ended March 31, 2024 compared to the quarter ended March 26, 2023. Financing Activities Net cash provided by financing activities was $10.6 million for the quarter ended March 31, 2024 compared to net cash used in financing activities of $16.1 million for the quarter ended March 26, 2023, an increase of $26.7 million or 165.8%. This increase is primarily due to cash provided by proceeds from borrowings of short-term debt of $7.0 million, partially offset by an increase in payments made under the TRA of $3.6 million. The quarter ended March 26, 2023 included the payment of long-term debt in connection with our refinancing, as described in Note 8. Debt. 2023 Revolver Facility and Liens On February 2, 2023, Holdings, the Borrower, the other Guarantors party thereto from time to time, each lender party thereto from time to time and Fifth Third Bank, National Association, as Administrative Agent, L/C Issuer and Swing Line Lender entered into the 2023 Credit Agreement which provides for the 2023 Term Loan in an initial aggregate principal amount of $300.0 million and the 2023 Revolver Facility in an initial aggregate principal amount of $100.0 million. The proceeds under the 2023 Term Loan and 2023 Revolver Facility, along with cash on hand, were used to repay outstanding indebtedness under the 2014 Credit Agreement and to pay related transaction expenses. The 2023 Term Loan and 2023 Revolver Facility are scheduled to mature on February 2, 2028. As of March 31, 2024, we had $32.0 million of borrowings under the 2023 Revolver Facility, and letters of credit issued under the 2023 Revolver Facility totaled $4.2 million. As a result, as of March 31, 2024, the Company had $63.8 million available under the 2023 Revolver Facility. The 2023 Credit Agreement also includes certain financial covenants with respect to cash interest coverage and total net rent adjusted leverage. As of March 31, 2024, the Company was in compliance with financial covenants in the 2023 Credit Agreement. Material Cash Requirements There have been no material changes to the material cash requirements as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, other than those payments made in the ordinary course of business. Refer to Note 8. Debt for a description of a Credit Agreement and the repayment of borrowings. Critical Accounting Estimates This discussion and analysis of financial condition and results of operations is based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates, judgments, and assumptions that can have a meaningful effect on the reporting of condensed consolidated financial statements. There have been no significant changes to our critical accounting estimates or significant accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 . The Company reviewed all other recently issued accounting pronouncements and concluded that they were either not applicable or not expected to have a significant impact to its condensed consolidated financial statements. Refer to Note 2. Summary Of Significant Accounting Policies for additional detail. Portillo's Inc. Form 10-Q | 31 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 .