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

Activist investor Engaged Capital has built a nearly 10% stake in Of PortilloThe struggling Chicago-based hot dog chain is working with management to improve operations, margins and the brand as the company looks to expand nationally, according to people familiar with the matter.

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

Shares of Portillo’s, which also offers sandwiches and burgers, are down about 25% since the start of the year and about 68% since its 2021 IPO. They were up about 3% in after-hours trading Thursday.

Portillo confirmed in a statement to Vscek that the company is in talks with Engaged.

“Our board of directors and management team will continue to take actions and make decisions that are in the best interests of our shareholders,” the company said in the emailed statement.

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

Shake Shack shares have risen 67% since the company reached a settlement with the activist in May 2023, giving Engaged two board seats and averting a proxy battle.

Engaged has made specific operational changes to management that sources say could help Portillo get back on track.

He believes the company should no longer own and develop real estate and should reduce the size of its current locations, according to a board presentation seen by Vscek. Engaged believes the adjustments could improve Portillo’s restaurant’s cash-on-cash returns by 25% to 50%.

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

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

The company was briefly valued at as much as $1.6 billion and currently has a market cap of about $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 company has pushed for changes in sales processes or direction at several food and consumer products names, including Hain Celeste and Del Frisco’s, the latter of which was acquired by Tilman Fertitta’s Landry’s in 2019.

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