The nearly 430-unit chain is off to a fast start as a publicly traded brand.
First Watch’s life as a public company is going much like its recent years as a private one did. The daytime dining concept's revenue increased nearly 60 percent (57.8) to $157.4 million in Q3, year-over-year. Same-store sales jumped 46.2 percent and traffic rose 40.1 percent.
While those results were a product of bouncing off COVID’s bottom, First Watch’s two-year view showed comps gains of 19.7 percent and traffic 4.8 percent higher. CEO Chris Tomasso called the period “one of the strongest quarters in First Watch’s nearly 40-year history.” It wasn’t a bad way to meet shareholders for the first time.
First Watch said it expects same-store sales to climb 31.5–33.5 percent in Q4 as it opens five corporate units and four franchises. Long-term, it guided unit grow in the low double-digits and restaurant sales in the mid-teens (comps of 3.5 percent as figures normalize on the lap). And as noted before its October stock market debut, First Watch still considers 2,200 domestic units an ultimate target to chase.
Today, there are about 428 locations in 28 states, spread across 337 corporate units and 91 franchises.
Also in Q3, restaurant-level operating profit margin upped to 19.5 percent from 9.9 percent (16 percent in 2019). Net income swung to a profit of $800,000 compared to a net loss of $11.1 million in the year-ago, coronavirus-saddled period.
Adjusted EBITDA lifted to $17 million from $2.6 million ($7.7 million in 2019).
First Watch did feel the weight of current operating conditions. Labor and other related expenses in Q3 was 32.6 percent of restaurant sales compared to 34.7 percent last year, and 35.2 percent in 2019’s comparable quarter (fewer employees). First Watch credited that “principally due to the challenging labor environment.”
“As the pace of job applications and hiring is improving, labor as a percentage of restaurant sales is expected to increase 100 to 150 basis points in the fourth fiscal quarter of 2021,” the company added.
Income from operations chimed in at $7.2 million versus a loss of $8.6 million, year-over-year. That was mainly a byproduct of the comps and traffic increase, which had declined in 2020 thanks to COVID.
Ahead of the pandemic, First Watch posted 28 consecutive quarters of same-restaurant sales growth from fiscal 2013 to 2019, and positive annual comparable traffic growth from fiscal 2014 to 2019. The chain reported same-store sales growth of 16.3 percent in Q2, a three-month stretch that ended June 27, relative to the same run in 2019. So the Q3 result has become a steady trend.
One reason being, even with dine-in climbing back, First Watch’s off-premises weekly sales have held in the $8,000 per store range. Before the crisis, it was less than $2,000.
In addition, First Watch opened 19 company-owned restaurants since September 27. That plus the sales and traffic return helped balance soaring food and beverage costs, the company said, as well as heightened labor bills.
Tomasso told MarketWatch the company’s one-shift model (7 a.m. to 2:30 p.m.) helped it navigate recent staffing challenges just as it did back in 2019. The company’s average tenure for director and regional directors exceeds a decade.
Despite setbacks, the brand elected to not raise menu prices in 2021, sidestepping a typical 2–3 percent hike taken each year. First Watch predicted food cost inflation of 4–7 percent in the mid-term.
On the company’s earnings call, Tomasso said the brand’s focus has centered on growing customer counts out of COVID. It’s been able to balance commodity inflation with higher check, namely due its growing alcohol program and add-ons.
“We’ve taken no price this year,” Tomasso said. “We’re focused on traffic.”
First Watch said in its prospectus the company’s alcohol program 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 did not offer alcohol. This past quarter, 37 more restaurants joined in as the total number lifted to 281 stores. The mix settled at 2.2 percent of restaurant sales at all corporate units.
On the add-on lever, the company didn’t pare down its menu of 60 or so entrée items at all during the pandemic. That, too, Tomasso said, was a decision meant to reinvigorate in-restaurant-dining numbers. “Our focus was on getting everybody back and not disappointing any of our customers,” he told analysts, adding the company will likely get back to price increases in the future.
