First Watch Restaurant Group, Inc. (FWRG) Q2 2025 Earnings Call Transcript
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Overview
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.
Key Financial Performance
Total Revenue $307.9 million, an increase of 19.1% year-over-year. This growth was driven by contributions from 149 non-comparable restaurants, including 61 company-owned new restaurant openings and 40 franchise locations acquired since Q1 2024, as well as traffic-driven positive same-restaurant sales growth of 3.5%.
Same-Restaurant Sales Growth 3.5% year-over-year, driven predominantly by 2% positive same-restaurant traffic growth and supported by marketing efforts and operational improvements.
Average Unit Volumes (AUVs) Increased from $1.6 million in 2019 to $2.3 million in 2025. New restaurants are projected to reach $2.7 million in their third year of operation, with recent classes on track to exceed this target. The increase reflects strong unit performance and strategic growth.
Food and Beverage Expense 23.6% of sales, up from 21.8% in the second quarter of 2024. This increase was due to commodity inflation of 8.1%, particularly in eggs, bacon, coffee, and avocados, which are key cost inputs.
Labor and Related Expenses 33.2% of sales, a 40 basis point increase from 32.8% in Q2 2024. The rise was attributed to labor inflation of 3.9% and higher health benefit costs.
Restaurant-Level Operating Profit Margin 18.6%, down from 21.9% in Q2 2024. The decline was due to increased food and beverage costs and labor expenses.
Adjusted EBITDA $30.4 million, $4.9 million below last year, with adjusted EBITDA margin declining to 9.9% from 13.7%. The decrease was driven by higher costs in food, beverage, and labor.
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Operating Highlights
Seasonal Menu Innovation: First Watch continues to innovate with a seasonal menu that changes every 10 weeks. Recent test items have exceeded expectations, with one breaking a sales mix record, indicating strong customer interest.
Digital Enhancements: The company is relaunching customer-facing digital properties, including a custom-built waitlist experience, streamlined digital ordering, and nutritional filtering tools to enhance customer experience.
Geographic Expansion: Opened 17 new system-wide restaurants across 8 states in Q2 2025. The company plans to open 62-67 new locations in 2025, with a strong pipeline of over 130 approved sites for future development.
Franchise Acquisitions: Completed acquisition and integration of 19 franchise restaurants in North Carolina, South Carolina, and Missouri, contributing to revenue growth.
Traffic Growth: Achieved positive same-restaurant sales growth of 3.5%, driven by 2% positive same-restaurant traffic growth. Traffic trends improved sequentially across all dayparts.
Third-Party Delivery: Improved performance in third-party delivery channels, achieving incremental profit and recapturing lost traffic.
Customer Demographics Shift: Customer base is shifting towards younger generations (Gen Z and millennials), with the majority now under 50 years old, driven by marketing and operational efforts.
Real Estate Strategy: Utilizing second-generation restaurant spaces for new openings, with 40% of the active pipeline consisting of such sites, offering high visibility and strong AUVs.
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Risk or Challenges
Commodity Cost Inflation: The company faced an 8.1% increase in commodity costs during the quarter, with significant price hikes in key inputs like eggs, bacon, coffee, and avocados. This has negatively impacted profit margins.
Labor Costs: Labor and related expenses increased to 33.2% of sales, driven by a 3.9% rise in labor inflation and higher health benefit costs. This has put pressure on operating profit margins.
Third-Party Delivery Channel: While traffic in the third-party delivery channel has improved, there is a risk of cannibalization of in-restaurant dining visits, which could impact overall profitability.
Seasonal Traffic Variability: The third quarter is typically the slowest period for the company, and fiscal September presents a challenging comparison due to strong traffic in the same period last year.
Marketing Investments: Increased marketing investments have raised general and administrative expenses, which could strain profitability if not offset by corresponding revenue growth.
Supply Chain Risks: The company relies on second-generation restaurant spaces and specific high-quality ingredients, which could pose risks if supply chain disruptions occur.
Economic Sensitivity: As a full-service dining brand, the company is exposed to economic downturns, which could reduce consumer spending on dining out.
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Guidance & Outlook
Revenue Growth: The company expects total revenue growth of around 20% for 2025, with a net 400 basis point impact from completed acquisitions.
Same-Restaurant Sales Growth: The company maintains its estimate of positive low single-digits percentage same-restaurant sales growth with flat to slightly positive same-restaurant traffic growth.
New Restaurant Openings: The company plans to open 62 to 67 new system-wide restaurants in 2025, including 55 to 58 company-owned restaurants and 7 to 9 franchise-owned restaurants, with 3 planned company-owned restaurant closures.
Adjusted EBITDA: The company is increasing its adjusted EBITDA guidance range to $119 million to $123 million, up from $114 million to $119 million, driven by reduced egg costs and shifting tariff impacts.
Commodity Cost Inflation: The company is lowering its fiscal year 2025 commodity cost inflation guidance to a range of 5% to 7%, down from high single digits previously, due to improved egg supply.
Capital Expenditures: The company is lowering its expected range for capital expenditures to $148 million to $152 million, down from $150 million to $160 million, due to fewer-than-expected ground lease new restaurant openings in both 2025 and 2026.
Long-Term Growth Plans: The company has double-digit percentage growth plans for 2026 firmly in place and is nearly halfway to its target for 2027. It aims to reach a total addressable market of 2,200 locations within the Continental United States.
Customer Experience Enhancements: The company plans to relaunch all customer-facing digital properties in the second half of 2025, including a custom-built waitlist experience, streamlined digital ordering, and nutritional filtering tools.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What factors contribute to the younger demographic of customers at First Watch?
A:The younger demographic is attributed to entering new markets, advancements in culinary offerings, and effective outreach to the next generation of customers. Social media presence and the introduction of alcohol also play a role in attracting younger customers.
Q:Are there differences in frequency or ticket size between younger and older consumers?
A:There are no significant differences in frequency or ticket size between younger and older consumers. The brand's evolution and positioning continue to attract a broad customer base.
Q:What gives First Watch confidence to raise its EBITDA outlook despite ongoing volatility?
A:The confidence stems from relief in egg costs, which were a major driver of cost inflation, and stable same-restaurant traffic trends in July, indicating that their strategies are working.
Q:What is First Watch's pricing strategy, and how does it impact margins?
A:First Watch's pricing strategy involves revisiting pricing twice a year to offset permanent inflation while avoiding pricing for temporary inflation. The recent 280 basis points increase in July is expected to help margins by addressing sticky inflation.
Q:How are marketing tactics contributing to positive traffic growth?
A:Marketing efforts focused on specific geographies and targeting existing customers for increased frequency and new category users have shown tangible results. The company compares performance in targeted markets to control markets to measure success.
Q:What is the cost difference between second-generation locations and new builds?
A:The build cost for second-generation locations is comparable to new builds, averaging around $1.7 million. Developers often offer incentives for national credit tenants like First Watch, and larger footprints may result in lower average rates per square foot.
Q:What is the outlook for second-generation locations in the pipeline?
A:Second-generation locations are expected to remain a significant part of the development mix for the next few years due to their high-quality locations and the company's ability to convert them effectively.
Q:How are in-restaurant actions like increased portion sizes and surprise acts of kindness impacting consumer perception?
A:These actions are positively impacting consumer perception by emphasizing hospitality, high-quality ingredients, and value. The company believes these efforts help them stand out and resonate with consumers.
Q:What factors contributed to the slightly positive mix in the quarter?
A:The slightly positive mix was primarily due to the reduction of the third-party surcharge and efforts to improve in-restaurant experiences.
Q:What are the expectations for EBITDA in the second half of the year?
A:Adjusted EBITDA is expected to be evenly distributed between the third and fourth quarters, with no significant additional guardrails provided.
Q:What is the impact of tariffs on costs this year?
A:Tariffs have become less impactful, with an estimated 10 basis points effect on the full year, making it relatively immaterial.
Q:How is the marketing spend allocated between existing and new customers?
A:Marketing spend is focused more on category users (existing customers) due to its efficiency. Digital channels like programmatic TV and paid social media are used for targeted advertising.
Q:How are new unit openings affecting margins?
A:New unit openings have a slight drag on margins due to the maturity curve, but their high sales levels often result in over-indexing at the margin level.
Q:What is driving the increase in third-party delivery volumes?
A:The increase is driven by optimized relationships with providers, reduced surcharges, and improved execution in accuracy, speed, and quality of third-party orders.
Q:What is the regional performance of First Watch locations?
A:There were no regional weaknesses in performance, and trade areas generally perform consistently across geographies due to disciplined site selection.
Q:What are the ROI and cash-on-cash returns for second-generation locations?
A:Second-generation locations are expected to achieve $2.7 million in sales by year three, with mature margins of 18%-20%, ROI of 18%-20%, and cash-on-cash returns of around 35%.
Q:How is First Watch managing COGS despite inflation?
A:First Watch manages COGS by leveraging a broad basket of commodities, balancing heightened inflation in some items with favorability in others, and maintaining operational efficiency.
Q:What are the drivers of top-line growth in the second half of the year?
A:Top-line growth is driven by improvements across all dayparts, proactive operational and culinary strategies, and a focus on hospitality and quality.
Q:What is the impact of floods in Texas on performance?
A:The floods in Texas did not have a significant impact on performance.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the exact allocation of marketing spend between existing and new customers, as well as the precise impact of in-restaurant actions like increased portion sizes on margins. Additionally, they did not provide detailed guardrails for EBITDA expectations beyond stating an even distribution between quarters 3 and 4.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AUVs
Carolina
Day day
Director
Division Brian
Father Day
LLC Research
Mother Day
President Investor
Research Division
Unidentified
Vice President
Watch customer
advantage
appeal
bar
cash
chain
commitment
culture
demographic
dining concept
employee customer
employee retention
enterprise
generation restaurant
host
life
majority
momentum
process
quality
restaurant operation
service dining
session
staff
state
track
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
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