First Watch was ready to explore life as a public company well before CEO Chris Tomasso rang the opening bell Friday. The concept filed an S-1 in January 2020, but elected to pull back in light of COVID-19. First Watch shuttered its entire corporate fleet in mid-April, and saw a streak of 28 consecutive quarters of same-store sales growth come to a halt.
During that pause, however, the company regrouped and bolstered digital and off-premises capabilities (you had to call in to-go orders before). It fast-tracked delivery, launched an app, introduced a waitlist tool, and, by fall, witnessed sales outside its four walls rise to 30 percent of the business. That mix was just 6 percent previously and has settled around 20 percent in recent quarters.
“Once we recovered from COVID, we haven’t looked back,” Tomasso says.
The brand has comped positive—versus 2019 levels—since March. In the second quarter, sales were mid-teens higher and traffic was positive, too. That continued into Q3 and same-store sales rose 20 percent in July and 17 percent in August. To pull that back further, First Watch’s three-year stack for 2017, 2018, and 2019 was 20.4 percent. So lapping positive against 2019 was no small achievement for First Watch. “That’s really emboldened us here,” Tomasso says. “That momentum has now been going on for five or six months.”
All told, it made a lot of sense for First Watch to resurface those January 2020 plans. Tomasso says staff got together and asked simply, “Do we want to do this.” They did.
The company’s latest S-1 arrived in early September and set First Watch on a path to become the first full-service chain to hit the stock market since Kura Sushi in August 2019. Before that, it had been four years since Fogo de Chao did so (it returned to the private sector with a $560 million sale in February 2018).
First Watch’s stock jumped close to 30 percent in its first day of trading on Friday as it raised about $170 million at 9.5 million shares, getting to $22.98 after pricing at $18, within its expected range of $17–$20. It was trading at $22.13 late in the day. That put First Watch’s valuation at roughly $1 billion. It began swapping under the ticker, “FWRG.”
First Watch said in filings it would use net proceeds to repay borrowings under its senior credit facilities. Or to pay down debt of $294 million.
Tomasso says you can’t understate the impact of doing so. Beyond getting the figure down, he says it will allow First Watch to get more “main market debt,” which is more favorable and the interest savings alone can be significant.
“What it does it really sets us up to fuel our growth,” Tomasso says. “To me, one of the most exciting things is an intangible—it allows our loyal customers and people who have had an affinity for us for many years and have asked us when we’re going public to feel even closer to our brand and our organization by participating.”
First Watch, despite 2020’s setbacks, opened 42 and 18 restaurants in the fiscal year and the 26-week period that closed June 27, respectively. The first number was a true outlier. It totaled more than the second, third, and fourth fastest-growing full-service chains combined (Texas Roadhouse, 19; Walk-On’s, 12; LongHorn, 8), and gave First Watch 423 stores across 28 states. Of those, 335 were corporate and 88 franchised.
Perhaps more alluring, though, Tomasso believes the IPO can provide First Watch’s profile a jolt. Throughout the U.S., he says, First Watch still carries “very low” brand awareness. “Even though we’ve been putting up incredible numbers for a long period of time, we’ve been a word-of-mouth concept and one that doesn’t have relative brand awareness,” Tomasso says.
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. Yet as indicated by a recent nationally represented survey, only 11 percent of respondents were aware of First Watch.
The chain’s largest base today is in its home state of Florida, where it’s scaled from 54 to 99 restaurants in the last six years while generating average annual comps growth of 6.8 percent (fiscal 2015–2019). The company thinks it can ultimately reach 2,200 U.S. stores, clustering current areas and crashing new ones. If so, First Watch would be the largest sit-down chain in the country—a banner held today by Waffle House and its 1,900 or so stores. The largest publicly held full-serves trade under Dine Brands’ umbrella, with IHOP boasting 1,654 domestic units as of June 30, and Applebee’s 1,590.
Presently, there are no First Watch locations in California or New York, and only 55 in Texas. Ten states boast five or fewer restaurants.
When Tomasso joined First Watch 15 years ago as its first CMO, there were 60 stores. The company had five different logos and three different uniforms. “Probably” four different menus as well.
“We joke about it internally that even though we’re 38 years old, we really feel like we’re just getting started,” Tomasso says. “We have all the benefit of being around for that long [since 1983], but we’re kind of at a launching point here where we’ve got a lot of momentum and a lot of opportunities sitting right in front of us that we can’t wait to take advantage of.”
He says becoming a public company won’t necessarily alter First Watch’s trajectory by the numbers. Rather, it will support it. The company was already sustaining 10–12 percent unit growth and expects to keep that pace, which amounts to 40–50 stores per year. “Our strategy remains the same,” he says. “Grow behind people.”
Advent International made a majority investment in 2017, the year before Tomasso, a former VP of marketing at Cracker Barrel, was named CEO.
The firm will still own about 79 percent of First Watch assuming an overallotment option goes through. It would be 81 percent otherwise.
Regardless, Tomasso says, Advent will remain the majority owner and engine behind First Watch’s growth. “If we deliver on [our goals] for 10 years, we’ll have a very happy private equity partner, happy management team, and happy investor base,” he says.
First Watch’s financials enter the public realm with momentum. Recent openings are generating annualized average sales of $2 million, above the fleet average of $1.7 million. Corporate units are debuting with average cash-on-cash returns of 50.8 percent.
In the six years leading up to COVID, same-store sales growth averaged 6.3 percent annually and traffic climbed about 1.4 percent.
Five years heading in, AUVs leapt 25.7 percent from $1.3 million to $1.6 million.
First Watch was a $194 million company in 2015. It closed 2019 at $429 million and finished 2020 down to $337 million as comps fell 33.9 percent and traffic declined 29 percent amid the pandemic. However, in the last 12 months ending Q2 2021, the figure is up to $483 million, despite the fact dine-in has not fully returned to prior marks, Tomasso says.
As the company’s recovery continues, it’s offering $2,000 referral bonuses for managers to aid recruitment and expects 2–3 percent commodity inflation next year, which likely will pass along in typical 2.5–3 percent annual price increases.
There’s a lot of whitespace ahead in more areas than just real estate. First Watch accelerated rollout of its alcohol program last year, 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. A off-premises-ready prototype remains a work in progress and First Watch sees ample potential in the breakfast and morning daypart. 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.
Also, just 6 percent of the chain’s weekday customers purchased lunch entrees in 2019. A suburban migration, the company noted, could change that as work-from-home trends present an incremental guest opportunity.
Friday’s milestone, though, was one First Watch planned to soak in. It brought 75 employees from around the country, everything from hourly workers to managers to corporate employees, to honor the occasion. “As you can imagine, we’re going to have a little celebration tonight,” Tomasso says.