Q3 2024 First Watch Restaurant Group Inc Earnings Call
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Speaker Change: Greetings, and welcome to the First Watch Restaurant Group's 3rd Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode.
A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Steven Marotta, Vice President, Investor Relations. Thank you, sir. You may 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.
Speaker Change: This morning, First Watch issued its earnings release for the third quarter of fiscal year 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.
Steven Marotta: Such statements include, without limitation, statements concerning the conditions of the 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 our 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.
Steven Marotta: Lastly, management's remarks today will include references to various non-GAP measures, including restaurant-level operating profit, restaurant-level operating profit margin, adjusted EBITDA, and adjusted EBITDA margin.
Steven Marotta: 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.
Steven Marotta: During today's call, references to same restaurant sales and traffic growth compares to the 13-week periods ended September 29, 2024.
Steven Marotta: and October 1st, 2023, in order to compare leg-for-leg periods. Otherwise, any reference to percentage growth when discussing third quarter performance is a comparison to the third quarter of 2023, unless otherwise indicated. And with that, I will turn the call over to Chris.
Chris Tomasso: Good morning. Thank you all for joining us this morning to discuss our third quarter 2024 financial results. Before I begin, I'd like to express my appreciation to the many of you in the investment community who reached out to us with concern regarding the recent hurricanes. We're grateful for your thoughtfulness.
Now let's jump right in.
Chris Tomasso: Our third quarter performance highlights include strong adjusted EBITDA growth, traffic momentum within the quarter, and our continued demonstration of solid operational execution.
Chris Tomasso: In the quarter, we generated $291.8 million in system-wide sales, $251.6 million in total revenues, $25.6 million in adjusted EBITDA, and $2.1 million in net income.
Chris Tomasso: In addition, we recognize increased restaurant-level operating profit margins, and our teams opened nine new system-wide restaurants across eight states, seven of which are company-owned and two that are franchise-owned.
Chris Tomasso: While overall same restaurant traffic was slightly lower in the third quarter versus the second quarter, there were several factors at play that matched improvement later in the quarter. First, as we noted on the last earnings call, July traffic was abnormally negative for us and the industry.
Chris Tomasso: Despite that sluggish start following July, our traffic trends improved and dining room traffic turned positive in the last period of the quarter, which we believe was partially driven by a favorable response to targeted marketing campaigns we tested during the quarter.
Chris Tomasso: Secondly, around mid-year we saw third-party delivery traffic move more negative, acting as a drag to consolidated traffic and concealing improving trends in both our dining room and direct off-premise traffic.
Chris Tomasso: As we've stated previously, our primary focus remains on growing our dining room and direct off-premise channels, although we are exploring plans to address the changes in third-party delivery dynamics.
Chris Tomasso: Moving to operations, our teams once again delivered solid execution and another quarter of improvement in employee turnover.
Chris Tomasso: Turnover is the lifeblood of any restaurant organization as our business is about people, not just food. Reducing turnover and increasing tenure supports knowledge transfer, reduces training time, and facilitates better execution, all of which are manifested in our results.
Chris Tomasso: Several ongoing initiatives highlight the aim to control what we can control, including efforts to, one, increase our rate of internal promotes within the First Watch organization, two, improve scheduling, including the addition of new labor tools and app-based scheduling, and three, strengthen our training program for new managers.
Chris Tomasso: Even more than delivering another quarter of focused cost management, our labor management is building a strong foundation for our continued unit growth as we march toward 2200 domestic units.
Chris Tomasso: Given our operator's successful optimization of restaurant level performance and the dining room traffic trend, we're confident increasing the midpoint of our adjusted EBITDA guidance.
Chris Tomasso: And before I leave the topic of our teams, I want to mention a recognition that they received just last month.
Chris Tomasso: Well, we've earned quite a number of accolades. This one is really extra special.
Chris Tomasso: First Watch's culture is guided by our You First vision, with the core value to just be kind.
Chris Tomasso: We know that if we take care of our people, they will in turn take care of our customers. This core principle was established by our founders and is practiced widely across our organization every day.
Chris Tomasso: With this in mind, I'm pleased to share that First Watch was recognized as the number one most loved workplace in America by Newsweek and the Best Practice Institute, following a survey of more than 2.6 million employees across hundreds of companies around the country.
Chris Tomasso: This is the third consecutive year First Watch has been recognized on this list, but it's our first time in the number one spot.
Chris Tomasso: To us, this recognition highlights what make First Watch, and our UFirst culture, so special and distinguishable. To all of our teams listening, I want to thank you for all that you do every day to make First Watch great. This award is a recognition of our focus on people, and I couldn't be prouder of this team.
Chris Tomasso: Next, I'd like to dive a little bit deeper into our demand generation efforts that I just referenced.
Chris Tomasso: In prior quarters, we highlighted our strategy of focusing on demand generation efforts rooted in customer data and analytics and done the first watch way. This multi-year initiative aims to develop strategies to efficiently attract new customers as well as remain top of mind for current category users.
Chris Tomasso: In the nearer term, we believe the opportunity exists to increase impressions to spur the next breakfast and brunch occasion for those active category users.
Chris Tomasso: By using data sets that give us confidence in one-to-one targeting, we are leveraging customer analytics to sharpen our plans and enhance marketing spend efficiency to reach specific audiences, whether lapsed or frequent customers, or those who may have recently visited a competitor.
Chris Tomasso: In the third quarter we deployed or increased usage of early versions of this strategy through our own database as well as various digital and social media networks and other channels including streaming video and connected TV to name a few.
Chris Tomasso: We're encouraged by our preliminary results, which we believe contributed to our traffic improvements in the restaurants, and look forward to furthering our efforts in this area.
Chris Tomasso: Investments in technology remain a core aim across the business. Beyond demand generation, our teams continue to focus on efficiencies stemming from our investments, including KDS, pay-at-the-table, point-of-sale, and waitlist management enhancements.
Chris Tomasso: One example of our collective efforts is reducing ticket times again by over 15% in the third quarter versus the same period a year ago, with a majority of our restaurants regularly reporting below 10 minutes. A remarkable achievement for a full-service restaurant that features a highly modified menu and cooks to order.
Chris Tomasso: The combination of increased restaurant-level operating efficiencies and demand generation tactics is supporting market share gains during a time when the morning meal occasion overall is experiencing softness. To that point, during the third quarter, our same restaurant traffic and sales were better than the black box casual dining segment.
Chris Tomasso: Finally, turning to development, and given that we still have so many new restaurants scheduled to open in the fourth quarter, I thought it was timely to dive a bit deeper into the topic of our new restaurant development.
Chris Tomasso: Our team's execution on our strategy continues to deliver impressive results, is fueling our growth, and continues to extend our segment-leading position.
Chris Tomasso: Last 12 months revenue from all NROs since 2022 is outperforming their underwriting expectations by roughly 10%. Our long-standing track record of high-performing, prolific unit growth has increased confidence with top-tier developers.
Chris Tomasso: Now, more than ever, we receive first looks into great locations including new plan centers as well as prominent existing sites.
Chris Tomasso: many of which are the result of vacating restaurant brands. For instance, we opened 13 formally occupied freestanding restaurant locations in the last 24 months, and they are among the highest performers in our system, with AUVs tracking over 15% higher than all other NROs in the same period.
Chris Tomasso: Our current pipeline now includes more than 25 of these prominent locations, which are slated to open over the next few years.
Chris Tomasso: Thanks to the hard work of so many throughout our organization, we experienced an immaterial same-restaurant sales impact from Hurricane Milton at the start of Q4. The storm did, however, cause some construction-related disruptions across the Southeast and beyond, impacting many of our new restaurants under near-term development.
Chris Tomasso: We know that strong restaurant openings are key to ensuring strong long-term restaurant performance. As such, we never compromise on any aspect of a new restaurant opening, which is why we've decided to reschedule five previously anticipated December openings into January 2025.
Chris Tomasso: In closing, I'm proud of our performance, our teams, and our results. Our customer proposition is highly differentiated with a culinary-forward menu, fresh ingredients, high-touchpoint customer service, fast ticket times, and easy accessibility at the corner of Main and Main.
Chris Tomasso: The Day Part remains highly fragmented and largely occupied by legacy players who continue to struggle with relevancy.
which makes our opportunity even more significant.
Chris Tomasso: First Watch's clear and growing leadership in the daytime dining day part, combined with significant scale advantages associated with our 547 restaurants across 29 states, positions us well within a large addressable market and provides a clear path to 2200 restaurants.
Chris Tomasso: Before I turn the call over to Mel, I'd like to welcome our two newest board members, Charlie Gemley and Michael Fleischer.
Mel Hope: Both are accomplished CFOs who have deep operational experience as senior executives at public companies in the consumer space, and both bring additional corporate governance proficiencies. They are terrific assets for First Watch. And with that, I'll turn it over to Mel. Thank you, Chris. Good morning, everyone.
Mel Hope: As they have all year, our restaurant managers and crews continue to operate with efficiency and our third quarter profits.
Mel Hope: The financial headline is that our revenues continue to grow, and our third-quarter restaurant-level operating profit margin and our adjusted EBITDA margin exceeded the prior year.
Chris Tomasso: Total third quarter revenues were $251.6 million, an increase of 14.8 percent.
Chris Tomasso: We experienced no check management in the third quarter, though planned, targeted marketing campaigns did have a small impact on our net per person average.
Speaker Change: As Chris mentioned, compared to last year, our dining room traffic, which is our most meaningful sales channel and represents more than four-fifths of overall sales and traffic, improved each month during the quarter and turned slightly positive in our ninth period.
Speaker Change: While off-prem traffic remains negative, we're encouraged by the indications of our improving dining room traffic, which we believe reflects the consistency of our food and service, our modest pricing philosophy, and the successful targeted campaigns.
Chris Tomasso: On the restaurant cost front, food and beverage was 22.4% of sales compared to 22.6% in the same period last year.
Chris Tomasso: As a percent of sales, costs benefited from carried pricing of 3.4% and offset by commodity inflation of 3.4%.
Chris Tomasso: Bacon, avocados, and eggs were the primary drivers of food inflation during the quarter.
Chris Tomasso: During the quarter, restaurant-level labor inflation was 3.8%. Labor and other related expenses were 33.6% of sales in the third quarter, a 30 basis point improvement from 33.9% reported in the third quarter of 2023.
Chris Tomasso: This labor efficiency is largely the result of continued gains our operators have driven from the application of new management tools implemented over the last year or so.
Chris Tomasso: As with last quarter, our customer experience scores improved again. The combination of labor efficiency coupled with favorable consumer service scores reflects our restaurant's commitment to excellent operations.
Income from operations margin was 2.5%.
Chris Tomasso: General and administrative expenses were $27.7 million, approximately $2.5 million higher than the prior year, primarily due to IT and other miscellaneous expenses, as well as additional headcount.
Chris Tomasso: As a percent of third quarter sales, general and administrative expenses was 11%, which was favorable to the prior year by 50 basis points.
Chris Tomasso: Adjusted EBITDA was $25.6 million, a $4 million increase versus the $21.6 million reported last year.
Chris Tomasso: An adjusted EBITDA margin was 10.2% versus 9.9% margin we realized in the third quarter last year.
Chris Tomasso: The year-over-year growth in both adjusted EBITDA and adjusted EBITDA margin was the result of improvement in restaurant-level operations, as well as the levering of G&A expenses, as I just mentioned.
Chris Tomasso: Net income was $2.1 million and net income margin was 0.8%.
Chris Tomasso: With the nine new system-wide restaurants opened during the third quarter, of which seven are company-owned and two are franchise-owned, we ended the third quarter with 547 restaurants.
Chris Tomasso: For your financial modeling purposes, the net effect of acquisitions, which includes only the impact of purchases made within the last 12 months, increased third quarter revenue by about $16.5 million and adjusted EBITDA by about $4 million.
Chris Tomasso: We're pleased with the performance of our acquired restaurants, and as such, their expected net impact on FY 2024 adjusted EBITDA has increased to $14 million from $13 million previously.
Chris Tomasso: For further details on the third quarter, please review our Supplemental Materials Deck on our Industrial Relations website beneath the webcast link.
Chris Tomasso: Again, we're proud of our restaurant teams who continue to raise the bar on customer experience in our restaurants while delivering strong profitability.
Chris Tomasso: Before we move on to guidance, I'd like to remind investors, when making comparisons to the fourth quarter last year, to consider the approximate $5 million of adjusted EBITDA benefit to the fourth quarter of 2023 associated with that fiscal year's 53rd week.
Chris Tomasso: Additionally, our targeted marketing campaigns in the third quarter were impactful and at least partially a stimulant.
Chris Tomasso: to same restaurant traffic improvement through the quarter. Some of these initiatives carried into October as well. The results of our 2024 marketing programs are currently being assessed in order to optimally plan for 2025.
Chris Tomasso: For the balance of 2024, our holiday marketing plans are similar to 2023.
Chris Tomasso: To update our full-year outlook for 2024, we are narrowing our same-restaurant sales growth estimate to around negative 1%, with same-restaurant traffic declining 4% to 4.5%, similarly with what we have experienced year to date.
Chris Tomasso: We are adjusting our annual revenue growth expectations to a range of 16.5% to 17% from the previous range of 17% to 19% in part due to the hurricane-related delays and our decision to push a handful of our new restaurant openings into early 2025.
Chris Tomasso: Approximately 7% of the growth is expected to be the net contribution from the franchise restaurants acquired in 2023 and 2024.
Chris Tomasso: For Adjusted EBITDA, we're now guiding to the high end of our previous range. Our guidance is now $110 to $112 million.
Chris Tomasso: The net impact from acquisitions is now expected to contribute about $14 million to the current year adjusted EBITDA.
Chris Tomasso: We now expect a total of 47 net new system-wide restaurants, updated to reflect 43 company-owned restaurants, 6 franchise-owned restaurants, and 2 system-wide closures.
We now expect a blended tax rate of around 33%.
Chris Tomasso: Our expectation of commodity inflation for the year is around 3%, and our expected restaurant-level labor cost inflation is around 5%.
Chris Tomasso: And finally, we're planning capital expenditures of around $130 million, not including capital invested in franchise acquisitions.
Chris Tomasso: And with that, Operator, if you'll please open the line for questions.
Speaker Change: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue.
Speaker Change: We ask that you limit your questions to one and a follow-up so that others may have an opportunity to ask questions. You may re-enter the queue by pressing star 1. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Our first question comes from Jim Salera.
Please proceed with your question.
Speaker Change: Hey guys, good morning. Thanks for taking the time. Good morning, Jim.
Jim: I really wanted to drill down on some of the success you guys mentioned on the targeting marketing campaign and maybe if I could make that into a two-part question. As we think about you know improving consumer trends
Jim: The back half of this year and really going into 2025. Is that a lever that you guys think you'll be able to flex? to help kind of
Jim: return traffic on the dining room back to positive growth, and then do you think that that has any impact on the off-premise panel as well, such that it can kind of be a double whammy?
Yeah, hi Jim, it's Chris Tomasso. Thanks for the question.
Jim: As we mentioned, we put a number of initiatives into test in Q3 on the demand generation front. And also, as we mentioned, we're pleased with some of the results that we saw. I will tell you that we believe that the on-prem and off-prem channels are very distinct. And while there might be a little carryover in the tactics that we use, they really are very specific.
which is why we called that out as well.
in talking about.
Jim: controlling what we can control and reading the macro environment. Again, none of us having the crystal ball in knowing how long this environment will be in place.
Chris Tomasso: We did take some steps to leverage the data that we've been talking about that we've been kind of cultivating and refining and tried a number of different things and we're pleased with the success.
Chris Tomasso: It's not something that we think will impact in Q4, but it's certainly something that we're considering for our overall plan for next year.
Speaker Change: Great, and then maybe if I could just ask a higher level question.
Speaker Change: What do you think you would need to see from, whether it's, you know, full service in general or the consumer more broadly, that would make you more confident, just kind of broader consumer recovery going into 2025?
Speaker Change: You know, I think the step up in restaurant dining, I think, for us is what our bellwether is. And as we've said, that turned positive at the end of the quarter. So that's one of the green sheets that we look at, you know, looking forward, so encouraged by that.
Great, thanks guys. I'll hop back into the queue.
Speaker Change: Our next question comes from Jeffrey Bernstein, Barclays. Please proceed with your question.
Jeffrey Bernstein: Great, thank you very much. Good morning. Two questions. The first one just Christian mentioned the industry is seeing some softness in the AM day part.
Chris Tomasso: and for better for worse that is your primary focus. I'm wondering what you think of the primary drivers of that and whether or not that's concerning for you or whether you're confident in a recovery.
Chris Tomasso: I know some people talk about more back-to-office during the week as perhaps somewhat more of a headwind for the AM day part, at least during the week. So just trying to get your assessment as to that AM segment commentary and your outlook going into 25 on that front, and then I had one follow-up.
Speaker Change: Sure, you know our take is that the the morning meal occasion is the one that's most under pressure right now And that it is you know really
Speaker Change: due to the macro environment. And by that, I mean, and we've said it on calls before, it's not that we've seen trade down into QSR or convenience breakfast. It really has been the occasion across the board.
Speaker Change: And to answer your question about why we believe that is, we think that, you know, as the consumer is thinking about reducing their dine-out dollars during this time, the breakfast occasion is one that's easily one that can be replaced at home. And so we continue to take market share, even in this down environment. So we're – and we're operating the restaurants really, really well. So I think we're weathering this extremely well. And I do believe that there's a – absence makes the heart grow fonder, and people will remember why they love breakfast and brunch specifically, and that occasion. And that, you know, once the consumer environment eases a little bit, I think we'll benefit
from that.
and the next episode.
Thank you.
Speaker Change: Thank you. And then the follow-up is just on the CompTrends.
Speaker Change: and a lot of restaurants have reported over the past 10 days and many of them are talking about pretty consistent improvement in the trends in September and going into October and early November. I'm wondering whether you've seen similar and
Speaker Change: as you think about the traffic component of that, which is obviously the area of focus.
Um...
Speaker Change: Your level of confidence that you can Revert that trend whether it's through targeted marketing or otherwise. I know the down 4% was disappointing for you, but Are there levers you have to reverse that to flat to positive or are there some just internal? Challenges that make a return to positive less likely into 25. Thank you
Thank you.
Speaker Change: Yeah, we saw, you know, improved trends in our dining room and direct off-premise channels. So, again, encouraging from that perspective. And I actually believe that we'll continue to see that, you know, should the environment improve. And that coupled with some of the things that we're able to do from a marketing standpoint now, I think, I think.
Speaker Change: is going to be our approach going forward. So, I mean, there's no question that this environment has led to a lot of pivoting, if you will, and we've done that, and I think we've managed it very well.
Thank you very much.
Speaker Change: Our next question comes from Todd Brooks with the Benchmark Company. Please proceed with your question.
Todd Brooks: Hey, good morning to you all. Thanks for taking my question.
Todd Brooks: Two questions if I may. One, there's obviously a kind of a silver lining maybe for the environment that we're in now.
Speaker Change: daytime dining, a high growth category. A lot of participants want to grow from that regional player to more of a super regional or or national over time but you have such a scale advantage.
Thank you for watching!
This is Chris
Speaker Change: There's no question that we're the leader in this segment. You know, you mentioned the scale, but I think also the 40 years of operational excellence and some of which we reported here today. So, and as I mentioned, we know where to share. There's a lot of legacy players that are closing locations. We think that that gives us a great opportunity as well. So, looking forward, I mean, I think,
Speaker Change: maybe there'll be some contraction in our segment, and I think our leadership position will serve us well.
I think one of the things people... Go ahead, Noel.
Noel: That one of the things that I think people miss is
Noel: This smart things that the company has done even in you know, what has been a choppy environment? I'm in between acquisitions of restaurants our our offerings the the efficiencies we've driven into the restaurants, you know as a result the revenues grown
Noel: Nearly 15%. We've grown our EBITDA nearly 18% to $25.6 million in the quarter. We've opened over 30 restaurants now through today.
this year that are company-owned and with more to come.
Noel: So, I think people look a lot at the same restaurant sales and our traffic, and of course those are choppy.
Speaker Change: But the company is winning, the company is extending its lead and I think that positions us going into an improving environment as maybe the first out of the box.
Speaker Change: That's great, thanks. And then my second question, you talked about that improving trend in dine-in traffic over the course of the quarter. I was wondering if you could parse out, you've talked in the past about Florida performance versus rest of
Speaker Change: rest of the fleet. And are you seeing any type of traffic improvement in those stores as well that would allow you to close that gap that you've seen as really that reverse migration headwind has been in place for the last four quarters? Thanks.
Speaker Change: Yeah, there's a couple of things that we're optimistic about as it relates to stabilization. One is that Florida has become more stable for us, obviously the sequentially improving in-restaurant traffic during the quarter with September being positive, direct off-prem is no longer a real drag on consolidated traffic, although as I mentioned, third-party continues to be. So all of those things are a reason for us to be optimistic.
Speaker Change: Our next question comes from Andy Barish with Jeffries. Please proceed with your question.
Thank you.
Andy Barish: Hey guys, I just want to make sure I'm calculating it, but mix looks like it was down about a point or so in the corner, and I just want to tie that into the
Speaker Change: Demand generation, I like that, Chris. That's truly from a former marketing guy. Related to a little bit of promo and discounting, is that kind of how we would have seen that in the quarter?
Andy Barish: PPA was down a little bit, but it was all attributed to the
to the promo.
effect overall.
Speaker Change: We were at mixed was mixed was pretty flat. Yeah. And as Mel said in his prepared remarks, no check management. When we look at it, I mean, it's been tracking well all year.
Speaker Change: Got it. And again, just going into the fourth quarter, I know you ran a little bit into October, but would you expect that, you know, overall mix to kind of, you know, flatten out, just, just given, you know, backing off on the promotional stuff, it sounds like for the holidays?
I believe that to be the case, yes.
Speaker Change: Okay. And then, Mel, just, I guess, with that many openings in the 4Q, just maybe level-setting on what we should be aware of, you know, in terms of
Speaker Change: you know, where we might see a little bit of, you know, restaurant level margin pressure. And I know it's tough because you're comparing against, you know, an extra week last year, which helps margins. But, you know, just any color on that might be helpful for the group.
Mel Hope: Well, the planned timing of the openings and their path to maturity, you know, obviously those are the least productive restaurants in terms of delivering at the...
Mel Hope: restaurant-level operating profit margin in a couple of weeks after they open. So it's kind of, I would say, we probably had to push more to December.
Speaker Change: But all of that's been built into our guidance, our four-year guidance that we provide. So I think you may be able to kind of back in to their contributions. So we've got 10 of them open now with the plan to open 23 in the period.
Speaker Change: So we've got 13 yet to go, and we're on pace to open every week, but we will have some open in December, which is what we typically try to avoid doing, actually.
Okay, thanks guys.
Speaker Change: Our next question comes from Brian Zarracrow with Raymond James. Please proceed with your question.
sort of are shaking out.
Brian Zarracrow: And I'm curious, in past quarters, you've noted that the weekday is softer than the weekend. Maybe you could give just an update on those dynamics as well.
Thank you for watching!
Brian when you say the magnitude of
of traffic, I'm
Speaker Change: I'm trying to understand what it is you're talking about. Yeah, well, I guess, yeah, from an industry perspective, July was definitely worse than August and September.
Speaker Change: So I want to be cognizant of that and then obviously cognizant of some of the levers that you're pulling.
Speaker Change: So, just trying to get a sense of your traffic was X in the quarter, just what we're seeing more recently versus what we saw earlier in the quarter, just any sense of magnitude of improvement or just absolute traffic trends.
Speaker Change: Yeah, I think if you if you take the two the two channels we that I mentioned so we saw in restaurant Traffic turned positive in September and we said that our direct off-prem stabilized So I think that gives you a feel for where we ended up because we had kind of already Talked about July on our last earnings call So, you know You can make that leap from the the improvement from July through the end of the quarter with the with those two channels which represent You know the majority of our of our sales
Speaker Change: All right, fair enough. And then, any comments on weekday versus weekend trends?
Weekend still is trending better than weekday.
Thank you very much.
Speaker Change: Okay, and I guess as you study the weekday trend, you know...
Speaker Change: I don't know if you want to triple click, quadruple click, whatever you want to call it, but
Speaker Change: I'm curious, with this discussion around back-to-office, return-to-office, do you, I mean, can you see anything within, like, the Tuesday-to-Thursday?
Speaker Change: or that would point to kind of a return to office dynamic or anything regionally. And then the other question I had for you, Chris, is during the weekday, when you look at where that softness might be,
Speaker Change: Is there an opportunity, I understand you don't want to discount or get it more aggressive on price point discounts, but is there an opportunity, there are other brands that have great everyday value.
Speaker Change: and they do some early dine programs or some late night programs obviously for their businesses that are mostly dinner. But is there any opportunity to do like an early riser type of thing before 8 a.m.?
Speaker Change: or maybe lunch is softer, I don't know, but if it was, maybe there were some lunch news that you could inject that might drive some weekday, you know, targeted weekday.
Speaker Change: Sure, I'll answer the first part of your question first. On the return to work, I mean, we've looked at it, you know, since COVID and, you know, when you hear about, you know,
Speaker Change: office occupancy increasing and things like that. And we haven't seen a correlation there. I think we might get some movement around when somebody uses us. If we have a restaurant near their office or near their home, I still think, if they're looking at an occasion that we provide, that we're still a good option for them. So no real correlation there.
you know.
the different from a highly urban.
Speaker Change: You know, I think we've been talking for a while about about about cultivating this
Speaker Change: Whatever makes your college bright? 17 Mario Rodriguez 17 Mario Rodriguez Will an 18-year-old who is simple with kiddo get sick in time and get to diabetes? Do you caution kids about high blood pressure? Do you have a prescription to avoid diabetes? 17 Years old. When can I have diabetes?
Speaker Change: We have tools, frankly, and data that allows us to do that.
All right, thanks very much. I'll pass it along.
Thank you.
Speaker Change: Our next question comes from Sara Senatore with Bank of America. Please proceed with your question.
Speaker Change: Hi, thank you. This is Katherine Griffin on for Sarah. First, I wanted to ask, I think it was Chris you were talking a little bit earlier about
Speaker Change: the receptivity to some of your targeted marketing from lapsed users and maybe some customers that have been going to competitors. I'm curious if you're able to tell if there's anything in common with either cohort.
Speaker Change: I would guess that these are, you know, customers that might be more value-seeking, but just want to make sure I understand, I guess, like what, you know, as far as what the opportunity is to continue to leverage targeted marketing and kind of where you might take share from.
Yeah, great question. I think it's.
Speaker Change: those things and more. We typically don't attract the value-driven customer and as we all know right now, there's a lot of consumers out there are just bouncing from discount offer to discount offer, taking advantage of it to help ease their wallet and we get that. But we're really looking for our target demographic who is also perhaps trying some of our competitors. We'd like to get one more of those occasions and we're gonna leverage our core brand strengths to do that and make sure that we again, increase the messaging and have the messaging be more relevant. So we think there's a lot of opportunity for us to continue to take market share like we have been and now we're.
Speaker Change: We're starting to feel really about the tools that we have to do that.
Speaker Change: Great, thank you. And then I was curious, you mentioned a little bit about just continuing to look at like technology investments. And I wanted to know where else you see opportunities, whether it's like in the four walls or maybe with regard to more like targeted marketing initiatives, just kind of like what's on your wish list for, you know, for technology investments? What are you prioritizing?
Speaker Change: Yeah, you know, I don't think we get full credit for all the...
Speaker Change: all the tech stack that we've launched in our restaurants, both front of house and back of house, consumer facing and employee facing. I ran through a quick list of those in my comments, but the benefit of those has been tremendous, as you can see in our results. So reducing friction from the customer experience.
Speaker Change: continuing to deliver tools that make us a most-loved workplace because we're removing even friction with our employees. But our focus now, and where you'll probably see us leveraging more technology, is on the consumer-facing side, specifically around marketing.
Speaker Change: I know we're talking a lot about that demand generation efforts right now, but that's where our focus is. And enhancing what we already do. Yeah.
Great, thank you.
Speaker Change: Our next question comes from John Towerwood, Citi. Please proceed with your question.
Great, thanks for taking the questions. Hey, good morning.
John Towerwood: Just, I mean, zooming out a little bit, I think your marketing spend as a percentage of sales kind of looks a lot lower than frankly, brands of similar scale.
Speaker Change: And I'm just curious, I know in the past you've talked about the idea of not necessarily wanting to go
you know, bump that number higher, and or...
Speaker Change: at least advertise at a national level. But can you maybe help us think about, do you believe that today the marketing dollars that you have are appropriate for the size of the business and frankly, where you want the brand to be over time, the 2,200 stores in North America?
That's a great question. What I'd say is that
Speaker Change: We're not targeting a specific percentage or ratio. What we're looking at is, can we efficiently and effectively spend either at the current rate that we're spending now, or do we need to increase that to get the results that we want? And all of that's in play and under consideration for 2025.
Jeffrey Bernstein: Got it. Okay, TBD. All right, then maybe just you, Chris, you'd mentioned the idea that obviously third party has been a bit of a drag on your business for some time. And I'm just curious if you could help us one, maybe quantify that number in the third quarter and then two, I think you spoke to the idea of potentially finding some new solutions around it or other ways to improve that going forward. Can you maybe speak to what exactly you're thinking about there?
Chris Tomasso: And I'll take the second part and Mel can take the first part if we even want to report on that. But, yeah, I mean, look, it's a completely different marketing channel and way to reach the consumer. And frankly, it's a different way the consumer wants to use us.
Speaker Change: I think the frustrating and challenging part for us and anybody is
Speaker Change: There's not a lot of control that you have on that.
Speaker Change: from an awareness perspective and whatnot. So we're working closely with our partners. Overall, Off-Prem is about 17, 18% of our business and third party is about, call it half of that. And then we have a couple of players within that half. So just working with them to optimize our presence there and our offering to the consumer and seeing, I mean, if you really parse out these channels for us.
Speaker Change: third party in terms of traffic has been down mid-teens since really the middle of the year. It's been pushing downward. So that's the challenge.
Speaker Change: The other thing I'll say, John, is that some of the other brands are spending and treating it almost as a primary growth channel for them, and that's not our approach. You know, we focus on our dining rooms, and honestly, competitive activity has...
Speaker Change: picked up significantly in those channels just as it has in the general consumer space with promotions and whatnot.
Speaker Change: Okay, thank you. I appreciate the color. And then maybe the last one, Chris, you also spoke to the new classes of stores outpacing
Speaker Change: I believe you're underwriting from a volume standpoint by about 10%, which is awesome to hear. I'm just curious if you can maybe drill into anything specific about these stores that might be allowing that to happen. I know you've talked about building bigger boxes, but obviously that would have been contemplated in the underwriting. What else are you doing to drive that volume improvement?
Speaker Change: Yeah, well, when you think about the group that I talked about, you know, those are a class that was 22 to 24, which means we approved those sometimes in 2020 and 2021. So at that time, I'm not sure we had the baseline of information on, say, these stand-alone freestanding former, you know, full-service restaurant sites that we have now as a benchmark. So we're just, the real answer is we're getting better and smarter as we open more of these diverse kind of restaurant platforms. And so that's why we wanted to call out the percentage of those freestanders that are in our pipeline.
hopefully has a great line coming up but
Speaker Change: I mean, even if you take those out, the classes themselves are doing well, and we've gotten better at locating sites, being near the epicenter, out-positioning competitors.
Speaker Change: the layouts of the restaurants to optimize operations, the dining room configurations. I mean, you've heard us talk about this cocktail of things that we've been working on to really optimize our operations. And that's a big part of it is.
Speaker Change: is the work that we've done, you know, when a restaurant opens, we analyze it, you know,
Speaker Change: within 60 days of it opening and look at optimization so that we can impact whatever the next one is that we're approving that still may not open for a couple of years. So that's why you've seen our, I think that's a big reason you've seen our AUVs grow so tremendously from, you know, one point.
Speaker Change: 6 to now, you know, we're talking about 2.2 and some of the ones we're approving are Are you know now going in at 2.6? So I mean, that's it. That's a tremendous increase in Projected average unit volumes for a restaurant that's only open seven and a half hours a day
Awesome, thanks for taking the questions.
Thank you.
Good luck.
Speaker Change: Our next question comes from Gregory Frankfurt with Guggenheim Securities. Please proceed with your question.
Hey guys, thanks.
Speaker Change: Hey Mel, just going back to maybe the marketing and I think one of the challenges for full service has been
Speaker Change: kind of pushing into this marketing. Do you think there's a bigger opportunity in lower frequency guests who might be lapsed or is it the customers coming every month or two that you can really move the needle for? I'm just curious how you kind of segment or think about your customers and who you can move the needle with.
The first thing I'll tell you is that our frequency
Speaker Change: pretty much mirrors what you talked about there with casual dining.
Speaker Change: We're looking at, you know, in terms of another visit, another half visit from all of the cohorts, but really understanding, you know, what's the motivation for the visit, what's the occasion for the visit. So the more we know about that, the better we can be in targeting. And we're not, I would say, we're not...
Speaker Change: discriminating against any particular frequency cohort. We kind of have a good feel for the groups and how often they use us and how they use us. And now, for example, what I was talking about earlier is if it's somebody who's weekday lunch, making sure that we hit them with the right message at the right time when they're making a decision on where to go for lunch during the week and likewise on brunch on the weekends or weekday breakfast. So we're looking, you know, if you think back to what we've said all along and how diverse and broad our customer base is, we actually have the opportunity to not have to be so specific and can make an impact, which is what we've been testing.
Speaker Change: God, thanks for the perspective. And then maybe for Mel, just as I look at kind of the margin lines, labor you've done a really good job of leveraging that despite negative comps. Can you talk about kind of what's going on there from an hour efficiency perspective and just your outlook for kind of cost inflation going forward?
Speaker Change: Yeah, I think the credit goes to the operators, frankly, and we've talked about it for a couple of quarters that we enhanced.
some of their tools that are provided.
Speaker Change: for managers to actually see more close to real time how their labor's running and they can be more accountable. But to their credit, it's not just providing them the information, it's their actual commitment.
Speaker Change: to focusing on it and holding each other accountable in the restaurants. And so I think the success that we have seen has been the focus that Dan Jones and his team really have applied to.
Speaker Change: to scheduling properly and being very attentive to the labor cost line.
Speaker Change: It cuts down on many things, like keeps us from paying for inefficient overtime or crews during our...
Speaker Change: hours that are not peak hours, you know, it helps with optimal staffing and that sort of thing. So, I would say that it's, yeah, it's the tools, but it's really, you know, most of it's elbow grease. It's the attention of the restaurants on that line item.
Speaker Change: and then just the outlook maybe for food and labor inflation.
Speaker Change: I think that in terms of inflation, I think we've given our full year guidance, it's 5% or so.
Okay. Thanks, y'all.
Yep, thank you.
We wish you a Happy Mother's Day!
Speaker Change: There are no further questions at this time. I would now like to turn the floor back over to Chris Tomasso for closing comments.
Chris Tomasso: I want to thank our teams again for their combined efforts.
Chris Tomasso: I have to say the entire organization's dedication and kindness was on full display in response to the recent hurricanes. Their collective actions really supported our reopening locations in short order and, again, typifies our You First culture. So, I was really pleased with how our teams responded to that. And we look forward to finishing the year strong and continuing to create memorable experiences for every First Watch customer. So, thank you, and I hope you all have a great day.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Thank you for watching.
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