First Watch Restaurant Group, Inc. Q3 FY2024 earnings call

• Strong adjusted EBITDA growth and solid operational execution.
• Traffic had mid-quarter improvement due to targeted marketing campaigns, but third-party delivery was a drag.
• Employee turnover improved with initiatives like increasing internal promotes, better scheduling, and training for new managers.
• Recognized as number one Most Loved Workplace in America for the third consecutive year.
• Focus on demand generation efforts with targeted marketing and technology investments in areas like KDS and pay at the table.
• New restaurant development: 9 new restaurants opened, pipeline over 120 projects, with 5 December openings rescheduled to January 2025.

In the third quarter, First Watch generated $291.8 million in system-wide sales, $251.6 million in total revenues, $25.6 million in adjusted EBITDA, and $2.1 million in net income. They opened 9 new system-wide restaurants. Dining room traffic improved mid-quarter, though third-party delivery traffic was negative, concealing improving trends in dining room and direct off-premise. Food and beverage costs were 22.4% of sales, labor was 33.6% of sales. Restaurant-level operating profit margin was 18.9%, 20 basis points better than the prior year.

• Narrowed same-restaurant sales growth estimate to around negative 1% with same-restaurant traffic declining 4% to 4.5%.
• Adjusted EBITDA guidance raised to $110 million to $112 million.
• Expect 47 net new system-wide restaurants (43 company-owned, 6 franchise-owned, 2 closures).
• Blended tax rate around 33%, commodity inflation around 3%, restaurant-level labor cost inflation around 5%, capital expenditures around $130 million.

• Macro environment uncertainties affecting consumer dining out.
• Third-party delivery dynamics impacting traffic.
• Hurricane Milton caused construction disruptions to new restaurants.

Q: Drill down on targeting marketing campaign and impact on dining room traffic and off-premise.

A: Chris Tomasso said on-prem and off-prem are distinct, but they saw success with demand gen initiatives in Q3 and are considering for next year.

Q: Thoughts on AM daypart softness and recovery outlook.

A: Chris Tomasso said morning meal occasion is under pressure due to macro, but they're taking market share and expect recovery when environment eases.

Q: Comp trends and traffic reversal levers.

A: Chris Tomasso said dining room and direct off-prem trends improved, and they'll use marketing and environment improvement to revert traffic.

Q: Long-term benefit of current environment on First Watch's position.

A: Chris Tomasso and Mel Hope said First Watch's scale, operational excellence, and market share gains position them well for recovery.

Q: Mix trends and holiday marketing impact.

A: Mel Hope said mix was flat, and Chris Tomasso said holiday marketing will likely flatten mix.

Q: Traffic improvement magnitude and weekday vs weekend trends.

A: Chris Tomasso said dining room traffic turned positive in September, weekend still better than weekday.

Q: Targeted marketing to lapsed and competitor customers.

A: Chris Tomasso said they target value-seeking and relevant demographic, using core strengths for share gain.

Q: Marketing spend appropriateness and third-party impact.

A: Chris Tomasso said marketing spend under consideration for 2025, and Mel Hope discussed third-party traffic drag.

Q: New store performance and volume drivers.

A: Chris Tomasso said new stores outpacing underwriting due to better site location, operations optimization, etc.

Q: Marketing frequency and customer segmentation.

A: Chris Tomasso said they target all frequency cohorts with relevant messaging.

Q: Labor margin and inflation outlook.

A: Mel Hope said labor margin improvement due to operator attention, and outlook for labor inflation around 5%.