The breakfast giant posted double-digit revenues and sales growth in the second quarter.

First Watch is on a roll—and we’re not just talking about cinnamon rolls here. The breakfast giant posted double-digit revenues and sales growth in the second quarter. Its recipe for success? Positive same-store sales growth, new restaurant openings, a dollop of menu innovation, and a laser focus on the experience of dine-in customers.

Balancing the in-person dining experience with off-premises business has been the consistent talk of the restaurant industry for the past few years since COVID hit, with no real consensus reached on the rules. But the obvious observation is, if the dine-in experience falters because your employees are so focused on fulfilling mobile orders, it’s a lose-lose. That’s why First Watch is hyper-focused on raising the bar for the hospitality experience for in-person diners in an era of increasing off-premises dining. 

“When our customers do visit us in the restaurants … they’re opting for the full experience. This shift by the consumer back to in-person experiences and social occasions is a really good thing for us,” said CEO Christopher Tomasso during the brand’s second quarter earnings call. 

Off-premises business represents about 18 percent of First Watch’s overall sales, which was at 5 percent pre-COVID. “During the time of necessity, we were pleased to accommodate the consumer for their off-prem occasion, and we will continue to do so, but we are even more pleased with the ongoing pivot back to our dining rooms,” he said. “Simply put, the totality of our in-restaurant service touch points generates a significantly better customer impression compared with that of off-prem.”

“What we’re seeing is, I think, the same phenomenon you’re seeing in travel where people are wanting experiences—you’re starting to see it in dining out occasions too,” Tomasso added. “So, dining out as groups, enjoying a shareable together, at least is what we’re seeing—indulging in an extra beverage, for example. And frankly, opting into our seasonal menus, which, for the most part, are higher-priced items than what’s on our core menu.”

Growth amid changing landscape

First Watch’s success in Q2 was driven by a 7.8 percent boost in same-store sales. The bottom line was further bolstered by easing food and beverage inflation, Tomasso told investors. 

Dine-in traffic was up in the low-single digits, but offset by fewer off-premises occasions, resulting in an overall traffic decline of 1.2 percent for Q2. However, First Watch continues to outperform casual dining overall by 510 basis points, according to Black Box Intelligence, highlighting the brand’s ability to grow market share in any environment, Tomasso noted.

“If you just kind of think about the environment last year, we were rolling over a tougher comparison with regard to people coming out of the Omicron event last year,” said Mel Hope, First Watch’s CFO, during the Q2 earnings call. “And as they circulated, we had more traffic in the restaurants. So we’re rolling over that. And as that kind of worked off through last year, we just saw an increase through the period.”

Total revenues were $216.3 million, a 17.3 percent increase over the second quarter of 2022. Food and beverage costs were 22.4 percent of sales in the second quarter compared to 24.9 percent in the same period last year.

The brand opened nine restaurants in Q2, including six company locations. “When you consider the number of restaurants we will open this year, and our clearly defined path to 2,200 domestic locations, we expect the long-term growth associated with new restaurant openings and franchise acquisitions to continue to fuel our value creation. Our teams are very proud as they should be, and I’m excited to see us continue to raise the bar,” Tomasso said during the earnings call.

First Watch closed the second quarter with 492 restaurants in 29 states.

First Watch continues to experience success with its new restaurant openings, in part due to strategic enhancements made which result in higher-profile locations with increased seating capacity, plus larger and more attractive patios and bars. 

“These initiatives have driven average unit volumes that we had not seen previously,” Tomasso highlighted. “And as a result, our new restaurant AUVs continue to exceed the comp group. We continue to innovate with far more room to optimize over the long term, and we’re encouraged by the impact we’re already seeing.”

Converting franchises to company-owned restaurants

First Watch also continued its strategy to acquire franchise-owned restaurants and territories in an effort to drive long-term value. In Q2, the company closed on six locations in the Omaha market, and most recently, bought five additional franchises in the Milwaukee area, with an expectation to close an additional seven. That includes one under construction in South Carolina and in Georgia within the next 30 days. After closing these deals, First Watch will have 12 franchisees who operate 100 restaurants. 

“As a reminder, our franchise-operated restaurants performed similarly to our company-owned restaurants. So for us, converting franchises to company-owned restaurants is compelling for both the financial and strategic perspective and represents a significant growth opportunity for our entire enterprise,” Tomasso noted.

Innovating around menu to maintain customer satisfaction

First Watch’s innovative approach to the menu and service offerings has resulted in positive year-over-year trends in beverage attachment and guest-elected pricing. The introduction of new menu items, such as specialty iced coffees and shareables like Bacon Cheddar cornbread, has resonated with customers. 

“Customers responded to our seasonal menus and pricing, and we saw a favorable seasonal menu mix and beverage attachment versus the same period last year,” said Hope during the Q2 earnings call.

First Watch also recently introduced a seasonal summer menu, available through August 13. From Strawberry Tres Leches French Toast to Lone Star Brisket Hash and Carnitas Breakfast Tostadas, First Watch continues to dish out seasonal ingredients and recipes that elevate the brunch experience and differentiate the brand. 

Read more: How First Watch Cracked the Culinary Code for Breakfast

“We have menu news five to six times per year,” Tomasso added. “We’re introducing new platforms, like we did with the specialty cold caffeinated beverages. So there’s some excitement around our menu constantly throughout the year, and we’ve seen that show up in positive mix.”

Favorable cost factors

First Watch benefited from cost deflation across its market basket, notably in pork and avocado costs. Food and beverage costs decreased to 22.4 percent of sales from 24.9 percent the previous year. Restaurant-level operating profit saw a significant improvement to 20.9 percent, reflecting sales leverage and favorable food and beverage costs.

Strategies for future growth

Looking ahead, First Watch’s focus and investment strategy lies in two pipelines: people and restaurant development. The company has over 100 new restaurants in various stages of development, and has more than 120 promotion-ready managers poised to lead them.

Hope told investors the company expects to open between 38 and 42 company restaurants and 10 to 12 franchises in 2023. Despite the potential to close up to three company locations, Hope reiterated same-restaurant sales growth of 6 to 8 percent in the year with a total of 45 to 51 net new systemwide restaurants.

“Our focus is on the next 1,500 restaurants. That’s where we see the greatest opportunity,” Tomasso told investors. “We have a regular market refresh strategy that’s in place for the legacy restaurants and markets, and sometimes it means moving restaurants in the trade area where we’ve been for 25, 30 years, which a lot of times when we talk about potentially closing three restaurants, it’s really a lease is up, and we’re going to move to a better spot in the trade area.”

First Watch also welcomed new board member Irene Chang Britt—who has experience in both operations and on the corporate governing side of food and beverage brands—during the Q2 earnings call.  

“The powerful combination of First Watch’s proven portability and vast landscape of untapped markets represents a long runway for future growth,” Tomasso added. “And when you couple that with our impressive historical cash-on-cash returns, the potential becomes clear.”

Increased full-year outlook

With a strong first half performance and several franchise acquisitions, First Watch is increasing certain elements of its full-year outlook. Total revenue growth is now expected to range from 18 to 21 percent, while adjusted EBITDA is anticipated to be in the range of $89 million to $92 million.

“Our impressive second quarter results exemplify our consistent long-term track record of operational excellence,” Tomasso added. “First Watch was built over four decades by keeping our eyes on the horizon while simultaneously focusing on exceptional execution, consistency, delivering value, and driving traffic. I believe we are well positioned to thrive in virtually any economic environment. We are, as always, looking forward to creating and serving more demand.”

Casual Dining, Chain Restaurants, Feature, Finance, Franchising, First Watch