Company Overview
First Watch Restaurant Group, Inc. (NASDAQ:FWRG) is the undisputed leader in the daytime dining segment, serving up a unique culinary experience that sets it apart from the competition. With a rich history spanning over four decades, this award-winning concept has carved out a formidable position in the fragmented restaurant industry, poised for continued growth and innovation.
Founded in 1983 in Pacific Grove, California, First Watch has steadily expanded its footprint, now boasting a robust network of 547 restaurants across 29 states. The company's commitment to serving made-to-order breakfast, brunch, and lunch using fresh, high-quality ingredients has earned it a loyal following and numerous accolades, including multiple "Best Breakfast" and "Best Brunch" awards.
Historical Milestones
First Watch's journey has been marked by significant milestones and strategic decisions. In 2017, the company was acquired by private equity firm Advent International, a move that provided the necessary resources and capital to accelerate its growth strategy. This acquisition proved to be a turning point, as First Watch opened over 100 new company-owned restaurants between 2017 and 2021, significantly expanding its presence across the United States.
The year 2021 marked another crucial moment in First Watch's history as the company completed its initial public offering, listing its shares on the Nasdaq stock exchange under the ticker symbol FWRG. This public listing provided additional capital to fuel the company's ambitious expansion plans. As of 2023, First Watch's restaurant portfolio includes 425 company-owned restaurants and 99 franchise-owned locations, showcasing its impressive growth trajectory.
Financials
First Watch's financial performance has been impressive, demonstrating consistent growth and profitability. In the most recent fiscal year (2023), the company reported revenues of $891.55 million, a 22.1% increase from the previous year. Net income for the same period stood at $25.39 million, showcasing the company's ability to deliver consistent profitability. The company's strong operating cash flow of $95.34 million further underscores its financial stability, with free cash flow reaching $10.65 million.
In the most recent quarter (Q3 2024), First Watch continued its growth trajectory, reporting revenue of $251.61 million, representing a 14.8% year-over-year increase. This growth was primarily driven by 37 new restaurant openings and 28 franchise acquisitions over the past year. However, the company experienced a 1.9% decline in same-restaurant sales, attributed to industrywide softness in the breakfast/brunch daypart. Despite this challenge, First Watch's net income for the quarter stood at $2.11 million, with operating cash flow of $35.86 million and free cash flow of $6.74 million.
The company's restaurant sales segment, which represents the aggregate sales of food and beverages at company-owned restaurants, remains the largest contributor to total revenues. In Q3 2024, restaurant sales reached $248.97 million, up 15.5% from the same period in the prior year. This growth was primarily driven by new restaurant openings, franchise acquisitions, and menu price increases.
First Watch's franchise revenues segment, which includes sales-based royalty fees, system fund contributions, and the amortization of upfront initial franchise fees, generated $2.64 million in Q3 2024. This represents a 28.9% decrease from the same period in the prior year, primarily due to the company's acquisition of 28 franchise-owned restaurants during that time.
Liquidity
First Watch maintains a healthy liquidity position, as evidenced by its debt-to-equity ratio of 0.23. The company's cash reserves stand at $51.13 million, with an additional $123.3 million available under its $125 million revolving credit facility. Furthermore, First Watch has access to $27.5 million under its $125 million delayed draw term loan. The company's current ratio of 0.55 and quick ratio of 0.51 indicate a solid ability to meet short-term obligations.
Growth Strategy
One of the key drivers of First Watch's success has been its strategic expansion strategy. Over the past two years, the company has opened 37 new company-owned restaurants and acquired 28 franchise-operated locations, strengthening its foothold in key markets. This disciplined approach to growth is complemented by a focus on operational efficiency, as evidenced by the company's restaurant-level operating profit margin of 18.9% in Q3 2024, up 0.2 percentage points from the prior year period.
Innovation and Technology
First Watch's commitment to innovation is another critical component of its success. The company has invested heavily in technology to streamline operations and enhance the customer experience, including the deployment of kitchen display systems, pay-at-the-table solutions, and waitlist management tools. These initiatives have contributed to a 15% reduction in ticket times compared to the prior year, a remarkable achievement for a full-service restaurant.
Resilience and Adaptation
Despite the challenges posed by the COVID-19 pandemic and recent industrywide softness in the breakfast/brunch segment, First Watch has demonstrated its resilience. The company's focus on off-premises dining, which now accounts for 17% of total sales, has helped offset the impact of reduced dine-in traffic. Furthermore, the company's proactive measures to support its employees, such as enhancing scheduling tools and strengthening its training programs, have resulted in a notable improvement in employee retention.
Future Outlook
Looking ahead, First Watch remains well-positioned for continued growth. The company has outlined plans to expand its footprint to 2,200 domestic locations, leveraging its strong brand recognition, operational expertise, and strategic partnerships with top-tier developers. For the full year 2024, First Watch has provided updated guidance, narrowing its same-restaurant sales growth estimate to around negative 1%, with same-restaurant traffic declining 4% to 4.5%. Annual revenue growth expectations have been adjusted to a range of 16.5% to 17%, down from the previous range of 17% to 19%.
Despite these challenges, First Watch is guiding adjusted EBITDA to the high end of its previous range, at $110 million to $112 million. The company expects the net impact from acquisitions to contribute about $14 million to the current year adjusted EBITDA. First Watch anticipates opening a total of 47 net new system-wide restaurants in 2024, with 43 being company-owned and 6 franchise-owned.
The company is also preparing for ongoing cost pressures, expecting commodity inflation of around 3% and restaurant-level labor cost inflation of around 5%. To support its growth initiatives, First Watch plans capital expenditures of around $130 million, excluding capital invested in franchise acquisitions.
While the restaurant industry continues to face headwinds, such as inflationary pressures and evolving consumer preferences, First Watch's differentiated offering, operational excellence, and adaptability position it as a standout player in the daytime dining segment. With a proven track record of success and a clear vision for the future, First Watch is poised to lead the charge in redefining the breakfast, brunch, and lunch experience for discerning diners nationwide.