First Watch Restaurant Group, Inc. (FWRG) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlights a strong revenue growth forecast, increased EBITDA guidance, and effective marketing strategies. Despite some inflationary pressures, the company is managing costs well and expects continued growth with new restaurant openings. The Q&A section reveals confidence in marketing efforts and competitive advantages in securing locations. Overall, the sentiment is positive, with a focus on expansion and customer engagement, suggesting a likely positive stock price movement.
Key Financial Performance
Total Revenue $316 million, an increase of 25.6% year-over-year. This growth was driven by positive same-restaurant sales growth of 7.1%, including positive traffic of 2.6%, and contributions from 167 non-comp restaurants, including new openings and acquisitions.
Same-Restaurant Sales Growth 7.1% year-over-year. This was supported by positive traffic growth of 2.6% and strategic changes in third-party delivery programs.
Restaurant-Level Operating Profit Margin 19.7%, an 80 basis point improvement from the prior year. This was due to carry pricing outstripping labor inflation and marginal labor efficiency.
Adjusted EBITDA $34.1 million, an increase of $8.5 million year-over-year, with a margin improvement to 10.8% from 10.2%. This reflects operational efficiencies and revenue growth.
Net Income $3 million for the quarter. No specific year-over-year comparison or reasons were provided.
Food and Beverage Expense 22.2% of sales, a decrease of 20 basis points year-over-year. This was due to carry pricing offsetting 3% commodity inflation, primarily in bacon and coffee.
Labor and Related Expenses 32.6% of sales, a 100 basis point decrease year-over-year. This was attributed to carry pricing outstripping labor inflation and improved labor efficiency.
General and Administrative Expenses $33.7 million, up from $27.7 million year-over-year. As a percentage of revenue, it decreased by 30 basis points to 10.7%, showing leverage from revenue growth.
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Operating Highlights
New Menu Rollout: A redesigned and reengineered menu is being tested to improve readability, broaden appeal, optimize mix, and streamline operations. It includes high-performing seasonal specials and is expected to roll out system-wide early next year.
Digital Platform Enhancements: A newly relaunched app with a 5-star ranking has been introduced, along with upgrades to customer data platforms, geolocation capabilities, order experience, and CRM systems. The database now includes 7 million identified customers.
Aggressive Unit Expansion: 21 new system-wide restaurants opened in Q3 2025 across 14 states, with a target of 63-64 new openings for the year. New markets like Boston, Las Vegas, and Memphis have exceeded expectations.
Second-Generation Sites: 13 of the 21 new restaurants in Q3 were second-generation sites, with some opening at volumes 190% of the average unit volume.
Operational Efficiency: Restaurant-level operating profit margin improved to 19.7%, an 80 basis point increase from the prior year. Labor and commodity cost management contributed to this improvement.
Employee Turnover: Restaurant-level employee turnover has improved for 10 consecutive quarters, outperforming industry benchmarks.
Marketing Investments: Increased marketing spend in 2025 has driven higher brand awareness and engagement. Targeted campaigns have delivered double the response rate compared to last year.
Franchise Acquisitions: Strategic franchise acquisitions contributed $9.1 million to Q3 revenue and $1.6 million to adjusted EBITDA.
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Risk or Challenges
Commodity Inflation: The company faced 3% commodity inflation in the third quarter, with bacon and coffee being the primary drivers. This could impact profit margins if inflation persists.
Labor Cost Inflation: Labor cost inflation was 3.6% in the third quarter, which could pressure operating margins if not offset by pricing or efficiency gains.
Supply Chain Challenges: The company mentioned a volatile commodity environment earlier in 2025, which could indicate potential supply chain disruptions or cost pressures.
Economic Uncertainty: The company acknowledged recent headlines about a slowdown in consumer activity tied to specific demographics, which could impact future sales.
Regulatory and Tax Risks: The company expects a blended income tax rate of approximately 45%, which is relatively high and could impact net income.
Strategic Execution Risks: Aggressive unit expansion plans (63-64 new restaurants in 2025) could strain resources and operational efficiency if not managed carefully.
Marketing and Digital Platform Investments: Significant investments in marketing and digital platforms may not yield the expected returns, posing a financial risk.
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Guidance & Outlook
Revenue Growth: Total revenue growth is projected to be in the range of 20% to 21% for fiscal year 2025, with a net 400 basis point impact from completed acquisitions.
Same-Restaurant Sales Growth: Guidance updated to approximately 4% growth, with same-restaurant traffic expected to grow approximately 1%.
New Restaurant Openings: Targeting 63 to 64 new system-wide restaurants in 2025, including 55 company-owned and 8 to 9 franchise-owned restaurants, with three planned company-owned restaurant closures.
Commodity Cost Inflation: Projected to be approximately 6% for fiscal year 2025, updated from a prior range of 5% to 7%.
Labor Cost Inflation: Expected to be approximately 4%, updated from a prior range of 3% to 4%.
Adjusted EBITDA: Annual adjusted EBITDA projection is approximately $123 million, at the high end of the prior guidance range of $119 million to $123 million.
Capital Expenditures: Narrowed expectations to approximately $150 million for fiscal year 2025, excluding capital allocated to franchise acquisitions.
Long-Term Growth Potential: The company remains confident in its ability to grow to a total addressable market of 2,200 locations within the continental United States.
Marketing Expansion: Plans to expand marketing programs in 2026, building on the success of 2025 campaigns.
Digital Platform Enhancements: Comprehensive relaunch of the digital platform, including consumer-facing and back-of-house improvements, with early positive results from the new app and targeted digital campaigns.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can you deconstruct the traffic results given the strength you're seeing relative to the rest of the industry? Specifically, how much of the incremental traffic is coming in-restaurant versus through the off-prem channel? Also, how much of the traffic is increased frequency with loyalists versus new customers?
A:Management noted that in-restaurant dining has continued to improve quarter-over-quarter and third-party traffic also contributed to growth. However, they did not have sufficient data to determine whether the traffic increase was due to repeat visits or new customers, as their marketing programs target increasing occasions without distinguishing between new and recurring visits.
Q:What is helping bolster the results at some of the new openings, such as Dover, which is significantly ahead of the fleet average?
A:Management attributed the success to evolving real estate site selection, larger and more visible locations, inviting patio designs, and strong pre-opening marketing efforts. They also emphasized operational excellence and the importance of first impressions and reviews.
Q:What are your plans to expand marketing efforts in 2026? Do you need greater scale in newer markets before rolling out broader marketing initiatives?
A:Management avoided providing specifics about 2026 plans but highlighted the success of their current social and digital marketing efforts. They noted that marketing becomes more efficient with greater market density but emphasized their ability to target effectively even in less dense markets.
Q:What is the fourth-quarter marketing plan, and how does it compare to the third quarter?
A:Management clarified that the lower marketing spend mentioned earlier referred to the fourth quarter due to seasonality. The third quarter's marketing spend was consistent with the first two quarters.
Q:What operational changes are driving the company's strong performance, especially given the increased demand?
A:Management highlighted the implementation of the KDS system, consumer-facing investments like the app and waitlist management, and operational improvements such as labor management and consistency in execution. They also mentioned complementary coffee, pricing strategy, and increased portion sizes as contributing factors.
Q:What was the actual menu price increase in the third quarter, and what is expected for the fourth quarter?
A:The carry pricing for the third quarter was about 5% overall, with an expected 5% increase in the fourth quarter. The full-year pricing is roughly 3.5%.
Q:What is the mix of second-generation sites in the 2025 openings, and will this trend continue in 2026?
A:About 50% of the 2025 openings were second-generation sites, and management expects a similar percentage for 2026.
Q:Is competition for second-generation sites increasing, and does First Watch have an advantage in securing these locations?
A:Management believes they have an advantage as a national credit tenant with strong performance, making them a preferred choice for commercial developers.
Q:How will marketing efforts be iterated in 2026, and what are the biggest surprises from the current marketing strategy?
A:Management plans to use learnings from this year's efforts to guide 2026 marketing, focusing on ROI and traffic impact. They noted success in targeting category users and building a playbook for consistent results. The biggest surprise was the effectiveness of targeting lapsed or infrequent customers.
Q:What impact has the new marketing strategy had on third-quarter comps, and are there regional variations in its effectiveness?
A:Management reported consistent results across geographies, with no significant regional variations. The strategy has been effective in raising awareness and driving traffic.
Q:What are the trends in commodity inflation, and what are the key drivers for the fourth quarter?
A:Commodity inflation is expected to step up slightly in the fourth quarter. While costs for eggs and avocados have moderated, bacon and coffee prices remain high.
Q:Are new customers responding to marketing using the brand differently than existing customers?
A:Management noted that new customers are not behaving differently. The marketing strategy focuses on raising awareness and bringing customers in, with no significant changes in menu mix or customer behavior.
Q:Are there any changes in the back-of-house operations for new stores, especially in denser markets?
A:Management stated that the back-of-house operations remain largely the same, with standard lines capable of handling high volumes. Larger spaces in second-generation sites allow for more prep and storage areas.
Q:What new technology initiatives are planned for the next 12-24 months?
A:Management did not disclose specific new technology initiatives but emphasized ongoing innovation and a focus on optimizing the menu for 2026.
Q:What are the trends in the breakfast daypart, and is there evidence of trade-down from dinner to breakfast?
A:Weekday breakfast was the standout daypart in the third quarter, showing the best traffic growth. Management did not find evidence of trade-down from dinner to breakfast.
Q:What customer metrics are improving, and what are the drivers behind the strong quarter?
A:Management reported steady increases in awareness, value scores, and indications of improved frequency. They attributed these improvements to effective marketing and operational strategies.
Q:How has demand in the delivery channel changed since the pricing adjustment, and what is its impact on profitability?
A:Demand in the delivery channel has increased significantly over the past three quarters. While delivery transactions are considered incremental, they are slightly less profitable than in-restaurant transactions but still contribute significantly to adjusted EBITDA.
Q:What are the expectations for labor and commodity inflation in 2026?
A:Management is still in discussions with suppliers and expects some labor inflation due to regulatory minimum wage increases. They hope for more normalized inflation levels compared to recent years.
Q:What drove the decision to take an incremental 1.1% price increase in August following the 2.8% increase in July?
A:The additional 1.1% increase was part of the pricing strategy planned earlier in the year. It was timed with the launch of the seasonal menu to maintain pricing relationships between seasonal and core menu items.
Q:What is the profitability of third-party delivery, and how does it contribute to overall performance?
A:Third-party delivery is slightly less profitable than in-restaurant transactions but is considered an incremental occasion and a significant contributor to adjusted EBITDA.
Q:Review of Unclear Management Responses
A:Management avoided providing specifics about their 2026 marketing plans, stating they had not yet indicated overall plans for the company. They also did not provide clear evidence or data regarding trade-down from dinner to breakfast or detailed guidance on labor and commodity inflation for 2026.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AUV target
AUVs brand
AUVs state
NRO
President Investor
United States
Vice President
Workplace
activity
appeal
benefit
campaign
career
confidence ability
construction
culture
daytime dining
digit percentage
enterprise
expansion
fact
generation site
investment restaurant
opening week
pace
percentage unit
platform
record
restaurant concept
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sale restaurant
segment
service restaurant
site opening
success
term margin
underwriting
value proposition
week sale
FWRG Transcript
First Watch Restaurant Group, Inc. (FWRG) Q3 2025 Earnings Call Transcript
Positive11-4
The earnings call highlights a strong revenue growth forecast, increased EBITDA guidance, and effective marketing strategies. Despite some inflationary pressures, the company is managing costs well and expects continued growth with new restaurant openings. The Q&A section reveals confidence in marketing efforts and competitive advantages in securing locations. Overall, the sentiment is positive, with a focus on expansion and customer engagement, suggesting a likely positive stock price movement.
First Watch Restaurant Group, Inc. (FWRG) Q2 2025 Earnings Call Transcript
Positive8-5
The earnings call summary and Q&A indicate strong revenue growth, successful marketing strategies, and effective cost management, despite some uncertainties in guidance and EBITDA. The company's strategic initiatives, like new restaurant openings and enhanced customer experience, coupled with positive same-restaurant sales and traffic trends, contribute to a positive outlook. The market cap suggests a moderate stock price reaction, leading to a positive sentiment rating.
First Watch Restaurant Group, Inc. (FWRG) Q1 2025 Earnings Call Transcript
Unknown5-6
Despite revenue growth and positive traffic trends in March and April, the company faces challenges with rising costs, declining margins, and a net loss. The lack of a share repurchase program and unclear management responses further dampen sentiment. The market cap indicates a potential for stronger reactions, but the overall negative aspects, such as increased expenses and lower operating profit margins, outweigh the positives, suggesting a stock price decline of -2% to -8% over the next two weeks.
First Watch Restaurant Group, Inc. (NASDAQ:FWRG) Q4 2024 Earnings Call Transcript
Unknown3-12
The earnings call presents a mixed picture. While total revenue increased by 16.8% and adjusted EBITDA improved, same-restaurant sales and traffic declined, indicating potential underlying issues. Management's optimism about future marketing and restaurant openings is tempered by economic pressures and higher commodity costs, including tariffs. The lack of a share repurchase program and unclear responses in the Q&A section contribute to uncertainty. Given the small-cap nature of the company, these mixed signals suggest a neutral stock price movement over the next two weeks.
FWRG Slides
FWRG Report
Frequently Asked Questions
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