Fast-growing, cult-favorite chain cuts expansion

With countless dining options competing for attention, it has become increasingly challenging for restaurants to establish loyal followings or even survive. Yet, one beloved chain has managed to build an almost cult-like fan base thanks to its Chicago-style hot dogs, Italian beef sandwiches, and signature chocolate cake, which have helped fuel an ambitious nationwide expansion. 

However, the once fast-growing restaurant chain is now feeling the pressures facing the restaurant industry, leading it to make a shocking announcement.

Portillo's revealed that it will slow new restaurant openings through the end of 2026, limiting growth to already signed leases. Instead of the 12 new locations originally planned for this year, the chain now expects to open eight, followed by another eight in 2026.

"Portillo's took a number of steps to reset our growth model in the third quarter, as we proceed at a more measured pace in new markets while pursuing better unit economics," said Portillo's CEO Mike Miles in the earnings report.

Portillo's opened too many restaurants too quickly

Portillo's (PTLO) rapid expansion came at a cost. New restaurants began "cannibalizing" sales from nearby locations, driving up costs without the expected boost in revenue.

During the third quarterof fiscal 2025, Portillo's opened four new restaurants in Florida and Texas, with three more planned across the Sunbelt and one in Illinois by the year's end. Still, the results were unfavorable.

Total revenue rose 1.8% year-over-year to $181.4 million, but same-store sales fell 0.8%, driven by a 2.2% drop in transactions.

Meanwhile, operating expenses increased by 6.2%, resulting in a decline in both operating income and net income. Portillo's stated that the higher costs primarily stemmed from opening eight restaurants in late 2024 and four more in 2025.

"We added too many locations too quickly and too close together over the past twenty-four months, particularly in Texas," said Miles. "This has produced a number of restaurants with initial volumes that are not sufficient to deliver healthy economics."

More Portillo's:

• Portillo's gives crucial update for major menu change
• Fast-growing, cult-favorite chain cuts expansion, ends breakfast
• Portillo's to make a crucial final decision this summer

Although Portillo's is slowing down new restaurant openings, it's not abandoning future expansion plans altogether. The company is deploying smaller-format restaurants, some of which have already opened in Chicago, that are proving more efficient and profitable.

For the full fiscal year 2025, Portillo's now expects same-restaurant sales to drop between 1% and 1.5%.

Portillo's new growth strategy

Though the slowdown may come as a surprise to some, Portillo's had already hinted at a more cautious approach.

While the chain initially accelerated expansion to boost brand visibility across new markets, currently operating nearly 100 locations across 10 states, it now faces the same headwinds challenging the entire restaurant sector, including economic uncertainty, weaker consumer spending, and uneven performance across markets.

In the second quarter of fiscal 2025, Portillo's introduced a strategic new plan focused on four priorities to stabilize operations and position the brand for sustainable growth.

Portillo's new plan

• Drive transactions by reinforcing value and service.
• Simplify operations by ending its Chicago breakfast pilot.
• Sharpen focus by slowing the pace of new restaurant openings.
• Optimize capital deployment to achieve positive free cash flow by 2026.

"We really have not ever sort of cracked the code on communicating what Portillo's is all about to people who have never heard of us before," said Miles in an earnings call. "We need to have a clearer way to communicate to folks have never heard of Portillo's before and don't know somebody from Chicago what's so great about it."

Restaurant industry struggles

Operating a restaurant today has become increasingly costly. Inflation has driven up expenses across all aspects, including labor, food, and rent, making it far more pricey to open and operate new locations.

Over the last five years, restaurant food and labor costs have surged 35%, according to the National Restaurant Association.

With about 17% of new restaurants closing within their first year, and nearly half failing within five, according to the U.S. Bureau of Labor Statistics, the odds are stacked against rapid expansion.

"Economic fragility is expected to continue to weigh heavily on consumer behavior, with uncertainty about the potential impact of tariffs on costs, weak job growth trends and the specter of stagflation further complicating operators’ efforts at forward planning," noted Bank of America in its State of the Restaurant Industry 2025 report.

Related: This iconic breakfast chain raised prices on some items by 82 percent