Portillo’s: Analyzing a Small-Cap Company

The TDR Three Key Takeaways regarding Portillo and small cap stock:

  1. Portillo’s, a Chicago-based fast-food chain, trades as a small-cap stock on NASDAQ.
  2. Portillo’s COGS is $7.58 per $10 of revenue, impacting its small-cap stock performance.
  3. Portillo’s faces high CAPEX, spending $84 million, significant compared to its revenue.

Portillo’s (NASDAQ: PLTO), a Chicago-based fast-food chain, has a strong customer following and distinctive menu offerings. The company primarily operates in the Chicago area, with additional locations in Arizona and Southern California. Portillo’s was founded in 1963 and has grown steadily within the Chicago metropolitan area. The company is often compared to other cult-followed chains like Chick-fil-A, In-N-Out Burger, and Shake Shack. Despite its regional concentration, Portillo’s has attracted significant attention and trades under the ticker symbol PLTO on the NASDAQ as a notable small-cap stock.

In the fiscal year 2023, Portillo’s reported a revenue of $689 million. As of the latest market evaluation, Portillo’s has a market capitalization of $678 million, positioning it firmly as a small-cap company within the stock market.

A critical aspect of Portillo’s financial performance is its cost structure. The company faces a high cost of goods sold (COGS), with $7.58 allocated for every $10 of revenue. This figure significantly exceeds industry standards, with McDonald’s reporting a COGS of $4.30 and Shake Shack at $6.30. The high COGS directly impacts Portillo’s gross margin, limiting its profitability compared to its competitors. 

Unlike McDonald’s, which has raised prices to offset increased costs, Portillo’s has maintained its pricing strategy. This decision has reduced profit margins. McDonald’s earns approximately $3 from every $10 spent by customers, while Shake Shack earns $1.07. In contrast, Portillo’s incurs a loss of $0.07 per $10, highlighting the financial strain from its current operational model, a common challenge for many small-cap companies.

Portillo’s also contends with substantial selling, general, and administrative (SG&A) expenses, alongside significant capital expenditures (CAPEX). Last year, the company reported a negative levered free cash flow of $11 million, a downturn from a positive $1.5 million in the preceding year. Additionally, the company allocated $84 million towards CAPEX, underscoring the high costs associated with maintaining and expanding its restaurant network, a significant consideration for any small-cap stock.

Portillo’s current credit score stands at 1.5, indicating financial vulnerabilities that could impact its ability to secure favorable financing terms. Despite these challenges, the company is under the scrutiny of ten analysts, a high number for a small-cap stock. This extensive coverage is likely driven by expectations of future capital-raising activities, with analysts positioning themselves for potential investment banking opportunities, a typical scenario for a small-cap company in need of capital.Portillo’s is a small-cap stock with a strong brand but faces significant financial challenges, including high costs and negative cash flow. While it has growth potential, investors should be cautious and monitor how it addresses cost structures and capital needs. Strategic adjustments could improve its financial health, but it remains a high-risk, high-reward prospect. Want to be updated on all things Psychedelic, Cannabis, AI, and Crypto? Subscribe to our Daily Baked in Newsletter!

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