Yahoo Finance First Watch Restaurant Group, Inc. (NASDAQ:FWRG) Q1 2024 Earnings Call Transcript
First Watch Restaurant Group, Inc. (NASDAQ:FWRG) Q1 2024 Earnings Call Transcript May 7, 2024
First Watch Restaurant Group, Inc. beats earnings expectations. Reported EPS is $0.12, expectations were $0.1. FWRG isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. First Quarter Earnings Conference Call occurring today, May 7th, 2024, at 8:00 AM Eastern Time. Please note that all participants are in a listen-only mode. Following the presentation, the conference call will be open 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.firstwatch.com under the News & Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch to begin. Go ahead sir.
Steve Marotta: Hello everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the first quarter and fiscal 2024 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. Let me first cover a few housekeeping matters before introducing Chris. 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. Such statements include, without limitations, 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-K. 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 margins, adjusted EBITDA and adjusted EBITDA margin. 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-restaurants sales and traffic growth compares the 13-week periods ended March 31st 2024 and April 2nd 2023 in order to compare like-for-like periods. Otherwise, any reference to percentage growth when discussing first quarter performance is a comparison to the first quarter of 2023 unless otherwise indicated. And with that, I will turn the call over to Chris.
Christopher Tomasso: Good morning. Thanks to the hard work of our entire team. I am pleased to report that First Watch delivered another solid quarter. We generated $289.6 million in system-wide sales, $242.4 million in total revenues and $28.6 million in adjusted EBITDA, driven by our comp restaurant performance, strong results by our non-comp restaurants, new unit growth, solid operations execution that drove improved profitability and contributions from our strategic franchisee acquisitions completed over the past year. We opened nine new restaurants in eight states during the quarter and on April 15th completed the acquisition of 21 franchise-owned restaurants and associated development rights in the Raleigh North Carolina market.
I'm especially proud that we delivered positive same-restaurants sales, continue to grow share, and drove strong operating results, despite well-documented headwinds in a particularly difficult start to the year, namely harsh weather in January. Encouragingly, our trends improved sequentially throughout the quarter. Although they were a bit choppy as we were up against the strongest quarterly sales and traffic comparison of the year, as well as Spring break and Easter weekend timing shifts. Despite the volatility in the quarter, our team produced strong operating results across multiple key performance indicators. Labor management efficiencies once again were driven by process improvements and the continual refinements of recently deployed Labor and Analytics tools that allow our operators a more real-time view into their business.
With more robust information and enhanced visibility, our leaders are better equipped to manage their business. This improved efficiency contributed to both our top and bottom-line, with KPIs once again improving and remaining very strong. In the quarter, we saw the highest customer experience scores we've recorded to-date, another sequential improvement in employee turnover, the fast food ticket times we've recorded to-date and continued market share gains with our same-restaurant traffic exceeding the Black Box Casual Dining segment by more than 100 basis points. These accomplishments were achieved during a quarter that typically includes some of the busiest months of the year for us. Our first quarter results give us confidence that we are focused on the right things and delivering the best possible experience for both our employees and our customers.
Turning to the consumer, its evidence that after several quarters of macro pressure, there appears to be clear signs of a slowdown. The reality is that consumers are being more cautious and more discerning resulting in fewer dining out occasions across the industry. This trend began last summer as several large factors converged, inflation pressures peaked, the gap between food at home and food away from home widened and student loan payments resumed. Macroeconomic environment are transitory but proven business models endure. Our operating model allows us to remain nimble, so that we can flex labor as business dictates, introduce elevated appeal on higher value items on our LTOs and lean into and out of G&A projects as the environment evolves.
However, we draw a hard line at reacting hastily to short-term dynamics with potentially brand-damaging tactics such as discounting or matching the promotional activity, which has begun to spike across the industry. In our view, broad discounting is a short-term fix with potentially negative long-term implications. Instead, we will continue to focus on profitable growth over the long-term. We've noted discussion about the challenging consumer environment facing restaurants in the State of Florida validated by Placer.ai reporting that restaurant business actually contracted over the last several quarters throughout the state. We believe that the traffic benefit the state enjoyed in the several years following the initial outbreak of COVID is now normalizing.
At First Watch, I am proud of our clear leadership in our home state where our aggressive expansion strategy is critical to our long-term growth. With 30% of our system in Florida, we are perhaps more tuned to the current environment here than most and our bullish outlook hasn't changed. Our development in Florida has seen us grow to 123 restaurants in the state, a 48% increase over the past five years. And over that period, we've gained significant market share, while keeping competitive intrusion at Bay by adhering to our disciplined site selection criteria as we have grown. The bottom-line is we're serving a lot more customers in Florida than we ever have and it will continue to be a material component of our growth strategy. No matter the market dynamics we’re operating in, we continue to be focused on our long-term opportunity.
It's something we've done throughout our 40 year history. As it relates to long-term strategic initiatives, we continue to focus on in-restaurant tech enablement with the ultimate goal of elevating both our customer and our employee experiences. In most instances, these enhancements are tucked behind the scenes, which is by design and our primary focus remains on delivering memorable hospitality and removing bottlenecks. The launch of systems such as KDS, pay-at-the-table and Waitlist Management, all serve a particular role in enhancing the First Watch experience. Now, there's a greater opportunity for those systems to begin communicating with one another with the purpose of digitizing the end-to-end customer experience. Doing so creates a broader platform to measure our performance more accurately in a variety of ways paving the road for further improvements.
For instance, prior to the launch of KDS, we had little insight into our food ticket times. We completed the installation over a year ago and with comparative information now available in real time, we are seeing tangible improvement. We'll continue to analyze that data to refine and evolve a system in an effort to optimize its benefits. Along with improved customer interactions, there is also a benefit in the acquisition of customer data and insights into their behavior. As we stated in the past, upwards of 50% of our weekend traffic originates on our waitlist. We're excited to see that our latest installation pay-at-the-table is experiencing 35% adoption during peak periods as well. The data generated from these two tech enhancements alone are offering rich insight into visit and ordering behavior.
We're beginning to pilot processes where these systems are joined in real time and customer identification can be connected to the POS where check information resides. The result is a more enriched view of our customers and the growing opportunity to target them with relevant communications through an enhanced marketing tech stack. We believe this creates a more focused approach to creating and serving more demand versus resorting to broader, inefficient and brand diluting action. We are in the very early stages of these initiatives and we'll have more to share in the coming quarters. I am as excited about the future of First Watch as I have ever been. We are the market leader in daytime dining with unmatched scale, proven affordability and a high ceiling with a total addressable market more than three times our current size.
And in the aggregate, our recent NRO vintages are all performing at or above their underwriting targets. In closing, while we feel the headwinds affecting us and many others, we're confident that we're simply far better equipped to withstand them than our competitive sets. And with that, I'll turn it over to Mel.
Mel Hope: Thanks, and good morning. Overall, as Chris mentioned, we're proud to have delivered strong first quarter operating results. Total revenues were $242.4 million, an increase of 14.7%. Our total revenue growth in the first quarter was driven primarily by our new restaurant openings and the 24 franchise restaurants we acquired over the past year. First quarter same-restaurant sales grew 0.5% on negative traffic of 4.5%, compared to last year's strong positive traffic of 5.1%. Our food and beverage costs were 21.8% of sales in the first quarter, compared to 22.4% in the same period last year. Cost as a percent of sales benefited from carried pricing of 4.4%, positive mix and were partially offset by commodity inflation of 2.9%.
Labor and other related expenses were 33.3% of sales in the first quarter, an increase from 33% in the first quarter of 2023. We’re fully staffed to support longer term growth with an average of three managers per restaurant, compared with 2.9 managers in the same period one year ago. Hourly labor efficiency improved in the first quarter and we're pleased to call out that our employee turnover again declined. Restaurant-level operating profit was $49.9 million for the first quarter reflecting a margin of 20.8%. The 40 basis point decline versus last year was due to an increase in the average number of managers per restaurant, deleveraging of fixed expenses, partially offset by favorable food and beverage costs, as a percent of sales. General and administrative expenses were $27.7 million, approximately $5 million higher than in the prior year, primarily due to additional headcount.
Adjusted EBITDA was $28.6 million, an increase versus the $27.4 million reported last year. Given the headwinds to the same-restaurant sales and traffic during the period, we’re pleased to report this year-over-year increase in adjusted EBITDA. Adjusted EBITDA margin was 11.8%, versus the 13% margin we realized in the first quarter of 2023. The difference was primarily attributable to the decline in restaurant-level operating profit margin and higher general administrative expenses. We opened nine system-wide restaurants during the quarter, of which seven are company-owned and two are franchise-owned and we closed two, including one company-owned and one franchise restaurant, resulting in $531 system-wide restaurants at the end of the quarter.
In an effort to help you model our performance, acquisitions favorably impacted first quarter revenue by $12 million and adjusted EBITDA by about $2 million. For further details on the first quarter, please review our supplemental materials deck on our Investor Relations website beneath the Webcast link. To provide some color on how we're planning the balance of the year, while our same-restaurant traffic trend improved each month during the first quarter, it remains negative mid-single-digit quarter-to-date, a trend we expect to continue for the remainder of the second quarter at the same time, based primarily on easing comparisons, we’re expecting same-restaurant traffic in the second half of 2024 to be relatively flat. Now I'd like to update our full year outlook for 2024.
We're adjusting our total revenue growth to a range of 17% to 19% from 18% to 20% previously, excluding the impact of the 53rd week last year. Of the 17% to 19% range, approximately 7% of the growth is expected to be contributed from the 23 restaurants we acquired in 2023 and the 22 restaurants we've acquired in 2024. We’re adjusting same-restaurant sales growth to a range of flat to up 2% with a low-single-digit decline in same-restaurant traffic from a range of 1% to 3% with flat to negative same-restaurant traffic previously. Our same-restaurant sales growth guidance includes a 2% price action implemented in the last week of January, which implies carried pricing of around 3.5% in the second quarter and just under 3% for the year. We continue to expect a total of 51 to 57 net new system-wide restaurants, updated to reflect 44 to 48 company-owned restaurants, 9 to 11 franchise-owned restaurants and the two aforementioned system-wide closures.
Our 2024 development pipeline remains heavily weighted in the second half of the year, Q4 in particular, similar to our cadence in 2023. 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%. Also unchanged is our adjusted EBITDA guidance range of $106 million to $112 million with the impact of acquisitions expected to contribute about $12 million. The overall adjusted EBITDA range implies growth of 12% to 18% over 2023 after adjusting for the 53rd week. We expect a blended tax rate in the range of 27% to 29%. Finally, we continue to plan capital expenditures of $125 million to $135 million not including the capital invested in franchise acquisitions.
Even though traffic has been challenging this year, our restaurant teams are operating at a high level. Our new restaurant development is on pace, our double-digit percentage unit growth and all departments are engaged in the successful execution of our franchise acquisition strategy. I commend all our teams for their commitment and excellence. And operator, if we could please open the line for the questions?
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