Q3 2022 First Watch Restaurant Group Inc Earnings Call
[music].
Thank you for standing by and welcome to the first Watch restaurant Group, Inc. Third quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
During 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.
Call is being recorded today November seven 2022 at eight a M eastern time and will be archived and available for replay at investors got 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. Please begin.
Good morning, everyone and welcome I'm joined here today by first watch as Chief Executive Officer, and President, Chris Tommaso and Chief Financial Officer. Mel Hope. This morning first watch issued its earnings release for the third quarter 2022, and globe Newswire and filed its quarterly.
Port and Form 10-Q with the SEC. These documents can be found at investors Doctor first watch dotcom.
Let me first copper a few housekeeping matters before introducing Chris. 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 these statements such statements include without limitation statements concerning the conditions of the company's industry.
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 SEC.
Including its most recent annual report on Form 10-K, and quarterly reports on Form 10-Q first watch assumes no obligation to update these forward looking statements whether as a result of new information future.
Or 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 restaurant level operating profit margin adjusted EBITDA and adjusted EBITDA margin Investor 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 would like to turn the call over to Chris.
Good morning, and thank you for joining US first of all I've had another fantastic quarter, where we experienced positive trends in improvement across several key areas of the business. We achieved same restaurant sales growth driven in part by an increase in same restaurant traffic, we accelerated our new restaurant development management staffing increased and we benefited from in.
Easing of commodity inflation, our confidence in the continued momentum we are experiencing with consumers to drive sustainable growth remains higher than ever.
This morning, I look forward to sharing our third quarter highlights I'll also provide an update on hurricane and the impact on our Florida business and discuss the national recognition as a beloved workplace that we recently received.
Afterward, I'll pass the call to meld, the dive into our quarterly results in greater detail.
In an environment, where economic uncertainty and global turmoil dominated the news cycle first watch experience great strength system wide sales for the third quarter were up 19, 2% year over year.
We achieved 12% same restaurant sales growth driven in part by three 7% same restaurant traffic growth when compared to a successful third quarter of 2021.
Performance brings our year to date same restaurant sales and traffic growth to 17% and 10, 6% respectively.
And when we compare our Q3 results to 2019 same restaurant sales growth was 32, 7% and same restaurant traffic growth was 7%. This brings our geometric three year stacks to 36, 1% and 10, 4% respectively.
We know that very few brands out there are generating traffic driven growth in this environment. In fact black box intelligence recently reported that September was the industry seventh consecutive month of traffic declines and in Q3 the industry as a whole was down 646% in traffic. So as you know first watch saw the opposite.
Our traffic grew three 7% during the same.
Our continued same restaurant performance appears to be consistently among the best in the industry demonstrating the enduring strength of the first watch brand.
And because of these continued strong results, we will again be raising certain elements of our full year guidance, which Mel will elaborate on shortly.
Breakfast and branch occasions continue to grow as consumers create elevated experiences and opportunities for meaningful social interactions and we show up very well here, we continue to see evidence that consumers truly recognize our unique positioning and our overall value proposition and are seeking out our highly differentiated offering.
According to Technomic data, we maintained high ratings related to food quality and health and wellness and in addition to appealing to a high income consumer we've seen a desirable borrowings balancing out of our customer base with strong growth among the millennial and Jason Gen Z segments, who now make up a majority of our heavy users according to technomic filling that pipe.
Line of future diners.
Growth in these segments is undoubtedly related to our increased relevance and these customer groups had the highest stated likelihood of increasing usage at restaurants, especially during the breakfast day part.
And in an environment, where consumers are nervous about inflation breakfast or lunch at first watch is an affordable luxury and an appealing alternative to more expensive meals like dinner with our elevated and on trend menu made with fresh high quality ingredients at our per person average just under $15 50.
Our scale is an advantage here and as the leader in <unk>.
We continue to see a long runway ahead.
Further to the point of continuing relevance our seasonal menu program serves as a key differentiator and a traffic driver we introduced our fall menu in late August featuring unique takes on some classic favorites like our brisket corned beef hash and modern Crook Madame.
Just one week ago, we unveiled our holiday menu, which includes includes Abrase, Barbara Covid breakfast Burrito, and Shareable gingerbread Spice doughnut holes and now across most of our restaurants, you can enjoy a refreshing when most of our bloody Mary made the way only first of all I can't.
We're proud of the investments we've made in developing our award winning culinary strategy and this approach continues to propel the first watch brand forward build tremendous loyalty among both staffing customers and create buzz throughout the year.
Our teams embrace a culture of innovation as an organization, we continue to invest in resources to support evolution and growth on the culinary operational enhancement and human capital front.
We've been pleased to see continued increases in applicant flow and our team's focus on hiring has resulted in continued improvement in staffing levels. In fact during Q3, we returned to full management staffing for the first time since before the pandemic.
We opened 11 system wide restaurants during the third quarter and we will open an additional 17 in the fourth quarter. This brings our full year total to 44, which is above the midpoint of our previously announced full year guidance range.
Our company owned restaurants opened to date in fiscal 'twenty to continue to both annualized <unk> above our comp group average and have maintained that momentum regardless of geography, which reinforces our proven portability.
Our kitchen display systems or <unk> continue to be a popular upgrade among our staff. In addition to efficiencies in our day to day execution. The system also streamlines, our onboarding and training process for both our hourly employees and our managers.
<unk> is now active in more than 300 restaurants. We're ahead of schedule with this rollout and now anticipate it will be active in every company owned first watch restaurant by early next year with plans for our franchise restaurants to implement the system next year as well.
With the capital spend on this system, we will reap the intended benefits in 2023.
First of all I'd say is delivered tremendous growth and success for decades.
Throughout our time throughout that time, our organization has managed through challenging times, including economic crises natural disasters and of course, the COVID-19 pandemic.
These challenges are by no means easy to navigate but I can assure you that each time, we faced an optical obstacle. We've continued to invest in people. We've continued to invest in our brand and we've continued to invest in our growth our customers Trust us and they have shown unwavering support for their neighborhood first watch during each difficulty we face and in every inch.
Since we've emerged stronger than before.
About five weeks ago, we provided an update on hurricane in and its effects on our Florida business. After the category four storm hits southwest, Florida. During the first week of our fourth quarter at that time, we shared most importantly that every first watch employee had been accounted for and that 10 of our restaurants remain temporarily closed.
Later that same week following our update we were able to reopen nine of those 10 restaurants, while we while we while we began to rebuild 135 year old restaurant that sits right on the intercoastal waterway of Naples that had sustained substantial damage.
I'm proud to share that next week, our trading team is heading the Naples preparing to reopen that final restaurants restaurant two weeks from today. The team is thrilled to return to their home restaurant reunite with their longtime colleagues and of course, we welcome back our loyal customers.
Through the storms destruction and southwest, Florida ongoing recovery, we once again saw the absolute best in our people they showed up for each other and for our communities through our you first one thus far we've been able to provide tax free grants to more than 230 of our employees that need in southwest, Florida, which is helping them get back on their feet more quickly.
Companies talk about culture, all the time in my 16 years with first watch I've seen firsthand, our culture come to life through inspiring actions, particularly during difficult times.
A few weeks ago first watch was honored nationally as one of Newsweek's top 100, most loved workplaces. In fact, we were the top ranked full service restaurant concept when our culture. Our people have built over the past 39 years is noticed and appreciated with recognition like this it makes me so proud.
Want to personally congratulate and thank our teams in every first watch restaurant and in our home office. This one is because of you and it's for you and with the mic to Mel to share our third quarter results.
Thanks, Chris and good morning, everybody.
During the quarter first of all restaurants realized system wide sales of $235 $2 million, which is as Chris mentioned.
19, 2% year over year increase.
Total revenues for the company were $186 9 million, including sales of $184 million and the company operated restaurants, and $2 9 million of franchise revenues.
Total revenues were 29 $4 million more than in the same period last year or up almost 19%.
The growth in our comp sales and traffic, which Chris also noted was 12% and three 7% respectively.
Overall growth in comp sales and traffic was driven by the continued recovery of our dining rooms, which increased to 93, 3% in the third quarter relative to our pre pandemic levels in the third quarter of 2019.
Starting in the fifth week of the quarter.
Sales benefited from our menu price increase of roughly three 9%.
This increase has not affected our dining room traffic and we continued to achieve year over year growth in our third party delivery sales and traffic through the rest of the quarter.
As a percentage of restaurant sales, our food and beverage cost were 24, 2%, which is a 70 basis point improvement from the second quarter.
Commodity inflation of our market basket cost topped out earlier in the year and trended down to 11, 2% during the third quarter.
We anticipate 12% to 14% inflation during the fourth quarter as we lose some benefit of lapping a short term spike in egg prices that was contained in the third quarter last year.
Labor and other related expenses were 33, 3% of restaurant sales, which is an increase of 100 basis points from the second quarter.
Our management staffing reached a target goal of $2 nine managers per restaurant by the end of the quarter. That's the highest it's been since pre COVID-19.
Over the next several quarters, we're focusing on optimizing our staffing as our restaurants have returned to a more normal seasonality.
General and administrative expenses of $21 7 million were slightly lower than the second quarter.
Our net income includes costs of approximately $1 $6 million incurred in connection with the secondary offering we completed during the quarter as a reminder.
These issuance costs are non deductible for tax purposes, and so the associated provision for income taxes is also higher.
Our net income is seven $4 million.
Adjusted EBITDA was $17 million with a margin of nine 1%, bringing our year to date adjusted EBITDA to $54 2 million with a margin of 10%.
Restaurant level operating profit was $31 9 million with a margin of 17 three.
Our year to date restaurant level operating profit is $98 4 million with a margin of 18, 3%.
I too want to Echo Chris's comments about the determination of our teams to swiftly reopen our restaurants impacted by Hurricane Ian.
Our fourth quarter got off to a slower start than we had planned but our team's efforts minimized those effects all things considered we are raising certain elements of our full year guidance.
Based on our sales results. We now expect full year same restaurant sales growth at the top end of our previously shared range of 13% to 15% including continued.
Positive traffic.
We now expect a year over year total revenue growth will be in the range of 20% to 22%.
We expect to open 12, new company owned restaurants, and five new franchised restaurants during the fourth quarter. This brings us to 30, New company owned restaurants, and 14, new franchise restaurants in 2022.
For a total of 44 new system wide restaurants.
This is above the midpoint of our previously shared range.
Capital expenditures should land in a range of $60 million to $63 million and will include the capital spending associated with rolling out our KBS system to our company owned restaurants.
And we confirm our previous fiscal 2022 guidance with respect to adjusted EBITDA in the range of $70 million to $72 million.
Finally, we've increased our blended tax rate to 40% to 41% due to the non deductible secondary offering costs, along with the increase of certain permanent book to tax differences.
For some further detail you can visit our third quarter supplementary materials deck on our Investor Relations website.
I want to thank you for the opportunity to share our continued success with you and if the operator would please open the line will be happy to take some questions.
Thirdly, we will now begin the question and answer session to ask a question you May correct Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
And our first question today will come from Jared Garber with Goldman Sachs. Please go ahead.
Hi, great.
Good morning Jared.
How are you Brian .
Thanks.
Wanted to get a.
A little bit of a sense on the new store productivity, Chris I think you mentioned continuing to see really strong sort of ramps in new markets on those new units that you open.
In the release today, you said you opened new restaurants across I think nine nine different states some of those presumably your safety already in like Florida.
But presumably some of our newest well so could you just give an update on new store productivity and what youre seeing in the new stores that are opened.
Three to six months and some of those newer markets. Thanks.
So most of our Jared this is Mel and most of our new restaurants now our.
Annualized net sales of about $2 $2 million, which is above the above.
Our system average.
Yes.
Great and then I guess anything just in terms of productivity ramps.
<unk> productivity and new markets versus core markets.
They are performing pretty similar across across different geographies and frankly, that's been the history of the company that it is less about.
The locations of where they are unless theres some outside of that.
That has more to do in terms of geography, but has more to do with the site selection. So that when we when we observe our site selection principles.
They pretty much had a fairly predictable ramp.
Sure This is Chris.
One thing I'd add there is.
For us we feel like Thats, a tremendous advantage for us to be able to balance out where we open.
A good mix of core emerging and new markets like we've talked about in the past. So we don't have to wait it heavily more towards.
Mature to get the volumes that we were looking for were able to do that as Mel said across geographies.
Great. Thanks for that and then I guess, just one more on the higher level sort of consumer outlook clearly first of all first watches getting its share of traffic.
Positive traffic share.
Wanted to get a sense of if you're seeing anything in terms of check management from diners or deaths that are coming in maybe there is a little bit of a shift there potentially lower beverage attach lower add on attached just anything youre seeing with that respect or maybe not in consumers still continue to spend on trade up of our swaps just curious what youre seeing there.
Thanks.
Thanks, No actually just the opposite I mean, obviously the first measure of that is the growth in traffic.
But from a check management standpoint, we're not seeing that at all not seeing.
Folks manage their check our beverage attachment is up.
So all the signs that we're seeing are positive and.
And we think thats because of the focus that we place on just delivering a great experience for both our team and our customer during this time.
We believe that as we move further into this economic environment that the strong will get stronger so where we're really focused on within our four walls and making sure that we deliver a tremendous value and an incredible experience and I think.
And our traffic has shown the dividends there.
Great. Thanks, so much.
And our next question will come from Andy Barish with Jefferies. Please go ahead.
Hey, guys good morning.
Alright, great how are you.
Good.
Good just to two quick ones for me I mean, one we've been seeing across the industry. The you know the other operating expense line.
Certainly elevated any any any color there.
You know relative to I guess, probably primarily utilities, but.
How do we do.
We should expect that continuing into the fourth quarter and then I had one other one after this.
Yes.
That line does experienced some inflation too and yeah. The utilities are in there but also.
We run repair and maintenance.
Through that line item as well in our repair and maintenance expenses have like every contractor expense has.
It has been.
No.
Ben.
The product had some inflationary.
Increase as well.
And we've got a 35 year old systems.
Nearly four decades now so frankly.
We're having to get back into some of the restaurants, where.
Over the course of the last several years.
Ed.
We are <unk>.
Those restaurants and more time, given spending more time on the on the repair and maintenance.
Costs, but it is something that we continue to see some some.
Increased inflation rolling through there, but it's.
I think it's in terms of what I look at going forward.
I don't see any reasonably optimistic that it's going to come down tremendously, but we'll continue to manage it.
Gotcha.
And then your comments just on the <unk> start I mean.
Got it.
15 ish for the year implies about eight in the fourth quarter, which is basically what you are running on.
I think on pricing so.
Maybe where are you now how much hurricane impact was in there for the first week or two of October as you mentioned.
Do you expect a ramp as the quarter goes on with.
What is expected to be a strong holiday season, any just any color on that.
Could help us out so.
Generally speaking, we would expect it to improve as we go through the balance of the year there.
Beyond the hurricane cost or are there other fourth quarter cost just to think about one we have our national conference that occurs in the fourth quarter, we had a.
We have a Sunday.
The holiday shift, where we Christmas falls on a Sunday this year, so so that important day.
Our crews are we're not serving.
The cost of the shelf registration and then the hurricane.
During the fourth quarter. So we're looking for a strong fourth quarter, but I just.
I do want to be sure on temporary everybody's results a little bit about the fact that we come in in the quarter doing.
No.
Continuing to deliver on growing traffic and growing sales.
But I don't want people to get too far in.
In front of us on that and we've built all that into our annual guidance that we put out.
Okay I.
Appreciate that thanks, guys.
And our next question will come from Andrew Charles with Cowen. Please go ahead.
Great. Thanks.
Chris can we just go over alcohol for a second I'm just curious that as of last update was around 75% of the system.
Looking to complete rollout to all the stores that contain a liquor license by the end of the year curious where you guys are with that and Thats still the right target and where you guys are seeing that mixed in recognizing that.
But obviously you haven't started to build awareness of this yet because there's more focus on implementation, but just early reads kind of where is alcohol Mexico for you guys.
Yes, sure. So I'll answer the first part of your question.
We have alcohol and about 83% of the company owned or excuse me of the system right now.
So on track if not ahead of the rollout. So we do expect to have that in place by the end of the year.
At the latest.
We have next year and alcohol continues to increase and mix. So we're getting more and more emboldened by the the.
The attention that its gaining from the consumer we think it's a traffic driver and we're really looking forward to innovating around that platform once we get it rolled out.
Super and then.
No I just want to come back to the other operating expenses that were a bit elevated call. It repair and maintenance is the KBS rollout going ahead of schedule or does that have any impact there or is that more capitalized.
No.
Most of the <unk> system is capex.
For us, there's probably when they get in and install it theres probably some.
Cost that they that they pick up at the time, but for the most part it's not it's not driving repair and maintenance increases.
Got it okay. That's helpful. Thanks, guys.
And our next question will come from Jeffrey Bernstein with Barclays. Please go ahead.
Great. Thank you.
Two questions. The first one just following up on the on the comp trends just wondering.
Got the impression that trends improved sequentially through the third quarter. So just trying to confirm that.
But when you said about a soft start in October I wasn't sure whether you were talking about the system due to more of a broader macro or whether you are purely talking about.
The hurricane just trying to.
Get a sense for that and what initiatives you might implement if trends were to slow, which again I don't get the sense that you're seeing that at all but just trying to get a sense for what levers you might pull if you saw a slowdown in your business and then one follow up yes.
Yes.
I'll just answer it directly traffic grew sequentially each month during the third quarter and all day parts were up.
And my reference to the slow start was that the hurricane actually hit us that first quarter I mean, excuse me the first week of the fourth quarter fourth quarter, yes.
Got it but otherwise other than that impact youre, not really seeing any underlying change in trend, but just curious what what might you do other levers that you would pull from a value perspective or do you stick to your kind of core regardless of maybe what the competitors are doing.
Yes.
We've already begun that work.
A year ago, which is definitely not discounting we don't we don't see ourselves going down that path. We again, we're focused heavily on.
Taking care of the customer innovating around our menu just just doing what we need to do to make sure that we are a tremendous value to the consumer I will say this that.
Our industry research has seen that.
Searches on Yelp for example for our restaurants are are down versus 2019, we think consumers are being less promiscuous with their dining dollars in so theyre sticking more to what they know and trust.
We've been called out as a restaurant that people can trust in fact, we were second in the industry. According to technomic.
Consumer ranking on on restaurants that I trust, so and our positioning with the more affluent.
I really just feel like we're well positioned.
Four four.
The near and long term.
Understood and then my follow up was more on the margin side.
I know, you're not giving any guidance per se looking into 'twenty three but.
Directionally speaking it does seem like investors are excited that in our sales tend to be holding up.
For sure in your case and menu pricing seems to be outsized and as you mentioned, maybe inflation is easing a little bit so would that kind of a trifecta. It seems like there is the potential for significant margin.
Expansion and earnings growth I'm, just wondering whether that's all directionally accurate going into 'twenty, three or are we underestimating, maybe the inflation impact or the pricing not being enough to fully offset just trying to get your directional thoughts on what could be a compelling or attractive fundamental outlook into 'twenty three.
What I can what I can tell you about 'twenty two 'twenty three is that we're certainly planning on.
Battling back the cost of the inflating prices and that sort of thing I don't think that we're going to get a lot I think the pace of inflation may.
It may slow, but I don't think we're necessarily expecting to see price real prices drop a great deal I think we still have to continue to shave basis points in the business, but.
We'll have some we'll have some good.
2023 guidance out there.
As we get closer and have a better visibility into what's happening.
Great. Thank you guys.
Thanks.
And our next question will come from Brian Vaccaro with Raymond James. Please go ahead.
Hi, good morning, Thanks for taking my question.
I wanted to ask on the commodity inflation front, you noted moderating inflation could you give a little more color on where youre starting to see some pressure ease some of the puts and takes within that line and I know the world can turn on a dime. These days, but any early reads on where food inflation could trend for your business in 'twenty three.
So Brian earlier in the year, we were pushing 18% inflation.
In the.
Late in the first quarter.
And in the second quarter, we have begun to roll over inflated.
Costs last year now that we're in the end of the fourth quarter. So we've seen some.
Relaxation.
Across the rollover effects. So if you just think about our.
Our largest commodities bacon.
Data is avocados eggs coffee.
Theyre all elevated in price, but we're starting to roll over their elevated periods last year as well. So so I don't know that we're actually seeing a whole lot of abatement, although bacon kind of bounces around from time to time.
And we probably are getting a better better price today than we were earlier.
But for the most part it's the rollover effect that we're seeing.
Yeah.
Alright, Thank you for that and I also wanted to ask about <unk> and some of the other changes you're making in the back of the house.
For sort of a post COVID-19 reality, where youre. A these are you know north of 2 million et cetera, but I think you said, it's in 300 units could you elaborate how that's benefiting.
The employee or guest experience and is there any way to maybe parse out the ones that have had it in for a longer quantify.
Quantify the lift in benefit to throughput or comps or perhaps any cost savings that might be associated with yes. Thank you.
Big Big question, there, but I'll try to run down some things on that first of all the kiddies system.
It's still in its infancy an hour.
In our environment.
As we are still rolling it out but it's also it's also part of a package of things that we do as a stand alone.
We're driving out other changes in our.
In terms of the effectiveness of our staffing as well as our allocation of staffing hours.
Our organization of the <unk>.
The kitchens and that sort of thing so in kgs sheds, a light shed light on.
Different different elements, maybe where maybe we're preparing food at pace and need to get it to the tables.
Faster or something like that so it shows a lot of for US. It shows a lot of different opportunities and we're excited about those.
What the immediate benefit is once we roll it out in a restaurant is that it's simple.
Our the complexity of operating the restaurants based on based on a call a verbal system more.
The Helms judgment about about the time to prepare.
Prepare guests' orders and as a consequence it allows us to.
Yes.
Opens us up to the ability to hire more back of house people, who come from systems, who already have a <unk> reader system.
And they are all they are already trained on it and they become somewhat parcels for it so.
Just by increasing the number of qualified applicants that helps us.
To deal with turnover better or fewer training costs.
And allows us to improve that those sort of they're not sexy things in the back of the house, but they are realities of the restaurant business.
Thank you ma'am.
And our next question will come from Nicole Miller with Piper Sandler. Please go ahead.
Good morning. Thank you two quick ones. The first as you exit this year and enter the new year, I think like 390 basis points of price would fall off and historically that would be at an annual.
Annual I'll call it 2% to 3%.
Price opportunity should we think about that more as a return to normal.
What I'd say here is that.
Just as we've been in the past, we intend to be nimble and thoughtful as it relates to pricing and we'll we'll make decisions as needing but as needed, but we will keep our value proposition in mind.
We mentioned earlier that we most likely get be getting back to a normal cadence of the number of times, we do it throughout the year, but with our focus on building traffic through Trialing and also increasing frequency with our core customers. We just as you know been intentionally conservative with our pricing and we will try to continue.
Along that path I'm, hoping that we see some easing in costs.
But from a cadence standpoint, I think as we've said before we will most likely get back to that twice a year.
Okay, Yes, I mean, it's interesting because prices. So sticky so there is an opportunity, but it doesn't mean, you Wanna flex it but to confirm it is usually in <unk> would be a normal period of just a question of how much is that right.
That's been our history Nicole.
We don't really visited until after we've we've until we've actually adjusted the menu prices, we don't announce when we're going to do it but it's will.
We'll take a closer look at the right timing.
With that value proposition in the mine.
And then the <unk>.
Labor is one of your biggest assets, especially returning too.
And then I.
I guess fully staff levels Youre looking for can you talk about how you got there I mean was it applicant flow or better applicant flow was it an ability to just take on those applications and process them in.
Really what is the cost of labor today, not just from a dollar per.
For our perspective that how have you enhance the total benefits package.
To be at the staffing levels. Thank you.
Sure. This is Chris I think the.
First piece is that even back during Covid times I mentioned on previous calls that we did not do sign on bonuses or or those type of things we focused on our internal teams being advocates and evangelists for the environment and the experience of working for first watching that.
Benefited as well during Covid and it's benefited us since then I will say that we've done a tremendous amount of work around.
The employee proposition and benefits and other things and I think that's helping us to but also I think being again the fastest growing full service restaurant company in America helps us attract people when the applicants are out there and so we think we show up really well and they're looking for jobs and our no nights ever AD Pops up.
In front of them, it's it's appealing.
We get our fair share of Africa. So it's a lot of those things and it's honestly, it's at a perfect time for us as we continue to ramp up our growth to have the management pipeline that we have in place to support that growth is really important right. Now so we feel like we're in a really good place.
Thank you.
And our next question will come from Chris you'll recall with Stifel. Please go ahead.
Good morning, Chris.
Now the low end to high end of your EBITDA guidance imply a pretty wide range for the fourth quarter. I was just hoping you could help us understand what are some of the key factors that could determine whether you land at the low or high end of the range.
I really was alluding to the same things I mentioned, a few minutes ago that we have going through the.
That quarter, we know we have some costs.
<unk> are a little bit unique to the fourth quarter and that we lose the Sunday business. We have shelf registration costs, we had the conference costs with the effects of the hurricane which we're in some respects, while we know the hard costs associated with Hurricane We're also evaluating the.
The business flow through.
Adjusted traffic and that sort of thing in those affected restaurants during.
During some period of time and so.
So knowing that and knowing just the.
The risk associated with some of them.
Some of the.
Environmental issues I would say.
Economic issues in the economy, we're operating and there is a little bit of caution.
<unk> built into our range there.
Okay and then my second question relates to development and I know the company is on track to hit its guidance for the year, but is the company planning to make any adjustments to maybe its approach for development next year given challenges to opening restaurants will probably continue it sounds like next year and then it was.
Hoping you could also just give us a sense of how the company store pipeline shaping up for next year.
So.
Will we be adjusting our development would be the first thing.
We have a.
We have what I think is a very data driven.
And.
A healthy approach to how we select sites.
I don't think I don't think you would expect to see us make any major changes on the on the way we develop.
Develop the restaurants.
<unk> sites, you still have to as I say kiss a lot of frogs in order to find the ones that.
The sites, where you where you want to open.
And I know our development team is working hard to get out there [laughter] well.
Was asking more around was just.
Given the delays in permitting given the delays in construction or are there any other changes youre, making in terms of just that process.
That you can assure you get openings on time.
Hum.
I mean, there is no major changes.
Our team is already a very.
They work on our schedule and we're very confident in our long term guidance on growth of new restaurants, I'll jump in Chris and say that.
R R.
<unk> to deliver on our unit growth I think speaks for itself this year and certainly going into the fourth quarter and our team has done an absolutely incredible job of what I call seeing around the corner and identifying what those challenges, whether it's supply chain or permitting and whatnot and have built a pipeline. That's that's sufficient for us to reach our long.
Term goals.
Which we would count next year in there as well so we feel really good about our process from from start to finish.
Perfect. Thanks, guys.
Yeah.
And our next question will come from Gregory Frankfurt with Guggenheim Securities. Please go ahead.
Hey, Thanks for the question I had a couple the first one just maybe a follow up to Andy's question I think was Andy.
I'm getting that the implied comp for the fourth quarter at a 15 would be something closer to nine to 10. So maybe if you could just check my math Amendment I had.
Two questions.
Well.
We havent really got it directly to the fourth quarter on on that but that sounds in the ballpark.
Got it and then just.
In terms of I think you made a comment of.
Trying to claw back some margin next year and it feels like the Big question is kind of every restaurant company tries to do that is.
Could you try to run pricing ahead of Boston inflation next year, and do you need to do that to get margins back higher and I'm, just curious how you're thinking about that framework.
As maybe commodity inflation comes down do you think you should try to run pricing ahead of some of your cost inflation next year and do you think the consumer is going to allow that.
So a couple of things on that point as long as I've been in the restaurant industry. There is always a battle for margin.
And claw back costs right and so so I think every restaurant company.
Spend a great deal of effort trying to.
Turning to claw back or claim basis points improvement with more efficiencies or lower cost.
And that sort of thing and so so yes, we'll be we'll be continuing that battle just like we always do in terms of solving for it at the topline.
It's it's not as easy as just taken taken the number and saying we're going to increase it by pricing. So we are we're very thoughtful about.
Staying committed to the value proposition that we present to our guests we think our we think our customers.
See us of the value, we don't want to lose that that position.
With the customer as.
As we think about pricing timing of pricing what it will be what it'll be on where it will be those that that science will.
Take place pretty thoughtfully about making sure that that we preserve the value proposition with our customer.
And then maybe if I can sneak one more in.
I think in terms of the changes to your unit.
Growth guidance this year, it's skewed a little bit more franchise than even the high end of that range that you had projected earlier in the year.
Do you expect the franchise mix of your store openings to maybe pick up in the next couple of years versus where you were expecting before is that kind of one off to this year. Thanks.
I don't expect it to change.
Thank you guys appreciate it.
And our next question will come from Sara Senatore with Bank of America. Please go ahead.
Great. Thank you so much.
Follow up question on Max and then.
Separate question, if I may.
First is just the gap between chicken prices I think of that wider this quarter. So actually suggest some more positive mix I wanted him to make sure I'm looking at that the right way and also asked what was the driver of that was just more off premise or are there kind of.
Trade up or.
The higher price items, I know you mentioned youre not seeing any trade down, but just trying to disaggregate a little bit what that might be and then like I said I have a follow up quite a different question. Please.
Sure.
As far as the mix is concerned I think again, that's one of the true benefits of our seasonal menu program, where we have menu news out there.
Five times a year.
10 weeks at a time it builds excitement for our staff and our customers and you say, you'll see customers trading into into that seasonal menu I think thats, where we see some of the mix and then also keep in mind that the alcohol continues to rollout, we'll see a mix impact there as well.
Okay, great. So that so it was less about higher average check on the library, which I guess, probably pretty similar CAGR in and restaurant check and more about seat like you said the seasonal menu on.
Beverage attach.
Yes, the dollar the dollars on.
Excuse me the transactions on off premise was pretty much flat obviously, the dollars were a little bit elevated because of the surcharge and the price increase that we took.
Got it Okay and then Mike My question. You mentioned, you said that your users are a little bit less promiscuous now I mean, we often see that when the demand environment gets a little under pressure young people less willing to take a risk if you will on.
On occasions around on concepts that aren't as consistent. So I was just curious is that what you think is driving this is changing and usage just people feeling at all.
Let you know tighter purse strings or are you seeing something about loyalty.
Specific to your two first watch that's just.
Okay.
Gradually edging up your frequency or get a royalty on gas.
Yeah, I think it's.
It's what we've been focusing on which is delivering consistency and value and an incredible experience. During these times.
I stand behind what I said that I think consumers if they choose to dine out less they're going to they're going to go to the restaurants. They trust theyre going to go to the restaurants that they know they'll get a good value and just as importantly, they know that it'll be a consistent experience they don't want to risk their dollars when there when there.
Being more decisive about where they go so.
And the audience that we appeal to the fact that <unk>.
Breakfast and brunch continues to be a growing day part and it is an experience where people feel like they can splurge, a little bit and they're able to do it in our restaurants.
At a very reasonable price point, so all of that work that we've been doing with being conservative on our pricing.
The evolution of our of our prototypes the building out of the environment to attract that customer.
Is what we believe sets us up for that.
Alright, so its just sort of the core value proposition as opposed to say you know, we're getting lifted from our off premise business, we're able to identify people in market to them directly that's still that's an opportunity right now.
Offering a better experience and time, when that's what consumers really want yes.
Yes.
And I think I think that's.
A very important.
Dresses that recovery of in restaurant dining, which we have seen tick up.
Sequentially and so it's at its highest it has been for us for a period end.
We look to that is as a key indicator of of driving that in restaurant traffic and also how we're going about doing it through the steps that we're talking about which is to your point focusing.
On the fundamentals and making sure that we deliver what the consumer is looking for at this time.
Alright, thank you.
<unk>.
And our next question will come from Jon Tower with Citi. Please go ahead.
Great. Thanks for taking the question good morning, Hey, Jonathan.
Thanks for taking the time just a few for me if I may.
First where are you seeing the traffic growth coming from is it is it concentrated on weekends and youre seeing maybe faster table turns in part due to the Katy yes or are you seeing it spread throughout the weekdays.
I'm, just curious to kind of get some color there.
Yeah.
As I mentioned earlier the traffic growth was sequentially. It grew sequentially across each month of the quarter, but more importantly, I guess all day parts are up so.
Where we're at.
We're seeing it across the entire business.
And in reference to off premises, we talked about how that from a dollar standpoint or excuse me from a transaction standpoint has remained steady so.
That growth come across all of our operating hours and we've.
<unk> talked about in the past.
Look at.
Three very distinct day parts weekday breakfast weekday lunch and then weekends as we just call that brunch and.
And all in all instances, we're seeing that traffic growth I think what's important for us is to be able to unlock those peak sales hours, where we have.
Have unmet demand and thats.
The critical nature of <unk> and some of the other initiatives that that Mel has talked about so that we can really unlock that because our off premise business pretty much mirrors, our in restaurant dining. So when were busy in the restaurants were busy with off premise orders. So.
That's why we're so focused on that increased throughput during those times.
Got it so no specific period stood out during the third quarter. It was all pretty much across the board.
Correct, Okay cool and then.
In the model I know seasonally or at least hard to tell in the model but.
The labor cost.
Per operating week stepped up sequentially this quarter and Mel I know you've mentioned that you've got some of the.
Management staffing at the stores.
Near or above pre COVID-19 levels are at pre COVID-19 levels excuse me.
I'm curious how should we think about that going forward or is there an opportunity to kind of manage that lower going forward or is that a line, we're just going to be pretty sticky because of underlying inflation.
I'm kind of counting on our 33.
33 to three 5% that we.
We've enjoyed.
Being pretty sticky early in the year, we were heading.
Signaled that we were.
I felt like the 34% level was kind of optimal and for us has been sort of.
The kind of a good level of staffing to have in our restaurants.
I think we've learned a bit about ourselves and also we've taken some price and so I think that 33.
To 33, 5%.
As a as a level.
I'm not expecting to see shift abruptly over a long period of time it by from quarter to quarter, we might see some.
Some movement up or down but we.
We want to be a little little careful about that.
Got it and then last one for me in terms of thinking about Capex beyond new store growth and obviously this year kgs has been an important piece and I know there'll be some more of that rolling through next year, but.
Are there any other initiatives that we should be thinking of in terms of capex spend into the next say two to three years.
We don't have anything that we'd be ready to announce right now and we'll probably probably get a much better indication of what it will be for next year, when we give guidance for next year.
Got it alright, thanks for the time.
And this will conclude our question and answer session I would like to turn the conference back over to Chris Marr for any closing remarks.
Thank you for joining us for this morning's call I appreciate it.
These results reiterate our strategic positioning as leaders of not only a growing daytime dining segment, but also of the restaurant industry as a whole we always appreciate the opportunity to share first watches progress.
And as our operators across the nation gear up to lead us through another holiday season, we look forward to closing out a strong 2022 together. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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