America’s fastest-growing full-service restaurant chain could soon hit the stock market. First Watch on Monday announced it intends to raise $100 million in an initial public offering.
If the brand does go public, it would become the first full-service restaurant to do so since Kura Sushi in August 2019. Fogo de Chao, which returned to the private sector with a $560 million sale in February 2018, preceded Kura Sushi in 2015.
BofA Securities, Goldman Sachs & Co. LLC, and Jefferies LLC are acting as lead book-running managers for First Watch’s proposed offering.
The company’s exploration of an IPO comes follows 28 consecutive quarters of same-restaurant sales growth from fiscal 2013 to 2019, and positive annual comparable traffic growth from fiscal 2014 to 2019 (all prior to the COVID-19 pandemic).
More recently during the COVID window, First Watch posted same-store sales growth of 16.3 percent in the second quarter that ended June 27 relative to the same stretch in 2019. Also notable, traffic was ahead of 2019 comparisons by 1 percent.
MORE: All Eyes on First Watch: Why the Breakfast Leader is Just Getting Started
On April 13, 2020, First Watch made the call to shutter its entire company-run footprint, including to-go and delivery. By the middle of May, it began to reopen dining rooms in two markets and emerged with a far stronger off-premises corner of its business. For perspective, pre-COVID, First Watch guests had to call restaurants to get takeout. Within a year, sales outside the four walls boomed 600 percent as First Watch fast-tracked online ordering and delivery (it implemented a surcharge for third-party orders), partnering with Olo and linking up with DoorDash and Uber Eats at all locations.
Additionally, First Watch integrated technology with waitlist management solution Wisely to manage the wait for dine-in and curbside pickup, while simultaneously gathering guest data on consumer preferences. The waitlist tool, first announced last June, went active on First Watch’s app, website, and Google.
As a result, First Watch’s off-premises mix rose to 30 percent of sales by the fall—up from 6 percent in 2019.
In the Q4 quarter that ended December 29, 2019, First Watch’s average weekly off-premises sales were $1,897 per restaurant. Come December 2020, the figure was up to $8,082. With dine-in returning, First Watch held off-premises weekly sales of $8,079 per restaurant (Q2 2021).
Despite all the challenges and pivots, First Watch managed to open 42 and 18 restaurants in fiscal 2020 and the 26-week period that closed June 27, respectively.
First Watch’s 42 openings totaled more than the second, third, and fourth fastest-growing full-service brands combined last year (Texas Roadhouse, 19; Walk-On’s, 12; LongHorn, 8). It brought the 1983-founded concept to 423 locations across 28 states as of June 27. Of that, 335 are company run and 88 operated by franchisees.
Recent openings are generating annualized average sales of $2 million as well, above the fleet average of $1.7 million.
It’s been a rapid climb. In 2006, when current-CEO Chris Tomasso joined as the chain’s first CMO, there were only 60 restaurants in nine states. The former VP of marketing for Cracker Barrel watched First Watch explode to more than 250 locations before being named CEO in 2018. Advent International made a majority investment the previous year.
In Florida, the chain’s most mature market with the greatest number of company-owned restaurants, First Watch has grown from 54 to 99 restaurants over the last six calendars, while generating average annual same-restaurant sales growth of 6.8 percent from fiscal 2015 to 2019.
“We believe we have significant potential to expand our presence within all the states in which we currently operate as well as new ones,” the company said. It believes there’s potential for more than 2,200 U.S. locations, which would sail it past Waffle House (about 1,900) as America’s largest full-service brand.
A look at First Watch’s growth (systemwide restaurants):
2014
- Franchised: 19
- Company owned: 129
2015
- Franchised: 91
- Company owned: 186
2016
- Franchised: 19
- Company owned: 129
2016
- Franchised: 103
- Company owned: 194
2017
- Franchised: 105
- Company owned: 213
2018
- Franchised: 103
- Company owned: 248
2019
- Franchised: 69
- Company owned: 299
2020
- Franchised: 88
- Company owned: 321
Q2 2021
- Franchised: 88
- Company owned: 335
First Watch famously runs a “one-shift” business, from 7 a.m. to 2:30 p.m., with one main menu, which the company says enables it to optimize operations and attract and retain employees passionate about hospitality and drawn to a “No Night Shifts Ever” approach.
In the six-year period that ended December 29 (before COVID), First Watch’s same-store sales growth averaged 6.3 percent annually. Traffic climbed about 1.4 percent. In the five-year period that ended the same time, average-unit volumes lifted 25.7 percent, from $1.3 million in fiscal 2015 to $1.6 million in 2019. Alongside growth, corporate units have opened with average cash-on-cash returns of 50.8 percent, the company said in the filing.
Annual company-owned restaurant sales (in millions):
- 2015: $194
- 2016: $234
- 2017: $278
- 2018: $342
- 2019: $429
During COVID
- 2020: $337
- Last 12 months Q1 2021: $359
- Last 12 months Q2 2021: $483
Annual company-owned same-store sales growth and traffic
2015
- Same-store sales: 6.5 percent
- Traffic: 1.2 percent
2016
- Same-store sales: 6.9 percent
- Traffic: 0.5 percent
2017
- Same-store sales: 7.9 percent
- Traffic: 1.6 percent
2018
- Same-store sales: 6.9 percent
- Traffic: 2.7 percent
2019
- Same-store sales: 5.6 percent
- Traffic: 1.6 percent
During COVID
FY 2020 versus 2019:
- Same-store sales: –33.9 percent
- Traffic: –29 percent
Q1 2021 versus Q1 2019
- Same-store sales: 0.5 percent
- Traffic: –13.6 percent
Q2 2021 versus Q2 2019
- Same-store sales: 16.3 percent
- Traffic: 1 percent
First Watch enjoyed ample momentum coming into the pandemic. The chain saw comps growth of 7.4 and 4.7 percent, respectively, in January and February of 2020.
Dining rooms began closing the week of March 15, which led to First Watch ultimately furloughing most of its 9,000 employees. The company provided relief payments to hourly workers with more than three years of service and committed to making managers and corporate employees “whole” upon return, meaning it covered any financial shortfall between state and federal benefits and those employees’ base salaries.
First Watch also paid employers and employee portions of healthcare premiums for furloughed individuals enrolled in its healthcare plans, and covered all out-of-pocket costs for insured workers and their families for medical visits related to COVID, while securing telemedicine services.
Additionally, First Watch created the “You First Fund,” which provides tax-free grants to in-need employees. The company distributed roughly $800,000 in such grants through June.
First Watch’s restaurant-level manager turnover was 29 percent during the last 12 months ending March 2020, lower than the industry average of 41 percent, according to Black Box Intelligence. As a result of COVID efforts, the company said, 75 percent of hourly employees who worked at First Watch for more than three years and about 90 percent of general managers returned to work when restaurants reopened.
On the operations side, First Watch launched its aforementioned new mobile app and accelerated rollout of its alcohol program, which increased overall beverage incidence by 230 basis points. As of June 27, First Watch’s alcohol menu was offered in 244 restaurants, “with clear plans to continue the expansion to all restaurants where feasible.” In Q2, alcohol accounted for 3.6 percent of in-restaurant sales at company-owned restaurants and increased the average in-restaurant customer spend by 30 cents as compared to restaurants that do not offer alcohol.
The company didn’t pare down its menu (60 entrée items) during COVID and expanded patio and outdoor service areas, too.
COVID cost First Watch $4.8 million in inventory obsolescence and spoilage ($600,000), compensation paid to employees ($1.4 million), health insurance costs paid for furloughed workers ($700,000), and employees retention credits and supplies, like PPP ($2.1 million).
Things began to pick up in March 2021. With pent-up demand surging in-store dining and off-premises channels remaining well above past levels, First Watch posted same-store sales growth of 5.9, 13.4, 14.8, and 19.7 percent in March, April, May, and June, respectively. And this was against 2019 months.
It’s carried over into Q3, with July up 20.2 percent on a two-year view and August 17 percent. Traffic in those periods climbed 5.1 and 2 percent, respectively.
Looking ahead, First Watch believes the breakfast and morning snack business is going to buoy trends into the future. The morning meal was the only foodservice daypart with consistent year-over-year growth, according to RKMA. The restaurant industry captured two additional breakfast visits per capita, from 2015 to 2018, and with 78 percent of breakfasts still being prepared at home during 2019, according to The NPD Group. There were 102 billion breakfast occasions and 50 billion morning snack occasions in 2019, per a January 2020 NPD Breakfast Insights report. “We believe that the broad appeal of our menu and the quality of our ingredients gives us a competitive advantage over many alternatives that offer breakfast and lunch,” First Watch said Tuesday.
The company also expects the “migration from dense urban to suburban areas, where most of our restaurants are located,” to result in increased traffic and brand awareness. “Increased work-from-home routines have kept people in suburban areas for larger portions of the day, increasing First Watch exposure to an incremental customer base,” the company said.
First Watch’s operating hours encompass breakfast, brunch, and lunch, which represent 63 percent of all restaurant sales in the U.S., according to RKMA.
In one example of trends at work, First Watch’s Fresh Juice and Sharables platforms climbed from 9.6 and 3.4 percent of customers purchasing in Q4 2019 to 15.6 and 5.7 percent, respectively, in Q2 201. The chain’s gross per person average over that same period rose from $12.29 to $14.69.
Another interesting point—in 2019, only 6 percent of First Watch’s weekday customers purchased lunch entrees. But the company said the migration of people from urban to suburban markets in light of COVID, coupled with work-from-home trends, presents the company with an incremental customer opportunity during the weekday business hours. “Which we believe will further propel growth in our lunch daypart,” the company said.
As this unfolds, First Watch has massive whitespace in the brand awareness conversation. The brand’s customer affinity was highlighted in a 2021 national study where First Watch ranked 10th in net promoter score among the country’s 74 largest restaurant brands. However, brand awareness, as indicated by a recent nationally represented survey, only 11 percent of respondents were aware of First Watch. “The combination of both high customer satisfaction and opportunity for growing awareness highlights strong potential for the brand,” First Watch said.
Advertising costs represented about 1 percent of total revenues in 2019 and 2020.
