Q2 2024 First Watch Restaurant Group Inc Earnings Call
Thank you for standing by and welcome to the First Watch Restaurant Group, Inc. second quarter earnings conference call occurring today, August 6, 2024, at 8 a.m. Eastern Time. Please note that all participants are currently in a listen-only mode.
Operator: Group, Inc. 2nd Quarter Earnings Conference Call occurring today, August 6, 2024, at 8 a.m. Eastern Time. Please note that all participants are currently in a listen-only mode.
Operator: Following the presentation, the conference call will be opened for analyst questions and instructions on how to ask a question will be given at that time. This call will be archived and available for replay at investors.firstwatch.com under the News & Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch, to begin.
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.
Steven Marotta: This call will be archived and available for replay at investors.firstwatch.com under the News & Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch, to begin.
Steven Marotta: Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso, and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the second quarter of fiscal 2024 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com, 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.
Speaker Change: Hello everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso, and Chief Financial Officer, Mel Hope.
Speaker Change: This morning, First Watch issued its earnings release for the second quarter of Fiscal 2024 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com.
Steven Marotta: Such statements include, without limitation, statements concerning the condition of a company's industry and its operations, performance and financial condition, outlook, growth plans and strategies, and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including its 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 developments, or otherwise, except as may be required by law.
Speaker Change: 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.
Speaker Change: Such statements include, without limitation, statements concerning the condition of a company's industry and its operations, performance and financial condition, outlook, growth plans, and strategies, and future expenses.
Speaker Change: Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q .
First Watch: 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.
Steven Marotta: 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. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release file this morning. During today's call, references to same restaurant sales and traffic growth compare to 13-week periods ended June 30, 2024, and July 2, 2023, in order to compare like-for-like periods. Otherwise, any references to percentage growth when discussing second quarter performance are a comparison to the second quarter of 2023, unless otherwise indicated. And with that, I will turn the call over to Chris.
Speaker Change: Lastly, management's remarks today will include references to various non- GAAP measures , including restaurant-level operating profit.
Speaker Change: Restaurant Level Operating Profit Margin, Adjusted EBITDA, and Adjusted EBITDA Margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release file this morning.
Speaker Change: During today's call, references to same-restaurant sales and traffic growth compares to 13-week periods ended June 30, 2024, and July 2, 2021.
Chris Tomasso: 2023 in order to compare like-for-like periods. Otherwise, any references to percentage growth when discussing second quarter performance is a comparison to the second quarter of 2023 unless otherwise indicated. And with that, I will turn the call over to Chris.
Christopher Tomasso: Thanks, Steve. Good morning.
Chris Tomasso: Thanks, Steve. Good morning. I'm pleased to report another quarter of solid operating results and adjusted EBITDA growth, and I thank everyone in our organization for their hard work.
Christopher Tomasso: I'm pleased to report another quarter of solid operating results and adjusted EBITDA growth, and I thank everyone in our organization for their hard work. I remain extremely proud of our teams for continuing to control what we can control and delivering exceptional customer experiences. Both of which are key factors in sustaining our profitability improvements, as evidenced by our adjusted EBITDA performance. As expected, traffic was challenging during the quarter, given the macro headwinds throughout most of our industry.
Chris Tomasso: I remain extremely proud of our teams for continuing to control what we can control and delivering exceptional customer experiences, both of which are key factors in sustaining our profitability improvements as evidenced by our adjusted EBITDA performance.
Chris Tomasso: As expected, traffic was challenging during the quarter given the macro headwinds throughout most of our industry.
Christopher Tomasso: Despite that, we are operating at a very high level and are comfortable reiterating our fiscal year 24 total revenue and adjusted EBITDA guidance. Additional second quarter highlights include sequentially better same restaurant traffic compared to the first quarter, positive mix, improved labor productivity, and better than expected contributions for both our new restaurant openings and strategic franchisee acquisitions completed over the past year.
Chris Tomasso: Despite that, we are operating at a very high level and are comfortable reiterating our fiscal year 24 total revenue and adjusted EBITDA guidance.
Chris Tomasso: In Q2, we generated $299 million in system-wide sales, $258.6 million in total revenues, and $35.3 million in adjusted EBITDA, the latter of which represented a 37% increase versus last year.
Chris Tomasso: Additional second quarter highlights include sequentially better same restaurant traffic compared to the first quarter, positive mix, improved labor productivity, and better than expected contributions from both our new restaurant openings and strategic franchisee acquisitions completed over the past year.
Chris Tomasso: We opened seven total new restaurants in six states during the second quarter, six of which are company-owned and one that's franchise-owned.
Chris Tomasso: We also completed our largest First Watch franchisee acquisition on April 15th, when we purchased 21 restaurants, along with the development rights, in the Raleigh-Durham-North Carolina DMA.
Chris Tomasso: Our results and our internal KPIs demonstrate that we continue to operate our restaurants with remarkable efficiency.
Chris Tomasso: Our NROs by vintage and across geographies have been outstanding, performing at or above their sales expectations, and our pipeline for future growth is stronger than ever.
Chris Tomasso: As of today, we have more than 130 new restaurant projects in our pipeline, and we are on track with our long-term target of delivering annual new restaurant growth in the low double digits as a percentage of our system.
Chris Tomasso: As we continue to expand the system, the pipeline remains a significant driver of long-term value creation and earnings growth.
Chris Tomasso: As we stated on our last earnings call, we believe our traffic headwinds are more macro than micro, and our insights indicate that one, much of the industry-wide pressure is occurring primarily during the weekday breakfast and lunch day parts as consumers look to trim weekday occasions.
Chris Tomasso: Two, that the behavior and frequency of our repeat customers remain relatively consistent, which is encouraging. And three, that occasions from our infrequent customers, those who average a single visit annually, have declined, as have visits by lower income consumers.
Chris Tomasso: While it's evident that our customer is under some pressure, our business is strong and our long-term strategy remains intact and compelling.
Chris Tomasso: In the second quarter, our customer experience scores improved versus the same period last year. Growth in our per-person average check exceeded carried pricing as a result of positive mix through menu innovation.
Chris Tomasso: Our ticket times were more than 20% faster than last year.
Chris Tomasso: Our employee turnover improved again, marking six straight quarters.
Chris Tomasso: It's clear that our investments in technology, both customer-facing and our enhanced business intelligence tools for our operations teams, are bearing fruit.
Chris Tomasso: exemplified by a record Mother's Day that featured positive 1.8% same restaurant traffic, positive 5.4% same restaurant sales, better than 20% faster ticket times, and higher customer experience scores.
Chris Tomasso: And, in the second quarter, Placer AI data indicates that First Watch's traffic share increased against the direct daytime dining competitive set.
Chris Tomasso: As I've shared with investors in our teams, our approach in the current environment is to double down where we already excel.
Chris Tomasso: Through our investments in technology, data capture, and analytics, we now know and continue to learn more about First Watch customers than ever.
Chris Tomasso: We're putting those insights to work. We've accumulated an opt-in database of roughly 7 million customers and are analyzing and segmenting customer information by visitation patterns to deliver the appropriate communication to the appropriate audience at the appropriate time.
Chris Tomasso: Whether we're delighting our repeat customers, re-engaging a lapsed customer, or reaching a competitive user, we are focused on targeting demand generation across our own communication channels as well as paid digital media.
Chris Tomasso: Our approach is in stark contrast to the broad-based discounting that many in our industry are deploying.
Chris Tomasso: It's our opinion that while aggressive promotions drive short-term traffic in some instances, we view that tactic as sacrificing margin from loyal customers while also attracting temporary discount-motivated customers with low recurrence rates.
Chris Tomasso: We will lean into traffic driving marketing initiatives the First Watch way, focusing on profitable growth with messages that lever our core brand attributes to increase the frequency of targeted customer groups.
Chris Tomasso: We realize that some may not fully appreciate our approach, but our industry has a history littered with brands that lost their way during challenging times.
First Watch: First Watch has always played to win the long game.
First Watch: First Watch restaurants deliver exceptional everyday value, featuring a culinary-forward menu using fresh, high-quality ingredients and consistent customer service that creates memorable experiences.
First Watch: We're very measured when it comes to pricing actions in any environment, and our conservatism, which is guided by our goal of preserving our value proposition, is well documented.
First Watch: The modest 1% price action we implemented during the last week of the second quarter is merely a continuation of our conservative pricing philosophy and is consistent with the multi-year strategy we implemented upon exiting COVID.
First Watch: As I stated earlier, our growth engine continues to hum and is a particular point of strength for us and our long-term growth outlook remains in place.
First Watch: Inclusive of the 40 company-owned NROs, combined with the 45 franchise acquisitions completed, we've added nearly 4,500 additional annual operating weeks to our operating model since the second quarter of 2023. Our new restaurants, as a group and by vintage, are meeting or exceeding our targets.
First Watch: New restaurant third-year AUV targets have increased by more than 40% since 2019 and our capital return criteria continues to be achieved.
First Watch: We had 538 restaurants in operation at the end of the second quarter, representing only a quarter of our total addressable market of 2,200.
First Watch: And, encouragingly, no DMA is completely built out. The 130 new restaurant projects currently under development reflect nearly 25% of our current system.
First Watch: Our future growth opportunities abound, and our manager-ready bench is as robust as our real estate pipeline.
First Watch: Since May 2023, our franchise acquisition strategy has resulted in our conversion of 45 restaurants from franchise-operated to company-owned, including our largest First Watch acquisition, which took place in the second quarter.
First Watch: Restaurants we have acquired from our franchisees have added nearly $100 million in annual restaurant sales and 17 new DMAs for corporate development.
First Watch: We're delighted with how these restaurants, leaders, and employees have integrated into our corporate operations.
First Watch: We successfully retained 94% of leaders, manager and above, across our 2024 acquisitions, including 100% of directors of operations.
First Watch: In short, times are good for us, just not in the usual way. Our most loyal customers expect a consistently high experience and are maintaining frequency.
First Watch: We're delivering on their high expectations.
First Watch: Furthermore, both our restaurant and enterprise-level profitability is exceptional.
First Watch: While we're not immune to macro headwinds, we are managing through these times by playing to our strength, which is paying off in restaurant-level profitability and the continued rapid growth in the number of well-run First Watch restaurants. And with that, I'll turn it over to Mel. Thank you, Chris. And good morning, everybody.
Mel Hope: We're pleased to report strong second quarter profits.
Mel Hope: We are controlling the controllables and as a result our teams continue to generate higher restaurant level operating profit margin and improved adjusted EBITDA margin.
Mel Hope: Total second quarter revenues were $258.6 million, an increase of 19.5 percent.
Christopher Tomasso: Our top-line growth in the second quarter was driven by our new restaurant openings and the franchise restaurants we acquired over the past year. Nevertheless, labor and other related expenses were 32.8% of sales in the second quarter, a 40 basis point improvement from 33.2% in the second quarter of 2023.
Mel Hope: Our top-line growth in the second quarter was driven by our new restaurant openings and the franchise restaurants we acquired over the past year. Same restaurant sales slipped 30 basis points on negative same restaurant traffic of 4%.
Mel Hope: Our food and beverage costs were 21.8% of sales in the second quarter compared to 22.4% in the same period last year. As a percent of sales, costs benefited from carried pricing of 3.5% and positive mix.
Mel Hope: partially offset by commodity inflation of 4.2 percent.
Mel Hope: During the quarter, restaurant-level labor inflation was 4.6%.
Mel Hope: Nevertheless, labor and other related expenses were 32.8% of sales in the second quarter, a 40 basis point improvement from 33.2% in the second quarter of 2023.
Mel Hope: The improvement in labor efficiency illustrates the success of our operators who have also been building on our reputation for great service.
Mel Hope: For the quarter, our customer experience scores have strengthened by roughly 10% versus last year.
Mel Hope: In short, and in the spirit of controlling what we can control, our restaurants continue to successfully serve our customers more efficiently at the same time our customers are reporting that our service is even better.
Mel Hope: The improvements in food and labor helped lift restaurant-level operating profit margin by 100 basis points versus the prior year, and income from operations margins by 110 basis points.
Mel Hope: General and administrative expenses were $27.2 million, approximately $1.9 million higher than in the prior year, primarily due to additional headcount.
Mel Hope: GNA expenses were actually lower than the first quarter of 2024.
Mel Hope: And at 10.5% of sales, they were 120 basis points lower than last year.
Mel Hope: Adjusted EBITDA was $35.3 million, a nine and a half million dollar increase versus the $25.8 million reported last year.
Speaker Change: We're pleased to report this significant year-over-year growth in adjusted EBITDA as we continue to open and acquire restaurants in the execution of our strategic long-term growth plan.
Speaker Change: Adjusted EBITDA margin was 13.7% versus the 11.9% margin we realized in the second quarter of 2023.
Speaker Change: The improvement was primarily attributable to the increase in restaurant-level operating profit margin we discussed, as well as lower general and administrative expenses as a percent of sales.
Speaker Change: Net income was 8.9 million dollars and net income margin was 3.4 percent.
Speaker Change: We opened 7 new system-wide restaurants during the second quarter, of which 6 are company-owned and 1 is franchise-owned. So, at the end of the second quarter, the First Watch system has now grown to 538 restaurants.
Speaker Change: For your financial modeling purposes, the net effect of acquisitions, which includes only the impact of purchases made within the last 12 months, increased both second quarter revenue by about $21 million and adjusted EBITDA by about $5 million.
Speaker Change: For further details on the second quarter, please review our Supplemental Materials Deck on our Investor Relations website beneath the webcast link.
Speaker Change: Again, we're proud of our restaurant teams who have continued to improve the experience in our restaurants while delivering strong profitability.
Speaker Change: To provide you with more insight on our planning for the rest of the year, third quarter to date, same restaurant, traffic growth has been below our second quarter results, and we're anticipating the second half of the year to be at least as challenging as the first half.
Speaker Change: We took about 1% of additional price the last week of June , and so we'll carry about 3.5% of price in the third quarter.
Speaker Change: Furthermore, our third-party off-prem channel remains volatile and we expect it to continue to weigh on our overall traffic for the balance of the year.
Speaker Change: To update our full-year outlook for 2024, we are adjusting same restaurant sales growth to a range of negative 2% to flat with a mid-single-digit decline in same restaurant traffic.
Speaker Change: We expect a total of 52 to 56 net new system-wide restaurants updated to reflect 45 to 48 company-owned restaurants, 9 to 10 franchise-owned restaurants, and the two system-wide closures.
Speaker Change: Our 2024 development pipeline remains heavily weighted in the second half of the year, the fourth quarter in particular, similar to our cadence in 2023.
Speaker Change: We now expect a blended tax rate between 31 and 33 percent.
Speaker Change: The Outperformance
Speaker Change: of our non-comp restaurants is largely offsetting our negative same-restaurant sales growth, and as such...
Speaker Change: We're maintaining our total revenue growth guidance in a range of 17 to 19 percent, excluding the impact of the 53rd week last year.
Speaker Change: Approximately 7% of the growth is expected to be the net contribution from the 23 restaurants we acquired in 2023 and the 22 restaurants acquired in 2024.
Speaker Change: We're also maintaining the adjusted EBITDA guidance range of 106 to 112 million. The net impact from acquisitions is now expected to contribute about 13 million to current year adjusted EBITDA.
Speaker Change: Our expectation of commodity inflation for the year remains unchanged at 2-4%, as does our expected restaurant-level labor cost inflation in the range of 5-7%.
Speaker Change: Finally, we continue to plan capital expenditures of $125 to $135 million, not including the capital invested in the franchise acquisitions.
Speaker Change: And with that, Operator, would you please open the line for the questions?
Speaker Change: Thank you. We will now be conducting a question and answer session.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press start to if you would like to remove your questions from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys.
Speaker Change: One moment, please, while we poll for questions.
Speaker Change: Yeah.
Speaker Change: The first question comes from the line of Chris Ockel with Stiefel. Please go ahead.
Speaker Change: Great, thanks guys. This is Patrick on for Chris. Good morning. Good morning, Patrick.
Patrick: Morning. I know you guys called out last quarter that Florida was a region of weakness for the system, and I'm curious if you've seen that remain the same, and if there's been a change when you look geographically across any other regions of the country that you have a relatively good penetration in.
Speaker Change: Yeah, we saw the gap.
Speaker Change: Between Florida and the rest of the system widen a little bit again But our position hasn't changed. I mean we still see that as a normalization of trends
Speaker Change: in the state, kind of coming out of COVID and normalizing. But we're still all in on Florida from a growth perspective. I mean, you know.
Speaker Change: Florida is still one of the top states for net migration in the U.S., and we continue to see it as an excellent opportunity for us to continue to operate and grow there, and, you know, still with the tourist destination aspect of it, we just, we believe that
Speaker Change: The presence that we have in Florida is strong and we'll continue to focus on it.
Speaker Change: And we don't have any other regions of the country that we'd call out as being weaker than the rest of them. Our development process is really data-driven, so when we select a site, the success of the site...
Speaker Change: really performs pretty pretty predictably within a narrow band.
Speaker Change: Got it, that's helpful. And then Chris, I know the company utilizes digital chain at greater frequency among current users and you called some of that out in your prepared remarks.
Speaker Change: but I was curious how you're thinking more about what you might call top-of-the-funnel tactics that you can deploy from a marketing perspective that maybe can help reach consumers who have never used First Watch.
Chris: Yeah, I think we look at and segment the consumer based on, you know, obviously demographic psychographics but probably more importantly, you know, the frequency and we do have a focus on all the channels that I mentioned on the call, so our, you know,
Chris: infrequent users, lapsed users, and even users of competitors. And we're doing that, again, what we're just calling the First Watch way, which is through the owned channels that we have, and then through social and digital.
Speaker Change: Hopeful. Thanks, guys.
Speaker Change: You're welcome
Speaker Change: Thank you. Next question comes from the line of Brian M. Vaccaro with Raymond James. Please go ahead.
Speaker Change: Hi, thanks and good morning.
Speaker Change: Back on the sales, I was also curious to what degree you think maybe return-to-office dynamics could be impacting your business. Could you elaborate on what you're seeing, you know, weekday versus weekend, or are there any other data dynamics that you analyze to try to answer that question?
Speaker Change: Yeah, we don't we don't have any data that suggests that it's it's due to return to work. We do know that the weekday occasion is the is the weekday lunch specifically is where we're seeing the most softness, weekday breakfast and weekday lunch. And so, you know, we just think it's, it's maybe a factor of the consumer just choosing to, to, you know,
Speaker Change: [inaudible]
Speaker Change: Full Service, QSR, and whatnot. So that kind of leads us more, Brian , towards a hypothesis that it's the occasion.
Brian: All right, that's helpful. Thanks, Chris. And on the labor front, another quarter of solid cost controls evident in your Q2 results. Could you just remind us what some of the new tools and processes you've deployed and any benchmarks or, you know,
Brian: data points you could provide on the efficiencies that that's driving in your restaurants.
Brian: So, good morning, Brian , by the way.
Speaker Change: The tools that we created really last year and have rolled out in the system continue to improve basically help the managers in the restaurant actually see their kind of real-time labor costs which helps them with scheduling and staffing during
Speaker Change: during weekdays and during their peak hours. They also have just better hourly management, I would say, in terms of labor and better scheduling. They're also successful in
Speaker Change: More throughput during our peak hours, which makes our labor, you know, labor look a little bit better. I don't have any metrics that I can
Speaker Change: I don't have a lot to give you or to share with you, but it's really just the attention to the management of the restaurant, the scheduling, and the labor management that our operators have been attentive to as they learn to use the new tools and apply some of the strengths of those.
Brian: And then Brian , I'll add that we, you know, just to give you an example, you know, we've, we had been testing a digital scheduling platform and the test went extremely well and we're rolling it out here in Q3, or excuse me, in Q3.
Brian: and that's...
Brian: a typical platform where the servers can look at their schedules, actually all employees can look at their schedules, they can trade schedules on their trade shift, things like that, things that we had to do very manually and frankly through the manager before. So this will again improve our efficiency and free up the manager to focus on other things. And make it easier for the crews. Yeah.
Brian: Okay. Well, I'll pass it along. Thank you very much.
Brian: Thanks.
Speaker Change: Thank you. Next question comes from the line of Andy Barish with Jeffreys. Please go ahead.
Andy Barish: Hey guys, good morning. I'm wondering, you know, as you kind of tease out, you know, the traffic impact is...
Andy Barish: Does discounting, you know, kind of in the breakfast category, some of the legacy players, obviously that's a subject we're hearing a lot about across the restaurant industry right now.
Speaker Change: Do you think that's having a near-term impact? Are you able to kind of tease that out of what you're seeing?
Speaker Change: Andy, I'd say that we worked really hard years ago to differentiate ourselves from that segment through our brand repositioning and things like that. That's not an area that we...
Speaker Change: choose to kind of operate in. What I'll tell you is that, back to my comment, if we were seeing check management and things like that, and looking at our own menu pricing compared to others in our space, and saw that there was something that was self-inflicted, I think we would address that, but that's really not what we're seeing. It really seems to be an occasion issue right now. So we are focused on our everyday value, what we are, what we have.
Speaker Change: launched here recently is you know really stepping up the communications and focusing on our brand attributes and and reminding people why they love First Watch so much and so that's that's kind of our take there we we won't
Speaker Change: I would say, you know, at the discounting level that's out there right now, that's just not something that we would do.
Speaker Change: Got it.
Speaker Change: You know, sort of seasonals, and I think last call, you know, you may have mentioned, hey, you know, we've got some things that maybe, you know,
Speaker Change: mixed really well, maybe a little bit lower, you know, on the price point. Is that starting to kind of work into the seasonals in the back half of the year?
Speaker Change: Yeah. Well, first of all, I know everybody's excited that we're almost to pumpkin season, so we'll get there with our pumpkin pancake breakfast soon. But yeah, I mean, we had positive mix in Q2 and in Q1, and I think a lot of the favorability you're seeing on the profit line in the restaurants was a result of that. I talked about the shrimp and grits and some other items that we brought back and put on, and so that strategy has actually helped us a lot. And then, you know, variation and mix for us, as you know, is kind of a...
Speaker Change: A quarter-to-quarter function because of the LTOs and the menu modifications, but there's really been no discernible change in customer behavior.
Speaker Change: in Mixer Attachment this year, but we are able to flex up a little bit sometimes with favorites like the shrimp and grits and when the pumpkin pancake breakfast comes back.
Speaker Change: Got it. And then just finally...
Speaker Change: The 130 projects, you know, in the pipeline for growth.
Speaker Change: You know, obviously,
Speaker Change: You know, that's multiple years of, you know, of new unit growth, you know, even assuming of, you know, absolute level of pickup. How does that, how should we frame that versus the past? I mean, I know some new
Speaker Change: Territory, obviously, is now flowing into that through the franchise acquisitions. Just, yeah, any help on that would be great.
Speaker Change: I think the point being made there is that we're on track like we have been for many years to, you know, meet our development goals.
Speaker Change: goals. And so that that's that is really to provide some comfort that we're we're well on our way. You know, that's that's been one of our hallmarks is is the consistency of the openings and then also the outperformance of the new restaurant. So that's really what we were trying to convey there. Right. And we know that our 10 percent.
Speaker Change: [inaudible]
Speaker Change: curating enough projects that we can fill that pipeline.
Speaker Change: Yeah, looking forward to a couple of those coming out of the pipeline in Massachusetts. Thanks guys. That's right. Get ready.
Speaker Change: Thank you. Next question comes from the line of Jeffrey Bernstein with Barclays. Please go ahead.
Pratik Patel: Hi, good morning. This is Pratik on behalf of Jeff. Thanks for the question.
Product Con: Hi, good morning. This is ProductCon for Jeff. Thanks for the question. I just wanted to get a sense of what you're seeing in your sales trends by income cohorts. You know, what buckets are you seeing strength from and, you know, where might you be seeing a little bit of softness?
Speaker Change: You did call out the weekday breakfast day part as a little bit weaker. Is that really just a function of consumers choosing food at home rather than losing traffic share?
Speaker Change: If you can call out any particular consumer segment where you're seeing that as most prevalent. Thanks.
Speaker Change: Yeah, so we talked about the lower-income consumer.
Speaker Change: I don't think that's very different than what you're hearing pretty much across the industry as far as a pressure point. And for us, that's defined as 70,000 household income or below. And then the only other insights I can give you that we've shared is that the infrequent customer is one that we're seeing less visits by as well based on our credit card data analysis.
Speaker Change: Got it. That's very helpful. And then I apologize if you already gave it, but are you contemplating any potential weather impact from Debbie in 3T? Was that baked into your guidance?
Speaker Change: You know, we really had, I think yesterday we might have had three restaurants with partial day closures.
Speaker Change: Something like that. So I don't know that it's going to be all that meaningful. If that changes, we'll update.
Speaker Change: What we're really looking for is the mobility of the consumer right now. I can tell you, as I'm sure everybody on the call heard, where we're based, Sarasota got the worst of it, and there's a lot of folks not able to get to our office today. So whether we're open or not, I think we're going to see some impacts, but we don't expect it to be.
Speaker Change: Significant as it relates to the whole company
Speaker Change: Thank you. The next question comes from the line of Gregory Francfort with Guggenheim Securities. Please go ahead.
Gregory Frankfurt: Hey, good morning guys. I had two questions. The first is...
Gregory Frankfurt: Just from a same-store sales perspective, I guess as we look to the back half, what can you guys do to maybe have an impact?
Speaker Change: On the comps, I mean, are you guys thinking about deploying a little bit more marketing from a calendar perspective? Is there something you can do, or is this just going to be more kind of bouncing around with the industry in terms of what's going to happen?
Speaker Change: No, I think we are taking steps to, again, reach out to our consumers.
Speaker Change: Again, I know I keep saying the same targets, but really focusing on our owned audiences, which as we said on the call, we've got an opt-in database now of close to 7 million that we've been curating over a period of time, and just really cutting that data in ways that we can be more efficient and more effective in the way we communicate with them. I'd say you'll probably start to see us increase the frequency of the communications as well with that group, and then also stepping up our digital and social activities as we do that simultaneously. Yeah, but to your question, we do not, absolutely do not bounce around with the system. I mean, we go straight at the audiences.
Speaker Change: where we have the most touch and we know people are listening.
Speaker Change: I mean just just on the on the GNA side of things how much of that was lower incentive comp versus belt tightening versus project timing just trying to think about that for the rest you know the next couple quarters
Speaker Change: Yeah, for the most part, it's just unspooling.
Speaker Change: The timing of our GNA realization for the year, I don't think the incentive comp differences were all that meaningful, and then the timing of...
Speaker Change: I said two, but maybe I'll sneak in one last one. Can you give us an update, Mel, on where new store returns look right now? You said the new store AUVs sounded becoming really strong, and I think the CapEx guidance is unchanged. Just maybe the update on what those numbers look like.
Mel Hope: Yeah, they're tracking with the unit economic model that we have in the investor deck that's attached to our website.
Ali Arfstrom: Hi, this is Ali Arfstrom on for Brian Mullan. Thank you for taking the question. Wondering if you could share comp turns directionally or by month in Q2. Thanks.
Speaker Change: Thank you.
Catherine: Hi, thank you. This is Katherine on for Sara. First, I wanted to ask just about the traffic trend in the quarter, which was sequentially stable versus the first quarter. So just curious if you can opine on what that means about the operating environment right now. It would seem to suggest that it's relatively stable.
Speaker Change: Yeah, I'd agree with that.
Speaker Change: Okay and then yeah I guess just another question on demand I think given that weekend brunch generally has a lower average check than you know other day part occasions in in full service
Speaker Change: in full service broadly. So I would think that, you know, First Watch could be a beneficiary of a kind of shift in that occasion. Are you are you still seeing that?
Speaker Change: Yeah, I think, you know, obviously for us, weekend brunch is our highest, you know, check average occasion, and it's still an area where we have demand, and so I think our general commentary here is that weekends are helping to offset the softness that we're seeing during weekdays, which is why our focus has been on throughput optimization, in that we can serve more people when we have the demand, rather than trying to create an occasion that maybe the consumer's not, you know, open to at this point. So that's been our focus, and I think that's why we delivered the results we did this quarter and last quarter, is because we're really, really optimized as it relates to the
Speaker Change: Thank you. Next question comes from the line of Jon Tower with Citi. Please go ahead.
John Tower: Is there anything you would point to in particular that's helping that, whether that's just improving site analytics, better developer relationships, the mix of info versus new market, just anything your own data is telling you?
Speaker Change: Over the course of the last few years, our non-comp restaurants and new restaurants have all fairly predictably outperformed the legacy system. Some of that is because...
Speaker Change: The legacy system includes, you know, a number of restaurants that might be occupied in smaller footprints and that sort of thing, and our shift to more premium real estate in about 2017 or so.
Speaker Change: has served us well in terms of accommodating more interest from the customers and greater volumes.
Speaker Change: And then, just on the modeling side, this is two quarters in a row now that we've seen sub-22% COGS, which is below where, you know, historically you've tracked. Is that, you know, sustainable and driven by some of the benefits of, like, alcohol in the juicing platform? Or, you know, are you worried about working that, you know, number too low that you're going to get offsides on a value proposition for the consumer? Not worried about it. Sometimes that number changes around when you have a heavier load of...
Christopher Tomasso: Yeah, I'm not worried about it. Sometimes that number changes around when you have a heavier load of new restaurants coming on board. And in the back half of the year, we might see some of the labor margins tick up a bit as we have more of a larger cohort of new restaurants who have some built-in inefficiency when they first open. But I would say it does show the success of our operators in terms of managing their crews better. And I think if we can keep that hover in that 22% area, that's something to be proud of over a long period of time.
Speaker Change: New restaurants coming on board in the back half of the year, we might see some of the labor margins.
Speaker Change: tick up a bit as we have more of a, you know, a larger cohort of new restaurants who have some built-in inefficiency when they first open.
Speaker Change: But I would say it does show the success of our operators in terms of.
Speaker Change: managing their crews better. And I think if we can, you know, if we can see that hover in the, you know, 22% area, that's something to be something to be proud of over a long period of time.
Speaker Change: And there's one final one for me, and apologies if I missed this in the prepared remarks. The last couple of quarters, you've shared your performance versus Black Sox. Do you have that for this quarter?
Speaker Change: We do. I think we said that we hadn't, that in terms of performance, that the black box data on the metrics that we measure, we're slightly below.
Speaker Change: the cohort. There's a lot of participants in that group that are
Speaker Change: number. And so this this would be a period where for relative to the casual dining category that our traffic hasn't has has has has
Speaker Change: has not not met black box we do continue to take share however in the you know against the category in the second in the second quarter our placer AI which I know people are using more and more
Speaker Change: These days indicates that our traffic shares increased against the direct daytime dining competitive set.
Speaker Change: Thank you. Next question comes from the line of Brian M. Vaccaro with Raymond James. Please go ahead.
Speaker Change: Hi, thanks for the quick follow-up. I just wanted to circle back on the second half guidance and could you elaborate on some of the assumptions you embedded on both sales and margins? You know, you mentioned the soft recorder to date. Many have seen that in the industry as well. Did you assume that continues or maybe there were some...
Speaker Change: calendar or other seasonal factors impacting July and really on the margins as well I understand you have less pricing
Speaker Change: But following the very strong Q2 EBITDA performance, just curious kind of what some of the margin dynamics that could be different in second half versus first half. Thanks very much. Yeah, for the back half of the year, I've already alluded to the fact that as we bring on, we've got a great deal of new restaurant openings that are calendared.
Speaker Change: margins of the company. We also have heavy up on expenses that occur in the back half of the year in our fourth quarter. For example, we have our national conference and some of those more seasonal type things, and there's a sort of a natural tendency to
Speaker Change: to make sure that we onboard staff and complete projects before the end of the year. So there's a tendency to sort of call it human nature that we tend to experience an uptick in our GINA expense during the fourth quarter. So those are kind of some of the seasonal kind of items.
Speaker Change: Thank you.
Speaker Change: Thank you. Ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Christopher Tomasso for closing comments.
Christopher Tomasso: I want to personally thank our teams for their efforts in this and every quarter with a special shout out to our operations leaders for the exceptional results they delivered in these interesting times.
Christopher Tomasso: And while I'm proud of what we accomplished, I'm even prouder of how we did it. We're guided by our You First philosophy. It's at our core, and it defines who we are. Our achievements have been, and our future growth is, underpinned by standing shoulder to shoulder, rolling up our sleeves, putting others first, and being kind.
Christopher Tomasso: Thanks everybody for your time today.