Q1 2022 First Watch Restaurant Group Inc Earnings Call

Thank you for standing by and welcome to the first watch restaurant group incorporated first quarter 2022 earnings conference call.

At this time all participants are in a listen only mode. Following the presentation. The conference call will be open for analyst questions and instructions on how to ask a question will be given at that time.

This call is being recorded today May 10, 2022 at eight a M. Eastern time and will be and will be archived and available for replay at investors, but first watch dot com under the news and events section.

I would now like to turn the conference over to Raphael gross partner at ICR to begin.

Good morning, everyone and welcome I'm joined here today by first watches Chief Executive Officer, and President, Chris Tommaso and Chief Financial Officer. Mel Hope. This morning first watch issued its earnings release for the first quarter 2022, and Globe Newswire and filed its quarterly report on form.

10-Q with the SEC. These documents can be found at investors talk first watch dotcom.

Let me now cover a few housekeeping housekeeping matters before introducing crest. This conference call will include forward looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from those from these statements. These statements include without limitation statements concerning the conditions of the companies into.

History, and its operations performance and financial condition and growth strategies and future expenses and any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in its filings with the FCC, including its most recent annual report on form.

Form 10-K, and quarterly report on Form 10-Q.

First watch assumes no obligation to update these forward looking statements whether as a result of new information future developments or otherwise, except as may be required by law.

Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant level operating profit a restaurant level operating profit margin.

Adjusted EBITDA and adjusted EBITA margin.

Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning, and with that I'd now like to turn the call over to Chris.

Good morning.

Just a few short weeks ago I shared our results from our record 2021, and I'm happy to once again share that our strong performance has carried into 2022.

Before I dive into that performance I wanted to take a minute to talk about why we believe we've been able to deliver exceptional results like we reported this morning and give you a little background on those results we.

We're in the position we are today because of how we came to be back in the early eighties back then you would have been hard pressed to find a breath. Another restaurant that serve breakfast brunch and lunch without moonlighting as a dinner place daytime dining was almost unheard of and first watch was built differently.

The fun side of the story of our beginnings and our daytime only ours is that our founders wanted to be able to play golf in the afternoons.

Certainly true.

But more importantly, they they wanted to give our staff the same opportunity to have evenings free to spend with their families.

After spending many years in the restaurant industry themselves working many long days and late nights. They set out to create a concept where those with the spirit of hospitality could have a fulfilling career in an industry. They loved and still have quality time to spend with their family and friends doing things they enjoy it.

That focus on family and a quality of life has been a part of first watch ever since even before work life balance was a trending topic and frankly, it's one of the attributes that drew me personally to first watch it in the first place nearly 16 years ago.

When I joined back in 2006, I had two young children, one of whom actually graduated from college this past weekend.

Moving to Sarasota, Florida with my young family was a big decision, but the opportunity to join an organization with the same priorities with a focus on people family imbalance with something nearly nonexistent in this industry and an opportunity I couldn't pass up.

I'm only hours weren't the only innovation our founders brought to first watch.

They were taking an approach to the menu that was focused on freshness quality and creativity, which back then and still today was a stark contrast to the diners and greasy spoons around the block.

That passion for innovation is still at the core of who we are sourcing fresh produce that's delivered to our more than 440 restaurants throughout the week and introducing seasonal menu five times a year highlighting only the best of what's in season at that time, whether for our entrees or fresh juice program.

We've always offered something different.

Today, we obviously are living in unique times and it's in times like this that I get even more excited to share the first watch story.

Remember we've been doing this for nearly 40 years and had been a high growth concept for most of those.

Despite the current environment, our branded thrive just as it did during difficult times in the past and I believe this can largely be credited to our non traditional model.

We realize that we do not fit neatly into industry categories, and as I've said before we embrace that.

We are instead focused on our customers evolving needs and the first watch experience for both our customers and our employees has never been more relevant than it is today.

Our long track record of strong traffic growth is not an accident, we offer a progressive trend forward menu that has consistently introduce menu items before they hit mainstream.

And we do it at a price point and value that allows for and I would say encourage frequency.

We're fortunate to attract and affluent customer base, yes, we continue to see growth from an emerging group that tends to skew younger a bit more digitally focused and seeks out great food.

My point here is that we cannot be easily defined and that is because we offer a highly differentiated experience and this experience is serving a unique need for our communities right now.

More than ever people are seeking connection and we know that our customers often described first watch as a place to quote take a time out or a mini vacation in their hectic day, we serve as the neighborhood gathering place and we don't take this for granted.

I believe this unique positioning is a large contributor to our continued strong traffic and dining room recovery.

And with that let's review our Q1 results.

We benefited from an accelerated recovery from Covid impacts in fact, starting in Q1 of 2020. One we began seeing positive same restaurant sales versus 2019 and that recovery continued steadily throughout the past year.

Year over year, our same restaurant sales growth was 27, 2% and when compared to our strong first quarter of 2019. It was 26, 1% driven primarily by same restaurant traffic growth of three 4% I realize that this puts us in rare air.

Moreover, despite the challenging operating environment, I'm, especially proud that we delivered a solid restaurant level operating profit margin that surpassed our expectations.

Our performance accelerated towards the end of quarter, bringing system wide sales for the quarter to $214 million with $173 million in total revenues.

That's a 36% increase over the first quarter of 2021.

We opened seven beautiful new first watch restaurants during the quarter, including six company owned and one franchise, bringing our system total to 441 at the end of the quarter. The seven restaurants opened across five states and seven DNA from St. Louis to Miami to Pittsburgh, and our new restaurants, regardless of geography continue to.

Distantly achieve annualized sales that exceed the average unit volumes of our existing restaurants.

Their proven portability is what unlocks expansion opportunities for the future of our brand once again reinforcing our confidence in our plans to grow to about 2200 domestic restaurants and to continue to grow our average unit volumes.

As we open those seven new restaurants during the quarter, we maintained our average of $2 seven managers per restaurant, keeping our talent pipeline full with strong leaders who are prepared to take on the general manager position for our upcoming new restaurant openings.

First watches always prioritize professional development for our employers employees and during the first quarter, we relaunched our weeklong culture and leadership training program, which we call farm. It's short for the first watch Academy of restaurant management, We hosted 50 managers during the quarter for this emerging experience at our home office here in Bradenton, Florida.

On our last earnings call you might remember that I mentioned that first watch C. P O lower sorensen was in Anaheim to accept Adp's prestigious culture at work Award I'm proud to share. She brought on the hardware. This honor was bestowed by the largest payroll provider in the world, which serves more than 80% of fortune 500 companies and more than nine.

Hundred thousand total clients first.

First watch was one of only five award recipients this year and the only company across all industries that was recognized for outstanding culture. This achievement is a big point of pride for our organization and it speaks to the incredible teams operating our restaurants every day.

If you've been to first watch or if you follow us on social media you know all about our commitment to continued menu innovation and the positive results that drives our dedication to early trend spotting and culinary research comes to life in a rotating seasonal menus and always expanding menu platforms.

During Q1, we featured several craveable craveable dishes on our jumpstart seasonal menu, including the Trailblazer Bowl the carnitas breakfast Burrito supersede protein pancakes and the star of the show really was our purple haze juice.

This refreshing beverage was an immediate success quickly developing a cult like following.

We responded to an overwhelming amount of customer please and added it to our menu permanently.

This color changing lavender eliminate is made with butterfly P flower T and it's now available year round alongside our fresh catatonic in morning meditation juices.

This Instagram mobile edition pays off with it with Incrementals City and is just another example.

Elected pricing as we continue to watch our customers choose to spend more to enhance their branch experience.

Now for an update on our restaurant technology, specifically as it relates to our kitchen display system rollout every new company owned restaurant is opening with these systems and we continue to install them in more of our existing restaurants each week.

When we last spoke about our fourth quarter and fiscal 2021 and results I shared at that time that Kt S was live in about 20 of our restaurants now about six weeks later, it's up and running in more than 65 first wash restaurants, we're conducting inefficient rollout with plans to have Tds and more than half of our company owned restaurants by the end of this year.

I've had the opportunity to visit some of the restaurants with KBS and I also attended a recent new restaurant opening opening that incorporated the technology and I'm still encouraged by the overwhelming support for this project by our teams and the positive energy that exists throughout the organization around its rollout.

As we stated before we have tremendous demand some of which remains unfulfilled and I'm proud of our teams in our restaurants, and our home office and the steps we're continuing to take in order to help capture that demand. While we also expand our footprint and now to discuss our first quarter results in greater detail I'll pass the phone to Mel.

Thank you.

We appreciate you joining us this morning, as Chris mentioned at the beginning of the call. Our first quarter performance accelerated at the end of the period and our teams powered through the periods of operating challenges to deliver some solid financial result.

In late March of this year, which happened to be very close to the end of our first quarter. We filed our first annual report on Form 10-K.

In that reporting cycle and when we hold our earnings call. We furnished some expectations about our first quarter based on what we experienced during the first two thirds of the quarter.

Frankly.

We beat our own expectations during March we experienced a surge in our restaurant sales across all channels.

Which allowed us to further leverage our fixed costs and expand our restaurant level operating profit margin, which finished the quarter at 19, 6%.

Furthermore, the increased sales and traffic we experienced in March have continued into our second quarter.

Our same restaurant sales growth was 27, 2% driven by our same restaurant traffic growth of 21, 9%.

Which we achieved despite the negative impacts in January from the omicron vary and from winter storms.

As we've mentioned before we believe our emphasis on building the same restaurant sales through traffic growth is a key measure of our success.

Not only did our first quarter traffic grow by nearly 22% on a one year basis. It also exceeded 2019 as pre pandemic traffic by three 4%.

After we chose not to increase our prices in 2021, we did take a 3.9% menu price increase in early January of 2022.

As we've shared before we believe we have additional pricing power should we determine to revisit our menu prices later this year due to continued inflation in our variable costs.

As for that inflation, our market basket was up about 15% in the first quarter.

Despite the our food and beverage costs as a percentage of restaurant sales came in at 23, 1%, which is actually down 50 basis points from Q4 of 2021.

Labor and other related expenses as a percentage of restaurant sales for the quarter landed at 32, 3%, which is also 50 basis points lower than the fourth quarter of last year.

That downward trend in labor percentage was primarily the product of the surge in March sales that I mentioned earlier.

And our teams continue to operate nimbly and a tight labor market.

Our operating level profit.

Was $33 4 million and our restaurant level operating profit margin was as I mentioned 19, 6% for the quarter.

We had indicated that we expected our restaurant level operating profit margin would be only slightly ahead of our fourth quarter last year due to the macroeconomic excuse we were aware of however.

That margin leverage levered.

The margin leverage created by our March sales moved our first quarter margins favorably and it moved to them quickly.

Adjusted EBITDA was $19 4 million and our adjusted EBITDA margin was 11, 2%. While these strong metrics were driven by our topline growth and improvement in our restaurant level operating profit first quarter G&A spending benefited from a $1 3 million.

Timing shift into our second quarter.

In addition to making note of the timing of the G&A falling in the second quarter I'll give you some additional points, we're seeing thus far in the in the current quarter as I mentioned earlier the sales momentum that surged in March has continued into our second quarter.

Through April inflation has increased our cost of goods sold about 130 basis points above the first quarter. Our labor percentage started the person started the period holding flat to the first quarter. Additionally, we expect to open at least eight system wide restaurants before the end of <unk>.

This quarter.

Now I'd like to shift the conversation to our full year outlook.

To better help you calculate our income tax expense.

We wanted to share that we currently use 33% to 34% blended rate and all of our forecasts.

Given our strong performance in Q1, coupled with the macroeconomic conditions I'd also like to reiterate reiterate our outlook for fiscal 2022.

For the full year, we expect same restaurant sales growth in the high single digits with continued positive traffic.

As we begin to lap quarters in 2021 that had more more than fully.

Recovered from Covid.

We plan to open 30 to 35 company restaurants, and 8% to 13 franchise restaurants.

We expect revenue growth in excess of 15% and a return to approximately 34% labor as a percentage of restaurant sales by the end of the year.

Based on these considerations, we expect adjusted EBITDA for the full year in the range of $67 million to $71 million.

When it comes to commodity inflation, we continue to see cost increases in our market basket as well as fuel surcharges associated with our deliveries and we expect 10% to 13% commodity inflation for the full year.

And finally, our capital expenditures during 2022 are still expected to range between 60 and $70 million.

We appreciate our opportunity to discuss our results with you and operator, if you'd please open the line for questions now, we'll be happy to field. So.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Chris <unk> from Stifel. Please go ahead.

Thanks, Good morning, guys.

Good morning.

So Chris you mentioned the March sales momentum continued into April and mill I think he did as well, but could you guys quantify what the comp was in April .

We don't we don't issue comps so to speak publicly about it.

On a period by period basis.

Okay, That's fair and then.

Can you help us understand Mel what's the benefit to the margin what was of that surge in the comp as you went through the quarter and how we should think about restaurant margin in the second yeah in that in the third period with the with the surge in sales we saw most of that come out.

In labor or labor ran very efficiently during the period, the sales where surgeon and we were still running on stem crews and so one of the things about that.

We've taken steps is to catch up on the on the on our staffing.

Consistent with the kind of surge in sales that we're seeing now.

Okay, and then you always pleased to see the full year inflation guidance intact with many companies having raised theirs recently is this because the company had contracts in place on commodities that have recently spiked or is there. Another way the company is mitigating the commodity inflation most of most of our contracts run.

30% to 45 days out in terms of fixing the pricing we do have a couple of things that we price during the year, but the.

As much as anything it's the.

<unk> of our supply chain teams solving for.

Those kinds of issues in real time, and we do expect the we did run higher inflation, but we have built it into our <unk>.

Plan for certainly for the first and second quarter and we should you should expect to see some tapering off simply partly.

As we start to rollover, a little bit of inflation last year.

Great. Thanks, guys.

Thanks.

Our next question comes from Jeffrey Bernstein from Barclays. Please go ahead.

Great. Thank you very much.

A question on the full year guidance.

It seemed like the first quarter.

Handily beat consensus expectations talked about them and I think you mentioned a beat your own I'm.

I'm just wondering.

What leads you to perhaps reiterate the guidance rather than raise the guidance effectively flowing through the first quarter I'm just wondering whether that's purely conservatism or maybe there are some macro factors that are leaving your cautious, especially with the sales momentum going into the second quarter just trying to understand.

What's keeping you from raising the full year guidance at this point sure I think that's a good question, Jeff and good morning by the way listen.

We gave what we think was some good guidance on the full year of 1 million three of our call. It our earning in the first quarter was related to timing and G&A. So I think we're still within the band of the original guidance that we gave and we're also looking at the backdrop of you know a lot of people with sprint about.

A challenging economy.

This recession that sort of thing where new registrants I want to be sure that we're thoughtful about the guidance that we give but we're really we're really optimistic about the year and enthusiastic about the performance in a few weeks, we will take another look and trying to update if we can.

Understood and just go.

As I mentioned, the whisper of the macro backdrop I'm just wondering how you guys see yourself positioning from a potential economic slowdown and maybe whether you have already seen any change in consumer behavior. I mean, it seems like the sales are still strong, but any change in traffic or mix that would lead you to perhaps take a more cautious view with a slowing economic backdrop.

Yes.

Hey, Jeff It's Chris Great question, I'd say that.

Looking back.

On our performance during tough economic times in the past, we performed very well it kind of referenced that a little bit in my commentary, but.

Also as we're as we're sitting here now we don't see.

Any early signs of that at least.

When we talk about the increase in our our traffic and sales and the momentum that we have we typically look for check management by the consumer to be the first sign of Av.

Any potential issues and we're not seeing that at all in fact, our PPA is up.

And we're pleased with the with the demand we're seeing but also.

With how the consumer's behavior when they're when they are interacting with us.

Sounds great and just lastly, the restaurant margin I know in the past you said you would take price to defend the margin.

And then I know you mentioned earlier that you'll reconsider later in the year I'm just wondering.

What would you be looking for to raise the margin and is the goal to hold that margin flat or how do you measure that relative value that gives you confidence that you have more of that pricing power.

There's no really one metric that's a trigger point for us we're going to we evaluate probably every restaurant company evaluates pricing.

Constantly based on margin and we certainly look at it very closely so as we as we go through the year as we look.

Closely at what our actual experience is and where we have.

Where we have.

Pricing needs or or or.

Or inflation that we're not offsetting them.

We will constantly take a look at it in and reevaluate it but we did have a very good first quarter and where.

I can just tell you that we constantly look at this.

Rich thank you.

Thanks.

The next question comes from Nicole Miller from Piper Sandler. Please go ahead.

Thank you good morning could you talk a little bit more about QQ inflation. So if cogs are up about 130 basis points sequentially. What is the embedded level of inflation and could you talk a little bit about items that are up are or even maybe down.

It.

Our inflation for the second quarter is really tracking pretty close to where we were in the first quarter I think we built in in our plan and what we're seeing is still a little high like 15% on the market basket.

In the first quarter of the things that tend to.

Run higher or sort of some high volume <unk>.

Commodities like Bacon and Avocados for example that we use a great deal of so when the inflation spikes they tend to drive drive the cost a little bit.

We're having the same.

We're experiencing the same thing plus to go packaging.

Continues to be a inflator of our overall restaurant.

Operating costs.

As Pac.

Packaging availability.

And cost of it just continues to be something that we're we've learned to have to deal with over the course of the last couple of.

Alright, that's very helpful. Thank you and then.

On Tds and just technology at large remind US you know I'm starting to think about QTS can it go faster or is it going slower.

Originally a very offensive.

Fence measure.

We make things easier in the back of the House makes people happy is it just defense now with you know the challenging macro kind of how does that play out and what comes behind that thanks.

Thanks, Nicole it's Chris I'll take that one I would say that our philosophy around the benefits of kidneys haven't changed at all which really has two.

Reduce friction and increase our our our throughput in our high demand period. So the good news about it is you're right.

The teams have taken to it and they look forward to it coming in their restaurants and as it relates to the rollout cadence I would say that.

We are encouraged by our ability to get the equipment necessary now I think youll see us continue with our aggressive rollout of that and again our goal is to get it rolled out as soon as we can and as soon as we can train it and get it operational in restaurants, but again were opening all new restaurants with it to start with so.

Basically reiterating everything we said before it's still very much.

For us.

Being on offense and really trying to increase those those peak demand hours.

Thanks again.

The next question comes from Jon Tower from Citi. Please go ahead, hey.

Hey, Joe Thanks for taking hi, good morning, Thanks for taking the question I appreciate it and Chris Congrats on the recent college Grad.

Just curious if you could dig into.

Your outlook for new store availability and the pipeline itself I'm just curious to know if you're seeing anything in the competitive landscape obviously it.

It seems like the consumers are bit more challenged than it had been in recent periods and then on the flip side, there is quite a bit of inflation out there in the marketplace.

Whether it is unbilled costs, the actual input themselves. So just curious what youre seeing on the landscape if there's more availability than in the past and if you guys can perhaps even accelerate unit growth.

Beyond what you're already doing today.

Hi, its Chris again, I'll take this one as well.

So we feel very confident in our ability to.

Execute against our development plans both for the rest of this year and for the follow on years. Our team has done a really great job of filling that pipeline with sites in various stages of development.

We have seen some cost increases, but nothing that our team hasn't been able to manage it.

That alongside availability of certain elements that we need to build the restaurants. They again theyre managing very well. So we're on track and we feel good about it as far as.

The competition for the sites.

These are markets that we've been in for a long time relationships with developers in those markets and we've leveraged those relationships even more so now and as far as acceleration goes again, we're sticking to our what we've put out there for our our growth.

Algorithm on new restaurant growth and.

Again, just feel very optimistic about our ability to achieve that at this point in time John .

Any project that's on the calendar for this year, we're already spending dollars into it.

And the development teams that probably turned them over more to either construction or site management type of.

Management folks, but I would and most of our prospecting for new restaurant sites has now turned to 2023 projects 2024 projects.

And that's.

And that's coming along based on what I can see the pipeline continues to to just fill and be ready theyre looking at way more projects than we will actually reach our calendar because some things fall out a bit but frankly, our teams out there prospecting for new sites.

And and identifying them and so so.

Haven't seen any softness in terms of the pace I think they are working very hard but.

I don't think we're seeing any falloff and sorry, let me add one more thing there that the performance of our new restaurants, I think speaks to the quality of the sites that they have been able to get despite.

Increased competition, specifically in the in the suburbs as we've all heard about so the fact that where we're able to get these.

Superior sites that are delivering.

Basically third year sales in their first year.

Is what is what has us optimistic about our ability to continue our growth.

Just kind of following up on that point on the new store performance are you doing anything differently now versus say two to three years ago. When you get into new markets in terms of building brand awareness. When you before you even open those doors as their grass root marketing programs that you have in place now that weren't there before.

I think it actually starts with the sites themselves and the buildings themselves and I mean, we use the word prototype here. We obviously don't have a prototype because we don't build from the ground up but meaning from our perspective, you know what elements that the restaurant have and we have spent.

A lot of time and a lot of effort really evolving that prototype with and putting in elements that we've talked about before whether it is a much larger.

More visible patio indoor outdoor bars.

Garage doors that open up to the outside things like that that it really.

Raise the profile of the restaurant and we're getting them.

Sites that are at or near the epicenter of the trade area high profile sites out on the street.

And so.

And that I've been here 16 years I can tell you that's not what we did 16 years ago and so just like our our concept has evolved so has our real estate site selection strategy and I think thats paying off big we are also.

Much more engaged in.

Digital marketing now and we leverage that prior to each opening to build anticipation and excitement and frankly I think people now are more familiar with our brand and so there is an excitement level that comes to us opening in a market that maybe wasn't there 15 years ago and I think that we've earned that overall these years and I think all of those elements.

Not to mention our great training teams and folks that we send to the restaurants to help open them all of those things.

What.

It's really leading to the success that we're seeing there.

Great and then just last one for me on the <unk> stuff I know you'd mentioned it was live in 20 stores in the fourth quarter. So it's still fairly early days, but is there anything you can call out with respect to either comp performance or perhaps even just actual versus theoretical.

Waste at the stores I'm, just curious any differentiation you can pull out between those stores versus the rest of the comp base would be great.

It is early days.

Again. This is almost has as much to do with our ability to hire and train people faster and then to also again improved ticket times that I'll give you one factoid.

Two of our restaurants that had <unk> in it had had.

They were the top two sales restaurants for the company on mother's day, which is our biggest day of the year, so definitely see that that.

When we're at peak.

Peak sales hours and so we've been able to deliver some higher peak sales hours in those restaurants as well.

The benefits, where we have it in the restaurants. So we're already realizing or just in terms of simplifying the back of the house operations and the team's just enjoy some you know some efficiencies.

Of having a more predictable flow of.

Food prep and.

And Seth.

And what the <unk> systems is really used for in terms of helping them get good things served hot.

And and timely so we're already benefiting from those but of the cohort grows we should be able to tease out some statistics.

Thank you I appreciate the time.

The next question comes from Andy Barish from Jefferies. Please go ahead.

Hey, guys. Good morning, good morning Dana.

Thanks, Hey, just a couple of things to level set on on.

Where you are on dining room sales.

And off premise mix currently please.

Sure so our dining room traffic.

As.

Recovered to about $90 to 92% of where it was pre COVID-19 and our off premise sits around 22%.

Got it.

And that in that off Prem.

Ben.

That's been fairly consistent across our last two or three quarters, yes.

And.

And where are you on the alcoholic beverage rollout in terms of.

Percentage of stores and then the mix in those stores. Please.

200 <unk>.

I don't have the figure in front of me I think were.

Probably it's still about we're probably about 70% of the.

The system rolled out right now.

Got it and then.

Just a couple of things on the cost side that you've mentioned in the in the past smell it.

I think you've said your.

Relatively channel agnostic in terms of margins, but.

You cited packaging cost again, I I assume that you know that.

It's still a little bit of a headwind.

Just on the to go side of things.

Yes.

It takes a little bit of a bite out of the overall margin but.

But we have a surcharge associated with with our off premises business and so it offsets it.

That's the bulk of that the bulk of that cost.

Okay and then just one other quick question on near term.

Did you see some of the egg inflation from some of the bird flu issues or does that move relatively quickly.

Yeah actually we.

We had a we have a contract.

The fact is no.

We got a contract that we said in December that fix the cost of our eggs.

Four.

For the during the period.

So the inflation and the cost of eggs that others. So we didn't experience.

Nicely done thanks, Scott.

Thanks.

The next question comes from Andrew Charles from Cowen and company. Please go ahead.

Great. Thanks, guys.

One quick one for me just Mel on the on the favorable commodities. This year, a favorable Cogs I should say in the quarter how much of that would you attribute just to the improvement beverages that you guys are seeing between the role of alcohol and 70% of stores success of the new purple haze juice just.

Trying to better understand that I'm at 15% commodity inflation for the quarter.

Yeah. This is Chris our overall beverage incidents is up so.

Analysis that we did prior to introducing purple haze, obviously, we wanted to test for cannibalization, we've always had two core juices in AR and a seasonal and so we did test the purple Hayes coming in as a core juice and what impact that would have and it was accretive obviously or we wouldn't have done it but we've seen our overall beverage incident.

<unk> increase.

And the alcohol, which we've talked about in the past.

Terrific. Thank you.

Yes.

The next question comes from Gregory Frankfurt Frankfurt from Guggenheim Securities. Please go ahead.

Thanks, guys How're you doing melt.

My first question was just <unk>.

Follow up for Andy that I think you said you were mostly fixed on your AG contracts in the first quarter.

I think you also said earlier in the call that most of the contract and <unk> been doing is 30% to 45 days is that part of the reason why think step up in the second quarter as those contracts are rolling off.

Are you continuing to fixed.

Eggs, maybe longer out and youre doing the rest of the commodity basket.

In this case, we had a contract for eggs and potatoes that are fixed for a longer period of time.

We're certainly having to watch that market carefully because of some of the other noise in there but.

Uh huh.

That's not driving the second quarter inflation.

Got it.

Maybe we've heard from some others that the staffing environment has gotten a little bit better can you maybe comment on staffing and turnover and then maybe even.

Kind of where you're seeing labor inflation right now.

So we are.

A couple of things.

This certainly the most pivotal staffing position for us that we monitor most closely is the turnover and managers.

Historically, we've run about 20 plus in the industry I think now were.

We've we kind of.

For a while there we were sort of middle of the pack during during some of last year, but we're now about 10% better than the industry.

And our number of managers.

Overall has has improved and so we're seeing some real gains there.

That that are important I think in terms of overall staffing were not in terms of.

Hourly our front and back of House staff.

We have seen an uptick in.

Applications and I think we've.

We've seen some improvement.

Overall, we're not precisely where we want to be in terms of developing the kind of bench strength, we're used to operating under but it has improved its improved a good bit this year.

And then maybe lastly, both of you guys have been doing this a long time wall Street seems to be very concerned.

The consumer environment.

Forward.

How do you see what are you looking at as you read the tea leaves and just overall thoughts on maybe where the consumer is headed for the next.

Nine to 12 months thanks.

Well I know, what we're looking for right.

Chris has mentioned that.

The response to <unk>.

First watches offerings in 2008, which was I guess the most analogous.

One word economic period.

That.

Draw for them.

The company continued to thrive during that period of time what.

As we look at what we're seeing right now we're certainly not seeing.

Any customer response.

Today, and where Chris has mentioned the fact that we'd be looking for people managing checks maybe dropping.

Dropping a beverage or or dropping a shareable off their check and we're not we're not seeing that right now so.

So.

I can't tell you where things are.

Headed for sure I, just know that today, we're not seeing any softness in that kind of behavior and Gregg what we saw in Oh 809 is the consumer really just became.

More discriminate about about where they went out to eat and how they spent their money in.

We've really worked hard to position ourselves to be in it to be there.

In a sweet spot again, I think part of our decision not to take price last year, our relative conservatism around taking price. This year. Thus far is really meant to make sure that we drive that value proposition.

In times like that they look for consistency they look for value they look for quality and where we have our entire team focused on all of that to make sure that should should.

What we're hearing happen.

Again, we believe that we'd be able to perform well relatively.

Good.

Back then.

Thank you both.

The next question comes from Sara Senatore from Bank of America.

Please go ahead.

Thank you I wanted to ask about.

You mentioned, a surgeon and sales and labor running.

Yeah, that's sort of it feels like it's been a theme actually for the industry.

The pandemic were even last year you saw.

Potentially a benefit to margins from that I'm trying to understand.

And is.

Is that two things one is okay.

Is there anything that makes you kind of rethink how your labor matrix work or is there technology I'm just thinking.

About going forward and yes, there is more volatility in the labor market or on the other side is there a way to actually have perhaps a tightened labor model and then the other piece of that is just do you know if there was any impact on your top line and.

Whether it's part of our service or anything like that again I'm trying to understand what the implications are rather than just having.

Having better than expected margins for a short period of time, So let me.

Let me come back to the second part of the question I may have to ask you a question about to understand what your question.

But on the first one was with regard to labor or what we're learning.

Our company is constantly evaluating efficiency back in the front of the house and so so.

I think we've made any major changes in the operations. We always look at we always look at.

Optimizing our labor considering the volume more we've got.

Had to Digest <unk>.

<unk> new sales channel over the course of the last year or so and how do we how do we properly staff around.

Pretty robust off premises business. So those things those things we're constantly building into the.

The labor matrix, but frankly.

Frankly, those kinds of savings come in basis points theres, not a lot of low hanging fruit.

This industry scenario you're constantly.

Looking for basis points to show you that in terms of overall cost and so so we've made we've made the same sort of improvements based on the changes in our business.

The you would expect that a restaurant company would make as we go along get along and then on the second part of your question.

We track NPS net promoter score.

Closely and I will just tell you that that over the quarter, our NPS scores sequentially improved.

Month over month, so as far as your question about about either cut.

Customer experience or whatnot, we believe.

Still delivering it at a very very high level.

Just give you a little bit more color on when we have a sales surge like we had in March and really the customer response has been it's been so favorable to spring.

What happens on the in the early days of that.

Our restaurant managers across the company, it's up their schedules according to.

Department of labor requirements or state requirements. So they've set schedules for sometimes two and three weeks out. So if you have an abrupt shift in your and your sales like we like.

We enjoyed during March then it takes them a little bit of time, just to step back up in <unk>.

Kind of recalibrate the staffing and.

And again.

I know I've said this before but it I think it is important.

One of the key benefits of being a company owned system is the opportunity and the ability to share employees from restaurant to restaurant. So.

If we see that one restaurant as their.

Their sales are increasing exponentially, we can we can send a server or cook from a neighboring restaurant and help with the staffing there if we need to so that's been a good benefit as well.

Okay. Okay got.

Kind of piece it all together.

Service.

Okay wasn't that great at the NPS scores are imperative.

The reason I sort of think about staffing back up.

Right now you're kind of putting out fires and moving people around but that's not necessarily sustainable model, even though the impact on that.

It Didnt materialize.

We'd like to we'd like to have.

More bench strength in our in our restaurants.

They are working hard and obviously delivering on good results.

And so.

But we prefer to be staffed at those levels, we were a product coming into the pandemic.

Yes.

Okay.

The next question comes from Jared Garber from Goldman Sachs. Please go ahead.

Hi, Good morning, guys and thanks for all the color today.

Just wanted to circle up.

On maybe how the consumer is it all is using the brand differently I know that there was there is an opportunity.

At weekday lunch.

Maybe shifting some folks are getting some repeat business from them on the weekend brunch crowd.

And then Chris you also noted that you are seeing some younger consumers come into the brand and I don't know if that's a one quarter thing or.

One of the more likely over time, but just wanted to get a sense of maybe what you think is driving that is it some of the menu innovation that youre doing and maybe that purple haze strength is something that can.

Can you can continue to drive that along with alcohol. So I just wanted to get a sense of how youre seeing the consumer interact with the brand maybe differently.

From the past based on some of the strategic initiatives that you guys have put in place.

Sure I think it actually started a number of years ago. When we did the what I would call the shift to urban farm and the focus on an R. R.

Our restaurants in our in our menu and tie that altogether I think we started to see that that that trend.

So it's not a this quarter thing I think we started to see our average age go down over these years I think when you look at our menu and innovation around there when you look at what our restaurants look like going forward all of our our new restaurants that we build but even the ones that we're going back and remodeling and bring it to that same look and feel.

We see an impact so.

I just think it's a.

We're broadening our appeal and where we're basically filling the pipeline with the next generation of our first watch customers because of the actions we've taken so and then as far as your question about weekday.

Weekday day part.

Is growing faster than our weekends are and so we're very encouraged by that I think I think you know we look at it in terms of three day parts weekday breakfast weekday lunch and then we.

Weekends, we just call branches. So the weekday breakfast in weekday lunch are both seeing growth and so that's been that's been encouraging for US now some of that has been a lot of the suburbanization of the workforce I think we're seeing a lot of that work where people have more time during the week to do things like that and we're benefiting from that but I think there is.

It might also be there their introduction to first Washington, and I think we're getting them to fall into one of our regular frequency buckets. Once they experience as we've always said that.

We have a very.

Ah trial to frequency conversion rate and so as we get more people to try us whether its through our high profile, new restaurant sites in new and existing markets or again because of this consumer shift.

That's what you see you see is benefiting from.

Great. That's really helpful. And then just one follow up quickly could you just remind us on how much of the system is sort of converted or currently designed in that urban farm design. If I recall it was the vast majority, but I just want to make sure that.

Correct on that.

It's now all of it the whole system.

Great. Thanks Congrats.

Thank you thanks sure.

This concludes our question and answer session I would like to turn the conference back over to Chris Tommaso for any closing remarks.

Great. Thank you all for joining us this morning, I appreciate the thoughtful questions and your time.

As you've probably heard me say a couple of times. This morning, we're very optimistic about our second quarter and the year ahead, and we really look forward to connecting with you all again in a few months and with that I Hope you have a great day and a great week. Thanks.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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