First Watch Embraces a Dine-In Comeback

First Watch CEO Chris Tomasso described Q1 as one of the best quarters he can remember in his 17 years at the company. 

Same-store sales increased 12.9 percent year-over-year, lapping 21.9 percent growth in 2022. Traffic increased 5.1 percent, outpacing the brand's competition. Adjusted EBITDA was $27.4 million, up 42 percent from last year. First Watch experienced these results despite a difficult March comparison. There wasn't a deceleration in sales and average weekly traffic held steady throughout the quarter. 

If Tomasso were to pick one downside in Q1, it'd be the softening of off-premises. CFO Mel Hope said the decline has been "pretty sequential" since the middle of the quarter. The company attributed the decrease to consumers' tightening their wallets. 

"Let's just be honest, the delivery, third-party delivery occasion is very expensive," Tomasso said during the brand's Q1 earnings call. " ... And not just with us, by the way, as you've seen with almost everybody in the industry where the consumer is starting to pull back. It's a discretionary occasion. And I think that's where you're starting to see it."

You're invited: Reserve your seat to hear First Watch CEO Chris Tomasso give a keynote at our upcoming NextGen Restaurant Summit! 

Tomasso isn't surprised delivery is first on the chopping block amid financial pressure. At any rate, the company is more than okay with the shift because it's witnessing growing dining room traffic. Inside restaurants, First Watch isn't seeing any notable check management. Beverage attachment is up and shareables have remained steady. Alcohol is in 87 percent of restaurants, slightly up from Q4, and it's mixing 6 percent. 

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"If we wow them with the food like we believe we did, hopefully, they will come in and give us a try in the restaurants where we can really turn them into a raving fan," Tomasso said. "But for right now, we still think that's an incremental visit as our dining room traffic grew alongside the third party. So as always, we're focused on our in-restaurant dining experience now more than ever."

First Watch carried 6.9 percent pricing in Q1 and will have 8 percent pricing in the second quarter. Hope said that from an absolute standpoint, the company doesn't consider this an aggressive position. The chain still thinks it's lagging in price compared to what peers have done in the past 18 to 24 months. While others took price in 2021, First Watch maintained its pricing structure throughout the entire year and focused on building customer count. This resulted in incremental market share. 

Hope said the NextGen Casual still has pricing power. 

"It's not contemplated in any of the guidance that we put out today, but we feel really good about where we are from a relative value standpoint and also from just an overall environment standpoint," Hope said. "So we're just following through on what we said about people looking for experiences, people looking for consistency and value and our pricing is a big part of that."

Tomasso said there isn't extra caution around driving favorable menu mix with its season menu and alcohol program. When it comes to those areas, First Watch's focus is more on the value instead of actual price. The bigger problem, the CEO said, is how the brand can outdo itself from the previous year. 

"Menu innovation has been the hallmark of our success for so many years," Tomasso said. "We're actually going to lean into it, to be honest with you. So you'll see us innovating around the alcohol program. You'll see us innovating around the shareables even more. And that doesn't necessarily mean higher price. A lot of times, we'll introduce items that may be at the same or lower price but deliver higher margin, and that works really well also."

Although March went smoothly, First Watch did experience some choppiness in traffic throughout April. The restaurant pointed to shifts in Easter and spring break, as well as customers showing signs of being under pressure. In response, First Watch marginally tempered traffic expectations for the balance of the year. 

Hope said that if the unevenness continues into May and June, First Watch won't do anything unnatural. 

"Our focus is on being successful over the long term," he said. "We'll continue to focus on quality products and service and entrees. We've always been very careful about pricing. And so I think given our history of being attentive to our customer with regard to pricing, I think we're already well-positioned if there is inflation or a recession that causes people to be more discriminating. But I do think that when people become more discriminating about where they're going to use their dollars that they are typically choosing restaurant brands that they trust. And I think we're well-trusted, which puts us in a good position."

After opening 10 restaurants in Q1, First Watch finished the quarter with 484 stores, including 370 company-owned and 114 franchises across 29 states. On Monday, the chain announced that it acquired six franchised locations in Omaha, Nebraska, for $8.2 million. 

Acquiring franchise-owned units is part of First Watch's long-term growth strategy. As of now, the brand has 14 franchisees who operate 109 stores. Sixty of those are subject to purchase options. Franchises perform in line with corporate units, and the six purchased outlets aren't an exception. Hope said that oftentimes franchises have different technology so there's an integration process, but beyond that, not much investment is necessary. 

First Watch expects the recent acquisition to deliver roughly $1 million in adjusted EBITDA for the balance of the year. 

"In general, our franchisees have done an incredible job of introducing the First Watch brands to markets that we probably wouldn't have gotten to as quickly as doing it with them," Tomasso said. "The restaurants look and feel exactly like a company-owned restaurant. And the primary motive for this purchase in particular, is just it's an efficient use of capital. We don't see operational enhancement opportunities there per se. So kind of just bringing them into the mothership, if you will, and having more company-owned restaurants because we're predominantly company-owned and want to move that way."

First Watch expects same-store sales of 6 to 8 percent in 2023, with positive traffic. It also projects 45-51 store openings, including 38-42 company units and 10-12 franchises. Capital expenditures should range from $100 million to $110 million, invested primarily in new restaurant projects and remodels.