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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 25, 2023

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM         TO

COMMISSION FILE NUMBER: 001-40951
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PORTILLO'S INC.
(Exact name of registrant as specified in its charter)
Delaware 87-1104304
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2001 Spring Road, Suite 400, Oak Brook, Illinois 60523
(Address of principal executive offices)
(630) 954-3773
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Class A common stock, $0.01 par value per sharePTLONasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒     Yes    ☐     No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒     Yes ☐     No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. (See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act).
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐     Yes         No
As of July 27, 2023, there were 55,101,465 shares of the registrant's Class A common stock, par value $0.01 per share, issued and outstanding.



TABLE OF CONTENTS
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Financial Information
Other Information





Table of Contents
Cautionary Note Regarding Forward-Looking Information
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This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements, so you should not unduly rely on these statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions and the following:

risks related to or arising from our organizational structure;
risks of food-borne illness and food safety and other health concerns about our food;
the impact of unionization activities of our restaurant workers on our operations and profitability;
the impact of recent bank failures on the marketplace, including the ability to access credit;
risks associated with our reliance on certain information technology systems and potential failures or interruptions;
privacy and cyber security risks related to our digital ordering and payment platforms for our delivery business;
the impact of competition, including from our competitors in the restaurant industry or our own restaurants;
the increasingly competitive labor market and our ability to attract and retain the best talent and qualified employees;
the impact of federal, state or local government regulations relating to privacy, data protection, advertising and consumer protection, building and zoning requirements, costs or ability to open new restaurants, or sale of food and alcoholic beverage control regulations;
inability to achieve our growth strategy, such as the availability of suitable new restaurant sites in existing and new markets and opening of new restaurants at the anticipated rate and on the anticipated timeline;
increases in food and other operating costs, tariffs and import taxes, and supply shortages;
the potential future impact of COVID-19 (including any variant) on our results of operations, supply chain or liquidity; and
other risks identified in our filings with the Securities and Exchange Commission (the “SEC”).

All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022 filed with the SEC on March 2, 2023, which is available on the SEC's website at www.sec.gov.

The forward-looking statements included in this Form 10-Q are made only as of the date hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.



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Table of Contents

PART I – FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Page




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PORTILLO'S INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share and per share data)




June 25, 2023December 25, 2022
ASSETS
CURRENT ASSETS:
Cash and cash equivalents and restricted cash$22,457 $44,427 
Accounts receivable11,496 8,590 
Inventory6,493 7,387 
Prepaid expenses5,139 4,922 
Total current assets45,585 65,326 
Property and equipment, net250,443 227,036 
Operating lease assets179,449 166,808 
Goodwill394,298 394,298 
Trade names223,925 223,925 
Other intangible assets, net30,356 31,800 
Equity method investment16,373 16,274 
Deferred tax assets186,997 150,497 
Other assets4,061 4,119 
Total other assets856,010 820,913 
TOTAL ASSETS$1,331,487 $1,280,083 
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable$24,147 $30,273 
Current portion of long-term debt7,500 4,155 
Current portion of Tax Receivable Agreement liability6,309 813 
Short-term debt10,000  
Current deferred revenue4,696 7,292 
Short-term operating lease liability5,053 4,849 
Accrued expenses31,322 29,915 
Total current liabilities89,027 77,297 
LONG-TERM LIABILITIES:
Long-term debt, net of current portion289,168 314,425 
Tax Receivable Agreement liability295,696 252,003 
Long-term operating lease liability217,989 200,166 
Other long-term liabilities3,151 3,291 
Total long-term liabilities806,004 769,885 
Total liabilities895,031 847,182 
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized, none issued or outstanding
  
Class A common stock, $0.01 par value per share, 380,000,000 shares authorized, and 55,073,993 and 48,420,723 shares issued and outstanding at June 25, 2023 and December 25, 2022, respectively.
551 484 
Class B common stock, $0.00001 par value per share, 50,000,000 shares authorized, and 17,472,926 and 23,837,162 shares issued and outstanding at June 25, 2023 and December 25, 2022, respectively.
  
Additional paid-in-capital301,622 260,664 
Retained earnings (accumulated deficit)1,462 (4,812)
Total stockholders' equity attributable to Portillo's Inc.303,635 256,336 
Non-controlling interest132,821 176,565 
Total stockholders' equity436,456 432,901 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$1,331,487 $1,280,083 
See accompanying notes to unaudited condensed consolidated financial statements.

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PORTILLO'S INC
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(In thousands, except share and per share data)

Quarter EndedTwo Quarters Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
REVENUES, NET$169,182 $150,623 $325,242 $285,105 
COST AND EXPENSES:
Restaurant operating expenses:
Food, beverage and packaging costs56,229 51,774 109,856 98,040 
Labor43,153 37,906 83,612 75,219 
Occupancy8,237 7,379 16,688 15,134 
Other operating expenses18,832 15,178 37,536 30,343 
Total restaurant operating expenses126,451 112,237 247,692 218,736 
General and administrative expenses19,609 15,439 38,387 31,126 
Pre-opening expenses275 423 2,619 979 
Depreciation and amortization5,941 5,309 11,610 10,514 
Net income attributable to equity method investment(381)(275)(588)(398)
Other (income) loss, net(97)51 (354)(105)
OPERATING INCOME17,384 17,439 25,876 24,253 
Interest expense6,523 6,097 13,966 12,196 
Tax Receivable Agreement liability adjustment(579)(1,754)(1,163)(1,754)
Loss on debt extinguishment  3,465  
INCOME BEFORE INCOME TAXES11,440 13,096 9,608 13,811 
Income tax expense1,542 2,340 983 2,505 
NET INCOME9,898 10,756 8,625 11,306 
Net income attributable to non-controlling interests3,110 5,645 2,351 6,001 
NET INCOME ATTRIBUTABLE TO PORTILLO'S INC.$6,788 $5,111 $6,274 $5,305 
Net income per common share attributable to Portillo's Inc.:
Basic$0.12 $0.14 $0.12 $0.15 
Diluted$0.12 $0.13 $0.11 $0.13 
Weighted-average common shares outstanding:
Basic54,964,649 35,991,079 52,252,053 35,899,125 
Diluted58,550,057 39,687,090 55,806,455 39,839,292 

See accompanying notes to unaudited condensed consolidated financial statements.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 4

PORTILLO'S INC
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share data)



Quarters Ended June 25, 2023 and June 26, 2022
Class A Common StockClass B Common Stock
Shares AmountSharesAmountAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Non-Controlling InterestTotal Stockholders' Equity
Balance at March 27, 202235,807,171 $358 35,673,321 $ $188,752 $(15,756)$254,387 $427,741 
Net income— — — — — 5,111 5,645 10,756 
Equity-based compensation— — — — 1,941 — 1,923 3,864 
Activity under equity-based compensation plans411,184 4 — — 1,447 — — 1,451 
Non-controlling interest adjustment— — — — 722 — (722) 
Balance at June 26, 202236,218,355 362 35,673,321  192,862 (10,645)261,233 443,812 
Balance at March 26, 202354,467,951 545 17,943,562 — 294,984 (5,326)132,783 422,986 
Net income— — — — — 6,788 3,110 9,898 
Equity-based compensation — — — — 3,146 — 1,037 4,183 
Activity under equity-based compensation plans135,406 1 — — 577 — — 578 
Redemption of LLC Interests470,636 5 (470,636)— (5)— —  
Non-controlling interest adjustment— — — — 4,109 — (4,109) 
Establishment of liabilities under Tax Receivable Agreement and related changes to deferred tax assets associated with increases in tax basis— — — — (1,189)— — (1,189)
Balance at June 25, 202355,073,993 $551 17,472,926 $ $301,622 $1,462 $132,821 $436,456 

See accompanying notes to unaudited condensed consolidated financial statements.




Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 5

PORTILLO'S INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands, except share data)

Two Quarters Ended June 25, 2023 and June 26, 2022
Class A Common StockClass B Common Stock
Shares AmountSharesAmountAdditional Paid-in CapitalRetained Earnings (Accumulated Deficit)Non-Controlling InterestTotal Stockholders' Equity
Balance at December 26, 202135,807,171 $358 35,673,321 $ $186,856 $(15,950)$252,142 $423,406 
Net income— — — — — 5,305 6,001 11,306 
Equity-based compensation— — — — 3,837 — 3,812 7,649 
Activity under equity-based compensation plans411,184 4 — — 1,447 — — 1,451 
Non-controlling interest adjustment— — — — 722 — (722) 
Balance at June 26, 202236,218,355 362 35,673,321  192,862 (10,645)261,233 443,812 
Balance at December 25, 202248,420,723 484 23,837,162  260,664 (4,812)176,565 432,901 
Net income— — — — — 6,274 2,351 8,625 
Equity-based compensation — — — — 5,571 — 2,149 7,720 
Activity under equity-based compensation plans289,034 3 — — 1,288 — — 1,291 
Redemption of LLC Interests6,364,236 64 (6,364,236)— (64)— —  
Non-controlling interest adjustment— — — — 47,845 — (47,845) 
Distributions paid to non-controlling interest holders— — — — — — (399)(399)
Establishment of liabilities under Tax Receivable Agreement and related changes to deferred tax assets associated with increases in tax basis— — — — (13,682)— — (13,682)
Balance at June 25, 202355,073,993 $551 17,472,926 $ $301,622 $1,462 $132,821 $436,456 

See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 6

PORTILLO'S INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

Two Quarters Ended
June 25, 2023June 26, 2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income$8,625 $11,306 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization11,610 10,514 
Amortization of debt issuance costs and discount620 1,243 
Loss on sales of assets496 107 
Equity-based compensation7,720 7,649 
Deferred rent and tenant allowance 2,112 
Deferred income tax expense983 2,505 
Tax Receivable Agreement liability adjustment(1,163)(1,754)
Amortization of deferred lease incentives (166)
Gift card breakage(528)(474)
Loss on debt extinguishment3,465  
Changes in operating assets and liabilities:
Accounts receivable(906)(1,089)
Receivables from related parties(141)(66)
Inventory894 439 
Other current assets(218)754 
Operating lease assets3,880  
Accounts payable(2,779)(2,908)
Accrued expenses and other liabilities(559)(6,140)
Operating lease liabilities(1,359) 
Deferred lease incentives850 1,251 
Other assets and liabilities(181)76 
NET CASH PROVIDED BY OPERATING ACTIVITIES31,309 25,359 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment(37,359)(13,940)
Proceeds from the sale of property and equipment33 30 
NET CASH USED IN INVESTING ACTIVITIES(37,326)(13,910)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term debt, net10,000  
Proceeds from long-term debt300,000  
Payments of long-term debt(322,428)(1,662)
Proceeds from equity offering, net of underwriting discounts179,306  
Repurchase of outstanding equity / Portillo's OpCo units(179,306) 
Distributions paid to non-controlling interest holders(399) 
Proceeds from stock option exercises1,015 1,451 
Employee withholding taxes related to net settled equity awards(56) 
Proceeds from Employee Stock Purchase Plan purchases297  
Payments of Tax Receivable Agreement liability(813) 
Payment of deferred financing costs(3,569) 
Payment of initial public offering issuance costs (771)
NET CASH USED IN FINANCING ACTIVITIES(15,953)(982)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH(21,970)10,467 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF THE PERIOD44,427 39,263 
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF THE PERIOD$22,457 $49,730 
See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 7

PORTILLO'S INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

Two Quarters Ended
June 25, 2023June 26, 2022
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid$13,447 $10,815 
Income tax paid  
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accrued capital expenditures$6,537 $333 
Establishment of liabilities under Tax Receivable Agreement51,165  

See accompanying notes to unaudited condensed consolidated financial statements.

Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 8

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    DESCRIPTION OF BUSINESS

Portillo’s Inc. (the "Company") was formed and incorporated as a Delaware corporation on June 8, 2021. The Company was formed for the purpose of completing an initial public offering ("IPO") and related reorganization transactions (collectively, the "Transactions”) in order to carry on the business of PHD Group Holdings LLC and its subsidiaries ("Portillo's OpCo"). Following the consummation of the Transactions on October 20, 2021, the Company became the sole managing member of Portillo’s OpCo, and as sole managing member, the Company operates and controls all of the business and affairs of Portillo's OpCo. As a result, the Company consolidates the financial results of Portillo's OpCo and reports a non-controlling interest representing the economic interest in Portillo's OpCo held by the other members of Portillo's OpCo (the "pre-IPO LLC Members"). Unless the context otherwise requires, references to "we," "us," "our," "Portillo's," and the "Company" refer to Portillo's Inc. and its subsidiaries, including Portillo's OpCo.

The Company operates fast-casual restaurants in 10 states, along with two food production commissaries in Illinois. As of June 25, 2023 and December 25, 2022, the Company had 75 and 71 restaurants in operation, respectively. The Company also had two non-traditional locations in operation as of June 25, 2023 and December 25, 2022. These non-traditional locations include a food truck and a ghost kitchen (small kitchen with no store-front presence, used to fill online orders). Portillo's additionally has a 50% interest in a single restaurant owned by C&O, which is excluded from the Company's restaurant count. The Company’s principal corporate offices are located in Oak Brook, Illinois.

Secondary Offerings

In the first quarter of 2023, the Company completed a secondary offering of 8,000,000 shares of the Company's Class A common stock at an offering price of $21.05 per share. On April 5, 2023, the Underwriter exercised its overallotment option in part, to purchase an additional 620,493 shares of the Company's Class A common stock at an offering price of $21.05 per share (collectively the "Q1 Secondary Offering and Overallotment Option"). We used all of the net proceeds from the Q1 Secondary Offering and Overallotment Option 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 Secondary Offering and Overallotment Option were used to (i) purchase 2,269,776 existing shares of Class A common stock from the shareholders of the Blocker Companies and (ii) redeem 6,350,717 LLC Units held by the pre-IPO LLC Members. In connection with the redemption, 6,350,717 shares of Class B common stock were surrendered by the pre-IPO LLC Members and canceled and the Company received 6,350,717 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.

In the third and fourth quarters of 2022, the Company completed two secondary offerings of 8,066,458 shares (including 66,458 shares sold to the underwriters pursuant to their overallotment option) and 8,000,000 shares, respectively, of the Company's Class A common stock at an offering price of $23.75 and $22.69, respectively, per share.

As of June 25, 2023, the Company owns 75.9% of Portillo's OpCo and the pre-IPO LLC Members own the remaining 24.1% of Portillo's OpCo.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 9

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Company has prepared the accompanying 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"). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments necessary for a fair presentation of our financial position and results of operations. Interim results of operations are not necessarily indicative of the results that may be achieved for the full year. The financial statements and related notes do not include all information and footnotes required by GAAP for annual reports. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022.

All intercompany balances and transactions have been eliminated in consolidation.

The Company does not have any components of other comprehensive income (loss) recorded within its condensed consolidated financial statements, and therefore, does not separately present a statement of comprehensive income (loss).

Segment Reporting

The Company owns and operates fast-casual restaurants in the United States, along with two food production commissaries in Illinois. The Company’s chief operating decision maker (the “CODM”) is its Chief Executive Officer ("CEO"). The CODM reviews financial performance and allocates resources at a consolidated level on a recurring basis. The Company has one operating segment and one reportable segment.

Fiscal Year

The Company uses a 52- or 53-week fiscal year ending on the Sunday prior to or on December 31. In a 52-week fiscal year, each quarterly period is comprised of 13 weeks. The additional week in a 53-week fiscal year is added to the fourth quarter. Fiscal 2023 and 2022 consist of 53 and 52 weeks, respectively. The fiscal periods presented in this report are the quarters and two quarters ended June 25, 2023 and June 26, 2022, respectively.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the period. Actual results could differ from those estimates.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 10

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recently Adopted Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The pronouncement provides temporary optional expedients and exceptions to the current guidance on contract modifications and hedge accounting to ease the financial reporting burden related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. FASB has extended the sunset date to December 31, 2024. The Company does not believe the impact of the transition from LIBOR to alternative reference rates is material to its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASC 842"), along with related clarifications and improvements. The pronouncement requires lessees to recognize a liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet. The guidance requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. The update is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. The Company adopted this standard effective December 27, 2021, electing the modified retrospective approach to apply the standard as of the transition date. We have elected the transition package of three practical expedients permitted under the new standard, which eliminates the requirement to reassess the conclusions about historical lease identifications, lease classifications, and initial direct costs. We did not elect the hindsight practical expedient, which permits the use of hindsight when determining lease terms and impairments of right-of-use assets. We elected to apply the practical expedient of combining lease and non-lease components. Additionally, we elected to utilize the short-term lease exception policy, which allows us to not apply the recognition requirements of this standard to leases with a term of 12 months or less. The adoption of this standard had a significant impact on the Company’s condensed consolidated balance sheet as we recognized the right-of-use asset and lease liabilities for our operating leases. The adoption had an immaterial impact on the condensed consolidated statement of operations, cash flows and overall liquidity. See Note 9. Leases for additional information.

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.

NOTE 3.    REVENUE RECOGNITION

Revenues from retail restaurants are presented net of discounts and recognized when food and beverage products are sold to the end customer. Sales taxes collected from customers are excluded from revenues and the obligation is included in accrued liabilities until the taxes are remitted to the appropriate taxing authorities.

Delivery sales are generally fulfilled by third-party delivery partners whether ordered through the Portillo's app and website ("Dispatch Sales") or through third-party delivery partners ("Marketplace Sales"). Dispatch Sales include delivery and service fees as the Company controls the delivery. Revenue from Dispatch Sales is recognized when food is delivered to the customer. For these sales, the Company receives payment directly from the customer at the time of sale. Revenue for Marketplace Sales is recognized in the amount paid to the delivery partner by the customer for food and excludes delivery and service fees charged by the third-party delivery partner as the Company does not control the delivery. Revenue from Marketplace Sales is recognized when food is delivered to the customer. For these sales, the Company receives payment from the delivery partner subsequent to the transfer of order, which is generally paid one week in arrears. For all delivery sales of food, the Company is considered the principal and recognizes revenue on a gross basis.

The Company sells gift cards which do not have expiration dates. The Company records the sale of the gift card as a contract liability and recognizes revenue from gift cards when: (i) the gift card is redeemed by the customer; or (ii) in the event a gift card is not expected to be redeemed, in proportion to the pattern of rights exercised by the customer (gift card breakage). The Company has determined that 11% of gift card sales will not be redeemed and will be retained by us based on a portfolio assessment of historical data on gift card redemption patterns. Gift card breakage is recorded within revenues, net in the condensed consolidated statements of operations. The Company recognized gift card breakage of $0.2 million and $0.5 million for the quarter and two quarters ended June 25, 2023, respectively, and $0.2 million and $0.5 million for the quarter and two quarters ended June 26, 2022, respectively.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 11

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s revenue related to performance obligations not yet satisfied is revenue from gift cards sold but not yet redeemed. The gift card liability included in current deferred revenue on the condensed consolidated balance sheets is as follows (in thousands):

June 25, 2023December 25, 2022
Gift card liability$4,624 $6,988 

Revenue recognized in the condensed consolidated statement of operations for the redemption of gift cards that were included in their respective liability balances at the beginning of the year is as follows (in thousands):
Quarter EndedTwo Quarters Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Revenue recognized from gift card liability balance at the beginning of the year$900 $830 $2,837 $2,681 

NOTE 4.    INVENTORIES

Inventories consisted of the following (in thousands):
June 25, 2023December 25, 2022
Raw materials$4,711 $5,722 
Work in progress123 104 
Finished goods846 876 
Consigned inventory813 685 
$6,493 $7,387 

NOTE 5.    PROPERTY & EQUIPMENT, NET

Property and equipment, net consisted of the following (in thousands):
June 25, 2023December 25, 2022
Land improvements$16,525 $16,369 
Furniture, fixtures, and equipment139,943 126,130 
Leasehold improvements180,639 153,341 
Transportation equipment2,672 2,281 
Construction-in-progress26,081 35,386 
365,860 333,507 
Less accumulated depreciation (115,417)(106,471)
$250,443 $227,036 

Depreciation expense was $5.2 million and $10.2 million for the quarter and two quarters ended June 25, 2023, respectively, and $4.5 million and $8.9 million for the quarter and two quarters ended June 26, 2022, respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 12

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6.    GOODWILL & INTANGIBLE ASSETS

The Company has one reporting unit for goodwill which is evaluated for impairment annually in the fourth quarter of each fiscal year.

Intangibles, net consisted of the following (in thousands):
June 25, 2023
Gross Carrying AmountAccumulated AmortizationNet Carrying Amount
Indefinite-lived intangible assets:
Trade names$223,925 $— $223,925 
Intangibles subject to amortization:
Recipes56,117 (25,761)30,356 
$280,042 $(25,761)$254,281 

December 25, 2022
Gross Carrying AmountAccumulated AmortizationASC 842 AdjustmentNet Carrying Amount
Indefinite-lived intangible assets:
Trade names$223,925 $— $— $223,925 
Intangibles subject to amortization:
Recipes56,117 (24,317)— 31,800 
Covenants not-to-compete40,799 (40,799)—  
Favorable rental contracts2,991 (1,849)(1,142) 
$323,832 $(66,965)$(1,142)$255,725 


Amortization expense was $0.7 million and $1.4 million for the quarter and two quarters ended June 25, 2023, respectively, and $0.8 million and $1.6 million for the quarter and two quarters ended June 26, 2022, respectively, and is included in depreciation and amortization in the condensed consolidated statements of operations.

The estimated aggregate amortization expense related to intangible assets held at June 25, 2023 for the remainder of this year and the succeeding five years and thereafter is as follows (in thousands):
Estimated Amortization
2023 (excluding the two quarters ended June 25, 2023)$1,445 
20242,813 
20252,707 
20262,707 
20272,707 
20282,707 
2029 and thereafter15,270 
$30,356 


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 13

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7.    FAIR VALUE OF FINANCIAL INSTRUMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The carrying value of the Company's cash and cash equivalents, restricted cash, accounts receivable, accounts payable and all other current assets and liabilities approximate fair values due to the short-term nature of these financial instruments.

Other assets consist of a deferred compensation plan with related assets held in a rabbi trust.

Deferred Compensation Plan - The Company maintains a rabbi trust to fund obligations under a deferred compensation plan. Amounts in the rabbi trust are invested in mutual funds, which are designated as trading securities carried at fair value. The fair value measurement of these trading securities is considered Level 1 of the fair value hierarchy as they are measured using quoted market prices.

As of June 25, 2023 and December 25, 2022, the fair value of the mutual fund investments and deferred compensation obligations were as follows (in thousands):

June 25, 2023December 25, 2022
Level 1Level 1
Assets - Investments designated for deferred compensation plan
Cash/money accounts$995 $1,470 
Mutual funds2,625 2,241 
Total assets$3,620 $3,711 
As of June 25, 2023 and December 25, 2022, we had no Level 2 or Level 3 assets.
The deferred compensation investments and obligations are included in other assets, accrued expenses and other long-term liabilities in the consolidated balance sheets. Changes in the fair value of securities held in the rabbi trust are recognized as trading gains and losses and included in other income in the consolidated statements of operations and offsetting increases or decreases in the deferred compensation obligation are recorded in other long-term liabilities in the consolidated balance sheets.
Refer to Note 8. Debt for additional information relating to the fair value of the Company's outstanding debt instruments.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Assets and liabilities that are measured at fair value on a non-recurring basis include property and equipment, net, operating lease assets, equity-method investment, goodwill and indefinite-lived intangible assets. These assets are measured at fair value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There were no impairment charges recognized during the quarter and two quarters ended June 25, 2023 and June 26, 2022.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 14

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8.    DEBT

Debt consisted of the following (in thousands):
June 25, 2023December 25, 2022
2023 Term Loan$300,000 $ 
2014 Term B-3 Loans 322,428 
2023 Revolver Facility10,000  
Unamortized discount and debt issuance costs(3,332)(3,848)
Total debt, net306,668 318,580 
Less: Short-term debt(10,000) 
Less: Current portion of long-term debt(7,500)(4,155)
Long-term debt, net$289,168 $314,425 
2023 Credit Agreement

On February 2, 2023 (the "Closing Date"), PHD Intermediate LLC (“Holdings”), Portillo’s Holdings LLC (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 a credit agreement (“2023 Credit Agreement”) which provides for a term A loan (the "2023 Term Loan") in an initial aggregate principal amount of $300.0 million and revolving credit commitments in an initial aggregate principal amount of $100.0 million (the “2023 Revolver Facility”). The 2023 Term Loan and 2023 Revolver Facility are scheduled to mature on February 2, 2028.

The 2023 Term Loan and the 2023 Revolver Facility will accrue interest at the forward-looking secured overnight financing rate (“SOFR”) plus an applicable rate determined upon the consolidated total net rent adjusted leverage ratio, subject to a floor of 0.00% (plus a credit spread adjustment of 0.10% per annum for 1-month interest periods and 0.15% for 3-month interest periods).

As of June 25, 2023, the interest rate on both the 2023 Term Loan and 2023 Revolver Facility was 8.00%. Pursuant to the 2023 Credit Agreement, as of June 25, 2023, the commitment fees to maintain the 2023 Revolver Facility were 0.250%, letter of credit fees were 2.75%, and letter of credit fronting fees were 0.125%. Commitment fees, letter of credit fees, and letter of credit fronting fees are recorded as interest expense in the condensed consolidated statements of operations. As of June 25, 2023, the effective interest rate was 8.16%.

The 2023 Term Loan will amortize in equal quarterly installments in aggregate annual amounts equal to $7.5 million for the first two (2) years following the Closing Date, (b) $15.0 million for the third (3rd) and fourth (4th) years following the Closing Date, and (c) $30.0 million for the fifth (5th) year following the Closing Date, commencing on the last day of the first full fiscal quarter ended after the Closing Date, with the balance payable on the final maturity date.

As of June 25, 2023, outstanding borrowings under the 2023 Credit Agreement totaled $310.0 million, comprising $300.0 million under the 2023 Term Loan and $10.0 million under the 2023 Revolver Facility. Letters of credit issued under the 2023 Revolver Facility totaled $4.3 million. As a result, as of June 25, 2023, the Company had $85.7 million available under the 2023 Revolver Facility. On July 31, 2023, the Company made a $5.0 million payment on the 2023 Revolver Facility (see Note 16. Subsequent Events for additional details).

2014 Credit Agreement

Holdings, the Borrower and certain of its subsidiaries entered into a credit agreement ("2014 Credit Agreement"), dated as of August 1, 2014 and as amended October 25, 2016, May 18, 2018 and December 6, 2019, with UBS AG, Stamford Branch, as the administrative agent and collateral agent, and other lenders from time to time party thereto (the “2014 Lenders”). The 2014 Lenders extended credit in the form of (i) first lien initial term loans in an initial aggregate principal amount of $335.0 million and (ii) a revolving credit facility in an original principal amount equal to $30.0 million, including a letter of credit sub-facility with a $7.5 million sublimit (the “2014 Revolving Facility” and the loans thereunder, the “2014 Revolving Loans”).


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 15

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

On December 6, 2019, the Borrower entered a third amendment to the 2014 Credit Agreement (the “Third Amendment to 2014 Credit Agreement”) whereby the aggregate principal amount of the term loans as of the effective date of the Third Amendment to 2014 Credit Agreement was $332.4 million (the “2014 Term B-3 Loans”), and the 2014 Revolving Facility was increased to $50.0 million. The maturity date with respect to the 2014 Term B-3 Loans was extended to September 6, 2024, and the maturity date with respect to the 2014 Revolving Loans was extended to June 6, 2024.

In connection with the Third Amendment to 2014 Credit Agreement, the interest rates spread for the 2014 Term B-3 Loans increased by 100 basis points to 5.50% for the adjusted London interbank offered rate ("Eurocurrency Rate") loans. As of June 26, 2022, the interest rate on the 2014 Term B-3 Loans was 6.56%. Beginning with December 31, 2019, the Company is required to pay on the last business day of each calendar quarter, March 31, June 30, September 30, and December 31, an aggregate principal amount of $0.8 million.

As of December 25, 2022, the Company had no borrowings under the 2014 Revolving Facility. As of June 26, 2022, the interest rate on the 2014 Revolving Facility was 3.25%, subject to change based on a consolidated first lien net leverage ratio as defined in the 2014 Credit Agreement. As of June 26, 2022, the commitment fees, pursuant to the 2014 Credit Agreement, to maintain the 2014 Revolving Facility were 0.250%. Also pursuant to the 2014 Credit Agreement, as of June 26, 2022, letter of credit fronting fees were 0.125%. Commitment fees and letter of credit fronting fees are recorded as interest expense in the condensed consolidated statements of operations. As of June 26, 2022, the effective interest rate was 7.38%.

The Company had $4.2 million of letters of credit issued against the 2014 Revolving Facility as of December 25, 2022.

On February 2, 2023, the Company used proceeds from the 2023 Term Loan and 2023 Revolver Facility, along with cash on hand, to pay off the 2014 Credit Agreement in full in the amount of $321.8 million. The 2023 Revolver Facility under the 2023 Credit Agreement replaces the $50.0 million 2014 Revolving Facility under the 2014 Credit Agreement.

Discount and Debt Issuance Costs

Pursuant to the 2023 Credit Agreement, the Company capitalized deferred financing costs and issuance discount of $3.6 million which will be amortized over the term of the 2023 Credit Agreement.

In connection with the repayment of the 2014 Credit Agreement as described above, deferred financing costs and original issuance discount of $3.5 million were recorded as a loss on debt extinguishment during the two quarters ended June 25, 2023 in the condensed consolidated statement of operations.

The Company amortized an immaterial amount and $0.3 million of deferred financing costs during the quarter and two quarters ended June 25, 2023, respectively, and $0.5 million and $0.9 million during the quarter and two quarters ended June 26, 2022, respectively, which is included in interest expense in the condensed consolidated statements of operations. In addition, the Company also amortized $0.2 million and $0.3 million in original issue discount related to the long-term debt during the quarter and two quarters ended June 25, 2023, respectively, and $0.1 million and $0.3 million, respectively, in the quarter and two quarters ended June 26, 2022 which is included in interest expense in the condensed consolidated statements of operations.

Total interest costs incurred were $6.5 million and $14.0 million for the quarter and two quarters ended June 25, 2023, respectively, and $6.1 million and $12.2 million for the quarter and two quarters ended June 26, 2022, respectively.

As of June 25, 2023 and December 25, 2022, the fair value of long-term debt approximates the carrying value as it is variable rate debt. The fair value measurement of this debt is considered Level 2 of the fair value hierarchy as inputs to interest are observable, unadjusted quoted prices in active markets for similar assets or liabilities.

The 2023 Credit Agreement is guaranteed by all domestic subsidiaries of the Borrower (subject to customary exceptions) and secured by liens on substantially all of the assets of Holdings, the Borrower and the subsidiary guarantors (subject to customary exceptions).

The 2023 Credit Agreement also includes certain financial covenants with respect to cash interest coverage and total net rent adjusted leverage. As of June 25, 2023, the Company was in compliance with all covenants in the 2023 Credit Agreement.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 16

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9.    LEASES

We qualify as an emerging growth company pursuant to the provisions of the Jumpstart our Business Startups ("JOBS") Act. As such, we adopted ASU 2016-02, Leases (Topic 842), along with related clarifications and improvements, using a modified retrospective approach, with first presentation of the application of ASC 842 in our Annual Report on Form 10-K for the fiscal year ended December 25, 2022. Quarterly interim financial statements for 2023 are presented under ASC 842. Quarterly interim financial statements were not required in 2022 under prior lease accounting guidance, therefore comparative amounts are not presented for those periods.

A summary of operating lease right-of-use assets and liabilities is as follows (in thousands):

Operating leasesClassificationJune 25, 2023December 25, 2022
Right-of-use assetsOperating lease assets$179,449 $166,808 
179,449 166,808 
Current lease liabilitiesShort-term operating lease liability5,053 4,849 
Non-current lease liabilitiesLong-term operating lease liability217,989 200,166 
$223,042 $205,015 

The components of lease expense were as follows (in thousands):
Quarter EndedTwo Quarters Ended
Operating leasesClassificationJune 25, 2023June 25, 2023
Operating lease costOccupancy
Other operating expenses
General and administrative expenses
Pre-opening expenses
$7,007 $13,835 
Short-term operating lease costOccupancy
Other operating expenses
180 332 
Variable lease costOccupancy
Other operating expenses
General and administrative expenses
1,028 2,022 
$8,215 $16,189 

A summary of lease terms and discount rates for operating leases is as follows:
Operating leasesJune 25, 2023December 25, 2022
Weighted-average remaining lease term (years):25.425.0
Weighted-average discount rate:9.8 %9.8 %

Supplemental cash flow information related to leases is as follows (in thousands):
Quarter EndedTwo Quarters Ended
June 25, 2023June 25, 2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases$5,808 $11,581 
Operating lease assets obtained in exchange for lease liabilities:
Operating leases7,834 15,097 


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 17

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of June 25, 2023, the maturity analysis of the lease liabilities consisted of the following (in thousands):

Year EndingOperating Leases
2023 (excluding the two quarters ended June 25, 2023)$11,987 
202424,548 
202524,558 
202624,638 
202723,933 
Thereafter583,994 
Total lease payments693,658 
Less: imputed interest(470,616)
Total operating lease liabilities$223,042 

As of June 25, 2023, operating lease payments include $398.7 million related to options to extend lease terms that are reasonably certain of being exercised and exclude $53.1 million of minimum payments for leases signed but not yet commenced.

NOTE 10.    NON-CONTROLLING INTERESTS

We are the sole managing member of Portillo's OpCo, and as a result, consolidate the financial results of Portillo's OpCo. We report a non-controlling interest representing the LLC Units in Portillo's OpCo held by pre-IPO LLC Members. Changes in our ownership interest in Portillo's OpCo while we retain our controlling interest in Portillo's OpCo will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Units in Portillo's OpCo by the pre-IPO LLC members will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.
In the first and second quarters of 2023, in connection with the Q1 Secondary Offering and Overallotment Option described in Note 1. Description Of Business, 6,350,717 of LLC Units and corresponding shares of Class B common stock were redeemed, respectively, by the pre-IPO LLC Members for newly-issued shares of Class A common stock. We received a total of 6,350,717 newly-issued LLC Units, increasing our total ownership interest in Portillo's OpCo.

The following table summarizes the LLC interest ownership by Portillo's Inc. and pre-IPO LLC members:
June 25, 2023December 25, 2022
LLC UnitsOwnership %LLC UnitsOwnership %
Portillo's Inc.55,073,993 75.9 %48,420,723 67.0 %
pre-IPO LLC Members17,472,926 24.1 %23,837,162 33.0 %
Total72,546,919 100.0 %72,257,885 100.0 %

The weighted average ownership percentages for the applicable reporting periods are used to attribute net income to Portillo's Inc. and the pre-IPO LLC Members. The pre-IPO LLC Members' weighted average ownership percentage for the quarter and two quarters ended June 25, 2023 was 24.2% and 27.8%, respectively. The pre-IPO LLC Members' weighted average ownership percentage for both the quarter and two quarters ended June 26, 2022 was 49.8%.


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PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the effects of changes in ownership in Portillo's OpCo on the Company’s equity (in thousands):

Quarter EndedTwo Quarters Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Net income attributable to Portillo's Inc. $6,788 $5,111 $6,274 $5,305 
Activity under equity-based compensation plans577 1,447 1,288 1,447 
Non-controlling interest adjustment4,109 722 47,845 722 
Redemption of LLC Units(5) (64) 
Establishment of liabilities under Tax Receivable Agreement and related changes to deferred tax assets associated with increases in tax basis(1,189) (13,682) 
Total effect of changes in ownership interest on equity attributable to Portillo's Inc. $10,280 $7,280 $41,661 $7,474 

NOTE 11.    EQUITY-BASED COMPENSATION
Equity-based compensation expense is calculated based on equity awards ultimately expected to vest and is reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment to equity-based compensation expense will be recognized at that time.

Equity-based compensation expense included in the Company’s consolidated statements of operations is as follows (in thousands):
Quarter EndedTwo Quarters Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Labor$440 $340 $785 $689 
General and administrative expenses3,744 3,525 6,935 6,960 
Total equity-based compensation expense$4,184 $3,865 $7,720 $7,649 

During the quarter ended June 25, 2023, we granted 236,096 and 56,488 restricted stock units (“RSUs”) under the Portillo's Inc. 2021 Equity Incentive Plan (the "2021 Plan") to certain employees and directors, respectively. During the two quarters ended June 25, 2023, we granted 236,812 and 56,488 RSUs under the 2021 Plan to certain employees and directors, respectively. The weighted average fair value of these awards was determined using the Company's closing stock price on the applicable grant dates, which was $20.51. The RSUs granted to employees will vest one-third on each of the first three anniversaries of the date of grant subject to continued service on such date. The RSUs granted to non-employee directors will vest at the end of this fiscal year.

Employee Stock Purchase Plan

During the quarter and two quarters ended June 25, 2023, the Company issued 9,051 and 15,014 shares, respectively, under the Employee Stock Purchase Plan ("ESPP"). At June 25, 2023, 227,248 shares remained available for issuance under the ESPP. The expense incurred under the ESPP was immaterial for the quarter and two quarters ended June 25, 2023 and is included within general and administrative expenses and labor in the condensed consolidated statements of operations.

NOTE 12.    INCOME TAXES

We are the sole managing member of Portillo's OpCo, and as a result, consolidate the financial results of Portillo's OpCo. Portillo's OpCo is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, Portillo's OpCo is not subject to U.S. federal and state and local income taxes in the majority of states in which it operates. Any taxable income or loss generated by Portillo's OpCo is passed through to and included in the taxable income or loss of its members, including us, based upon the respective member's ownership percentage in Portillo's OpCo. We are subject to U.S. federal income taxes, in addition to 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.


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PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Income Tax Expense

The effective income tax rate for the quarter and two quarters ended June 25, 2023 was 13.5% and 10.2%, and 17.9% and 18.1% for the quarter and two quarters ended June 26, 2022, respectively. The decrease in our effective income tax rate for the quarter and two quarters ended June 25, 2023 compared to the quarter and two quarters ended June 26, 2022 was primarily driven by the recording of net operating loss carryforwards, 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. The Company’s annual effective tax rate differs from the statutory rate of 21% primarily because the Company is not liable for federal or state income taxes on the portion of OpCo’s earnings that are attributable to non-controlling interests, deferred tax adjustments and impacts from equity-based award activity.

We evaluate the realizability of our deferred tax assets on a quarterly basis and establish valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of June 25, 2023, the Company concluded, based on the weight of all available positive and negative evidence, that all of its deferred tax assets (except for those deferred tax assets relating to the basis difference in its investment in Portillo's OpCo that will never be realizable or only reverse upon the eventual sale of its interest in Portillo's OpCo, which we expect would result in a capital loss which we do not expect to be able to utilize) are more likely than not to be realized.

Secondary Offerings

In the first quarter of 2023, in connection with the Q1 Secondary Offering and Overallotment Option previously discussed in Note 1. Description Of Business, 6,350,717 LLC Units were redeemed by the pre-IPO LLC Members for newly-issued shares of Class A common stock and on April 5, 2023, the Underwriter exercised its overallotment option in part, causing an additional 457,117 LLC Units to be redeemed. As a result, an increase in the tax basis of net assets of Portillo's OpCo subject to the provisions of the Tax Receivable Agreement (the "Tax Receivable Agreement" or "TRA") was recorded. The Company recorded a deferred tax asset of $37.5 million and an additional TRA liability of $51.2 million. As of June 25, 2023, we estimated that our obligation for future payments under the TRA liability totaled $302.0 million. The Company made payments of $0.8 million under the TRA during the two quarters ended June 25, 2023 relating to tax year 2021. There were no amounts paid under the TRA during the quarter ended June 25, 2023 and the quarter and two quarters ended June 26, 2022. We expect a payment of $6.3 million relating to tax year 2022 to be paid within the next 12 months.

NOTE 13.    EARNINGS PER SHARE

Basic net earnings per share of Class A common stock is computed by dividing net income attributable to Portillo's Inc. by the weighted-average number of Class A common stock outstanding.

Diluted net earnings per share is computed by dividing net income attributable to Portillo's Inc. by the weighted-average number of dilutive securities, using the treasury stock method.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 20

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The computations of basic and diluted earnings per share for the quarters and two quarters ended June 25, 2023 and June 26, 2022 are as follows (in thousands):
Quarter EndedTwo Quarters Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Net income$9,898 $10,756 $8,625 $11,306 
Net income attributable to non-controlling interests3,110 5,645 2,351 6,001 
Net income attributable to Portillo's Inc.$6,788 $5,111 $6,274 $5,305 
Shares:
Weighted-average number of common shares outstanding-basic54,965 35,991 52,252 35,899 
Dilutive share awards3,585 3,696 3,554 3,940 
Weighted-average number of common shares outstanding-diluted58,550 39,687 55,806 39,839 
Basic net income per share$0.12 $0.14 $0.12 $0.15 
Diluted net income per share$0.12 $0.13 $0.11 $0.13 
The following shares were excluded from the calculation of diluted earnings per share because they would be antidilutive (in thousands):
Quarter EndedTwo Quarters Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Shares subject to performance conditions1,807 1,794 1,807 1,794 
Shares that were antidilutive22 28 14 18 
Total shares excluded from diluted net income per share1,829 1,822 1,821 1,812 

NOTE 14.    CONTINGENCIES

The Company is party to legal proceedings and potential claims arising in the normal conduct of business, including claims related to employment matters, contractual disputes, customer injuries, and property damage. Although the ultimate outcome of these claims and lawsuits cannot be predicted with certainty, management believes that the resulting liability, if any, will not have a material effect on the Company’s condensed consolidated financial statements.

NOTE 15.    RELATED PARTY TRANSACTIONS

As of both June 25, 2023 and December 25, 2022, the related parties’ receivables balance consisted of $0.4 million due from C&O, which is included in accounts receivable in the condensed consolidated balance sheets.

Olo, Inc.

Noah Glass, a member of the Company's Board, is the founder and CEO of Olo, Inc. ("Olo"), a platform the Company uses in connection with our mobile ordering application and delivery.


Portillo's Inc. https://cdn.kscope.io/554a50e22a1bc909ed603b030618547b-circle.jpg Form 10-Q | 21

PORTILLO'S INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company incurred the following Olo-related costs for the quarter and two quarters ended June 25, 2023 and June 26, 2022 (in thousands):

Quarter EndedTwo Quarters Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
Food, beverage and packaging costs$478 $558 $1,063 $883 
Other operating expenses112 101 226 215 
Net Olo-related costs$590 $659 $1,289 $1,098 

As of June 25, 2023 and December 25, 2022, $0.1 million and $0.2 million, respectively, were payable to Olo and was included in accounts payable in the condensed consolidated balance sheets.

Tax Receivable Agreement

We are party to a TRA 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 Company made payments of $0.8 million under the TRA relating to tax year 2021 during the two quarters ended June 25, 2023. There were no amounts paid under the TRA during the quarter ended June 25, 2023 and quarter and two quarters ended June 26, 2022.

(in thousands)June 25, 2023December 25, 2022
Current portion of Tax Receivable Agreement liability$6,309 $813 
Tax receivable agreement liability295,696 252,003 

Secondary Offerings

In connection with the secondary offerings previously discussed in Note 1. Description Of Business, we purchased LLC Units and corresponding shares of Class B common stock and shares of Class A common stock using the proceeds of the secondary offerings at a price equal to the public offering price less the underwriting discounts and commissions from certain pre-IPO LLC Members and shareholders of the Blocker Companies, including from funds affiliated with Berkshire Partners LLC, which is our largest shareholder that beneficially owns approximately 30.8% of the Company as of June 25, 2023.

NOTE 16.    SUBSEQUENT EVENTS

On July 31, 2023, the Company made a $5.0 million payment on the 2023 Revolver Facility. The outstanding balance of the 2023 Revolver Facility upon payment is $5.0 million. As a result, as of July 31, 2023, the Company had $90.7 million available under the 2023 Revolver Facility.

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Table of Contents
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
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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 25, 2022 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 25, 2022 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. 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 a distinctive culture driven by our team members gives us a competitive advantage.

As of June 25, 2023, we owned and operated 76 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.


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Financial Highlights for the Quarter Ended June 25, 2023 vs. Quarter Ended June 26, 2022:

Total revenue increased 12.3% or $18.6 million to $169.2 million;
Same restaurant sales increased 5.9%;
Operating income decreased $0.1 million to $17.4 million;
Net income decreased $0.9 million to $9.9 million;
Restaurant-Level Adjusted EBITDA* increased $4.3 million to $42.7 million; and
Adjusted EBITDA* increased $1.6 million to $29.2 million.

Financial Highlights for the Two Quarters Ended June 25, 2023 vs. Two Quarters Ended June 26, 2022:

Total revenue increased 14.1% or $40.1 million to $325.2 million;
Same restaurant sales increased 7.4%;
Operating income increased $1.6 million to $25.9 million;
Net income decreased $2.7 million to $8.6 million;
Restaurant-Level Adjusted EBITDA* increased $11.2 million to $77.6 million; and
Adjusted EBITDA* increased $3.6 million to $48.9 million.

* Adjusted EBITDA and Restaurant-Level Adjusted EBITDA are non-GAAP measures. Definitions and reconciliations of Adjusted EBITDA to net (loss) income 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

We continue to see revenue growth due to our new restaurant openings, as well as same-restaurant sales growth. Total revenue grew 12.3% during the quarter ended June 25, 2023 and 14.1% for the two quarters ended June 25, 2023. Same-restaurant sales grew 5.9% during the quarter ended June 25, 2023, compared to 1.9% same-restaurant sales growth during the same quarter in 2022. Same-restaurant sales grew 7.4% during the two quarters ended June 25, 2023, compared to 4.8% same-restaurant sales growth during the two quarters ended June 26, 2022.

During the quarter ended June 25, 2023, we opened one new restaurant in Gilbert, Arizona for a total of 76 restaurants, including a restaurant owned by C&O, of which Portillo's owns 50% of the equity. Two restaurants opened in the second through fourth quarters of 2022 and four restaurants opened during the two quarters ended June 25, 2023, positively impacted revenues by approximately $10.4 million and $20.9 million in the quarter and two quarters ended June 25, 2023, respectively. We plan to open eight new restaurants in the third and fourth quarters of 2023.

In the quarter and two quarters ended June 25, 2023, we continued to experience commodity inflation, but to a lesser extent than we saw in 2022. Commodity inflation was 5.5% and 7.1% for the quarter and two quarters ended June 25, 2023, respectively, compared to 15.2% and 15.5% for the quarter and two quarters ended June 26, 2022. We expect our overall commodity inflation to ease over the course of the year and are currently estimating commodity inflation in the mid-single digits for the full fiscal year. Labor expenses, as a percentage of revenue, slightly increased during the second quarter of 2023 compared to the same quarter in 2022. For the two quarters ended June 25, 2023, we experienced a decline in labor expenses, as a percentage of revenue, compared to the two quarters ended June 26, 2022 primarily due to increases in our average check, partially offset by additional wage investments. Subsequent to the quarter, we made additional wage investments in our team members. We currently estimate mid-single digit labor inflation for the full fiscal year. During mid-January 2023 and at the beginning of May 2023, we increased certain menu prices to reflect a net approximate 2.0% and 3.0% price increase, respectively, to continue to combat inflationary cost pressures and progress towards our goal to improve Restaurant-Level Adjusted EBITDA margins for fiscal 2023. We will continue to monitor the environment and make additional pricing decisions if necessary.

In the quarter ended June 25, 2023, operating income margin and Restaurant-Level Adjusted EBITDA Margin continued to improve since the fourth quarter of 2022. We believe this improvement was the result of our ongoing efforts to deploy strategic pricing actions, elevate guest experiences, and implement operational efficiencies.

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Development Highlights

During the two quarters ended June 25, 2023, we opened the remaining four restaurants that were planned for 2022. The opening of these restaurants brings the total restaurant count to 76, including a restaurant owned by C&O of which Portillo’s owns 50% of the equity.

Location Opening Date
Kissimmee, FloridaDecember 2022
The Colony, TexasJanuary 2023
Tucson, ArizonaFebruary 2023
Gilbert, ArizonaMarch 2023



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Consolidated Results of Operations

The following table summarizes our results of operations for the quarter and two quarters ended June 25, 2023 and June 26, 2022 (in thousands):
Quarter EndedTwo Quarters Ended
June 25, 2023June 26, 2022June 25, 2023June 26, 2022
REVENUES, NET$169,182 100.0 %$150,623 100.0 %$325,242 100.0 %$285,105 100.0 %
COST AND EXPENSES:
Restaurant operating expenses:
Food, beverage and packaging costs56,229 33.2 %51,774 34.4 %109,856 33.8 %98,040 34.4 %
Labor43,153 25.5 %37,906 25.2 %83,612 25.7 %75,219 26.4 %
Occupancy8,237 4.9 %7,379 4.9 %16,688 5.1 %15,134 5.3 %
Other operating expenses18,832 11.1 %15,178 10.1 %37,536 11.5 %30,343 10.6 %
Total restaurant operating expenses126,451 74.7 %112,237 74.5 %247,692 76.2 %218,736 76.7 %
General and administrative expenses19,609 11.6 %15,439 10.3 %38,387 11.8 %31,126 10.9 %
Pre-opening expenses275 0.2 %423 0.3 %2,619 0.8 %979 0.3 %
Depreciation and amortization5,941 3.5 %5,309 3.5 %11,610 3.6 %10,514 3.7 %
Net income attributable to equity method investment(381)(0.2)%(275)(0.2)%(588)(0.2)%(398)(0.1)%
Other (income) loss, net(97)(0.1)%51 — %(354)(0.1)%(105)— %
OPERATING INCOME17,384 10.3 %17,439 11.6 %25,876 8.0 %24,253 8.5 %
Interest expense6,523 3.9 %6,097 4.0 %13,966 4.3 %12,196 4.3 %
Tax Receivable Agreement liability adjustment(579)(0.3)%(1,754)(1.2)%(1,163)(0.4)%(1,754)(0.6)%
Loss on debt extinguishment— — %— — %3,465 1.1 %— — %
INCOME BEFORE INCOME TAXES11,440 6.8 %13,096 8.7 %9,608 3.0 %13,811 4.8 %
Income tax expense1,542 0.9 %2,340 1.6 %983 0.3 %2,505 0.9 %
NET INCOME9,898 5.9 %10,756 7.1 %8,625 2.7 %11,306 4.0 %
Net income attributable to non-controlling interests3,110 1.8 %5,645 3.7 %2,351 0.7 %6,001 2.1 %
NET INCOME ATTRIBUTABLE TO PORTILLO'S INC.$6,788 4.0 %$5,111 3.4 %$6,274 1.9 %$5,305 1.9 %

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 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 quarter ended June 25, 2023 were $169.2 million compared to $150.6 million for the quarter ended June 26, 2022, an increase of $18.6 million or 12.3%. The increase in revenues was primarily attributed to the opening of two restaurants in the second through fourth quarters of 2022 and four restaurants during the two quarters ended June 25, 2023 and an increase in our same-restaurant sales. New restaurants positively impacted revenues by approximately $10.4 million in the quarter ended June 25, 2023. Same-restaurant sales increased 5.9% during the second quarter ended June 25, 2023, which was attributable to an increase in average check of 7.1% and partially offset by 1.2% decrease in transactions. The higher average check was driven by an approximate 9.9% increase in certain menu prices partially offset by product mix. For the purpose of calculating same-restaurant sales for June 25, 2023, sales for the 66 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).


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Revenues for the two quarters ended June 25, 2023 were $325.2 million compared to $285.1 million for the two quarters ended June 26, 2022, an increase of $40.1 million or 14.1%. The increase in revenues was primarily attributed to the opening of three restaurants in 2022 and four restaurants during the two quarters ended June 25, 2023 and an increase in our same-restaurant sales. The new restaurants positively impacted revenues by approximately $20.9 million in the two quarters ended June 25, 2023. Same-restaurant sales increased 7.4% during the two quarters ended June 25, 2023, which was attributable to an increase in average check of 7.1% and a 0.3% increase in transactions. The higher average check was primarily driven by an approximate 9.6% increase in menu prices partially offset by product mix. During mid-January 2023 and at the beginning of May 2023, we increased certain menu prices to reflect an approximate 2.0% and 3.0% price increase, respectively, to continue to combat inflationary cost pressures and progress towards our goal to improve Restaurant-Level Adjusted EBITDA margins for fiscal 2023. For the purpose of calculating same-restaurant sales for June 25, 2023, sales for the 66 restaurants that were open for at least 24 full fiscal periods were included in the Comparable Restaurant Base.

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 quarter ended June 25, 2023 was $56.2 million compared to $51.8 million for the quarter ended June 26, 2022, an increase of $4.5 million or 8.6%. This increase was primarily driven by a 5.5% increase in commodity prices and the opening of two restaurants in the second through fourth quarters of 2022 and four restaurants during the two quarters ended June 25, 2023, partially offset by lower third-party delivery commissions. As a percentage of revenues net, food, beverage and packaging costs decreased 1.2% during the quarter ended June 25, 2023. 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.

Food, beverage and packaging costs for the two quarters ended June 25, 2023 was $109.9 million compared to $98.0 million for the two quarters ended June 26, 2022, an increase of $11.8 million or 12.1%. This increase was primarily driven by a 7.1% increase in commodity prices and the opening of three restaurants in 2022 and four restaurants during the two quarters ended June 25, 2023, partially offset by lower third-party delivery commissions. As a percentage of revenues, net, food, beverage and packaging costs decreased 0.6% during the two quarters ended June 25, 2023. 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 quarter ended June 25, 2023 were $43.2 million compared to $37.9 million for the quarter ended June 26, 2022, an increase of $5.2 million or 13.8%. This increase was primarily driven by the opening of two restaurants in the second through the fourth quarter of 2022 and four restaurants during the two quarters ended June 25, 2023, and incremental investments to support our team members, including annual rate increases primarily made in July 2022, and higher variable-based compensation. As a percentage of revenues, net, labor increased 0.3% primarily due to the aforementioned incremental wage rate increases to support our team members and higher labor utilization, partially offset by the increase in our average check.

Labor expenses for the two quarters ended June 25, 2023 were $83.6 million compared to $75.2 million for the two quarters ended June 26, 2022, an increase of $8.4 million or 11.2%. This increase was primarily driven by the opening of three restaurants in 2022 and four restaurants during the two quarters ended June 25, 2023, incremental investments to support our team members, including annual rate increases primarily made in July 2022 and higher variable-based compensation. As a percentage of revenues, net, labor decreased 0.7% primarily due to an increase in our average check, partially offset by the aforementioned incremental hourly rate increases to support our team members.

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Occupancy Expenses