Portillo's (PTLO) Q2 2026 Earnings Call Transcript

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DATE

Wednesday, Aug. 5, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• Vice President of Investor Relations - Chris Brandon
• President and Chief Executive Officer - Brett A. Patterson
• interim chief financial officer - Pamela Smith

TAKEAWAYS

• Revenue -- $199 million, representing a 5.6% year-over-year increase driven by the contribution of $13.3 million from noncomp restaurants.
• Same-Restaurant Sales -- A decrease of 1.2% in the quarter, reflecting a 3.4% decline in transactions that was partially offset by a 2.2% increase in average check.
• Non-GAAP Adjusted EBITDA -- $29.8 million, a 0.8% decrease from $30.1 million in the prior year due to higher restaurant operating expenses.
• Net Income -- $7.2 million, a decrease of 28.8% compared to $10 million in the previous year, reflecting a decline in operating income and tax adjustments.
• Average Check Growth -- 2.2%, driven by a 2.6% increase in menu prices and slightly offset by a 0.4% decrease in product mix.
• Menu Pricing Benefit -- 2% anticipated for the third quarter of 2026, assuming no further pricing actions are implemented.
• Portillo's Perks Penetration -- 15.1% of sales in the second quarter, representing the highest penetration level in the history of the loyalty program.
• Food, Beverage, and Packaging Costs -- Increased to 35% of revenue from 33.8% last year, primarily due to 7% commodity inflation and new restaurant openings.
• Commodity Inflation -- 7% in the quarter, driven primarily by rising costs for beef and produce.
• Labor Expense -- Flat at 25.7% of revenue, as efficiencies in operations offset wage inflation and deleverage from newer locations.
• Restaurant-Level Adjusted EBITDA -- $43.2 million, a 2.8% decrease year over year reflecting higher commodity costs not fully offset by menu pricing.
• Restaurant-Level Adjusted EBITDA Margin -- 21.7%, a decrease from 23.6% in the prior year driven by food cost inflation and underperformance of noncomp units.
• General and Administrative Expenses -- $19.6 million, an increase from $18.8 million in the prior year driven by higher professional fees and $900,000 in dead-site costs.
• G&A Guidance -- $78 million to $82 million for the full fiscal year, including costs related to corporate restructuring and leadership transitions.
• Adjusted EBITDA Guidance -- $92 million to $96 million for the full year, reflecting a reforecast of noncomp restaurant performance and a decision to underprice inflation.
• Restaurant-Level Adjusted EBITDA Margin Guidance -- 19.5% to 20.5% for the fiscal year 2026.
• New Restaurant Openings -- Eight new units planned for 2026, with seven already opened through the second quarter.
• Capital Expenditures Guidance -- $55 million to $60 million for the fiscal year 2026.
• Run Rate Savings -- $10 million to $15 million annually expected from a reduction in corporate workforce and supply chain efficiencies.
• Corporate Workforce Reduction -- An 18% reduction in corporate headquarters personnel implemented on July 31, 2026, to simplify the organizational structure.
• Total Restaurants -- 109 locations as of Aug. 5, 2026, which includes one restaurant owned by a joint venture.
• Average Unit Volume -- $8.2 million for the 12-month period ended June 28, 2026, compared to $8.7 million in the prior year period.
• Cash and Net Debt -- $21.3 million in cash and $338 million in total net debt at the end of the second quarter.
• Interest Expense -- $5.7 million for the quarter, which remained flat compared to the previous year.
• July Sales Trend -- Same-restaurant sales were slightly positive month to date as of the earnings call on Aug. 5, 2026.

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RISKS

• Patterson stated, "candidly, we just built too many too quickly," noting that rapid development in Dallas and Houston has created near-term performance pressures.
• Patterson warned that build costs in some newer markets are "truly prohibitive to generating a reasonable return based on those sales," contributing to restaurant-level margin compression.
• Management noted that lapping prior year promotional activities, such as buy-one-get-one beef sandwiches and breakfast initiatives, created a 250-basis-point headwind for transactions in the quarter.

SUMMARY

Management at Portillo's Inc. (NASDAQ:PTLO) is executing a strategic reset focused on improving unit economics and operational discipline following a period of rapid unit expansion. The company reported a 5.6% increase in revenue despite a 1.2% decline in same-restaurant sales, as new restaurant contributions were offset by traffic headwinds and lapped promotional activity. To address margin pressure and underperforming noncomp units, the company implemented a corporate reduction in force and initiated a supply chain optimization program expected to generate up to $15 million in annual savings. The company is also refining its real estate strategy by introducing a smaller, more efficient prototype for future development to enhance capital returns and reduce the impact of cannibalization in core markets.

• CEO Patterson noted that the brand's first airport location at Dallas-Fort Worth International Airport features a kitchen 25% smaller than former prototypes to test operational efficiency.
• Management introduced three strategic pillars: operational excellence, integrated marketing, and disciplined development to stabilize the long-term growth platform.
• CFO Smith stated, "Q2 delivering the highest sales penetration in Perks history at 15.1%," as the loyalty program was used to drive engagement without aggressive discounting.
• The company implemented a new real estate forecasting model to better understand site selection and performance after identifying cannibalization as a significant traffic headwind.
• CEO Patterson stated that brand research confirmed "exceptional brand affinity in Chicago and beyond," and attributed underperformance in newer markets to site selection strategy.
• The company hired Chris Hanson as executive chef to advance menu innovation and address findings from a recent menu satisfaction study.
• Management identified Texas and Arizona as regions requiring a reset in performance expectations after rapid development occurred over a short period.

INDUSTRY GLOSSARY

• AUV: Average Unit Volume, representing the total revenue recognized in the comparable restaurant base divided by the number of restaurants in that base.
• Comparable Restaurant Base: The set of restaurants that have been open for at least 24 full fiscal periods, used to measure underlying sales trends.
• Dead-site costs: Expenses related to the abandonment of potential restaurant locations that are no longer being pursued for development.
• ERP: Enterprise Resource Planning, a software system used by the company to manage business processes and data.
• HCM: Human Capital Management, referring to the systems and processes used to manage the company's workforce.
• Non-GAAP Adjusted EBITDA: A financial measure that excludes certain non-cash or one-time items from net income to evaluate core operating performance.
• Portillo's Perks: The company's digital loyalty program that allows customers to earn rewards and receive targeted promotional offers.
• Restaurant-Level Adjusted EBITDA: A measure of restaurant profitability that excludes corporate-level expenses and depreciation on restaurant assets.
• Tax Receivable Agreement (TRA): A contractual agreement requiring the company to pay a portion of its tax savings from certain tax assets to pre-IPO investors.

Full Conference Call Transcript

Operator: Good afternoon. Welcome to Portillo's Second Quarter 26 Earnings Conference Call. All participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, Please note that this event is being recorded. I will now hand you over to the Vice President of Investor Relations, Chris Brandon. Please go ahead.

Chris Brandon: Thank you, operator. Good afternoon, everyone, and welcome to the Portillo's Second Quarter 26 Earnings Call. With me today are Brett A. Patterson, President and Chief Executive Officer and Pamela Smith, interim chief financial officer. You will find our 10 Q and earnings press release at investors.portillos.com. Any commentary made here about our future results and business condition are forward-looking statements. Which are based on management's current expectations and are not guarantees of future performance. We do not update these forward-looking statements unless required by law. Our 10 Q identifies risk factors that may cause our actual results to vary materially from these forward-looking statements.

Today's earnings call will make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials. Finally, after we deliver our prepared remarks, we will be happy to take questions from our covering sell-side analysts. And with that, I will turn the call over to Brett.

Brett A. Patterson: Thanks, Chris, and good afternoon, everyone. Quarter 2 demonstrated the strength and resilience of the Portillo's brand. While we lapped significant prior year promotional and 1-time activities, that we chose not to repeat, underlying sales remain resilient reinforcing the enduring appeal of our brand and the strength of our restaurant teams. Over the past several months, we have taken meaningful steps to strengthen operations, improve our business model and unit economics, and build a more sustainable platform for profitable new unit growth. This work is grounded in 3 strategic pillars we introduced last quarter. Operational excellence, integrated marketing, and disciplined development.

I will cover the progress we have made how we are approaching the next 6 months, and the key takeaways from the second quarter before Pamela Smith walks through our results in more detail. Before we get into that, I am excited to provide an update on our finance leadership transition. As you may have seen yesterday, we announced that Kevin Kalicak will join Portillo's as chief financial officer. We are thrilled to welcome such an accomplished leader to the team. His leadership will be essential as we continue strengthening our financial rigor and executing our growth strategy.

I also want to thank Pamela for stepping in to lead our finance function over the last quarter. he is been a great stabilizing force throughout this transition, and I am grateful for her steady hand and partnership. Turning to the business, the work we completed in recent months was part of broader strategic reset, designed to strengthen our foundation, improve operating discipline, and support long term profitable growth all while running great restaurants. The actions we took across our cost structure, development model, and operating approach are connected by a common objective, building a more focused and scalable platform for the future.

First, we made the purposeful decision to simplify our G&A structure so we can operate with greater focus. Move more nimbly, and better support our restaurant teams. After the quarter, we implemented a reduction in force that reduced our corporate headquarters with no direct impact on restaurant level team members. While this action will create G&A savings, the primary objective was to align our teams, resources, and decision making more directly with the priorities that matter most to our operators and guests. Pamela will discuss the financial impact in more detail. Second, we launched an initiative to capture meaningful efficiencies across our supply chain and indirect spending categories.

We expect those savings to begin contributing this year and build over time supporting improved profitability as we scale the business. Third, reviewed our development function end to end and identified opportunities to simplify processes reduce cost, and improve capital discipline. These changes will begin benefiting the class of 27 restaurants, while our future prototype design work will support a significantly more efficient model for 2028 and beyond. We also built a stronger and more robust real estate forecast model to improve site selection. Better understand new restaurant performance, and guide future capital deployment. Early learning is already helping us understand actual performance against prior expectations for recent restaurant classes and will also sharpen future development decisions.

Taken together, these actions are expected to generate annualized run rate savings of approximately $10 million to $15 million while creating a more rigorous platform for future unit growth. As we discussed last quarter, our strategy is anchored in 3 pillars, operational excellence, integrated and targeted marketing, and disciplined development. Together, these pillars are designed to improve restaurant level performance engage guests by leveraging sharper insights, and create value through better site selection, right size prototypes, and lower build cost. To support these pillars, we commissioned formal studies in 3 areas. Customer segmentation, brand perception and positioning, and menu satisfaction.

Those insights combined with feedback from our operators are sharpening our approach to operations, targeted customer engagement, and future restaurant design. 1 key takeaway is clear. Portillo's has exceptional brand affinity in Chicago and beyond, along with differentiated brand positioning, that we believe can travel well across existing and new markets. I would also like to highlight a few other actions from the quarter that support this broader strategy. We strengthened our culinary function by adding Chris Hanson as executive chef. Chris brings deep restaurant experience in culinary strategy and development, and his leadership will help us advance menu innovation as well as culinary creativity quality, and consistency.

We also restructured our development team and processes and engaged the design firm to advance our next prototype, That work is guided by our brand research and focused on 3 priorities. Lowering build cost, improving returns, and amplifying the elements that matter most to the Portillo's experience. Lastly, we opened our first airport location at Dallas Fort Worth International Airport. At under 3.1 thousand square feet, and a kitchen 25% smaller than our former prototypes, this location incorporates equipment enhancements, that will allow us to operate more efficiently within a smaller footprint.

Before I turn it over to Pamela, I want to briefly touch on our second quarter results and how we are thinking about the business as we move through the back half of the year. Regarding sales performance, several items created meaningful same restaurant sales headwinds in the quarter. Our decision to not repeat last year's buy-1-get-1 beef promotion, the discontinuation of the prior year breakfast initiative, and cannibalization represented approximately 250 basis points of headwind. As we move through the back half of the year, we will remain focused on profitable transactions growth, and avoid aggressive discounted activity as we lap significant prior year promotions including 50% off burgers and buy-1-get-1-free sandwiches.

With that backdrop, we now expect adjusted EBITDA of $92 million to $96 million for the year. This updated outlook reflects deliberate choices to protect guest value, by underpricing inflation avoiding aggressive low margin promotional activity, and reforecasting our non comp restaurants based on recent performance and realistic expectations. In summary, over the last quarter, we aligned the organization to better support our restaurants, took meaningful actions to strengthen the business and sharpen our focus on profitable growth. We captured savings with immediate impact, completed brand research that is shaping our future roadmap, improved capital discipline for the 2027 pipeline and beyond, and advance prototype redesign work to support stronger cash on cash returns.

I am confident that our sharper focus and more deliberate execution will position Portillo's for more durable, profitable growth over time. We look forward to sharing more detail on our strategy soon. Lastly, I want to thank our operators and team members who bring Portillo's energy, hospitality, and culture to life every day. Their focus and execution are what makes this progress possible. With that, I will turn it over to Pamela to walk through our second quarter results in more detail. Pamela?

Pamela Smith: Thanks, Brett. As Brett noted, second quarter sales were resilient even with the lap of breakfast, BOGO beef, and cannibalization while the team executed meaningful work to position the company for a strategic reset. Perks continued to perform well, with Q2 delivering the highest sales penetration in Perks history at 15.1%. This platform will continue to be used for surprise and delight offers to reward our most loyal customers. Now on to our Q2 results. Revenues were $199 million, reflecting a 5.6% increase versus last year. Revenue growth was driven by the addition of non comp restaurants which contributed $13.3 million of the year over year increase.

Same restaurant sales declined 1.2% reflecting a 3.4% decrease in transactions partially offset by a 2.2% increase in average check. Higher average check was driven by an approximate 2.6% increase in menu prices partially offset by a 0.4% decrease in product mix. As previously mentioned, Q2 had combined traffic headwinds of approximately 250 basis points from promotional activity, the breakfast pilot in the prior year, and cannibalization from new restaurants. Thus far into the third quarter, we are running slightly positive same restaurant sales. And we are mindful of expected headwinds from promotional activity and cannibalization throughout August and September. We entered the second quarter with approximately 1.7% of carryover pricing from 2025.

Approximately 1% of this carryover pricing rolled off in early April, and the remaining 0.7% lapsed in June. In mid April, we implemented a 2% price increase across select menu categories. Absent further pricing actions, we expect approximately a 2% menu pricing benefit in the third quarter and anticipate that offers within perks could have a modest impact on realized pricing. Turning to costs. Food, beverage, and packaging cost increased to 35% of revenue in the quarter from 33.8% last year. This increase was driven primarily by the addition of new restaurants and higher commodity costs of 7%. Led by beef and produce. Partially offset by an increase in average check.

We still expect commodity inflation to be consistent with our original guidance for the fiscal year of mid single digits. Labor expense was flat versus prior year at 25.7%, primarily due to wage inflation and deleverage from our newer restaurant openings partially offset by labor efficiencies. Other operating expenses increased $1.4 million or 6.5% primarily driven by the opening of new restaurants partially offset by lower utilities and insurance costs. As a percentage of revenue, other operating expenses were 11.7% slightly up from 11.6% last year. Occupancy expenses increased 60 basis points or $1.7 million versus last year. This was driven by the opening of new restaurants, higher occupancy costs, and deleverage from new restaurant openings.

Restaurant level adjusted EBITDA decreased $1.2 million to $43.2 million with margins declining approximately 190 basis points to 21.7%. This was mainly driven by food cost inflation not being fully offset by pricing and noncomp restaurant underperformance in the second quarter. G&A expenses increased to $19.6 million, or 9.8% of revenue in the quarter. This is up from $18.8 million, or 10% of revenue in the prior year. This increase was driven by higher professional fees including $900 thousand of dead-site costs. Preopening expenses were $900 thousand in the quarter compared to $1.7 million last year. This reflects the timing and scale of activities related to our planned restaurant openings including expansion into new markets.

Adjusted EBITDA of $29.8 million, or 15% of revenue is slightly below last year's result of $30.1 million, or 16% of revenue. Interest expense was $5.7 million in the quarter, flat to prior year. Q2 income tax expense was $1.8 million a decrease of $1.9 million from last year. Our effective tax rate for the quarter was 19.8%, versus 26.8% in the prior year reflecting changes in our valuation allowance related to equity based compensation expense. We expect to open 1 additional location in the fourth quarter of 26 which will be in Downtown Chicago and is our second in line format restaurant. This will bring our total restaurant openings in 2026 to 8.

In line with our original guidance for the fiscal year. Cash provided by operating activities increased 22.4% year over year to $35.1 million year to date primarily reflecting favorable timing of operating assets and liabilities. We ended the quarter with $21.3 million in cash. We had $97 million outstanding on our revolver, total net debt of $338 million and approximately $49 million of remaining revolver capacity. We are pleased to see the balance sheet in a much healthier position and will utilize our cash available from the recent shift toward free cash flow positivity to pay down debt and reduce our revolver. Thank you for your time today. Operator, please open the line for questions.

Operator: Thank you. Ladies and gentlemen, we will now be conducting the question and answer session. Please note, for participants making use of speaker equipment, it may be necessary to [Inaudible] before pressing the star keys. If you would like to ask a question, please key in star and then 1. A confirmation tone will indicate that your line is in the question queue. First question comes from Margaret-May Binshtok of Wolfe Research. Please go ahead.

Margaret-May Binshtok: Hey, guys. Thanks for taking my question. But I just want to ask, on the last call, you talked a little bit about the brand work as the input that is needed to come back before, the strategy starts to take shape. Now that you have done some of that, can you tell us a little bit about the initial learning coming out of it? And then I also wanted to You are 5 months into the job now. Are there any broader observations on the brand and the business from the time that you have spent now in the restaurants and with the team? Thank you.

Brett A. Patterson: Hey, Margaret-May. Thank you for the question. Yes. So as it relates to the research, going back to what we talked last time, we had you know, 3 really landmark studies for the brand that we have not done. The first 1 was on guest segmentation to really identify you know, who our target customer is. And who we need to activate against. We did a quant and cost study on brand perception that led to our brand positioning work. And the third piece of work was our menu satisfaction study that we had not done.

So but I will tell you without giving away the full strategy because our plan in the very near future to have a fulsome rollout. Is, 1, we have clearly identified who are our target segmentation is for our customers. We have got, you know, we believe real growth opportunity in a couple of different target areas. The second, I am very excited because we got very clear brand positioning. It was very clear to us after this research. And, and what we know intuitively in talking to our operators and teams. What our brand strengths really are, and those competitive advantages. So we have now really locked in on what we believe is a really solid brand positioning.

And the third piece, and we are this is still coming in as we speak, but know, looking at our food to make sure that, we honor the what matters most to the Portillo's guest and our legacy items. And innovation of the future is quality. And abundance. And so we have got really clear line of sight now to where we are really winning on and then where we have opportunities. And so bringing on Chris as our as our culinary lead chef will be really imperative as we move forward to, you know, going after some of that work.

So again, I think we have I would say to sum it up, we have got really strong clarity now around the brand. And that will take shape, and our growth strategy work will roll out soon. As far as how after my first 5 months, I would say still, like I mentioned last time, very few surprises. It was you know, to see the brand research and realize that we have got a brand that many of you know and people certainly that are familiar with the brand is a very special brand. The guest loyalty, I would say fanaticism, kind of brand love or net promoter score is as high as anybody in the industry.

Once they get to know the brand. And so we know outside of Chicago, it absolutely just is strong. it is just how we how we get them in the door the first time to hook them. So that was that was more clarity, and it was good to see that outside of Chicago that we have got that resonance as well. And I would say so Not surprising, but I think where the work really has to be is we just have to continue to build better business disciplines and make sure that, look, we have a very clear strategy, a focused strategy. And very resilient disciplines towards achieving that strategy.

And, will be a very bright future for this brand. Thanks, bro.

Operator: The next question comes from Sara Senatore of Bank of America. Please go ahead.

Sara Senatore: Hi. Good afternoon. This is Ashling on for Sara. My question is just on the guidance. You lowered restaurant level margin guidance roughly 75 bps to the midpoint. I just wanted to get your thoughts on what changed versus the prior view. And is this lower margin outlook more of a function of you know, weaker than expected sales leverage or commodity pressure? Or is this just kind of the lower near term margin baseline as you work through the reset? Just any color here would be helpful. Thanks.

Brett A. Patterson: Yeah, Brett. Thank you for your question. You know, what I would say is that with the guidance tonight, 1 of my first earnings call, the question was asked and we, you know, kind of we reaffirmed at that point with an understanding that I had not had much time to really get under the hood of the brand and look at it. We certainly had an opportunity that over the last 13 weeks. So I would say the guidance adjustment was really it was in a couple of areas. And 1 is the noncomp restaurants.

We just had to we just had to reset and adjust the noncomp locations based on what was in the original guidance versus where we see them today and from a performance standpoint and be more realistic. So there was a there was a non adjustment, particularly in our Texas, Arizona market. You know, the other piece was, yeah, there is been some a little bit more commodity inflation in the second quarter. However, we do think that will moderate in Q3 and Q4 and be on our guidance. So I would say it had more to do with just kind of resetting that non comp base and what we have seen thus far.

And giving ourselves some room there to make sure that, you know, we have time to operate those little bit differently than maybe we have in the past. Which will come to light more, you know, later this year and early next year.

Sara Senatore: Brett. Thank you.

Brett A. Patterson: You are welcome. Good day.

Operator: Next question comes from the line from of Gregory Francfort of Guggenheim. Please go ahead.

Gregory Francfort: Hi. This is Arian Razai on for Gregory. I wanted to ask your thoughts on beef market and like the outlook into the next year. And I am sorry if I missed that. Looks like a 2-year stack is decelerating, and how much of the miss is actual the BOGO flap, the buy-1-get-1 BOGO flap versus the structural traffic softness? I am just trying to gauge the underlying trend, extra emotional distortions. Thank you.

Brett A. Patterson: So I just want to clarify. Is that 2 separate questions: 1 on beef commodity and the other on underlying trends or those together?

Gregory Francfort: Yes. Correct.

Brett A. Patterson: Okay. 2 separate.

Gregory Francfort: Yeah. Thank you. 2 separate.

Brett A. Patterson: Got you. Okay.

Pamela Smith: Yeah. Thank you. Just wanted clarity on that. Beef? So with regard to beef commodity costs, We did see a higher impact in the second quarter, but we are 85% hedged in Q3 and Q4. And the rest of our basket is about 63% locked. And so we are feeling very comfortable about where costs will be for the rest of the year and expect to hit guidance by the end of this year.

Brett A. Patterson: I will take the, you know, the underlying trends and what we reported for quarter 2 we talked about there is really 3 significant headwinds we were lapping. Know, 1 was the buy-1-get-1 beef. In May, and that was, you know, that was a significant headwind. At a deep discount that we chose that. You know, that is not part of our strategy going forward. The second 1 was that we are lapping the breakfast initiative for last year. Which, you know, is anywhere between, you know, 70 to 100 basis points depending on the period for the company.

And the third was, you know, we I mentioned in the you know, the script that we have a new real estate forecast model. And then out of that model, we have learned a lot about our newer markets as well as cannibalization impact. And I think 1 of the great things about this brand is, as you all know, is people will drive a long way to come to Portillo's. And, you know, we see we see it when we open Kennesaw. We see it in lot of our openings. You know, the downside of that is if you impact a restaurant with another location fairly close by, there is significant cannibalization.

And that is really what we have seen to great detail in a couple of markets. So, you know, those 3 things had a pretty profound headwind in quarter 2. But, you know, to give some solace that this is an underlying trend as we mentioned July, with less noise from last year. We still have the breakfast lap a few other things, but we are, you know, we are we are positive quarter to date. In some, you know, some markets that are performing really well.

Gregory Francfort: Got it. Thank you.

Operator: The next question comes from the line of Brian Mullan of Piper Sandler. Please go ahead.

Brian Mullan: Kelly. This is Alison Armstrong on for Brian. Thanks for the question. Wanted to ask about the ongoing operational improvements around throughput and labor What have you seen working so far in the first half? Has anything surprised you, and how did these learnings inform the second half and beyond plans? Thank you.

Brett A. Patterson: Hey, Allison, thanks for the question. I would say the focus, we mentioned this on the last call, of kind of our Texas market or some of our lower volume restaurants that we had some productivity initiatives that we were working towards. And we have seen those come to fruition as evidenced by our, you know, our labor percent of total sales stayed flat to last year even with wage inflation. And some, you know, and non comp restaurants. So we have we have seen productivity in those markets.

What I could tell you is we are now getting learning from our Dallas Fort Worth location where we have got a much smaller kitchen We designed it differently from a layout standpoint, and we have new equipment. Which will generate future efficiencies in the back-of-house productivity We are gonna take the next step with that, and we are gonna continue to deploy that model into some of our Texas locations and the, you know, the current prototype, to see what kind of benefit we can get there.

So that is how we are we are looking at productivity is really you know, we have got, I would say, you know, very good productivity in most of our locations. it is just when we have certain volume bands. We have got some opportunities to tighten that up, and, we will take those learnings from what we have done earlier in the year as well as the Dallas Fort Worth Airport. Thank you.

Brian Mullan: Thank you.

Operator: The next question comes from the line of Dennis Geiger of UBS. Please go ahead.

Dennis Geiger: Hey. Good afternoon, This is Nick on for Dennis. Thanks for taking my question. So I know you briefly touched on menu innovation in the prepared remarks. Just on that topic, we saw the limited time Doctor Pepper shake was available. Starting yesterday, if I am not mistaken. So we are just curious on the appetite to leave beverages and expand the offering to include refreshers, dirty sodas, or any other drinks? Has that been tested before? Is it in test? And, I guess, is that something that is within the plan?

Brett A. Patterson: Yeah. Thanks for the question, Akhil. I would say, you know, 1 of the reasons we brought on Chef Chris was exactly that. Right? We know beverages are certainly really popular across the industry right now. They are turning well with a lot of different cohorts. And so we have got that opportunity because we have equity, you know, in beverages with the shakes, the cake shakes. And, you know, coming off our recent menu set, we know those score very well from a satisfaction standpoint.

So that is why we leaned in on this innovation with Doctor Pepper, which has been trending So you will see, over time, there will be further innovation around beverage platform, and I think it will link very well to the customer segments that we are going to be you know, attached to and be building towards. Awesome.

Dennis Geiger: Thank you. Thank you.

Operator: The next question comes from the line of Jim Salira of Stephens Inc. Please go ahead.

James Salera: Hi. This is Tyler Prause on for Jim. Thanks for taking our question. With the transaction softness broad based across your entire footprint, or are there areas of outperformance? And to what extent are elevated gas prices driving demand headwinds across your market? If so, are there any ways to offset that impact?

Pamela Smith: I will speak a little bit to transaction. As Brett mentioned before, we were lapping a BOGO Beef promotion last year. And so as we chose not to chase a deep discount promotion this year, Our transactions are down, and that is essentially what we expected because we were not going to chase the deep discount. In regard to the overall market in terms of the what consumers are facing, I believe it is difficult for consumers these days, but that is part of the reason why we are hopefully trying to focus on giving them the proper value equation and a proper and consistent guest perform or experience every time they enter 1 of our restaurants.

Brett A. Patterson: And I would say, too, as far as transactions go, we did we did see we did see markets that were certainly stronger. And 1 thing we are proud about right now is our Chicagoland is performing very well. You know, it is it is, you know, and I would say there are marks outside of Chicago, but as we know, with the size of our business and what percentage of it is Chicago, they performed very well in quarter 2 and continue to perform very well at the beginning of quarter 3. I think those markets that have been a little challenged, we talked about those headwinds.

But they also faced a heavier cannibalization than maybe some of our core markets have.

Operator: Jim, does that conclude your questions?

James Salera: Yes. Thank you.

Operator: Thank you. Next question comes from the line of J.P. Wollam of ROTH Capital Partners. Please go ahead.

John-Paul Wollam: Brett. Thanks for taking my question. I want to maybe focus on kind of non Chicagoland, but Brett, you mentioned, you know, sort of rightsizing the for the non comp base units. Just wondering if, you know, can you quantify sort of where the more tenured Texas and maybe you can include Arizona in that unit economics sit today relative to the Chicago base. Just trying to get an understanding of your expectations and whether that is shifted from kind of the former team's expectations for new markets. And I have 1 follow-up. Thank you.

Brett A. Patterson: Yeah. No. Let me talk about the noncomp a little bit broader. Right? I think when we look at and this is particular in Texas and now part of Arizona, part of Phoenix. I would say there is 3 there is 3 factors that are really contributing to the you know, contributing to the underperformance. 1 is look, we candidly, we just built too many too quickly You know, in Dallas, we built 12 in 3.5 years. In Houston, we built 6 and 16 months.

Which that, you know, with this brand as the more we learn the model we are using now that we know is quite a bit more accurate. that is not something that we would repeat going forward. Number 2, meaningful can of locations and sites that we have opened in those markets, they do not they do they do not model appropriately right now for sales and returns. So based on what we know today, there is certainly you know, we would look at both those markets in a very different way, in Dallas and Houston. And third, the build cost know, that we went in those market with are truly prohibitive.

To generating a reasonable return based on those sales. And, again, that is something that, you know, we as we move forward with development, we cannot do. So would tell you, yeah, there is it is had a profound impact by having that many restaurants and that is, you know, that size market, and it happened so quickly. That it is certainly put pressure on our restaurant level margins. You know, and as I mentioned on the last call, you know, in order for us to solve this, we are doing a full assessment of all of our real estate locations.

And then we will make we will make the right strategic decision for the business that is gonna support you know, our shareholders and the company.

John-Paul Wollam: Brett. And maybe that kinda leads into just a quick follow-up But I think last quarter, you talked about, actually pruning some of the leases you had signed. And just curious if there is any update as, you know, we think about kinda 2027. But have you cut further in that pipeline, or are you and Jennifer beginning to add to the pipeline?

Brett A. Patterson: Yeah. We are we are we are we feel good about where we are at. In 2027 when we came out and said 4 to 6 last time. So, you know, we are still we are still finalizing that right now. Obviously, you know, the clock's ticking. I am sure before next time we get together, we will have that locked. And now we are starting to actively look into 2028. So we do have some sites already identified for 2028. Which our plan is Q1 of 28.

We will launch the brand new prototype. that is being designed right now, will be, you know, a you know, taking our 2.0 and continue to further reduce footprint, and also look at the kitchen layout to use new equipment designed to be more efficient and be able to execute you know, high volumes at a much smaller and cost efficient unit. Thanks, Brett. Thank you, and best of luck going forward.

John-Paul Wollam: Thanks, JP.

Operator: The next question comes from the line of Matt Curtis of D.A. Davidson. Please go ahead.

Analyst: Hi. This is Andrew, I was just wondering with the number of additional openings in Texas this year, what have you learned from this year's Texas class regarding site quality, product, productivity, and awareness?

Brett A. Patterson: Yeah. You know, we did yeah. So the most of our growth, as you know, was Texas this year. And so, you know, again, I mentioned on the last call, right, we bought Jennifer in as our chief development officer. We have done a really an end to end scrub of all the processes. Andrew, And, you know, 1 of the things that was the you know, how we were using a forecasting model before to get to what we believe sales were going to be. I would say our biggest learning now is that model has absolutely reinforced the performance we are seeing in Texas is what we would expect using this model. Right?

So I would say it is just, you know, it is a much more sophisticated model that we are using today. A lot of different attributes have been plugged in and I would say we know much more about why sites work well, such as Kennesaw, Georgia, who, you know, continues to perform very well. Our opening in May, and San Antonio is doing very, very well. Right? And so when you look at those side attributes, we now know it is it is not a portability issue, which I know has been a lot of question. And the research confirms that as well. It really comes down to a real estate strategy.

So I would say what we learned is, you know, if we had things to do ever again, we would not make a lot of those decisions. But, you know, we were already committed, and we are gonna figure out the best way to move forward with those locations here very shortly.

Analyst: Got it. Thank you.

Operator: The next question comes from the line of Patrick Johnson of Baird. Please go ahead.

David Tarantino: Thanks for the question, guys. And this is Patrick on for David Tarantino at Baird. Brett, I was encouraged to hear that you are in positive territory to start the quarter, and I was hoping you could delve a bit deeper into the levers you think you have to drive that transaction recovery or sustain a transaction recovery in the second half here? And just how are you thinking about maybe the most impactful initiatives that you guys can deploy? And I know you mentioned that there are continued headwinds in September and October. Is there any way to maybe quantify that relative to what you guys lapped here in the second quarter as well?

Brett A. Patterson: Yeah. Let me let me I will tell you what, you know, we are gonna combat some of those headwinds with is, you know, when we think about you know, our you know, our 3 pillars of our strategy, the first 1 is operational excellence. And I would say that Tony Darden and his team are doing a really good job of identifying some very specific KPIs that will help drive traffic in the restaurants. And so his narrowed down on a couple that we have done a lot of research to find out where we might be having experiences that are creating low satisfaction or low intent to return. We are buttoning up that now with really intense focus.

So I would say operationally, you have got an opportunity to close the gap in some of those areas. The second is the marketing piece. I would say, you know, generally, we have been fairly underspent on marketing. We are very fortunate to have a brand. With such high awareness and where the majority of our restaurants are that we have not had to spend a ton of marketing. But there is always that avenue, right, is say if we wanted to spend more, for high ROI marketing, we could. We know with food innovation, we you know, the Chardonnay Dog that we launched in quarter 2, performed very well for us.

So because we have not had a lot of innovation in the past, I think, you know, it creates, additional visitation for our core consumers. And so there is that opportunity we are working on right now with, again, bringing on Chris. We have got some ideas for innovation for the rest of the year. So I would say that is how we are gonna combat it. What we are not gonna do right now is we have not really, you know, disclosed exactly what our, you know, our guidance is for sales and what the size of lap we are going to be.

But, you know, I would say it is it is probably not as significant as the buy-1-get-1 beef and breakfast cannibalization that we had in quarter 2. It will be fairly significant. You know, I would if I had to guess, it would be more than 200-basis-points of headwind. As we lap those discounts.

David Tarantino: Brett. that is helpful. Thank you. And I know you mentioned there were some significant opportunities for supply chain savings. And I was hoping maybe you could delve into that a little bit more just in terms of what those specific opportunities are maybe what the time line is on execution? And could you clarify if the $10 million to $15 million in savings from the actions you cited if the supply chain savings were included in that or if that incremental to that figure?

Brett A. Patterson: Yeah. The $10 million to $15 million is the combination of both the G&A reduction as well as the indirect spend and supply chain. So it will be that will be all 3 of those it is a wide range right now because we are in the early stages of the indirect spend and supply chain. But what I would tell you is I believe, you know, we will have a we will have a real clear line of sight to that before our next call about really what that total is.

And look, as you I think, you know, you can expect sometimes when companies grow really quickly and all the focus is really on development and getting new restaurants in the dirt, sometimes there is opportunities that are left behind, and I would say my earlier comment on just really having clear priorities and a very disciplined approach to our business processes. The supply chain and indirect spends fall into that category. And so we will see some immediate benefits, you know, even recognizing some in quarter 3, but, you know, quarter 4. So your annual run rate is gonna be that $10 million to $15 million right now of pure flow through from a savings standpoint.

David Tarantino: Brett. that is helpful. Thanks, guys. Thank you.

Operator: Ladies and gentlemen, with no further in the question queue, have reached the end of the question and answer session. That concludes this event. Thank you for attending, and you may now disconnect your lines.

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