First Watch Restaurant Group, Inc. (FWRG) has long been a standout player in the Daytime Dining segment, carving out a unique niche and consistently delivering strong financial performance amidst an increasingly competitive and volatile restaurant industry. With its unwavering commitment to operational excellence, culinary innovation, and an unparalleled focus on the customer experience, First Watch has positioned itself as a resilient and adaptable industry leader.
Company Background and Growth
Founded in 1983, First Watch has been a pioneer in the Daytime Dining segment, serving made-to-order breakfast, brunch, and lunch using fresh ingredients. The company's growth trajectory has been remarkable, evolving from a word-of-mouth success in its early years to a major player in the restaurant industry. By 2017, First Watch had expanded to 366 company-owned restaurants across 26 states, showcasing its ability to build a loyal customer base through its focus on fresh, high-quality food and excellent service.
A significant milestone in First Watch's history came in August 2017 when the company was acquired by funds affiliated with Advent International L.P. This acquisition provided First Watch with additional resources and expertise to accelerate its expansion plans. In the years following the acquisition, the company experienced rapid growth, both through new restaurant openings and the acquisition of franchise locations.
Corporate Culture and Values
Throughout its four-decade history, First Watch has cultivated an organizational culture built on their foundational concept of "You First," which prioritizes serving others above all else. This people-centric approach has been instrumental in attracting and retaining top talent in the industry, as evidenced by numerous workplace awards and accolades the company has received over the years.
Operational Excellence
First Watch has successfully navigated various challenges common to the restaurant industry, including managing food costs, addressing labor shortages, and maintaining high standards of food safety and quality. The company's ability to overcome these obstacles through operational excellence, a commitment to its core values, and an unwavering focus on the customer experience has been a key factor in its sustained success.
Expansion and Market Presence
As of the end of fiscal year 2024, First Watch has grown its network to 572 restaurants across 29 states, consisting of 489 company-owned restaurants and 83 franchise-owned restaurants. The company's strategic expansion has been underpinned by a disciplined site selection process and an evolution of its restaurant prototype, allowing First Watch to seamlessly integrate into diverse markets while maintaining a consistently elevated customer experience. First Watch has a significant presence in Florida, Texas, Ohio, North Carolina, and Arizona.
Financials
In fiscal year 2024, First Watch delivered impressive financial results, with total revenues reaching $1.02 billion, representing a 13.9% increase from the prior year. This top-line growth was driven by the opening of 50 new system-wide restaurants, including 43 company-owned locations, as well as the acquisition of 22 franchise-owned restaurants. Restaurant sales increased by 14.5% to $1.00 billion. Notably, the company's same-restaurant sales declined a modest 0.5% despite the broader industry headwinds, underscoring the strength of the First Watch brand and its ability to navigate challenging operating environments. This decline was partially offset by a 3.6% increase in menu prices.
The company's operational efficiency was on full display, with restaurant-level operating profit margin expanding to 20.1% in fiscal 2024, up from 20.0% in the prior year. This margin improvement was achieved through disciplined cost management, including labor efficiencies and favorable food and beverage costs as a percentage of sales. First Watch's adjusted EBITDA also increased to $113.8 million, representing an 11.2% margin and a 14.4% year-over-year increase.
The company's cost structure primarily consists of food and beverage costs (22.2% of restaurant sales), labor and other related expenses (33.4% of restaurant sales), and other restaurant operating expenses (15.1% of restaurant sales). Despite the improved restaurant-level operating profit margin, net income decreased to $18.9 million in 2024, down from $25.4 million in 2023, primarily due to higher operating costs, depreciation expense, and interest expense.
In the most recent quarter (Q4 2024), First Watch reported revenue of $263.29 million, representing a 16.8% year-over-year increase when excluding the impact of the 53rd week in 2023. The company achieved a restaurant-level operating profit margin of 18.8% in Q4 2024, which would have been even with Q4 2023 excluding the impact of the 53rd week. Adjusted EBITDA for Q4 2024 was $24.3 million, a nearly $5 million increase compared to $19.6 million in Q4 2023, excluding the contribution of the 53rd week.
Liquidity
First Watch maintains a solid liquidity position to support its growth initiatives. As of the end of fiscal year 2024, the company had $33.31 million in cash and $123.30 million available under its $125 million revolving credit facility. Additionally, First Watch has access to $27.50 million through a delayed draw term loan. The company's debt-to-equity ratio stands at 1.36, while its current ratio and quick ratio are 0.40 and 0.36, respectively.
Operating cash flow for fiscal year 2024 was $115.67 million, while free cash flow was negative $12.38 million, reflecting the company's significant investments in growth initiatives.
First Watch's financial performance is underpinned by its unwavering focus on the customer experience. The company's seasonal menu rotations, featuring innovative and craveable offerings, have consistently delighted its loyal customer base. Additionally, the company's recent investments in technology, including enhanced online ordering capabilities and a reimagined waitlist experience, have further elevated the First Watch brand in the eyes of its consumers.
Future Outlook
Looking ahead to fiscal year 2025, First Watch has provided guidance that reflects its confidence in the continued strength of its business model. The company expects to open between 59 and 64 net new system-wide restaurants, including 55 to 58 company-owned locations and 7 to 9 franchise-owned restaurants. Furthermore, First Watch anticipates same-restaurant sales growth in the low single digits, with flat to slightly positive same-restaurant traffic.
The company implemented a 1.3% price increase in January 2025, implying carried pricing of around 2.8% in Q1 2025 and 2% for the full year 2025. First Watch expects total revenue growth of approximately 20%, with a 400 basis point impact from acquisitions.
In terms of cost management, First Watch anticipates full-year commodity inflation in the high single digits, driven by increases in eggs, pork, coffee, and avocados, as well as tariffs. Restaurant-level labor inflation is expected to be in the range of 2% to 4%.
For fiscal year 2025, First Watch has provided an adjusted EBITDA guidance range of $124 million to $130 million, with the net impact from acquisitions expected to contribute about $8 million. The company expects a blended tax rate in the range of 31% to 33%. Capital expenditures are projected to be $150 million to $160 million, not including capital allocated to franchise acquisitions.
This guidance is supported by the company's robust development pipeline, its proven ability to drive brand awareness through targeted marketing initiatives, and its disciplined approach to pricing and cost management.
Industry Challenges and Resilience
Despite the industry-wide challenges posed by inflationary pressures and supply chain disruptions, First Watch has demonstrated its resilience. The company's long-standing relationships with key suppliers, as well as its commitment to passing on only permanent cost increases to consumers, have allowed it to navigate these headwinds without compromising its core value proposition.
The restaurant industry has faced challenges such as inflation, labor shortages, and changing consumer preferences in recent years. However, First Watch believes the daytime dining segment remains an attractive opportunity for growth. The company's focus on its "You First" culture, which emphasizes employee development and engagement, is also a key component of its growth strategy.
Long-Term Growth Strategy
First Watch has an extensive real estate pipeline and plans to continue its aggressive unit growth strategy, with a long-term goal of over 2,200 locations in the continental United States. The company is actively acquiring franchise-owned restaurants to expand its company-owned footprint. In 2024, First Watch acquired 22 franchise-operated restaurants and has entered into agreements to acquire an additional 19 franchise-owned restaurants.
In addition to new restaurant development, First Watch is investing in enhancing its customer experience, improving operational efficiency, and expanding its digital capabilities to drive same-restaurant sales growth and profitability. The company has invested in technology and data analytics to enhance marketing efforts and the overall customer experience.
Conclusion
In conclusion, First Watch Restaurant Group's consistent financial performance, operational excellence, and unwavering focus on the customer experience have established the company as a beacon of stability in the evolving dining landscape. With a compelling growth strategy, a strengthening brand, and a talented management team, First Watch is poised to continue its trajectory of sustained success, solidifying its position as a premier player in the Daytime Dining segment. The company's ability to navigate industry challenges while maintaining its core values and growth initiatives positions it well for long-term success in the highly competitive restaurant industry.