First Watch Restaurant Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by and welcome to the First Watch Restaurant Group, Inc. 2nd Quarter Earnings Conference Call occurring today, August 6, 2024, at 8 am Eastern Time. Please note that all participants are currently in a listen only mode. Following the presentation, the conference call will be opened for analyst questions and instructions on how to ask a question will be given at that time. This call will be archived and available for replay at investors.

Operator

Firstwatch.com under the News and Events section. I would now like to turn the conference over to Stephen Marotta, Vice President of Investor Relations at First Watch to begin.

Speaker 1

Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tommaso and Chief Financial Officer, Mel Hope. This morning First Watch issued its earnings release for the Q2 of fiscal 2024 on GlobeNewswire and filed its quarterly report on Form 10Q with the SEC. These documents can be found at investors. Firstwatch.com.

Speaker 1

This conference call will include forward looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Thus statements include without limitation statements concerning the condition of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. First Watch assumes no obligation to update these forward looking statements whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non GAAP measures, including restaurant level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin.

Speaker 1

Investors should review the reconciliation of these non GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. During today's call, references to same restaurant sales and traffic growth compares to 13 week periods ended June 30, 2024 July 2, 2023 in order to compare like for like periods. Otherwise, any references to percentage growth when discussing the 2nd quarter performance is a comparison to the Q2 of 2023 unless otherwise indicated. And with that, I will turn the call over to Chris.

Speaker 2

Thanks, Steve. Good morning. I'm pleased to report another quarter of solid operating results and adjusted EBITDA growth.

Speaker 3

And I thank everyone in our organization for

Speaker 2

their hard work. I remain extremely proud of our teams for continuing to control what we can control and delivering exceptional customer experiences, both of which are key factors in sustaining our profitability improvements as evidenced by our adjusted EBITDA performance. As expected, traffic was challenging during the quarter given the macro headwinds throughout most of our industry. Despite that, we are operating at a very high level and are comfortable reiterating our fiscal year 2024 total revenue and adjusted EBITDA guidance. In Q2, we generated $299,000,000 in system wide sales, dollars 258,600,000 in total revenues and $35,300,000 in adjusted EBITDA, the latter of which represented a 37% increase versus last year.

Speaker 2

Additional second quarter highlights include sequentially better same restaurant traffic compared to the Q1, positive mix, improved labor productivity and better than expected contributions from both our new restaurant openings and strategic franchisee acquisitions completed over the past year. We opened 7 total new restaurants in 6 states during the Q2, 6 of which are company owned and one that's franchise owned. We also completed our largest First Watch franchisee acquisition on April 15th when we purchased 21 restaurants along with the development rights in the Raleigh Durham, North Carolina DMA. Our results and our internal KPIs demonstrate that we continue to operate our restaurants with remarkable efficiency. Our NROs by vintage and across geographies have been outstanding, performing at or above their sales expectations and our pipeline for future growth is stronger than ever.

Speaker 2

As of today, we have more than 130 new restaurant projects in our pipeline and we are on track with our long term target of delivering annual new restaurant growth in the low double digits as a percentage of our system. As we continue to expand the system, the pipeline remains a significant driver of long term value creation and earnings growth. As we stated on our last earnings call, we believe our traffic headwinds are more macro than micro and our insights indicate that 1, much of the industry wide pressure is occurring primarily during the weekday breakfast and lunch day parts as consumers look to trim weekday occasions. 2, that the behavior and frequency of our repeat customers remain relatively consistent, which is encouraging. And 3, that occasions from our infrequent customers, those who average a single visit annually have declined as have visits by lower income consumers.

Speaker 2

While it's evident that our customer is under some pressure, our business is strong and our long term strategy remains intact and compelling. In the Q2, our customer experience scores improved versus the same period last year. Growth in our per person average check exceeded carried pricing as a result of positive mix through menu innovation. Our ticket times were more than 20% faster than year. Our employee turnover improved again, marking 6 straight quarters.

Speaker 2

It's clear that our investments in technology, both customer facing and our enhanced business intelligence tools for our operations teams are bearing fruit, exemplified by a record Mother's Day that featured positive 1.8 percent same restaurant traffic, positive 5.4% same restaurant sales, better than 20% faster ticket times and higher customer experience scores. And in the 2nd quarter, Placer AI data indicates that First Watch's traffic share increased against the direct daytime dining competitive set. As I've shared with investors and our teams, our approach in the current environment is to double down where we already excel. Through our investments in technology, data capture and analytics, we now know and continue to learn more about First Watch customers than ever. We're putting those insights to work.

Speaker 2

We've accumulated an opt in database of roughly 7,000,000 customers and are analyzing and segmenting customer information by visitation patterns to deliver the appropriate communication to the appropriate audience at the appropriate time. Whether we're delighting our repeat customers, reengaging a lapsed customer or reaching a competitive user, we are focused on targeting demand generation across our own communication channels as well as paid digital media. Our approach is in stark contrast to the broad based discounting that many in our industry are deploying. It's our opinion that while aggressive promotions drive short term traffic in some instances, we view that tactic as sacrificing margin from loyal customers, while also attracting temporary discount motivated customers with low recurrence rates. We will lean into traffic driving marketing initiatives the First Watch way, focusing on profitable growth with messages that lever our core brand attributes to increase the frequency of targeted customer groups.

Speaker 2

We realize that some may not fully appreciate our approach, but our industry has a history littered with brands that lost their way during challenging times. First Watch has always played to win the long game. First Watch restaurants deliver exceptional everyday value featuring a culinary forward menu using fresh, high quality ingredients and consistent customer service that creates memorable experiences. We're very measured when it comes to pricing actions in any environment and our conservatism which is guided by our goal of preserving our value proposition is well documented. The modest 1% price action we implemented during the last week of Q2 is merely a continuation of our conservative pricing philosophy and is consistent with the multi year strategy we implemented upon exiting COVID.

Speaker 2

As I stated earlier, our growth engine continues to and is a particular point of strength for us and our long term growth outlook remains in place. Inclusive of the 40 company owned NROs combined with the 45 franchise acquisitions completed, we've added nearly 4,500 additional annual operating weeks to our operating model since the Q2 of 2023. Our new restaurants as a group and by vintage are meeting or exceeding our targets. New restaurant 3rd year AUV targets have increased by more than 40% since 2019 and our capital return criteria continues to be achieved. We had 538 restaurants in operation at the end of the second quarter, representing only a quarter of our total addressable market of 2,200.

Speaker 2

And encouragingly, no DMA is completely built out. The 130 new restaurant projects currently under development reflect nearly 25% of our current system. Our future growth opportunities abound and our manager ready bench is as robust as our real estate pipeline. Since May 2023, our franchise acquisition strategy has resulted in our conversion of 45 restaurants from franchise operated to company owned, including our largest First Watch acquisition, which took place in the Q2. Restaurants we have acquired from our franchisees have added nearly $100,000,000 in annual restaurant sales and 17 new DMAs for corporate development.

Speaker 2

We're delighted with how these restaurants, leaders and employees have integrated into our corporate operations. We successfully retained 94% of leaders, manager and above across our 2024 acquisitions, including 100 percent of Directors of Operations. In short, times are good for us, just not in the usual way. Our most loyal customers expect a consistently high experience and are maintaining frequency. We're delivering on their high expectations.

Speaker 2

Furthermore, both our restaurant and enterprise level profitability is exceptional. While we're not immune to macro headwinds, we are managing through these times by playing to our strength, which is paying off in restaurant level profitability and the continued rapid growth in the number of well run First Watch restaurants. And with that, I'll turn it over to Mel.

Speaker 4

Thank you, Chris, and good morning, everybody. We're pleased to report strong second quarter profits. We are controlling the controllables and as a result our teams continue to generate higher restaurant level operating profit margin and improved adjusted EBITDA margin. Total second quarter revenues were $258,600,000 an increase of 19.5%. Our top line growth in the Q2 was driven by our new restaurant openings and the franchise restaurants we acquired over the past year.

Speaker 4

Same restaurant sales slipped 30 basis points on negative same restaurant traffic of 4%. Our food and beverage costs were 21.8 percent of sales in the 2nd quarter compared to 22.4% in the same period last year. As a percent of sales, costs benefited from carry pricing of 3.5% and positive mix, partially offset by commodity inflation of 4.2%. During the quarter, restaurant level labor inflation was 4 point 6%. Nevertheless, labor and other related expenses were 32.8% of sales in the 2nd quarter, a 40 basis point improvement from 33.2% in the Q2 of 2023.

Speaker 4

The improvement in labor efficiency illustrates the success of our operators who have also been building on our reputation for great service. For the quarter, our customer experience scores have strengthened by roughly 10% versus last year. In short, and in the spirit of controlling what we can control, our restaurants continue to successfully serve our customers more efficiently at the same time our customers are reporting that our service is even better. The improvements in food and labor helped lift restaurant level operating profit margin by 100 basis points versus the prior year and income from operations margins by 110 basis points. General and administrative expenses were $27,200,000 approximately $1,900,000 higher than in the prior year, primarily due to additional headcount.

Speaker 4

G and A expenses were actually lower than the Q1 of 2024 and at 10.5% of sales, they were 120 basis points lower than last year. Adjusted EBITDA was 35 point $3,000,000 a $9,500,000 increase versus the $25,800,000 reported last year. We're pleased to report this significant year over year growth in adjusted EBITDA as we continue to open and acquire restaurants in the execution of our strategic long term growth plan. Adjusted EBITDA margin was 13.7 percent versus the 11.9% margin we realized in the Q2 of 2023. The improvement was primarily attributable to the increase in restaurant level operating profit margin we discussed as well as lower general and administrative expenses as a percent of sales.

Speaker 4

Net income was $8,900,000 and net income margin was 3.4%. We opened 7 new system wide restaurants during the Q2 of which 6 are company owned and 1 is franchise owned. So at the end of the Q2, the First Watch system has now grown to 5 38 restaurants. For your financial modeling purposes, the net effect of acquisitions, which includes only the impact of purchases made within the last 12 months, increased both 2nd quarter revenue by about $21,000,000 and adjusted EBITDA by about 5,000,000 dollars For further details on the Q2, please review our supplemental materials deck on our Investor Relations website beneath the webcast link. Again, we're proud of our restaurant teams who have continued to improve the experience in our restaurants, while delivering strong profitability.

Speaker 4

To provide you with more insight on our planning for the rest of the year, 3rd quarter to date same restaurant traffic growth has been below our 2nd quarter results and we're anticipating the second half of the year to be at least as challenging as the first half. We took about 1% of additional price the last week of June and so will carry about 3.5% of price in the 3rd quarter. Furthermore, our 3rd party off prem channel remains volatile and we expect it to continue to weigh on our overall traffic for the balance of the year. To update our full year outlook for 2024, we are adjusting same restaurant sales growth to a range of negative 2% to flat with a mid single digit decline in same restaurant traffic. We expect a total of 52 to 56 net new system wide restaurants updated to reflect 45 to 48 company owned restaurants, 9 to 10 franchise owned restaurants and the 2 system wide closures.

Speaker 4

Our 2024 development pipeline remains heavily weighted in the second half of the year, the 4th quarter in particular similar to our cadence in 2023. We now expect a blended tax rate between 31% 33%. The outperformance of our non comp restaurants is largely offsetting our negative same restaurant sales growth and as such we're maintaining our total revenue growth guidance in a range of 17% to 19%, excluding the impact of the 53rd week last year. Approximately 7% of the growth is expected to be the net contribution from the 23 restaurants we acquired in 2023 and the 22 restaurants acquired in 2024. We're also maintaining the adjusted EBITDA guidance range of $106,000,000 to $112,000,000 The net impact from acquisitions is now expected to contribute $13,000,000 to current year adjusted EBITDA.

Speaker 4

Our expectation of commodity inflation for the year remains unchanged at 2% to 4%, as does our expected restaurant level labor cost inflation in the range of 5% to 7%. Finally, we continue to plan capital expenditures of $125,000,000 to $135,000,000 not including the capital invested in the franchise acquisitions. And with that, operator, would you please open the line for the questions?

Operator

Thank you. We will now be conducting a question and answer session. The first question comes from the line of Chris O'Cull with Stifel. Please go ahead.

Speaker 5

Great. Thanks guys. This is Patrick on for Chris. Good morning. Good morning Patrick.

Speaker 5

Good morning. I know you guys called out last quarter that Florida was a region of weakness for the system. And I'm curious if you've seen that remain the same and if there's been a change when you look geographically across any other regions of the country that you have a relatively good penetration in? Yes, we relatively good penetration in?

Speaker 2

Yes. We saw the gap between Florida and the rest of the system widen a little bit again. But our position hasn't changed. I mean, we still see that as a normalization of trends in the state kind of coming out of COVID and normalizing. But we're still all in on Florida from a growth perspective.

Speaker 2

I mean, Florida is still one of the top states for net migration in the U. S. And we continue to see it as an excellent opportunity for us to continue to operate and grow there. And still with the tourist destination aspect of it, we just we believe that the presence that we have in Florida is strong and we'll continue to focus on it. And we don't have any other regions of

Speaker 4

the country that we'd call out as being weaker than the rest of the system. Our development process is really data driven. So our when we select a site, the success of the site really performs pretty predictably within a narrow band.

Speaker 5

Got it. That's helpful. And then Chris, I know the company utilizes digital channels to drive greater frequency among current users and you called some of that out in your prepared remarks. But I was curious how you're thinking more about what you might call top of the funnel tactics you can deploy from a marketing perspective that maybe can help reach consumers who have never used First Watch?

Speaker 2

Yes. I think we look at and segment the consumer based on obviously demographics psychographics, but probably more importantly, the frequency. And we do have a focus on all the channels that I mentioned on the call. So our infrequent users, lapsed users and even users of competitors. So and we're doing that again what we just we're just calling the first watch way, which is through the owned channels that we have and then through social and digital.

Speaker 5

Helpful. Thanks guys.

Speaker 4

You're welcome.

Operator

Thank you. Next question comes from the line of Brian Amboccaro with Raymond James. Please go ahead.

Speaker 6

Hi, thanks and good morning. Back on the sales, I was also curious to what degree you think maybe return to office dynamics could be impacting your business. Could you elaborate on what you're seeing weekday versus weekend? Or are there any other data dynamics that you analyze to try to answer that question?

Speaker 2

Yes. We don't have any data that suggests that it's due to return to work. We do know that the weekday occasion is the weekday lunch specifically is where we're seeing the most softness, weekday breakfast and weekday lunch. And so we just think it's maybe a factor of the consumer, just choosing to treat that occasion as one that they can have at home or something like that in this environment. Again, we didn't see any check management steps prior to what we're seeing in the traffic pressure.

Speaker 2

So we believe it's actually a and then when we look at industry data, we also see that those dayparts are down across full service QSR and whatnot. So that kind of leads us more Brian towards a hypothesis that is the occasion.

Speaker 6

All right. That's helpful. Thanks, Chris. And on the labor front, another quarter of solid cost controls evident in your Q2 results. Could you just remind us what some of the new tools and processes you've deployed?

Speaker 6

And any benchmarks or data points you could provide on the efficiencies that that's driving in your restaurants?

Speaker 4

Yes. So good morning, Brian, by the way. The tools that we created really last year and have rolled out in system continue to improve basically help the managers in the restaurant actually see their kind of real time labor costs, which helps them with scheduling and staffing during weekdays and during their peak hours. They also have just better hourly management, I would say, in terms of labor and better scheduling. They're also successful in more throughput during our peak hours, which makes our labor look a little bit better.

Speaker 4

I don't have any metrics that I can give you or to share with you, but it's really just the attention to the management of the restaurant, the scheduling and the labor management that our operators have been attentive to as they've learned to use the new tools and apply some of the strengths of those.

Speaker 2

And then Brian, I'll add that we just to give you an example, we had been testing a digital scheduling platform and the test went extremely well and we're rolling it out here in Q3 excuse me in Q3. And that's a typical platform where the servers can look at their schedules. Actually all employees can look at their schedules. They're a lot they can trade schedules on their trade shifts things like that. Things that we had to do very manually and frankly through the manager before.

Speaker 2

So this will again improve our efficiency and free up the manager to focus on other things.

Speaker 4

And make it easier for the crews. Yes.

Speaker 6

Okay. Well, I'll pass it along. Thank you very much.

Speaker 2

Thanks.

Operator

Thank you. Next question comes from the line of Andy Barish with Jefferies. Please go ahead.

Speaker 3

Hey guys, good morning. Wondering as you kind of tease out the traffic impact, Does discounting kind of in the breakfast category, some of the legacy players? Obviously, that's a subject we're hearing a lot about across the restaurant industry right now. Do you think that's having a near term impact? Are you able to kind of tease that out of what you're seeing?

Speaker 2

Andy, I'd say that we worked really hard years ago to differentiate ourselves from that segment through our brand repositioning and things like that. That's not an area that we choose to kind of operate in. What I'll tell you is that back to my comment, if we were seeing check management and things like that and looking at our own menu pricing compared to others in our space and saw that there was something that we were that was self inflicted, I think we would address that. But that's really not what we're seeing. It really seems to be an occasion issue right now.

Speaker 2

So we are focused on our everyday value. What we are what we have launched here recently is really stepping up to communications and focusing on our brand attributes and reminding people why they love First Watch so much. And so that's kind of our take there. We won't I would say at the discounting level that's out there right now, that's just not something that we would do.

Speaker 7

Got it.

Speaker 3

And where are you on sort of seasonals and I think last call you may have mentioned, hey, we've got some things that maybe mix really well, maybe a little bit lower on the price point. Is that starting to work into the seasonals in the back half of the year?

Speaker 2

Yes. Well, first of all, I know everybody is excited that we're almost to pumpkin season. So we'll get there with our pumpkin pancake breakfast soon. But yes, I mean, we had positive mix in Q2 and in Q1. And I think a lot of the favorability you're seeing on the profit line in the restaurants was a result of that.

Speaker 2

I talked about the shrimp and grits and some other items that we brought back and put on. And so that strategy has actually helped us a lot. And then variation in mix for us as you know is kind of a quarter to quarter function because of the LTOs and the menu modifications. But there's really been no discernible change in customer behavior in mix or attachment this year. So but we are able to flex up a little bit sometimes with favorites like the shrimp and grits and when the pumpkin pancake breakfast comes back.

Speaker 3

Got it. And then just finally, the 130 projects in the pipeline for growth, obviously, that's multiple years of new unit growth, even assuming an absolute level of pickup. How does that how should we frame that versus the past? I mean, I know some new territory obviously is now flowing into that through the franchise acquisitions. Just, yes, any help on that would be great.

Speaker 2

I think the point being made there is that, we're on track like we have been for many years meet our development goals. And so that stat is really to provide some comfort that we're well on our way. That's been one of our hallmarks is the consistency of the openings and then also the outperformance of the new restaurants. So that's really what we were trying to convey there.

Speaker 4

Right. And we know that our 10% growth in the system long term guidance is a big number and we want people to be comfortable that we're actually curating enough projects that we can fill that pipeline.

Speaker 3

Yes. Looking forward to a couple of those coming out of the pipeline in Massachusetts. Thanks guys.

Speaker 2

That's right. Get ready.

Operator

Thank you. Next question comes from the line of Jeffrey Bernstein with Barclays. Please go ahead.

Speaker 7

Hi, good morning. This is Pradek on for Jeff. Thanks for the question.

Speaker 2

I just wanted to get

Speaker 7

a sense of what you're seeing in your sales trends by income cohorts, what buckets are you seeing strength from and where might you be seeing a little bit of softness? You did call out the weekday breakfast day part as a little bit weaker. And is that really just a function of consumers choosing food at home rather than losing traffic share? And any if you can call it any particular consumer segment where you're seeing that as most prevalent? Thanks.

Speaker 2

Yes. So we talked about the lower income consumer, seeing less visits by that group. I don't think that's very different than what you're hearing pretty much across the industry as far as a pressure point. And for us that's defined as $70,000 household income or below. And then the only other insights I can give you that we've shared is that we're the infrequent customer is one that we're seeing less visits by as well based on our credit card data analysis.

Speaker 7

Got it. That's very helpful. And then, I apologize if you already gave it, but are you contemplating any potential weather impact from Debbie in 3Q? Is that baked into your guidance?

Speaker 4

We really had I think yesterday, we might have had 3 restaurants with partial day closures, something like that. So I don't know that it's going to be all that meaningful. If that changes, we'll update.

Speaker 2

What we're really looking for is the mobility of the consumer right now. I can tell you, as I'm sure everybody on the call heard where we're based, Sarasota got the worst of it and there's a lot of folks not able to get to our office today. So whether we're open or not, we're I think we're going to see some impacts, but we don't expect it to be significant as it relates to the whole company.

Speaker 7

Got it. Thank you. Very helpful. Appreciate it.

Operator

Thank you. Next question comes from the line of Gregory Francfort with Guggenheim Securities. Please go ahead.

Speaker 8

Hey, good morning guys. I had two questions. The first is just from a same store sales perspective, guess as we look to the back half, what can you guys do to maybe have an impact on the comps? I mean, are you guys thinking about redeploying a little bit more marketing from a calendar perspective? Is there something you can do?

Speaker 8

Or is this just going to be more kind of bouncing around the industry in terms of what's going to happen?

Speaker 2

No. I think we are taking steps to again reach out to our consumers. Again, just I know I keep saying the same targets, but really focusing on our owned audiences, which as we said on the call, we've got an opt in database now of close to 7,000,000 that we've been curating over a period of time. And just really cutting that data in ways that we can be more efficient and more effective in the way we communicate with them. I'd say you'll probably start to see us increase the frequency of the communications as well with that group.

Speaker 2

And then also stepping up our digital and social activity as we do that simultaneously. Yes.

Speaker 4

But I mean to your question, we don't we do not absolutely do not bounce around with the system. I mean we go straight out the audiences that where we have the most touch and we know people are listening.

Speaker 8

And then just on the G and A side of things, how much of that was lower incentive comp versus belt tightening versus project timing? I'm just trying to think about that for the rest the next couple of quarters.

Speaker 4

Yes. For the most part, it's just unspooling the timing of our G and A realization for the year. I don't think the incentive comp differences were all that meaningful. And then the timing of new restaurant openings tends to drive some other costs into the back half of the year too.

Speaker 8

I said 2, but maybe I'll sneak in one last one. Can you give us an update, Mel, on where new store returns look right now? I know you said the new store AUVs sounded becoming a really strong and I think the CapEx guidance is unchanged. Just maybe the update on what those numbers look like?

Speaker 4

Yes. They're tracking with the unit economic model that we have in the investor deck that's attached to our website.

Speaker 8

Thank you, guys. Appreciate it.

Operator

Thank you. Next question comes from the line of Brian Mullen with Piper Sandler. Please go ahead.

Speaker 5

Hi, this is Alie Arfstrom on for Brian Mullen. Thank you for taking the question. Wondering if you could share comp turns directionally or by month in Q2? Thanks.

Speaker 4

We don't typically share by month. We share by quarter. And so I can tell you that quarter to quarter you have both those comps. And what we did say is exiting the quarter into the Q3, our traffic was running somewhat below the full quarter of Q2.

Speaker 5

Thank you.

Operator

Thank you. Next question comes from the line of Sara Senhor with Bank of America. Please go ahead.

Speaker 9

Hi, thank you. This is Catherine on for Sara. First, I wanted to ask just about the traffic trend in the quarter, which was sequentially stable versus the Q1. So just curious if you can opine on what that means about the operating environment right now. It would seem to suggest that it's relatively stable.

Speaker 2

Yes, I'd agree with that.

Speaker 9

Okay. And then, yes, I guess just another question on demand. I think given that weekend brunch generally has a lower average check than other daypart occasions in full service broadly. So I would think that First Watch could be a beneficiary of a kind of shift in that occasion. Are you still seeing that?

Speaker 2

Yes. I think obviously for us, weekend brunch is our highest check average occasion and it's still an area where we have demand. And so I think our general commentary here is that weekends are helping to offset the softness that we're seeing during weekdays, which is why our focus has been on throughput optimization in that we can serve more people when we have the demand rather than trying to create an occasion that maybe the consumer is not open to at this point. So that's been our focus and I think that's why we delivered the results we did this quarter and last quarter is because we're really, really optimized as it relates to the peak sales hours and the time when we have the most demand.

Speaker 9

Great. Thank you.

Operator

Thank you. Next question comes from the line of Jon Tower with Citi. Please go ahead.

Speaker 10

Hi, this is Karen Holthouse on for Jon. Thanks for taking the question. I wanted to dig a little bit into the commentary on stronger non comp store performance. Is there anything you would point to in particular that's helping that whether that's just improving site analytics, better developer relationships, the mix of info versus new market, just anything your own data is telling you?

Speaker 2

Over the

Speaker 4

course of the last few years, our non comp restaurants, new restaurants have all fairly predictably outperformed the legacy system. Some of that is because the legacy system includes a number of restaurants that might be occupied in smaller footprints and that sort of thing and our shift to more premium real estate in about 2017 or so has served us well in terms of accommodating more interest from customers and greater volumes.

Speaker 10

And then just on the modeling side, this is 2 quarters in a row now that we've seen sub-twenty 2 percent COGS, which is below where historically you've tracked. Is that sustainable and driven by some of the benefits of like alcohol in the juicing platform? Or are you worried about working that number too low that you're going to get offsides on the value proposition for the consumer?

Speaker 4

Yes, not worried about it. Sometimes that number changes around when you have a heavier load of new restaurants coming on board and in the back half of the year, we might see some of the labor margins tick up a bit as we have more of a larger cohort of new restaurants who have some built in inefficiency when they first open. But I would say it does show the success of our operators in terms of managing their crews better. And I think if we can see that hover in the 22% area, that's something to be proud of over a long period of time.

Speaker 10

And then just one final one for me and apologies if I missed this in the prepared remarks. The last couple of quarters you've shared your performance versus Black Fox. Do you have that for this quarter?

Speaker 4

We do. I think we said that we hadn't that in terms of performance that the black box data on the metrics that we measure, we're slightly below the cohort. There's a lot of participants in that group that are pressing on aggressive advertising promotions and discounting. So there's we look closely at the traffic number. And so this would be a period where for relative to the casual dining category that our traffic has not met Black Box.

Speaker 4

We do continue to take share, however, in the against the category in the second quarter, our Placer AI, which I know people are using more and more these days indicates that our traffic shares increased against the direct daytime dining competitive set.

Speaker 10

Okay. Thanks. I'll pass it on from there.

Operator

Thank you. Next question comes from the line of Brian Amboccaro with Raymond James. Please go ahead.

Speaker 6

Hi, thanks for the quick follow-up. I just wanted to circle back on the second half guidance. And could you elaborate on some of the assumptions you embedded on both sales and margins? You mentioned the softer quarter to date, many have seen that in the continues or maybe there were some calendar or other seasonal factors impacting July? And really on the margins as well, I understand you have less pricing, but following the very strong Q2 EBITDA performance, just curious kind of what some of the margin dynamics that could be different in second half versus first half?

Speaker 6

Thanks very much.

Speaker 4

Yes. For the back half of the year, I've already alluded to the fact that as we bring on we've got a great deal of new restaurant openings that are calendared to enter the mix in the back half of the year. And as I mentioned earlier, their immature margins can sometimes affect the overall margins of the company. We also have heavy up on expenses that occur in the back half of the year. In our Q4, for example, we have our national conference and some of those more seasonal type things.

Speaker 4

And there's a sort of a natural tendency to make sure that we onboard staff and complete projects before the end of the year. So there's a tendency sort of call it human nature that we tend to experience an uptick in our G and A expense during the Q4. So those are kind of some of the seasonal kind of items.

Speaker 6

Thank you.

Operator

Thank you. Ladies and gentlemen, we have reached the end of question and answer session. I would now like to turn the floor over to Christopher Tommaso for closing comments.

Speaker 2

I want to personally thank our teams for their efforts in this and every quarter with a special shout out to our operations leaders for the exceptional results they delivered in these interesting times. And while I'm proud of what we accomplished, I'm even prouder of how we did it. We're guided by our You First philosophy. It's at our core and it defines who we are. Our achievements have been and our future growth is underpinned by standing shoulder to shoulder, rolling up our sleeves, putting others first and being kind.

Speaker 2

Thanks everybody for your time today.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time.

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Key Takeaways

  • First Watch delivered Q2 systemwide sales of $299 M, total revenues of $258.6 M and adjusted EBITDA of $35.3 M, representing a 37% increase year-over-year and a 13.7% adjusted EBITDA margin.
  • Same-restaurant sales slipped 0.3% on a 4% traffic decline, but sequentially improved vs. Q1; macro headwinds were concentrated in weekday breakfast and lunch, with infrequent and lower-income customers cutting visits while repeat customer frequency held steady.
  • The company opened 7 new restaurants in Q2 (6 company-owned, 1 franchise), acquired 21 Raleigh-Durham units, and has a robust pipeline of 130 projects to support its long-term goal of low-double-digit annual new unit growth toward a 10% system expansion rate.
  • Ongoing cost controls lowered food & beverage costs to 21.8% of sales and labor costs to 32.8%, driving a 100 bps improvement in restaurant-level operating margin and a 110 bps lift in income from operations margin.
  • Management reiterated full-year 2024 guidance, targeting 17–19% total revenue growth, $106–112 M in adjusted EBITDA, same-restaurant sales of –2% to flat, mid-single-digit traffic decline, 52–56 net new restaurants and $125–135 M in capital expenditures.
A.I. generated. May contain errors.
Earnings Conference Call
First Watch Restaurant Group Q2 2024
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