Q1 2025 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 Grouping First Quarter earnings conference call occurring today May 6, 2025 at 8 a.m. Eastern time. Please note that all participants are currently in a listen only mode.
Speaker Change: Following the presentation, the conference call will be open for analyst questions and the instructions on how to ask the question will be given at that time. This call will be archived and available for replay at investors dot firstwatch dot com under the news and investment section.
Speaker Change: I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch, to begin.
Chris Tomasso: Hello everyone, I am joined by First Watch's Chief Executive Officer and President Chris Tomasso and Chief Financial Officer Mel Hope.
Chris Tomasso: This morning, First Watch Issues, earnings release for the first quarter of fiscal 2025 on Globe News Wire and Files, it's quarterly report on form 10Q with the SEC. These documents can be found at investors.firstwatch.com.
Chris Tomasso: This conference call will include overlooking statements that are subject to various risks and uncertainties that could cause the company's actual results due to from materially from the statements.
Chris Tomasso: Such statements include, without limitation, statements concerning the condition of the company's industry and its operations, performance and financial condition, outlook, growth plans, and strategies and future expenses.
Chris Tomasso: Any such statements should be considered in conjunction with the cautionary statements of the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on form 10K and quarterly reports on form 10Q.
Chris Tomasso: First Watch, soon, 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.
Chris Tomasso: Lastly, Managing's remarks today will include references to various non-GAAP measures , including restaurant level operating profits, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin.
Chris Tomasso: Investors should review the reconciliation of these non-dap measures to compare the gap results contained in the company's earnings release file this morning.
Chris Tomasso: Any reference to percentage growth when discussing the first quarter performance is comparison to the first quarter of 2024 unless otherwise indicated and with that I will turn the call over to Chris.
Chris Tomasso: Good morning everyone. Thank you for joining us today to discuss our first quarter results and a very special thank you to our entire team across the country over 16,000 strong.
Chris Tomasso: At First Watch, regardless of the season or the economic cycle, we are about broke, bringing our unique breakfast brunch and lunch offering to more customers, more often, and in more
Chris Tomasso: Our first quarter of 2025 delivered better than 16% total revenue growth, positive same restaurant growth, 13 new system wide restaurant openings, and the launch of new marketing campaigns across multiple markets.
Chris Tomasso: We also realized a lift in our traffic as the improvement in that trend we shared with you in March continued with our first quarter results. As always, our teams continue their high standard of consistent execution on our service objectives.
Chris Tomasso: As recent headlines a test, the broader macro environment appears even more volatile than when we spoke in March, with rapidly shifting expectations for both consumer demand and input costs.
Chris Tomasso: Last year in describing our organization's primary focus, we often use the phrase controlling the controllables with regard to our customer and employee experiences, as well as our management of the business day in and day out. This approach served us well for 2024 and will continue to be a guiding principle.
Now, on the Q1 in more detail.
Chris Tomasso: 2025 got off to an encouraging start with a return to positive traffic in January , followed by a widely reported weather driven decline in February , and then a return to positive traffic in March.
Chris Tomasso: Then, in April , we posted the best monthly same restaurant traffic result in over two years, giving us optimism that we're on track to achieve positive traffic for the year.
Chris Tomasso: Our better than 16 percent total revenue growth in the first quarter driven by a powerful combination of positive same restaurant sales and continued success of new restaurants illustrates the strength of First Watch's growth strategy.
Chris Tomasso: The commitment of our culture to improving operational efficiency has led to the adoption of new technologies and streamlined processes, ensuring we deliver exceptional customer experiences while remaining competitive and agile in an ever-changing macro backdrop.
Chris Tomasso: Ticket times, for instance, are an important KPI for us, and they improved once again in the first quarter compared to the year-go period.
Chris Tomasso: Indeed, the first quarter of 2025 represented the eighth consecutive quarter of improved field level employee turnover.
Chris Tomasso: Our people are a key brand differentiator, and because we recognize the importance of maintaining a positive and productive work environment, we will continue to introduce and prioritize programs that support their personal and professional growth.
Chris Tomasso: Like our GM council for instance, where a select few of our general managers are chosen to act as sounding boards and problem solvers for their counterparts across the system.
Chris Tomasso: Our enhanced strategic marketing efforts began rolling out across multiple markets in March, and we are pleased with the results as far. We have tactically targeted various consumer touch points, including social media, digital advertising and connected TV, to positively influence both reach and engagement.
Chris Tomasso: This multifaceted approach is allowing us to connect with a broader but more targeted audience driving brand awareness and fostering deeper connections with our existing customers.
Chris Tomasso: These campaigns are already exhibiting promising results in targeted geographies. As we continue to refine and expand our marketing strategies as the year progresses, we will be able to increase our reach, retention and frequency to support sustained same-restaurant traffic growth.
Chris Tomasso: Turning to new restaurant development, we open 13 company owned and franchise restaurants during the quarter across ten states, ending with 584 First Watch locations.
Chris Tomasso: In January , we open our first New England location in Hanover, Massachusetts and only its first few months this restaurant is performing well above our expectations and is often on a weight even on weekdays.
Chris Tomasso: Hanover's success is yet another proof point that supports the fact that the First Watch brand is highly portable and that our total addressable market of at least 2,200 locations in the continental United States is not only realistic but highly attainable.
Chris Tomasso: And just two weeks ago, we announced that we will open a flagship location in a high profile site on Boyleston Street, right at the finish line of the Boston Marathon in Boston's Back Bay.
Chris Tomasso: The entire New England market represents a significant opportunity for our continued expansion. Towards that end, we recently signed a lease in Nashua New Hampshire representing our very first in that state.
Chris Tomasso: Speaking of new markets, in addition to our previously announced entry into Las Vegas later this year, we recently signed our first lease agreement in Memphis, Tennessee, where we expect to open our first restaurant in Q3 of this year.
Chris Tomasso: Our strategic expansion into Memphis is also set to advance our footprint across the region, complimenting our presence in Nashville, our market we entered more than a decade ago and now have 14 restaurants.
Chris Tomasso: And just yesterday, we put our 31st state on the map with our first restaurant in Idaho, specifically in Meridian, a suburb of Boise, yet another market with a lot of white space that also helps us fill in the northwest and builds upon our expansion into Nevada and Utah.
Chris Tomasso: One last word on development. As a group, the 2024 and 2025 classes are currently tracking 10% or above both the comp cohort and our first-year sales expectations.
Chris Tomasso: This relative outperformance underpins our confidence in delivering double digit percentage unit growth targets and in our capital allocation strategy targeting cash on cash returns of around 35% and an IRR of greater than 18%.
Chris Tomasso: Additionally, we are pleased to share the completion of our previously announced franchise acquisition of 16 restaurants in North and South Carolina on April 28th, as well as the acquisition of three franchise restaurants in Missouri on April 14th.
Chris Tomasso: These strategic acquisitions bolster our presence in these key states and the accompanying development rights provide several high quality trade areas for continued new company restaurant growth.
Chris Tomasso: Every year, our strategic planning focuses on innovative methods to create more demand, improve throughput, enhance customer satisfaction, and at the same time, support our entire team. I'd like to highlight a few key initiatives that aim to further strengthen our leadership position and contribute to our continued growth.
Chris Tomasso: Last quarter, we mentioned working more closely with our third party delivery partners to better accommodate the demand dynamics in that channel given the macro pressure is facing the consumer. [inaudible]
Chris Tomasso: Working in partnership with the largest of our two third party delivery providers we developed an implemented a strategy that reversed our negative traffic trends in this channel.
Chris Tomasso: The channel's traffic lift has outperformed our expectations and as a result we are driving more margin dollars albeit by design at a lower PPA and at a somewhat lower margin.
Chris Tomasso: To enhance customer satisfaction and deliver increased value, we doubled the amount of meat in one of our top selling plastic dishes, the trifecta and chose not to take price in order to maintain original margin.
Chris Tomasso: The timing of an outsize increase in bacon costs combined with the significant demand shift by customers into this menu item has placed additional pressure on our margins. We believe taking selective steps like this will ultimately lead to increased customer frequency at the short term cost of a tighter margin for this high mixing item.
Chris Tomasso: Our General Managers are at the forefront of our customer service.
Chris Tomasso: To demonstrate our commitment to hospitality, inspire their creativity and positively impact their communities. We have empowered and encouraged them to make days brighter for certain customers through surprise and delight acts of kindness.
Chris Tomasso: These come to life in the form of a complimentary juice, shareable or entree. While there is an impact to our per person average check, with these actions we are making an investment in long term customer retention.
Chris Tomasso: Small acts such as these create an emotional connection for our customers and build loyalty in ways point-based loyalty programs simply can't.
Chris Tomasso: We believe that the way to effectively manage through uncertain times is to focus on the customer, deliver exceptional value and meet the customer where they are.
Chris Tomasso: By optimizing our third party delivery program, amplifying our Invest in the Guest Initiatives, and empowering our leaders to make days brighter for our customers, we are doing just that and building a stronger foundation for future growth at the same time.
Inevitably, every year presents a new set of challenges.
Chris Tomasso: While our overall first-quarter traffic was a bit lower than our own expectations, specifically as it relates to the in-restaurant channel, we're pleased to see same-restaurant traffic growth displaying sequential improvement. April was better than the first-quarter, which was better than the fourth-quarter, which was better than the third-quarter.
Chris Tomasso: Near term, our margin profile is being pressured by higher inflationary headwinds in our market baskets since our last earnings call the impacts of new tariff implementation and the incremental costs of the previously listed initiatives. [inaudible]
Chris Tomasso: We believe that the multiple challenges affecting our current margin profile are transitory, and that our day park dominance, market share, unit growth, competitive positioning, and customer service experience are unmatched across the industry.
Chris Tomasso: We have a lot to look forward to in 2025. With our increased marketing activity this year, we're actively building customer awareness in core, emerging, and entirely new markets.
Chris Tomasso: Our new restaurant openings continue to exceed expectations. Our growth plan is solid with both our real estate and people pipelines in place to support our continued expansion.
Chris Tomasso: Our top performing restaurants span 14 states and 22 DMAs, showcasing the adaptability and appeal of our brand across diverse regions and illustrating First Watch's widespread popularity.
Chris Tomasso: We have nearly 600 system wide restaurants serving breakfast brunch and lunch in 31 states. We believe that with the higher sales potentials represented in our new openings when compared to the existing portfolio, our future restaurant classes will perform even better. And now I'd like to turn it over to Mal. And now I'd like to turn it over to you. And now I'd like to turn it over to you.
Thank you, Chris, and good morning.
Mel: Total first quarter revenues were $282.2 million, an increase of 16.4%.
Mel: Our top line increase results from positive same restaurant sales growth of 0.7%.
Mel: and the contribution of 115 non-comp restaurants, including 46 company-owned new restaurant openings and 22 locations we've acquired since the fourth quarter of 2023.
Mel: Same Restaurant Traffic was negative seven tenths of a percent. We're generally pleased that both January and March posted positive same Restaurant Traffic by the headwinds experienced industry-wide applied pressure on February results.
Mel: for the quarter. Our in-restaurant traffic was below our expectations. However, changes we made to our third party delivery program yielded immediate results with this channel experiencing percentage traffic growth in the mid teens.
Mel: and offsetting much of the traffic decline of our in-restraught dining and direct off-prem sales channels.
We also experienced positive sales mix during the quarter.
Before moving on to specific income statement inputs.
Mel: I want to draw your attention to two independent factors that impacted multiple income statement line items.
Mel: First, growth in the per person average check was lowered and carried pricing in the first quarter. Due to both the surcharge adjustments we made to our third party delivery program as well as various in restaurant marketing initiatives not check management. [inaudible]
Mel: Second, and as we've shared before, our new restaurants operate at less efficient margins with the first 120 days having the steepest climb to maturity.
Mel: During the quarter, the contribution from our new restaurants was more pronounced than usual, considering that we've opened 33 new company owned restaurants in the last two quarters.
Mel: Food and beverage expense rose to 23.8% of sales compared to 21.8% in the first quarter last year.
Mel: Costs, as a percent of sales, benefited from carried pricing of around two and a half percent, though this was more than offset by commodity inflation of 7.7 percent.
Mel: Eggs, bacon, coffee, and avocados which comprise four of our top five food cost inputs are all trading at remarkably high prices and so are increasing our commodity costs.
Mel: Additionally, food and beverage cost as a percent of sales were impacted by our decision to increase certain portion sizes as Chris mentioned earlier.
Mel: Labor and other related expenses were 34.6% of sales in the first quarter, 130 basis point increase from 33.3% reported in the first quarter of 2024.
Mel: Higher Health Benefit Costs were the primary reason for the year-over-year percentage increase due to higher enrollment and higher claims.
Mel: Restraught level labor inflation was 4.1% in the first quarter and labor efficiency was in line compared with last year.
Mel: Restaurant-level operating profit margin was 16.5% in the first quarter compared to 20.8% in the first quarter last year.
Income from Operations, Margin, was four tenths of a percent.
And I'm going to show you how to do this.
We lever to GNA expenses. [inaudible]
Mel: As a percentage of total revenue, these expenses declined to 10.7%, a 70 basis point improvement compared to the same quarter last year.
the two and a half million dollar increased.
Mel: Versus last year was driven by investments in marketing and in headcount.
Mel: Adjusted EBITDA was $22.8 million, $5.8 million below last year with adjusted EBITDA margins slipping to 8.1% from 11.8%.
Adjusted EBITDA results were lower than our prior expectations due to three factors.
Mel: First, while Mark's traffic improved from February , both months were weaker than we expected.
Mel: Second, as Chris mentioned, we empowered our managers to surprise and delight certain customers and the costs associated with this program were higher than anticipated.
Mel: And lastly, Adjusted EBITDA was affected by the increased costs of our health care benefit programs.
We reported a net loss of $829,000.
Mel: There were 13 new system-wide restaurants opened during the first quarter of which ten are company owned and three are franchise owned and we ended the period with 584 restaurants in the system.
Mel: The Net Effective Acquisitions, which includes only the impact of purchases made within the last 12 months increased first quarter revenue by about ten and a half million dollars and adjusted the EBITDA by about 1.9 million.
Mel: For further details on the quarter, please review our supplemental materials deck on our Industrial Relations website beneath the webcast link.
Mel: Before moving on to guidance, I want to offer some further context on our commodity costs. Four of our top five market basket items including eggs, bacon, coffee and avocado are experiencing high rates of inflation in 2025.
Mel: While slightly higher since our last earnings call, our consolidated commodity inflation expectations remain in the high single digits for 2025, and we expect the inflated cost to peak in the second quarter.
Mel: In our experience, outsize inflation tends to be transitory, and as such we do not intend to fully offset the inflation with increased menu pricing.
Now I'd like to provide an outlook.
for 2025, as I do.
Mel: Please note that our updates incorporate our estimates of the impacts of announced tariffs, which account for roughly 30 basis points of additional costs as a percentage of total revenue.
Mel: We're maintaining our estimate of percentage same restaurant sales growth at positive low single digits with flat to slightly positive same restaurant traffic.
Mel: Our estimate includes the consideration of a 1.3% price action implemented in January and implies carried pricing of around 2.6% in the second quarter and 2% for the full year.
Mel: As a reminder, our menu pricing disciplines target the offset of what we perceive to be permanent cost inflation, not transitory spikes.
Mel: We expect total revenue growth of around 20% with a net 400 basis point impact from completed acquisitions.
Mel: We expect the total of 59 to 64 net new system-wide restaurants, including 55 to 58 company-owned restaurants and seven to nine franchise-owned restaurants with three planned company-owned restaurant closures.
Mel: Our company owned new restaurant development pipeline is weighted in the second half of 2025 Q4 in particular.
Mel: We expect full-year percentage commodity inflation in the high single digits.
Mel: Driven largely by increases in the four commodities I discussed earlier as well as the tariffs.
Mel: Restaurant-level labor cost inflation is expected to be in the range of three to four percent.
Mel: We're lowering our Adjusted EBITDA guidance to a range of $114 to $119 million, which includes the estimated net contribution of about $7 million from acquired restaurants.
Mel: Our updated estimate of full-year adjusted EBITDA considers the first quarters under performance are lower than expected in restaurant traffic, costs associated with investing the guest
and incremental inflation expectations among other items.
Mel: We expect a blended tax rate of 45 to 50 percent.
Mel: We expect capital expenditures of $150,000,000 to $160,000,000, not including the capital allocated to Frameshaw's acquisitions.
And finally, a couple of reminders about the current quarter.
Speaker Change: to help with your financial models. As Chris mentioned, April's consolidated same restaurant traffic was
Speaker Change: And though the consumer backdrop remains highly uncertain, our expectation of positive, same restaurant traffic in the back half of 2025 remains unchanged.
Speaker Change: Also, we currently expect the second quarter will represent the peak of our commodity inflation for the year with some relief in the second half of the year.
Speaker Change: With a strong pipeline of new restaurant openings and plans to continue driving traffic, we're looking forward to serving our current customers more frequently as well as introducing new customers to First Watch.
Operator, if you'll please open the line for questions.
Speaker Change: Thank you. We will now 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 your line is in the question queue.
Speaker Change: You may press star two if you would like to remove your questions from the queue. We ask that analysts limit themselves to one question and a follow-up so that others have an opportunity to ask questions. For participants using speaker equipment it may be necessary to pick up your hands at before pressing the star key.
One moment please while we pull for questions. Thank you very much again.
Speaker Change: Our first question comes from Andrew Charles with PD Callin. Please proceed with your question.
Speaker Change: Good morning, Andrew. Morning, Mel, thank you guys. Can you stand on the comment that sales term positive in March and then traffic term positive in April ? I'm wondering just given the Easter shift, you can speak to two-year underlying sales, you're improving from March to April .
Speaker Change: Be positive across both periods. Andrew, it's Chris. I'll say that we had sequential, positive dining traffic improvement for all four quarters last year and in Q1 taking out February that that trend would have continued.
Speaker Change: Chris, what do you talk more about the tradeoff between driving traffic through third-party actions and other initiatives, but doing so at a lower margin? What gives you confidence is the right approach for the business?
Speaker Change: that it's working. The results that we're seeing are, you know, encouraging for us. So, you know, our focus right now in this environment, obviously we've got cost pressures, we'll talk about that some more I'm sure, but our focus is on, you know,
Speaker Change: Driving Traffic in our channels and specifically in our dining rooms and in the third party channel. So as you know, we had certain headwinds that we spoke about very often in 2024 and our team got to work on addressing those and we're pleased with the results we're seeing. So if you look, if you look at what we reported today, a lot of confidence here around our ability to move the needle and get the consumer engagement
Speaker Change: with us, whether it's the marketing efforts, the moves we make in partnerships with our third-party providers, but the costs that we're dealing with...
Speaker Change: We are confident that they are not permanent so we are really focused on the top line and that is really what is driving the guidance and why we kept a lot of the elements from the top line perspective of the guidance in place because we are seeing some positive inflection there.
That's helpful. Thank you. Sure.
Speaker Change: Our next question comes from Jim Flair with Steven's Inc. Please proceed with your question.
Hey guys, good morning. Thanks for taking our question Thank you.
I'm sure I want to drill down a little bit on
Speaker Change: Some of the warnings from the increased media spend and particularly
Speaker Change: The engagement that you've seen following some of the nearly the efforts in March, and if that has any sort of...
Speaker Change: One of the things that you can apply more broadly across the network and help support traffic as we have kind of this consumer malaise that we're confronting.
Speaker Change: Yeah, again, we're iterating as we go along, but we're pleased with the results we've seen. I think it comes to life in the form of the improved traffic trends that we're seeing, and so we're chipping away at it, and we're only in...
to call it the second month of...
Speaker Change: of that effort. We launched it really February March, so we're starting to see the benefits of that now, which gave us the confidence to hold some of the guidance as it relates to that, because we are happy with what we're seeing. So, the team's just doing a really good job of harvesting the data, leveraging it for the messaging, the timing, all of those things. And it really is a high...
Speaker Change: We're learning from markets, what are the characteristics that are, where the response is quicker than others and so it's helping us to dial it in more directly.
Speaker Change: Okay, great. And then I can maybe ask one on commodity. I believe you guys said two few should be the peak on commodity costs.
Any thoughts on this? Is that?
just
Speaker Change: You have better visibility in the commodities in the back half of the year or there's some things you're doing on sourcing that help mitigate those costs is just any color around why we that you a lot of it. Jim the thing one thing I would point to is first of all we have commodities that are crop related so some of them have to do with when the when the crops come in and so. So.
Speaker Change: Crops haven't had suffered. We don't expect that to be a permanent sort of item. Then where eggs are concerned, for example, that's been a large part of the discussion around our inflation for quite a couple of quarters here. Here's your sub.
Speaker Change: as the flocks are still rebuilding for our, you know, we're finicky about our eggs, they're...
Speaker Change: Cage-free, pasteurized, extra-large, shell-in-eggs that we use, and in order for the flocks to lay extra-large eggs, the hands have to be a certain maturity and they're replenishing those flocks.
Speaker Change: Now, so at some point in time, I have to believe that there's going to be a sufficient supply of our kind of specialty bird in order to see some relief there.
Speaker Change: Our next question comes from Brian Vaccaro with Raymond Jean. Please proceed with your question.
Brian Vaccaro: Just a quick follow up on the marketing spend and just think about the potential benefits through the year. Could you elaborate on sort of what percentage of the system had support in the first quarter or any color on how that could increase in the second quarter or second half?
Brian Vaccaro: or anything around spams with levels. I'm just trying to gauge what we've seen versus what we could see rest of the year.
Brian Vaccaro: Thanks, Brian . It's Chris. I mean, basically almost the entire system is receiving some kind of support. Obviously, there's heavy ups in certain markets that we're not disclosing. But there are efforts whether it's digital social or some of the more targeted things that are impacting the entire system and then an elevated level in certain markets where more of the spend is being allocated. [inaudible]
Brian Vaccaro: Brian , every market, every restaurant has always received some level of marketing support so this is more of an emphasis in certain markets.
Speaker Change: Okay, and then I guess maybe a high level question. I guess I'm curious to get your thoughts just on the breakfast category in the US and
Speaker Change: It seems like quick service weekend, quite a bit in the first quarter, and then legacy family dining continues to have its challenges. Are there macro factors that might be weighing there that you are less exposed to, or maybe you do see some evidence of the broader headwinds sort of beneath the surface, whether that be softness during the weekdays or any pullbacks you're seeing in the lower range of your income cohort, just just curious to get your lay in the wind.
and all the category.
Speaker Change: We do believe that our higher income profile customer provides some...
Speaker Change: some protection for us against that. I think there's been a lot of discussion around the lower income consumer pulling back and you know that's the type of customer that we appeal to and it makes up the majority of our demographic profile of our customers. So we think there's some...
Some protection there.
Thank you.
Speaker Change: Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.
Jeffrey Bernstein: Great, thank you very much. My question is on the 2025 guide, so you temper the EBITDAB by...
Speaker Change: Roughly $10 million or 8%, but all of the components effectively reiterated...
Jeffrey Bernstein: Melanie talked a lot about variety of headwinds. They don't think to be top line related at least in your view. I'm just wondering what you're doing.
Speaker Change: It's all about costs over sales here. I was wondering if you could prioritize or buck it for us. Again, you mentioned a number of them, but the primary drivers in order of magnitude, I guess, for that significant EBITDA reduction. And then I had one follow-up.
I think that I think almost certainly the cost related issues are the...
Speaker Change: are the piece that motivated us to bring down our God-Uts for the full year, you know, more sustain.
Speaker Change: More sustained inflation and then obviously the consideration of tariffs which we hadn't included in our guidance before.
Speaker Change: And Jeff, this is a, I mean, I've been here as you know, almost 20 years and at least in my time unprecedented that we'd have...
Speaker Change: four of our top five commodities be under pressure at one time. The diversity of our market basket has been a benefit to us throughout the history of the company and so this is certainly a unique time.
Speaker Change: Gotcha. And my follow-up is just on the the com trend. I'm wondering whether you've seen any change in consumer behavior, whether it's frequency or weekday versus weekend.
Speaker Change: It does seem like you're encouraged by the sequential traffic uptick, but I know there are some that are concerned looks like you're saying you expect to sustain that positive traffic in the second half despite the consumer volatility. So I'm just wondering if you can prioritize the primary driver to give you that level of confidence. Thank you.
Speaker Change: Sure, yeah, I mean, we, you know, we are encouraged by the trends that we're seeing and again, it goes back a little ways here as we're, as we're chipping away at it, but, you know,
Speaker Change: As far as the high level trends, we're not seeing any big shifts or anything, we're not seeing any check management, as Mel mentioned, which is great, so...
Speaker Change: You know, at least all the signs that we're seeing in our business [inaudible]
Speaker Change: We see a healthy customer for us, and I'm choosing the word customer because they're the ones that come to us rather than consumer. Obviously there's some challenges in the environment, but in our four walls and our restaurants and the customers that we're serving, we're encouraged by the trends we're seeing right now.
Great, thank you.
Speaker Change: Our next question comes from Sara Senatore, Bank of America. Please proceed with your questions.
Sarah Senator: Thank you. I have two questions. I'll start with the first one.
Sarah Senator: Just on the closures this year, I think it's been a while since you've closed restaurants or certainly this number. Can you talk about the ones that you're closing and especially in light of how good the new new economic seems to be?
Sarah Senator: Anything, you know, worth noting there and like I said, we're a system of 500 restaurants and every year one of the leases or a couple of the leases run to term.
Sarah Senator: and at the trade area has moved or something like that, and we might choose to not renew the lease or to relocate the restaurant or something like that, but there's nothing remarkable about the three closures that we anticipate.
having this year.
Sarah Senator: But in terms of new units, you ask new units continue to outperform the rest of the system in terms of their sales volumes and meet our expectations on their pathway to form maturity over time.
Speaker Change: Right, right. So these aren't reloads. These are just like you said, a system of 500. You're going to invariably have maybe a couple more closures than you would have a couple years. Yeah, across, across 40 years, we've got, we've got restaurants that have, you know, leases that are maybe. We've got, we've got, we've got,
25, 30 years old and occasionally things.
Speaker Change: Move or trade areas, trade areas, go through a regentrification or something like that.
Sara, I'll be even more specific sometimes. There's...
Speaker Change: There are restaurants in what at the time, you know, we opened them say 20 years ago was really the only trade area to open in and new trade areas have emerged and sometimes by closing one we can open to in, you know, adjacent trade areas now but whereby having one in the middle locks out the other two so we just we constantly do a review of our assets and as Lisa's expire we look to be as proactive as we can about optimizing the markets and
And, you know... [inaudible]
Speaker Change: and ideally shooting for the penetration in the market and the density in the market that we believe sets us up best for success.
Speaker Change: Okay. Thank you. That's very helpful. And then just on the surprise and delight, I know you said that was a little bit the pressure on margin was a bit higher than you had anticipated. It was a little bit higher than you had anticipated.
Speaker Change: Sounds like maybe some of the, you know, customer sort of choice too in terms of shifting to the...
Speaker Change: The Higher Cogs item with the portion investment. Is there anything maybe in particular with the surprise and delight piece that you can do to perhaps manage that or maybe guidance that you can give to your managers about how to do that most efficiently?
Speaker Change: Yeah, I mean, it was something we rolled out at our annual conference, and you know, you hear us use the term making days brighter, and this was a way to bring that to life, and our managers got way behind it. They got really excited about it. I mean, we're recognizing first responders and teachers and our neighbors and little league teams, and really putting a big focus around two and a half miles around the restaurants, which is where our customers come from. [inaudible]
Speaker Change: I mean, this is something that we'll continue to do for the rest of the year. Obviously there's conversations that goes on about managing it appropriately, but we think it's a great program, we think it's a great way to build loyalty, and I think our teams are doing a great job with it, and we'll just manage it appropriately with them as the year goes on.
Thank you for watching!
Speaker Change: Our next question comes from Jon Tower with City, please proceed with your question.
John Towerwood: Great, thanks. I know it's early in the process in terms of some of the marketing stuff and even some of the surprise and delight ramping, but I'm curious maybe if you've seen any improvement in some of the consumer scores regarding, you know, your value proposition to the guest as you've been ramping some of these things through the system.
John Towerwood: Now, yeah, I think you're right. It's early. I mean, we've been probably 13 weeks with some of this. We're going to have a longer period and more cohort to analyze.
Speaker Change: Okay, and then maybe just on the label front, I know it was higher this quarter, you call that.
Speaker Change: to help benefit costs kind of pick and hire, but is there anything else that we should consider going forward aside from underlying labor inflation to consider? Is there any investment here that? Yeah, part of the battle. Yep.
Speaker Change: The other part of the uptick is one that we always have, which is that we carry extra managers because we're opening so many restaurants.
Speaker Change: at such a rapid pace that we carry extra managers so that when we do up in a restaurant, we can put a veteran manager into the restaurant.
Speaker Change: and so we tend to carry some higher costs there. And as we open, as we're opening more restaurants each year and opening more rapidly, the fact of the matter is that we're carrying more managers.
Speaker Change: Yeah, and then just last one quick on the tear of pressure. Can you just tell us exactly where that came from? Is that coffee and maybe avocados? Curious where? Sure.
Speaker Change: A lot of it has to do with supplies that we get from Asia and
Speaker Change: There's some on food products, but really a great deal of it has to do with our packaging supplies and paper very good forms, napkins, that sort of thing.
Speaker Change: Our next question comes from Todd Brooks with The Benchmark Company. Please proceed with your question.
Todd Brooks: Hey, thanks for taking my questions. First wondering, and now you give us some color on the pricing waterfall over the balance of the year, but if we think about the mixed impacts that you highlighted between the GM's surprise and delight and...
Todd Brooks: Dordash, the new algorithm around how that business is priced. What do you see as kind of the mix offsets for those pricing impacts as we look forward?
The End of The End of The End
Todd Brooks: Todd, when you say mix offsets, help me understand what you're trying to drill to. I'm trying to get from the menu pricing that you talked about to what the actual average check.
Growth Would Be And The Forward Outlook.
So, if that's helpful.
Speaker Change: Okay, I didn't know if there had been any Delta with that, with what you called out, with surprise and delight.
Speaker Change: The kind of big growth, he saw a third-party delivery in the near structure there. Okay, great, thanks. And then, and this is more of a just management.
Speaker Change: kind of philosophy question but in an environment like we're in now it seems like
Speaker Change: Relative to most that are maybe struggling with a guidance strategy, you guys, the top line seems fairly sturdy relative to others. So, when you're looking at the revised EBITDA guidance.
Speaker Change: Is there a thought of, okay, let's take our swipe at this and really work to incorporate.
Speaker Change: Everything Plus, some cushion or this is basically best snapshot of where things stand now and what's a pretty fluid cost environment for you.
Speaker Change: I, in terms of just management, I think, look, we're pleased with what we've, with the investment I guess that you mentioned. I, you know, I think the thing that propels our growth over a long period of time is
Speaker Change: Growing Share. It's increasing our in restaurant dining, which is our you know our most...
Speaker Change: Profitable and our proudest representation of our brand, and so I think those things that we do.
Speaker Change: that create more loyalty, more frequency, remind the guests that we're thinking about them personally and celebrate their attendance in the restaurants. I think those things are our management decisions that we believe are going to pay dividends.
over the long-term. [inaudible]
Speaker Change: Relation Pressure. So if you're asking if there's cushion in there, I'll just tell you, I think you know how we operate. [inaudible]
Speaker Change: You know, we base it based on what we're experiencing now, but as Mel said, we expect Q2 to be the peak of that, and a lot of it has to do with the repopulation of the eggs, of the hens and the...
Speaker Change: You know, the weather-related pressures that we've had, whether it be on coffee or other commodity. So, again, it's just, it's based on our best information at the time.
Speaker Change: Our next question comes from Andy Barish with Jeffries. Please proceed with your question.
Andy Barash: Good morning, guys. I'm wondering if you could comment on the Florida market relative to the system. I know there's been a lot of dynamics down there in that large market for you. Anything you'd like to call out. Thank you very much.
Florida's been great it's
Andy Barash: You know, outperformed the rest of the country. I think we've talked a lot about that when it wasn't, when it was underperforming and why we thought it was.
Andy Barash: I mean, I'd like to think that we had a really good handle on it when we were explaining in 24 that it was kind of a re-leveling, if you will, of post-COVID euphoria and kind of in bounds into Florida, and now it's leveled off that has and performing really well. We continue to open new restaurants here and I'll use the same phrase we used all last year. We're bullish on Florida and nothing's changed. Thank you very much. Thank you very much.
Speaker Change: Yes, good to hear. And then Mel, just one other cost item.
Speaker Change: It looked like you called out an increase, I think it was two and a half million dollars in R&M and utilities. Was that kind of a variant on the bad side to what you guys expected or was that sort of in line with what you had been thinking in that area?
Speaker Change: Repair and maintenance has been a little bit, I would say a little bit of a growth area for us in terms of increased cost, but it's not too surprising for us.
Thank you for watching!
Speaker Change: Our next question comes from Brian Moon with Piper Sandler. Please proceed with your question.
Brian Mullen: Thank you. Just question on menu innovation. You know, last time you discussed testing and expanded line of beverages, you know, can you just elaborate a bit on those efforts? What are you seeing in test and maybe what the next steps would be with that idea if you wanted to move it across the system.
Brian Mullen: Yeah, thanks for the question. This is Matt Eisenacher, Chief Brand Officer. We've continued to iterate on different formats for our menus. We are still in the final stages of moving into test for those expanded beverages.
Speaker Change: Okay, thanks. And just follow up in question on the franchise store base after this most recent acquisition closes the store. It's for minus what you have left in terms of options to purchase stores, you know, if anything, just an update. There'd be about, well, there are 67 franchise locations and eight of those are subject to purchase rights. And just follow up in question on the franchise store.
Thank you for watching!
Speaker Change: Our next question comes from Chris O'Cole, it's Stevele. Please proceed with your question.
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Chris Ockel: I wanted to follow up on the mixed conversation and I was just curious if you could talk about Mel the timing of the investment in portioning changes to the trust acta and then the door dash change or the 3p delivery change that you made.
Speaker Change: Just in terms of timing and one cue, and I really just look and understand, you know, whether that makes impact we saw on first quarters reflective of essentially a full quarter of impact.
Chris Ockel: It would have been early in January on both of those fronts. If it's not all 13 weeks, it's at least 11 of them.
Got it. That's helpful. Thank you. And then...
Speaker Change: I think you mentioned Chris that ticket times improved again and I was just curious if you have a sense of sort of the disaggregation of that between KDS system and pay at the table and kind of what those drivers are and I think you guys made some other changes in terms of...
Speaker Change: Table Utilization as well and the stores and just Chris Hall that's coming together and if you could kind of rank order the impact that's having on service times.
Yeah, one, two, and three is KDS.
Speaker Change: and I would say then the dining room optimization and the enhanced busing procedures. And again, what I call the the unsexy things that are part of the blocking and tackling, but you know, really help with the throughput. I also don't want to, you know, not mentioned the waitlist. [inaudible]
Speaker Change: on the app, that's a big component of us being able to...
to quote, quote, more accurate wait times. [inaudible]
Speaker Change: Stop that look and leave, you know, key people from falling off the list, those type of things. And then the pay at the table really isn't a ticket time driver. It's more of a consumer benefit, if you will, because it happens after the meals are out. So we're really focused on, as I've said before, the time of the experience that we control, we want to be as efficient as possible. Of course our customers can sit as long as they'd like, but whether it's getting them seated as quickly as possible, getting their food out. [inaudible]
Speaker Change: to them as quickly as possible, allowing them to pay as they want to and when they want to, which is why we put the check down halfway through the meal so that now the power is in the hands of our customers to pay when they want to pay. So it really is a toolbox that we've put together that all works really well together. And we've actually done some time and motion studies in the back of the house that we've removed a lot of steps and a lot of [inaudible]
Speaker Change: Latency in different positions, so we've really been on for the past couple of years, a serve more demand focus and it's...
Speaker Change: He pretty much touched every part of our four-wall experience, and if you consider the app just outside the four-wall, so that's all worked really well.
Speaker Change: Our next question comes from Gregory Francfort, the Guggenheim Securities. Please proceed with your question.
Speaker Change: Hey, thanks. Two questions. The first one, I guess, is for Mel. How are you thinking about long-term margins, restaurant margins? [inaudible]
Speaker Change: In the context of maybe your 20% in 2024, I think your guidance was suggested to me down.
Speaker Change: to some degree this year. What is your target for long-term margins and kind of where you want to be in that range? Thanks. Yeah, I think we've always said that we try to over the long-term target between 18 and 20 percent on the restaurant level operating profit margins.
and that haven't changed. [inaudible]
Speaker Change: Okay, and then just maybe digging in a little bit more on aggregator performance and the third party sale being as strong as they were in the quarter.
Speaker Change: Are you seeing anything different from the consumer in terms of how they are?
Speaker Change: Responding or the offers that they want to see or just kind of how the aggregators might be dealing with place in First Watch versus other brands, just any thoughts there.
Um, not necessarily for us, I think, you know, our-
Speaker Change: The biggest benefit that we received was really through the partnership with DoorDash and, you know, having them lean in and us lean in on realizing that, you know, we could really help each other, you know, we serve a day part that's...
Speaker Change: not as crowded as lunch and dinner per se. But from a consumer standpoint, we haven't really seen much change as far as what the order looks like. And again, we're not big on discounting on that channel, so that's not really a...
Speaker Change: Our next question comes from Brian Vaccaro with Raymond Jean. Please proceed with your question.
Brian Vaccaro: Yeah, I just had a quick follow up kind of high level on just thinking about relative pricing within the category.
Speaker Change: It seems like some of the family diners have gotten even more aggressive on value.
Speaker Change: in recent months and quarters, but at the same time, you know, they may be paying elevated by menu pricing for maybe, maybe a higher for longer strategy, many of them are on my 20th
Speaker Change: and so forth. So, for their core menu prices, they don't appear to be much different than yours. And in some cases are even higher based on some of our checks. I'm curious if that fits with what your pricing studies and internal analytics would show and just sort of how much that pricing differential may have narrowed over the last few years.
Thank you for watching!
Speaker Change: Yeah, it does line up with our research front, and it's actually a big part of our strategy, which is why we are working really hard to keep our menu prices down, and maybe taking...
Speaker Change: having some impact on our marches right now because we think our relative value has improved significantly. When you think about the quality of the increase that we use and what we offer as compared to family dinners, and I'll go back to what I've said before with the highly franchise systems, the mothership doesn't have a lot of control over the menu pricing which is why us being, you know,
Speaker Change: call it 90 plus percent company own allows us to make those long term strategic decisions that ultimately we believe will be the best decisions that we've made.
Speaker Change: As we prioritize traffic right now and deal with the commodity costs that we're dealing with, you know...
Speaker Change: We've got two drivers for our growth, right? Our unit growth and our same-store sales growth, and to us the best way to build the same-store sales is through increased traffic, not through pricing. We're looking to be that every day occasion, we want to be approachable, we don't want price to be a limiter to us being able to build traffic. So we believe we're strengthening the system by...
Speaker Change: acquiring franchisees and by the strategic moves we're making to differentiate ourselves in a challenging environment. So, we know we're taking share. Our new restaurants are performing really well and I think that's why we're just so optimistic about where we are right now and actually using this macro environment as an opportunity to strengthen our position and widen our lead. Thank you so much.
Speaker Change: All right, I'll take the rest offline. Thanks so much. Thank you
Speaker Change: There are no further questions at this time, so I would now like to turn the floor back over to Chris Tomasso for closing comments.
Chris Tomasso: Great. Thanks everyone for joining us this morning. We appreciate it. It really is an exciting time for First Watch and we're looking forward to continuing to make days brighter for our customers and our employees in our nearly 600 First Watch restaurants across 31 states now. And a special thank you again to our entire team across the system for making days brighter for everyone. Thanks everyone. Thank you for joining us this morning. Thanks for joining us this morning. Thank you for joining us this morning.
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