Q4 2023 Portillos Inc Earnings Call

Participants

Barbara Noverini; IR Manager; Portillo's Restaurant Group Inc

Michael Osanloo; President, Chief Executive Officer; Portillo's Restaurant Group Inc

Michelle Hook; Chief Financial Officer; Portillo's Restaurant Group Inc

Sharon Zackfia; Analyst; William Blair & Company

Sara Senatore; Analyst; BofA Global Research

Chris O'Cull; Analyst; Stifel Nicolaus and Company, Incorporated

Brian Mullan; Analyst; Piper Sandler

Andy Barish; Analyst; Jefferies

Dennis Geiger; Analyst; UBS

David Tarantino; Analyst; Robert W. Baird & Co., Inc.

Brian Harbour; Analyst; Morgan Stanley

Gregory Francfort; Analyst; Guggenheim Partners

Presentation

Operator

Greetings and welcome to the Portillo's fourth-quarter and year-end 2023 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Barbara Noverini, Portillo's Director of Investor Relations. Thank you. You may begin.

Barbara Noverini

Thank you, operator. Good morning, everyone, and welcome to our fourth quarter and full year 2023 earnings call. Our 10-K earnings press release and supplemental presentation are posted at investors dot portilla.com.
With me on the call today is Michael Simon, new President and Chief Executive Officer, and Michelle Hug, Chief Financial Officer.
Any commentary may hear about our future results and business conditions are forward-looking statements, which are based on management's current expectations and are not guarantees of future performance. We did not update these forward-looking statements unless required by law. Our 10-K identifies risk factors that may cause our actual results to vary materially from these forward-looking statements.
Today's earnings call, we'll make reference to non-GAAP financial measures, which are not an alternative to GAAP measures. Reconciliations of these non-GAAP measures to their most comparable GAAP counterparts are included in this morning's posted materials.
Finally, after we deliver our prepared remarks, we will open the lines for your questions.
Now let me turn the call over to Michael Osanloo, President and Chief Executive Officer of Portillo's.

Michael Osanloo

Thank you, Barb, and good morning, everyone. Thanks for joining us for our fourth quarter and full year 2023 earnings call. I'm happy to share that we had a great fourth quarter and ended the year on a high note. In the fourth quarter, total sales increased 24.5% to approximately $188 million. Same restaurant sales grew 4.4% on the back of transactions, increasing 1.3%.
Restaurant-level adjusted EBITDA grew 42.7% to $46 million and restaurant-level adjusted EBITDA margins expanded by 310 basis points to 24.3% for fiscal year 2023, total sales increased 15.8% to approximately $680 million. Same-restaurant sales grew 5.7%, and we ended the year with average unit volumes of $9.1 million per restaurant restaurant-level adjusted EBITDA grew 24.7% to $165 million. And for the full year we expanded restaurant level margins by 170 basis points to 24.3%. And importantly, we grew operating cash flow by 24.4% to a record level for Fort Hills.
Let's dive into the factors that drove the success. First, we were operationally on-point. We believe the best way to drive revenue and traffic in a sustainable fashion is to give our guests the outstanding experience we're known for, and they've come to expect in the fourth quarter. We did just that the result was strong revenue and margin performance, multiyear highs in overall guest satisfaction and a current net promoter score of nearly 70 outperforming most of our peers.
We know the play we serve abundant delicious food at a fantastic price in an engaging environment. This is the number one way we create value for our guests and keep them coming back in Q4, we flexed our multichannel muscle extremely well, we excelled in dine-in, our drive throughs were home and pickup and delivery orders were flying off the shelves, and we did a great job growing our catering business. For example, in 2023, we invested in dedicated catering resources, such as a new concierge service to provide our guests with a high touch ordering experience.
We also strengthened our ability to handle large-scale catering events. For example, we serve holiday meals to the frontline workers of a major airline in both Chicago and Arizona. The overarching theme there is that these investments are driving strong catering sales and will help us to continue to grow this channel. Today, catering represents only about 5% of our overall revenue. We know it can be more. We're excited about the opportunities to grow this channel by marketing, additional catering occasions and expanding this channel across our new markets.
Speaking of marketing in the lead-up to the holiday season, we ran an advertising campaign in Chicago that brought the sites smells and sounds of portals to the forefront instead of using discounting to drive traffic. We simply reminded fans in our largest market why they love port pillows. If you haven't seen our ad, we have unlinked on our Investor Relations website and you can see for yourself how a simple message like this can work as a traffic driver. And as we move forward in the new year, we're going to continue to leverage traffic, driving tools and initiatives.
One that I'm excited to share is that we'll be adding two new salads to our permanent menu soon. As you know, we take menu innovation very seriously at Portola. We don't just add items to add. They have to fill a gap in the menu makes sense operationally and most importantly be utterly craveable Portola's already generates more than $650,000 in salad sales per restaurant per year with our beloved Chopped Salad as the best seller based on consumer and competitive data.
We know we've got space to add more variety to this already craveable menu category. So we created a spicy chicken version of our signature Chopped Salad. We've also tested a chicken pecan salad with a new honey pepper corn dressing like all of our salads these are also made fresh to order and you can customize all the ingredients. However, you want both test salads are selling really well, and we look forward to rolling them out system-wide soon.
Now let's pivot to development. In 2023, we opened 12 restaurants, including six in the fourth quarter. That 12 includes 8 planned 2023 restaurants as well as the four carryovers from the prior year. This is the most we've opened in a single year, and I'm excited for what this means and what we can do in the future. We've already got a lot of momentum heading into 2024, and you can expect it to be another strong year of growth for us. We've committed to at least nine new restaurants in 2024 pipelines, five of which are already under construction. And by the way, we self fund all of this growth, our new restaurants generate cash flow immediately and we put all that cash right back into the business to fund further expansion.
Now as for unit economics, I've been told that everyone is sick of me bragging about the Colony restaurant in Texas.
So let's talk about some of the other stars of the class of 2023. I'm extremely happy with the results coming out of our growth markets, in particular, Fort Worth, Texas and Claremont. Florida have both opened strong out of the gate and especially impressive with our new efficient kitchen layout. We also opened our second pickup location in Rosemont, Illinois. We continue to learn a lot from this model and we were and we're excited about its potential for Portola as we continue to grow.
Remember that this model has everything except a dine-in capability. So it's essentially a drive-through. We delivered a strong finish for the class of 2023, and we're looking forward to entering the Houston market in 2024. All told, we're really happy with the quarter and how the year ended. We executed on the fundamentals of our business and invested incrementally to drive brand awareness in 2024.
We will continue to flex drive traffic, driving tools, driving success first and foremost, by being operationally sound and protecting our value proposition. We're just building on the factors that have made portals great for 60 years. We continue to execute against our playbook, providing a great experience and great food at a great price point is not ours are not our not so secret sauce, it's how we drive the kind of financial results you saw from us in 2023.
With that, let me hand it over to Michelle.

Michelle Hook

Great. Thank you, Michael, and good morning, everyone.
In Q4, we saw strong top line revenue growth during the fourth quarter. Revenues were up $187.9 million, reflecting an increase of $37 million or 24.5% compared to last year, driven by a 4.4% increase in same restaurant sales combined with the opening of new restaurants, same-restaurant sales increase of 4.4% was primarily driven by an increase in average check of 3.1% and a 1.3% increase in transactions.
The higher average check was driven by an approximate 6% increase in certain menu prices, partially offset by product mix. We had 14 weeks this fiscal quarter versus 13 weeks last year. Excluding the 14th week, revenue in the fourth quarter increased approximately 15.3%. The 14th week and fiscal 2023 included Christmas Day, resulting in six operating days. You have all seen choppy performance during the first quarter due to winter weather and consumer headwinds in our industry.
We are not immune to that but we don't expect that to derail the rest of our year. Our long-term growth algorithm reflects low single digit comps. Now there will be years when unexpected things happen in any given quarter and years when we outperform. But on average, we have confidence we can hit that target on an annual basis. And we feel no different as we sit here today.
On the development front, we expect to open at least nine new restaurants in the class of 2024. We currently expect one new opening later in the first quarter of this year with two to three openings in each of the subsequent quarters. We remain committed to delivering on our long term mid 10s revenue growth target, primarily through new restaurant growth while continuing to deliver positive comp growth. We updated our long-term outlook in September at our development day, increasing our restaurant growth and revenue targets. These are also outlined in our earnings release issued this morning.
Moving on to our costs, food, beverage and packaging costs as a percentage of revenues decreased to 34.8% in the fourth quarter of 2023 from 35% in the fourth quarter of 2022. This decrease was primarily due to an increase in our revenue and lower third-party delivery commissions, partially offset by 4.4% increase in commodity prices. We estimate overall commodity inflation to stay consistent with recent trends and are currently estimating commodity inflation in the mid-single digits in 2024.
Labor as a percentage of revenues decreased to 25.4% in the fourth quarter of 2023 from 26.5% in the fourth quarter of 2022. The decrease was primarily driven by an increase in our revenue, partially offset by higher labor utilization and incremental investments in our team members, including hourly rate increases and variable-based compensation. Hourly labor rates were up 2.4% in the fourth quarter of 2023 and up 4.3% year to date versus the prior periods. We are currently estimating labor inflation in the mid-single digits in 2024.
Other operating expenses increased $2.4 million or 13.5% in the fourth quarter of 2023 compared to the fourth quarter of 2022, which was primarily driven by the opening of new restaurants as well as higher credit card fees utilities and repair and maintenance expenses.
Occupancy expenses increased $0.6 million or 7.4% in the fourth quarter of 2023 compared to the fourth quarter of 2022, primarily driven by the opening of new restaurants. As a percentage of revenues, occupancy expenses decreased 0.7% compared to prior year, driven by an increase in our revenue. Restaurant-level adjusted EBITDA increased 42.7% to $45.7 million in the fourth quarter of 2023.
Restaurant level adjusted EBITDA includes an impact of approximately $3.5 million due to the 14th week. Restaurant-level adjusted EBITDA margins were 24.3% in the fourth quarter of 2023 versus 21.2% in the fourth quarter of 2022, a strong improvement of 310 basis points quarter over quarter. For the full year 2023 our restaurant-level adjusted EBITDA margins were also 24.3%, which was an improvement of 170 basis points versus fiscal year 2022.
As we said, at the beginning of the year, increasing our margins was a focus in 2023, and we delivered our improvement in restaurant-level adjusted EBITDA margins on top of opening a record level of new restaurants in 2023, which all have a lower margin profile to starts. This improvement was the result of our ongoing efforts to deploy strategic pricing actions, elevate guest experiences and implement operational efficiencies. We will continue to focus on driving long-term shareholder value by focusing on our operational execution and a disciplined development strategy on pricing.
As a reminder, in 2023, we took two pricing actions in January in May. We recently announced an additional pricing action in January of 2024 of approximately 1.5% we will continue to monitor our cost pressures, the competitive landscape as well as consumer sentiment to inform our pricing decisions in the coming quarters. This recent action puts us as an effective price increase of nearly 5% in the first quarter of 2024.
Our general and administrative expenses increased by $3.8 million to 11.5% of revenue in the fourth quarter of 2023 from 11.7% in the fourth quarter of 2022. The increase was primarily driven by higher variable-based compensation higher advertising expenses due to our Chicago land ad campaign, increased wages and benefits attributable to annual rate increases and the filling of open positions to execute our growth plans, partially offset by a decrease in equity-based compensation expense and insurance.
In 2024, we currently expect general and administrative expenses to be between $85 million to $87 million. Pre-opening expenses increased $1 million to 2.1% in the fourth quarter of 2023 from 2% in the fourth quarter of 2022. The increase was due to the number and timing of executed and planned new restaurant openings, we expect pre-opening expenses to be between eight to $9 million in 2024. Please keep in mind that our reported pre-opening expenses as well as our estimate for 2024 includes deferred or non-cash rent expense as well as actual costs incurred prior to the restaurants opening.
All this led to adjusted EBITDA of $26.1 million in the fourth quarter of 2023 versus $18.1 million in the fourth quarter of 2022, an increase of 44.5%. Adjusted EBITDA includes an impact of approximately $2.4 million due to the 14th week for the full year 2023. Our adjusted EBITDA margins were 15% compared to 14.5% for 2020 to below the EBITDA line.
Interest expense was $6.9 million in the fourth quarter of 2023, a decrease of $1.4 million from the fourth quarter of 2022. This decrease was primarily driven by improved lending terms associated with our 2023 term loan and revolver facility.
As of today, our outstanding borrowings under the revolver are $13 million. Our effective interest rate was 8.4% for 2023 versus 10.4% for 2022. Income tax benefit was $0.4 million in the fourth quarter of 2023, and we had an income tax expense of $3.2 million for the year. Our effective tax rate for the fourth quarter of 2023 was negative 3.8%, driven by a change in our valuation allowance.
Our effective tax rate for the year was 11.5% versus 9.6% in 2022. The increase in our effective income tax rate was primarily driven by an increase in the company's ownership interest in Portola OpCo, partially offset by a decrease in the valuation allowance and the recording of net operating loss carryforwards. Our future effective tax rate will fluctuate as Class A. equity ownership increases and as equity based awards are exercised and best.
As a reminder, we invest our strong operating cash flows into our future by self-funding our new restaurant growth.
Cash from operations increased by 24.4% year over year to $70.8 million for the year. This was primarily driven by solid revenue growth across the existing base of restaurants, the record number of new restaurant openings in 2023 and margin expansion. Note that in the fourth quarter of 2023. We pulled forward some capital expenditures to support activity for the 2024 pipeline were motivated to capture as many operating weeks as possible from our new restaurant openings in any year. You may see quarterly CapEx spend flex based on timing of new restaurant openings.
Having said that, we are committed to staying within the $6.2 million to $6.5 million average build cost range for the class of 2024. We previous previously shared that we have accelerated our time line to bring restaurant of the future into Q4 of this year. And remember, these are expected to carry an even lower build costs in 2024.
We estimate the CapEx range to be $90 million to $93 million, which will fund our 2024 openings and the first wave of our 2025 pipeline. In addition to other operational CapEx needs, we are currently estimating that 85% of our 2024 projected CapEx will be spent on new restaurant builds, including early 2025 builds 10% on investments in existing restaurants.
And 5% on other discretionary capital, including investments in our commissaries. We are confident in the strength of our brand, our operational execution and look forward to continuing to deliver on our long-term outlook that was provided in our earnings release this morning.
Thank you for your time. And with that, I'll turn it back to Michael.

Michael Osanloo

Thanks, Michelle. Before we open for questions, I want to reiterate how pleased we are with the progress our teams made in 2023, we grew revenue and adjusted EBITDA by double digits. We generated record operating cash flow. We opened 12 new restaurants. We ended the year with positive traffic and multiyear highs in guest satisfaction.
None of this is possible without our great team members. I'm extremely proud of them and thankful to our frontline folks who delight our guests every single day, feel great about these results, and I've never been more confident about our future. Thank you.

Question and Answer Session

Operator

(Operator Instructions) Sharon Zackfia, William Blair.

Sharon Zackfia

It sounds like you're probably not going to price away all of the labor and commodity inflation. You're expecting this year. So if you could give some thoughts on kind of how you think restaurant level margin of their flows this year. I think that would be helpful.
And then Michael, given the success of the market in Chicago, can you talk about what plans might be for marketing in Chicago this year and whether there are any other markets where you have density where that might make sense?

Michael Osanloo

Yes, Sharon. So I'll address the first question on pricing. We haven't made any decisions yet. It's still early in the year and how we're going to approach pricing as we go into this year, which, as you know, we always take an approach that generally we want to set offset our inflationary pressures with price, having said that though you are you all know that the consumer right now is a little bit shaky. And so we need to be careful on how we approach pricing. And so we're going to continue to assess how that consumer is, what the competitive landscape looks like before we make any decisions further on pricing.
In terms of your restaurant level margin question and when we look at the portfolio and bringing in 12 new restaurants into the base this year, plus the nine plus that we're going to open this year, we do expect to see some margin degradation from those restaurants. As you know, they don't come out of the gate doing 20 plus percent margins generally in year one, they're going to be in that high 10s. And so we do expect to see those restaurants impact restaurant-level margins as we approach this year.
Phil, on and then on NAM, I think your question it's marketing, but it's really traffic-driving. So undeniably, we have a muscle that we use, but we like to use selectively when it comes to TV and ad campaigns to drive traffic. It works really well in Chicago. I think we're approaching a scale where it could work for us in markets like Arizona and Indiana and so on. We certainly have that our arrow in our quiver, and we won't hesitate to use that if we need to. I honestly think though share and that the best way to drive traffic is operational excellence, we're already investing in that.
We're already paying people to do that. So the difference between good and great is a guest comes back frequently or guest comes back less frequently. And so we think that being operationally excellent is probably the most important lever to use to drive traffic. But of course, we have advertising. We have new menu innovation. We have our PR machine so we have other tools that we'll use to make sure that we're appropriately driving and balancing traffic versus expense.

Operator

Sara Senatore, Bank of America.

Sara Senatore

Okay, thank you. And just I guess a little bit more of a deeper dive into that comp. I'm so I guess you talked about catering and so I was curious if that was an outsized driver for the fourth quarter, but I know that's a big, bigger share of the mix in the fourth quarter, but just trying to understand to what extent that a driver in the fourth quarter versus over time. And then as we think about the advertising in the Chicago land, I guess the sort of perception has always been that your new markets tend to comp better than the core market.
Is that fair? And two, should we think about the fourth quarter being just maybe less of a drag from the Chicago land comp? Or did you actually see traffic improve sequentially across all your markets?

Michelle Hook

Yes. I'll take the catering question, Sarah. So I would only say that as we were comparing catering this year versus last year, remember, we had a little bit of weather impacts as we approach that heavy catering season for us in Q4 last year.
And so when I look at quarter over quarter, yes, we did see a growth in catering from that perspective. But having said that, it was an outweighted. I wouldn't call it anything it weighted in Q4. But as Michael mentioned over time, I think it is a real opportunity for us to push catering, particularly in our outer markets. And so that's we're going to what we're going to continue to work towards is making sure that our guests understand that we have this channel outside of Chicago land.

Michael Osanloo

Yes, let me end up two to two little builds. One is I think the catering theme is part of a broader theme for us, which is we are incredibly proud of our multichannel capabilities and it's important to us that we are masters at flexing each one of those channels. There's a lot of folks right now who are trying to learn how to do drive-through people trying to get better catering.
We're really good at all of these channels. And so our goal is that catering, we think there's more opportunity, more tailwind. And we look at the catering performance in the core versus in our growth markets, and we know that we can get better. And so that's one of the reasons I think we're excited about catering. We want that to be as strong a channel for us as drive-through is dine-in and delivery. So that's sort of the big picture.
The your second theme of questions here about the trends. The trends were pretty consistent for us across all of our markets. I would say that we probably saw a little bit of an acceleration with the with the advertising campaign in the Midwest. So that certainly helped. But we had a very, very positive trends across all of our markets for the for the fourth quarter.

Barbara Noverini

Chris O'Cull, Stifel.

Chris O'Cull

Thanks for taking my question and congratulations on a strong quarter. I had a follow up question just on advertising. And Michael, I appreciate the need to drive frequency by delivering on the experience inside the store. But just curious why not have a more consistent advertising strategy in Chicago that keeps the brand top of mind, really Didj during important seasons for the brands.

Michael Osanloo

Your first, thanks for the compliment. And I actually I think we do. We're just not comfortable telling everyone exactly what we're going to do. And when to be totally honest with you, we have done we have post in and out of the Chicago market as appropriate. And I think we will continue to do that like and it doesn't I'm not telling you anything that's state secrets, but like trying to advertise during an election cycle is really tough US spend.
And so we're probably not advertising the back half of this year, anywhere in the country, we would get shouted out by local politicians. So you can imagine that if we're going to advertise. We're going to do it selectively. We're going to advertise and as long as necessary and when we think we're going to get great returns on those dollars I don't want, Chris, I don't want to be formulaic and say I got to spend this much money on advertising in this quarter. We'd like to be more opportunistic when it comes to spending those ad dollars.

Chris O'Cull

That's fair. And then when you look at the early sales curves of the 2022, '23 class of units, new units do they continue to outperform your previous classes at a similar point in time, particularly those new units outside of Chicagoland?

Michelle Hook

Yes, Chris, as you know, we put out at our development day how the class of '22 was trending from in that 1st year, that $8 million AUV level Class of 23?
Frankly, Chris, is really very new and young. So we opened six of the eight just in Q4 alone. So it's really too early to tell. But I'll point to what Michael said, which is we're very happy about the performance particularly when you look at those outer markets, you called out Fort Worth and Claremont. But really, it's too early for me to make any commentary on the class of 2023 because it's just so new right now.

Operator

Brian Mullan, Piper Sandler.

Brian Mullan

Thank you. Just a question on Texas, you're off to a great start in that market. And can you just speak to how the Arlington and Fort Worth openings went? And out of curiosity, do you see any cannibalization effect that at the Colony or at Alan, that you could observe?

Michael Osanloo

And then a related, but separate, just talk about the entrance into Houston this year, kind of what's the roadmap here. And so we look, we're super excited about Texas. We have been consistent about how how great our response has been from people in DFW. We've gone from zero restaurants a little over a year ago to four opened. The fifth is going to open soon.
That's I mean, we're really happy with that. The Colony had a ridiculously good 1st year. And I think that's not surprising. We have a very strong brand. We have an installed base. There was a lot of demand for us. And so I think that that 1st year, you see a lot of a lot of visitation that's outside of a normal catchment. You have people driving 30, 40 miles. I mean, heck, we had people driving from Houston and Austin to visit us at the Colony. So that's, of course, not sustainable.
So as we expect fully expected, the economy has slowed down a bit this year and we're seeing that still performing exceptionally well exceptionally well. But Arlington Fort Worth have gotten off to great starts. It's those are those are great starts. Alan has been a little bit slower. You'll recall that it was, I don't know, maybe eight, nine months ago that that mall that we're at had a shooting. And so I think that whole mall has been a bit depressed. It's still performing well. It's just not performing at the same pace as Arlington Fort Worth or the Colony.
So we're super excited about at DFW. We're continuing to build in DFW, and we're continuing to develop scale there. We will open our first few restaurants in Houston this year, similar to Dallas Fort Worth. I think that we're going to we're going to come out of the gate strong. All of the modeling that we have done for what it's worth says, it's going to be every bit as good as Dallas is for us.
And so we have great locate. We have some great locations. We took our time to make sure we have A-plus locations that have great visibility, great ingress, great. Egress, great demographics, tailwind, population growth, sort of all the things that matter to us, and I'm excited I'm excited to see how Houston grows for us. I'm excited to get to scale very quickly in Houston.

Brian Mullan

Okay. Thank you for all that color. And then just a follow-up question on the Rosemont, Illinois location. I think you touched on it a little in the prepared remarks. Just elaborate a little how that second location is doing and maybe anything you're learning there relative to the first one? And then when might you start to expect to deploy these formats a little more broadly across the system. I mean, could that be next year or should we be thinking a little bit longer term for that type performance?

Michael Osanloo

Yes, I know Julia, it was fantastic. It exceeded all of our expectations when we built Juliet. That was the very first Portola's pickup. Rosemont is doing well. We learned from Julia I think in the Julia, we realize we overbuilt the kitchen. It was a little bit bigger. We probably underbuilt the amount of space necessary for teams. And I think, frankly, we underestimated how many people would walk up and order food. And we were not quite as well prepared for walk-in business.
So we tried to tweak all of that in Rosemont, Rosemont I really want to I want to sue on a bit to make sure that we've learned everything that we need to learn. Do we have the right kitchen line? Do we have enough space for our team members are we appropriately friendly to walk up some people who just want to come in and get their food and eat at a counter, maybe and so we're learning all of that. And my expectation is that we'll probably have one more iteration to perfect the model and then we can hit go and grow aggressively.

Operator

Andy Barish, Jefferies.

Andy Barish

Hey, guys, good morning, Tom. Yes, it was kind of more on sort of explicit guidance. First and implied guidance. And Michelle, you noted a couple of things on same-store sales. Margins may be down a little bit on units are a little bit below the 12 to 15 but clearly kind of distilling it down to adjusted EBITDA growth in the low low double digits. Is that a reasonable starting point kind of adjusting out, you know, the extra week for for 23? Just trying to kind of get a little bit closer to what really matters there.

Michelle Hook

Yes. I think, Andy, as you know, we don't give short-term guidance, but we, as I mentioned, in terms of a long-term growth algorithm, right? We're always going to be aiming to hit that as we look at any given year. And I will say on the margins, though that?
Yes, we have a lot of new units coming in and obviously, we still have a lot of year to play out here. But our operational teams are phenomenal in terms of just continuing to look for ways that we can become more efficient as we have these new kitchens coming online.
As Michael mentioned in his prepared remarks, kitchen '23 as we build restaurant of the future, even as we retrofit another 20 plus restaurants within 2024, I think we continue to look for operational efficiencies. So that we can come combat some of that margin pressures that we see from the new units as well as getting to scale as quickly as possible.
And I know we've talked to you all about that and in continuing to do that. So we can, again buffer against any margin degradation degradation, but that's just a fact, right with the 12 from last year and the nine plus this year. But but I think if you if you look at how you expect the units to perform when you layer in the nine units, et cetera. Obviously, I'm not going to give short-term guidance, but it's something that we're always going to aim for. So that's what I'll comment on, Andy, without giving explicit guidance in 2024.

Michael Osanloo

Yes, that's very helpful. And sort of dovetails into my follow-up. I was going to ask a last couple of years. You've kind of had a handful of really effective operational changes and productivity measures. You know that Derek and the team have put in place and anything you're willing to share with us kind of, you know, in your back pocket for '24, is it really kind of around the, you know, the labor deployment with the new kitchens and the remodels and things like that?
I think it's the latter, Andy I think you nailed it like Michelle, just I think probably gave more guidance. She wanted like we have 20. We did 17 restaurants last year that we rush road in Chicago land to do the grab and goes to streamline the kitchen to get some efficiency for our team members. We have another 20 we're doing this year. That's that's I mean that's a that is very, very good.
That's real helpful. And it helps protect our margins. Our new kitchens, the more we deploy these, the more we learn and the more excited we are the shorter kitchen lines have improvements. They were seeing every little element of our staffing, our productivity getting better and better. And so I think it's more of the same in what we did in '23 on a go-forward basis, we were passionate about efficiency. We're sort of closet Lean Six Sigma people. And so we want to get really great at that in our restaurants.

Barbara Noverini

Dennis Geiger, UBS.

Dennis Geiger

Great. Thanks, guys, and congrats on the results. I wondering if you could talk a little bit more about the traffic strength that you saw in the quarter and what that means for this year?
Michael, I know you talked about a bunch of key traffic drivers. I assume all those are in play for 24. Is there anything else to add on how you're thinking about traffic this year, given those drivers given the momentum you had in the 4Q, Michelle, I know you kind of spoke to the long term, low single-digit company. Any other considerations and how you're thinking at a high level about that traffic momentum broadly going into into this year or for this year?

Michael Osanloo

I think traffic is obviously really important. And we take we take traffic trends very, very seriously it's probably the most important health metric of an organization. And I would say Dennis, like in my experience, the reason people choose to go to a restaurant is because of a past great experience.
Think about where you all go. When you want to go get something to eat for lunch or dinner, you're going to go somewhere. And he said, man, I had a great experience there last time, and it was delicious. And as craveable, I think that's the healthiest way to be a consistent traffic driver.
Now, of course, you need to have an entire toolkit. And so part of our toolkit is it's been great experiences is the preeminent one, but part of our toolkit is channel flexibility. If the weather's bad, you've got great drive-thru. We have great delivery. We have great catering. If the weather is great, we have beautiful restaurants that you can sit outside and enjoy.
So having channel flexibility is really important to be a traffic buffer, having an ability to market aggressively. And whether that's doing, we have some really entertaining quirky marketing campaigns coming up with our new salads. I think that's going to be awesome. I think it's going to drive visitation. I think it's going to drive incrementality to salad.
And we've got two amazing new salads coming out that our guests love in the test panels and the test kitchens and in our restaurants and our investors are going to love because they're they mix a little bit higher price point and better margins. So and I think those are the kind of things that a company needs to do.
And it's there's no one lever that's the magical lever that you pull all the time you have to be balanced and what levers you're pulling and our commitment is we will we will use whatever levers are necessary to make sure that we have a healthy level of transaction growth.

Michelle Hook

And I'll just add onto that, Dennis, one of the things that we know is very powerful is having digital menu boards in our restaurants and so to Michael's point earlier on, you don't have to have a massive ad campaign, but we found that to be effective, whether it's in the core or outside of the core how we market for tellers or markets.
Certain things on those menu boards, I think matters, and we talked to you all about Portola's classics and portals pairings and how we pivoted into that advertising within the back half of last year. And I think there's some opportunities to utilize those assets within our restaurants, go bomb to drive home, whatever messaging we want whether that's the new salads or other things. So I think that's a powerful tool as well.

Dennis Geiger

That's great. Thanks, guys. And then just one more as it relates to, I guess Michael, you talked about the strength and the guest satisfaction scores to all-time highs, which is terrific about the strength, I think, across channels or anything else as it relates to what you saw with your customer in behavior changes that help support some of that traffic, whether it's dayparts days of the week of days of the week, anything else you would flag there that you maybe saw that was a shift in the fourth quarter versus prior quarters? Thanks very much.

Michael Osanloo

And then it's a great question, Dennis, but and I think that I would say it was a broad based improvement.

Dennis Geiger

It was not dinner versus lunch or weekend versus weekday or or anything like that?

Michael Osanloo

It was at no unique segments of consumer. It was pretty broad-based and we feel really good about that.

Operator

David Tarantino, Baird.

David Tarantino

Hi, good morning. I have two different questions. Actually, one sort of dovetails off some of the comments you're just making my God, I was just wondering on traffic, whether you think speed of service is a big opportunity for port Telos? And is that something you're you're focused on more so going forward than but in the past? Or just wondering what your thoughts are on that as a potential traffic driver?

Michael Osanloo

Well, I mean, for sure, David, that it is some it is hard hit is sort of I know that might be my secret sauce that we didn't want to talk about. But yes, we have a very strong emphasis internally on speed of service, even to the point where look, we know exactly what our service times are in the drive-thru, a 32nd improvement in service time in the drive-thru represents a 1% comp when we're pack that is incremental and the incrementality of that revenue flows through remarkably well.
So we are our operators right now are maniacally focused on speed of service, number one in the drive-through. It's less relevant, frankly, on dine-in, still important, but just it doesn't have the same impact as in the drive-through. And so absolutely speed of service matters, how fast you get guests in and out matters not just their perception of the time and how happy they are with it. But literally the math of getting them in and out and moving the next person and it's drive-through can be almost infinite capacity if you're fast enough.
And I guess that's yet a definite huge emphasis for us. We don't we don't like to talk about it. We'd like to just do that.

David Tarantino

I thought that was going to be your answer. But I guess my follow-up to that is, I guess, where where are you on speed of service now versus maybe where you were previously? And is this is this a bigger opportunity now that you have more new locations and new markets that maybe have less experienced operators, so to speak? I guess, how do you how do you think about kind of where you are now and maybe where you want to be at the end of this year or next year or the following year?

Michael Osanloo

Yes. I think you want to separate speed of that. I think there's two ways to think about speed of service. One is what does the customer say in terms of their satisfaction on speed of service. That is a that is their perception which matters and it makes them happy or not. Then then there is something on speed of service. Just the absolute time it took you to get, I guess, through your drive-throughs?
I think we have material room for improvement. There were nowhere near when we were at our best and it's always a balancing act when you focus purely on speed, there's a tendency to perform less well on accuracy on all these other things that really matter.
So for us, it's what's usually important is you don't love sort of the old adage of walking and chewing gum at the same time. So we need to be fast, but we also need to be accurate and friendly and so those things are always a balance. I think we have perhaps pushed accuracy and friendliness to the detraction of speed a little bit. And it's and that's what we'll rejigger that will rebalance that. And hopefully, that's a traffic driver for us this year as well.

Operator

Brian Harbour, Morgan Stanley.

Brian Harbour

Thank you. Good morning. I had just a couple of margin questions. Was the timing of the openings in the fourth quarter kind of consistent with what you planned or could you shed any light on what the timing looked like in? Was there any sort of impact on 4Q versus like what you might expect in 1Q 24 from a margin perspective?

Michelle Hook

Yes, right now it was as expected, our openings and you can look whether it's in the K or the earnings release, we give the bond that we open those restaurants. So you can see heavy into November and December when you look at the openings there. And so yes, as you look at again, those coming into the first quarter, right, always within that first call it six month time period, Brian, right.
You're still going to be heavy on the training heavy on the labor side, heavier on the inefficiency side, whether it's labor or on the food side. And so that's where you'll see. I see. I think a little bit more of the impact would be in that first part of 2024 versus the back half.
But then remember, we start to layer and then write the new class of restaurants, one in Q1 towards the tail end of Q1 of this year and then two to three in Q2, et cetera. So yes, I think you'd see a little bit more outweighted impact from those six, particularly in the class of 23 coming into Q1 and Q2.

Brian Harbour

Okay. Makes sense. And then just on your food cost ratio, I think it was a little bit higher than I would have thought in the fourth quarter relative to kind of what you said inflation was, were there any product mix, drivers of that are anything we should keep in mind? And then into coming year, would you expect pretty even inflation throughout the year? Anything we should keep in mind. Just with regards to food costs?

Michelle Hook

Yes, I'd say, Brian, the 4.4% in Q4 was right about where we thought it would would be maybe just a hair higher, but nothing that I would call out in terms of what we were thinking versus where Q4 came in at when we look at 2024, I think Q2 looks to be a little bit more heavier impacted for us just based on again, these are projections based off of our basket of goods and where we think some of the pressures might come into play in Q2, and then Q3 and Q4 be a little bit more moderated, but I'd call it more Q2 as maybe being a little bit heavier impacted at least that's what we're seeing today.

Operator

Gregory Francfort, Guggenheim Securities.

Gregory Francfort

Hey, thanks. I have two questions. First, that I know you don't like to talk short term, but Michelle, maybe can you can you address what the 53rd week is there a comp impact to the first quarter, just based on that? And any thoughts on them kind of rightsizing expectations for how much weather might be impacting you early in the quarter?

Michelle Hook

Yes, Greg. So the comp, there's no impact. So our comp is actually a 53 week comp number at the Yum. 4.4%. And we did that purposefully because that 53rd week has Christmas in it. And so when you look at if we were if we were to do a 52 week comp, it would have skewed the comp a little bit higher in Q4. And so that's where we reported a 53 week comp in the fourth quarter because we felt that was more honest, in terms of what's the true nature of the business doing actually in the quarter.
And so therefore, when we come into Q1, Greg, there is no impact because we're going to continue to be comparing like for like we except Jan. one week starting Jan one week in 2024 to starting Jan second in 2023. So no impact in terms of whether you think about holidays, et cetera, on the cap on to address your question on Q1 of this year, absolutely.
We are not immune to the impacts that the industry have seen on weather as well as how the consumer is feeling as we look at not just performance in January, but performance and February, but I'll come back to we feel really good about the health of the business to Michael's point and regardless of how that choppy the comp maybe in Q1, not just for us but the rest of the industry, we feel really good about the health of the business, the trends that we were seeing outside of a weather impact in January. And so that's what I would say about Q1.

Gregory Francfort

Got it. Thanks. And then, Michael, maybe maybe just I think you now have five stores in the Phoenix market and can you talk so the corn harvest in behind that. Just can you talk a little about the Phoenix market? I think you now have five our stores there. What has changed as you've hit maturity? What benefits are you getting as you scale up that market? And do you now are maybe hitting a path where other markets are looking to go? Thanks.

Michael Osanloo

Yes, we you bet, Greg so we have we have seven restaurants in Arizona, six are in the Valley area and one in Tucson. And so we are approaching scale. And Michelle gave a little dissertation on the impact of scale in Arizona when we went from two to four and the just the demonstrable margin improvement that we had. But scale allows us to leverage the cost side of the P&L really quickly. It's a wonderful dynamic because you get supply chain distribution and even some staffing synergies when you have the scale.
Second thing that it does for us is it creates some revenue synergy because now when you're craving upward pillows, beef sandwich dip with hot peppers on that delicious crust bread, you have one relatively close. You don't have to drive 45 minutes to the one on the other side of the valley or the only one that you know of there's something a little closer.
And so that tends to be a revenue synergy once we achieve scale, where at the early stages of scale in Phoenix, and we're still planning more restaurants in that market. We've got I don't know that. But we publicly announced we're going to we're definitely building more restaurants in that market to leverage that scale that we're getting.
So you'll see it across the P&L in terms of revenue, but you also see it in margin improvement, and that's that they're both super exciting things.

Barbara Noverini

We have reached the end of our question-and-answer session. This concludes today's conference. Thank you for your participation. You may disconnect your lines.