Executive Summary / Key Takeaways

• Accelerated Growth and Market Leadership: First Watch (NASDAQ:FWRG) is rapidly expanding its footprint, with 620 system-wide restaurants across 32 states, and is on track for 63-64 new openings in 2025. This aggressive unit growth, coupled with strong new restaurant performance exceeding underwriting targets (e.g., $2.7 million AUVs by year 3 and 35% cash-on-cash returns), solidifies its leadership in the daytime dining segment.
• Robust Financial Performance and Outlook: The company delivered strong Q3 2025 results, with total revenue up 25.6% to $316 million and Adjusted EBITDA increasing 33.1% to $34.1 million. Management has raised its 2025 Adjusted EBITDA guidance to approximately $123 million, driven by positive same-restaurant sales growth of 4% and traffic growth of 1%.
• Technology as a Competitive Edge: First Watch leverages a suite of integrated technologies, including its Kitchen Display System (KDS), a relaunched 5-star mobile app with waitlist and geolocation features, and a robust customer data platform. These tools enhance operational efficiency, improve customer experience by reducing wait times and personalizing engagement, and provide valuable data for targeted marketing.
• Customer-Centric Value Proposition: Despite inflationary pressures, First Watch prioritizes customer value through modest pricing, increased portion sizes on popular dishes, and "surprise and delight" initiatives. This strategy, combined with a shift towards a younger demographic, aims to drive long-term loyalty and market share gains.
• Operational Excellence and Culture: The company's "You First" culture and unique "No Nights Ever" model contribute to industry-leading employee retention, with turnover improving for 10 consecutive quarters. This operational stability and motivated workforce are critical enablers of consistent execution and high customer satisfaction.

The Dawn of Daytime Dining: First Watch's Strategic Ascent

First Watch Restaurant Group, Inc. has meticulously carved out a dominant position in the burgeoning daytime dining segment, transforming from a regional Florida-based concept founded in 1983 into a national powerhouse. The company's core business revolves around serving made-to-order breakfast, brunch, and lunch, distinguishing itself through a steadfast commitment to fresh ingredients and an elevated culinary experience. This focus has allowed First Watch to cultivate a unique niche, appealing to a broad customer base seeking quality and consistency beyond what fast-casual alternatives typically offer.

The restaurant industry, particularly the casual dining sector, faces a dynamic macro environment characterized by shifting consumer preferences and persistent inflationary pressures. In this landscape, First Watch's strategy is anchored in aggressive, disciplined unit expansion, continuous menu innovation, and a profound investment in both its people and technology. This multi-pronged approach not only drives robust financial performance but also widens its competitive moat against both established chains and emerging concepts.

Technological Edge: Streamlining Operations and Enhancing Experience

First Watch's operational prowess is significantly bolstered by its strategic adoption and integration of technology, which serves as a key differentiator in a competitive industry. At the heart of its back-of-house efficiency is the Kitchen Display System (KDS). This digital ordering system replaces traditional paper tickets, streamlining communication between the front and back of house. The KDS enhances accuracy by minimizing misinterpreted orders, improves kitchen efficiency by routing tickets to specific prep stations, and allows for dynamic order prioritization, ensuring dishes are prepared and served in a timely manner. The KDS also provides analytical data on fulfillment times, aiding in staffing optimization and identifying areas for process improvement. This system is a primary driver behind the company's improved ticket times, a critical KPI, which saw gains in Q1 2025 compared to the prior year.

Beyond the kitchen, First Watch has invested heavily in customer-facing digital platforms. A comprehensive relaunch of its digital properties is underway, including a custom-built waitlist experience, streamlined digital ordering, and nutritional filtering tools. The newly relaunched mobile app, introduced in Q2 2025, has already achieved a 5-star ranking, indicating strong customer reception. This app, along with geolocation technology, allows customers to be automatically checked in as they approach the restaurant, reducing congestion at the host stand, especially during peak hours. The company is also making significant upgrades to its customer data platform and CRM systems, building a database of approximately 7 million identified customers. This granular data enables highly targeted micro-marketing campaigns, allowing First Watch to personalize offers and track marketing effectiveness based on purchase behavior. These technological advancements contribute directly to a seamless and memorable dining experience, driving customer satisfaction and repeat visits.

Aggressive Unit Growth and Market Share Expansion

First Watch's growth narrative is fundamentally tied to its aggressive unit expansion. The company opened 21 system-wide restaurants across 14 states in Q3 2025, contributing to a total of 620 system-wide restaurants across 32 states as of September 28, 2025. This pace positions First Watch to meet its target of 63 to 64 new restaurant openings for 2025, representing nearly 11% system-wide growth. Notably, the new restaurants opened in the last two years outnumber the entire system size of the next largest daytime dining concept, underscoring First Watch's rapid market penetration.

The performance of these new units is exceptional, consistently exceeding underwriting targets. Nine of the ten highest opening week sales in company history were achieved in restaurants opened within the last 12 months. New locations are projected to reach average unit volumes (AUVs) of $2.7 million by their third year of operation, significantly above the current system average of $2.3 million. These investments yield attractive returns, with projected cash-on-cash returns of approximately 35% and an internal rate of return (IRR) exceeding 18%. A strategic advantage lies in the company's increasing utilization of second-generation sites, which accounted for about 50% of 2025 openings and are expected to maintain a similar percentage in 2026. These sites, often larger and more prominently located, are opening at volumes exceeding 190% of the average unit volume of the comparable base, as exemplified by the Dover, Delaware, location in Q3 2025. This adaptability in site selection, combined with a robust pipeline of over 130 approved sites, provides a clear runway for continued expansion towards its total addressable market of 2,200 locations in the continental U.S.

Financial Performance and Liquidity

First Watch delivered strong financial results in the third quarter of 2025, demonstrating the effectiveness of its growth strategy. Total revenues increased by a robust 25.6% to $316 million compared to Q3 2024, driven by new restaurant openings, positive same-restaurant sales, and accretive franchise acquisitions. System-wide sales also saw significant growth, rising 20.9% to $352.7 million. Same-restaurant sales growth was a healthy 7.1%, underpinned by a positive same-restaurant traffic growth of 2.6%, marking two consecutive quarters of positive traffic. This strong top-line performance translated into improved profitability, with income from operations margin increasing to 3.2% from 2.5% in the prior year period. Restaurant level operating profit margin expanded to 19.7% in Q3 2025 from 18.9% in Q3 2024, reflecting solid operational execution. Net income for the quarter rose to $3 million, or $0.05 per diluted share, from $2.1 million, or $0.03 per diluted share, in Q3 2024. Adjusted EBITDA increased 33.1% to $34.1 million, with the Adjusted EBITDA margin improving to 10.8% from 10.2%.

For the thirty-nine weeks ended September 28, 2025, total revenues reached $906.149 million, an increase of 20.4% over the same period in 2024. Adjusted EBITDA for this period was $87.231 million.

The company's liquidity position as of September 28, 2025, included $20.70 million in cash and cash equivalents, with $87.90 million available under its $125 million revolving credit facility. Capital expenditures for 2025 are estimated at approximately $150 million, primarily for new restaurant projects and remodels, funded by operating cash flows and credit facility borrowings.

Management believes its cash flow from operations, available credit, and cash will be sufficient to meet liquidity needs for at least the next 12 months.

Competitive Positioning and Strategic Differentiation

First Watch operates in a highly competitive restaurant industry, facing rivals such as Dine Brands Global (DIN) (IHOP, Applebee's), Denny's (DENN), Cracker Barrel (CBRL), and Brinker International (EAT) (Chili's). However, First Watch strategically differentiates itself through several key advantages. Its specialized focus on daytime dining, offering fresh, made-to-order meals, contrasts with the broader, often more commoditized, all-day menus of many competitors. This niche allows First Watch to appeal to a more affluent consumer, making it "underexposed to current demographic pressures" affecting the broader restaurant sector.

The company's aggressive unit growth pace is unmatched by any other full-service restaurant company, making it challenging for competitors to establish a presence in markets where First Watch is already entrenched. Its high percentage of company-owned restaurants (548 out of 620 system-wide) provides greater control over quality, customer experience, and pricing strategy compared to highly franchised systems. This enables First Watch to make long-term strategic decisions, such as its disciplined approach to pricing, which focuses on permanent inflationary trends rather than transitory commodity spikes. This strategy, as seen during avian flu outbreaks, has allowed First Watch to gain market share by maintaining value perception while competitors may be forced into more aggressive, margin-eroding promotions.

First Watch's "You First" culture and unique "No Nights Ever" operating model are significant competitive advantages in attracting and retaining talent. Restaurant-level employee turnover has improved for 10 consecutive quarters and consistently outperforms industry benchmarks. This commitment to employee well-being, recognized by Newsweek and the Best Practice Institute as America's #1 Most Loved Workplace for two consecutive years, fosters a highly motivated workforce crucial for consistent operational execution and superior customer service.

Outlook, Guidance, and Risks

First Watch's management has provided an optimistic outlook for 2025, reflecting confidence in its strategic initiatives. The company updated its guidance for same-restaurant sales growth to approximately 4% and same-restaurant traffic growth to approximately 1%. Total revenue growth is projected in the range of 20% to 21%, including a 400 basis point impact from completed acquisitions. Annual adjusted EBITDA is expected to be approximately $123 million, at the high end of its prior guidance, with an estimated net contribution of $7 million from acquired restaurants. The company plans to open 63 to 64 new system-wide restaurants, including 55 company-owned locations.

Key assumptions underpinning this guidance include a projected full-year commodity cost inflation of approximately 6%, driven by bacon and coffee, and restaurant-level labor cost inflation of approximately 4%. Management's decision not to fully offset commodity inflation with menu pricing, instead opting for a modest 3.5% carry pricing for the full year, underscores its commitment to long-term value for customers.

Despite this positive outlook, First Watch faces several risks. The company acknowledged material weaknesses in its internal control over financial reporting as of September 28, 2025, though it is actively implementing remedial actions. Commodity and food price risks remain, with full-year commodity inflation projected at 6%. Increased interest expense due to higher borrowings associated with franchise acquisitions could also pressure profitability. Furthermore, while First Watch's customer base is more affluent, the broader restaurant sector's sensitivity to economic cycles and potential shifts in consumer spending habits remain a general risk.

Conclusion

First Watch Restaurant Group stands as a compelling investment in the casual dining sector, distinguished by its strategic focus on daytime dining, aggressive unit expansion, and a deeply ingrained culture of operational excellence and technological innovation. The company's ability to consistently deliver strong financial results, including robust revenue growth and expanding margins, even amidst a volatile macroeconomic environment, speaks to the resilience of its business model and the effectiveness of its customer-centric strategies.

The ongoing investment in its KDS, digital platforms, and targeted marketing, coupled with a disciplined approach to pricing and a commitment to employee well-being, positions First Watch to continue gaining market share. With a clear path to significant unit growth, a proven ability to generate high returns on new restaurants, and a strong competitive moat built on quality, service, and operational control, First Watch is well-equipped to extend its leadership in the daytime dining segment. Investors should recognize the company's strategic foresight in leveraging technology and culture to drive sustainable, long-term value creation.