First Watch Reports Strong Growth Amid Margin Challenges

First Watch Restaurant Group, Inc. ((FWRG)) has held its Q1 earnings call. Read on for the main highlights of the call.

First Watch Restaurant Group, Inc. recently held its earnings call, revealing a mixed sentiment. The company reported strong revenue growth and successful new store openings, driven by strategic marketing and operational efficiency. However, these positive trends were offset by significant margin pressure from higher commodity and labor costs, as well as a decline in adjusted EBITDA. Despite these challenges, First Watch remains optimistic about its growth strategies and market position.

Strong Revenue Growth

First Watch achieved a remarkable 16.4% increase in total revenue, fueled by a positive same-restaurant sales growth of 0.7% and the contribution of 115 non-comp restaurants. This impressive growth underscores the company’s robust performance in a competitive market.

New Restaurant Openings

The company celebrated the opening of 13 new system-wide restaurants, including its first location in New England, situated in Hanover, Massachusetts. This new location is performing above expectations, highlighting the success of First Watch’s expansion strategy.

Traffic Improvement

There was a notable sequential improvement in same-restaurant traffic, with a return to positive traffic in March. April marked the best monthly same-restaurant traffic result in over two years, showcasing the effectiveness of First Watch’s efforts to attract more customers.

Successful Marketing Campaigns

Enhanced strategic marketing efforts have led to improved traffic trends, with promising results in targeted geographies. These campaigns have been instrumental in driving customer engagement and increasing foot traffic.

Franchise Acquisitions

First Watch completed franchise acquisitions of 16 restaurants in North and South Carolina and three in Missouri. This expansion bolsters the company’s presence in key states, strengthening its market position.

Operational Efficiency

The company demonstrated operational efficiency with improved ticket times and reduced employee turnover for the eighth consecutive quarter. This reflects strong team development and effective management practices.

Margin Pressure

Despite positive revenue trends, restaurant-level operating profit margin decreased to 16.5% from 20.8% last year. This decline was primarily due to higher commodity inflation and labor costs, posing a challenge to profitability.

Cost Inflation

Commodity inflation of 7.7% and increased food and beverage costs, accounting for 23.8% of sales, significantly impacted margins. High prices of essential ingredients like eggs, bacon, coffee, and avocados were major contributors.

Adjusted EBITDA Decline

Adjusted EBITDA was reported at $22.8 million, $5.8 million below the previous year, with the adjusted EBITDA margin slipping to 8.1% from 11.8%. This decline reflects the financial pressures faced by the company.

Lower In-Restaurant Traffic

The first quarter saw in-restaurant traffic below expectations, despite improvements in third-party delivery traffic. This indicates a shift in consumer behavior that the company needs to address.

Higher Health Benefit Costs

Labor and related expenses increased by 130 basis points due to higher health benefit costs, resulting from increased enrollment and claims. This rise in expenses adds to the financial challenges faced by First Watch.

Forward-Looking Guidance

In its forward-looking guidance, First Watch highlighted both challenges and opportunities. The company expects to maintain low-single-digit same-restaurant sales growth and positive traffic, focusing on expanding marketing efforts and optimizing third-party delivery partnerships. Despite revising adjusted EBITDA down to $114 million to $119 million due to increased costs, First Watch remains committed to long-term growth, targeting 59 to 64 net new restaurant openings.

In conclusion, First Watch Restaurant Group, Inc.’s earnings call presented a mixed outlook. While the company experienced strong revenue growth and successful expansion, it faces significant margin pressures and financial challenges. Nevertheless, First Watch remains optimistic about its strategic initiatives and long-term growth potential, aiming to navigate the current economic landscape effectively.