Engaged Capital has big stake in Portillo’s, pushing for turnaround: Sources

Activist investor Engaged Capital has built a nearly 10% stake in Portillo’s, the struggling Chicago-based hot-dog chain, and is engaging with management on improving operations, margins and branding as the company pushes to expand nationally, according to people familiar with the matter.

It’s the first activist campaign Glenn Welling’s Engaged has mounted in the fast-casual sector since a successful push at Shake Shack. The people familiar with the matter, who requested anonymity to discuss confidential matters freely, said Engaged aims to replicate much of the playbook it executed at the burger chain, where the stock price has roughly doubled since the activist first invested in 2023.

Shares in Portillo’s, which also offers sandwiches and burgers, are down about 25% year to date and off about 68% since its 2021 IPO.

Portillo’s did not immediately respond to a request for comment. Shares rose around 3% in after-hours trading Thursday.

Conversations between the activist and management have been constructive, the people said, and Engaged is not seeking leadership change. The firm has told Portillo’s it believes there would be significant private-equity interest if a public-market turnaround fails, the people said.

Shake Shack shares are up 67% since the company settled with the activist in May 2023, giving Engaged two board seats and staving off a proxy battle.

Engaged has given management specific operational changes it believes would help get Portillo back on track, the people said.

It believes the company should no longer own and develop real estate, and should shrink the size of its current locations, according to a presentation to the board viewed by CNBC. Engaged believes the fixes could improve Portillo’s restaurant cash-on-cash returns from 25% to 50%.

The activist believes Portillo’s should be worth at least 100% more than its present valuation, the people said. The company currently trades at a steep discount compared with other “fast casual” chains such as Chipotle and Shake Shack.

Engaged is pushing management to accelerate national growth, the people said. Shake Shack has managed to do that successfully through standardized store layouts and targeted, regional advertising. Engaged believes both those tactics could help Portillo’s grow beyond its present 85 locations.

The company was briefly valued at as much as $1.6 billion, and it currently has a market capitalization of around $867 million. It was previously a portfolio company of Berkshire Partners, a $16 billion largely middle-market private equity firm.

Engaged was founded in 2012 by Welling. The California-based firm has pushed for turnarounds or sale processes at several food and consumer names, including Hain Celestial and Del Frisco’s, the latter of which was acquired by Tilman Fertitta’s Landry’s in 2019.

Berkshire retains a 9.6% stake in the company. A spokesperson for Berkshire did not immediately respond to a request for comment.