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As filed with the Securities and Exchange Commission on October 12, 2021

Registration No. 333-259810

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Portillo’s Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   5812   87-1104304
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 

 

2001 Spring Road, Suite 400

Oak Brook, IL 60523

(630) 954-3773

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Michelle G. Hook

Chief Financial Officer

2001 Spring Road, Suite 400

Oak Brook, IL 60523

(630) 954-3773

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Alexander D. Lynch, Esq.

Merritt S. Johnson, Esq.
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
(212) 310-8000 (Phone)

(212) 310-8007 (Fax)

 

Susan B. Shelton, Esq.

General Counsel and Secretary

2001 Spring Road, Suite 400

Oak Brook, IL 60523

(630) 954-3773

 

Marc D. Jaffe, Esq.

Ian D. Schuman, Esq.

Adam J. Gelardi, Esq.

Latham & Watkins LLP

1271 Avenue of Americas

New York, New York 10020

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting 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. in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller 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 to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of Each Class of
Securities to be Registered

 

Amount to be

Registered(1)(2)

 

Proposed

Maximum

Offering

Price Per

Share

 

Proposed

Maximum

Aggregate

Offering Price (1)(2)

  Amount of
Registration Fee

Class A common stock, $0.01 par value per share

 

23,310,810

  $20.00   $466,216,200   $43,218.24(3)

 

 

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) promulgated under the Securities Act of 1933, as amended.

(2)

Includes shares of Class A common stock that may be issuable upon exercise of an option to purchase additional shares granted to the underwriters.

(3)

Of this amount, $10,910.00 was previously paid.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, Dated October 12, 2021

PRELIMINARY PROSPECTUS

20,270,270 Shares

 

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Portillo’s Inc.

Class A Common Stock

 

 

This is an initial public offering of Class A common stock by Portillo’s Inc. We are offering 20,270,270 shares of our Class A common stock. Prior to this offering, there has been no public market for our Class A common stock. It is currently estimated that the initial public offering price per share will be between $17.00 and $20.00.

We intend to apply to have our Class A common stock listed on Nasdaq Global Select Market (“Nasdaq”) under the symbol “PTLO.”

Following this offering, we will have two classes of common stock: Class A common stock and Class B common stock. Each share of Class A common stock and Class B common stock entitles its holder to one vote on all matters presented to our stockholders generally. All of our Class B common stock will be held by the Continuing Pre-IPO LLC Members (as defined herein) on a one-to-one basis with the number of LLC Units (as defined herein) they own. See “Description of Capital Stock.” Immediately following this offering (assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock), the holders of our Class A common stock issued in this offering collectively will hold 28% of the economic interests in Portillo’s OpCo and 28% of the voting power in the Company, the Reorganization Parties (as defined herein), through their ownership of our Class A common stock, collectively will hold 19% of the economic interests in Portillo’s OpCo and 19% of the voting power in the Company, and the Continuing Pre-IPO LLC Members collectively will hold (i) through their LLC Units, 53% of the economics interests in Portillo’s OpCo and (ii) through their ownership of all of our outstanding Class B common stock, no economic interest in the Company and 53% of the voting power in the Company. See “Organizational Structure—Holding Company Structure and the Tax Receivable Agreements.” As a result, the Reorganization Parties and Continuing Pre-IPO LLC Members will, together, be able to control any action requiring the general approval of our stockholders, including the election of our Board of Directors (the “Board”), the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or sale of the Company or substantially all of our assets. See “Management.”

We intend to use all of the net proceeds from this offering (other than from any exercise by the underwriters of their option to purchase additional shares of Class A common stock) to purchase newly issued LLC Units from Portillo’s OpCo (as defined herein). Portillo’s OpCo currently intends to use the net proceeds it receives from this offering, first, to repay the redeemable preferred units (as defined herein) in full (including any redemption premium) and second, depending on the amount of net proceeds remaining as well as the available cash balance, to repay all or a portion of the borrowings outstanding under the Second Lien Credit Facility (as defined herein) (including any prepayment penalties). If the underwriters exercise their option to purchase additional shares of Class A common stock, we will use the additional net proceeds to purchase LLC Units from certain Pre-IPO LLC Members and/or to repurchase shares of Class A common stock received by the Reorganization Parties in connection with the Mergers (as defined herein). As a result, Portillo’s OpCo will not receive any additional proceeds from any exercise of the underwriters’ option to purchase additional shares of Class A common stock. The foregoing purchases of LLC Units and shares of Class A common stock will be at a price per unit or share equal to the public offering price per share of Class A common stock in this offering, less the underwriting discounts and commissions.

We are an “emerging growth company” as defined under the federal securities laws and, as such, will be subject to reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.” After the completion of this offering, we expect to be a “controlled company” within the meaning of the corporate governance standards of the Nasdaq.

 

 

Investing in our Class A common stock involves a high degree of risk. See “Risk Factors” on page 34.

 

 

 

     Per Share      Total  

Initial public offering price

   $                $            

Underwriting discount(1)

   $                $            

Proceeds, before expenses, to us

   $                $            

 

(1)

See “Underwriting” for additional information regarding underwriter compensation.

One or more funds managed by Select Equity Group, L.P. (the “cornerstone investor”) has indicated an interest in purchasing an aggregate of up to $100 million in shares of Class A common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, the cornerstone investor may decide to purchase more, less or no shares of our Class A common stock in this offering, or the underwriters may decide to sell more, less or no shares of our common stock in this offering to the cornerstone investor. The underwriters will receive the same discount from any shares of Class A common stock sold to the cornerstone investors as they will from any other shares of common stock sold to the public in this offering.

We have granted the underwriters an option to purchase up to an additional 3,040,540 shares from us at the initial public offering price less the underwriting discount at any time within 30 days from the date of this prospectus.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York on                  , 2021.

 

 

 

Jefferies   Morgan Stanley           BofA Securities   Piper Sandler
Baird   UBS Investment Bank       William Blair

Co-Managers

 

Guggenheim Securities   Stifel
Loop Capital Markets   Ramirez & Co. Inc.

The date of this prospectus is                  , 2021.


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     Page  

PROSPECTUS SUMMARY

     1  

ORGANIZATIONAL STRUCTURE

     12  

SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA

     28  

RISK FACTORS

     34  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     71  

ORGANIZATIONAL STRUCTURE

     73  

USE OF PROCEEDS

     78  

DIVIDEND POLICY

     79  

CAPITALIZATION

     80  

DILUTION

     82  

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     84  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     94  

BUSINESS

     117  

MANAGEMENT

     139  

EXECUTIVE AND DIRECTOR COMPENSATION

     145  

PRINCIPAL STOCKHOLDERS

     155  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     157  

DESCRIPTION OF MATERIAL INDEBTEDNESS

     164  

DESCRIPTION OF CAPITAL STOCK

     168  

SHARES ELIGIBLE FOR FUTURE SALE

     174  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     177  

UNDERWRITING

     180  

LEGAL MATTERS

     190  

EXPERTS

     190  

WHERE YOU CAN FIND MORE INFORMATION

     190  

INDEX TO FINANCIAL STATEMENTS

     F-1  

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus we may specifically authorize to be delivered or made available to you. Neither we nor the underwriters (or any of our or their respective affiliates) have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we nor the underwriters (or any of our or their respective affiliates) take any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters (or any of our or their respective affiliates) are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or the time of any sale of shares of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: We and the underwriters have not done anything that would permit this offering or the possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States. See “Underwriting.”


 

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Basis of Presentation

We use a 52- or 53-week fiscal year ending on the Sunday prior to December 31, effective beginning with the first quarter of 2019. 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. We believe the difference in reporting periods does not have a material impact on comparability. Fiscal 2020, 2019 and 2018 each consisted of 52 weeks.

Trademarks and Trade Names

We own or have the rights to use various trademarks, trade names and service marks, including “Portillo’s” and various logos used in association with our name. Solely for convenience, any trademarks, trade names, service marks or copyrights referred to or used herein are listed without the applicable ©, ® or symbol, but such references or uses are not intended to indicate, in any way, that we, or the applicable owner, will not assert, to the fullest extent under applicable law, our or their, as applicable, rights to these trademarks, trade names, service marks and copyrights. Other trademarks, trade names, service marks or copyrights of any other company appearing in this prospectus are, to our knowledge, the property of their respective owners.

Market and Industry Information

Unless otherwise indicated, market data and industry information used throughout this prospectus is based on management’s knowledge of the industry and the good faith estimates of management. We also relied, to the extent available, upon management’s review of independent industry surveys and publications and other publicly available information prepared by a number of sources, including Service Management Group (“SMG”), Technomic, The NPD Group, Inc. (“The NPD Group”), and Socialinsider. All of the market data and industry information used in this prospectus involves a number of assumptions and limitations and you are cautioned not to give undue weight to such estimates. Although we believe that these sources are reliable, neither we nor the underwriters can guarantee the accuracy or completeness of this information and neither we nor the underwriters have independently verified this information. Additionally, from time to time, these sources may change their input information or methodologies, which may change the related results. While we believe the estimated market position, market opportunity and market size information included in this prospectus is generally reliable, such information, which is derived in part from management’s estimates and beliefs, is inherently uncertain and imprecise. Projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in our estimates and beliefs and in the estimates prepared by independent parties. In addition, certain market and industry data has been derived from research and “whitespace” modeling prepared for us in 2020 by Forum Analytics, a leading real estate analytics firm (“Forum Analytics”). We engaged Forum Analytics to prepare a “whitespace” analysis to identify the Company’s potential new unit expansion opportunity in the United States. Additionally, certain information included herein is derived from a consumer survey of NPS scores powered by Dynata LLC (“Dynata”), a global online market research firm, which we commissioned in 2021.

Certain Definitions

As used in this prospectus, unless otherwise noted or the context requires otherwise:

 

   

“Amended LLC Agreement” refers to the limited liability company agreement of Portillo’s OpCo, as in effect at the time of this offering.

 

   

“Berkshire” refers to Berkshire Partners LLC, a private equity firm.


 

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“Blocker Companies” refers to entities treated as corporations for U.S. tax purposes that hold LLC Units prior to the Reorganization Transactions (as defined herein) (individually, each a “Blocker Company”).

 

   

“Continuing Pre-IPO LLC Members” refers to the Pre-IPO LLC Members who will retain their equity ownership in Portillo’s OpCo in the form of LLC Units immediately following the consummation of the Reorganization Transactions.

 

   

“LLC Units” has the meaning given in “Prospectus Summary—Organizational Structure.”

 

   

“Mergers” has the meaning given in “Prospectus Summary—Organizational Structure.”

 

   

“Pre-IPO LLC Members” refers to the pre-IPO owners that directly (or indirectly through a Blocker Company) hold LLC Units immediately prior to the consummation of the Reorganization Transactions.

 

   

“Portillo’s,” the “Company,” “our company,” “we,” “us” and “our” refer (i) prior to the consummation of the Reorganization Transactions described under “Organizational Structure—The Reorganization Transactions,” to Portillo’s OpCo and its subsidiaries and (ii) after the Reorganization Transactions described under “Organizational Structure—The Reorganization Transactions,” to Portillo’s Inc., Portillo’s OpCo and their subsidiaries.

 

   

“Portillo’s OpCo” refers to PHD Group Holdings LLC, a Delaware limited liability company, and, following the Reorganization Transactions, a subsidiary of Portillo’s Inc.

 

   

“Reorganization Parties” has the meaning given in “Prospectus Summary—Organizational Structure.”

 

   

“Reorganization Transactions” has the meaning given in “Prospectus Summary—Organizational Structure.”

 

   

“Sponsor” refers to Berkshire.

 

   

“Tax Receivable Agreement” refers to the tax receivable agreement entered into with the TRA Parties.

 

   

“TRA Parties” refers to, collectively, the Continuing Pre-IPO LLC Members, the Reorganization Parties, and any future party to the Tax Receivable Agreement.

Non-GAAP Financial Measures

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). We also supplement our consolidated financial statements with the following non-GAAP financial measures in this prospectus: Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. See “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Data.”

Key Metrics

Same-Restaurant Sales

Same-restaurant sales is the percentage change in year-over-year revenue (excluding gift card breakage) for the comparable restaurant base, which is defined as the number of restaurants open for at least 24 full fiscal months (the “Comparable Restaurant Base”). At the end of fiscal 2020, there were 56 restaurants in the Comparable Restaurant Base. The Comparable Restaurant Base excludes a restaurant that is owned by C&O Chicago, L.L.C. (“C&O”) of which Portillo’s owns 50% of the equity, as described in Note 6 - Equity Method Investment in the notes to the audited consolidated financial statements included elsewhere in this prospectus.

An increase or decrease in same-restaurant sales is the result of changes in restaurant traffic and average guest check. We gather daily sales data and regularly analyze the restaurant traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable same-restaurant sales.


 

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New Restaurant Openings

New restaurant openings are central to growing our footprint and executing our growth strategy. We have never closed a restaurant in our 58-year history.

Potential new restaurant sites are typically identified and evaluated at least 18 months prior to opening. New restaurant opening dates trigger advance staff recruiting and training, in addition to the relocation of experienced general managers from existing restaurants and other pre-opening expenses.

The total number of new restaurants per year and the timing of new restaurant openings has, and will continue to have, an impact on our results of operations.

Average Unit Volume (“AUV”)

AUV is the total revenue (excluding gift card breakage) recognized in the Comparable Restaurant Base, divided by the number of restaurants in the Comparable Restaurant Base during the period.

An increase or decrease in AUV is the result of changes in restaurant traffic and average guest check. We gather daily sales data and regularly analyze the restaurant traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable AUV. Historically, when opening restaurants in new markets outside of Chicagoland, we experience higher revenues in the first year of operation with a decline in revenues in the second year. After the second year, we have experienced growth in revenues in the third year and beyond as the restaurant and brand continue to grow awareness in those markets.

Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin

Restaurant-Level Adjusted EBITDA is defined as revenue, less restaurant operating expenses, which include cost of goods sold, excluding depreciation and amortization, labor expenses, occupancy expenses and other operating expenses. Restaurant-Level Adjusted EBITDA excludes corporate level expenses, pre-opening expenses and depreciation and amortization on restaurant property and equipment. Restaurant-Level Adjusted EBITDA Margin represents Restaurant-Level Adjusted EBITDA as a percentage of revenue. Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are not required by, nor presented in accordance with GAAP. Rather, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are supplemental measures of operating performance of our restaurants. You should be aware that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are not indicative of overall results for the Company, and Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. In addition, our calculations thereof may not be comparable to similar measures reported by other companies. We believe that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are important measures to evaluate the performance and profitability of our restaurants, individually and in the aggregate. Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin have limitations as analytical tools and should not be considered as a substitute for analysis of our results as reported under GAAP. For a reconciliation of operating income, the most directly comparable GAAP measure, to Restaurant-Level Adjusted EBITDA, see “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Data.”

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income (loss) before depreciation and amortization, interest expense and income taxes, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of net income (loss), the


 

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most directly comparable GAAP measure, to Adjusted EBITDA, included in “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Data.” Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues. We use Adjusted EBITDA and Adjusted EBITDA Margin (i) to evaluate our operating results and the effectiveness of our business strategies, (ii) internally as benchmarks to compare our performance to that of our competitors and (iii) as factors in evaluating management’s performance when determining incentive compensation.

We believe that Adjusted EBITDA and Adjusted EBITDA Margin are important measures of operating performance because they eliminate the impact of expenses that do not relate to our core operating performance. Adjusted EBITDA and Adjusted EBITDA Margin are supplemental measures of operating performance and our calculations thereof may not be comparable to similar measures reported by other companies. Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as analytical tools and should not be considered in isolation as substitutes for analysis of our results as reported under GAAP.


 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and may not contain all of the information you should consider before investing in our Class A common stock. Before making an investment decision, you should read this entire prospectus, including our consolidated financial statements and the related notes included elsewhere herein. You should also carefully consider the information set forth under “Risk Factors” beginning on page 34. In addition, certain statements in this prospectus include forward-looking information that is subject to risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.”

 

LOGO

Portillo’s: Prepare to Get Obsessed

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,” Portillo’s has grown to become a treasured brand with a passionate (some might say obsessed) nationwide following. Our diverse menu features all-American favorites such as Chicago-style hot dogs and sausages, Italian beef sandwiches, chopped salads, burgers, crinkle-cut french fries, homemade chocolate cake and milkshakes. 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/curbside, delivery and catering in order to quickly and efficiently serve our guests. As of June 27, 2021, we owned and operated 67 Portillo’s restaurants across nine states. According to data gathered by The NPD Group, our restaurants generated higher AUVs and Restaurant-Level Adjusted EBITDA Margins than any other fast casual restaurant concept of $7.7 million and 26.8% in 2020, respectively. For the twelve months ended June 27, 2021, our restaurants generated AUVs of $7.9 million and Restaurant-Level Adjusted EBITDA Margins of 28.6%.

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 and allows us to generate the highest AUVs and traffic per restaurant among fast casual and quick service restaurants. In 2019, 2020 and for the twelve months ended June 27, 2021, the average Portillo’s restaurant generated:

 

   

Drive-thru sales of $3.4 million in 2019, $4.6 million in 2020 and $4.9 million in the twelve months ended June 27, 2021, more than double the throughput of McDonald’s 2019 average drive thru and more than triple their 2020 and twelve months ended second quarter of 2021 average drive thru;

 

   

Dine-in sales of $4.4 million in 2019, $1.9 million in 2020 and $1.9 million in the twelve months ended June 27, 2021, greater than Chipotle’s 2019 total AUV of $2.2 million, approximately 90% of their 2020 total AUV and approximately 75% of their twelve months ended second quarter of 2021 total AUV; and


 

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Delivery sales of approximately $500,000 in 2019, nearly $800,000 in 2020 and approximately $850,000 in the twelve months ended June 27, 2021, which is approximately 80% of Domino’s 2019 average delivery volume, approximately equal to their 2020 average delivery volume and higher than their twelve months ended second quarter of 2021 delivery volume.

Each Portillo’s location on average served approximately 800,000 guests in 2020 and approximately 825,000 guests in the twelve months ended June 27, 2021, based on our average per-guest spend of approximately $9.60 and our AUVs of approximately $7.7 million in 2020 and $7.9 million in the twelve months ended June 27, 2021. Our restaurants are buzzing with the energy and excitement of our team members and guests that bring everyone together, from single diners to large groups, around great food, drinks and fun. Our restaurants have attracted a growing cult-like following that has enabled us to thrive across a variety of suburban and urban trade areas around the country. All of our restaurants are profitable, and we are proud to have never closed a restaurant in our 58-year history.

 

LOGO

We believe our unique brand experience, passionate following, and compelling everyday value proposition drive strong operating results, as illustrated by the following:

 

   

Opened 15 new restaurants across 8 states from January 1, 2018 through June 27, 2021

 

   

Grew operating income from $46 million in fiscal 2018 to $57 million in fiscal 2020 (operating income for the two quarters ended June 27, 2021 was $35 million compared to $23 million for the two quarters ended June 28, 2020)

 

   

Grew our industry-leading Restaurant-Level Adjusted EBITDA Margin by 190 basis points from 24.9% in fiscal 2018 to 26.8% in fiscal 2020 (our Restaurant-Level Adjusted EBITDA Margin was 28.2% for the two quarters ended June 27, 2021 compared to 24.3% for two quarters ended June 28, 2020)

 

   

Grew net income from $5 million in fiscal 2018 to $12 million in fiscal 2020 (net income for the two quarters ended June 27, 2021 was $14 million as compared to a net loss of $733 thousand for the two quarters ended June 28, 2020)

 

   

Grew Adjusted EBITDA from $75 million in fiscal 2018 to $88 million in fiscal 2020 (our Adjusted EBITDA was $51 million for the two quarters ended June 27, 2021 compared to $38 million for the two quarters ended June 28, 2020)


 

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($ in Millions)     

Restaurants

  

Total Revenue

LOGO    LOGO
Operating Income    Restaurant-Level Adjusted EBITDA (Margin)*
LOGO    LOGO
Net Income    Adjusted EBITDA (Margin)*
LOGO    LOGO

 

 

(*)

Please see “—Summary Historical and Pro Forma Consolidated Financial and Other Data” for a reconciliation of the above non-GAAP financial measures to their most directly comparable GAAP measure.

Our Competitive Strengths

We believe the following strengths separate us from our competitors and serve as the foundation for our continued growth:

Values-Driven, People-Centered Culture. People are the heart of Portillo’s. We hire and train great people who can turn their obsession into a profession. Our team members are passionate about our food, love our guests, and call their teammates “family.” Our people-centric culture is about working together to deliver an exceptional experience for our guests, while operating with the fun-loving energy that drives the exciting atmosphere within our busy restaurants. Our Portillo’s team members bring our brand to life through their commitment to our values:

“Family” – We work together to make everyone feel at home, and we step up when someone needs help


 

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“Greatness” – We are obsessed with being the best and work hard to continuously improve. Our greatness is rooted in Quality, Service, Attitude and Cleanliness (“QSAC”)

“Energy” – We move with urgency and passion, while maintaining attention to detail

“Fun” – We entertain our guests, we connect authentically, and we make each other smile

During the COVID-19 pandemic, we prioritized the health and safety of our team members who in turn helped our business not only survive but thrive. We chose to not lay off or furlough any team members, and instead invested in them with a focus on cross-training additional skills, which enabled us to increase capacity in our off-premises channels and drive operating efficiencies. We acted quickly to provide paid leave, personal protective equipment and setup a “Wellness Team” to advise on and monitor the well-being of our teams. Additionally, we provided 100% meal discounts and gift cards to every team member throughout the COVID-19 pandemic and funded bonuses to field managers. We also launched a Company foundation called “The Heart of Portillo’s Fund” to support team members facing challenging personal situations.

We work with each team member to build a personal development plan and a corresponding training plan to support their professional development at Portillo’s. We view this investment as a fundamental aspect of our company and key to our growth as it enables us to deliver a consistently memorable experience for our guests and build a pipeline of leaders to drive the success of our future restaurant openings.

We are proud that Portillo’s was recently ranked the #1 restaurant company on America’s 2021 Best Midsized Employers by Forbes magazine and #99 out of the 500 companies surveyed.

 

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An Iconic and Beloved Brand with Obsessed, Lifelong Fans. Portillo’s captures the hearts, minds and stomachs of its guests with every meal. In the 58 years since Dick Portillo opened his first hot dog stand, Portillo’s has grown to become an iconic restaurant brand with a national following. Our menu features something for everyone and appeals to a broad demographic that enables our restaurants to thrive across diverse trade areas and generate strong and balanced volumes across multiple dayparts, weekdays and occasions. Our new restaurant openings draw massive crowds of passionate fans who line up overnight with lines stretching around the block. Additionally, we have received numerous accolades, including recognition as the “#1 Fast Casual Restaurant in the U.S.” by Trip Advisor.


 

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We have a very engaged and passionate following on social media. As of June 8, 2021, our average Facebook post generates 10x more engagement than the average restaurant brand post, while our average Twitter post generates 40x more engagement than the average restaurant brand post based on a social media industry benchmarks study conducted by Socialinsider in 2021. Many of our fans beg us through social media to bring a Portillo’s restaurant to their city (and we have received similar pleas from mayors), which we believe is indicative of the passion of our guests and the demand for more Portillo’s locations across the country. In a similar vein, we have operated a direct shipping business for over 20 years, shipping a select menu of our most popular offerings to all 50 states, which provides us with an additional channel to build our national brand presence. In the past five years we have shipped 2.7 million sandwiches (Italian beef, sausages and hot dogs) via our own direct-to-consumer direct shipping channel across all 50 states, creating fans all over the country. Based on a recent national survey powered by Dynata, our nationwide net promoter score exceeded that of many notable fast casual competitors.

 

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Distinctive, Diverse High-Quality Menu. Our menu offers something for everyone. We obsess over each and every ingredient and curate our menu to ensure that each item receives high marks from our guests and meets our rigorous quality standards. Our Italian beef sandwiches feature high-quality beef slow roasted for four hours, thinly sliced, served on freshly baked Turano French bread and dipped in hot gravy with a proprietary blend of spices perfected over 50 years and designed to deliver an amazing flavor. Our Chicago-style hot dogs feature mustard, relish, freshly chopped onion, sliced red ripe tomatoes, a kosher pickle and sport peppers piled high onto a perfectly steamed poppy seed bun, all finished with a few shakes of savory celery salt. Guests also love our craveable crinkle-cut french fries that are cooked in beef tallow resulting in a perfectly salted, crispy outside with a soft inside. Lastly, for those craving something sweet, our famous homemade fluffy chocolate cakes are baked with love each morning in every restaurant and generously iced with rich chocolate frosting.

 

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Everyone can be satisfied with a visit to one of our restaurants as demonstrated by our sales mix with no single menu category accounting for more than 23% of sales in 2020. As an example of how our guests order


 

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across our menu, we sold on average more than $600,000 worth of salad per restaurant in 2020. Menu variety is a major motivator for guests and the difference with Portillo’s is, no matter what someone is craving, we have something for them.

2020 Sales Mix

 

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Robust Multichannel Sales Capabilities. Our restaurants are designed to provide speed and convenience across multiple sales channels including drive-thru, dine-in, carryout/curbside, delivery and catering. We also serve guests outside our footprint through our website for direct shipping. In each restaurant, our high-energy, passionate team members deliver exceptional customer service to our guests whether they dine in one of our restaurants or order through the drive-thru where team members personally take and deliver orders car-side. At the onset of the COVID-19 pandemic, we quickly adapted to sales shifts and cross-trained our team members to allow us to significantly increase our drive-thru sales from $3.4 million per restaurant in 2019 to

$4.6 million in 2020 and $4.9 million in the twelve months ended June 27, 2021 and enhance our third-party delivery and self-delivery channels and capabilities. Our app and website, combined with our third-party delivery partnerships, resulted in over 20% of our sales being placed digitally during fiscal 2020 and the twelve months ended June 27, 2021. Since nearly all of our restaurants were purpose built with a double lane drive-thru and sizable parking areas to handle our large volumes, we were able to quickly respond to sales shifts without structural changes to our sites. Our ability to execute high sales volumes through our double drive-thrus combined with our robust digital capabilities enabled us to generate over 80% of our revenue through these order methods in fiscal 2020 and the first two quarters of 2021. In a world where customers increasingly value convenience and optionality, our longstanding multichannel expertise positions Portillo’s to continue to succeed and grow market share.


 

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Average Restaurant Sales by Channel ($ Millions)

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Note: Excludes direct shipping sales.

Energetic Restaurant Atmosphere that Engages the Senses. While our operating model is focused on getting delicious, made-to-order food to our guests quickly, the Portillo’s atmosphere makes the experience even more than a delicious meal. When guests walk into a Portillo’s, they get an experience completely different than a typical chain restaurant visit. Our restaurants engage all the senses to create a fun, relaxed and memorable occasion.

Our dining areas evoke nostalgia and local influences. No two Portillo’s are alike. Each of our restaurants has its own themed décor ranging from a 1930’s prohibition motif to a 1950’s jukebox, to a 1960’s hippie bus. The period music ties to the theme, from ragtime to doo wop to disco. No detail is too small, be it lighting, signage or even the stars subtly sparkling on the ceiling. Each restaurant also draws design elements from the community. The layouts create spaces comfortable for individual diners, families, large groups, and even wedding parties.

Beyond the space itself, the energy of a Portillo’s is unique. Our guests can see into our huge, open kitchens, where their meals are prepared right before their eyes. The smells of burgers broiling, french fries frying, and beef simmering emanate from the kitchen. Each completed meal is announced with a fun rhyme (“Number two, we got you”; “Number seven, welcome to Portillo’s heaven”). But the most important element of the energy is the enthusiasm of the scores of other guests who are all excited to be there and enjoying their Portillo’s. We want every guest that visits Portillo’s to leave with a memorable experience, a satiated appetite and a desire to return.


 

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LOGO

An Incredible, Everyday Value Proposition. Portillo’s redefined the fast casual and quick service value propositions by combining high-quality, craveable food served at incredible speed with multichannel convenience all inside a differentiated, energy-filled atmosphere. We do not discount and rarely engage in price promotion of our products. Instead, we provide an exceptional value to our guests every day. We believe the combination of our craveable food made with high-quality ingredients, served fast however you want it, in an engaging atmosphere by our passionate team members—all at an affordable per-person spend of approximately $9.60—will continue to sustain and grow our volumes.

 

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Proven Portability and Strong Unit Economics. Our concept is successful across diverse markets throughout the United States. As of June 27, 2021, we had 67 restaurants open across nine states including Illinois, Arizona, Indiana, Florida, Iowa, Minnesota, Wisconsin, Michigan and California in a variety of urban and suburban trade areas. Our broadly appealing menu and everyday value caters to a variety of customers and occasions as evidenced by our balanced daypart mix with nearly equal lunch and dinner revenues, as well as a balanced weekday sales mix.


 

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LOGO

As we increase our brand awareness and guest following outside Chicagoland, we believe our restaurants will be even better positioned to consistently grow volumes over time, as evidenced by the performance of our Chicagoland restaurants.

Our team members’ focus on operational excellence enables our restaurants to drive exceptional throughput, creating substantial volumes and profitability. Restaurants in our Chicagoland market had AUVs of approximately $9.6 million in 2019, $8.7 million in 2020 and $9.1 million in the twelve months ended June 27, 2021 and Restaurant-Level Adjusted EBITDA Margins of 28% in 2019, 31% in 2020 and 32% in the twelve months ended June 27, 2021. Restaurants outside of Chicagoland had AUVs of approximately $6.3 million in 2019, $5.6 million in 2020 and $5.8 million in the twelve months ended June 27, 2021 and Restaurant-Level Adjusted EBITDA Margins of 22% in 2019, 25% in 2020 and 26% in the twelve months ended June 27, 2021. When considering new restaurant locations each year as part of our growth strategy, we target AUVs of approximately $5.8 million and average Restaurant-Level Adjusted EBITDA Margins of approximately 22%, each in the third year of operation, with targeted cash-on-cash returns of approximately 25%, which we calculate by dividing our Restaurant-Level Adjusted EBITDA in the third year of operation by our initial investment costs (net of tenant allowances and excluding pre-opening expenses).

Visionary Leadership Team. Our iconic brand, values-driven culture and growth strategies are guided by our highly experienced senior management team, led by our Chief Executive Officer Michael Osanloo. Mr. Osanloo joined Portillo’s in 2018 and has over 25 years of leadership experience, having previously served as CEO of P.F. Chang’s and EVP of Kraft Foods. In addition to Mr. Osanloo, we have a talented team of industry veterans leading the organization including Chief Financial Officer, Michelle Hook, previously VP of Finance, FP&A and IR at Domino’s; Chief Operating Officer, Derrick Pratt whose prior experience includes VP-level operations roles at McDonald’s and Starbucks; Chief Human Resource Officer, Jill Waite, former executive at 24 Hour Fitness and Sephora; and Chief Development and Supply Chain Officer, Sherri Abruscato, a 43-year Portillo’s veteran. Under Mr. Osanloo and the executive team’s leadership, we have made significant investments in our brand, people, culture, systems, and infrastructure. We believe our experienced management team is a key driver of our success and positions us well for long-term growth.

Our Growth Strategies

We believe we are well-positioned to take advantage of significant growth opportunities due to our values-driven culture, highly trained and passionate team members, differentiated brand experience and


 

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AUVs and Restaurant-Level Adjusted EBITDA Margins which are higher than other fast casual restaurant concepts according to data gathered by The NPD Group, which drive impressive unit economics. We plan to expand our business by executing on the following growth strategies:

 

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Expand Our Restaurant Base. We are in the early stages of our nationwide growth with 67 locations across nine states as of June 27, 2021. From November 2020 through the end of 2021, we are targeting opening seven new restaurants, including new locations in Illinois, Michigan, Florida and Arizona. Since 2015, we have opened new restaurants at a compound annual growth rate of approximately 9.3%. Over the long term, we plan to increase our number of restaurants by approximately 10% annually. Our near-term restaurant growth strategy is focused on leveraging our proven unit economic model primarily in adjacent and national markets outside Chicagoland with favorable macro-economic tailwinds where we already have a presence. We will also add select new restaurants in the Chicagoland market. We utilize a data driven approach with our real estate team to identify optimal sites and curate a high-quality restaurant pipeline. Given our leading volumes and the size of our restaurants, we typically do not compete for real estate with quick service or fast casual concepts and tend to be a tenant of choice by landlords due to the significant traffic going through our restaurants. People are key to our growth, which is why we have invested in creating professional development plans for our team members to ensure a steady flow of Portillo’s trained managers who are ready to staff our new restaurants. Additionally, we have established multiple new restaurant opening teams, which allow us to support our future pace of openings while driving new restaurant opening success. Based on a whitespace analysis prepared for us by Forum Analytics in 2020, we believe we have a substantial runway for growth with a long-term opportunity to grow to more than 600 restaurants domestically over the next 25 years and are well-positioned for global growth in the future. While we are optimistic about our ability to expand our restaurant base, we will continue evaluating the impact of the COVID-19 pandemic, which may continue to disrupt our business and affect our ability to execute our expansion strategy. For more information, see “Risk Factors—Risks Related to Our Business, Industry and Growth Strategies—Our financial condition and results of operations have been and may continue to be adversely affected by the COVID-19 pandemic or future pandemics or disease outbreaks.”

 

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Increase Our Same-Restaurant Sales. We aim to continue delivering an outstanding value proposition to our guests and enhance our experience to grow our volumes. We believe the following initiatives will drive same-restaurant sales growth.

 

   

Deliver a Consistently Outstanding Guest Experience. In our business, the best way to drive a return visit is to provide our guests a consistently fantastic experience when they visit our restaurants or eat our food. Therefore, our relentless focus on operational excellence enables us to drive significant throughput in our restaurants, provide a one-of-a-kind experience and a compelling everyday value proposition to our guests and thereby drive increased customer trial and frequency.


 

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Purposeful Menu Enhancements. We are maniacal about quality and crave-ability when it comes to our menu. We are constantly studying ways to further enhance our existing offerings while thoughtfully adding new high-quality items. We are also disciplined in maintaining the number of options on our menu. When a new item earns its way onto our menu, we often replace an existing item to maintain our operational efficiency. We believe this purposeful enhancement drives increased guest frequency and reinforces our everyday value proposition that is key to our success.

 

   

Increase Brand Awareness Through Non-Traditional and Social Marketing. Portillo’s does not rely on mass media advertising or promotion to drive traffic to our restaurants. We actively engage our fans and guests through a dynamic social media effort that includes email, Twitter, Instagram, TikTok, Facebook, and other platforms. Our social media activity generates significant engagement with our guests and provides our most passionate fans an opportunity to share their enthusiasm with their followers. Portillo’s has dedicated Field Marketing Managers for each market that supplement our engaging social media efforts. These managers are involved in local restaurant marketing and assist in the preparation of new openings including coordinating “sneak peek” visits and organizing visits from “The Beef Bus,” our food truck, to create excitement and awareness, and donating meals to community members including first responders and coordinating events with local media. After opening, our operations and field marketing teams continue to support brand awareness and drive sales by developing local partnerships with sports teams, such as our vending partnership with the Tampa Bay Lightning and hosting local community events and fundraisers in our restaurants.

 

   

Enhance Our Off-Premises Guest Experience. We have always been committed to providing our guests with our delicious food however and whenever they want it. We are currently testing a third drive-thru lane for guests who have digitally pre-paid for their orders to enhance speed of service and further increase our capacity during peak times. We are also developing geo-fencing capabilities to support our curbside pick-up operations and provide additional convenience for our guests who place orders through our mobile app and website. Additionally, we will continue to invest in targeted digital advertising to drive demand and direct orders through our app and website to further drive sales across all channels.

 

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Leverage Our Infrastructure to Drive Profitability. Our attractive business model generates strong operating margins and cash flow. We constantly focus on restaurant-level operations while ensuring that we do not sacrifice the quality and experience for which we are known. Our AUVs, which are higher than other fast casual restaurant concepts according to data gathered by The NPD Group, and strong operational focus give us the ability to manage variable costs and leverage our fixed costs. We believe we will continue to grow revenue and system-wide profitability by executing our growth strategy and leveraging the experience of existing Portillo’s general managers to lead our new restaurants to drive successful and efficient new openings. Our investments to enhance our multichannel capabilities and drive a frictionless guest order experience are also expected to further leverage our fixed costs. We have made significant investments at the corporate level, which we believe we will leverage in the future, exclusive of the additional costs of operating as a public company.

Risks Associated With Our Business

Investing in our Class A common stock involves a number of risks. These risks represent challenges to the successful implementation of our strategy and the growth of our business. Some of these risks are:

 

   

continued adverse effects of the COVID-19 pandemic or future pandemics or disease outbreaks on our financial condition and results of operations;

 

   

our vulnerability to changes in consumer preferences and economic conditions;


 

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increases in the cost of our frequently used food items or shortages or disruptions in the supply or delivery of frequently used food items;

 

   

our inability to open new restaurants in new and existing markets;

 

   

the number of visitors to areas where our restaurants are located may decline;

 

   

our inability to generate same-restaurant sales growth;

 

   

our marketing programs and limited-time or seasonal menu offerings may fail to generate profits;

 

   

incidents involving food-borne illness and food safety, including food tampering or contamination, which we may be unable to prevent;

 

   

our inability to compete successfully with other lunch and dinner restaurants;

 

   

our vulnerability to adverse geographic, demographic, unemployment, economic, regulatory and weather conditions;

 

   

damage to our reputation and negative publicity, even if unwarranted;

 

   

our vulnerability to changes in the digital and delivery business;

 

   

our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media;

 

   

our reliance on a small number of suppliers and distributors for a substantial amount of our food and beverages;

 

   

our failure to effectively address environmental, social and other sustainability matters affecting our industry, or to set and meet relevant sustainability goals;

 

   

our level of indebtedness and our duty to comply with covenants under our Credit Facilities;

 

   

the interests of Berkshire may differ from those of our public stockholders;

 

   

our failure to adequately protect our network security;

 

   

compliance with federal and local environmental, labor, employment and food safety laws and regulations; and

 

   

our inability to effectively manage our internal controls over financial reporting.

For a discussion of these and other risks you should consider before making an investment in our Class A common stock, see the section entitled “Risk Factors.”

ORGANIZATIONAL STRUCTURE

We currently conduct our business through Portillo’s OpCo and its subsidiaries. Following this offering, Portillo’s Inc. will be a holding company and its sole material asset will be an ownership interest in Portillo’s OpCo.

In connection with the Reorganization Transactions (as defined herein), the amended and restated limited liability company agreement of Portillo’s OpCo will be further amended and restated to, among other things, convert all outstanding equity interests (except for those redeemable preferred units which will be repaid in full in connection with this offering) into one class of non-voting common units (the “LLC Units”).

In connection with this offering, we intend to enter into the following series of transactions to implement an internal reorganization, which we collectively refer to as the “Reorganization Transactions.”

 

   

Our amended and restated certificate of incorporation that will be in effect upon the completion of this offering will authorize the issuance of two classes of common stock: Class A common stock and Class B


 

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common stock (collectively, our “common stock”). Each share of common stock will entitle its holder to one vote per share on all matters submitted to a vote of our stockholders. The Class B common stock is not entitled to economic interests in Portillo’s Inc. See “Description of Capital Stock.”

 

   

Portillo’s OpCo will enter into the Amended LLC Agreement. Under the Amended LLC Agreement, holders of LLC Units (other than us and our wholly owned subsidiaries), including the Continuing Pre-IPO LLC Members, will have the right, from and after the completion of this offering (subject to the terms of the Amended LLC Agreement), to require Portillo’s OpCo to redeem all or a portion of their LLC Units for, at our election, newly issued shares of Class A common stock on a one-for-one basis or a cash payment from the proceeds of a sale of shares of Class A common stock in accordance with the terms of the Amended LLC Agreement. Shares of Class B common stock will be cancelled on a one-for-one basis if we, following a redemption request from a holder of LLC Units, redeem or exchange LLC Units of such holder pursuant to the terms of the Amended LLC Agreement. See “Certain Relationships and Related Party Transactions—Amended Portillo’s OpCo Agreement.” Except for transfers to us or to certain permitted transferees pursuant to the Amended LLC Agreement, the LLC Units and corresponding shares of Class B common stock may not be sold, transferred or otherwise disposed of.

 

   

Prior to the completion of this offering, we will acquire, directly and indirectly, LLC Units through the mergers (the “Mergers”), in which certain Blocker Companies will each merge with a merger subsidiary created by us (and survive such merger as a wholly owned subsidiary of Portillo’s Inc.), after which each Blocker Company will immediately merge into Portillo’s Inc. The shareholders of the Blocker Companies (the “Reorganization Parties”), including affiliates of Berkshire, will collectively hold 13,296,936 shares of Class A common stock of Portillo’s Inc. after the Mergers. The Reorganization Parties will collectively receive a number of shares of our Class A common stock in the Mergers equal to the number of LLC Units held by the Blocker Companies prior to the Mergers, and will not directly hold interests in Portillo’s OpCo.

 

   

Each Continuing Pre-IPO LLC Member will be issued a number of shares of our Class B common stock in an amount equal to the number of LLC Units held by such Continuing Pre-IPO LLC Member.

 

   

We will use the net proceeds from this offering to acquire newly issued LLC Units from Portillo’s OpCo and, if the underwriters exercise their option to purchase additional shares of Class A common stock, we will use the additional net proceeds to purchase LLC Units from certain Pre-IPO LLC Members and/or to repurchase shares of Class A common stock received by the Reorganization Parties in connection with the Mergers, in each case, at a purchase price per LLC Unit or share of Class A common stock equal to the initial public offering price of Class A common stock, after deducting the underwriting discounts and commissions, collectively representing 28% of Portillo’s OpCo’s outstanding LLC Units (or 33%, if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

   

We will enter into a Tax Receivable Agreement that will obligate us to make payments to the TRA Parties in the aggregate generally equal to 85% of the applicable cash savings that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in this offering, (ii) certain favorable tax attributes we will acquire from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with this offering and (y) future redemptions or exchanges of LLC Units by Continuing Pre-IPO LLC Members for cash or Class A common stock and (iv) certain other tax


 

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benefits related to entering into the Tax Receivable Agreement, including payments made under the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of these tax savings.

 

   

Assuming no material changes in relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect future payments under the Tax Receivable Agreement relating to the purchase by us of LLC Units in connection with this offering (including the repayment of the redeemable preferred units), and the Mergers to be approximately $149.7 million and, based on certain assumptions, to range over the next 15 years from approximately $4.9 million to $15.6 million per year and decline thereafter. These estimates are based on an initial public offering price of $18.50 per share of Class A common stock, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus. Future payments in respect of subsequent redemptions or exchanges would be in addition to these amounts and are expected to be substantial.

The actual amounts we will be required to pay may materially differ from these hypothetical amounts. We are a holding company with no operations of our own and our ability to make payments under the Tax Receivable Agreement will depend on the ability of Portillo’s OpCo to make distributions to us. Deterioration in the financial condition, earnings, or cash flow of Portillo’s OpCo and its subsidiaries for any reason could limit or impair their ability to pay such distributions. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid. Nonpayment for a specified period, however, may constitute a breach of a material obligation under the Tax Receivable Agreement (unless, generally, such nonpayment is due to a lack of sufficient funds) and therefore accelerate payments due under the Tax Receivable Agreement, which could negatively impact our results of operations and could also affect our liquidity in periods in which such payments are made. See “Organizational Structure—Holding Company Structure and the Tax Receivable Agreement.”

 

   

We will cause Portillo’s OpCo to use the proceeds from the issuance of LLC Units to (i) pay fees and expenses in connection with this offering and (ii) as otherwise set forth in “Use of Proceeds.”

 

   

We will issue 20,270,270 shares of Class A common stock pursuant to this offering.

In connection with the Reorganization Transactions, Portillo’s Inc. will become the sole managing member of Portillo’s OpCo. Because we will manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and because we will also have a substantial financial interest in Portillo’s OpCo, we will consolidate the financial results of Portillo’s OpCo, and a portion of our net income will be allocated to the noncontrolling interest to reflect the entitlement of the Continuing Pre-IPO LLC Members to a portion of Portillo’s OpCo’s net income. In addition, because Portillo’s OpCo will be under the common control of the Pre-IPO LLC Members before and after the Reorganization Transactions (both directly and indirectly through their ownership of the Company), we will account for the Reorganization Transactions as a reorganization of entities under common control and will initially measure the interests of the Continuing Pre-IPO LLC Members in the assets and liabilities of Portillo’s OpCo at their carrying amounts as of the date of the completion of the consummation of the Reorganization Transactions.

The following diagram depicts our organizational structure immediately following the consummation of the Reorganization Transactions, the completion of this offering and the application of the net proceeds from this offering, based on an assumed initial public offering price of $18.50 per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus) and assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock. This chart is provided for illustrative purposes only and does not purport to represent all legal entities within our organizational structure.


 

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LOGO

 

 

*

Excludes shares of our Class A common stock underlying vested stock options granted to certain of our Continuing Pre-IPO LLC Members under the 2014 Plan.

Our corporate structure following the completion of this offering, as described above, is commonly referred to as an umbrella partnership-C-corporation (or “Up-C”) structure, which is used by partnerships and limited liability companies when they undertake an initial public offering of their business. Our Up-C structure will allow the Continuing Pre-IPO LLC Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or “pass-through” entity, for U.S. federal and applicable state and local income tax purposes following this offering. One of these benefits is that future taxable income of Portillo’s OpCo that is allocated to such owners will be taxed on a flow-through basis and, therefore, will generally not be subject to U.S. federal and applicable state and local income taxes at the entity level. Additionally, because the LLC Units that the Continuing Pre-IPO LLC Members will hold are redeemable or exchangeable for, at our election, either newly issued shares of Class A common stock on a one-for-one basis or a cash payment from the proceeds of a sale of shares of Class A common stock in accordance with the terms of the Amended LLC Agreement, our “Up-C” structure also provides the Continuing Pre-IPO LLC Members with potential liquidity that holders of nonpublicly traded limited liability companies are not typically afforded. See “Organizational Structure” and “Description of Capital Stock.”

We will also hold LLC Units, and therefore receive the same benefits as the Continuing Pre-IPO LLC Members with respect to our ownership in an entity treated as a partnership, or “pass-through” entity, for U.S.


 

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federal and applicable state and local income tax purposes. The acquisition of LLC Units pursuant to this offering (including the repayment of the redeemable preferred units), the Mergers and future taxable redemptions or exchanges by the Continuing Pre-IPO LLC Members for shares of our Class A common stock or cash are expected to result in favorable tax attributes that will be allocated to us. These tax attributes would not be available to us in the absence of those transactions and are expected to reduce the amount of tax that we would otherwise be required to pay in the future. In connection with the Reorganization Transactions, we will enter into a Tax Receivable Agreement that will obligate us to make payments to the TRA Parties in the aggregate generally equal to 85% of the applicable cash savings that we actually realize, or in certain circumstances are deemed to realize, as a result of these tax attributes and tax attributes resulting from certain payments made under the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of these tax savings. See “Organizational Structure—Holding Company Structure and the Tax Receivable Agreement.”

Under the Amended LLC Agreement, we will receive a pro rata share of any distributions, including tax distributions, made by Portillo’s OpCo to its members. Such tax distributions will be calculated based upon an assumed tax rate, which, under certain circumstances, may cause Portillo’s OpCo to make tax distributions that, in the aggregate, exceed the amount of taxes that Portillo’s OpCo would have paid if it were a similarly situated corporate taxpayer. Funds used by Portillo’s OpCo to satisfy its tax distribution obligations will not be available for reinvestment in our business. See “Risk Factors—Risks Related to Our Organizational Structure.”

Upon completion of the transactions described above, this offering and the application of the Company’s net proceeds from this offering:

 

   

Portillo’s Inc. will become the managing member of Portillo’s OpCo and will hold 33,567,206 LLC Units, constituting approximately 47% of the outstanding economic interests in Portillo’s OpCo (or 35,807,171 LLC Units, constituting approximately 50% of the outstanding economic interests in Portillo’s OpCo if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

   

The Pre-IPO LLC Members will collectively hold (i) (x) 13,296,936 shares of Class A common stock (or 12,496,361 shares of Class A common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and (y) 37,913,286 LLC Units (or 35,673,321 LLC Units if the underwriters exercise their option to purchase additional shares of Class A common stock in full, which together directly and indirectly represent approximately 72% of the economic interest in Portillo’s OpCo (or approximately 67% if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and (ii) through their collective ownership of 13,296,936 shares of Class A common stock or (12,496,361 shares of Class A common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and 37,913,286 shares of Class B common stock (or 35,673,321 shares of Class B common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full), approximately 72% of the combined voting power of our common stock (or 67% if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

   

Investors in this offering will collectively hold (i) 20,270,270 shares of our Class A common stock, representing approximately 28% of the combined voting power of our common stock (or 23,310,810 shares and 33%, respectively, if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and (ii) through our ownership of LLC Units, indirectly will hold approximately 28% of the economic interest in Portillo’s OpCo (or 33% if the underwriters exercise their option to purchase additional shares of Class A common stock in full).


 

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See “Organizational Structure,” “Certain Relationships and Related Party Transactions” and “Description of Capital Stock” for more information on the rights associated with our common stock and the LLC Units.

Recent Developments

The following tables set forth estimates, and estimated ranges of, certain of our preliminary financial results for the third quarter ended September 26, 2021. The data presented below reflects our preliminary financial results based upon information available to us as of the date of this prospectus, is not a comprehensive statement of our financial results for the third quarter ended September 26, 2021 and has not been audited or reviewed by our independent registered public accounting firm. Our actual results may differ materially from this preliminary data. During the course of the preparation of our financial statements and related notes, additional adjustments to the preliminary financial information presented below may be identified. Any such adjustments may be material.

All of the data presented below has been prepared by and is the responsibility of management. Our independent accountants, Deloitte & Touche LLP, have not audited, reviewed, compiled or performed any procedures, and do not express an opinion or any other form of assurance with respect to any of such data.

 

     Portillo’s OpCo  
     Third Quarter Ended  
           September 26,
2021
    September 27,
2020
 
           Estimated     Actual  

Revenues (in thousands)

     $ 138,000     $ 119,700  

Other Data:

      

Total Restaurants (at end of period)(a)

       67       62  

Change in same-restaurant sales(b)

       6.8     (2.1 )% 

AUV (in millions)(a)

     $ 8.0     $ 8.0  
     Portillo’s OpCo  
     Third Quarter Ended  
     September 26,
2021
    September 27,
2020
 
     Low     High     Actual  

Operating income (in thousands)

   $ 16,000     $ 17,200     $ 18,870  

Net income (in thousands)

     5,500       6,500       8,104  

Other Data:

      

Adjusted EBITDA (in thousands)(c)

   $ 22,400     $ 24,200     $ 26,434  

Adjusted EBITDA Margin(c)

     16.5     17.5     22.1

Restaurant-Level Adjusted EBITDA (in thousands)(d)

   $ 32,500     $ 34,350     $ 34,623  

Restaurant-Level Adjusted EBITDA Margin(d)

     23.9     24.9     28.9

 

(a)

Includes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity. In the table above, AUVs for the Third Quarter Ended September 26, 2021 and September 27, 2020 represent AUVs for the Twelve Months Ended September 26, 2021 and September 27, 2020, respectively.

(b)

Excludes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity.

(c)

For a further description of Adjusted EBITDA and Adjusted EBITDA Margin, see “—Summary Historical and Pro Forma Consolidated Financial and Other Data.” See below for a reconciliation of net income, the most directly comparable GAAP measure, to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin.



 

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(d)

For a further description of Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin, see “—Summary Historical and Pro Forma Consolidated Financial and Other Data.” See below for a reconciliation of operating income, the most directly comparable GAAP measure, to Restaurant-Level Adjusted EBITDA.

Discussion of Financial Results for the Third Quarter Ended September 26, 2021

Revenues for the third quarter ended September 26, 2021 are expected to be approximately $138.0 million compared to $119.7 million for the third quarter ended September 27, 2020, an increase of approximately $18.3 million, or 15.3%. The increase in revenues was primarily attributable to an increase in our average check and the opening of two new restaurants in the fourth quarter of 2020 and three new restaurants during the three quarters ended September 26, 2021. Same-restaurant sales are expected to increase approximately 6.8% during the third quarter ended September 26, 2021, which was attributable to an increase in the average check, partially offset by a slight decline in traffic. The higher average check was driven by an increase in menu prices, mix of items sold, and more items per order. For the purpose of calculating same-restaurant sales for the third quarter ended September 26, 2021, sales for 60 restaurants were included in the Comparable Restaurant Base versus 55 as of the end of the third quarter of 2020.

Operating income for the third quarter ended September 26, 2021 is expected to be between $16.0 million and $17.2 million compared to $18.9 million for the third quarter ended September 27, 2020, a decrease of approximately $2.3 million, or 12%, based on the midpoint of the range. The decrease in operating income was primarily driven by increases in labor, cost of goods sold, excluding depreciation and amortization, occupancy expenses, other operating expenses, and general and administrative expenses, partially offset by the aforementioned increase in revenues and lower depreciation and amortization. The increase in expenses was driven by the opening of two new restaurants in the fourth quarter of 2020 and three new restaurants during the three quarters ended September 26, 2021. Additionally, expenses were comparatively impacted by continued expansion of our dine-in capacity, an increase in commodity prices (primarily beef), and several incremental labor investments to support our team members, including hourly and salary rate increases, training costs and discretionary bonuses. The incremental labor investments are expected to be partially offset by lower than expected staffing levels in our restaurants. The decrease in depreciation and amortization expense was primarily attributable to lower amortization expense from an expiring non-compete agreement. We expect to continue to experience higher expenses in all these areas during the fourth quarter of 2021 versus the fourth quarter of 2020 resulting from the addition of our new restaurants in 2020 and 2021, including two anticipated openings in the fourth quarter of 2021, continued commodity cost increases, incremental labor investments and the expansion of our dine-in capacity.

Net income for the third quarter ended September 26, 2021 is expected to be between $5.5 million and $6.5 million compared to $8.1 million for the third quarter ended September 27, 2020, a decrease of approximately $2.1 million, or 25.9%, based on the midpoint of the range. The decrease in net income was primarily due to the factors driving the aforementioned decrease in operating income.

Subsequent to the third quarter ended September 26, 2021, the Company made required principal and interest payments on its outstanding debt of approximately $10.6 million. As a result, these payments reduced our cash balance. As of October 11, 2021, we had approximately $40.1 million of cash and cash equivalents.

Updates on Development and New Restaurant Performance

Over the long term, we plan to increase our number of restaurants by approximately 10% annually. Our near-term restaurant growth strategy is focused on leveraging our proven unit economic model primarily in adjacent and national markets outside Chicagoland with favorable macro-economic tailwinds where we already


 

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have a presence and brand awareness. We will also add select new restaurants in the Chicagoland market. For fiscal 2022, we are targeting opening seven new restaurants. Our development strategy for 2022 will focus on adding at least one restaurant in the Chicagoland market and will target new restaurants in Florida, Arizona, Michigan and Indiana as well as the expected opening of our first restaurant in Texas.

From November 2020 through September 26, 2021, we have opened five new restaurants, with locations in Illinois, Michigan, Florida, and Arizona. Since opening, these five restaurants have average weekly sales of approximately $168 thousand, which is approximately 36.6% above our year-one AUV target of approximately $6.4 million or approximately $123 thousand in average weekly sales.

The following table reconciles net income to Adjusted EBITDA for the periods presented above.

 

     Third Quarter Ended     Third Quarter Ended  
     September 26,
2021
    September 27,
2020
 
     Low     High     Actual  
($ in thousands)    (unaudited)  

Net income

   $ 5,500     $ 6,500     $ 8,104  

Depreciation and amortization

     5,300       5,500       6,138  

Interest expense

     10,500       10,700       10,766  
  

 

 

   

 

 

   

 

 

 

EBITDA

     21,300       22,700       25,008  

Deferred rent(1)

     700       800       738  

Unit-based compensation and consulting fees(2)

     300       350       687  

Other income, net(3)

     —         25       (7

Transaction-related fees & expenses(4)

     100       325       8  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 22,400     $ 24,200     $ 26,434  
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin

     16.5     17.5     22.1

 

  (1)

Represents the difference between cash rent payments and the recognition of straight-line rent expense recognized over the lease term.

  (2)

Represents unit-based compensation and consulting fees related to our former owner.

  (3)

Represents loss on disposal of property and equipment.

  (4)

Represents fees and expenses associated with public company readiness.


 

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The following table reconciles operating income to Restaurant-Level Adjusted EBITDA for the periods presented above.

 

     Third Quarter Ended     Third Quarter Ended  
     September 26,
2021
    September 27,
2020
 
     Low     High     Actual  
($ in thousands)    (unaudited)  

Operating income

   $ 16,000     $ 17,200     $ 18,870  

General and administrative expenses

     11,400       12,000       9,706  

Pre-opening expenses

     300       350       544  

Depreciation and amortization

     5,300       5,500       6,138  

Net income attributable to equity method investment

     (250     (300     (121

Other income, net

     (250     (400     (514
  

 

 

   

 

 

   

 

 

 

Restaurant-Level Adjusted EBITDA

   $ 32,500     $ 34,350     $ 34,623  
  

 

 

   

 

 

   

 

 

 

Restaurant-Level Adjusted EBITDA Margin

     23.9     24.9     28.9

The preliminary financial data included in this prospectus has been prepared by and is the responsibility of our management. Neither our independent registered public accounting firm nor any other independent registered public accounting firm has audited, reviewed, prepared or compiled, examined or performed any procedures with respect to the estimated results, nor have they expressed any opinion or any other form of assurance on the preliminary estimated financial results. This preliminary information reflects management’s estimates based solely upon information available as of the date of this prospectus and is not a comprehensive statement of our financial results for the third quarter ended September 26, 2021. The information presented herein should not be considered a substitute for the financial information to be filed with the SEC in our Quarterly Report on Form 10-Q for the third quarter ended September 26, 2021 once it becomes available. We have no intention or obligation to update the preliminary financial data in the prospectus prior to filing our Quarterly Report on Form 10-Q for the third quarter ended September 26, 2021.

The estimates and ranges for the preliminary estimated financial results described above constitute forward-looking statements. We have provided an estimate or a range for the preliminary estimated financial results described above primarily because our financial closing procedures for the third quarter ended September 26, 2021 are not yet complete and will not be publicly available until after the completion of this offering. There is a possibility that actual results will vary materially from these estimates or fall outside of the range provided for such preliminary estimated financial results due to the completion of our final accounting closing procedures. Accordingly, you should not place undue reliance upon these preliminary financial results. Please refer to “Cautionary Note Regarding Forward-Looking Statements” in this prospectus for additional information. These preliminary results should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. For additional information, please see “Risk Factors.”

Our Sponsor

Berkshire Partners has invested more than $16 billion in over 135 private equity investments and as of December 31, 2020, had $12.7 billion in assets under management within Berkshire Private Equity. Berkshire’s current private equity portfolio comprises investments across five sectors — business services & technology, consumer, communications, healthcare, and industrials. The Berkshire Partners team includes more than 65 investment professionals across North America.


 

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In August 2014, we entered into a merger transaction through which we were acquired by funds affiliated with or managed by Berkshire (the “Berkshire Acquisition”).

Following the closing of this offering, funds managed by Berkshire are expected to own (i) approximately 68% of the combined voting power of our common stock (or approximately 64% of the combined voting power of our common stock, if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and (ii) approximately 68% of the economic interest in Portillo’s OpCo (or approximately 64% of the economic interest in Portillo’s OpCo, if the underwriters’ option to purchase additional shares is fully exercised). In addition, following the closing of this offering, funds managed by Berkshire are expected to own approximately 49% of the LLC Units, or 46% if the underwriters’ option to purchase additional shares is fully exercised. As a result, Berkshire will be able to exercise significant voting influence over fundamental and significant corporate matters and transactions. See “Risk Factors—Risks Relating to This Offering and Ownership of Our Common Stock” and “Principal Stockholders.”

Corporate Information

Portillo’s Inc. was incorporated in Delaware on June 8, 2021. Our principal executive offices are located at 2001 Spring Road, Suite 400, Oak Brook, IL 60523, and our telephone number is (630) 954-3773. Our corporate website address is www.portillos.com. Our corporate website and the information contained on, or that can be accessed through, the website is not deemed to be incorporated by reference in, and is not considered part of, this prospectus. You should not rely on any such information in making your decision whether to purchase our Class A common stock.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in gross revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). An emerging growth company may take advantage of specified reduced reporting and other regulatory requirements for up to five years that are otherwise applicable generally to public companies. These provisions include, among other matters:

 

   

requirement to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations;

 

   

exemption from the auditor attestation requirement on the effectiveness of our system of internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

   

exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer;

 

   

an exemption from the requirement to seek non-binding advisory votes on executive compensation and golden parachute arrangements; and

 

   

reduced disclosure about executive compensation arrangements.

We will remain an emerging growth company until the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering unless, prior to that time, we have more than


 

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$1.07 billion in annual gross revenue, have a market value for our common stock held by non-affiliates of more than $700 million as of the last day of our second fiscal quarter of the fiscal year and a determination is made that we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or issue more than $1.0 billion of non-convertible debt over a three-year period, whether or not issued in a registered offering. We have availed ourselves of the reduced reporting obligations with respect to audited financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations and executive compensation disclosure in this prospectus and expect to continue to avail ourselves of the reduced reporting obligations available to emerging growth companies in future filings.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. An emerging growth company can, therefore, delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. As an emerging growth company, we elected to take advantage of the extended transition period provided in Section 13(a) of the Exchange Act, for complying with new or revised accounting standards.

As a result of our decision to avail ourselves of certain provisions of the JOBS Act, the information that we provide may be different than what you may receive from other public companies in which you hold an equity interest. In addition, it is possible that some investors will find our Class A common stock less attractive as a result of our elections, which may cause a less active trading market for our Class A common stock and more volatility in our stock price.


 

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THE OFFERING

 

Issuer

Portillo’s Inc.

 

Class A common stock offered by us

20,270,270 shares of Class A common stock (23,310,810 shares if the underwriters exercise their option to purchase additional shares in full).

 

Option to purchase additional shares of Class A common stock

The underwriters have an option to purchase an additional 3,040,540 shares of Class A common stock from us. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Class A common stock to be outstanding after this offering

33,567,206 shares of Class A common stock, representing approximately 47% of the combined voting power of our common stock (35,807,171 shares, representing approximately 50% of the combined voting power of our common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

Class B common stock to be outstanding after this offering

37,913,286 shares of Class B common stock, representing approximately 53% of the combined voting power of our common stock (35,673,321 shares, representing approximately 50% of the combined voting power of our common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

LLC Units to be held by us after this offering

33,567,206 LLC Units, representing an approximately 47% economic interest in Portillo’s OpCo (or 35,807,171 LLC Units, representing an approximately 50% economic interest in Portillo’s OpCo, if the underwriters exercise their option to purchase additional shares of Class A common stock in full). The LLC Units are not entitled to voting interests in Portillo’s OpCo.

 

Total LLC Units to be outstanding after this offering

71,480,492 LLC Units (or 71,480,492 LLC Units if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

Ratio of shares of Class A Common stock to LLC Units

Our amended and restated certificate of incorporation will require that we maintain at all times a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of LLC Units owned by us.

 

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Ratio of shares of Class B Common stock to LLC Units

Our amended and restated certificate of incorporation will require that we maintain at all times a one-to-one ratio between the number of shares of Class B common stock issued by us and the number of LLC Units owned by holders of LLC Units (other than us and our wholly owned subsidiaries).

 

Permitted holders of shares of Class B common stock

Except for transfers in connection with the transfer of LLC Units, shares of Class B common stock may not be transferred.

 

Redemption rights of holders of LLC Units

Under the Amended LLC Agreement, holders of LLC Units (other than us and our wholly owned subsidiaries), including the Continuing Pre-IPO LLC Members, will have the right, from and after the completion of this offering (subject to the terms of the Amended LLC Agreement), to require Portillo’s OpCo to redeem all or a portion of their LLC Units for, at our election, newly issued shares of Class A common stock on a one-for-one basis or a cash payment from the proceeds of a sale of shares of Class A common stock in accordance with the terms of the Amended LLC Agreement. Shares of Class B common stock will be cancelled on a one-for-one basis if we, following a redemption request from a holder of LLC Units, redeem or exchange LLC Units of such holder pursuant to the terms of the Amended LLC Agreement. See “Certain Relationships and Related Party Transactions—Amended Portillo’s OpCo Agreement.”

 

Use of proceeds

We estimate that the net proceeds from the sale of our Class A common stock in this offering, after deducting the estimated underwriting discount and estimated offering expenses payable by us, will be approximately $345 million (assuming the underwriters do not exercise their option to purchase additional shares) based on an assumed initial public offering price of $18.50 per share (the midpoint of the price range set forth on the cover of this prospectus).

 

  We intend to use the net proceeds from this offering to purchase newly issued LLC Units from Portillo’s OpCo. The foregoing purchases of LLC Units will be at a price per unit equal to the public offering price per share of Class A common stock in this offering, less the underwriting discounts and commissions. Portillo’s OpCo currently intends to use the net proceeds it receives from this offering, first, to repay the redeemable preferred units in full (including any redemption premium) and second, depending on the amount of net proceeds remaining as well as the available cash balance, to repay all or a portion of the borrowings outstanding under our Second Lien Credit Facility (including any prepayment penalties).

 

 

If the underwriters exercise their option to purchase additional shares of Class A common stock in full, we estimate that our additional net proceeds will be approximately $53 million, based on an assumed offering price of $18.50, which is the midpoint of the range set forth


 

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on the cover of this prospectus. We will use the additional net proceeds we receive pursuant to any exercise of the underwriters’ option to purchase additional shares of Class A common stock to purchase LLC Units from certain Pre-IPO LLC Members and/or to repurchase shares of the Class A common stock received by the Reorganization Parties in connection with the Mergers at a price per LLC Unit or share of Class A common stock equal to the initial public offering price of our Class A common stock minus underwriting discounts and commissions. As a result, Portillo’s OpCo will not receive any additional proceeds from any exercise of the underwriters’ option to purchase additional shares of Class A common stock.

 

Tax Receivable Agreement

Upon the completion of this offering, we will be a party to the Tax Receivable Agreement with the TRA Parties. Under the Tax Receivable Agreement, we generally will be required to pay to the TRA Parties 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize (or in some circumstances are deemed to realize) as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in this offering, (ii) certain favorable tax attributes we will acquire from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with this offering and (y) future redemptions or exchanges of LLC Units by Continuing Pre-IPO LLC Members for cash or Class A common stock and (iv) certain payments made under the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of these tax savings. See “Organizational Structure—Holding Company Structure and the Tax Receivable Agreement.”

 

Registration Rights Agreement

In connection with this offering, we intend to enter into a registration rights agreement with Berkshire and certain of our other stockholders. This agreement will provide Berkshire, and their permitted transferees, with “demand” registrations, which will require us to register shares of our common stock under the Securities Act. Each of our stockholders that is a party to the registration rights agreement will also be entitled to customary “piggyback” registration rights and entitled to participate on a pro rata basis in any registration of our common stock under the Securities Act that we may undertake, subject to the terms of the registration rights agreement. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

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Dividend policy

We do not anticipate paying any dividends on our Class A common stock for the foreseeable future; however, we may change this policy in the future. See “Dividend Policy.”

 

Voting Rights

Each share of our Class A common stock and Class B common stock entitles its holder to one vote on all matters to be voted on by stockholders generally.

 

  Holders of outstanding shares of our Class A common stock and Class B common stock will vote as a single class on all matters on which stockholders are entitled to vote generally, except as otherwise required by law. See “Description of Capital Stock—Common Stock.”

 

Indications of Interest

The cornerstone investor has indicated an interest in purchasing an aggregate of up to $100 million in shares of Class A common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, the cornerstone investor may decide to purchase more, less or no shares of our Class A common stock in this offering, or the underwriters may decide to sell more, less or no shares of our common stock in this offering to the cornerstone investor. The underwriters will receive the same discount from any shares of Class A common stock sold to the cornerstone investors as they will from any other shares of common stock sold to the public in this offering.

 

Risk Factors

Investing in our Class A common stock involves a high degree of risk. See the “Risk Factors” section of this prospectus beginning on page 34 for a discussion of factors you should carefully consider before investing in our Class A common stock.

 

Listing

We intend to apply to have our Class A common stock listed on the Nasdaq under the symbol “PTLO.”

Except as otherwise indicated, the number of shares of our Class A common stock outstanding after this offering:

 

   

excludes 37,913,286 shares of Class A common stock reserved for issuance upon redemption or exchange of LLC Units that will be held by the Continuing Pre-IPO LLC Members on a one-for-one basis;

 

   

gives effect to the conversion of vested and unvested stock options awarded under our 2014 Equity Incentive Plan (the “2014 Plan”) into options on Class A common stock, which will occur upon the consummation of this offering and excludes any shares of Class A common stock underlying such options;

 

   

excludes an aggregate of approximately 7,148,049 shares of our Class A common stock that will be available for future equity awards under a new equity incentive plan (the “2021 Plan”) that we intend to adopt at the time of this offering;

 

   

excludes shares of our Class A common stock underlying restricted stock units and shares of our Class A common stock issuable upon the exercise of stock options with the initial public offering


 

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price as the exercise price that we intend to grant under the 2021 Plan at the time of this offering; and

 

   

assumes no exercise of the underwriters’ option to purchase additional shares of Class A common stock.

Unless otherwise indicated, all information in this prospectus:

 

   

assumes an initial public offering price of $18.50 per share (the midpoint of the price range set forth on the cover of this prospectus);

 

   

assumes the underwriters’ option to purchase additional shares of Class A common stock has not been exercised; and

 

   

assumes the completion of the Reorganization Transactions described under “Organization Structure—The Reorganization Transactions.”

Unless otherwise indicated or the context otherwise requires, references in this prospectus to the exercise of the underwriters’ option to purchase additional shares of Class A common stock give effect to the use of the net proceeds therefrom.


 

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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables present the summary historical consolidated financial and other data for PHD Group Holdings LLC and its subsidiaries and the summary pro forma consolidated financial and other data for Portillo’s Inc. PHD Group Holdings LLC is the predecessor of the issuer, Portillo’s Inc., for financial reporting purposes. The statements of operations data for the years ended December 27, 2020 and December 29, 2019 and balance sheet data as of December 27, 2020 has been derived from PHD Group Holdings LLC’s audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The information for the year ended December 31, 2018 has been derived from PHD Group Holdings LLC’s audited consolidated financial statements and the related notes thereto not included elsewhere in this prospectus. The summary historical consolidated financial information as of June 27, 2021 and for the two quarters ended June 27, 2021 and June 28, 2020, have been derived from the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on a basis consistent with our audited financial statements and, in our opinion, contain all adjustments, consisting of only normal recurring adjustments, necessary for fair presentation of such financial data. Results for any interim period are not necessarily indicative of the results that may be expected for the full fiscal year or any future period.

Portillo’s Inc. was formed as a Delaware corporation on June 8, 2021 and has not, to date, conducted any activities other than those incident to its formation, those in preparation for the Reorganization Transactions and preparation of this prospectus and the registration statement of which this prospectus forms a part. The summary historical financial and other data of Portillo’s Inc. has not been presented because Portillo’s Inc. is a newly incorporated entity, has had no business transactions or activities to date, and had no assets or liabilities during the periods presented. Immediately following this offering, Portillo’s Inc. will be a holding company and its sole material asset will be a controlling equity interest in Portillo’s OpCo. Portillo’s Inc. will, through Portillo’s OpCo, operate and conduct our business. Following this offering, Portillo’s OpCo will be considered our predecessor for accounting purposes and its consolidated financial statements will be our historical financial statements.

The summary unaudited pro forma combined and consolidated financial data of Portillo’s Inc. presented below have been derived from our unaudited pro forma combined and consolidated financial statements included elsewhere in this prospectus. The summary unaudited pro forma combined and consolidated statement of operations data for the year ended December 27, 2020 and for the two quarters ended June 27, 2021 give effect to (i) the Reorganization Transactions and (ii) this offering, each as if they had occurred on December 30, 2019. The summary unaudited pro forma consolidated balance sheet data as of June 27, 2021 gives effect to (i) the Reorganization Transactions and (ii) this offering, each as if they had occurred on June 27, 2021. The summary unaudited combined and consolidated pro forma financial data is presented for illustrative purposes only and is not necessarily indicative of the results of operations or financial position that would have occurred if the relevant transactions had been consummated on the dates indicated, nor is it indicative of future operating results or financial position. See “Unaudited Pro Forma Consolidated Financial Information” and “Organizational Structure.”

Our historical results are not necessarily indicative of future results of operations. You should read the information set forth below together with “Organizational Structure,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Capitalization” and the audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus.


 

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    Portillo’s OpCo           Portillo’s Inc.
Pro Forma
    Portillo’s Inc.
Pro Forma
 
    Fiscal Year
Ended
    Two Quarters
Ended
    Fiscal Year
Ended
    Two Quarters
Ended
 
    December 27,
2020
    December 29,
2019
    June 27,
2021
    June 28,
2020
    December 27,
2020
    June 27,
2021
 
    (in thousands)  

Consolidated Statement of Operations and Comprehensive Loss:

           

Revenues:

           

Revenues

  $ 455,471     $ 479,417     $ 258,041     $ 217,260     $ 455,471     $ 258,041  

Cost and Expenses:

           

Cost of goods sold, excluding depreciation and amortization

    142,446       149,063       77,180       69,523       142,446       77,180  

Labor

    115,991       134,206       65,512       58,080       115,991       65,512  

Occupancy

    24,920       24,538       13,890       12,349       24,920       13,890  

Other operating expenses

    50,169       54,540       28,633       24,457       50,169       28,633  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    333,526       362,347       185,215       164,499       333,526       185,215  

General and administrative expenses

    39,854       43,118       24,005       18,212       39,854       24,005  

Pre-opening expenses

    2,209       2,834       1,960       294       2,209       1,960  

Depreciation and amortization

    24,584       24,364       12,709       12,266       24,584       12,709  

Net income attributable to equity method investment

    (459     (766     (359     (232     (459     (359

Other income, net

    (1,537     (1,402     (803     (578     (1,537     (803
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    57,294       48,922       35,314       22,799       57,294       35,314  

Interest expense

    45,031       43,367       21,441       23,532       26,500       12,351  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 12,263     $ 5,555     $ 13,873     $ (733   $ 30,794     $ 22,963  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common unit data:

           

Weighted average number of common units outstanding-basic

    378,633,829       378,535,959       378,689,468       378,609,104       33,567,206       33,567,206  

Weighted average number of common units outstanding-diluted

    378,633,829       378,535,959       381,402,258       378,609,104       37,227,158       37,227,158  

Basic earnings (loss) per common unit

  $ (0.02   $ (0.03   $ 0.01     $ (0.03   $ 0.37     $ 0.29  

Diluted earnings (loss) per common unit

  $ (0.02   $ (0.03   $ 0.01     $ (0.03   $ 0.34     $ 0.26  

 

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     Portillo’s OpCo  
     Fiscal Year Ended     Two Quarters Ended  
     December 27,
2020
    December 29,
2019
    June 27,
2021
    June 28,
2020
 
     (in thousands)  

Consolidated Statement of Cash Flows Data:

      

Net cash provided by operating activities

   $ 58,271     $ 43,325     $ 32,817     $ 21,298  

Net cash used in investing activities

     (21,420     (22,012     (18,545     (3,515

Net cash used in financing activities

     (18,048     (11,721     (1,312     (16,411

Net increase in cash and cash equivalents and restricted cash

   $ 18,803     $ 9,592     $ 12,960     $ 1,372  

 

     Portillo’s OpCo  
     Fiscal Year Ended     Two Quarters Ended  
     December 27,
2020
    December 29,
2019
    June 27,
2021
    June 28,
2020
 

Other Data:

        

Total Restaurants (at end of period)(a)

     64       62       67       62  

Change in same-restaurant sales(b)

     (7.7 )%      3.3     12.7     (9.9 )% 

AUV (in millions)(a)

   $ 7.7     $ 8.7     $ 7.9     $ 8.1  

Adjusted EBITDA (in thousands)(c)

   $ 87,804     $ 79,495     $ 51,073     $ 37,863  

Adjusted EBITDA Margin(c)

     19.3     16.6     19.8     17.4

Restaurant-Level Adjusted EBITDA (in thousands)(d)

   $ 121,945     $ 117,070     $ 72,826     $ 52,761  

Restaurant-Level Adjusted EBITDA Margin(d)

     26.8     24.4     28.2     24.3

 

     Portillo’s OpCo      Portillo’s Inc. Pro Forma  
     As of December 27,
2020
    As of June 27,
2021
     As of June 27,  
     Actual     Actual      2021  
     (in thousands)  

Consolidated Balance Sheet Data:

       

Cash and cash equivalents

   $ 41,211     $ 54,157      $ 26,777  

Total assets

     910,222       924,033        932,665  

Total debt(e)

     469,704       469,962        319,567  

Total liabilities

     568,942       568,257        566,795  

Working capital(f)

     (11,726     332        (27,048

Total Stockholders’ equity

     140,709       144,113        365,870  

 

(a)

Includes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity, as described in Note 6 – Equity Method Investment in the notes to the audited consolidated financial statements. In the table above, AUVs for the Two Quarters Ended June 27, 2021 and June 28, 2020 represent AUVs for the Twelve Months Ended June 27, 2021 and June 28, 2020, respectively.

(b)

Excludes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity, as described in Note 6 – Equity Method Investment in the notes to the audited consolidated financial statements.

(c)

Adjusted EBITDA and Adjusted EBITDA Margin as presented in this prospectus are supplemental measures of our performance that are neither required by, nor presented in accordance with GAAP. Adjusted EBITDA and Adjusted EBITDA Margin are not measurements of our financial performance under GAAP and should not be considered as an alternative to net income (loss), operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity. Adjusted EBITDA represents net income (loss) before depreciation and amortization, interest expense and income taxes, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of net income (loss), the most directly comparable measure under GAAP, to Adjusted EBITDA. Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues.


 

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Management uses Adjusted EBITDA and Adjusted EBITDA Margin (i) to evaluate our operating results and the effectiveness of our business strategies, (ii) internally as benchmarks to compare our performance to that of our competitors and (iii) as factors in evaluating management’s performance when determining incentive compensation. The use of Adjusted EBITDA and Adjusted EBITDA Margin as performance measures permit a comparative assessment of our operating performance relative to our performance based on our GAAP results, while isolating the effects of some items that are either non-recurring in nature or vary from period to period without any correlation to our ongoing core operating performance.

Adjusted EBITDA and Adjusted EBITDA Margin or similar non-GAAP measures are frequently used by securities analysts, investors and other interested parties as supplemental measures of financial performance within our industry. Management believes that Adjusted EBITDA and Adjusted EBITDA Margin provide investors with additional transparency of our operations.

Our presentation of Adjusted EBITDA and Adjusted EBITDA Margin should not be construed to imply that our future results will be unaffected by these items that are excluded. Adjusted EBITDA and Adjusted EBITDA Margin are supplemental measures of operating performance and our calculations thereof may not be comparable to similar measures reported by other companies. Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not adjust for all non-cash income or expense items that are reflected in our consolidated statement of cash flows;

 

   

although depreciation is a non-cash charge, the assets being depreciated will often have to be replaced in the future, Adjusted EBITDA and Adjusted EBITDA Margin do not reflect any cash requirements for such replacements;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the impact of unit-based compensation on our results of operations;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

   

Adjusted EBITDA and Adjusted EBITDA Margin do not reflect our income tax expense (benefit) or the cash requirements to pay our income taxes; and

 

   

other companies in our industry may calculate Adjusted EBITDA and Adjusted EBITDA Margin differently than we do, limiting their usefulness as comparative measures.

In evaluating Adjusted EBITDA and Adjusted EBITDA Margin, you should be aware that in the future we may incur expenses similar to those adjusted for in the reconciliation of net income (loss), the most directly comparable GAAP measure to Adjusted EBITDA. We compensate for these limitations by providing specific information regarding the GAAP amounts excluded from such non-GAAP financial measures. We further compensate for the limitations in our use of non-GAAP financial measures by presenting comparable GAAP measures more prominently.


 

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See below for a reconciliation of net income (loss), the most directly comparable GAAP measure, to EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin:

 

     Portillo’s OpCo  
     Fiscal Year Ended     Two Quarters Ended  
     December 27,
2020
    December 29,
2019
    December 31,
2018
    June 27,
2021
    June 28,
2020
 
     ($ in thousands)  

Net income (loss)

   $ 12,263     $ 5,555     $ 5,042     $ 13,873     $ (733

Depreciation and amortization

     24,584       24,364       23,007       12,709       12,266  

Interest expense

     45,031       43,367       41,369       21,441       23,532  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     81,878       73,286       69,418       48,023       35,065  

Deferred rent(1)

     2,771       2,405       2,150       1,594       1,312  

Unit-based compensation and consulting fees(2)

     2,960       3,286       3,272       1,273       1,377  

Other income(3)

     130       304       168       132       52  

Transaction-related fees & expenses(4)

     65       214       261       51       57  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 87,804     $ 79,495     $ 75,269     $ 51,073     $ 37,863  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA Margin

     19.3     16.6     16.7     19.8     17.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)

Represents the difference between cash rent payments and the recognition of straight-line rent expense recognized over the lease term.

  (2)

Represents unit-based compensation and consulting fees related to our former owner.

  (3)

Represents loss on disposal of property and equipment.

  (4)

Represents fees and expenses associated with public company readiness.

 

(d)

Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are non-GAAP supplemental measures of operating performance of our restaurants that are neither required by, nor presented in accordance with GAAP, and should not be considered as a substitute for analysis of our results as reported under GAAP. Restaurant-Level Adjusted EBITDA represents revenue, less restaurant operating expenses, which include cost of goods sold, excluding depreciation and amortization, labor expenses, occupancy expenses, and other operating expenses. Restaurant-Level Adjusted EBITDA excludes corporate level expenses, pre-opening expenses and depreciation and amortization on restaurant property and equipment. Restaurant-Level Adjusted EBITDA Margin represents Restaurant-Level Adjusted EBITDA as a percentage of revenue.

Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are important measures we use to evaluate the performance and profitability of our restaurants, individually and in the aggregate. Additionally, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin or similar non-GAAP financial measures are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We believe that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin, when used in conjunction with GAAP financial measures, provide useful information about our operating results, identify operational trends, and allow for greater transparency with respect to key metrics used by us in our financial and operational decision making. We use Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin to make decisions regarding future spending and other operational decisions. However, you should be aware that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are financial measures, which are not indicative of overall results for the Company, and Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures. In addition, our calculations of Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin


 

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thereof may not be comparable to similar measures reported by other companies, have limitations as analytical tools and should not be considered as a substitute for analysis of our results as reported under GAAP.

See below for a reconciliation of operating income, the most directly comparable GAAP measure, to Restaurant-Level Adjusted EBITDA.

 

     Portillo’s OpCo  
     Fiscal Year Ended     Two Quarters Ended  
     December 27,
2020
    December 29,
2019
    December 31,
2018
    June 27,
2021
    June 28,
2020
 
     (in thousands)  

Operating income

   $ 57,294     $ 48,922     $ 46,411     $ 35,314     $ 22,799  

Plus:

          

General and administrative expenses

     39,854       43,118       38,039       24,005       18,212  

Pre-opening expenses

     2,209       2,834       5,693       1,960       294  

Depreciation and amortization

     24,584       24,364       23,007       12,709       12,266  

Net income attributable to equity method investment

     (459     (766     (756     (359     (232

Other income, net

     (1,537     (1,402     —         (803     (578
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant-Level Adjusted EBITDA

   $ 121,945     $ 117,070     $ 112,394     $ 72,826     $ 52,761  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restaurant-Level Adjusted EBITDA Margin

     26.8     24.4     24.9     28.2     24.3

 

(e)

Total debt includes unamortized debt discount and deferred issuance costs.

(f)

Working capital means current assets less current liabilities.


 

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RISK FACTORS

An investment in our Class A common stock involves a high degree of risk. You should carefully consider each of the following risk factors, as well as other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited consolidated financial statements and related notes and our unaudited condensed consolidated financial statements and related notes, before investing in our Class A common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case the trading price of our Class A common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business, prospects, financial condition, results of operations and cash flow. See “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business, Industry and Growth Strategies

Our financial condition and results of operations have been and may continue to be adversely affected by the COVID-19 pandemic or future pandemics or disease outbreaks.

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly spreading outbreak of a novel strain of coronavirus (“COVID-19”). The COVID-19 pandemic has caused businesses, including our business, as well as federal, state and local governments to implement significant actions to attempt to mitigate this public health crisis in the United States. Our operations have been impacted by the COVID-19 pandemic. Future pandemics (or epidemics on a local basis) could have a similar impact on our business.

During 2020 and early 2021, individuals in many areas where we operate our restaurants were required to practice social distancing, restricted from gathering in groups and/or mandated to “stay home” except for “essential” purposes. In response to the COVID-19 pandemic and government restrictions, we were required to close or restrict our dining rooms, but were able to continue to operate our drive-thru and delivery channels. The mobility restrictions, fear of contracting COVID-19 and the sharp increase in unemployment caused by the closure of businesses in response to the COVID-19 pandemic, have adversely affected and may continue to adversely affect our guest traffic, which in turn adversely impacts our business, financial condition or results of operations. In fiscal 2020, same-restaurant sales decreased 7.7%, which was attributable to a 16.5% decline in guest traffic, partially offset by an 8.8% increase in the average check. Even as the mobility restrictions were loosened or lifted, some guests remained reluctant to return to in-restaurant dining and the impact of lost wages due to COVID-19 related unemployment has dampened consumer spending. Our restaurant operations have been and could continue to be adversely affected by employees who are unable or unwilling to work, whether because of illness, quarantine, fear of contracting COVID-19 or caring for family members due to COVID-19 disruptions or illness. Restaurant closures, limited service options or modified hours of operation due to staffing shortages could materially adversely affect our business, liquidity, financial condition or results of operations.

To protect the health and safety of our team members and guests, we implemented COVID-19 safety measures, including but not limited to COVID-19 screenings for all of our team members, utilizing and purchasing non-contact forehead thermometers for temperature checks, installing Plexiglas point of sale cashier wraps, raising the partitions between dining room booths, and limiting use of freestanding tables to meet social distancing requirements. Additionally, we purchased face coverings for all restaurant team members and offered them to our guests, purchased additional sanitation supplies and personal protective materials and introduced a new team member COVID-19 contact tracing tool for all team members in our restaurants, commissaries and restaurant support center. We implemented enhanced safety protocols in all of our locations, temporarily introduced one-time use menus in our restaurants, and developed COVID-19 training covering risks and the protocols implemented to ensure safe operations for our team members and guests. We also launched a new mobile app for self-delivery to supplement our other third-party delivery platforms. Additionally, we increased spending on healthcare and team member bonuses as a result of the COVID-19 pandemic. We temporarily paid

 

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100% of the employer portion of premiums for active team members and team members on voluntary leaves of absence participating in our health insurance program, eliminated the team member payment for a meal provided while working and distributed a $100 Portillo’s gift card to all team members. These investments decreased our operating income by an estimated $4.5 million in 2020. We experienced a steady recovery during the first two quarters of 2021, as dine-in capacity grew, when same-restaurant sales increased 12.7% compared to the first two quarters of 2020.

As a result of the COVID-19 pandemic and the closure of our dining rooms, we negotiated with our landlords for rent relief and certain modified obligations under our leases. Due to operating uncertainties, we modified the timing of new restaurant openings and delayed the negotiation and commitments for new locations, as well as delayed plans for remodeling existing restaurants. These changes have impacted our pace of business growth.

The extent of the impact of the COVID-19 pandemic on our operations and financial results depends on future developments and is highly uncertain due to the unknown duration and severity of the outbreak, including the potential impact of the COVID-19 delta variant. The situation is changing rapidly and future impacts may materialize that are not yet known. As of the date of this filing, substantially all of our restaurants continue to operate, with dining rooms open at varying capacities. We intend to continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our team members, customers, suppliers and shareholders. Recently, the Biden Administration announced that all U.S. private businesses with 100 or more employees will have to ensure staff are fully vaccinated against COVID-19 or tested regularly. Businesses that fail to comply will be subject to fines of up to $13,600 per violation. The rules related to this federal mandate are still evolving and remain unclear, and the mandate is likely to be challenged in court by various states. We are actively monitoring the situation and will adopt policies at the appropriate time; however, any failure to comply with, or difficulty maintaining staffing levels due to, this mandate or any other governmental rules or regulations may have a material adverse impact on our business, financial condition and results of operations.

The further spread of COVID-19 or other infectious diseases, and the requirements or measures imposed or taken by federal, state and local governments and businesses to mitigate the spread of such diseases, could disrupt our business or impact our ability to carry out our business as usual. Depending on the duration and severity of any such business interruption, we may need to seek additional sources of liquidity. There can be no guarantee that additional liquidity, whether through the credit markets or government programs, will be readily available or available on favorable terms to us. The ultimate impact of adverse events in the future on our operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration, and any additional preventative and protective actions that governments, or we, may direct, which may result in an extended period of continued business disruption, reduced guest traffic, damage to our reputation and reduced operations, any of which could have a material adverse effect on our business, financial condition and results of operations.

The COVID-19 pandemic or other infectious diseases may also have the effect of heightening other risks disclosed in this prospectus, including, but not limited to, those related to our growth strategy, our ability to service our debt obligations, comply with debt covenants, access capital markets and other funding sources, changes in consumer spending behaviors, supply chain interruptions and/or commodity price increases.

We are vulnerable to changes in economic conditions and consumer preferences that could have a material adverse effect on our business, financial condition and results of operations.

The restaurant industry depends on consumer discretionary spending and is often affected by changes in consumer tastes, national, regional and local economic conditions and demographic trends, including changes in behavior caused by the COVID-19 pandemic. In addition, factors such as traffic patterns, weather, fuel prices, local demographics, local regulations and the type, number and locations of competing restaurants may adversely affect the performances of individual locations. In addition, economic downturns, inflation or increased food or

 

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energy costs could harm the restaurant industry in general and our restaurants in particular. Adverse changes in any of these factors could reduce consumer traffic or impose practical limits on pricing that could have a material adverse effect on our business, financial condition and results of operations. There can also be no assurance that consumers will continue to regard our menu offerings favorably, that we will be able to develop new menu items that appeal to consumer preferences or that there will not be a drop in consumer demands for restaurant dining during lunch and dinner dayparts. Restaurant traffic and our resulting sales depend in part on our ability to anticipate, identify and respond to changing consumer preferences and economic conditions. In addition, the restaurant industry is subject to scrutiny due to the perception that restaurant company practices have contributed to poor nutrition, high caloric intake, obesity or other health concerns of their customers. If we are unable to adapt to changes in consumer preferences and trends, we may lose customers, which could have a material adverse effect on our business, financial condition and results of operations.

Customer preference on how and where they purchase food may change because of advances in technology or alternative service channels. If we are not able to respond to these changes, or our competitors respond to these changes more effectively, our business, financial condition and results of operations could be adversely affected.

Changes in the cost of food could have a material adverse effect on our business, financial condition and results of operations.

Our profitability depends in part on our ability to anticipate and react to changes in the cost of sales, including, among other things, pork, beef, chicken, potatoes, bread, and produce items. We are susceptible to increases in the cost of food due to factors beyond our control, such as freight and delivery charges, general economic conditions, seasonal economic fluctuations, weather conditions, global demand, food safety concerns, infectious diseases, fluctuations in the U.S. dollar, tariffs and import taxes, product recalls and government regulations. Dependence on frequent deliveries of fresh produce and other food products subjects our business to the risk that shortages or interruptions in supply could adversely affect the availability, quality or cost of ingredients or require us to incur additional costs to obtain adequate supplies. Deliveries of supplies may be affected by adverse short-term weather conditions or long-term changes in weather patterns, including those related to climate change, natural disasters, labor shortages, or financial or solvency issues of our distributors or suppliers, product recalls or other issues. Further, increases in fuel prices could result in increased distribution costs. In addition, a material adverse effect on our business, financial condition and results of operations could occur if any of our distributors, suppliers, vendors, or other contractors fail to meet our quality or safety standards or otherwise do not perform adequately, or if any one or more of them seeks to terminate its agreement or fails to perform as anticipated, or if there is any disruption in any of our distribution or supply relationships or operations for any reason.

Changes in the price or availability of certain food products, including as a result of the COVID-19 pandemic, could affect our profitability and reputation. For example, beef supply shortages during the second quarter of 2020—largely due to the COVID-19 pandemic—resulted in significant inflation in beef prices, and impacted our results of operations. While a portion of other commodities we purchase are subject to contract pricing and therefore have not been fully impacted by price inflation as a result of the COVID-19 pandemic thus far, as our contracts expire we may not be able to successfully re-negotiate terms that protect us from price inflation in the future or the portion not covered by contact pricing might increase unexpectedly, creating price inflation we have not planned for. Furthermore, we have experienced higher commodity prices in the third quarter of 2021 and expect that trend to continue in the fourth quarter of 2021.

Changes in the cost of ingredients can result from a number of factors, including seasonality, short-term weather conditions or long-term changes in weather patterns, natural disasters, currency exchange rates, increases in the cost of grain, consumer demand, disease and viruses and other factors that affect availability and greater international demand for domestic beef, pork and chicken products. In the event of cost increases with respect to one or more of our raw ingredients, we may choose to temporarily suspend or permanently discontinue serving menu items rather than paying the increased cost for the ingredients. Any such changes to our available menu could negatively impact our restaurant traffic, business and results of operations during the shortage and thereafter. While future cost

 

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increases can be partially offset by increasing menu prices, there can be no assurance that we will be able to offset future cost increases by such menu price increases. If we implement menu price increases, there can be no assurance that increased menu prices will be fully absorbed by our guests without any resulting change to their visit frequencies or purchasing patterns. Competitive conditions may limit our menu pricing flexibility and if we implement menu price increases to protect our margins, restaurant traffic could be materially adversely affected.

An important aspect of our growth strategy involves opening new restaurants in existing and new markets. We may be unsuccessful in opening new restaurants or establishing new markets and our new restaurants may not perform as well as anticipated, which could have a material adverse effect on our business, financial condition and results of operations.

A key part of our growth strategy includes opening new restaurants in existing and new markets and operating those restaurants on a profitable basis. From November 2020 through the end of 2021, we are targeting opening seven new restaurants, including new locations in Illinois, Michigan, Florida and Arizona. Since 2015, we have opened new restaurants at a compound annual growth rate of approximately 9.3%. Over the long term, we plan to increase our number of restaurants by approximately 10% annually. We must identify target markets where we can enter or expand, and we may not be able to open our planned new restaurants within budget or on a timely basis, and our new restaurants may not perform as well as anticipated. Our ability to successfully open new restaurants is affected by several factors, many of which are beyond our control, including our ability to:

 

   

identify available, appropriate and attractive restaurant sites;

 

   

compete for restaurant sites;

 

   

reach acceptable agreements regarding the lease or purchase of restaurant sites;

 

   

obtain or have available the financing required to develop and operate new restaurants, including construction and opening costs, which includes access to leases and equipment leases at favorable interest and capitalization rates;

 

   

respond to unforeseen engineering or environmental problems with our selected restaurant sites;

 

   

respond to landlord delays and the failure of landlords to timely deliver real estate to us;

 

   

mitigate the impact of inclement weather, natural disasters and other calamities on the development of restaurant sites;

 

   

hire, train and retain the skilled management and other team members necessary to meet staffing needs of new restaurants;

 

   

obtain, in a timely manner and for an acceptable cost, required licenses, permits and regulatory approvals and respond effectively to any changes in local, state or federal law and regulations that adversely affect our costs or ability to open new restaurants; and

 

   

respond to construction and equipment cost increases for new restaurants.

There is no guarantee that a sufficient number of available, appropriate and attractive restaurant sites will be available in desirable areas or on terms that are acceptable to us in order to achieve our growth plan. If we are unable to open new restaurants, or if planned restaurant openings are significantly delayed, it could have a material adverse effect on our business, financial condition and results of operations.

As part of our long-term growth strategy, we may open restaurants in geographic markets in which we have little or no prior operating experience. Our restaurant base is geographically concentrated in the Midwestern United States, and we may encounter new challenges as we enter new markets. The challenges of entering new markets include: difficulties in hiring experienced personnel; unfamiliarity with local real estate markets and demographics; consumer unfamiliarity with our brand; and different competitive and economic conditions, consumer tastes and discretionary spending patterns that are more difficult to predict or satisfy than in our

 

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existing markets. Consumer recognition of our brand has been important in the success of our restaurants in our existing markets, and we may find that our concept has limited appeal in new markets. Restaurants we open in new markets may take longer to reach expected sales and profit levels on a consistent basis and may have higher construction, occupancy and operating costs than existing restaurants. Any failure on our part to recognize or respond to these challenges may adversely affect the success of any new restaurants and could have a material adverse effect on our business, financial condition and results of operations.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges or opportunities, including the need to open additional restaurants. Accordingly, we may need to engage in equity or debt financings to secure additional funds. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, which could have a material adverse effect on our business, financial condition and results of operations.

New restaurants may not be profitable or may close, and the performance of our restaurants that we have experienced in the past may not be indicative of future results.

Some of our restaurants open with an initial start-up period of higher than normal sales volumes, and our Restaurant-Level Adjusted EBITDA Margins are generally lower through the first 12 months of operation. In new markets, the length of time before average sales for new restaurants stabilize is less predictable as a result of our limited knowledge of these markets and consumers’ limited awareness of our brand. In addition, our AUV and same-restaurant sales may not increase at the rates our existing restaurants have achieved over the past several years. Our ability to operate new restaurants profitably and increase AUV and same-restaurant sales will depend on many factors, some of which are beyond our control, including:

 

   

consumer awareness and understanding of our brand;

 

   

general economic conditions, which can affect restaurant traffic, local labor costs and prices we pay for the food products and other supplies we use;

 

   

consumption patterns and food preferences that may differ from region to region;

 

   

changes in consumer preferences and discretionary spending;

 

   

difficulties obtaining or maintaining adequate relationships with distributors or suppliers in new markets;

 

   

increases in prices for commodities;

 

   

inefficiency in our labor costs as the staff gains experience;

 

   

competition, either from our competitors in the restaurant industry or our own restaurants;

 

   

temporary and permanent site characteristics of new restaurants;

 

   

changes in government regulation; and

 

   

other unanticipated increases in costs, any of which could give rise to delays or cost overruns.

Although we target specified operating and financial metrics, new restaurants may not meet these targets or may take longer than anticipated to do so. If our new restaurants do not perform as planned or close, or if we are unable to achieve our expected restaurant sales, it could have a material adverse effect on our business, financial condition and results of operations.

 

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Our failure to manage our growth effectively could harm our business and results of operations.

Our growth plan includes opening new restaurants. Our existing restaurant management systems, financial and management controls and information systems may be inadequate to support our planned expansion. Managing our growth effectively will require us to continue to enhance these systems, procedures and controls and to hire, train and retain managers and team members. We may not respond quickly enough to the changing demands that our expansion will impose on our management, restaurant teams and existing infrastructure, which could have a material adverse effect on our business, financial condition and results of operations. These demands could cause us to operate our existing business less effectively, which in turn could cause a deterioration in the financial performance of our existing restaurants. If we experience a decline in the financial performance, we may decrease the number of or discontinue restaurant openings, or we may decide to close restaurants that we are unable to operate in a profitable manner.

Opening new restaurants in existing markets may negatively impact sales at our existing restaurants.

The consumer target area of our restaurants varies by location, depending on a number of factors, including population density, other local retail and business attractions, area demographics and geography. As a result, if we open new restaurants in or near markets in which we already have restaurants, it could have a material adverse effect on sales at these existing restaurants. Existing restaurants could also make it more difficult to build our consumer base for a new restaurant in the same market. Our core business strategy does not entail opening new restaurants that we believe will materially affect sales at our existing restaurants over the long term. However, due to brand recognition and logistical synergies, as part of our growth strategy, we also intend to open new restaurants in areas where we have existing restaurants. This plan could have a material adverse effect on the results of operations and same-restaurant sales for our restaurants in such markets due to the close proximity with our other restaurants and market saturation, particularly within our core market of Chicago. Although some sales cannibalization between our restaurants will be intentional in order to relieve sales pressures on some existing locations, unintentional sales cannibalization or sales cannibalization in excess of what was intended may become significant in the future as we continue to open new restaurants, and could affect our sales growth, which could, in turn, have a material adverse effect on our business, financial condition and results of operations.

Our plans to open new restaurants, and the ongoing need for capital expenditures at our existing restaurants, require us to spend capital.

Our growth strategy depends on opening new restaurants, which will require us to use cash flows from operations and a portion of the net proceeds of this offering. We cannot assure you that cash flows from operations and the net proceeds of this offering will be sufficient to allow us to implement our growth strategy. If this cash is not allocated efficiently among our various projects, or if any of these initiatives prove to be unsuccessful, we may experience reduced profitability and we could be required to delay, significantly curtail or eliminate planned restaurant openings, which could have a material adverse effect on our business, financial condition, results of operations and the price of our Class A common stock.

In addition, as our restaurants mature, our business will require capital expenditures for the maintenance, renovation and improvement of existing restaurants to remain competitive and maintain the value of our brand standard. This creates an ongoing need for cash, and, to the extent we cannot fund capital expenditures from cash flows from operations, funds will need to be borrowed or otherwise obtained.

If the costs of funding new restaurants or renovations or enhancements at existing restaurants exceed budgeted amounts, and/or the time for building or renovation is longer than anticipated, our profits could be reduced. If we cannot access the capital we need, we may not be able to execute on our growth strategy, take advantage of future opportunities or respond to competitive pressures.

 

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A decline in visitors to any of the retail centers, lifestyle centers, or entertainment centers where our restaurants are located could negatively affect our restaurant sales.

Our restaurants are primarily located in high-activity trade areas that often contain retail centers, lifestyle centers, and entertainment centers. We depend on high visitor rates in these trade areas to attract guests to our restaurants. Factors that may result in declining visitor rates at these locations include economic or political conditions, anchor tenants closing in retail centers in which we operate, changes in consumer preferences or shopping patterns, changes in discretionary consumer spending, increasing petroleum prices, mobility restrictions, fear of contracting COVID-19 and the sharp increase in unemployment caused by the closure of businesses in response to the COVID-19 pandemic, or other factors. A decline in traffic at these locations for a sustained period could have a material adverse effect on our business, financial condition and results of operations.

Our same-restaurant sales may be lower than we expect in future periods.

Same-restaurant sales will continue to be a critical factor affecting our ability to generate profits because the profit margin on same-restaurant sales is generally higher than the profit margin on new restaurant sales. Our ability to increase same-restaurant sales depends in part on our ability to successfully implement our initiatives to build sales. It is possible such initiatives will not be successful, that we will not achieve our target same-restaurant sales or that the change in same-restaurant sales could be negative, which may cause a decrease in sales growth and ability to achieve profitability. This could have a material adverse effect on our business, financial condition and results of operations.

Our marketing programs and any limited time or seasonal offerings may not be successful and could fail to meet expectations, and our new menu items, advertising campaigns and restaurant designs and remodels may not generate increased sales or profits.

We incur costs and expend other resources in our marketing efforts on new and seasonal menu items, advertising campaigns and restaurant designs and remodels to raise brand awareness and attract and retain guests. In addition, as the number of our restaurants increases, and as we expand into new markets, we expect to increase our investment in advertising and consider additional promotional activities. Accordingly, in the future, we will incur greater marketing expenditures, resulting in greater financial risk. Our limited time or seasonal menu offerings, which we offer as a part of our promotional activities from time to time, may not perform as anticipated, which could have an adverse impact on our results of operations for the related period. If these initiatives are not successful, it could result in us incurring expenses without the benefit of higher revenues, which could have a material adverse effect on our business, financial condition and results of operations.

Incidents involving food-borne illness and food safety, including food tampering or contamination could adversely affect our brand perception, business, financial condition and results of operations.

Food safety is a top priority, and we dedicate substantial resources to help ensure that our guests enjoy safe, quality food products. However, food-borne illnesses and other food safety issues have occurred in the food industry in the past, and could occur in the future. Incidents or reports of food-borne or water-borne illness or other food safety issues, food contamination or tampering, team member hygiene and cleanliness failures or improper team member conduct, guests entering our restaurants while ill and contaminating food ingredients or surfaces at our restaurants could lead to product liability or other claims. Such incidents or reports could negatively affect our brand and reputation and could have a material adverse effect on our business, financial condition and results of operations. Similar incidents or reports occurring at competitors in our industry unrelated to us could likewise create negative publicity, which could negatively impact consumer behavior towards us.

We cannot guarantee to consumers that our food safety controls, procedures and training will be fully effective in preventing all food safety and public health issues at our restaurants, including any occurrences of pathogens (i.e., Ebola, “mad cow disease,” “SARS,” “swine flu,” Zika virus, avian influenza, hepatitis A, porcine epidemic diarrhea virus, norovirus or other virus), bacteria (i.e., salmonella, listeria or E. coli), parasites or other

 

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toxins infecting our food supply. For example, in August 2021, we received a report from the county health department of cases of E. coli that were possibly connected to our Glendale Heights, Illinois restaurant and subsequently one lawsuit that has been filed in Illinois state court. We have cooperated fully with state and county health authorities, and the DuPage County Health Department in August 2021 stated that the information gathered so far indicates there is no current risk to the public’s health. Although we believe all guest and team member cases have been identified, additional cases may be reported and additional lawsuits or negative publicity may result.

These public health issues, in addition to food tampering, could adversely affect food prices and availability of certain food products, could generate negative publicity and litigation, and could lead to closure of restaurants resulting in a decline in our sales or profitability. In addition, there is no guarantee that our restaurant locations will maintain the high levels of internal controls and training we require at our restaurants. Furthermore, our reliance on third-party food processors makes it difficult to monitor food safety compliance and may increase the risk that food-borne illness would affect multiple locations rather than single restaurants. Some food-borne illness incidents could be caused by third-party food suppliers and transporters outside of our control, and may affect multiple restaurant locations as a result. We cannot assure you that all food items will be properly maintained during transport throughout the supply chain and that our team members will identify all products that may be spoiled and should not be used in our restaurants. The risk of food-borne illness may also increase whenever our menu items are served outside of our control, such as by third-party food delivery services, guest take out or at catered events. We do not have direct control over our third-party suppliers, transporters or delivery services, including in their adherence to additional sanitation protocols and guidelines as a result of the COVID-19 pandemic or other infectious diseases, and may not have visibility into their practices. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of food-borne illness in one of our restaurants could negatively affect sales at all our restaurants if highly publicized, such as on national media outlets or through social media, especially due to the geographic concentration of many of our restaurants. This risk exists even if it were later determined that the illness was wrongly attributed to one of our restaurants. Food safety incidents, whether at our restaurants or involving our business partners, could lead to wide public exposure and negative publicity, which could materially harm our business. A number of other restaurant chains have experienced incidents related to food-borne illnesses that have had material adverse impacts on their operations, and we cannot assure you that we could avoid a similar impact upon the occurrence of a similar incident at one of our restaurants. Additionally, even if food-borne illnesses were not identified at our restaurants, our restaurant sales could be adversely affected if instances of food-borne illnesses at other restaurant chains were highly publicized.

We face significant competition for guests, and our inability to compete effectively may affect our traffic, our sales and our operating profit margins, which could have a material adverse effect on our business, financial condition and results of operations.

The restaurant industry is intensely competitive with many companies that compete directly and indirectly with us with respect to food quality, brand recognition, service, price and value, convenience, design and location. We compete in the restaurant industry with national, regional and locally-owned and/or operated limited-service restaurants and full-service restaurants. We compete with fast casual restaurants, quick service restaurants and casual dining restaurants. Some of our competitors have significantly greater financial, marketing, personnel and other resources than we do, and many of our competitors are well-established in markets in which we have existing restaurants or intend to locate new restaurants. In addition, many of our competitors have greater name recognition nationally or in some of the local markets in which we have or plan to have restaurants. Competition from food delivery services has also increased in recent years, particularly during the COVID-19 pandemic, and is expected to continue to increase. Any inability to successfully compete with the restaurants in our existing or new markets will place downward pressure on our guest traffic and could have a material adverse effect on our business, financial condition and results of operations. Additionally, a significant amount of the delivery from our restaurants is through third-party delivery companies. If these third-party delivery companies cease doing business with us, or cannot make their scheduled deliveries, or do not continue their relationship with us on favorable terms, it may have a negative impact on sales or result in increased third-party delivery fees.

 

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Our continued success also depends in part on the continued popularity of our menu and the experience we offer guests at our restaurants. Consumer tastes, nutritional and dietary trends, traffic patterns and the type, number, and location of competing restaurants often affect the restaurant business, and our competitors may react more efficiently and effectively to changes in those conditions. In addition, some of our competitors in the past have implemented promotional programs that provide price discounts on certain menu offerings, and they may continue to do so in the future. If we are unable to continue to compete effectively, our traffic, restaurant sales and restaurant operating profit margins could decline, which could have a material adverse effect on our business, financial condition and results of operations.

Additionally, our competitors with greater financial resources can spend significantly more on marketing and advertising and other initiatives than we are able to. Should our competitors increase spending on marketing and advertising and other initiatives or our marketing expenditures decrease for any reason, or should our advertising, promotions, and restaurant designs and locations be less effective than our competitors, it could have a material adverse effect on our business, financial condition and results of operations.

Our restaurant base is geographically concentrated in the Midwestern United States, and we could be negatively affected by conditions specific to that region.

Our restaurants in the Midwestern United States represented approximately 89% of our restaurants as of December 27, 2020. Our restaurants in the Chicagoland area represented approximately 61% of our restaurants as of December 27, 2020. Adverse changes in demographic, unemployment, economic, regulatory or weather conditions in the Midwestern United States have had, and may continue to have, material adverse effects on our business, financial condition and results of operations. As a result of our concentration in this market, we have been, and in the future may be, disproportionately affected by conditions in this geographic area compared to other chain restaurants with a national footprint.

In addition, our competitors could open additional restaurants in the Midwestern United States, which could result in reduced market share for us in this key geographic region, which could have a material adverse effect on our business, financial condition and results of operations.

Damage to our reputation and negative publicity could have a material adverse effect on our business, financial condition and results of operations.

Our reputation and the quality of our brand are critical to our business and success in existing markets, and will be critical to our success as we enter into new markets. Any incident that erodes consumer loyalty for our brand could significantly reduce its value and damage our business. We may be adversely affected by negative publicity relating to food quality, the safety, sanitation and welfare of our restaurant facilities, guest complaints or litigation alleging illness or injury, health inspection scores, integrity of our or our suppliers’ food processing and other policies, practices and procedures, team member relationships and welfare or other matters at one or more of our restaurants. Any publicity relating to health concerns, perceived or specific outbreaks of a food-borne illness attributed to one or more of our restaurants, or non-compliance with food handling and sanitation requirements imposed by federal, state and local governments could result in a significant decrease in guest traffic in all of our restaurants and could have a material adverse effect on our results of operations. Furthermore, similar negative publicity or occurrences with respect to other restaurants or other restaurant chains could also decrease our guest traffic and have a similar material adverse effect on our business. In addition, incidents of restaurant commentary have increased dramatically with the proliferation of social media platforms. Negative publicity may adversely affect us, regardless of whether the allegations are valid or whether we are held responsible. In addition, the negative impact of adverse publicity may extend far beyond the restaurant involved, especially due to the high geographic concentration of many of our restaurants, and affect some or all our other restaurants. For example, we, or other restaurant companies generally, could come under criticism from animal rights and welfare activists for our business practices or those of our suppliers. Such criticisms could impair our brand, our restaurant sales, our hiring, and our expansion plans. If we changed our practices because of concerns about animal welfare, or in response to such criticisms, our costs might increase, or we may have to change our suppliers or our menu. A similar risk exists with respect to food service businesses unrelated to us, if customers

 

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mistakenly associate such unrelated businesses with our operations. Team member claims against us based on, among other things, wage and hour violations, discrimination, harassment or wrongful termination may also create not only legal and financial liability but negative publicity that could adversely affect us and divert our financial and management resources that would otherwise be used to benefit the future performance of our operations. A significant increase in the number of these claims or an increase in the number of successful claims could have a material adverse effect on our business, financial condition and results of operations.

The digital and delivery business, and expansion thereof, is uncertain and subject to risk.

We believe digital investments to be a critical differentiator for our business, creating the opportunity to drive greater engagement and frequency with both new and existing customers. As the digital space around us continues to evolve, our technology needs to evolve concurrently to stay competitive with the industry. If we do not maintain and innovate our digital systems that are competitive with the industry, our digital business may be adversely affected and could damage our sales. We rely on third-parties for our ordering and payment platforms. Such services performed by these third-parties could be damaged or interrupted by technological issues, which could then result in a loss of sales for a period of time. Information processed by these third-parties could also be impacted by cyber-attacks, which could not only negatively impact our sales, but also harm our brand image.

Recognizing the rise in delivery services offered throughout the restaurant industry, we understand the importance of providing such services to meet our guests wherever and whenever they want. We have invested in marketing to promote our delivery partnerships, which could negatively impact our profitability if the business does not continue to expand. We rely on third-parties to fulfill delivery orders timely and in a fashion that will satisfy our guests. Errors in providing adequate delivery services may result in guest dissatisfaction, which could also result in loss of guest retention, loss in sales and damage to our brand image. Additionally, as with any third-party handling food, such delivery services increase the risk of food tampering while in transit. We developed sealed packaging to provide some deterrence against such potential food tampering. We are also subject to risk if there is a shortage of delivery drivers, which could result in a failure to meet our guests’ expectations.

Third-party delivery services within the restaurant industry is a competitive environment and includes a number of players competing for market share. If our third-party delivery partners fail to effectively compete with other third-party delivery providers in the sector, our delivery business may suffer resulting in a loss of sales. If any third-party delivery provider we partner with experiences damage to their brand image, we may also see ramifications due to our partnership with them.

Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse effect on our business, financial condition or results of operations.

Our marketing efforts rely heavily on the use of social media. In recent years, there has been a marked increase in the use of social media platforms, including weblogs (blogs), mini-blogs, chat platforms, social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Many of our competitors are expanding their use of social media, especially since the beginning of the COVID-19 pandemic, and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with customers and brand relevance, particularly given the rise in digital orders by customers at home due to the COVID-19 pandemic. We also continue to invest in other digital marketing initiatives that allow us to reach our customers across multiple digital channels and build their awareness of, engagement with, and loyalty to our brand. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher sales or increased brand recognition. Additionally, negative commentary regarding our restaurants, our food or our service may be posted on social media platforms and may be adverse to our reputation or business. This harm may be immediate, without affording us an opportunity for redress or correction.

As laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms

 

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and devices could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and results of operations. In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations.

We have a limited number of suppliers and distributors for several of our frequently used ingredients. If our suppliers or distributors are unable to fulfill their obligations under our arrangements with them, we could encounter supply shortages and incur higher costs.

We utilize a combination of direct suppliers and distributors dependent on both the product category as well as geography. These products are purchased through various pricing protocols inclusive of commodity and risk management, fixed pricing agreements and market-based costing measures. Due to the concentration of suppliers and distributors that we utilize, the cancellation of our supply arrangements with these suppliers or the disruption, delay or inability of these suppliers to deliver these products to our restaurants due to problems in production or distribution, inclement weather, natural disasters, unanticipated demand or other conditions may materially and adversely affect our results of operations while we establish alternative distribution channels.

In addition, we do not control the businesses of our suppliers and distributors and our efforts to monitor the standards by which they perform may not be successful. If our suppliers or distributors fail to comply with food safety or other laws and regulations, or face allegations of non-compliance, their operations may be disrupted. If that were to occur, we may not be able to find replacement suppliers on commercially reasonable terms or a timely basis, if at all.

Contingency platforms have been developed to mitigate the risk in various cases including secondary supply, floor stocking arrangements, product diversification and inventory management. While we therefore believe that alternative supply and distribution sources are available, there can be no assurance that we will continue to be able to identify or negotiate with such sources on terms that are commercially reasonable to us or that the quality of the product from an alternative supplier is comparable to existing standards. If our suppliers or distributors are unable to fulfill their obligations under their contracts or we are unable to identify alternative sources, we could encounter supply shortages and incur higher costs, each of which could have a material adverse effect on our results of operations.

Any prolonged disruption in the operations of our two supply chain centers could harm our business.

We operate two manufacturing and supply chain centers in Illinois. We plan to continue investing in additional supply chain capacity in the future, as necessary, based on our growth in existing and new restaurants. Our supply chain centers produce all the Italian beef, gravy and sweet peppers used within all of our restaurants. As a result, any prolonged disruption in the operations of any of these facilities, whether due to technical, operational or labor difficulties, destruction or damage to the facility, real estate issues, limited capacity or other reasons, could adversely affect our business, financial condition and results of operations.

We face potential liability with our gift cards under the property laws of some states.

Our gift cards, which may be used to purchase food and beverages in our restaurants, may be considered stored value cards by certain states in accordance with their abandoned and unclaimed property laws. These laws could require us to remit cash to such state in an amount equal to all or a designated portion of the unredeemed balance on the gift cards based on certain card attributes and the length of time that the cards are inactive. The Company formed an affiliate in Florida, PHD Card Services, LLC that handles the issuance of Portillo’s gift cards, and the gift card breakage is recorded based on historical data on gift card redemption.

The analysis of the potential application of the abandoned and unclaimed property laws to our gift cards is complex, involving an analysis of constitutional, statutory provisions and factual issues. In the event that

 

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one or more states change their existing abandoned and unclaimed property laws or successfully challenge our position on the application of its abandoned and unclaimed property laws to our gift cards, or if the estimates that we use in projecting the likelihood of the cards being redeemed prove to be inaccurate, our liabilities with respect to unredeemed gift cards may be materially higher than the amounts shown in our consolidated financial statements. If we are required to materially increase the estimated liability recorded in our consolidated financial statements with respect to unredeemed gift cards, our financial condition and results of operations could be adversely affected.

We depend on our executive officers and certain other key team members, the loss of whom could have a material adverse effect on our business, financial condition and results of operations.

We rely upon the accumulated knowledge, skills and experience of our executive officers and certain other key team members. Our chief executive officer has been with us for more than three years and our executive officers have a combined total of over 140 years of experience in the food service industry. The loss of the services of any of our executive officers could have a material adverse effect on our business, financial condition and results of operations, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. If our executive officers were to leave us or become incapacitated, it might negatively impact our planning and execution of business strategy and operations. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified executive personnel. There is a high level of competition for experienced, successful executive personnel in our industry. Our inability to meet our executive staffing requirements in the future could have a material adverse effect on our business, financial condition and results of operations.

Our inability to identify qualified individuals for our workforce could slow our growth and adversely impact our ability to operate our restaurants.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified team members to meet the needs of our existing restaurants and to staff new restaurants. A sufficient number of qualified individuals to fill these positions may be in short supply in some communities. Competition in these communities for qualified team members could require us to pay higher wages and provide greater benefits. We place a heavy emphasis on the qualification and training of our personnel and spend a significant amount of time and money on training our team members. Any inability to recruit and retain qualified individuals may result in higher turnover and increased labor costs, and could compromise the quality of our service, could have a material adverse effect on our business, financial condition and results of operations. Any such inability could also delay the planned openings of new restaurants and could adversely impact our existing restaurants. The inability to retain or recruit qualified team members, increased costs of attracting qualified team members or delays in restaurant openings could have a material adverse effect on our business, financial condition and results of operations. The COVID-19 pandemic has exacerbated staffing complexities for us and other restaurant operators. During 2020, we closed our dining rooms at the time required by different jurisdictions, but were able to maintain our drive-thru, delivery and curbside pick-up business. We reopened our dining rooms as permitted by the various applicable municipal health and safety mandates. We reopened all of our restaurants in a new environment, filled with increased complexity for our team members and managers, a decreased applicant pool for all positions, safety concerns, and ongoing staff call-outs and exclusions due to illness. The COVID-19 pandemic has also resulted in aggressive competition for talent, wage inflation and pressure to improve benefits and workplace conditions to remain competitive. Maintaining adequate staffing in our existing restaurants and hiring and training staff for our new restaurants has been significantly complicated by the impacts of the COVID-19 pandemic on our business. Our existing wages and benefits programs, combined with the challenging conditions due to the COVID-19 pandemic and the highly competitive wage pressure resulting from the labor shortage, may be insufficient to attract and retain the best talent. Our failure to recruit and retain new team members in a timely manner or higher team member turnover levels all could affect our ability to open new restaurants and grow sales at existing restaurants, and we may experience higher than projected labor costs.

 

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The failure to obtain or to properly verify the employment eligibility of our team members could have a material adverse effect on our business, financial condition and results of operations.

Although we require all workers to provide us with government-specified documentation evidencing their employment eligibility, some of our team members may, without our knowledge, be unauthorized workers. We currently participate in the “E-Verify” program, an Internet-based, free program run by the U.S. government to verify employment eligibility, in Arizona, which is the only state in which we operate where participation is required. However, use of the “E-Verify” program does not guarantee that we will properly identify all applicants who are ineligible for employment, and we are not utilizing “E-Verify” in any other states where we operate. Unauthorized workers are subject to deportation and may subject us to fines or penalties, and if any of our workers are found to be unauthorized, we could experience adverse publicity that may negatively impact our brand and may make it more difficult to hire and keep qualified team members. Termination of a significant number of team members who are unauthorized employees may disrupt our operations, cause temporary increases in our labor costs as we train new team members and result in adverse publicity. We could also become subject to fines, penalties and other costs related to claims that we did not fully comply with all recordkeeping obligations of federal and state immigration compliance laws. These factors could materially adversely affect our business, financial condition and results of operations.

Failure to maintain our corporate culture as we grow could have a material adverse effect on our business, financial condition and results of operations.

We believe that a critical component to our success has been our corporate culture and values of Family, Greatness, Energy and Fun. We have invested substantial time and resources in building our team. As we continue to grow, we may find it difficult to maintain the innovation, teamwork, passion and focus on execution that we believe are important aspects of our corporate culture. Any failure to preserve our culture could negatively impact our operations, including our ability to retain and recruit personnel and to effectively focus on and pursue our corporate objectives. If we cannot maintain our corporate culture as we grow, it could have a material adverse effect on our business, financial condition and results of operations.

Unionization activities may disrupt our operations and increase our costs.

Although none of our team members are currently covered under collective bargaining agreements, our team members may elect to be represented by labor unions in the future. If a significant number of our team members were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements, it could have a material adverse effect on our business, financial condition and results of operations. In addition, a labor dispute involving some or all our team members may harm our reputation, disrupt our operations and reduce our revenues, and resolution of disputes could increase our costs. Further, if we enter into a new market with unionized construction companies, or the construction companies in our current markets become unionized, construction and build-out costs for new restaurants in such markets could materially increase.

Matters relating to employment and labor law could have a material adverse effect on our business, financial condition and results of operations and restaurant companies have been the target of class action lawsuits and other proceedings alleging violations of workplace and employment laws. Proceedings of this nature are costly, divert management attention and, if successful, could result in our payment of substantial damages or settlement costs.

Various federal and state labor laws govern our relationships with our team members and affect our operating costs. Our operations are subject to the U.S. Occupational Safety and Health Act, which governs worker health and safety, the U.S. Fair Labor Standards Act, which governs such matters as minimum wages and overtime, and a variety of similar federal, state and local laws that govern these and other employment law matters. These laws include employee classifications as exempt or non-exempt, minimum wage requirements, unemployment tax rates, workers’ compensation rates, overtime, family leave, working conditions, safety standards, immigration status, unemployment tax rates, workers’ compensation rates, state and local payroll

 

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taxes, federal and state laws which prohibit discrimination, citizenship requirements and other wage and benefit requirements for team members classified as non-exempt. In addition, with the passage in 2010 of the U.S. Patient Protection and Affordable Care Act (the “ACA”), we are required to provide affordable coverage, as defined in the ACA, to all team members, or otherwise be subject to a payment per team member based on the affordability criteria in the ACA. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Significant additional government regulations and new laws, including mandated increases in minimum wages, changes in exempt and non-exempt status, or increased mandated benefits such as health care and insurance costs could have a material adverse effect on our business, financial condition and results of operations. In addition, changes in federal or state workplace regulations could adversely affect our ability to meet our financial targets.

Our business is subject to the risk of litigation by team members, consumers, suppliers, stockholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action and regulatory actions, is difficult to assess or quantify. In recent years, restaurant companies, including us, have been subject to lawsuits alleging violations of federal and state laws regarding workplace and employment conditions, discrimination and similar matters, and some restaurants have been subject to class action lawsuits in respect of such matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits have been instituted from time to time alleging violations of various federal and state wage and hour laws regarding, among other things, employee meal deductions, overtime eligibility of managers and failure to pay for all hours worked. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations and result in increases in our insurance premiums. In addition, they may generate negative publicity, which could reduce guest traffic and sales. Although we maintain what we believe to be adequate levels of insurance, insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims or any adverse publicity resulting from claims could have a material adverse effect on our business, financial condition and results of operations.

If we face labor shortages or increased labor costs, it could have a material adverse effect on our business, financial condition and results of operations.

Labor is a primary component in the cost of operating our restaurants. If we face labor shortages or increased labor costs because of increased competition for team members, federal or state unemployment benefits, higher team member-turnover rates, unionization of restaurant workers, or increases in the federally-mandated or state-mandated minimum wage, change in exempt and non-exempt status, or other employee benefits costs (including costs associated with health insurance coverage or workers’ compensation insurance), our operating expenses could increase and our growth could be adversely affected.

As a result of wage pressures, our team members are all paid more than the applicable minimum wage in the area where they work. Increases in federal or state minimum wages or unemployment benefits may also result in increases in the wage rates paid. We may be unable to increase our menu prices in order to pass future increased labor costs on to our guests, in which case our operating margins would be negatively affected. If menu prices are increased by us to cover increased labor costs, the higher prices could adversely affect demand for our menu items, resulting in lower sales.

In addition, our success depends in part upon our ability to attract, motivate and retain a sufficient number of well-qualified restaurant operators, management personnel and other team members. Qualified individuals needed to fill these positions can be in short supply in some geographic areas. Competition for these team members could require us to pay higher wages, which could also result in higher labor costs. In addition, limited service restaurants have traditionally experienced relatively high employee turnover rates. Although we have not yet experienced any significant problems in recruiting team members, our ability to recruit and retain such individuals may delay the planned openings of new restaurants or result in higher team member turnover in existing restaurants, which could increase our labor costs and have a material adverse effect on our business, financial condition and results of operations.

 

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We are exposed to risks associated with leasing property subject to long-term and non-cancelable leases and may be unable to renew leases at the end of their terms.

Many of our restaurant leases are non-cancelable and typically have initial terms of 10 to 20 years, providing for four renewal options of five years each as well as rent escalations. Generally, our leases are triple-net leases that require us to pay our share of the costs of real estate taxes, utilities, building operating expenses, insurance and other charges in addition to rent. We generally cannot cancel these leases, and additional sites that we lease are likely to be subject to similar long-term non-cancelable leases. Even if we close a restaurant, we are required to perform our obligations under the applicable lease, which could include, among other things, a payment of the base rent, property taxes, insurance and common area maintenance costs for the balance of the lease term, which would impact our profitability. Due to the COVID-19 pandemic, we temporarily closed dining rooms in all restaurants and negotiated extensively with our landlords for rent relief and certain modified obligations under our leases, but we still may not be able to recover our investment in these properties. In addition, as leases expire for restaurants that we will continue to operate, we may, at the end of the lease term and any renewal period for a restaurant, be unable to negotiate renewals, either on commercially acceptable terms or at all. As a result, we may close or relocate the restaurant, which could subject us to unanticipated construction costs related to leasehold improvements at the new restaurant location that we are unable to control, the delay or failure by the landlord to deliver the new restaurant location to us, and unfavorable anticipated commercial, residential or infrastructure development near our new restaurant location, among other costs and risks. Additionally, the revenues and profit, if any, generated at a relocated restaurant may not equal the revenues and profit generated at the existing restaurant.

Our business is subject to risks related to our sale of alcoholic beverages.

We serve alcoholic beverages at most of our restaurants, and we may introduce alcoholic beverages at additional restaurants in the future. Alcoholic beverage control regulations generally require our restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license that must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of daily operations of our restaurants, including minimum age of team members, advertising, trade practices, wholesale purchasing, other relationships with alcoholic beverages manufacturers, wholesalers and distributors, inventory control and handling, storage and dispensing of alcoholic beverages and training of team members. Any future failure to comply with these regulations and obtain or retain licenses could have a material adverse effect on our business, financial condition and results of operations.

We are also subject in certain states to “dram shop” statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. We carry liquor liability coverage as part of our existing comprehensive general liability insurance. Recent litigation against restaurant chains has resulted in significant judgments and settlements under dram shop statutes. Because these cases often seek punitive damages, which may not be covered by insurance, such litigation could have a material effect on our business, financial condition and results of operations. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage or not covered by insurance could have a material adverse effect on our business, financial condition or results of operations.

An impairment in the carrying value of our goodwill, indefinite-lived intangible assets or long-lived assets could have a material adverse effect on our financial condition and results of operations.

As of December 27, 2020, we had approximately $394 million of goodwill and $266 million of intangible assets, primarily related to the purchase price allocation performed in connection with the Berkshire Acquisition. We test goodwill and indefinite-lived intangible assets for impairment in the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that impairment may have occurred. In fiscal 2020, we performed an impairment test and even with changes in circumstances brought about by the COVID-19 pandemic, we did not recognize impairment charges; however, an impairment test in the future may

 

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indicate that an impairment has occurred. In the event that the book value of goodwill or other indefinite-lived intangible assets is impaired, any such impairment would be charged to earnings in the period of impairment. We cannot accurately predict the amount and timing of any impairment of assets. Should the value of goodwill or other indefinite-lived intangible assets become impaired in the future, any impairment could have a material adverse effect on our financial condition and results of operations. See Note 5 – Goodwill and Intangible Assets in the notes to the audited consolidated financial statements included elsewhere in this prospectus for additional information.

Changes to estimates related to our property, fixtures and equipment and definite-lived intangible assets or operating results that are lower than our current estimates at certain restaurant locations may cause us to incur impairment charges or accelerate the amortization on certain long-lived assets, which may adversely affect our results of operations.

Natural disasters, unusual weather conditions, pandemic outbreaks, political events, war and terrorism could disrupt our business and result in lower sales, increased operating costs and capital expenditures.

Our home office, restaurant locations, suppliers and distributors, and their respective facilities, as well as certain of our vendors and customers, are located in areas that have been and could be subject to natural disasters such as floods, drought, hurricanes, tornadoes, fires or earthquakes. As a result of the concentration of our restaurants in the Midwestern United States, adverse weather conditions or other extreme changes in short-term weather conditions or long-term changes in weather patterns related to climate change, including those that may result in electrical and technological failures, may disrupt our business and may adversely affect our ability to obtain food and supplies and sell menu items. Our business may be harmed if our ability to obtain food and supplies and sell menu items is impacted by any such events, any of which could influence customer trends and purchases and may negatively impact our revenues, properties or operations. Such events could result in physical damage to one or more of our properties, the temporary closure of some or all of our restaurants and our suppliers and distributors, the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, delay in the delivery of goods and supplies to our restaurants and our suppliers and distributors, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel prices, all of which would increase the cost of doing business. These events also could have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage. Any of these factors, or any combination thereof, could have a material adverse effect on our business, financial condition and results of operations.

The increasing focus on environmental sustainability and social initiatives could increase our costs, harm our reputation, and adversely impact our financial results.

There has been increasing public focus by investors, environmental activists, the media and governmental and nongovernmental organizations on a variety of environmental, social and other sustainability matters. With respect to the restaurant industry, concerns have been expressed regarding energy management, water management, food and packaging waste management, food safety, nutritional content, labor practices and supply chain and management food sourcing. We experience pressure to make commitments relating to sustainability matters that affect companies in our industry, including the design and implementation of specific risk mitigation strategic initiatives relating to sustainability. If we are not effective in addressing environmental, social and other sustainability matters affecting our industry, or setting and meeting relevant sustainability goals, our brand image may suffer. In addition, we may experience increased costs in order to execute upon our sustainability goals and measure achievement of those goals, which could have an adverse impact on our business and financial condition.

 

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Risks Related to Our Indebtedness

Our level of indebtedness could have a material adverse effect on our business, financial condition and results of operations and limit our ability to plan for or respond to changes in our business.

The total principal amount of debt outstanding under our Credit Facilities, excluding finance lease liabilities and financing obligations, as of December 27, 2020 was approximately $484.0 million. Our indebtedness could have significant effects on our business, such as:

 

   

limiting our ability to borrow additional amounts to fund capital expenditures, acquisitions, debt service requirements, execution of our growth strategy and other purposes;

 

   

limiting our ability to make investments, including acquisitions, loans and advances, and to sell, transfer or otherwise dispose of assets;

 

   

requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our borrowings, which would reduce availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;

 

   

making us more vulnerable to adverse changes in general economic, industry and competitive conditions, in government regulation and in our business by limiting our ability to plan for and react to changing conditions;

 

   

placing us at a competitive disadvantage compared with our competitors that have less debt; and

 

   

exposing us to risks inherent in interest rate fluctuations because our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates.

In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our borrowings as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our financial condition and results of operations.

Pursuant to the First Lien Credit Agreement (as defined herein), if the revolving credit exposure exceeds 35% of the aggregate amount of revolving credit commitments as of the last day of any fiscal quarter (which calculation shall exclude letter of credit obligations that have been cash collateralized or backstopped in full and obligations with respect to other letters of credit in an aggregate amount not to exceed $5.0 million), the Borrower (as defined herein) must maintain a ratio of consolidated first lien net debt to consolidated EBITDA (with certain adjustments as set forth in the First Lien Credit Agreement) of no greater than 6.50 to 1.00, to be tested as of the last day of each fiscal quarter and determined on the basis of the four most recently ended fiscal quarters of the Borrower for which financial statements have been delivered pursuant to the First Lien Credit Agreement. Events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy the financial covenant. We cannot assure you that we will satisfy the financial covenant in the future, or that our lenders will waive any failure to satisfy the financial covenant.

Further, a portion of our indebtedness bears interest at fluctuating interest rates based on the London interbank offered rate (“LIBOR”), and the financial authority that regulates LIBOR has announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2023. If LIBOR ceases to exist, we may need to renegotiate certain loan documents and we cannot predict what alternative index would be negotiated with our lenders. As a result, our interest expense could increase, in which event we may have difficulties making interest payments and funding our other fixed costs, and our available cash flow for general corporate requirements may be adversely affected.

 

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We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which would adversely affect our financial condition and results of operations.

Our ability to manage our debt is dependent on our level of positive cash flow from our restaurants. An economic downturn may negatively impact our cash flows. Credit and capital markets can be volatile, which could make it more difficult for us to refinance our existing debt or to obtain additional debt or equity financings in the future. Such constraints could increase our costs of borrowing and could restrict our access to other potential sources of future liquidity. Our failure to comply with the covenants under the Credit Facilities or to have sufficient liquidity to make interest and other payments required by our debt could result in a default of such debt and acceleration of our borrowings, which could have a material adverse effect on our business, financial condition and results of operations.

Downgrades in our credit ratings could impact our ability to access capital and materially adversely affect our business, financial condition and results of operations.

Our debt is rated by credit rating agencies. These agencies may downgrade their credit ratings for us based on the performance of our business, our capital strategies or their overall view of our industry. There can be no assurance that any rating assigned to our currently outstanding indebtedness will remain in effect for any given period of time or that any such ratings will not be lowered, suspended or withdrawn entirely by a rating agency if, in that agency’s judgment, circumstances so warrant.

A downgrade of our credit ratings could, among other things, increase our cost of borrowing, limit our ability to access capital, result in more restrictive covenants in agreements governing the terms of any future indebtedness that we may incur, including restrictions on our ability to pay dividends or repurchase shares, or require us to provide collateral for future borrowings, and thereby adversely impact our business, financial condition and results of operations.

Risks Related to Our Organizational Structure

The interests of Berkshire may conflict with our interests or the interests of the holders of our Class A common stock in the future.

Berkshire Private Equity engages in a range of investing activities, including investments in restaurants and other consumer-related companies. In the ordinary course of its business activities, Berkshire may engage in activities where its interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will provide that our directors and stockholders, including Berkshire, do not have any obligation to offer us an opportunity to participate in business opportunities presented to them even if the opportunity is one that we might reasonably have pursued (and therefore may be free to compete with us in the same business or similar businesses) and that, to the extent permitted by law, such directors and stockholders will not be liable to us or our stockholders for breach of any duty by reason of any such activities. Accordingly, the interests of Berkshire may supersede ours, causing them or their affiliates to compete against us or to pursue opportunities instead of us, for which we have no recourse. Such actions on the part of Berkshire and inaction on our part could have a material adverse effect on our business, financial condition and results of operations. In addition, Berkshire may have an interest in pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment in us, even though such transactions might involve risks to you, such as debt-financed acquisitions.

Delaware law and our organizational documents, as well as our existing and future debt agreements, may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.

We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be

 

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beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate of incorporation and bylaws that will be effective upon closing of this offering may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our Board. Among other things, these provisions:

 

   

do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

   

delegate the sole power of a majority of the Board to fix the number of directors;

 

   

provide the power of our Board to fill any vacancy on our Board, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;

 

   

authorize the issuance of “blank check” preferred stock without any need for action by stockholders;

 

   

eliminate the ability of stockholders to call special meetings of stockholders;

 

   

establish advance notice requirements for nominations for election to our Board or for proposing matters that can be acted on by stockholders at stockholder meetings; and

 

   

limit the ability of stockholders to act by written consent after Berkshire no longer holds 50% of our common stock.

In addition, our Credit Facilities impose, and we anticipate that documents governing our future indebtedness may impose, limitations on our ability to enter into change of control transactions. Thereunder, the occurrence of a change of control transaction could constitute an event of default permitting acceleration of the indebtedness, thereby impeding our ability to enter into certain transactions.

The foregoing factors, as well as the significant Class A common stock ownership by Berkshire, could impede a merger, takeover, or other business combination, or discourage a potential investor from making a tender offer for our Class A common stock, which, under certain circumstances, could reduce the market value of our Class A common stock. See “Description of Capital Stock.”

We are a holding company and our principal asset after completion of this offering will be our ownership of 33,567,206 LLC Units in Portillo’s OpCo, and we are accordingly dependent upon distributions from Portillo’s OpCo to pay dividends, if any, and taxes, make payments under the Tax Receivable Agreement and pay other expenses.

We are a holding company and, upon completion of the Reorganization Transactions and this offering, our principal asset will be our ownership of 33,567,206 LLC Units. See “Organizational Structure.” We have no independent means of generating revenue. Portillo’s OpCo is, and will continue to be, treated as a partnership for U.S. federal and applicable state and local income tax purposes and, as such, will generally not be subject to entity-level U.S. federal and applicable state and local income tax. Instead, the taxable income of Portillo’s OpCo will be allocated to holders of LLC Units, including us. Accordingly, we will incur income taxes on our allocable share of any taxable income of Portillo’s OpCo. We will also incur expenses related to our operations, and will have obligations to make payments under the Tax Receivable Agreement. As the sole managing member of Portillo’s OpCo, we intend to cause Portillo’s OpCo to make distributions to the holders of LLC Units (including us) in amounts sufficient to (i) cover all of the income taxes payable on our and the other LLC Unit holders’ respective allocable shares of the taxable income of Portillo’s OpCo, (ii) allow us to make any payments required under the Tax Receivable Agreement we intend to enter into as part of the Reorganization Transactions, (iii) fund dividends to our stockholders in accordance with our dividend policy, to the extent that our Board declares such dividends and (iv) pay our expenses.

Deterioration in the financial condition, earnings or cash flow of Portillo’s OpCo and its subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, to the extent that we need funds and Portillo’s OpCo is restricted from making such distributions to us under applicable law or

 

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regulation, as a result of covenants in its debt agreements or otherwise, we may not be able to obtain such funds on terms acceptable to us, or at all, which could have a material adverse effect on our liquidity and financial condition.

In certain circumstances, Portillo’s OpCo will be required to make distributions to us and the other holders of LLC Units, and the distributions that Portillo’s OpCo will be required to make may be substantial.

Under the Amended LLC Agreement, Portillo’s OpCo will generally be required from time to time to make pro rata distributions in cash to us and the other holders of LLC Units at certain assumed tax rates in amounts that are intended to be sufficient to cover the income taxes payable on our and the other LLC Unit holders’ respective allocable shares of the taxable income of Portillo’s OpCo. As a result of (i) potential differences in the amount of taxable income allocable to us and the other LLC Unit holders, (ii) the lower tax rate applicable to corporations than individuals and (iii) the use of an assumed tax rate (based on the tax rate applicable to individuals) in calculating Portillo’s OpCo distribution obligations, we may receive tax distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement. Our Board, in its sole discretion, will make any determination from time to time with respect to the use of any such excess cash so accumulated, which may include, among other uses, funding repurchases of shares of our Class A common stock; acquiring additional newly issued LLC Units from Portillo’s OpCo at a per unit price determined by reference to the market value of the Class A common stock; paying dividends, which may include special dividends, on its Class A common stock; or any combination of the foregoing. We will have no obligation to distribute such cash (or other available cash other than any declared dividend) to our stockholders. To the extent that we do not distribute such excess cash as dividends on our Class A common stock or otherwise undertake ameliorative actions between LLC Units and shares of Class A common stock and instead, for example, hold such cash balances, holders of our LLC Units (other than Portillo’s Inc.) may benefit from any value attributable to such cash balances as a result of their ownership of Class A common stock following a redemption or exchange of their LLC Units, notwithstanding that such holders of our LLC Units (other than Portillo’s Inc.) may previously have participated as holders of LLC Units in distributions by Portillo’s OpCo that resulted in such excess cash balances at Portillo’s Inc. See “Certain Relationships and Related Party Transactions—Amended Portillo’s OpCo Agreement.”

The Tax Receivable Agreement with the TRA Parties requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make will be substantial.

Under the Tax Receivable Agreement, we will be required to make cash payments to the TRA Parties equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets related to LLC Units acquired in this offering, (ii) certain favorable tax attributes we will acquire from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (iii) increases in our then allocable share of existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including repayment of the redeemable preferred units) in connection with this offering and (y) future redemptions or exchanges of LLC Units by Continuing Pre-IPO LLC Members for cash or Class A common stock and (iv) certain other tax benefits related to entering into the Tax Receivable Agreement, including payments made under the Tax Receivable Agreement.

The payment obligations under the Tax Receivable Agreement are obligations of the Company and we expect that the amount of the cash payments that we will be required to make under the Tax Receivable Agreement will be significant. Any payments made by us to the TRA Parties under the Tax Receivable Agreement will not be available for reinvestment in our business and will generally reduce the amount of overall cash flow that might have otherwise been available to us. The payments under the Tax Receivable Agreement are not conditioned upon continued ownership of us by the exchanging TRA Parties. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an

 

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acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. For more information, see “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” The amount of existing tax basis and anticipated tax basis adjustments and utilization of tax attributes, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions or exchanges by the Continuing Pre-IPO LLC Members, the price of shares of our Class A common stock at the time of the redemptions or exchanges, the extent to which such redemptions or exchanges are taxable, the amount of gain recognized by such holders of LLC Units, the amount and timing of the taxable income allocated to us or otherwise generated by us in the future, the portion of our payments under the Tax Receivable Agreement constituting imputed interest and the federal and state tax rates then applicable.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the TRA Parties that will not benefit holders of our Class A common stock to the same extent that it will benefit the TRA Parties.

Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the TRA Parties that will not benefit the holders of our Class A common stock to the same extent that it will benefit the TRA Parties. We will enter into the Tax Receivable Agreement with Portillo’s OpCo and the TRA Parties in connection with the completion of this offering, which will provide for the payment by us to the TRA Parties of 85% of the amount of tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in this offering, (ii) certain favorable tax attributes we will acquire from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with this offering and (y) future redemptions or exchanges of LLC Units by Continuing Pre-IPO LLC Members for cash or Class A common stock and (iv) certain other tax benefits related to entering into the Tax Receivable Agreement, including payments made under the Tax Receivable Agreement.

See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” Although we will retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for our Class A common stock.

In certain cases, payments under the Tax Receivable Agreement to the TRA Parties may be accelerated or significantly exceed any actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement provides that upon a “Change of Control” under the Tax Receivable Agreement (which is defined to include, among other things, a 50% change in control of Portillo’s Inc., the approval of a complete plan of liquidation or dissolution of Portillo’s Inc., the disposition of all or substantially all of Portillo’s Inc.’s direct or indirect assets or a change of a majority of the Board of Directors without approval of at least two-thirds majority of the then-existing Board members), upon a breach of any of our material obligations under the Tax Receivable Agreement or if, at any time, we elect an early termination of the Tax Receivable Agreement, then our obligations, or our successor’s obligations, under the Tax Receivable Agreement to make payments will accelerate. The accelerated payments required in such circumstances will be calculated by reference to the present value (at a discount rate equal to the lesser of (i) 6.5% per annum and (ii) one year LIBOR (or its successor rate) plus 100 basis points) of all future payments that holders of LLC Units or other recipients would have been entitled to receive under the Tax Receivable Agreement, and such accelerated payments and any other future payments under the Tax Receivable Agreement will utilize certain valuation assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement. Based on these assumptions and assuming

 

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that the market value of a share of Class A common stock were to be equal to an initial public offering price of $18.50 per share of Class A common stock (the midpoint of the price range set forth on the cover of this prospectus) and a discount rate of 1.25%, we estimate that the aggregate amount of these termination payments would be approximately $385.9 million if Portillo’s Inc. were to exercise its early termination right immediately following this offering. The foregoing number is merely an estimate and the actual payments could differ materially.

As a result of the foregoing, we could be required to make payments under the Tax Receivable Agreement that are greater than the specified percentage of any actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement and we could be required to make payments under the Tax Receivable Agreement significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement.

The acceleration of payments under the Tax Receivable Agreement in the case of certain changes of control may impair our ability to consummate change of control transactions or negatively impact the value received by owners of our Class A common stock.

In the case of certain changes of control (as described above), payments under the Tax Receivable Agreement will be accelerated and may significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement. We expect that the payments that we may make under the Tax Receivable Agreement in the event of a change of control will be substantial. As a result, our accelerated payment obligations and/or the assumptions adopted under the Tax Receivable Agreement in the case of a change of control may impair our ability to consummate change of control transactions or negatively impact the value received by owners of our Class A common stock in a change of control transaction.

We will not be reimbursed for any payments made to the TRA Parties under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the U.S. Internal Revenue Service, or the IRS, or another taxing authority may challenge all or part of the amount of existing tax basis, tax basis increases or other tax benefits we claim, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially affect a recipient’s payments under the Tax Receivable Agreement, then we will not be permitted to settle or fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of certain TRA Parties. The interests of the TRA Parties in any such challenge may differ from or conflict with our interests and your interests, and the TRA Parties may exercise their consent rights relating to any such challenge in a manner adverse to our interests and your interests. We will not be reimbursed for any cash payments previously made to the TRA Parties under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to a TRA Party are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to a TRA Party will be netted against any future cash payments that we might otherwise be required to make to such TRA Party, as applicable, under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to a TRA Party for a number of years following the initial time of such payment and, if any of our tax reporting positions are challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the Tax Receivable Agreement until any such challenge is finally settled or determined. Moreover, the excess cash payments we previously made under the Tax Receivable Agreement could be greater than the amount of future cash payments against which we would otherwise be permitted to net such excess. As a result, payments made under the Tax Receivable Agreement could be significantly in excess of any tax savings that we realize from the tax attributes that are the subject of the Tax Receivable Agreement.

 

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If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), as a result of our ownership of Portillo’s OpCo, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding, or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.

As a result of the Reorganization Transactions, we obtained control over Portillo’s OpCo. As the sole managing member of Portillo’s OpCo, we control and operate Portillo’s OpCo. On that basis, we believe that our interest in Portillo’s OpCo is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of Portillo’s OpCo, or if Portillo’s OpCo itself becomes an investment company, our interest in Portillo’s OpCo, could be deemed an “investment security” for purposes of the 1940 Act.

We, and Portillo’s OpCo intend to conduct our operations so that we will not be deemed an investment company. If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties, and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company. If we were required to register as an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.

Risks Related to Intellectual Property, Information Technology, and Data Security

The failure to protect and maintain our intellectual property, including our trademarks, could have a material adverse effect on our business, including our ability to establish and maintain brand awareness.

Our intellectual property includes our trademarks and service marks registered with the United States Patent and Trademark Office (including Portillo’s® and other names used by our restaurants), the trade dress of our restaurants, our websites and domain names (including our website at portillos.com and other websites and domain names used by our restaurants) and other unregistered intellectual property. The success of our business strategy depends on our continued ability to use such intellectual property that we own, in addition to intellectual property we license from third parties. We require continued use of our existing trademarks and service marks in order to increase brand awareness and develop our branded products. If our efforts to maintain and protect our intellectual property are not adequate (including by way of confidentiality or other contractual restrictions we impose on third parties), or if any third-party misappropriates, infringes, dilutes or otherwise violates our intellectual property, the value of our intellectual property may be harmed. For example, failure to protect or enforce or trademarks, whether in print, on the Internet or through social media or other media, could prevent us from challenging third parties who use trademarks similar to our trademarks and who, as a result, could cause consumer confusion, harm the public perception of our brands, prevent our brands and branded products from achieving and maintaining market acceptance and cause a material adverse effect on our business, financial condition and results of operations. There can be no assurance that all the steps we have taken to maintain and protect our intellectual property in the United States will be adequate or will permit us to obtain or maintain any competitive advantage.

 

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Security breaches could negatively impact our business by causing disruption to our operations, a compromise of confidential guest information, or confidential team member information, and could subject us to loss and harm our business.

Our business requires the collection, transmission and retention of large volumes of guest and team member data, including credit and debit card numbers and other personally identifiable information, in various information technology systems that we maintain and in those maintained by third parties with whom we contract to provide services. The integrity and protection of that guest and team member data is critical to us. Further, our guests and team members have a high expectation that we and our service providers will adequately protect their personal information.

Like many other retail and restaurant companies, we have experienced, and will likely continue to experience, attempts to compromise our information technology systems. Additionally, the techniques and sophistication used to conduct cyber-attacks and breaches of information technology systems, as well as the sources and targets of these attacks, change frequently and are often not recognized until such attacks are launched or have been in place for a period of time. While we continue to make significant investment in physical and technological security measures, team member training, and third party services, designed to anticipate cyber-attacks and prevent breaches, our information technology networks and infrastructure or those of our third party vendors and other service providers could be vulnerable to damage, disruptions, shutdowns, data loss, or breaches due to criminal conduct, team member error, negligence or malfeasance, utility failures, natural disasters or other catastrophic events. Due to these scenarios we cannot provide assurance that we will be successful in preventing such cyber-attacks, breaches or data loss.

Additionally, the information security and privacy requirements imposed by governmental regulation are evolving and we are expected to fulfill such requirements. Our systems may not be able to satisfy these requirements and expectations or may require significant additional investments or time in order to do so. Efforts to hack or breach security measures, failures of systems or software to operate as designed or intended, viruses, operator error or inadvertent releases of data all threaten our and our service providers’ information systems and records. A breach in the security of our information technology systems or those of our service providers could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits. Additionally, a significant theft, loss or misappropriation of, or unauthorized access to, our guests’ data or other proprietary data or other breach of our information technology systems could result in fines, legal claims or proceedings, regulatory investigations and actions, or liability for failure to comply with privacy and information security laws, which could disrupt our operations, damage our reputation and expose us to claims from guests and team members, any of which could have a material adverse effect on our business, financial condition and results of operations.

System interruptions or a material failure of our systems could damage our business, reputation and brand and substantially harm our business, financial condition and results of operations.

Our omni-channel approach will in large part rely on our information technology systems to operate successfully, including the implementation of our delivery strategy. As we expand our delivery business channels, our exposure to such risks will increase.

Our systems, which in some cases rely on third-party providers, may experience service interruptions, degradation or other performance problems because of hardware and software defects or malfunctions, distributed denial-of-service and other cyberattacks, infrastructure changes, human error, earthquakes, hurricanes, floods, fires, natural disasters, power losses, disruptions in telecommunications services, fraud, military or political conflicts, terrorist attacks, computer viruses, ransomware, malware, or other events. Our systems also may be subject to break-ins, sabotage, theft, and intentional acts of vandalism as a result of criminal third parties (including state-sponsored organizations with significant financial and technological resources), third parties we do business with and team members. Our reliance on third parties increases our exposure to such

 

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risks as we exercise a lesser degree of control over such persons. Our cyber insurance and business interruption insurance may not be sufficient to cover all of our losses that may result from interruptions in our service as a result of systems failures and similar events. As a result, if we experience any outsized material impacts from a failure of our systems, our business, financial condition and results of operations could be materially and adversely effected.

While we endeavor to keep all systems current, there can be no guarantee that we can reliably update and maintain our systems. In instances where we are unable to do so, the mitigating controls we put in place to reduce the risk may fail. Any such failure could lead to website downtime, disruptions to our information technology systems and systems vulnerability exposure to cyber-criminals.

Failure to comply with federal and state laws and regulations relating to privacy, data protection, advertising and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection, advertising and consumer protection, could have a material adverse effect on our business, financial condition and results of operations.

We rely on a variety of marketing and advertising techniques, including email communications, affiliate partnerships, social media interactions, digital marketing, direct mailers, public relations initiatives and local community sponsorships, promotions and partnerships, and we are subject to various laws and regulations that govern such marketing and advertising practices. A variety of federal and state laws and regulations govern the collection, use, retention, sharing and security of consumer data, particularly in the context of digital marketing, which we rely upon to attract new customers.

Laws and regulations relating to privacy, data protection, marketing and advertising, and consumer protection are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices may not have complied or may not comply in the future with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our privacy policies, our contractual commitments or any federal or state privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities, customers, suppliers or others or other liabilities or may require us to change our operations and/or cease using certain data sets. Any such claims, proceedings or actions could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings or actions, distract our management, increase our costs of doing business, result in a loss of customers, suppliers or vendors and result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

Federal and state governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. The U.S. government has enacted, has considered or is considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could if widely adopted result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. For example, Apple recently moved to “opt-in” privacy models, requiring users to voluntarily choose to receive targeted ads, which may reduce the value of ad impressions on its iOS mobile application platform. Many

 

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applications and other devices allow consumers to avoid receiving advertisements by paying for subscriptions or other downloads. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such technologies could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and, consequently, have a material adverse effect on our business, financial condition and results of operations.

In addition, various federal and state legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection, consumer protection, and advertising. Additionally, the Federal Trade Commission (the “FTC”) and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data. Each of these privacy, security, and data protection laws and regulations, and any other such changes or new laws or regulations, could impose significant limitations, require changes to our business, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct. In addition, any such changes could compromise our ability to develop an adequate marketing strategy and pursue our growth strategy effectively, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

Litigation with respect to intellectual property, if decided against us, may result in competing uses or require adoption of new, non-infringing intellectual property, which may in turn adversely affect sales and revenues.

There can be no assurance that third parties will not assert claims of infringement, misappropriation or other violation of intellectual property against us, or assert claims that our trademarks, service marks, trade names and other intellectual property are invalid or unenforceable. In addition, our trademarks may be narrowed. Any such claims decided against us could have a material adverse effect on our business, financial condition and results of operations. For example, if any of our intellectual property is invalidated or deemed unenforceable, competing uses of such intellectual property would be permitted and could lead to a decline in our results of operations. Additionally any infringement or misappropriation claims decided against us could result in our being required to pay damages, to cease using our intellectual property, to develop or adopt non-infringing intellectual property or to acquire a license to the third party intellectual property that is the subject of the asserted claim. There could be significant expenses associated with the defense of any claims of infringement, misappropriation, or other violation of third party intellectual property. We may also from time to time have to assert claims against third parties and initiate litigation in order to enforce our trademarks, service marks and other intellectual property. Any such litigation could result in substantial costs and diversion of resources, could be protracted with no certain of success, or could fail to achieve an adequate remedy. Any of these occurrences could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to this Offering and Ownership of Our Class A Common Stock

Future offerings of debt or equity securities by us may have a material adverse effect on the market price of our Class A common stock.

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our Class A common stock or by offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity or shares of preferred stock.

Any future debt financing could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which might make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Moreover, if we issue debt securities, the debt holders would have rights to make claims on our assets senior to the rights of our holders of our Class A common stock. The issuance of additional shares of our Class A common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or

 

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reduce the market price of our Class A common stock or both. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our Class A common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may have a material adverse effect on the amount, timing, or nature of our future offerings. Thus, holders of our Class A common stock bear the risk that our future offerings may reduce the market price of our Class A common stock and dilute their stockholdings in us.

If the ownership of our Class A common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.

Following the closing of this offering, funds managed by Berkshire are expected to own (i) approximately 68% of the combined voting power of our common stock (or approximately 64% of the combined voting power of our common stock, if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and (ii) approximately 68% of the economic interest in Portillo’s OpCo (or approximately 64% of the economic interest in Portillo’s OpCo, if the underwriters’ option to purchase additional shares is fully exercised). As a result, Berkshire will indirectly beneficially own shares sufficient for majority votes over all matters requiring stockholder votes, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our certificate of incorporation or our bylaws; and our winding up and dissolution.

This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Berkshire may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of us. Also, Berkshire may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering. As a result, the market price of our Class A common stock could decline or stockholders might not receive a premium over the then-current market price of our Class A common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our Class A common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. See “Principal Stockholders” and “Description of Capital Stock—Anti-takeover Provisions.”

As a controlled company, we will not be subject to all of the corporate governance rules of the Nasdaq.

Upon the listing of our Class A common stock on the Nasdaq in connection with this offering, we will qualify as a “controlled company” under the rules of the Nasdaq. Controlled companies are exempt from the Nasdaq corporate governance rules requiring that listed companies have (i) a majority of the Board consist of “independent” directors under the listing standards of the Nasdaq, (ii) a nominating/corporate governance committee composed entirely of independent directors and a written nominating/corporate governance committee charter meeting the Nasdaq requirements and (iii) a compensation committee composed entirely of independent directors and a written compensation committee charter meeting the requirements of the Nasdaq. Following this offering, we will not avail ourselves of these exemptions. Upon the listing of our common stock, our Board will be composed of a majority of independent directors and our Compensation Committee and our Nominating and Corporate Governance Committee will be composed entirely of independent directors. If we choose to avail ourselves of these exceptions in the future, we may not have a majority of independent directors and our nomination and corporate governance committee and compensation committee may not consist entirely of independent directors and you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq. See “Management.”

 

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We do not anticipate paying any dividends on our Class A common stock in the foreseeable future.

We do not expect to declare or pay any cash or other dividends in the foreseeable future on our Class A common stock because we intend to use cash flow generated by operations to grow our business. Our Credit Facilities do not restrict our ability to pay cash dividends on our Class A common stock but they may restrict the ability of certain subsidiaries of Portillo’s OpCo to pay such cash dividends to Portillo’s OpCo. We may also enter into other credit agreements or other borrowing arrangements in the future that restrict or limit our ability to pay cash dividends on our Class A common stock. As a result, you may not receive any return on an investment in our Class A common stock unless you sell our Class A common stock for a price greater than that which you paid for it. See “Dividend Policy.”

Our quarterly results of operations may fluctuate significantly and could fall below the expectations of securities analysts and investors due to seasonality and other factors, some of which are beyond our control, resulting in a decline in our stock price.

Our quarterly results of operations may fluctuate due principally to seasonal factors and the timing of holidays. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and same-restaurant sales for any particular future period may decrease. In addition, as we expand our number of restaurants in hot weather climates, the seasonality of our business may be amplified due to a portion of the population who lives elsewhere in the summer. Similarly, our plans to expand the number of restaurants in cold weather climate could be impacted by the population heading south for the summer. In the future, results of operations may fall below the expectations of securities analysts and investors. In that event, the price of our Class A common stock could be adversely impacted.

No market currently exists for our Class A common stock and we cannot assure you that an active market will develop for such stock.

Prior to this offering, there has been no public market for our Class A common stock. The initial public offering price for our Class A common stock has been determined through negotiations among us and the representatives of the underwriters and may not be indicative of the market price of our Class A common stock after this offering or to any other established criteria of the value of our business. If you purchase shares of our Class A common stock, you may not be able to resell those shares at or above the initial public offering price. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market on the Nasdaq or otherwise or how liquid that market might become. An active public market for our Class A common stock may not develop or be sustained after this offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of Class A common stock at a price that is attractive to you or at all.

The market price and trading volume of our Class A common stock may be volatile, which could result in rapid and substantial losses for our stockholders, and you may lose all or part of your investment.

Shares of our Class A common stock sold in this offering may experience significant volatility on the Nasdaq. An active, liquid and orderly market for our Class A common stock may not be sustained, which could depress the trading price of our Class A common stock or cause it to be highly volatile or subject to wide fluctuations. The market price of our Class A common stock may fluctuate or may decline significantly in the future and you could lose all or part of your investment. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our Class A common stock include:

 

   

variations in our quarterly or annual results of operations;

 

   

changes in our earnings estimates (if provided) or differences between our actual results of operations and those expected by investors and analysts;

 

   

the contents of published research reports about us or our industry or the failure of securities analysts to cover our Class A common stock;

 

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additions or departures of key management personnel;

 

   

any increased indebtedness we may incur in the future;

 

   

announcements by us or others and developments affecting us;

 

   

actions by institutional stockholders;

 

   

litigation and governmental investigations;

 

   

legislative or regulatory changes;

 

   

judicial pronouncements interpreting laws and regulations;

 

   

changes in government programs;

 

   

changes in market valuations of similar companies;

 

   

restaurant or dining area closures or modified operating hours due to the COVID-19 pandemic;

 

   

reduced guest traffic due to illness, quarantine or government or self-imposed restrictions placed on our restaurants’ operations;

 

   

changes in consumer spending behaviors (e.g., continued practice of social distancing, decrease in consumer confidence in general macroeconomic conditions and a decrease in consumer discretionary spending);

 

   

speculation or reports by the press or investment community with respect to us or our industry in general;

 

   

announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments; and

 

   

general market, political and economic conditions, including local conditions in the markets in which we operate.

These broad market and industry factors may decrease the market price of our Class A common stock, regardless of our actual financial performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including recently. In addition, in the past, following periods of volatility in the overall market and decreases in the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

The market price of our Class A common stock could be negatively affected by sales of substantial amounts of our Class A common stock in the public markets.

After this offering, we will have 71,480,492 shares of Class A common stock outstanding assuming that the Continuing Pre-IPO LLC Members redeem or exchange all of their LLC Units and shares of Class B common stock for newly issued shares of our Class A common stock on a one-for-one basis. Of our issued and outstanding shares, all the Class A common stock sold in this offering will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Following the closing of this offering, approximately 68% of our Class A common stock on an as-converted basis (or 64% if the underwriters’ option to purchase additional shares is fully exercised), will be beneficially owned by funds managed by Berkshire, and can be resold into the public markets in the future in accordance with the requirements of Rule 144. See “Shares Eligible For Future Sale.”

During the lock-up period (as defined below), we and our officers, directors and holders of substantially all of our outstanding capital stock and other securities have agreed not to, directly or indirectly, without the prior written consent of Jefferies LLC and Morgan Stanley & Co. LLC, subject to customary exceptions:

 

   

sell or offer to sell any (i) shares of Class A common stock or (ii) any options or warrants or other rights to acquire the Class A common stock or any securities exchangable or exercisable for or

 

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convertible into Class A common stock, or to acquire other securities or rights ultimately exchangable or exercisable for or convertible into Class A common stock (“Related Securities”), in each case currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Exchange Act), or otherwise dispose of any shares of Class A common stock, options or warrants to acquire shares of Class A common stock, or securities exchangeable or exercisable for or convertible into shares of Class A common stock currently or hereafter owned either of record or beneficially, or

 

   

enter into any swap, hedge or similar arrangement or agreement that transfers, in whole or in part, the economic risk of ownership of shares of Class A common stock or Related Securities, regardless of whether any such transaction is to be settled in securities, in cash or otherwise, or

 

   

make any demand for, or exercise any right with respect to, the registration under the Securities Act of the offer and sale of any Shares or Related Securities, or cause to be filed a registration statement, prospectus or prospectus supplement (or an amendment or supplement thereto) with respect to any such registration, or

 

   

publicly announce an intention to do any of the foregoing.

The “lock-up period” means the period beginning on the date the lock-up agreement is signed and continuing until close of trading on the date that is 180 days after the date of this prospectus. Jefferies LLC and Morgan Stanley & Co. LLC may, in their sole discretion and at any time or from time to time before the termination of the lock-up period release all or any portion of the securities subject to lock-up agreements. See “Underwriting—No Sales of Similar Securities.”

The market price of our Class A common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of our Class A common stock might impede our ability to raise capital through the issuance of additional Class A common stock or other equity securities.

The future issuance of additional Class A common stock in connection with any equity plans, acquisitions or otherwise will dilute all other stockholdings.

After this offering, we will have an aggregate of 293,948,280 shares of Class A common stock authorized but unissued and not reserved for issuance under our equity incentive plans assuming that the Continuing Pre-IPO LLC Members redeem or exchange all of their LLC Units and shares of Class B common stock for newly issued shares of our Class A common stock on a one-for-one basis. We may issue all these shares of Class A common stock without any action or approval by our stockholders, subject to certain exceptions. Any Class A common stock issued in connection with any equity incentive plan, the exercise of outstanding stock options, or otherwise, would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

You will incur immediate dilution as a result of this offering.

If you purchase Class A common stock in this offering, you will pay more for your shares than the amounts paid by existing stockholders for their shares. As a result, you will incur immediate dilution of $22.56 per share, representing the difference between the assumed initial public offering price of $18.50 per share (the midpoint of the price range set forth on the cover of this prospectus) and our pro forma net tangible book value (deficit) per share after giving effect to this offering. See “Dilution.”

For as long as we are an emerging growth company, we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.

We are an emerging growth company, as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act, and we have elected to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. These provisions include,

 

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but are not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of stockholder approval of any golden parachute payments not previously approved. We do not know if some investors will find our Class A common stock less attractive as a result of our decision to avail ourselves of certain of these exemptions. The result may be a less-active trading market for our Class A common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We could remain an emerging growth company for up to five years or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (b) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the date on which we have issued more than $1 billion in non-convertible debt securities in the preceding three-year period.

The exact implications of the JOBS Act are still subject to interpretations and guidance by the SEC and other regulatory agencies, and we cannot assure you that we will be able to take advantage of all of the benefits of the JOBS Act. In addition, investors may find our Class A common stock less attractive to the extent we rely on the exemptions and relief granted by the JOBS Act. If some investors find our Class A common stock less attractive as a result, there may be a less active trading market for our Class A common stock and our stock price may decline or become more volatile.

Risks Related to Legal and Regulatory Matters

We are subject to many federal, state and local laws with which compliance can be both costly and complex.

The restaurant industry is subject to extensive federal, state and local laws and regulations, including those relating to building and zoning requirements and those relating to the preparation and sale of food. Such laws and regulations are subject to change from time to time. The failure to comply with these laws and regulations could adversely affect our results of operations. Typically, licenses, permits and approvals under such laws and regulations must be renewed annually and may be revoked, suspended or denied renewal for cause at any time if governmental authorities determine that our conduct violates applicable regulations. Difficulties or failure to maintain or obtain the required licenses, permits and approvals could adversely affect our existing restaurants and delay or result in our decision to cancel the opening of new restaurants, which could have a material adverse effect on our business, financial condition and results of operations.

The development and operation of our restaurants depend, to a significant extent, on the selection of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards.

There is also a potential for increased regulation of certain food establishments in the United States, where compliance with a Hazard Analysis and Critical Control Points (“HACCP”) approach would be required. HACCP refers to a management system in which food safety is addressed through the analysis and control of potential hazards from production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Many states have required restaurants to develop and implement HACCP Systems, and the

 

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United States government continues to expand the sectors of the food industry that must adopt and implement HACCP programs. For example, the FDA Food Safety Modernization Act (“FSMA”), signed into law in January 2011, granted the U.S. Food and Drug Administration new authority regarding the safety of the entire food system, including through increased inspections and mandatory food recalls. Although restaurants are specifically exempted from or not directly implicated by some of these requirements, we anticipate that the requirements may impact our industry. Additionally, our suppliers may initiate or otherwise be subject to food recalls that may impact the availability of certain products, result in adverse publicity or require us to take actions that could be costly for us or otherwise impact our business. We may be required to incur additional time and resources to comply with new food safety requirements made under the FSMA or other federal or state food safety regulations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, many applicable laws could require us to expend significant funds to make modifications to our restaurants or operations to comply with such laws. Compliance with these laws can be costly and may increase our exposure to litigation or governmental investigations or proceedings.

Additionally, government regulation may impact our business as a result of changes in attitudes regarding diet and health or new information regarding the adverse health effects of consuming certain menu offerings. These changes have resulted in, and may continue to result in, laws and regulations requiring us to disclose the nutritional and allergen content of our food offerings and laws and regulations affecting permissible or limitations on ingredients and menu items. A number of counties, cities and states have enacted menu labeling laws requiring multi-unit restaurant operators to disclose to consumers certain nutritional and allergen information, or have enacted legislation restricting the use of certain types of ingredients in restaurants. An unfavorable report on, or reaction to, our menu ingredients, the size of our portions or the nutritional content of our menu items could negatively influence the demand for our menu offerings.

Compliance with current and future laws and regulations regarding the ingredients, nutritional and allergen content of our menu items may be costly and time-consuming. If we fail to comply with existing or future laws and regulations, we may be subject to governmental or judicial fines or sanctions. The risks and costs associated with nutritional disclosures on our menus could also impact our operations, particularly given differences among applicable legal requirements and practices within the restaurant industry with respect to testing and disclosure, ordinary variations in food preparation among our own restaurants and the need to rely on the accuracy and completeness of nutritional information obtained from third-party suppliers. We may not be able to effectively respond to changes in consumer health perceptions, comply with further nutrient content disclosure requirements or adapt our menu offerings to trends in eating habits, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to the Americans with Disabilities Act (the “ADA”), which, among other things, requires our restaurants to meet federally mandated requirements for the disabled. The ADA prohibits discrimination in employment and public accommodations on the basis of disability. Under the ADA, we could be required to expend funds to modify our restaurants to provide service to, or make reasonable accommodations for the employment of, disabled persons. In addition, our employment practices are subject to the requirements of the Immigration and Naturalization Service relating to citizenship and residency.

Further, a new presidential and legislative administration recently took office, and it is not yet known what changes the new administration will make to economic or tax policies and how those policies will impact the economy or consumer discretionary spending.

The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and could have a material adverse effect on our business,

 

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financial condition and results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. In addition, certain laws, including the ADA, could require us to expend significant funds to make modifications to our restaurants if we failed to comply with applicable standards. Compliance with all these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

We could be party to litigation that could distract management, increase our expenses or subject us to material monetary damages or other remedies.

Our guests occasionally file complaints or lawsuits against us alleging we caused an illness or injury they suffered at or after a visit to our restaurants, or that we have problems with food quality or operations. We may also be subject to a variety of other claims arising in the ordinary course of our business, including personal injury claims, contract claims and claims alleging violations of federal and state law regarding workplace and employment matters, equal opportunity, harassment, discrimination and similar matters, and we could become subject to class action or other lawsuits related to these or different matters in the future. In recent years, a number of restaurant companies have been subject to such claims, and some of these lawsuits have resulted in the payment of substantial damages by the defendants. Regardless of whether any claims against us are valid, or whether we are ultimately held liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance. A judgment in excess of our insurance coverage for any claims could have a material adverse effect on our business, financial condition and results of operations. In addition, such allegations could result in adverse publicity and negatively impact our reputation, which could have a material adverse effect on our business, financial condition and results of operations.

In addition, the restaurant industry has been subject to a growing number of claims based on the nutritional content of food products sold and disclosure and advertising practices. We may also be subject to this type of proceeding in the future and, even if we are not, publicity about these matters (particularly directed at the fast casual or traditional fast food segments of the industry) may harm our reputation and could have a material adverse effect on our business, financial condition and results of operations.

We can incur liabilities arising from environmental laws and compliance with environmental laws could increase our operating expenses.

We are subject to federal, state and local laws, regulations and ordinances that govern activities or operations that may have adverse environmental effects, such as waste handling and disposal practices for solid and hazardous wastes, discharges to water and air and odor control and also impose liability for the costs of cleaning up, and damage resulting from, sites of past spills, disposals or other releases of hazardous materials. In particular, under applicable environmental laws, we may be responsible for remediation of environmental conditions and may be subject to associated liabilities, including liabilities for clean-up costs and personal injury or property damage, relating to our restaurants and the land on which our restaurants are located, regardless of whether such environmental conditions were created by us or by a prior owner or tenant. Third parties also may make claims against owners or operators of properties for personal injuries and property damage associated with releases of, or actual or alleged exposure to, such hazardous or toxic substances at, on or from our restaurants. Some of our leases provide for indemnification of our landlords for environmental contamination, clean-up or owner liability. See “Business—Environmental Matters.”

If we fail to maintain effective internal controls over financial reporting, our ability to produce timely and accurate financial information or comply with Section 404 of the Sarbanes-Oxley Act of 2002 could be impaired, which could have a material adverse effect on our business and stock price.

Upon becoming a public company, we will be required to comply with Section 404 of the Sarbanes-Oxley Act (“Section 404”), which will require management to certify financial and other information in our

 

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quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report after this offering. In addition, under Section 404 our independent registered public accounting firm will also need to attest to the effectiveness of our internal control over financial in the future to the extent that we are no longer an emerging growth company or a smaller reporting company. To achieve compliance with Section 404 within the prescribed period, we will need to continue to dedicate internal resources, engage outside consultants and continue to execute on a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue taking steps to improve control processes, as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Section 404.

The failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business, financial condition and results of operations. In the event that we are not able to demonstrate compliance with Section 404, or if our internal control over financial reporting is perceived as inadequate or it is perceived that we are unable to produce timely or accurate consolidated financial statements, investors may lose confidence in our results of operations, the price of our Class A common stock could decline, we could become subject to investigations by the stock exchange on which our Class A common stock is listed, the SEC or other regulatory agencies, which could require addition financial and management resources, or our Class A common stock may not be able to remain listed on such exchange.

As a public company, we will be subject to additional reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the listing standards of the Nasdaq.

General Risks

Our management does not have experience managing a public company and our current resources may not be sufficient to fulfill our public company obligations.

Following the closing of this offering, we will be subject to various regulatory requirements, including those of the SEC and the Nasdaq. These requirements include record keeping, financial reporting and corporate governance rules and regulations. Our management team does not have experience in managing a public company and, historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to support our increased reporting obligations and we may be unable to hire, train or retain necessary staff and may be reliant on engaging outside consultants or professionals to overcome our lack of experience or team members. If our internal infrastructure is inadequate, we are unable to engage outside consultants at a reasonable rate or attract talented team members to perform these functions or are otherwise unable to fulfill our public company obligations, it could have a material adverse effect on our business, financial condition and results of operations.

Fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets may result in volatility of our results of operations.

We are subject to income taxes in various U.S. jurisdictions. We record tax expense based on our estimates of future payments, which may in the future include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets. At any one time, many tax years may be subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated.

In addition, our effective tax rate in a given financial reporting period may be materially impacted by a variety of factors including, but not limited to, changes in the mix and level of earnings, varying tax rates in the

 

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different jurisdictions in which we operate, fluctuations in the valuation allowance or by changes to existing accounting rules or regulations. Further, new or revised tax legislation may be enacted in the future, which could negatively impact our current or future tax structure and effective tax rates. For example, President Joe Biden and Congress have set forth tax proposals that would, if enacted, make significant changes to U.S. tax laws. Such proposals include, but are not limited to, (i) an increase in the U.S. income tax rate applicable to corporations, (ii) an increase in the maximum U.S. federal income tax rate applicable to individuals, (iii) a minimum book income tax on certain large corporations, (iv) the modification or replacement of the minimum tax on global intangible low-taxed income and base erosion and anti-abuse tax and (v) an increase in the U.S. federal income tax rate for long-term capital gain for certain taxpayers with income in excess of a threshold amount. It is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could take effect. The passage of any legislation as a result of these proposals and other similar changes in U.S. federal income tax laws could adversely affect our or Portillo’s OpCo’s business and future profitability.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our Class A common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us, the trading price for our Class A common stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if our results of operations do not meet the expectations of the investor community, or one or more of the analysts who cover our company downgrade our stock, our stock price could decline. As a result, you may not be able to sell shares of our Class A common stock at prices equal to or greater than the initial public offering price.

Our insurance may not provide adequate levels of coverage against claims.

We believe that we maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business, financial condition and results of operations.

Changes in accounting principles applicable to us could have a material adverse effect on our financial condition and results of operations.

Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our financial condition and results of operations, and could affect the reporting of transactions completed before the announcement of a change.

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, and will designate the federal district courts of the United States as the sole and exclusive forum for claims arising under the Securities Act, which, in each case could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers employees, agents or other stockholders.

Our amended and restated certificate of incorporation will provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware (or if the Court of Chancery lacks jurisdiction, a state court located within the State of Delaware or the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (a) derivative action or proceeding brought on our behalf; (b) action asserting a claim of breach of a fiduciary duty owed by or other wrongdoing by any current or former director, officer, employee, agent or stockholder to us or our stockholders; (c) action asserting a claim arising under any provision of the DGCL or our amended and restated

 

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certificate of incorporation or amended and restated bylaws (as either may be amended from time to time), or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware; or (d) action asserting a claim governed by the internal affairs doctrine. For the avoidance of doubt, our amended and restated certificate of incorporation will also provide that the foregoing exclusive forum provision does not apply to actions brought to enforce any liability or duty created by the Securities Act or the Exchange Act, or any rules or regulations promulgated thereunder, or any other claim or cause of action for which the federal courts have exclusive jurisdiction.

Our amended and restated certificate of incorporation will also provide that, unless we consent in writing to an alternative forum, the federal district courts of the United States of America shall be the sole and exclusive forum for the resolution of any action asserting a claim arising under the Securities Act or the rules and regulations promulgated thereunder. Pursuant to the Exchange Act, claims arising thereunder must be brought in federal district courts of the United States.

To the fullest extent permitted by law, any person or entity purchasing or otherwise acquiring or holding any interest in any shares of our capital stock shall be deemed to have notice of and consented to the forum provision in our amended and restated certificate of incorporation. This choice of forum provision may limit a stockholder’s ability to bring a claim in a different judicial forum, including one that it may find favorable or convenient for a specified class of disputes with us or our directors, officers, other stockholders or employees, which may discourage such lawsuits, make them more difficult or expensive to pursue and result in outcomes that are less favorable to such stockholders than outcomes that may have been attainable in other jurisdictions. By agreeing to this provision, however, stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the choice of forum provisions in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition and results of operations.

As a public company, we incur significant costs to comply with the laws and regulations affecting public companies which could harm our business and results of operations.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and the listing requirements of the Nasdaq, and other applicable securities rules and regulations. These rules and regulations have increased and will continue to increase our legal, accounting and financial compliance costs and have made and will continue to make some activities more time-consuming and costly, particularly after we cease to be an emerging growth company as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. For example, these rules and regulations could make it more difficult and more costly for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or to incur substantial costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board or our Board committees or as executive officers. Our management and other personnel will devote a substantial amount of time to these compliance initiatives. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. We will need to hire more team members in the future to comply with these requirements, which will increase our costs and expenses.

Our management team and other personnel devote a substantial amount of time to new compliance initiatives and we may not successfully or efficiently manage our transition to a public company. To comply with the requirements of being a public company, including the Sarbanes-Oxley Act, we will need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff or outsourcing certain functions to third parties, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Our annual and quarterly results of operations may fluctuate, and if our operating and financial performance in any given period does not meet the guidance that we have provided to the public or the expectations of our investors and securities analysts, the trading price of our Class A common stock may decline.

Our annual and quarterly results of operations may fluctuate for a variety of reasons, many of which are beyond our control. These reasons include those described in these risk factors as well as the following:

 

   

variations in the timing and volume of our sales;

 

   

the timing of expenditures in anticipation of future sales;

 

   

planned or actual changes to our capital or debt structure;

 

   

strategic actions by us or our competitors, such as sales promotions, acquisitions or restructurings;

 

   

significant litigation;

 

   

legislation or other regulatory developments affecting us or our industry;

 

   

changes in competitive and economic conditions generally;

 

   

general market conditions; and

 

   

changes in the cost or availability of our ingredients or labor.

Fluctuations in our annual and quarterly results of operations may cause those results to fall below the guidance that we have provided to the public or the expectations of our investors and securities analysts, which could cause the trading price of our Class A common stock to decline. Fluctuations in our results could also cause a number of other problems. For example, analysts or investors might change their models for valuing our Class A common stock, we could experience short-term liquidity issues, our ability to retain or attract key personnel may diminish and other unanticipated issues may arise.

In addition, we believe that our quarterly results of operations may vary in the future and that period-to-period comparisons of our results of operations may not be meaningful. You should not rely on the results of one quarter as an indication of future performance.

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

Upon the closing of this initial public offering, we will become subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to provide reasonable assurance that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected and could materially adversely affect our business, liquidity, financial condition or results of operations.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods, or by the inclusion of forecasts or projections. Examples of forward-looking statements include, but are not limited to, statements we make regarding the outlook for our future business and financial performance, such as those contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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. 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:

 

   

continued adverse effects of the COVID-19 pandemic or future pandemics or disease outbreaks on our financial condition and results of operations;

 

   

our vulnerability to changes in consumer preferences and economic conditions;

 

   

increases in the cost of our frequently used food items or shortages or disruptions in the supply or delivery of frequently used food items;

 

   

our inability to open new restaurants in new and existing markets;

 

   

the number of visitors to areas where our restaurants are located may decline;

 

   

our inability to generate same-restaurant sales growth;

 

   

our marketing programs and limited-time or seasonal menu offerings may fail to generate profits;

 

   

incidents involving food-borne illness and food safety, including food tampering or contamination, which we may be unable to prevent;

 

   

our inability to compete successfully with other lunch and dinner restaurants;

 

   

our vulnerability to adverse geographic, demographic, unemployment, economic, regulatory and weather conditions;

 

   

damage to our reputation and negative publicity, even if unwarranted;

 

   

our vulnerability to changes in the digital and delivery business;

 

   

our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media;

 

   

our reliance on a small number of suppliers and distributors for a substantial amount of our food and beverages;

 

   

our failure to effectively address environmental, social and other sustainability matters affecting our industry, or to set and meet relevant sustainability goals;

 

   

our level of indebtedness and our duty to comply with covenants under our Credit Facilities;

 

   

the interests of Berkshire may differ from those of our public stockholders;

 

   

our failure to adequately protect our network security;

 

   

compliance with federal and local environmental, labor, employment and food safety laws and regulations; and

 

   

our inability to effectively manage our internal controls over financial reporting.

 

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See “Risk Factors” for a further description of these and other factors. For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this prospectus. Any forward-looking statement made by us in this prospectus speaks only as of the date on which we make it. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

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ORGANIZATIONAL STRUCTURE

Structure Prior to the Reorganization Transactions

We currently conduct our business through Portillo’s OpCo and its subsidiaries. Following this offering, we will be a holding company and our sole material asset will be an ownership interest in Portillo’s OpCo. Portillo’s Inc. was incorporated as a Delaware corporation on June 8, 2021 to serve as the issuer of the Class A common stock offered hereby.

Prior to the consummation of the Reorganization Transactions, the amended and restated limited liability company agreement of Portillo’s OpCo will be amended and restated to, among other things, convert all outstanding equity interests (except for those redeemable preferred units which will be redeemed in connection with this offering) into LLC Units.

The Reorganization Transactions

In connection with this offering, we intend to enter into the Reorganization Transactions.

In connection with the Reorganization Transactions, Portillo’s Inc. will become the sole managing member of Portillo’s OpCo. Because we will manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and because we will also have a substantial financial interest in Portillo’s OpCo, we will consolidate the financial results of Portillo’s OpCo, and a portion of our net income will be allocated to the noncontrolling interest to reflect the entitlement of the Continuing Pre-IPO LLC Members to a portion of Portillo’s OpCo’s net income. In addition, because Portillo’s OpCo will be under the common control of the Pre-IPO LLC Members before and after the Reorganization Transactions (both directly and indirectly through their ownership of us), we will account for the Reorganization Transactions as a reorganization of entities under common control and will initially measure the interests of the Continuing Pre-IPO LLC Members in the assets and liabilities of Portillo’s OpCo at their carrying amounts as of the date of the completion of the consummation of the Reorganization Transactions.

Our amended and restated certificate of incorporation that will be in effect upon the completion of this offering will authorize the issuance of two classes of common stock: Class A common stock and Class B common stock. Each share of common stock will entitle its holder to one vote per share on all matters submitted to a vote of our stockholders. The Class B common stock is not entitled to economic interests in Portillo’s Inc. See “Description of Capital Stock.”

Prior to the completion of this offering, we will acquire, directly and indirectly, LLC Units through the Mergers. The Reorganization Parties will collectively hold 13,296,936 shares of Class A common stock of Portillo’s Inc. after the Mergers (assuming the underwriters do not exercise their option to purchase additional shares of Class A common stock). The Reorganization Parties will collectively receive a number of shares of our Class A common stock in the Mergers equal to the number of LLC Units held by the Blocker Companies prior to the Mergers, and will not directly hold interests in Portillo’s OpCo.

Each Continuing Pre-IPO LLC Member will be issued a number of shares of our Class B common stock in an amount equal to the number of LLC Units held by such Continuing Pre-IPO LLC Member.

Portillo’s OpCo will enter into the Amended LLC Agreement. Under the Amended LLC Agreement, holders of LLC Units (other than us and our wholly owned subsidiaries), including the Continuing Pre-IPO LLC Members, will have the right, from and after the completion of this offering (subject to the terms of the Amended LLC Agreement), to require Portillo’s OpCo to redeem all or a portion of their LLC Units for, at our election, newly issued shares of Class A common stock on a one-for-one basis or a cash payment from the proceeds of a sale of shares of Class A common stock in accordance with the terms of the Amended LLC Agreement.

 

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Shares of Class B common stock will be cancelled on a one-for-one basis if we, following a redemption request from a holder of LLC Units, redeem or exchange LLC Units of such holder pursuant to the terms of the Amended LLC Agreement. See “Certain Relationships and Related Party Transactions—Amended Portillo’s OpCo Agreement.” Except for transfers to us or to certain permitted transferees pursuant to the Amended LLC Agreement, the LLC Units and corresponding shares of Class B common stock may not be sold, transferred or otherwise disposed of.

We will issue 20,270,270 shares of Class A common stock to investors pursuant to this offering.

We will use the net proceeds from this offering to acquire newly issued LLC Units from Portillo’s OpCo and, if the underwriters exercise their option to purchase additional shares of Class A common stock, we will use the additional net proceeds to purchase LLC Units from certain Continuing Pre-IPO LLC Members and/or to repurchase shares of Class A common stock received by the Reorganization Parties in connection with the Mergers, in each case, at a purchase price per LLC Unit or share of Class A common stock equal to the initial public offering price of Class A common stock, after deducting the underwriting discounts and commissions, collectively representing approximately 47% of Portillo’s OpCo’s outstanding LLC Units (or approximately 50%, if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

We will enter into a Tax Receivable Agreement, that will obligate us to make payments to the TRA Parties in the aggregate generally equal to 85% of the applicable cash savings that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in this offering, (ii) certain favorable tax attributes we will acquire from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with this offering and (y) future redemptions or exchanges of LLC Units by Continuing Pre-IPO LLC Members for cash or Class A common stock and (iv) certain other tax benefits related to entering into the Tax Receivable Agreement, including payments made under the Tax Receivable Agreement. We will retain the benefit of the remaining 15% of these tax savings.

We will cause Portillo’s OpCo to use the proceeds from the issuance of LLC Units to (i) pay fees and expenses in connection with this offering and (ii) as otherwise set forth in “Use of Proceeds.”

Effect of the Reorganization Transactions and This Offering

The Reorganization Transactions are intended to create a holding company that will facilitate public ownership of, and investment in, the Company and are structured in a tax-efficient manner for the Blocker Companies and Reorganization Parties. The Continuing Pre-IPO LLC Members will continue to hold their ownership interests in Portillo’s OpCo until such time in the future as they may elect to cause us to redeem or exchange their LLC Units for a corresponding number of shares of our Class A common stock or cash.

We estimate that the offering expenses (other than the underwriting discounts and commissions) will be approximately $8,000,000. All of such offering expenses will be paid for by Portillo’s OpCo. See “Use of Proceeds.”

The following diagram depicts our organizational structure immediately following the consummation of the Reorganization Transactions, the completion of this offering and the application of the net proceeds from this offering, based on an assumed initial public offering price of $18.50 per share of Class A common stock (the midpoint of the price range set forth on the cover page of this prospectus) and assuming the underwriters do not

 

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exercise their option to purchase additional shares of Class A common stock. This chart is provided for illustrative purposes only and does not purport to represent all legal entities within our organizational structure.

 

LOGO

 

 

*

Excludes shares of shares of our Class A common stock underlying vested stock options granted to certain of our Continuing Pre-IPO LLC Members under the 2014 Plan.

Upon completion of the transactions described above, this offering and the application of the Company’s net proceeds from this offering:

 

   

Portillo’s Inc. will be appointed as the managing member of Portillo’s OpCo and will hold 33,567,206 LLC Units, constituting approximately 47% of the outstanding economic interests in Portillo’s OpCo (or 35,807,171 LLC Units, constituting approximately 50% of the outstanding economic interests in Portillo’s OpCo if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

   

The Pre-IPO LLC Members will collectively hold (i) (x) 13,296,936 shares of Class A common stock (or 12,496,361 shares of Class A common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and (y) 37,913,286 LLC Units (or 35,673,321 LLC Units if the underwriters exercise their option to purchase additional shares of Class A common stock in full), which together directly and indirectly represent approximately 72% of the economic interest in Portillo’s OpCo (or approximately 67% if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and

 

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(ii) through their collective ownership of 13,296,936 shares of Class A common stock (or 12,496,361 shares of Class A common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and 37,913,286 shares of Class B common stock (or 35,673,321 shares of Class B common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full), approximately 72% of the combined voting power of our common stock (or approximately 67% if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

   

Investors in this offering will collectively hold (i) 20,270,270 shares of our Class A common stock, representing approximately 28% of the combined voting power of our common stock (or 23,310,810 shares and 33%, respectively, if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and (ii) through our direct and indirect ownership of LLC Units, indirectly will hold approximately 28% of the economic interest in Portillo’s OpCo (or approximately 33% if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

Holding Company Structure and the Tax Receivable Agreement

We are a holding company, and immediately after the consummation of the Reorganization Transactions and this offering, our sole material asset will be our ownership interests in Portillo’s OpCo. The number of LLC Units that we will own directly and indirectly in the aggregate at any time will equal the aggregate number of outstanding shares of our Class A common stock. The economic interest represented by each LLC Unit that we own directly and indirectly will correspond to one share of our Class A common stock, and the total number of LLC Units owned directly and indirectly by us and the holders of our Class B common stock at any given time will equal the sum of the outstanding shares of all classes of our common stock.

We do not intend to list our Class B common stock on any stock exchange.

We will acquire certain favorable tax attributes from the Blocker Companies in the Mergers. In addition, acquisitions by us of LLC Units in connection with this offering (including the repayment of the redeemable preferred units) and from Continuing Pre-IPO LLC Members in connection with future redemptions or exchanges by the Continuing Pre-IPO LLC Members of LLC Units for shares of our Class A common stock or cash are expected to result in favorable tax attributes that will be allocated to us. These tax attributes would not be available to us in the absence of those transactions and are expected to reduce the amount of tax that we would otherwise be required to pay in the future.

We intend to enter into a Tax Receivable Agreement with the TRA Parties. Under the Tax Receivable Agreement, we generally will be required to pay to the TRA Parties, in the aggregate, 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in this offering, (ii) certain favorable tax attributes we will acquire from the Blocker Companies in the Mergers (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with this offering and (y) future redemptions or exchanges of Units by Continuing Pre-IPO LLC Members for cash or Class A common stock and (iv) certain other tax benefits related to entering into the Tax Receivable Agreement, including payments made under the Tax Receivable Agreement.

Assuming no material changes in relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect future payments under the Tax Receivable Agreement relating to the purchase by us of LLC Units in connection with this offering (including the repayment of the redeemable preferred units), and the Mergers to be approximately $149.7 million and, based on

 

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certain assumptions, to range over the next 15 years from approximately $4.9 million to $15.6 million per year and decline thereafter. These estimates are based on an initial public offering price of $18.50 per share of Class A common stock, which is the midpoint of the estimated public offering price range set forth on the cover page of this prospectus. Future payments in respect of subsequent redemptions or exchanges would be in addition to these amounts and are expected to be substantial. The actual amounts we will be required to pay may materially differ from these hypothetical amounts, depending on a number of factors, including potential future tax savings that we will actually realize or be deemed to realize, and the Tax Receivable Agreement payments made by us, will be calculated based in part on the market value of our Class A common stock at the time of each redemption or exchange of an LLC Unit for cash or a share of Class A common stock and the prevailing applicable federal tax rate (plus the assumed combined state and local tax rate) applicable to us over the life of the Tax Receivable Agreement and will depend on our generating sufficient taxable income to realize the tax benefits that are subject to the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

Payments under the Tax Receivable Agreement will be based on the tax reporting positions we determine, and the IRS or another taxing authority may challenge all or part of the existing tax basis, deductions, tax basis increases, net operating losses or other tax attributes subject to the Tax Receivable Agreement, and a court could sustain such challenge. Payments we will be required to make under the Tax Receivable Agreement generally will not be reduced as a result of any taxes imposed on us, Portillo’s OpCo or any direct or indirect subsidiary thereof that are attributable to a tax period (or portion thereof) ending on or before the Mergers or the date of the completion of this offering. Further, the TRA Parties will not reimburse us for any payments previously made if such tax attributes are subsequently challenged by a taxing authority and are ultimately disallowed, except that any excess payments made to a TRA Party will be netted against future payments otherwise to be made to such TRA Party under the Tax Receivable Agreement, if any, after our determination of such excess. As a result, in such circumstances we could make future payments under the Tax Receivable Agreement that are greater than our actual cash tax savings and may not be able to recoup those payments, which could negatively impact our liquidity. See “Risk Factors—Risks Related to Our Organizational Structure—We will not be reimbursed for any payments made to the TRA Parties under the Tax Receivable Agreement in the event that any tax benefits are disallowed.”

Our obligations under the Tax Receivable Agreement will also apply with respect to any person who is issued LLC Units in the future and who becomes a party to the Tax Receivable Agreement.

We are a holding company with no operations of our own and our ability to make payments under the Tax Receivable Agreement will depend on the ability of Portillo’s OpCo to make distributions to us. Deterioration in the financial condition, earnings, or cash flow of Portillo’s OpCo and its subsidiaries for any reason could limit or impair their ability to pay such distributions. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid. Nonpayment for a specified period, however, may constitute a breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement (unless, generally, such nonpayment is due to a lack of sufficient funds) which could negatively impact our results of operations and could also affect our liquidity in periods in which such payments are made.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our sale of 20,270,270 shares of Class A common stock in this offering will be approximately $344.5 million, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering. The underwriters also have an option to purchase up to an additional 3,040,540 shares of Class A common stock from us. We estimate that the net proceeds to us, if the underwriters exercise their right to purchase the maximum of 3,040,540 additional shares of Class A common stock from us, will be approximately $52.9 million, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us in connection with this offering. This estimate assumes a public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus.

We estimate that the offering expenses (other than the underwriting discount and commissions) will be approximately $8.0 million. All of such offering expenses will be paid for or otherwise borne by Portillo’s OpCo.

We intend to use the net proceeds from this offering to purchase 20,270,270 newly issued LLC Units from Portillo’s OpCo. The foregoing purchases of LLC Units will be at a price per unit equal to the public offering price per share of Class A common stock in this offering, less the underwriting discount.

Portillo’s OpCo currently intends to use the net proceeds it receives from this offering, first, to repay the redeemable preferred units in full (including any redemption premium) and second, depending on the amount of net proceeds remaining as well as the available cash balance, to repay all or a portion of the borrowings outstanding under our Second Lien Credit Facility (including any prepayment penalties). The Second Lien Term B-3 Loans mature on December 6, 2024 and as of December 27, 2020, the interest rate on the Second Lien Term B-3 Loans was 10.75%. See “Description of Material Indebtedness.”

If the underwriters exercise their option to purchase additional shares of Class A common stock in full, we estimate that our additional net proceeds will be approximately $52.9 million. We will use the additional net proceeds we receive pursuant to any exercise of the underwriters’ option to purchase additional shares of Class A common stock to purchase LLC Units from certain Pre-IPO LLC Members and/or to repurchase shares of the Class A common stock received by the Reorganization Parties in connection with the Mergers at a price per LLC Unit and share of Class A common stock, in each case, equal to the initial public offering price of our Class A common stock minus underwriting discounts and commissions. As a result, Portillo’s OpCo will not receive any additional proceeds from any exercise of the underwriters’ option to purchase additional shares of Class A common stock.

A $1.00 increase (decrease) in the assumed initial public offering price of $18.50 per share would increase (decrease) the amount of proceeds to us from this offering available by approximately $19.1 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial public offering price per share, the midpoint of the price range shown on the cover page of this prospectus, would increase (decrease) the amount of net proceeds to us from this offering available by approximately $17.4 million.

 

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DIVIDEND POLICY

We do not currently intend to pay cash dividends on our Class A common stock in the foreseeable future. However, in the future, subject to the factors described below and our future liquidity and capitalization, we may change this policy and choose to pay dividends. Any determination to pay dividends in the future will be at the discretion of our Board and will depend upon our results of operations, cash requirements, financial condition, contractual restrictions, restrictions imposed by applicable laws and other factors that our Board may deem relevant.

We are a holding company that does not conduct any business operations of our own and has no material assets other than its ownership of LLC Units. As a result, our ability to pay cash dividends on our common stock, if our Board determines to do so, will be dependent upon the ability of Portillo’s OpCo to pay cash dividends and distributions to us. The ability of Portillo’s OpCo to pay cash dividends and distributions to us is not restricted by the terms of our Credit Facilities but the ability of certain subsidiaries of Portillo’s OpCo to make such cash dividend and distributions to Portillo’s OpCo may be restricted by the terms of the Credit Facilities. See “Description of Material Indebtedness.”

If Portillo’s OpCo makes such distributions, the holders of LLC Units will be entitled to receive equivalent distributions from Portillo’s OpCo. However, because we must pay taxes, make payments under the Tax Receivable Agreement and pay our expenses, amounts ultimately distributed as dividends to holders of our Class A common stock are expected to be less than the amounts distributed by Portillo’s OpCo to the other holders of LLC Units on a per share basis. See “Certain Relationships and Related Party Transactions—Amended Portillo’s OpCo Agreement.”

Under the Amended LLC Agreement, Portillo’s OpCo will generally be required from time to time to make pro rata distributions in cash to us and the other holders of LLC Units at certain assumed tax rates in amounts that are intended to be sufficient to cover the income taxes payable on our and the other LLC Unit holders’ respective allocable shares of the taxable income of Portillo’s OpCo. We may receive tax distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement. Our Board, in its sole discretion, will make any determination from time to time with respect to the use of any such excess cash so accumulated, which may include, among other uses, funding repurchases of Class A common stock; acquiring additional newly issued LLC Units from Portillo’s OpCo at a per unit price determined by reference to the market value of the Class A common stock; paying dividends, which may include special dividends, on its Class A common stock; or any combination of the foregoing. We will have no obligation to distribute such cash (or other available cash other than any declared dividend) to our stockholders. We also expect, if necessary, to undertake ameliorative actions, which may include pro rata or non-pro rata reclassifications, combinations, subdivisions or adjustments of outstanding LLC Units, to maintain 1:1 parity between LLC Units and shares of Class A common stock. See “Risk Factors—In certain circumstances, Portillo’s OpCo will be required to make distributions to us and the other holders of LLC Units, and the distributions that Portillo’s OpCo will be required to make may be substantial.”

See “Risk Factors—Risks Related to this Offering and Ownership of Our Class A Common Stock—We do not anticipate paying any dividends on our Class A common stock in the foreseeable future,” “Organizational Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Liquidity, Capital Resources and COVID-19,” “Description of Material Indebtedness” and “Description of Capital Stock.”

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 27, 2021:

 

   

on an actual basis for Portillo’s OpCo;

 

   

on an as adjusted basis to reflect the Reorganization Transactions; and

 

   

on a pro forma basis after giving effect to the Offering Adjustments described under “Unaudited Pro Forma Consolidated Financial Information,” including the sale of 20,270,270 shares of our Class A common stock in this offering at an assumed public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and the application of the net proceeds received by us from this offering as described under “Use of Proceeds.”

This table should be read in conjunction with “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and the consolidated financial statements and notes thereto appearing elsewhere in this prospectus.

 

     Portillo’s OpCo  
     As of June 27, 2021  
     Actual      As Adjusted      Pro Forma(1)  
     (in thousands)  

Cash and cash equivalents(2)

   $ 54,157      $ (27,380    $ 26,777  
  

 

 

    

 

 

    

 

 

 

Debt:

        

Short-term debt

     —          —          —    

Current portion of long-term debt

     3,324        —          3,324  

Long-term debt, net of current portion

     466,638        (150,395      316,243  
  

 

 

    

 

 

    

 

 

 

Total debt(2)(3)

     469,962        (150,395      319,567  

Redeemable preferred units(2)

     211,663        (211,663      —    

Equity:

        

Common units—378,790,682 units authorized, 378,790,682 units issued and outstanding

     —          —          —    

Preferred stock, $0.01 par value per share, 10,000,000 shares authorized 0 issued and outstanding

     —          —          —    

Class A common stock, $0.01 par value per share, 380,000,000 shares authorized, and 33,567,206 shares issued and outstanding, as adjusted

     —          336        336  

Class B common stock, $.00001 par value per share, 50,000,000 shares authorized, and 37,913,286 shares issued and outstanding, as adjusted

     —          —          —    

Stock subscription receivable

     (249      —          (249

Additional paid-in capital

     141,581        37,186        178,767  

Retained earnings (accumulated deficit)

     2,781        (9,822      (7,041

Contingently redeemable non-controlling interest(2)(4)

     —          194,057        194,057  
  

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

     144,113        221,757        365,870  

Total capitalization(2)

   $ 825,738      $ (140,301    $ 685,437  
  

 

 

    

 

 

    

 

 

 

 

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(1)

Each $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, as applicable, our net proceeds, after deducting the estimated underwriting discount and estimated offering expenses payable by us, by $19.1 million (assuming no exercise of the underwriters’ option to purchase additional shares). Similarly, an increase or decrease of one million shares of Class A common stock sold in this offering by us would increase or decrease, as applicable, our net proceeds, after deducting the estimated underwriting discount and estimated offering expenses payable by us, by $17.4 million, based on an assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus.

(2)

Total debt includes unamortized debt discount and deferred issuance costs as of June 27, 2021. The table above does not reflect Portillo’s OpCo’s debt balance as of September 26, 2021 nor the total amount of cash required to repay the redeemable preferred units in full (which we estimate is approximately $222 million based on the assumed offering closing date). Portillo’s OpCo’s total cash and cash equivalents were $40.1 million as of October 11, 2021. Portillo’s OpCo currently intends to use the net proceeds it receives from this offering, first, to repay the redeemable preferred units in full (including any redemption premium) and second, depending on the amount of net proceeds remaining as well as the available cash balance, to repay all or a portion of the borrowings outstanding under our Second Lien Credit Facility (including any prepayment penalties). As a result, a portion of our Second Lien Credit Facility may remain outstanding following this offering. As of September 26, 2021, Portillo’s OpCo has $44.7 million of availability under its Revolving Facility (including $5.3 million of letters of credit).

(3)

For a description of our debt, see “Description of Material Indebtedness.”

(4)

Represents Continuing Pre-IPO LLC Members’ LLC Units. See “Certain Relationships and Related Party Transactions—Amended Portillo’s OpCo Agreement.”

 

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DILUTION

If you invest in our Class A common stock, you will experience dilution to the extent of the difference between the initial public offering price per share of our Class A common stock and the pro forma net tangible book value per share of our Class A common stock. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the pro forma net tangible book value per share attributable to the Continuing Pre-IPO LLC Members.

The Continuing Pre-IPO LLC Members will maintain their LLC Units in Portillo’s OpCo after the Reorganization Transactions, but will be able to cause the redemption or exchange of their LLC Units for, at our election, shares of Class A common stock or cash. We have presented dilution in pro forma net tangible book value per share assuming that all of the holders of LLC Units (other than the Company) had their LLC Units redeemed or exchanged for newly issued shares of Class A common stock on a one-for-one basis (rather than for cash) and the cancellation for no consideration of all of their shares of Class B common stock (which are not entitled to receive distributions or dividends, whether cash or stock, from the Company) in order to more meaningfully present the dilutive impact on the investors in this offering.

Our pro forma net tangible deficit as of June 27, 2021, would have been approximately $(413.2) million, or $(8.07) per share of our Class A common stock on a fully diluted basis. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares of common stock outstanding, in each case after giving effect to the Reorganization Transactions, assuming that the Continuing Pre-IPO LLC Members redeem or exchange all of their LLC Units and shares of Class B common stock for newly issued shares of our Class A common stock on a one-for-one basis.

After giving effect to the Reorganization Transactions, assuming that the Continuing Pre-IPO LLC Members redeem or exchange all of their LLC Units for newly issued shares of our Class A common stock on a one-for-one basis, and after giving further effect to the sale of 20,270,270 shares of Class A common stock in this offering at the assumed initial public offering price of $18.50 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and the use of the net proceeds from this offering, our pro forma as adjusted net tangible deficit would have been approximately $(290.2) million, or $(4.06) per share, representing an immediate increase in net tangible book value of $4.01 per share to existing equity holders and an immediate dilution in net tangible book value of $22.56 per share to new investors.

The following table illustrates the per share dilution:

 

Assumed initial public offering price per share

      $ 18.50  

Pro forma net tangible book value per share as of (1)

   $ (8.07   

Increase in pro forma net tangible book value per share attributable to new investors

   $ 4.01     

Pro forma as adjusted net tangible book value per share after this offering

      $ (4.06
     

 

 

 

Dilution in net tangible book value per share to new investors in this offering

      $ 22.56  
     

 

 

 

 

(1)

Reflects 51,210,222 outstanding shares of Class A common stock prior to the offering (assuming all LLC Units and corresponding shares of Class B common stock held by the Continuing Pre-IPO LLC Members are exchanged for shares of Class A common stock).

(2)

Reflects 71,408,492 outstanding shares, consisting of (i) 20,270,270 shares of Class A common stock to be issued in this offering and (ii) the 51,210,222 outstanding shares described in note (1) above.

 

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Dilution is determined by subtracting pro forma net tangible book value per share after this offering from the initial public offering price per share of Class A common stock.

A $1.00 increase (decrease) in the assumed initial public offering price of $18.50 per share would increase (decrease) our pro forma net tangible book value after this offering by $19.1 million and the dilution per share to new investors by $0.27, in each case assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same. Each increase (decrease) of 1,000,000 shares in the number of shares sold by us in this offering, as set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $17.4 million, assuming the assumed initial public offering price of $18.50 per share (the midpoint of the price range set forth on the cover page of this prospectus) remains the same.

To the extent the underwriters’ option to purchase additional shares of Class A common stock is exercised, there will be further dilution to new investors.

The following table illustrates, as of June 27, 2021, after giving effect to the Reorganization Transactions, assuming that the Continuing Pre-IPO LLC Members redeem or exchange all of their LLC Units for newly issued shares of our Class A common stock on a one-for-one basis, and after giving further effect to the sale by us of shares of our Class A common stock in this offering at the initial public offering price of $18.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), the difference between the Pre-IPO LLC Members, and the investors purchasing shares of our Class A common stock in this offering with respect to the number of shares of our common stock purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us, before deducting underwriting discounts and commissions and the estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent  

Pre-IPO LLC Members

     51,210,222        71.6   $ —          0   $ 0.00  

Investors in this offering

     20,270,270        28.4       375,000,000        100       18.50  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     71,480,492        100.0   $ 375,000,000        100.0                   
  

 

 

    

 

 

   

 

 

    

 

 

   

We may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to holders of our Class A common stock.

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated statement of operations for the year ended December 27, 2020 and for two quarters ended June 27, 2021 gives effect to the pro forma adjustments related to (i) the Reorganization Transactions, which we refer to as the “Transactions Accounting Adjustments” and (ii) the offering transactions (the “IPO Transactions”), including the sale of 20,270,270 shares of Class A common stock and the application of the net proceeds from this offering, which we refer to as the “Offering Adjustments.” We refer to the Reorganization Transactions and the IPO Transactions collectively as the “Transactions.” The unaudited pro forma consolidated statement of operations for the year ended December 27, 2020 and for two quarters ended June 27, 2021 gives effect to the Transactions and their related adjustments as if they had occurred on December 30, 2019. The unaudited pro forma balance sheet as of June 27, 2021 gives effect to as the Transactions and their related adjustments if they had occurred on June 27, 2021. See “Capitalization.” The unaudited pro forma financial information has been prepared by our management and is based on Portillo’s OpCo’s historical financial statements and the assumptions and adjustments described in the notes to the unaudited pro forma financial information below. The presentation of the unaudited pro forma financial information is prepared in conformity with Article 11 of Regulation S-X rules effective January 1, 2021.

Our historical financial information for the year ended December 27, 2020 has been derived from the audited consolidated financial statements and footnotes of Portillo’s OpCo included elsewhere in this prospectus. The historical financial information as and for the two quarters ended June 27, 2021 has been derived from Portillo’s OpCo’s unaudited consolidated financial statements and footnotes included elsewhere in this prospectus.

We based the pro forma adjustments on available information and on assumptions that we believe are reasonable under the circumstances in order to reflect, on a pro forma basis, the impact of the relevant transactions on the historical financial information of Portillo’s OpCo. See the notes to unaudited pro forma financial information below for a discussion of assumptions made. The unaudited pro forma financial information does not purport to be indicative of our results of operations or financial position had the relevant transactions occurred on the dates assumed and does not project our results of operations or financial position for any future period or date.

The Transactions Accounting Adjustments are described in the notes to the unaudited pro forma consolidated financial information and primarily include:

 

   

adjustments for the Reorganization Transactions, the entry into the Amended LLC Agreement and the entry into the Tax Receivable Agreement;

 

   

the recognition of a contingently redeemable non-controlling interest in Portillo’s OpCo held by the Continuing Pre-IPO LLC Members, which will be redeemable, at our election, for shares of Class A common stock on a one-for-one basis or a cash payment from the proceeds of a sale of shares of Class A common stock in accordance with the terms of the Amended LLC Agreement; and

 

   

provision for federal and state income taxes of Portillo’s Inc. as a taxable corporation at an effective rate of 12.98% for the year ended December 27, 2020 (calculated using a U.S. federal income tax rate of 21%).

The Offering Adjustments are described in the notes to the unaudited pro forma consolidated financial information and primarily include:

 

   

the issuance of shares of our Class A common stock to the purchasers in this offering in exchange for net proceeds of approximately $344.5 million, assuming that the shares are offered at $18.50 per share (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions but before offering expenses (and, unless otherwise indicated, assuming no exercise of the underwriters’ option to purchase additional shares);

 

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the application by Portillo’s Inc. of the net proceeds from this offering to acquire newly issued LLC Units from Portillo’s OpCo at a purchase price per LLC Unit equal to the initial public offering price of Class A common stock net of underwriting discounts and commissions; and

 

   

the application by Portillo’s OpCo of a portion of the proceeds of the sale of LLC Units to Portillo’s Inc. to (i) pay fees and expenses, including underwriting discounts and commissions of approximately $30.5 million in connection with this offering and (ii) as otherwise set forth in “Use of Proceeds.”

We are in the process of implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these procedures and processes and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal, and administrative personnel, increased auditing and legal expenses, and other related costs. Due to the scope and complexity of these activities, the amount of these costs could increase or decrease materially and are based on subjective estimates and assumptions that cannot be factually supported. We have not included any pro forma adjustments related to these costs.

Because Portillo’s Inc. was formed on June 8, 2021 and will have no material assets or results of operations until the completion of the offering, its historical financial information is not included in the unaudited pro forma consolidated financial information for the year ended December 27, 2020 or two quarters ended June 27, 2021.

The unaudited pro forma consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results that would have occurred if the Transactions had been completed as of the dates set forth above, nor is it indicative of our future results. Additionally, the unaudited pro forma consolidated financial information does not give effect to the potential impact of any anticipated synergies, operating efficiencies, or cost savings that may result from the Transactions or any integration costs.

The unaudited pro forma consolidated financial information should be read together with “Organizational Structure,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes thereto included elsewhere in this prospectus.

 

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UNAUDITED PRO FORMA CONSOLIDATED

STATEMENT OF OPERATIONS

 

    For the Year Ended December 27, 2020  
    Historical
Portillo’s
OpCo
    Transactions
Accounting
Adjustments
    Pro
forma before
Offering
Adjustments
Portillo’s Inc.
    Offering
Adjustments
    Pro
forma
Portillo’s
Inc.
 
    (in thousands, except per unit/share data)  

Revenue

  $ 455,471     $ —       $ 455,471     $ —       $ 455,471  

Cost and expenses:

                                                             

Restaurant operating expenses:

         

Cost of goods sold, excluding depreciation and amortization

    142,446       —         142,446       —         142,446  

Labor

    115,991       —         115,991       —         115,991  

Occupancy

    24,920       —         24,920       —         24,920  

Other operating expenses

    50,169       —         50,169       —         50,169  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating expenses

    333,526       —         333,526       —         333,526  

General and administrative expenses

    39,854       —         39,854       —         39,854  

Pre-opening expenses

    2,209       —         2,209       —         2,209  

Depreciation and amortization

    24,584       —         24,584       —         24,584  

Net income attributable to equity method investment

    (459     —         (459     —         (459

Other income, net

    (1,537     —         (1,537     —         (1,537
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    57,294       —         57,294         57,294  

Interest expense

    45,031       —         45,031       (18,531 ) (4)      26,500  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    12,263       —         12,263       18,531       30,794  

Less: Redeemable preferred units accretion

    (20,524     —         (20,524     20,524  (5)      —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common unit holders

    (8,261     —         (8,261     39,055       30,794  

Income tax expense

    —         1,592  (1)      1,592       2,405  (1)      3,997  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) after income tax expense

    (8,261     (1,592     (9,853     36,650       26,797  

Net income (loss) attributable to noncontrolling interests

    —         (5,226 ) (2)      (5,226     19,439  (2)      14,213  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Portillo’s Inc.

  $ (8,261   $ 3,634     $ (4,627     17,211       12,584  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share data (3)

         

Pro forma average shares of Class A common stock outstanding (3)

         

Basic

            33,567,206  

Diluted

            37,227,158  

Net income per share of Class A common stock

         

Basic

          $ 0.37  

Diluted

          $ 0.34  

See accompanying notes to unaudited pro forma financial information.

 

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UNAUDITED PRO FORMA CONSOLIDATED

STATEMENT OF OPERATIONS

 

          For the Two Quarters ended June 27, 2021  
    Historical
Portillo’s
OpCo
    Transactions
Accounting
Adjustments
    Pro
forma before
Offering
Adjustments
Portillo’s Inc.
    Offering
Adjustments
    Pro forma
Portillo’s Inc.
 
    (in thousands, except per unit/share data)  

Revenue

  $ 258,041     $ —       $ 258,041     $ —       $ 258,041  

Cost and expenses:

         

Restaurant operating expenses:

         

Cost of goods sold, excluding depreciation and amortization

    77,180       —         77,180       —         77,180  

Labor

    65,512       —         65,512       —         65,512  

Occupancy

    13,890       —         13,890       —         13,890  

Other operating expenses

    28,633       —         28,633       —         28,633  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total restaurant operating expenses

    185,215       —         185,215       —         185,215  

General and administrative expenses

    24,005       —         24,005       —         24,005  

Pre-opening expenses

    1,960       —         1,960       —         1,960  

Depreciation and amortization

    12,709       —         12,709       —         12,709  

Net income attributable to equity method investment

    (359     —         (359     —         (359

Other income, net

    (803     —         (803     —         (803
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    35,314       —         35,314       —         35,314  

Interest expense

    21,441       —         21,441       (9,090 ) (4)      12,351  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    13,873       —         13,873       9,090       22,963  

Less: Redeemable preferred unit accretion

    (11,092     —         (11,092     11,092   (5)      —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common unit holders

    2,781       —         2,781       20,182       22,963  

Income tax expense

    —         1,296  (1)      1,296       849   (1)      2,145  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) after income tax expense

    2,781       (1,296     1,485       19,333       20,818  

Net income (loss) attributable to noncontrolling interests

    —         788  (2)      788       10,254    (2)      11,042  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Portillo’s Inc.

  $ 2,781     $ (2,084   $ 697     $ 9,079     $ 9,776  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share data (3)

         

Pro forma average shares of Class A common stock outstanding (3)

         

Basic

            33,567,206  

Diluted

            37,227,158  

Net income per share of Class A common stock

         

Basic

          $ 0.29  

Diluted

          $ 0.26  

See accompanying notes to unaudited pro forma financial information.

 

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Notes to Unaudited Pro Forma Statement of Operations

(Year Ended December 27, 2020 and Two Quarters ended June 27, 2021)

 

(1)

Following the Reorganization Transactions, Portillo’s Inc. will be subject to U.S. federal and applicable state and local income taxes. As a result, the pro forma statement of operations reflects an adjustment to income tax expense for corporate income taxes to reflect a statutory tax rate of 27.93%, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and local jurisdiction. Portillo’s OpCo is, and will continue to be, taxed as a partnership for federal income tax purposes and, as a result, its members, including Portillo’s Inc., will pay income taxes with respect to their allocable shares of its taxable income.

The pro forma adjustment for income tax expense represents tax expense on income that will be taxable in jurisdictions after our corporate reorganization that previously had not been taxable. The adjustment is calculated as pro forma income before income taxes multiplied by the effective tax rate of 12.98% for the year ended December 27, 2020 and 9.34% for the two quarters ended June 27, 2021. Our effective tax rate differs from the statutory rate of 27.93% primarily due to income allocable to non-controlling interests.

As a result, the pro forma statement of operations reflect adjustments to our income tax expense of $4.0 and $2.1 million for the year ended December 27, 2020 and the two quarters ended June 27, 2021, respectively.

 

(2)

In connection with the Reorganization Transactions, we will become the sole managing member of Portillo’s OpCo pursuant to the Amended LLC Agreement. Because we will manage and operate the business and control the strategic decisions and day-to-day operations of Portillo’s OpCo and will also have a substantial financial interest in Portillo’s OpCo, we will consolidate the financial results of Portillo’s OpCo, and a portion of our net income (loss) will be allocated to the noncontrolling interests to reflect the entitlement of the Continuing Pre-IPO LLC Members to a portion of Portillo’s OpCo’s net income (loss). We will initially hold approximately 47% of Portillo’s OpCo’s outstanding LLC Units (or approximately 50% if the underwriters exercise their option to purchase additional shares of Class A common stock in full), and the remaining LLC Units of Portillo’s OpCo will be held by the Continuing Pre-IPO LLC Members. Immediately following the Reorganization Transactions, the ownership percentage held by the noncontrolling interest will be approximately 53%. Net income attributable to the noncontrolling interest will represent approximately 53% of net income.

 

(3)

Pro forma basic net income per share of Class A common stock is computed by dividing the pro forma net income available to Class A common stockholders by the pro forma weighted-average shares of Class A common stock outstanding during the period. Pro forma diluted net income per share of Class A common stock is computed by dividing the pro forma net income available to Class A common stockholders by the pro forma weighted-average shares of Class A common stock outstanding to give effect to potentially dilutive securities.

 

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Table of Contents
Pro Forma loss per share of Class A common stock    Year Ended
December 27, 2020
     Two Quarters Ended
June 27, 2021
 
     (in thousands)  

Numerator:

     

Pro forma net income attributable to the Issuer’s Class A common stockholders (basic and diluted)

   $ 12,584      $ 9,776  

Denominator:

     

Pro forma weighted average of shares of Class A common stock outstanding (basic)

     33,567,206        33,567,206  

Pro forma weighted average of shares of Class A common stock outstanding (diluted)

     37,227,158        37,227,158  

Pro forma basic earnings per share

   $ 0.37      $ 0.29  

Pro forma diluted earnings per share

     0.34        0.26  

Pro forma net income per share of Class B common stock is not presented because Class B common stock is not entitled to economic interests in Portillo’s Inc.

 

(4)

Portillo’s OpCo will use a portion of the proceeds from the issuance of LLC Units to Portillo’s Inc. to repay its Second Lien Term B-3 Loans. Our unpaid balance of our indebtedness on the Second Lien Term B-3 Loans, including unamortized debt discount and deferred issuance costs was $148.4 million bearing interest at a rate of 12.06% as of December 30, 2019. We anticipate an estimated $3.1 million in additional charges for prepayment penalties related to the repayment of such indebtedness. As such, interest expense will be reduced by $18.5 million and $9.1 million as a result of the lower borrowings outstanding for the year ended December 27, 2020 and two quarters ended June 27, 2021, respectively.

 

(5)

Portillo’s OpCo will use a portion of the proceeds from the issuance of LLC Units to Portillo’s Inc. to repay its redeemable preferred units in its entirety. As such, we have eliminated the preferred unit accretion for the year ended December 27, 2020 and the two quarters ended June 27, 2021.

 

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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (AS OF JUNE 27, 2021)

 

     Historical
Portillo’s

OpCo
    Transactions
Accounting

Adjustments
    Pro forma
before Offering
Adjustments

Portillo’s Inc.
    Offering
Adjustments
    Pro forma
Portillo’s Inc.
 
     (in thousands, except per share data)  

Assets

          

Current Assets:

          

Cash and cash equivalents

   $ 54,157       —         54,157       (27,380 ) (1)      26,777  

Restricted cash

     235       —         235       —         235  

Accounts receivable

     4,373       —         4,373       —         4,373  

Inventory

     3,573       —         3,573       —         3,573  

Other current assets

     3,995       —         3,995       (783 ) (3)      3,212  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     66,333       —         66,333       (28,163     38,170  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and equipment, net

     180,907       —         180,907       —         180,907  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Assets:

          

Goodwill

     394,298       —         394,298       —         394,298  

Intangible assets-net of accumulated amortization

     261,795       —         261,795       —         261,795  

Equity method investment

     16,184       —         16,184       —         16,184  

Deferred tax asset

     —         36,795  (2)      36,795       —         36,795  

Other assets

     4,516       —         4,516       —         4,516  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other assets

     676,793       36,795       713,588       —         713,588  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 924,033       36,795       960,828       (28,163     932,665  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities, Redeemable Preferred Units and Common Equity

          

Current Liabilities:

          

Accounts payable

   $ 20,642       —         20,642       (783 ) (3)      19,859  

Current portion of long-term debt

     3,324       —         3,324       —         3,324  

Current deferred revenue

     4,414       —         4,414       —         4,414  

Accrued expenses

     37,621       —         37,621       —         37,621  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     66,001       —         66,001       (783     65,218  

Long-Term Liabilities:

          

Long-term debt, net of current portion

     466,638       —         466,638       (150,395 ) (1)      316,243  

Deferred rent

     28,823       —         28,823       —         28,823  

Tax receivable liability

     —         149,716  (4)      149,716       —         149,716  

Other long-term liabilities

     6,795       —         6,795       —         6,795  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term liabilities

     502,256       149,716       651,972       (150,395     501,577  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     568,257       149,716       717,973       (151,178     566,795  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Redeemable Preferred Units

     211,663       —         211,663       (211,663 ) (1)      —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ Equity:

          

Common Units—378,790,682 units authorized, 378,790,682 units issued and outstanding

     —         —         —         —         —    

Preferred Stock—$0.01 par value, 10,000,000 shares authorized, 0 issued and outstanding on a pro forma basis

     —         —         —         —         —    

Class A Common Stock—$0.01 par value, 380,000,000 shares authorized, 33,567,206 shares issued and outstanding on a pro forma basis

     —         133       133  (5)(6)      203  (5)(6)      336  

Class B Common Stock—$0.00001 par value, 50,000,000 shares authorized, 37,913,286 shares issued and outstanding on a pro forma basis

     —         —         —         —         —    

Stock subscription receivable

     (249     —         (249     —         (249

Additional paid-in capital

     141,581       (129,598 ) (5)(7)      11,983       166,784  (5)(7)      178,767  

Retained earnings (accumulated deficit)

     2,781       —         2,781       (9,822 ) (8)      (7,041

Contingently redeemable non-controlling interest

     —         16,544  (5)(6)(9)      16,544  (5)(6)      177,513  (5)(6)(9)      194,057  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Stockholders’ Equity

     144,113       (112,921     31,192       334,678       365,870  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, redeemable preferred units and stockholders’ equity

   $ 924,033       36,795       960,828       (28,163     932,665  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited pro forma financial information.

 

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Notes to Unaudited Pro Forma Consolidated Balance Sheet (as of June 27, 2021)

 

(1)

Reflects the net effect on cash of the receipt of offering proceeds of $375.0 million, based on the sale of 20,270,270 million shares of Class A common stock at an assumed initial public offering price of $18.50 per share of common stock (the midpoint of the price range set forth on the cover of this prospectus) and assuming the underwriters’ option to purchase additional shares of Class A common stock is not exercised, after deducting underwriting discounts and commissions.

The offering proceeds and cash on hand were used to pay down the following (in thousands):

 

Gross proceeds from offering of Class A common stock

   $ 375,000  

Payments of underwriting discounts and commissions

     (22,500
  

 

 

 

Net cash proceeds received

     352,500  

Payment of redeemable preferred units

     (211,663

Payment of Second Lien Term B-3 Loans(a)

     (155,000

Payment of redeemable preferred units liquidation amount

     (2,117

Payment of Second Lien Term B-3 Loans prepayment penalty

     (3,100

Payment of non-underwriting offering costs(b)

     (8,000

Use of cash on hand

   $ (27,380

(a)   Payment of long-term debt, net of current portion excludes unamortized debt discount and deferred issuance costs of $4.6 million. However, this amount is included in the total pro forma adjustment to long-term debt, net of current portion, in the pro forma consolidated balance sheet as of June 27, 2021.

 

(b)   Total non-underwriting offering costs include $0.8 million in deferred costs as of June 27, 2021 (see Note 3) and an additional $7.2 million in estimated non-underwriting costs (see Note 7)

    

    

 

(2)

We are subject to U.S. federal, state and local income taxes and will file income tax returns for U.S. federal and certain state and local jurisdictions. This adjustment reflects the recognition of deferred taxes in connection with the Reorganization Transaction assuming the federal rates currently in effect and the highest statutory rates apportioned to each state and local jurisdiction.

We have recorded a pro forma deferred tax asset adjustment of $36.8 million (assuming that the underwriters do not exercise their option to purchase additional shares of Class A common stock). The deferred tax asset includes (i) a ($37.0) million deferred tax liability related to temporary differences in the book basis as compared to the tax basis of our investment in Portillo’s OpCo, (ii) $10.3 million due to favorable tax attributes we will acquire from the Blocker Companies in the Mergers and (ii) $63.5 million related to tax benefits from future deductions attributable to payments under the Tax Receivable Agreement as described further in Note (4) below.

 

(3)

We are deferring $0.8 million of certain costs associated with this offering. These costs primarily represent legal, accounting and other direct costs and are recorded in other current assets in our consolidated balance sheet. In addition, we estimate $7.2 million of additional offering costs will have been incurred at the IPO date. Upon completion of this offering, these deferred costs will be charged against the proceeds from this offering with a corresponding reduction to additional paid-in capital. As such, these deferred costs are recorded as a reduction to cash and additional paid-in capital in the pro forma consolidated balance sheet as of June 27, 2021.

 

(4)

Upon the completion of this offering, we will be a party to a Tax Receivable Agreement with the TRA Parties. Under the Tax Receivable Agreement, we generally will be required to pay 85% of the applicable cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of (i) our allocable share of existing tax basis in depreciable or amortizable assets relating to LLC Units acquired in this offering, (ii) certain favorable tax attributes we will acquire from the Blocker Companies in the Mergers

 

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  (including net operating losses and the Blocker Companies’ allocable share of existing tax basis), (iii) increases in our allocable share of then existing tax basis in depreciable or amortizable assets, and adjustments to the tax basis of the tangible and intangible assets, of Portillo’s OpCo and its subsidiaries, as a result of (x) sales or exchanges of interests in Portillo’s OpCo (including the repayment of the redeemable preferred units) in connection with this offering and (y) future redemptions or exchanges of LLC Units by Continuing Pre-IPO LLC Members for cash or Class A common stock and (iv) certain other tax benefits related to entering into the Tax Receivable Agreement, including payments made under the Tax Receivable Agreement.

We estimate the Tax Receivable Agreement liability as a result of the Mergers and acquisitions by us of LLC Units in connection with this offering (including the repayment of the redeemable preferred units) to be up to $149.7 million. Due to the uncertainty in the amount and timing of future exchanges of LLC Units by the Continuing Pre-IPO LLC Members of Portillo’s OpCo and the uncertainty of when those exchanges will ultimately result in tax savings, the unaudited pro forma consolidated financial information assumes that no exchanges of Portillo’s OpCo units have occurred and therefore no increases in tax basis in Portillo’s OpCo assets or other tax benefits that may be realized thereunder have been assumed in the unaudited pro forma consolidated financial information. However, if all of the Continuing Pre-IPO LLC Members were to exchange their Portillo’s OpCo units, we would recognize a liability of approximately $431.2 million, assuming (i) that the Continuing Pre-IPO LLC Members exchanged all of their Portillo’s OpCo units immediately after the completion of this offering at an initial public offering price of $18.50 per share of Class A common stock (the midpoint of the price range set forth on the cover of this prospectus), (ii) no material changes in relevant tax law and (iii) that we have sufficient taxable income in each year to realize on a current basis the increased depreciation, amortization and other tax benefits that are the subject of the Tax Receivable Agreement. These amounts are estimates and have been prepared for informational purposes only. The actual amount of deferred tax assets and related liabilities that we will recognize will differ based on, among other things, the timing of the exchanges, the price of shares of our Class A common stock at the time of the exchange and the tax rates then in effect.

 

(5)

As described in “Organizational Structure—Effect of the Reorganization Transactions and this Offering,” upon completion of the Reorganization Transactions, this offering and the application of the net proceeds from this offering, we will become the sole managing member of Portillo’s OpCo and will hold 33,567,206 LLC Units, constituting 47% of the outstanding economic interests in Portillo’s OpCo (or 35,807,171 LLC Units, constituting 50% of the outstanding economic interests in Portillo’s OpCo if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

(6)

Represents an adjustment to stockholders’ equity reflecting (i) par value of $0.01 for Class A common stock and $0.00001 for Class B common stock to be outstanding following the Reorganization Transactions and the Offering Adjustments and (ii) a decrease of $194.1 million in members’ equity to allocate a portion of Portillo’s Inc.’s equity to the noncontrolling interests, which is calculated as approximately 53% of total Stockholders’ equity.

 

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(7)

The following table is a reconciliation of the adjustments impacting additional paid-in-capital (in thousands):

 

Gross proceeds from offering of Class A common stock

   $ 375,000  

Payment of underwriting discounts and commissions in connection with this offering

     (22,500

Net adjustment from recognition of deferred tax asset and tax receivable liabilities described in Note 2 and 4

     (112,921

Reclassification of offering costs from other current assets to additional paid-in capital as described in Note 3

     (783

Adjustment for noncontrolling interests as described in Note 6

     (194,057

Other offering costs

     (7,217

Par value of Class A common stock

     (336

Total

   $ 37,186  

 

(8)

The following table is a reconciliation of the adjustments impacting retained earnings (accumulated deficit) (in thousands):

 

Payment of redeemable preferred LLC units liquidation amount

   $ 2,117  

Payment of Second Lien Term B-3 Loans prepayment penalty

     3,100  

Extinguishment of unamortized debt discount and deferred issuance costs associated with Second Lien Term B-3 Loans

     4,605  
  

 

 

 

Total

   $ 9,822  
  

 

 

 

 

(9)

As described in “Organizational Structure—Effect of the Reorganization Transactions and this Offering,” under the Amended LLC Agreement, holders of LLC Units (other than us and our wholly owned subsidiaries), including the Continuing Pre-IPO LLC Members, will have the right, from and after the completion of this offering (subject to the terms of the Amended LLC Agreement), to require Portillo’s OpCo to redeem all or a portion of their LLC Units for, at our election, newly issued shares of Class A common stock on a one-for-one basis or to make a cash payment from the proceeds of a sale of shares of Class A common stock in accordance with the terms of the Amended LLC Agreement. Shares of Class B common stock will be cancelled on a one-for-one basis if we, following a redemption request from a holder of LLC Units, redeem or exchange LLC Units of such holder pursuant to the terms of the Amended LLC Agreement. In accordance with the terms of the Amended LLC Agreement, Portillo’s OpCo shall have no obligation to settle the redemption of the LLC Units for cash if such amount exceeds the cash contributed to Portillo’s OpCo from the offering or sales of shares of Class A common stock.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations as of, and for, the periods presented. You should read the following discussion and analysis of our financial condition and results of operations together with the sections entitled “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Data,” “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements,” “Unaudited Pro Forma Consolidated Financial Information,” our audited consolidated financial statements and the related notes thereto and our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements, including statements regarding industry outlook, our expectations for the future of our business and our liquidity and capital resources as well as other non-historical statements. These statements are based on current expectations and are subject to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by these forward-looking statements.

We use a 52- or 53-week fiscal year ending on the Sunday prior to December 31, effective beginning with the first quarter of 2019. 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. We believe the difference in reporting periods does not have a material impact on comparability. Fiscal 2020, 2019 and 2018 each consist of 52 weeks. Results for any interim period should not be construed as an inference of what our results would be for any full fiscal year or future period.

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,” Portillo’s has 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/curbside, delivery and catering in order to quickly and efficiently serve our guests. As of June 27, 2021, we owned and operated 67 Portillo’s restaurants across nine states. According to data gathered by the NPD Group, our restaurants generated higher AUVs and Restaurant-Level Adjusted EBITDA Margins than any other fast casual restaurant concept of $7.7 million and 26.8% in 2020, respectively. For the twelve months ended June 27, 2021, our restaurants generated AUVs of $7.9 million and Restaurant-Level Adjusted EBITDA Margins of 28.6%.

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 and allows us to generate the highest AUVs and traffic per restaurant among fast casual and quick service restaurants. In 2019, 2020 and for the twelve months ended June 27, 2021, the average Portillo’s restaurant generated:

 

   

Drive-thru sales of $3.4 million in 2019, $4.6 million in 2020 and $4.9 million in the twelve months ended June 27, 2021, more than double the throughput of McDonald’s 2019 average drive thru and more than triple their 2020 and twelve months ended second quarter of 2021 average drive thru;

 

   

Dine-in sales of $4.4 million in 2019, $1.9 million in 2020 and $1.9 million in the twelve months ended June 27, 2021, greater than Chipotle’s 2019 total AUV of $2.2 million, approximately 90% of their 2020 total AUV and approximately 75% of their twelve months ended second quarter of 2021 total AUV; and

 

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Delivery sales of approximately $500,000 in 2019, nearly $800,000 in 2020 and approximately $850,000 in the twelve months ended June 27, 2021, which is approximately 80% of Domino’s 2019 average delivery volume, approximately equal to their 2020 average delivery volume and higher than their twelve months ended second quarter of 2021 delivery volume.

Each Portillo’s location on average served approximately 800,000 guests in 2020 and approximately 825,000 guests in the twelve months ended June 27, 2021, based on our average per-guest spend of approximately $9.60 and our AUVs of approximately $7.7 million in 2020 and $7.9 million in the twelve months ended June 27, 2021. Our restaurants are buzzing with the energy and excitement of our team members and guests that bring everyone together, from single diners to large groups, around great food, drinks and fun. Our restaurants have attracted a growing cult-like following that has enabled us to thrive across a variety of suburban and urban trade areas around the country. All of our restaurants are profitable, and we are proud to have never closed a restaurant in our 58-year history.

Significant Recent Developments Regarding COVID-19

The COVID-19 pandemic has significantly impacted economic conditions in the United States, where all of our restaurants are located. We first began to experience impacts from the COVID-19 pandemic during the second half of March 2020, as federal, state and local governments began to react to the public health crisis by encouraging or requiring social distancing, instituting stay-at-home orders, and requiring, in varying degrees, restaurant dine-in limitations, capacity limitations or other restrictions that largely limited restaurants to take-out, drive-thru and delivery sales. Our priority has been ensuring the health and safety of our team members and guests, and compliance with the applicable safety regulations. To protect the health and safety of our team members and guests, we implemented COVID-19 safety measures, including but not limited to COVID-19 screenings for all of our team members, utilizing and purchasing non-contact forehead thermometers for temperature checks, installing Plexiglas point of sale cashier wraps, raising the partitions between dining room booths, and limiting use of freestanding tables to meet social distancing requirements. Additionally, we purchased face coverings for all restaurant team members and offered them to our guests, purchased additional sanitation supplies and personal protective materials and introduced a new team member COVID-19 contact tracing tool for all team members in our restaurants, commissaries and restaurant support center. We implemented enhanced safety protocols in all of our locations, temporarily introduced one-time use menus in our restaurants, and developed COVID-19 training covering risks and the protocols implemented to ensure safe operations for our team members and guests. We also launched a new mobile app for self-delivery to supplement our other third-party delivery platforms. Additionally, we increased spending on healthcare and team member bonuses as a result of the COVID-19 pandemic. We temporarily paid 100% of the employer portion of premiums for active team members and team members on voluntary leaves of absence participating in our health insurance program, eliminated the team member payment for a meal provided while working and distributed a $100 Portillo’s gift card to all team members. We estimate the investments made to protect the health and safety and boost the morale of our team members was approximately $4.5 million in fiscal 2020.

During the second quarter of fiscal 2020, we began to re-open certain dining rooms in accordance with applicable regulatory requirements. As a result of the required changes to consumer behavior to largely off-premise dining, we saw some recovery in sales at the end of the second quarter of fiscal 2020 and into the third quarter of fiscal 2020. Our most significant declines in sales were in late March through April 2020. Beginning in May, sales began to recover, remaining below the comparable period in fiscal 2019, but did have an additional negative impact during the latter part of the fourth quarter of fiscal 2020 due to declines in our seasonal catering business. We experienced a steady recovery during the two quarters ended June 27, 2021, as dine-in capacity grew, when same-restaurant sales increased 12.7% compared to the two quarters ended June 28, 2020. Same-restaurant sales increased 0.8% in the first quarter ended March 28, 2021 and increased 25.0% in the second quarter ended June 27, 2021 versus the comparable periods in 2020. The following chart outlines our

 

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dine-in capacity and our same-restaurant sales performance, by period, for fiscal 2020 and the two quarters ended June 27, 2021:

Same Restaurant Sales by Period

 

LOGO

Our COVID-19 mitigation measures did have a positive impact on our results in fiscal 2020 and through the first two quarters of 2021. In fiscal 2020, we implemented curbside pick-up, self-delivery, simplified our menu to enhance operational efficiency and continued to invest in targeted digital advertisements that contributed to growth in our direct shipping business. Cross-training efforts were accelerated during COVID-19 to provide more staffing flexibility in restaurants, which led to enhanced productivity. Additionally, we also experienced lower operating expenses in our restaurants in fiscal 2020 as a result of the COVID-19 pandemic due primarily to reductions in our marketing, repairs and maintenance, and utilities expenses. Despite our revenues being down 5.0% in fiscal 2020 as compared to fiscal 2019, we grew our Adjusted EBITDA by 10.5% during that same period.

During the first two quarters of 2021, we benefited from lower cost of goods sold, excluding depreciation and amortization, as a percentage of revenues, and from lower labor expenses, as a percentage of revenues, versus the first two quarters of 2020, as described in more detail below. These lower expenses primarily drove a 3.2% increase in operating income margin, a 3.9% improvement in Restaurant-Level Adjusted EBITDA Margin, a 5.7% increase in net income (loss) margin and a 2.4% improvement in Adjusted EBITDA Margin. We expect to see higher expenses in both these areas during the second half of 2021 versus the first two quarters of 2021 resulting from commodity cost increases, hourly rate increases implemented in all our markets and increased staffing levels in our restaurants as dine in capacity increases (although staffing levels remain below expected levels in our restaurants). Additionally, and as described in more detail below, we saw higher other operating expenses and general and administrative expenses during the first two quarters of 2021 versus the first two quarters of 2020. The 12.7% same-restaurant sales increase during the first two quarters of 2021 versus the first two quarters of 2020, combined with the net impact of the aforementioned expenses, led to net income of $13.9 million as compared to a net loss of $0.7 million and Adjusted EBITDA growth of $13.2 million.

The extent of the impact of the COVID-19 pandemic on our operations and financial results depends on future developments and is highly uncertain due to the unknown duration and severity of the outbreak, including the potential impact of the COVID-19 delta variant. The situation is changing rapidly and future

 

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impacts may materialize that are not yet known. As of the date of this filing, substantially all of our restaurants continue to operate, with dining rooms open at varying capacities. We intend to continue to actively monitor the evolving situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our team members, customers, suppliers and shareholders.

Growth Strategies and Outlook

We believe we are well-positioned to take advantage of significant growth opportunities due to our values-driven culture, highly trained and passionate team members, differentiated brand experience and AUVs and Restaurant-Level Adjusted EBITDA Margins which are higher than other fast casual restaurant concepts according to data gathered by The NPD Group, which drive impressive unit economics. We plan to expand our business by executing on the following growth strategies:

Expand Our Restaurant Base

We are in the early stages of our nationwide growth with 67 locations across nine states as of June 27, 2021. From November 2020 through the end of 2021, we are targeting opening seven new restaurants, including new locations in Illinois, Michigan, Florida and Arizona. Since 2015, we have opened new restaurants at a compound annual growth rate of approximately 9.3%. Over the long term, we plan to increase our number of restaurants by approximately 10% annually. Our near-term restaurant growth strategy is focused on leveraging our proven unit economic model primarily in adjacent and national markets outside Chicagoland with favorable macro-economic tailwinds where we already have a presence. We will also add select new restaurants in the Chicagoland market. Based on a whitespace analysis prepared for us by Forum Analytics in 2020, we believe we have a substantial runway for growth with a long-term opportunity for our brand to grow to more than 600 restaurants domestically over the next 25 years and are well-positioned for global growth in the future. While we are optimistic about our ability to expand our restaurant base, we will continue evaluating the impact of the COVID-19 pandemic, which may continue to disrupt our business and affect our ability to execute our expansion strategy. For more information, see “Risk Factors—Risks Related to Our Business, Industry and Growth Strategies—Our financial condition and results of operations have been and may continue to be adversely affected by the COVID-19 pandemic or future pandemics or disease outbreaks.”

Increase Our Same-Restaurant Sales

We aim to continue delivering an outstanding value proposition to our guests and enhance our experience to grow our volumes. We believe the following initiatives will drive same-restaurant sales growth.

Deliver a Consistently Outstanding Guest Experience. In our business, the best way to drive a return visit is to provide our guests a consistently fantastic experience when they visit our restaurants or eat our food. Therefore, our relentless focus on operational excellence enables us to drive significant throughput in our restaurants, provide a one-of-a-kind experience and a compelling everyday value proposition to our guests and thereby drive increased customer trial and frequency.

Purposeful Menu Enhancements. We are maniacal about quality and crave-ability when it comes to our menu. We are constantly studying ways to further enhance our existing offerings while thoughtfully adding new high-quality items. We are also disciplined in maintaining the number of options on our menu. When a new item earns its way onto our menu, we often replace an existing item to maintain our operational efficiency. We believe this purposeful enhancement drives increased guest frequency and reinforces our everyday value proposition that is key to our success.

Increase Brand Awareness Through Non-Traditional and Social Marketing. Portillo’s does not rely on mass media advertising or promotion to drive traffic to our restaurants. We actively engage our fans and guests through a dynamic social media effort that includes email, Twitter, Instagram, TikTok, Facebook, and other

 

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platforms. Our social media activity generates significant engagement with our guests and provides our most passionate fans an opportunity to share their enthusiasm with their followers. Portillo’s has dedicated Field Marketing Managers for each market that supplement our engaging social media efforts.

Enhance Our Off-Premises Guest Experience. We have always been committed to providing our guests with our delicious food however and whenever they want it. We are currently testing a third drive-thru lane for guests who have digitally pre-paid for their orders to enhance speed of service and further increase our capacity during peak times.

Leverage Our Infrastructure to Drive Profitability

Our attractive business model generates strong operating margins and cash flow. We constantly focus on restaurant-level operations while ensuring that we do not sacrifice the quality and experience for which we are known. Our investments to enhance our multichannel capabilities and drive a frictionless guest order experience are also expected to further leverage our fixed costs. We have made significant investments at the corporate level, which we believe we will leverage in the future, exclusive of the additional costs of operating as a public company.

Reorganization Transactions

The historical results of operations discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are those of Portillo’s OpCo prior to the completion of the Reorganization Transactions, including this offering, and do not reflect certain items that we expect will affect our results of operations and financial condition after giving effect to the Reorganization Transactions and the use of proceeds from this offering.

Following the completion of the Reorganization Transactions, Portillo’s Inc. will become the sole managing member of Portillo’s OpCo. We will have the sole voting interest in, and control the management of, Portillo’s OpCo. As a result, we will consolidate the financial results of Portillo’s OpCo and will report a noncontrolling interest related to the LLC Units held by the Continuing Pre-IPO LLC Members on our consolidated statements of operations and comprehensive income and balance sheet. Immediately after this offering, investors in this offering will collectively own approximately 28% of our outstanding common stock or approximately 33%, if the underwriters exercise in full their option to purchase additional shares of common stock, consisting of 20,270,270 shares (or 23,310,810 shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock), Portillo’s Inc. will own 33,567,206 LLC Units (or 35,807,171 LLC Units if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately 47% of the LLC Units (or approximately 50% if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and the Continuing Pre-IPO LLC Members will collectively own 37,913,286 LLC Units (or 35,673,321 LLC Units if the underwriters exercise in full their option to purchase additional shares of Class A common stock), representing approximately 53% of the LLC Units (or approximately 50% if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Accordingly, net income attributable to equity method investment will represent 47% of the income before income tax benefit (expense) of Portillo’s Inc. (or 50% if the underwriters exercise in full their option to purchase additional shares of Class A common stock). Portillo’s Inc. is a holding company that conducts no operations and, as of the consummation of this offering, its principal asset will be LLC Units we purchase from Portillo’s OpCo.

After consummation of this offering, Portillo’s Inc. will become subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of Portillo’s OpCo and will be taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur public company expenses related to our operations, plus payment obligations under the Tax Receivable Agreement, which we expect to be significant. We intend to cause Portillo’s OpCo to make distributions to us in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any payments due under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Amended Portillo’s OpCo Agreement.”

 

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In connection with this offering, and upon completion of the Reorganization Transactions, each option under the 2014 Plan that is outstanding at such time, whether vested or unvested, will be substituted for an option to purchase a number of shares of Class A common stock under the 2021 Plan, and the option holders will receive a cash payment in respect of their options (whether vested or unvested) in an aggregate amount of approximately $6.3 million, which we expect to make in the fourth quarter of 2021. In addition, as a result of the waiver and the resultant modification in the terms of certain performance-vesting awards as further described in “Executive and Director Compensation—Equity Compensation,” we will record compensation expense based on the fair value of the modified awards. Assuming all of the options vest and an offering price of $18.50 per share of Class A common stock (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), we would expect to recognize a cash compensation expense of approximately $1.1 million and a non-cash compensation expense of approximately $23.3 million, each in the fourth quarter of fiscal 2021, as well as, an additional non-cash compensation expense of approximately $12.7 million ratably over the next 4.5 years.

Key Performance Indicators

In addition to the measures presented in our financial statements, we use the following key performance indicators to evaluate our business, measure our performance, develop financial forecasts and make strategic decisions. These key measures include same-restaurant sales, new restaurant openings, average unit volume (AUV), Adjusted EBITDA, Adjusted EBITDA Margin, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin. The Company includes these non-GAAP measures because management believes that they are important to day-to-day operations and overall strategy and are useful to investors in that they provide for greater transparency with respect to supplemental information used by management in its financial and operational decision-making.

Selected Operating Data:

 

     Year Ended     Two Quarters Ended  
     December 27, 2020     December 29, 2019     June 27, 2021     June 28, 2020  

Total Restaurants(1)

     64       62       67       62  

Change in same-restaurant sales(2)

     (7.7 )%      3.3     12.7     (9.9 )% 

AUV (in millions)(1)

   $ 7.7     $ 8.7     $ 7.9     $ 8.1  

Adjusted EBITDA (in thousands)(3)

   $ 87,804     $ 79,495     $ 51,073     $ 37,863  

Adjusted EBITDA Margin(3)

     19.3     16.6     19.8     17.4

Restaurant-Level Adjusted EBITDA (in thousands)(4)

   $ 121,945     $ 117,070     $ 72,826     $ 52,761  

Restaurant-Level Adjusted EBITDA Margin(4)

     26.8     24.4     28.2     24.3

 

(1)

Includes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity. In the table above, AUVs for the Two Quarters Ended June 27, 2021 and June 28, 2020 represent AUVs for the Twelve Months Ended June 27, 2021 and June 28, 2020, respectively.

(2)

Excludes a restaurant that is owned by C&O of which Portillo’s owns 50% of the equity.

(3)

For a discussion of Adjusted EBITDA and Adjusted EBITDA Margin and a reconciliation from net income (loss), the most comparable GAAP measure to Adjusted EBITDA, please see “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Data.”

(4)

For a discussion of Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin and a reconciliation from operating income, the most comparable GAAP measure to Restaurant-Level Adjusted EBITDA, please see “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Data.”

 

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Change in Same-Restaurant Sales

The change in same-restaurant sales is the percentage change in year-over-year revenue (excluding gift card breakage) for the Comparable Restaurant Base. At the end of fiscal 2020 and the two quarters ended June 27, 2021, there were 56 and 59 restaurants in our Comparable Restaurant Base, respectively.

An increase or decrease in same-restaurant sales is the result of changes in restaurant traffic and average guest check. We gather daily sales data and regularly analyze the restaurant traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable same-restaurant sales. This measure highlights, and allows us and investors to assess, the performance of existing restaurants, as the impact of new restaurant openings is excluded.

New Restaurant Openings

New restaurant openings constitute new restaurants that open for business during the period being reported. New restaurant openings are central to growing our footprint and executing our growth strategy. We have never closed a restaurant in our 58-year history.

Potential new restaurant sites are typically identified and evaluated at least 18 months prior to opening. New restaurant opening dates trigger advance staff recruiting and training, in addition to the relocation of experienced general managers from existing restaurants and other pre-opening expenses.

The total number of new restaurants per year and the timing of new restaurant openings has, and will continue to have, an impact on our results of operations. We monitor new restaurant openings as a metric that informs the growth of our restaurant base and tracks our nationwide presence and believe that this metric is useful to investors to understand our growing footprint and growth strategy.

Average Unit Volume (AUV)

Average unit volume (“AUV”) is the total revenue (excluding gift card breakage) recognized in the Comparable Restaurant Base, divided by the number of restaurants in the Comparable Restaurant Base during the period. This measurement allows us to assess, and our investors to understand, changes in guest spending patterns at restaurants in our Comparable Restaurant Base and the overall performance of our Comparable Restaurant Base.

An increase or decrease in AUV is the result of changes in restaurant traffic, average guest check and the mix of restaurants entering the Comparable Restaurant Base. We gather daily sales data and regularly analyze the restaurant traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies designed to produce sustainable AUV. Historically, when opening restaurants in new markets outside of Chicagoland, we experience higher revenues in the first year of operation with a decline in revenues in the second year. After the second year, we have experienced growth in revenues in the third year and beyond as the restaurant and brand continue to grow awareness in those markets. We expect this trend to continue in the future.

Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin

Restaurant-Level Adjusted EBITDA is defined as revenue, less restaurant operating expenses, which include cost of goods sold, excluding depreciation and amortization, labor expenses, occupancy expenses and other operating expenses. Restaurant-Level Adjusted EBITDA excludes corporate level expenses, pre-opening expenses and depreciation and amortization on restaurant property and equipment. Restaurant-Level Adjusted EBITDA Margin represents Restaurant-Level Adjusted EBITDA as a percentage of revenue. Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are not required by, nor presented in accordance with GAAP. Rather, Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are supplemental measures of operating performance of our restaurants. You should be aware that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are not indicative of overall results for the Company, and Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin do not accrue directly to the benefit of

 

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stockholders because of corporate-level expenses excluded from such measures. In addition, our calculations thereof may not be comparable to similar measures reported by other companies. We believe that Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin are important measures to evaluate the performance and profitability of our restaurants, individually and in the aggregate. Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin have limitations as analytical tools and should not be considered as a substitute for analysis of our results as reported under GAAP. We use Restaurant-Level Adjusted EBITDA and Restaurant-Level Adjusted EBITDA Margin to develop internal budgets and forecasts and assess the performance of our restaurants relative to budgets, forecasts and versus prior periods. For a reconciliation of operating income, the most directly comparable GAAP measure, to Restaurant-Level Adjusted EBITDA, see “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Data.”

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA represents net income (loss) before depreciation and amortization, interest expense and income taxes, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA, included in “Prospectus Summary—Summary Historical and Pro Forma Consolidated Financial and Other Data.” Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of total revenues. We use Adjusted EBITDA and Adjusted EBITDA Margin (i) to evaluate our operating results and the effectiveness of our business strategies, (ii) internally as benchmarks to compare our performance to that of our competitors and (iii) as factors in evaluating management’s performance when determining incentive compensation.

We believe that Adjusted EBITDA and Adjusted EBITDA Margin are important measures of operating performance because they eliminate the impact of expenses that do not relate to our core operating performance. Adjusted EBITDA and Adjusted EBITDA Margin are supplemental measures of operating performance and our calculations thereof may not be comparable to similar measures reported by other companies. Adjusted EBITDA and Adjusted EBITDA Margin have important limitations as analytical tools and should not be considered in isolation as substitutes for analysis of our results as reported under GAAP.

Components of our Results of Operations

Revenues

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 and product mix.

Cost of Goods Sold, Excluding Depreciation and Amortization

Cost of goods sold, excluding depreciation and amortization includes the direct costs associated with food and beverages, including paper products. The components of cost of goods sold, excluding depreciation and amortization are variable by nature, change with sales volume, are impacted by product mix and are subject to increases or decreases in commodity costs.

Labor Expenses

Labor expenses include hourly and management wages, bonuses, payroll taxes, workers’ compensation expense and team member benefits. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs and the performance of our restaurants.

 

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Occupancy Expenses

Occupancy expenses primarily consist of rent, property insurance, common area expenses and property taxes.

Other Operating Expenses

Other operating expenses consist of direct marketing expenses, utilities and other operating expenses incidental to operating our restaurants, such as credit card fees and repairs and maintenance.

General and Administrative Expenses

General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations, including marketing and advertising costs incurred as well as legal and professional fees. General and administrative expenses also include unit-based compensation expense. General and administrative expenses are impacted by changes in our team member count and costs related to strategic and growth initiatives. In preparation for and after the consummation of this offering, we have incurred and we expect to incur in the future significant additional legal, accounting and other expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act. In addition, as a result of new equity awards that will take place at or after the consummation of this offering, we anticipate that our equity-based compensation will be higher in 2021 and beyond.

Pre-Opening Expenses

Pre-opening expenses consist primarily of occupancy expenses, which represent rent expense recognized during the period between the date of possession of the restaurant facility and the restaurant opening date, wages, travel for the opening team, food, beverage, and the initial stocking of operating supplies. All such costs incurred prior to the opening are expensed in the period in which the expense was incurred. Pre-opening expenses can fluctuate significantly from period to period, based on the number and timing of openings and the specific pre-opening expenses incurred for each restaurant. Additionally, restaurant openings in new geographic market areas will initially experience higher pre-opening expenses than our established geographic market areas, such as the Chicagoland area, where we have greater economies of scale and incur lower travel and lodging costs for our training team.

Depreciation and Amortization Expenses

Depreciation and amortization expenses consist of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of recipes, non-compete agreements and favorable leasehold positions.

Net Income Attributable to Equity Method Investment

Net income attributable to equity method investment consists of a 50% interest in C&O, which runs a single restaurant located within the Chicagoland market. We account for the investment and financial results in the consolidated financial statements under the equity method of accounting as we have significant influence but do not have control.

Other Income, Net

Other income, net includes among other items, income resulting from discounts received for timely filing of sales tax returns, management fee income associated with our investment in C&O, and gains or losses on asset disposals.

 

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Interest Expense

Interest expense primarily consists of interest and fees on our Credit Facilities and the amortization expense for debt