Hello, everyone. Welcome. I am Brian Mullan, restaurant analyst here at Piper Sandler. Very happy to have Chris Tomasso, CEO of First Watch. Chris, thanks for being here.
Yeah, thanks for having me.
You know, First Watch really on in its growth journey. You know, at the time of the IPO, you identified a target of at least 2,200 restaurants in the U.S. You know, maybe a good place to start, just remind everyone how many restaurants you have today, and then maybe what the unit economics were at the time of the IPO that you were targeting. There has been a lot of construction costs, inflation environment. The question investors have: how has that changed for First Watch?
Great start. So, we just opened our 500th restaurant, two weeks ago, this past Monday, right outside Atlanta. So a big milestone for us. We, you know, have been opening a lot of restaurants, high growth for a number of years.
I think the model, you know, that the underwriting model that we're targeting is, you know, about a $1.4 million cost and $2.5 million in sales, third-year sales. We typically, you know, 18%-20% restaurant-level operating profit margin, and so that pencils out to 35%+ cash-on-cash returns. At the time of IPO, our cost to build was around $900,000, so a significant increase in our cost to build.
But probably unlike others, we've evolved our prototype over the years, and the actual inflation piece of that increase is really only about 10%. If you've heard us talk about how our prototype has evolved, we've started to have bigger boxes, indoor/outdoor bars, larger patios. You know, we also went from an off-premise business that was basically nonexistent to about 18% of our business now.
So in the next 1,500 restaurants going forward, our kitchens look different. They're set up differently, excuse me, to accommodate that kind of business. But we've also seen our AUVs increase significantly. So we've always seen our new restaurants outperform our core, so by about, you know, anywhere from 10%-20%, depending on the year.
So our new restaurants are opening at higher volumes than our core system, but then they continue to act like the core system as far as growth goes. So, it's been a nice evolution for us. The additional expense that we're putting into the restaurants all goes into the model to achieve that target cash-on-cash return.
So, I think our team's done a really nice job. We hit our opening target number last year, and I think we're one of the few restaurant companies to do that. And, it's just a muscle that we've developed over the years and have gotten really good at.
That's great. Thank you. And then, you know, something else I want to touch on before maybe we turn to the consumer-
Sure.
Some of the operations. Been fairly active on... You know, you do have a franchisee base. You've been fairly active on the franchisee acquisition front or the unit acquisition front.
Mm-hmm.
After the Georgia and South Carolina transactions, I think you've got 12 franchisees left. They operate 100 restaurants. Could you just talk about the history there? I think there's purchase options. Explain that a little bit and why you're picking that up right now.
Sure. So, we stopped offering franchises in 2017. We looked at franchising as a way to expand our brand, you know, in the kinda early to mid-2000s and basically signed on very sophisticated, well-capitalized, multi-unit restaurant operators who could help launch the brand in markets that we probably weren't gonna get to for a while.
So, in those agreements, in most of those agreements, there are purchase options, and they're at preset multiples, and they're evergreen for us. They were either triggered by time or by the IPO, actually. So, we're looking at those acquisitions now as part of our growth strategy and, you know, acquiring these groups and bringing them on board as company-operated restaurants.
So, you're right, we did Milwaukee, Nebraska, a group in North Carolina, South Carolina, and Georgia. So yeah, that's always been part of our long-term plan. We wanted to do what we said we were gonna do when we went public, and that really wasn't part of the story then. So we did. We met or exceeded everything we said we would do at IPO, and now this is the next logical step for us to continue to grow.
Great. Thank you. And then moving to the consumer, you know, on your earnings call last month, you, you weren't really seeing any signs of check management, I believe you said. Maybe some shifting going around with off-premise and the dining room. But I think, you know, the core underlying point, you were seeing higher beverage attach on a year-over-year basis, positive mix.
So is, is that just... Could you talk to the dynamics and, and, and how you, how you drive that? And, you know, maybe what are you watching? Is that still how you feel today? What are you-- and what are you watching over the balance this year? There's a lot of calls for recession. Doesn't sound like you are seeing it with your-
Yeah. So, for the second quarter, our in-restaurant dining traffic was actually up. And when the customer came into the restaurant, they opted for the full experience. They were, you know, the beverage attachment was up, and there's a couple pieces of that. One is our menu innovation. I think it's an underappreciated part of our model, where we have five seasonal menus a year.
There's constant menu news in our restaurants. It gets our teams excited, it gets the customer excited, and these are not, discount plays. That's not what they are. They're typically premium proteins, premium items, and sometimes with premium prices, with margins that exceed, you know, that of our core menu items. So it also creates five kind of real-time pricing opportunities for us, as we're looking at those things.
And so all of that combined, I think, is really what led to, again, increased and positive traffic in the restaurants. So we'll continue to do that. I think, you know, our—we've, we've intentionally kept our core menu pretty tight. It's about 55 items, which is a lot smaller than most restaurant companies have. That's so that we have the flexibility and the, and the bandwidth to execute against these, these seasonal menus.
And then the other element of the seasonal menus is they are like a farm system for our core menu. So a lot of our best-selling core menu items started on a seasonal menu. Some, some of our juices, for example, when, when we launched juices, they were mixing at about twenty, excuse me, about 2%. We juiced the fruits and vegetables in-house. Now, they're 15% of our mix.
We sell more of those than we do soda, and they're at, you know, $5. So, that, and then we just launched a cold caffeinated program. We continue to innovate around our shareables platform. So that menu innovation and that mix effect that we get from that has really helped us.
Just 'cause you mentioned it, the cold caffeinated platform, that did come up on the last call. Can you just talk about that? How new is that? What are the insights behind that, and can this... You know, how excited versus not excited? You know, how big could something like this be?
Yeah, we're very excited about it. We, you know, we always start something with what I call the, the gateway. When we launched juices, the first one was a Kale Tonic. This one, so we've always had cold brew and iced coffee, but this is really specialty cold caffeinated beverages. So it's a Mint Mocha and a Honey Caramel Crunch.
A nd, it, you know, it's just a whole new line that we've never had before, and, they've exceeded our expectations. They're beautiful drinks. They work really well with brunch. They work really well with the target demographic that we're going to build that next pipeline of consumers that, you know, we want to get into First Watch. So, same with our alcohol program, same with our this program.
I think, you know, all the innovation and ideation is in front of us, and we're really excited about it.
And where are you at with alcohol? Just for those who are less familiar-
Yeah.
When did you launch it, and how's it mixing, and is there still growth ahead? Is really the-
Yeah, same thing. I think we're in the very early innings of alcohol. We call it we're fully rolled out. That doesn't mean we're in every restaurant, 'cause some of our restaurants aren't able to get liquor licenses for various reasons. But we're fully rolled out on alcohol.
You know, it's about a 6% mix there, and, I, you know, we liken it to the juice program. We think, coming out with what we've come out with is kind of the entry level of alcohol offerings, and that we have a lot of room to work there, and our team's working, you know, behind the scenes now to innovate around that, and we think there's potential there, too.
Okay, and then wanted to bring in, you know, KDS system rollout, you know, I think it might be fully rolled out-
Yep.
Just to take a step back, what was the impetus behind that? Now that it's rolled out, what are you seeing? Are you-- Is it going exactly how you thought, a little better, a little worse, and then what lies ahead with that?
So 38 years of success without KDS, you know, cooking off of handwritten checks, it was kind of a, "If it's not broke, don't fix it," type thing. But as we moved from, you know, restaurants that were built to do $1.2 million to now, AUVs of 2-2.2 and some restaurants doing upwards of $4 million, we realized that that was not gonna get us to 2,200 restaurants.
So that's the real impetus, is the, you know, the next 1,500-1,700 restaurants. What it really allowed us to do is broaden our, our, pool for hiring because, when you're doing the type of volume that we are in 7.5 hours, it's a lot of throughput.
The way it worked before is we had to have somebody at the helm position at the kitchen who could remember everything that was on these checks and call them down the line. It just wasn't conducive for us to be able to improve our throughput and serve more demand. For us, it's table stakes. We get asked a lot about the ROI on that.
There's so many qualitative things that we now get from that, from the training, shortening the training, the hiring, data and insights that we didn't have before on our average ticket times and orders and things like that. It's really more from that standpoint than it is on any kind of ROI. I mean, it's just, it's opened up a lot to...
Then, to answer your specific question, it's we're really happy we rolled it out.
Thank you. And since we've brought up labor, just a couple, you know, questions. I think, is there a new labor scheduling tool? You know, just give a little history there. Is that? Are you fully optimizing that now, and what's... How's that helping?
Yeah, so that's another thing. We've worked a lot behind the scenes over the last, call it 18 months, on data and reporting and visibility for our operations team, and the labor piece was one of it. So we've always had a labor matrix, but this new tool really helps guide them in their scheduling to optimize the labor. And it's fully rolled out, but same thing with the KDS system.
I mean, we're making changes weekly based on feedback we're getting. It's pretty amazing. I can pull up my phone now and check the labor in any restaurant today and on what their ideal labor is and where they're scheduled and what they're tracking. So our operators have that at their fingertips now.
So, just, you know, with the information comes the ability to manage it better, and we lacked that before. We had, you know... Because we have great tenure out in our operations team, they've done a really good job of managing labor without these tools, and I think these tools are just gonna make them even better.
Sticking with labor, I think one shift model, competitive advantage for First Watch always has been, you're not shy about talking about that. But if you could just, within your own existing business, just talk about turnover at the manager level and the hourly level from a retention perspective, and where are you all the way back to where you were before, and where is there opportunity?
Yeah, I think if we, you know, if we look at where we are now, we're back to what I call our happy place. We're fully staffed with managers. We've got a full complement of managers ready to support our growth. So we have, you know, 100 restaurants plus in various stages of development in our real estate pipeline, and we've got 120 managers who are through training, ready to go to run those restaurants. So I feel really good about that.
Historically, our turnover has been about 20% lower than industry average. A lot of that has to do with our daytime-only hours and what we offer, the quality of life that we offer, which is rare in the restaurant industry. So that's always been a hallmark.
You know, our industry, even still today, the challenges around hiring have come at, you know, evening and late night and even overnight, and we don't even deal with that. So, we were able to recover more quickly from you know COVID and all of that with our staffing.
And then we just have incredible tenure. The average tenure for our general managers is about five years. The next level up is our DOs, theirs are over 10 years. And then when you get to our RVP and our VP level, the average tenure is over 15 years. So we continue to promote from within. All of our new restaurants will be staffed and have a manager that's from within.
If you come into our system as a manager, you'll still start as an operations manager, no matter what you've done in the past. We're able to attract really the best and the brightest because of our growth. That's a big piece.
They might be with a great company and have a great role, but there's no growth in the organization, so that gets projected onto them if they don't see a growth opportunity for themselves. Where we're opening, you know, call it 50 restaurants a year, all you got to do is raise your hand at First Watch, and you'll have an opportunity to advance and grow and move in your career.
Thank you. And then, you know, just the last one on labor. I think the expectations for labor inflation this year for First Watch is about up 8%-10%.
Yeah.
Just a little color, why might that be running a little higher at First Watch this year relative to the industry? Or is that a geographic thing or something else? And then, I guess, at the industry level, as you look out to 2024 and 2025, you know, what any early thoughts on what you'd expect?
Yeah. So I mean, for us, the reason we're projecting a little higher than most is because of our concentration in three key states, which is Arizona, Colorado, and Florida, all of which have mandated minimum wage increases that are set in certain times.
So we plan for that. You know, our pricing strategy, which you know has been to you know cover the cost of inflation, our recent price increase of 1% was predominantly taken in those states to cover those increased expected increased wages. So we expect that inflation, and we plan for it. It's you know... The good news about it is, it is something we have visibility into and can prepare for. And obviously, we're seeing relief in the commodity side.
So, hopefully, we get back to a cadence of normal pricing of 2%-4% a year to cover inflation. It's been a little wonky, as we all know, over the last couple of years, but we'd love to get back into that normal rhythm there.
Okay, thanks. Then I just wanted to ask, you know, big picture, you know, G&A as a percentage of sales, you're early in your growth journey. I think it's running somewhere in the 9%-10% range today. Again, it's early, but is there any reason over the long term, as you approach 2,000 restaurants and beyond, that wouldn't leverage quite meaningfully again? I'm not asking for guidance for next year.
Yeah.
But how do you think about that internally, and how does that, as you scale, how does that...?
Yeah. I think, you know, as a high-growth, full-service restaurant concept, I think you can expect to see our G&A, you know, around where we are now. But of course, as we get closer to that 2,200 units, I think you should expect to see some deleveraging. But for the time being, we're focused on growth and quality growth and, you know, putting the appropriate G&A behind that.
Okay. Then I'm gonna bring it back kinda to where we started. Just the industry, the traffic. Your traffic was up in the dining room in the second quarter, that's pretty unique. I think it was about 500 basis points of-
Mm-hmm
... at First Watch, a lot of strength. How do you think, when you look at the industry, when you see industry traffic struggling, you still compete within the industry. You don't want to see it.
Sure
... continue to get worse. So how do you think about that? Do you get concerned? And then within family dining, just tie that all in together to the opportunity. I mean, I think you're going to grow regardless, but talk about how your brand is positioned for today's consumer and when you survey the landscape, what you see.
Yeah. I think, you know, our performance in a trying time like this is really the outcome of decisions that we made 12, 18 months ago. We've been very, very conservative on pricing, intentionally. We knew this day would come. You know, obviously, our industry, and there have been CEOs that have talked about it, got very aggressive on pricing, and I think there was some cover there with what grocery was doing. I think the big difference there is grocery prices come down.
Restaurant prices rarely, if ever, do, and that's when you start to see discounting and things like that. So we've just been very judicious about and conservative about our pricing, really trying to focus on the traffic.
We'd much rather have one more visit than 10 more cents, is our philosophy. That said, I think the industry, as a whole, is feeling that pushback from the consumer now. So for us to have positive in-restaurant traffic, you know, I think is a testament to our strategy.
But you know, I would like... You know, you just feel this general consumer malaise right now, and I believe that they're probably gonna continue to go out less. And you know, for all of us, I think we just wanna make sure that you know, our concept is the one that's still in the cycle of reduced visits.
So, we're working really hard to do that by focusing on basics, frankly, just, you know, great service, great food, hospitality, value, all the things we talked about, and then I think that's what moves you to the top of the list, and what we saw.
You know, I've been with First Watch for 17 years now. What we saw in 2008, 2009, and 2010 was that we were in a very unique position, and what we tried to do was replicate that position relatively this year. And by that, I mean we were an affordable luxury. We saw trade down from family steak dinners to family brunch on the weekend at half the ticket.
And so I think if we can deliver that quality, that high level of service and do it, our per person average is right around $16.50. So, you know, very approachable. I think that's what the consumer is gonna be looking for until things ease up.
... Thank you. Just want to see if anyone in the audience has any questions for Chris they'd like-- Yes?
Yeah. Yeah, I mean, it's literally night and day. I think, for all the right reasons back then, the number one focus was: How much is rent? And we would take B, B- sites with no visibility, and they would. Actually, you know, NROs used to be an Achilles' heel for us. We would open below AUVs and take a long time to grow because we had no visibility, we were hard to find.
We have low brand awareness, it was even lower back then. And now we're taking, you know, A sites in the markets, right up on the road, high traffic roads, bigger boxes. They're. We're building lighthouses now, basically. And also, more and more people are aware of our brand and seek it out.
So that's been the big difference, and part of our evolution over the years was we couldn't just add seats without thinking differently about how we did the kitchen, because the kitchen was set up to do $1.2 million.
That's why you've seen us evolve so much over the past, call it 7-10 years, with our box, with our kitchen, and things that we've talked about. We're just maturing as a company and as a brand, and we've just been very focused on making sure that we stay ahead of that and not get behind. But if you look...
I mean, you could go to Orlando or Kansas City, and you can, you'll very quickly see the restaurants that were open in the last five years and the ones that were open 25, 30 years ago, and you'll see a vast difference.
Now, those older restaurants, for all of that, are some of our, you know, best producers, because they're on leases that were signed 25 years ago, and, we've built a customer base over the years, and, you know, they do really well too. So it's a nice balance to have a portfolio that's 40 years old, and have the entire enterprise, you know, continue to drive positive traffic and sales, is a nice place to be.
And with that, I'll also say that when we look at our rolling remodel program, we look at it on a market basis. So we'll look at an entire market and say: Okay, do we need to reposition these 3 restaurants in the market, and where do we want to go? And so you'll start to see us, when leases come up on some of those older ones, move to a higher profile location and set us up for the next 30 years.
Thank you for that, Chris. And then, you know, we've just taken us through some of your earlier history. I guess maybe just the last question for today. In the brand's history, there was an example, or if not more than one example, of buying another brand and converting it, and it was very successful. I know you don't need to do that to grow, but is that something you'd be amenable to for the right opportunity as you look forward over the next five, ten years?
Yeah. Obviously, with a projected TAM of 2,200 restaurants, our plate's full with organic growth. That said, you're right, acquisitions have been very successful, element and lever for us. And, you know, I would say it's opportunistic that we'd look at opportunities, but I'm most excited about our organic growth, you know, for the years to come, just based on all the white space in front of us.
That's great. I think that's a good place to leave it. Thank you so much.
All right.
Chris, for doing this.
Yeah, thank you.
All right.
Appreciate it.