Q4 2024 First Watch Restaurant Group Inc Earnings Call
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Speaker Change: Thank you for standing by, and welcome to the First Watch Restaurant Group Incorporated's Fourth Quarter Earnings Conference Call, occurring today, March 11, 2025, at 8 a.m. Eastern Time.
Speaker Change: Please note that all participants are currently in listen only mode. Following the presentation, the conference call will be open for analyst questions, and the instructions on how to ask a question will be given at that time.
Speaker Change: This call will be archived and available for replay at investors.Firstwatch.com But there's news and events section.
Speaker Change: I would now like to turn the conference over to Steven Marotta, Vice President of Vestrelations of First Watch to begin. Thank you.
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 fourth quarter of fiscal 2024 on global newswire and filed its annual report on 10K with the SEC. The documents can be found at investors.firstwatch.com.
Speaker Change: This conference will include forward-looking statements that are subject to various risks and uncertainties that can cause the company's actual results to differ materially from these statements.
Speaker Change: 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.
Speaker Change: Any such statement should be considered in conjunction with cautionary statements from the company's earnings release and the risk factor disclosure and the company's filings with the SEC, including our annual report on Form 10K.
Speaker Change: first watch assumes no obligation to update these forward looking statements whether a result of new information, future developments or otherwise, except as may be required by law.
Speaker Change: Lastly, Management's remarks today will include references to various non-GAAT measures, including restaurant level operating profit, restaurant level operating profit margin, adjusted EBITDA, and adjusted EBITDA margin.
Speaker Change: Investor should review the reconciliation of his non-get measures to the comparable gap results contained in the company's earnings release file this morning.
Speaker Change: During today's call, references to same restaurant sale and traffic growth compares to the 13-week periods and the December 29th, 2024 and December 31st, 2023 in order to compare like the like periods. Otherwise, any reference to percentage growth...
Speaker Change: My discussing fourth quarter performance is a comparison to the fourth 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 to discuss our fourth quarter 2024 financial results in our outlook for 2025.
Chris Tomasso: And thank you to our more than 15,000 employees who wake up early every day to make days brighter for our customers and each other. These results are the product of their extraordinary efforts.
Chris Tomasso: 2024 was a pivotal year for First Watch, just not in the typical way. I'm particularly proud of how our teams operated during the year, driving our total revenue to over 1 billion dollars and our adjusted EBITDA to over 100 million for the first time in the company's more than 40 year history.
Chris Tomasso: Despite the adverse conditions faced by consumers, which pressured restaurant industry sales.
Chris Tomasso: We controlled the controllables and in the process increased labor efficiency, improved restaurant level operating profit margins, reduced ticket times, improved employee turnover and raised our already exceptional customer experience scores.
Chris Tomasso: I'm also proud of what we did not do in 2024. We differentiated ourselves by refraining from aggressive price promotions which were widespread across all day parts.
Chris Tomasso: Above all, we state true to who we are, which is a trait that has served us well through every environment. And as a result, the First Watch brand entered 2025 in a position of strength, committed to serving in elevated daytime-dining experience, and to providing our customers with value.
Chris Tomasso: Importantly, we open 50 new restaurants in 2024, including a record 25 in the fourth quarter alone.
Chris Tomasso: On average, restaurants we opened in 2024 are on pace to generate third year sales of $2.6 million or about 20% above our current system average unit volumes, with a projected cash on cash return above 35% and IRR above 22%.
Chris Tomasso: The pace of our new restaurant development and our proven site selection principles creates a formidable growth engine that contributes to our ability to fulfill First Watch's long-term annual goals of mid-teens percentage increases in revenues and adjusted EBITDA.
Chris Tomasso: We've identified vast white space for First Watch throughout the U.S., which continues to affirm our strategy to reach 2200 locations in the continental U.S. It's not a matter of if, it's a matter of when.
Chris Tomasso: For more than four decades, First Watch has grown largely via word of mouth. While we're proud that loyal customers love and recommend us, as our national footprint has grown, we recognize our opportunity to raise brand awareness via smart, targeted marketing efforts.
Chris Tomasso: After several years of technology investments and associated data collection aimed at improving our marketing efficiency, combined with learnings from test conducted in 2024, we are meaningfully scaling our marketing spend in 2025.
Chris Tomasso: This effort represents the next step in the continued evolution of our marketing capabilities which has been years in the making and was not a reaction to the more recent challenging industry traffic.
Chris Tomasso: Our broad-based, iterative approach utilizes various media strategies that target current customer frequency as well as attract new consumers to the First Watch brand.
Chris Tomasso: Historically, marketing campaigns aimed at increasing a restaurant's brand awareness were anchored by a significant investment in advertising on national media.
Chris Tomasso: You should not expect to see First Watch commercials on traditional broadcast television.
Chris Tomasso: Instead, our approach utilizes a variety of channels to connect with consumers at various stages of the marketing funnel and nurtures that relationship to a first party connection.
Chris Tomasso: Our investments in technology have led to greater tracking, measurement, and targeting resulting in more informed results and we believe the potential for greater per dollar return than previously achieved.
Chris Tomasso: Given these new capabilities, we are funding the cost of our 2025 customer target strategy with both the reallocation of existing dollars and increased investment and expected driver return to positive guest counts in 2025.
Chris Tomasso: While this investment represents a significant step up for us, we believe that as a percent of sales, our planned investment in marketing remains below the industry average. We view this as a natural part of our brand evolution and see it as a leverage to support our long-term growth targets.
Chris Tomasso: We do not expect our campaigns to result in traffic-related peaks driven by price promotions rather an ongoing drum beat to scale awareness alongside our new restaurant growth.
Chris Tomasso: Later this year, we also plan to launch enhanced customer-facing technologies as part of our ongoing journey to improve both the customer and employee experience.
Chris Tomasso: These include, but are not limited to, a custom built weightless experience, a new menu experience with dynamic nutrition and knowledge and tools, new ordering capabilities, and a personalized offer a lot. We will build on these levers for continued growth over the next several years.
Chris Tomasso: As I mentioned on our third quarter conference call in an effort to stabilize traffic in the third party delivery channel, we partnered with our platform providers to modify our approach and improve our effectiveness.
Chris Tomasso: These modifications, which we instituted early in the first quarter of this year, immediately improved our visibility within the delivery apps and subsequently reversed our trend. Please report that traffic is now positive in this channel year-to-date.
Chris Tomasso: We know that the consumers facing a lot of pressure everywhere they turn these days are instinctive responses to reinvest in the customer experience through innovation, heightened hospitality, and enhanced value.
Chris Tomasso: Our highly anticipated seasonal menus continued to delight our customers, which was on full display with our current Jump Start menu and its eye-catching and craveable Parmesan prosciutto toast.
Chris Tomasso: We'll soon test an expanded line of beverages and have already tested exciting new menu innovations which have delivered positive early results.
Chris Tomasso: We increase meat and potato portions on some of our top-selling menu items and replace honey do with more premium fruit such as strawberries, pineapple and blueberries in our fruit bowls.
Chris Tomasso: And we brought that complimentary coffee while you wait, something our customers love that we did for more than 30 years before it was discontinued for safety reasons during COVID.
Chris Tomasso: This investment in the guest philosophy is nothing new for us. It's yet another way in which we extend hospitality and a key factor in how we remain relevant and driven a high value perception with our customers for many years.
[inaudible]
Chris Tomasso: Being the category leader in the daytime dining segment has many advantages. Scale is the top of the list. This is where our scale matters.
Chris Tomasso: Scales the difference between new restaurant openings at A locations in the epicenter of the trade area versus openings in second rate B or C locations. Scales the difference between accelerating unit growth and expanding our footprint while others in our segment pull back or close under performing units.
Chris Tomasso: Scales a difference between an elevated menu offering with dynamic seasonal menus, highlighting fresh in-season ingredients versus highly commoditized breakfast offerings.
Chris Tomasso: and Scale is the difference between a strong supply chain versus scrambling for key ingredients in challenging times.
Chris Tomasso: Quite simply, in good times and not so good times, our scale positions us to power through challenges better than anybody else in our space, especially those that are highly franchise which inherently have less control over menu pricing.
Chris Tomasso: Strategically and historically, our disciplined approach considers pricing only to long-term inflationary trends, not to transitory commodities bikes, and we will do the same in 2025.
Chris Tomasso: Similar to the avian flu experience in 2022, after taking no price in 2021, our modest pricing that year looked through the short-lived spike in egg costs which rolled off in the following year and spurred market share gains for us in the meantime.
Chris Tomasso: I'm also excited about the opportunities that lie ahead in 2025. Our real estate and people pipelines are robust and well-positioned to support our ambitious yet highly achievable unit growth targets.
Chris Tomasso: We're bullish on our ability to bring our unique breakfast brunch and lunch offering to new markets, such as New England, where we've already been welcomed with open arms and Las Vegas, where we expect to open in the second half of the year, while we continue to build out our core and emerging markets.
Chris Tomasso: We spent several years focusing on serving more demand, and in doing so have raised our AUVs from 1.6 million in 2019 to 2.2 million today. We now turn our efforts to creating more demand through our continued new restaurant unit growth and burgeoning marketing efforts to expand our presence, increase our awareness, and drive our compressed pump base.
Chris Tomasso: Every year inevitably presents unique challenges, whether it be a pandemic, supply shortages, traffic
Chris Tomasso: We approach them all the same way, with a long view. We control the controllables year in and year out and along the way take chair and expand scale to set up a stronger tomorrow. And now I'd like to turn it over to Mel. Thank you, Chris, good morning.
as Chris referenced in his opening remarks.
Mel Hope: Our restaurant managers and crews continued the efficient operation of our restaurants in the fourth quarter as they did throughout all of 2024. They further improved our employee turnover, generated faster ticket times, and posted better customer service scores compared to the prior year.
Mel Hope: Total fourth quarter revenues were $263.3 million, an increase of 16.8%, excluding the impact of the 53rd week in 2023.
Mel Hope: Our top line growth in the fourth quarter is attributed to the 145 non-comp restaurants, including the 43 company-owned new restaurant openings in the 28 acquired franchise locations since the third quarter of 2023.
Mel Hope: This was partially offset by negative same restaurant sales of 0.3%, which includes the same restaurant traffic decline of 3%.
Mel Hope: In the fourth quarter, our in-restaurant dining traffic was stronger than our off-prem traffic. However, as Chris mentioned early in 2025, we implemented changes to our delivery program.
Speaker Change: This has driven improvement in the third-party delivery sales channel, resulting in higher traffic here today and is now positive year-over-year.
Speaker Change: On the food cost front, food and beverage expense was 22.7% of sales compared to 22.5% in the same period last year.
Speaker Change: As a percent of sales costs benefited from carried pricing of 2.9% offset by commodity inflation of 2.4%.
Speaker Change: excluding marketing incentives in the first month of the quarter, food and beverage as a percent of sales would have been flat versus the same period a year ago.
During the quarter, restaurant level labor inflation was 4.3%.
Speaker Change: Labor and other related expenses were 33.7% of sales in the fourth quarter, a 20 basis point improvement from 33.9% reported in the fourth quarter of 2023.
Speaker Change: Our increased labor efficiency combined with carried pricing offset the impact of labor inflation in the fourth quarter.
Speaker Change: We achieved restaurant level operating profit margin of 18.8% in the fourth quarter of 2024.
Speaker Change: excluding the impact of the 53rd week in 2023's results, restaurant-level operating profit margin would have been even with the fourth quarter of 2023.
Income from Operations Margin was 1.5%.
Speaker Change: At 30.7 million general administrative expenses were 11.7% of fourth quarter revenue which was favorable to the prior year by 50 basis points.
Speaker Change: Adjusted EBITDA was $24.3 million, a nearly $5 million increase versus the 19.6 million reported last year, excluding the contribution of the 53rd week.
Speaker Change: Adjusted EBITDA margin grew to 9.2% as compared to the 8.7% margin we realized in the fourth quarter of 2023 again excluding the impact of the 53rd week in 2023.
Net income was $700,000, and net income margin was 0.3%.
Speaker Change: With the 25 new system-wide restaurants opened during the fourth quarter of which 23 are company-owned and two are franchise-owned, we ended the fourth quarter with 572 restaurants.
Speaker Change: Our new restaurant openings are a key contributor to our growth.
Speaker Change: Not only did new restaurants increase our revenue and profits, they extend our leadership in the day-time dining segment, they increase our brand awareness.
Speaker Change: and they provide attractive personal and professional growth opportunities for our employees, which we believe also contributes to our leading retention and turnover rates.
For your financial modeling purposes, the net effect of acquisitions.
Speaker Change: which includes only the impact it purchases made within the last 12 months, increased fourth quarter revenue by about $12 million and adjusted EBITDA by about $3 million and full year by about $58 million and $13 million respectively.
Speaker Change: For further details on our fourth quarter, please review our supplemental materials deck on our investor relations website beneath the webcast link.
Speaker Change: Before providing guidance for 2025, we'd like to offer some additional color on the inflation and key commodities.
Speaker Change: Although we contract annually for our eggs which ensures our supply and protects us from the most severe price volatility.
Speaker Change: The continuing impact of the avian influenza has necessitated that our egg supply will be supplemented with purchases subject to spot market pricing.
This obviously increases our overall ag cost.
Speaker Change: Additionally, prices of avocados, bacon and coffee beans are elevated as well.
Speaker Change: Year-to-date, our commodity inflation is tracking at high single digit percent inflation and we expect much of the higher pricing to be sustained throughout the year.
Speaker Change: Our full-year expectation for commodity inflation and adjusted EBITDA have contemplated these higher costs as well as the recently announced tariffs.
Now I'd like to provide our initial outlook for 2025.
Speaker Change: We're expecting same-restaurant sales growth to be positive low single digits with flat to slightly positive same-restaurant traffic.
Speaker Change: Our same restaurant sales growth guidance includes a 1.3% price action implemented in January which implies carried pricing of around 2.8% in the first quarter and 2% for the full year.
As a reminder,
Speaker Change: Historically our disciplined price actions aim to offset what we perceive to be permanent inflation, not transitory spikes.
Speaker Change: We expect total revenue growth of around 20 percent with a net 400 basis point impact from acquisitions completed or announced, assuming the timely closing of announced acquisitions.
Speaker Change: We expect a total of 59-64 net new system-wide restaurants, including 55-58 company-owned restaurants and 7-9 franchise-owned restaurants.
with three planned company-owned restaurant closures due to lease explorations.
Speaker Change: Our company and a new restaurant development pipeline is weighted in the second half of 2025, Q4 in particular.
Speaker Change: We expect full-year commodity inflation percentage increase in the high single digits driven by recent increases in eggs, pork, coffee, and avocados as well as the tariffs.
Speaker Change: Restaurant-level labor inflation is expected to be in the range of 2% to 4%.
Speaker Change: Our Adjusted EBITDA guidance range is $124,000,000 to $130,000,000 with the net impact from acquisitions expected to contribute about $8,000,000 to our Adjusted EBITDA this year, assuming the timely closing of announced acquisitions.
Speaker Change: We expect a blended tax rate in the range of 31 to 33 percent. We expect capital expenditures of 150 to 160 million, not including the capital allocated to franchise acquisitions.
while we do not typically provide quarterly earnings guidance.
Speaker Change: We believe you may find a number of current considerations helpful to your models.
Speaker Change: As we have discussed our new restaurants operate at less efficient margins with the first 120 days having the steepest climb to maturity.
Speaker Change: The company's overall profitability in the first quarter of 2025 will be affected.
Speaker Change: by the record number of new company-owned restaurants opened in the fourth quarter of 2024, in addition to the ten or so expected in the current quarter.
Speaker Change: Combined with the recent spikes in key commodity prices, we expect adjusted EBITDA in the first quarter of 2025 to be around $4 million below the first quarter of 2024.
Speaker Change: Note also that we expect 50 to 55% of our adjusted EBITDA for the year will be generated in the second half of 2025.
Speaker Change: Additionally, we enjoyed positive same-restaurant traffic in the month of January , though with unseasonably cold weather and a weaker industry backdrop. February proved more challenging, posting negative, low single-digit same-restaurant traffic.
Speaker Change: While we expect same restaurant traffic to be slightly negative for the first quarter, our guidance contemplates positive traffic for the balance of 2025.
Speaker Change: Lastly, we remain highly confident in our growth prospects, as such we're reiterating our long-term annual financial targets, including NRO percentage growth in the low double digits.
Speaker Change: Same restaurant sales growth of around three and a half percent, restaurant sales and adjusted the EBITDA percentage growth in the mid-teens.
Speaker Change: and so operator, if we could open the line now for questions.
Speaker Change: Yes, thank you. We'll now be conducting a question and answer session.
Speaker Change: If you'd like to ask a question at this time, please press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue.
Speaker Change: Let me first start, too, if you'd like to withdraw your question from the Q.
Speaker Change: Hope, distance you to speak your equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please are we told for our first question. Thank you.
Speaker Change: Thank you and our first question is from the line of Jeffrey Bernstein with Barclays. We'll see you with your questions.
Good morning, Jeff
Jeffrey Bernstein: Good morning. Thank you very much to question the first one just on the
the current conference.
Jeffrey Bernstein: in a many of spoken of weather and holiday shifts, pressuring the first quarter of the date comps.
Jeffrey Bernstein: and it sounds like you had some impact in February , but any concern of a slow and macro beneath the surface that is perhaps being messed with these transitory headlands because that would seem to be contrary to your assumption for a return to positive traffic.
Jeffrey Bernstein: Rest of Year, just trying to gauge whether there's something more going on than perhaps just something transitory. Maybe you've seen something in consumer behavior by income levels or anything along those lines that you can share in terms of your confidence in those cops and then one follow it.
Jeffrey Bernstein: Sure. It's hard to say, Jeff, but we feel good about the direction that we've seen for our business. Our Q4 traffic was better than Q3, and our Q1-day traffic is better than Q4, so we're seeing a positive trend.
Understood.
Speaker Change: And then in terms of the the marketing you talked about, I think you mentioned meaningfully scaling that definitely an area of interest.
Jeffrey Bernstein: Obviously you seem pleased with your fourth quarter test. I'm just wondering how 2025...
Jeffrey Bernstein: is going to look different than 2024. Maybe what components have you most excited, or how you're thinking about the dollars to spend. I think you said percentage of sales is still below peers, but any call you could share in terms of the spend you're going to be doing and where you think you're going to get the best bang for the buck. Thank you.
Speaker Change: Sure, I'll take that one too. Yeah, we're really excited about the results that we've seen from the marketing campaigns and initiatives that we tested in 24. As I said on our last call and at ICR, we've basically taken the best of what we tested and put that into our plan. It's fully contemplated in our plan, the expenses. It's a big step up for us. From a cent.
Board of Trustees
Thank you.
Speaker Change: Our next questions are from the line of Andrew Charles with TD Kallen. Please receive your questions.
One of their great thanks.
Andrew Charles: Hey guys, so very helpful, you know, details from the high single digit, you know, commodity inflation, you know, just on the egg side. What are you specifically seeing there? You know, I know you said you had to go outside of your outside of the network to buy some spot prices as well. And just remind us, I guess, on the egg side, I'm believing the past you've quantified eggs and potatoes together as a mixture commodity basket. Keep providing updated that as well. Thank you.
Speaker Change: Yeah, the exit is roughly run about 15% of our market basket.
Speaker Change: And what was the first question in a color on the eggs? Yeah, just eggs in particular, as you guys got into a high-signature inflation for the full year and you're seeing that year, quarter to day. You know, how much of that is just being driven by the eggs component of it?
Speaker Change: Well, the overall inflation we're not breaking down in the components, but we do, you know, eggs.
Speaker Change: I don't know the portion that we're buying on the open market right now, but overall our eggs, we contract for that price on an annual basis.
and then during this time when there is diminished flocks.
then we're having to supplement this.
Speaker Change: Supply, and that's causing some additional add or cost or a surcharge on top of our negotiated price and that's really where the inflation associated with the eggs are concerned in terms of time.
Speaker Change: Frame, I've said before, we're pretty finicky about the quality of our eggs and the type of eggs and therefore in order for the flocks that produce the sort of the eggs.
Speaker Change: that we use. It'll take the better part of the year we understand before we see some, you know, sufficiently mature flocks.
Speaker Change: to start producing the kind of eggs that we look for assuming there's no more flock depopulation.
Speaker Change: That's helpful. And then Chris Quick follow up, you know, I think he articulated well, you know, the reason why you want to keep pricing modest, you know, only taking 1.3% pricing in January despite the severe amount of inflation you guys are seeing. Just curious, you know, how open-minded are you that if this persists, you know, your level of willingness potentially revisit the pricing decision later in 2025? [inaudible]
Speaker Change: Yeah, we're going to follow the same cadence we do every year. It has served us well for a number of years where we take a price increase at the beginning of the year based on what we expect to commodity or just the overall inflation labor and commodities to be. And then we are always planning to take a mid-year look and see where we are, see if anything's changed for the good or the other way and we'll approach it that way. In years of what I would call outsized inflation.
Speaker Change: We, as I mentioned in the opening, we may or may not price to cover all of it, we may make a strategic decision based on, you know, the long term health of the business, again, not to make a permanent pricing decision on something that we see as a transitory issue, which we feel avian influenza is right now.
Speaker Change: We experienced that in 2022. I talked about that a little bit. We certainly didn't price to cover that.
Speaker Change: Inflation, which I think was over 13% that year, and that helped us grow traffic since then, and we're going to take that same kind of approach mid-year here, but we're open to it, Andrew, we're just...
Speaker Change: We know what the pressure that consumers under, and we want to make sure that we're thoughtful about it.
Makes sense. Thank you.
Andrew Barish.
I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Speaker Change: The next question is from the line of Sara Senatore with Bank of America. This is your three questions.
Sarah Senator: Thank you. I wanted to ask about your approach to value, I guess.
Speaker Change: You said, and maybe it's a two-part, you're emphasizing value about doing deep discounts. I guess do your customers?
Sarah Senator: I recognize that the feedback you're getting or how can you tell that that's the case versus something that's a little louder, I guess.
Sarah Senator: In that same vein, even though you do have to buy on the spot, I suspect your inflation is still a lot lower than maybe what your competitors are seeing who haven't locked in any and certainly what we're seeing in grocery stores.
Sarah Senator: Is that an opportunity for you to, you know, kind of emphasize your value gap or expand it further and then I'll have a just a quick follow up on advertising please.
Speaker Change: Sure, I'll take the first part and then let Mel speak to the inflation. I'll just say that, you know, the...
Speaker Change: The focus on communicating our everyday value with something that kind of came to light in the marketing testing. With the messaging, we tested a number of different messages creative and those type of things. And in the past where you've seen us focus on our seasonal menus and perhaps some of the more, I'd call them, you know,
Speaker Change: One sort I'm looking for. You know, more of the specialty items that we do on the seasonal menus.
Speaker Change: The messaging that we use that focused on the core menu and frankly some of our top sellers, our top three or five sellers.
Speaker Change: is really what resonated with the consumer so that's what we've leveraged going forward and so when you ask how do we know that the consumer is recognizing that we've got results from tests that we've done on a number of different creative executions.
Egg Contract
Speaker Change: Really, for us, it's secure as the supply, right? We don't have any outages or...
or Shortages of Eggs in the Restaurants and...
Speaker Change: but I don't think in terms of just pricing, we are still paying more and we have a premium product that we use in terms of the eggs. So while you go to the grocery store and maybe you're seeing egg outages,
or just thin shells of that sort of thing. [inaudible]
Speaker Change: We don't procure our eggs from the same place that grocers do.
Speaker Change: You know, principally because of the business that we're in, but it's not a place for us to look for value right now, it is very, it is, you know, we're paying a premium and I think everybody else is probably paying a premium too.
Speaker Change: All right, so what do you think about competitors who maybe, you know, search are things like that, you know, your, your view is that you're still, it still may not be the place that you want to emphasize value just because you're in focus are so high.
I think that's right, yes [inaudible]
Speaker Change: Okay, and then just quickly on the advertising, I guess when we talk about one like the delivery and the 3P are...
Speaker Change: Is that what you were doing better as you think about transaction growth? Is it the marketing pieces or something else that you were referring to as you were able to turn that trend around?
Speaker Change: Yes, if you remember what we talked about previously, the third party channel was the biggest headwind on our customer counts and traffic and we also talked about how quickly it turned and so we just worked very closely with our providers.
Speaker Change: on kind of a new arrangement that helps with our visibility and we've seen the results that we expected from it. So, our partners leaned in with us and worked with us. I mean, it's good for them too. Our day part is one that, you know, we're a big player in and it's not as robust, I guess, from a number of restaurants that are in that space, so we're important to them. They're important to us and we work together to put together a true partnership that works for both. Thank you.
Thank you.
Speaker Change: Our next questions are from the line of Andy Barish with Jeffries. Please receive your questions.
Andy Varish: Take good morning guys. Just wanted to kind of go through you know restaurant level margins or you know in in 24 and 23 for that matter at the high end of your
Speaker Change: You know, kind of targeted range and it looks like there'll be some decline this year. I'm kind of guessing you know anywhere from 25 to 75 bits is
I guess with that all in the... [inaudible]
Speaker Change: You know, in the food costs line and we're just in terms of geographically on the P&L. Where will the higher marketing costs, you know, wind up showing up the most?
Andy Varish: Yeah, marketing would be in the GNA, in the GNA line item. And if we have margin pressure, Andy,
Andy Varish: I think what we're trying to dial into is we're focused on growing traffic.
really wouldn't want to confirm.
and kind of your percentage range that you express there.
Andy Varish: But again, we're focused on growing those dollars even if we have to take a little bit of the inflation on the margin because
Andy Varish: If we look and we see that the inflation appears to be transitory, then we're pleased to take some on the margin as long as we're growing our margin dollars.
Speaker Change: Gotcha. And then just a quick follow up on the on the labor efficiencies. I know that.
Speaker Change: Work worked really well. Are you at a point where there is more productivity improvements or will it kind of potentially come from just the leverage of getting back the positive comps and positive traffic?
Speaker Change: Yeah, that's the always work of a heart of restaurant managers, and so we claim some low-hanging fruit last year and the teams worked hard to incorporate some of the new information and to adjust.
Speaker Change: More swiftly, in terms of staffing, there are more things that will continue to add.
Speaker Change: I don't know that we can expect the kind of efficiencies to flow through that we saw last year, just because the volume of things to focus on is smaller, but they're constantly looking for ways to…
Speaker Change: either change the staffing or the choreography of the restaurants so that so that we can better serve the customers but also to optimize the labor efficiency as well. And Andy, I'd say that, you know, the restaurants.
Speaker Change: performed exceptionally well in a down traffic environment and so we think we have leverage opportunity with, you know, if and when we see the improved customer counts.
Speaker Change: Great, thanks for opening hand over, may I have to head over there later.
You're welcome. We did it for you.
I'm sorry. I'm sorry. I'm sorry. I'm sorry. I'm sorry.
Speaker Change: Thank you. As I'm whether to allow as many as possible last questions, we ask you please learn yourself to one question per analyst. And the next question will come from the line of Jim Salera, let's see if you see a clear question.
Speaker Change: Chris, I don't know if you want to take an opportunity. No, I wanted to maybe disaggerate if I can. Some of your commentary on the commodities, given that you're factoring in tariffs.
Speaker Change: Is there a way for you to break out how much of that high single digit, you know, come out of the impact is from tariffs and if we were to see those roll off kind of what you would expect from an improvement and I guess with that happen, I would think immediately maybe I'm not thinking about that correctly.
Speaker Change: So Jim, we believe that furnishing the inflation is just a combined range is most helpful because that's how we think about it. Management considers it.
Speaker Change: You know, one pool of costs that we manage to and as we go through the year, I mean, we'll be updating where we come out on inflation and we'll know more about the tariffs when we issue in May.
Great.
Speaker Change: and then maybe shifting gears and thinking about the traffic commentary. You know, we think about flat deposited traffic.
Speaker Change: for the year. Obviously, a lot of people in the industry are talking about, and they'd flat the down traffic, which would imply you guys getting a little bit of share.
Speaker Change: Is that the marketing, driving, new guests to the restaurants and kind of discovering First Watch for the first time? Or is there a frequency component in there as well that's supporting guests that are already familiar with the concept coming on a more frequent basis?
Speaker Change: I think our expectation of our marketing is, I mean, we're certainly very optimistic about it. I think it drives both frequency and, I guess.
Okay, great. I'll hop back into you.
Speaker Change: A discussion from the line of Gregory Francfort with good and good health carries. This is your question.
Gregory Frankfurt: Hey, hey, thanks for the question. My question is, I think a couple of cores ago when traffic was maybe in a little bit softer spot, you talked about pressure on, you know, kind of the weekday, day part in certain times.
Gregory Frankfurt: Has that changed, and has that been what's maybe helping traffic the last couple quarters get a little bit better spot? Any change in terms of what you're seeing from a date park perspective? Thanks.
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Gregory Frankfurt: I think it's pretty much stayed the same from a mixed standpoint. Weekend traffic is still better than weekday and the day part mix has been about the same. I think it's just so I think the input flow of the consumer at the different day parts hasn't changed. It's just that we've seen more.
Thank you.
Speaker Change: God, and then maybe I'll sneak a second one in here. Chris, for a company of your size, I think you guys are doing more...
Speaker Change: with customer data and analytics than some of your peers. Can you share how you think about that? Do you need customers to be in a loyalty program to be able to use customer data? Can you do it outside of that? Just just any perspective on how you do that? Thanks.
Yeah, I'll tell you that
Speaker Change: If I have to answer your question, yes or no, the question is no, you don't have to, as long as you have...
Speaker Change: You know, ways in which you can collect consumer data, both your customers, customers of competitors.
Speaker Change: Labs users, those type of things, it's really about the way you go about speaking to them and reaching out to them, the frequency, the messaging, and those type of things. And our team does an incredible job of...
Speaker Change: of cutting up that data and using it. We've been talking about it for a long time, building that data lake, and we're at a point now where we can really start to leverage it, but the way in which our team goes about it is high level. [inaudible]
Thank you.
Mm-hmm.
Speaker Change: Our next question is from the line of Crystal Coat with Steve Hull. This is your question.
Patrick: Very thanks, guys. This is Patrick on for Chris. Good morning.
Patrick: Hey, I wanted to ask about the anticipated mix impact of the marketing investment going forward. Mel, I know you don't typically have an explicit forecast in the guidance for the underlying mix if I remember correctly and you can correct me from wrong there, but are you assuming any negative mix impacts from those marketing investments you plan to make? [inaudible]
Patrick: and is the underlying mix still positive if you kind of back that out in the current result?
Patrick: I don't think we anticipate, and first of all confirm you're right, we don't typically break out mix in our guidance, but we don't expect a negative mix impact.
Okay.
Speaker Change: Chris, I have a quick follow-up on the marketing investment, so is the plan to distribute the spend equally across the system, or is there any intent to lean into specific markets or regions where you think you could see?
Speaker Change: and then a disproportionate impact. And then in the testing that you guys did, was there any major difference in the result of reaching your own customers versus, I know you had some efforts where you were looking to, you know, reach customers who had not ever used the brand yet, maybe customers of competitors. And I was just curious kind of the relative distribution there as well, between targeting your own customers versus targeting customers outside the brand. And if there was any learning from the test that influenced kind of how you distribute those investments across those buckets. [inaudible]
Thanks, guys.
Speaker Change: Sure, I'll start with the first part of your question, which is...
We're obviously focusing on markets where we have the greatest...
Speaker Change: Density in Penetration for obvious reasons, the more outlets we have for customers to be able to engage with us, the more efficient our spend is going to be. And that was a big learning from our test.
Speaker Change: It's obvious, but we also wanted to test it that way and on the second part of your question we saw the results that we expected from
when we targeted our own customers and when we targeted...
Speaker Change: You know, customers of competitors because it was based on frequency and you know basically trying to get one more visit out of our customers and also getting in the rotation for customers of competitors in in our day parts and so both of those. [inaudible]
Speaker Change: Approaches were successful, obviously at different levels but both of those approaches are also built into our plan for 25.
Great. Thank you.
Uh-huh.
Speaker Change: Our next question is from the line of Brian Vaccaro with Raymond James. Please excuse your questions.
Brian Vaccaro: Hi, thanks. Good morning. You guys highlighted the strong performance of some of your new unit openings. Could you just elaborate on some of the common threads driving that out performance versus your targets? Is there anything worth highlighting in terms of average square footage, new versus existing markets or any inflections you're seeing in certain markets around brand awareness? Yes.
Brian Vaccaro: Probably on average the new restaurants that we'd open the last.
Recently, and that probably could last a couple of years.
Brian Vaccaro: Probably the square footage has exceeded the legacy fleet. I think if you go back a few years, the legacy restaurants on average were probably under 4,000 square feet.
Brian Vaccaro: and most of the projects that we open now are above 4,000 square feet, 4,500. There's also Brian , I think you and I talked about this before that there's a lot of...
It's a lot of second-generation space that we have...
Brian Vaccaro: proven that we can go into and sort of nimbly change you know restaurants which are in great locations.
for our...
Brian Vaccaro: for our customers, but that they, you know, they, another brand or another, you know, another type of concept, maybe...
Brian Vaccaro: wanted to move out of their lease or relocate or something like that and so some of those are actually quite large.
Brian Vaccaro: You know, generally they provide for a much larger dining room and larger kitchens, larger patios or more prominent appearance in the restaurants. I do think that those are.
Well received when we when we add them to the fleet.
Brian Vaccaro: And Brian , I'll add that one of the things I'm excited about and we've talked about it before is...
Brian Vaccaro: Our ability to open across geographies and have similar performance. So we know that when our teams stick to the, you know...
Brian Vaccaro: the data, the diligence, the site selection criteria, and the evolution that we've seen in our prototype.
Brian Vaccaro: that we work everywhere. And so our ability to enter new markets like we've done this year in New England and in years past with Chicago and other markets is very encouraging to us because we can kind of have a diversified geographical footprint of where we open. And if you look at, you know, we've talked about, there's no two First Watches that look alike. We're constantly iterating and improving our prototype and how they look, for example, the patio.
Brian Vaccaro: Features and those type of things. So we continue to get smarter and better at this and have been really pleased with the results that I talked about in the opening, you know, from our at our standpoint.
Speaker Change: All right, that's helpful. Thank you. And maybe just one quick follow-up if I could on the guidance. Mel obviously a lot of moving pieces with commodity inflation, the advertising investment.
Speaker Change: Are there any high-level guardrails you could help us with in terms of what your guidance assumes for store margins and G&A spend? Thank you.
Speaker Change: The guidance that we gave, I think the guard rail I'd refer you to is the Adjusted Abidda in the range of 124 to 130.
Speaker Change: for the year we've, everything that we've considered for the year in terms of inflation.
Speaker Change: in terms of our marketing spend in terms of restaurant margins, all of that is baked into those numbers and that's where we have our enthusiastic plan addressed.
Thank you.
Thank you.
Speaker Change: At this time, I'll turn the floor back to Chris Tomasso, if it goes your way.
Christopher Tomasso: Thank you for your thoughtful questions and for participating in our call today. We appreciate it. Once again, I also want to say a special thank you to our entire First Watch team for standing shoulder to shoulder and making days brighter for all of our customers every day. And I hope you all have a great day.
Speaker Change: This will conclude today's conference. Thank you for your participation. You may not disconnect your lines this time.