First Watch Restaurant Group, Inc. (FWRG) is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. The company operates and franchises restaurants in 29 states under the "First Watch" trade name and as of March 31, 2023, the company had 432 company-owned restaurants and 99 franchise-owned restaurants.

Financials

In fiscal year 2022, First Watch generated annual revenue of $891,551,000 and net income of $25,385,000. The company also reported annual operating cash flow of $95,338,000 and annual free cash flow of $10,650,000. These strong financial results demonstrated First Watch's ability to consistently deliver value to its shareholders.

For the first quarter of 2023, First Watch reported total revenues of $242.4 million, an increase of 14.7% compared to the same period in the prior year. This growth was driven primarily by new restaurant openings and the acquisition of 24 franchise-owned restaurants over the past year. Same-restaurant sales grew 0.5% during the quarter, despite negative same-restaurant traffic of 4.5%.

Food and beverage costs as a percentage of restaurant sales decreased to 21.8% in the first quarter of 2023, compared to 22.4% in the same period last year. This improvement was due to carried pricing of 4.4% and positive mix, partially offset by commodity inflation of 2.9%. Labor and other related expenses increased to 33.3% of restaurant sales, up from 33.0% in the prior year period, primarily due to higher average hourly wages and an increase in the number of managers per restaurant to support growth.

Restaurant-level operating profit margin declined 40 basis points to 20.8% in the first quarter of 2023, due to the increase in labor costs and the deleveraging of fixed expenses. However, the company was able to grow adjusted EBITDA by 4.3% to $28.6 million, representing an adjusted EBITDA margin of 11.8%.

Outlook

Looking ahead, First Watch has updated its full-year 2023 guidance. The company now expects total revenue growth of 17% to 19%, down slightly from the previous range of 18% to 20%, due to lower same-restaurant sales growth expectations. The company is forecasting same-restaurant sales growth of flat to up 2%, with a low-single-digit decline in same-restaurant traffic. This revised guidance reflects the challenging consumer environment that the restaurant industry is facing, particularly in the state of Florida, which accounts for 30% of First Watch's system.

Business Overview

Despite these near-term headwinds, First Watch remains focused on its long-term growth strategy. The company plans to open 44 to 48 new company-owned restaurants and 9 to 11 new franchise-owned restaurants in 2023, for a total of 51 to 57 net new system-wide restaurants. The company's development pipeline remains heavily weighted towards the second half of the year, similar to the cadence seen in 2022.

First Watch is also continuing to invest in technology initiatives to enhance the customer and employee experience. The company has recently implemented systems such as kitchen display systems (KDS), pay-at-the-table, and waitlist management, which are providing valuable data and insights into customer behavior. These initiatives are laying the groundwork for further digital enhancements that will enable First Watch to better understand and serve its customers.

Conclusion

The company's strong brand positioning, operational excellence, and strategic initiatives position First Watch for continued success. With a total addressable market more than 3 times its current size, the company has significant runway for growth. While near-term headwinds may persist, First Watch's focus on profitable expansion, data-driven decision making, and unwavering commitment to its customers make it well-equipped to navigate the current environment and capitalize on long-term opportunities.