All right, well, good morning, everyone. I'm Brian Vaccaro, the restaurant analyst here at Raymond James, and we're excited to wrap up our conference on a high note with First Watch, in our view one of the most interesting growth stories in the restaurant space. First Watch is the scaled leader in the brunch daytime café category with over 500 restaurants in the U.S. I'm just gonna read a quick disclaimer, and then we'll dive right in. For those joining the webcast, please refer to the First Watch Restaurant Group Forward-Looking Statements disclosure posted on the IR website below the webcast link. But, Chris, just to kick us off, you know, for anyone new to the story in the room, maybe just give us a high-level overview of the company and some highlights from your 2023 performance.
Sure. So, 40+-year-old brand, breakfast, brunch, and lunch only, 7:00 A.M. to 2:30 P.M. We have 520+ restaurants in 19 states. We've been the fastest-growing full-service restaurant company in America the past three years, and I expect that we will be recognized for that for 2023 as well when that comes out. But we're a highly differentiated concept in a very fragmented segment. So, our menu is known for fresh alternatives, healthy alternatives, quality ingredients. We don't have heat lamps, deep fryers, or microwaves in our restaurant. You can get traditional breakfast fare and then just a lot of elevated offerings. We have five seasonal menus a year. We've been expanding pretty aggressively for the past 10 or 12 years, and our prototype has evolved. And the way we consider ourselves is really as a network of neighborhood restaurants.
Most of our customers don't realize that we're a chain. They certainly don't know that we have more than 500 restaurants, and that's a benefit in the breakfast space. So if you think about, you know, brunch, brunch has been the only segment in the restaurant industry that has shown consistent growth over the past five years. And we've just, you know, we're the first mover in the space. We're segment leader. We have tremendous scale and, you know, a highly, highly qualified and engaged management team that really executes well. We've been recognized with a number, hundreds actually, of consumer accolades from Best Breakfast , Best Hangover Brunch , Healthiest Breakfast , and really runs the gamut. And then that translates into our customer base, which is very, very diverse and broad. So we don't have a very specific target.
As it relates to the prototype, we've been building more standalone restaurants with larger patios, larger footprints. Our, our company is kind of, if you think about it in terms of, of two eras. The first era was, you know, our, our founder and co-founder was got rents that they could afford regardless of where the sites were. The restaurants were built to do $1.2 million in, in average unit volumes, and, you know, now we see average unit volumes, you know, double that and, and prototypes that are kind of A-plus sites on Main and Main.
Well, that's great. Just following up on that, you touched on a few of them, but it strikes me that there are some unique attributes to the business that might be underappreciated by some investors. You know, the One Shift model, your very high sales per hour that you're open, your high store margins. Maybe just elaborate on some of those key differences and how that's driven, you know, the brand's strong market share gains over time.
Sure.
In terms of those operational.
Yeah. So again, we're only open 7.5 hours a day. So when you hear us talk about AUVs of, you know, $2.2 million and some restaurants that do over $4 million, you can imagine the throughput. You know, if you go out for breakfast or brunch on the weekends, pretty much any restaurant that serves brunch is busy. I think the key differentiator for us is we're busy throughout the week. We have a nice weekday lunch business. But yeah, the other key differentiators as it relates to that, obviously, our hours make us unique, the fact that we're in 2 day parts, that are pretty much 2 different day parts than most of the industry, and the very unique and compelling employee proposition that we offer, which is, No Nights Ever is how we talk about it.
Our folks, you know, get to have a great job, make a great living, and be home with their families every night for dinner. So that helps us attract the best and the brightest in the industry. Many times it's people who have been in the industry for many, many years and realize there's more to life than working till 2:00 A.M. and then having to get up and go back to work at 11:00 A.M. the next day. So, we lean on that for sure. We're able to find folks who stay with us. Our turnover has traditionally been, you know, 20% lower than the industry for both hourly and managers. We've got tremendous tenure in our organization at an operations level. Our general managers have been with us an average of five and a half years.
The level above that has been with us an average of more than 10 years. And then when you go one level up to RVP and VP, it jumps to over 15 years. So just tremendous loyalty and tenure within our organization, which has really helped us as we've grown. If you think about one of the potholes, if you will, of high-growth concepts, it really is losing some of that fidelity that you have and, you know, losing the what I call the intangibles, the brand, the essence, the DNA, the mission, vision, and values. And so that's been a big focus of ours as we've continued to grow is to make sure that we don't lose that. And actually, I talked about it on our earnings call yesterday. We believe that's a force multiplier for us.
So, instead of thinking about it in terms of our culture getting diluted, we look at it in terms of that’s that many more evangelists that we have in our organization that help spread the word.
Yeah.
So we've always been a word-of-mouth concept. We don't spend a lot on marketing or advertising, about half of what the industry averages on that. And it really is a neighborhood approach. And again, folks think we're just their neighborhood breakfast and brunch restaurant.
Chris is right there. We get a lot of attention for turnover, and having favorable turnover statistics. But boy, that tenure really is a secret weapon for us, having those veteran people throughout our operations force. They are the people who make sure that we have great service and great food delivered in the restaurants every time. It's really important to the company and the way we've grown.
Well, I'm gonna jump ahead 'cause I have a question kind of focused on that. But, you know, you've got this culture that's focused on operations and delivering a consistently strong guest experience. And now that I'm an old man, I, I have a greater appreciation for just how hard it is to consistently execute at a high level, just, you know, an intense focus on the day-to-day doing the little things consistently. So maybe talk about what you've done at the organizational level to maintain that consistency and kind of what you were just talking about, the fidelity of, of and, and then take it to the store level for us. What have you done at the store level operationally? What have been some of the recent wins.
Yeah.
To deliver that guest experience and driving throughput, execution, etc.?
Well, well, first, I'll say thanks for recognizing that because it's, it's not easy. I, I get two recurring comments from people who visit First Watch if they if they visit frequently. One is that our staff seems really happy, and they are. And two, that the, the experiences are amazingly consistent. And so what I'll tell you is the, the intangible part of that is the fact that our employees are working one shift, which means they're working together all the time. If you think about other restaurant concepts, one shift will come in. The other shift, when that shift's over, the other one comes in. They don't even know each other. They pass in the night. Our folks know each other. They work together every single day. And that also allows them to build up relationships with the customer.
So that's a foundational piece of why we're able to execute like that. The other side of it is all the evolution that we've had over these 40 years of teamwork and operational, you know, excellence and tools that we've given them. So whether it's scheduling tools or the KDS system or our training programs or things like that, we've really invested in our team so that they can be successful. The one story I always like to tell is we're with our third private equity partner now, and I've been with all three. You can imagine there were probably two things that they say when they first come in. One is, "Wow, you have all this capacity at night.
Let's open for dinner," and, you know, then we kind of walk through what's so special about our model and why it's compelling on its own and the benefits we get and would lose if we opened for dinner. A, we'd be like everybody else. But to each of their credit, they gave us time to show them that, and they recognized that, and that never became an issue. The second part of it is that we invest heavily, at the above-restaurant level, more than most restaurant companies, frankly. So our philosophy is no airplane time, little windshield time, more in-restaurant time. So their span of control is smaller, because we want them to be able to get to every one of their restaurants in one shift. So when you're only open till 2:30 P.M., you have to do that.
That's another place where if you just look at it on paper, it looks like we spend more, at the restaurant level, and we do. But that shows up in our results. That shows up in our accolades. That shows up in a lot of key metrics that we have. I don't know if there's anything you wanna add.
The one thing that, as the company got bigger over the course of the last few years, we launched The FARM, which is The FARM, our First Watch Academy of Restaurant Management. We provided space in the home office, large classroom, and facilities in order to train in our home office and through 10 or 12 groups a year, we fly managers or people who are getting ready to be managers in from all over the country to train on the principles in the restaurants. It's a cultural immersion.
They meet people in the corporate headquarters, but that's another way that we've invested in the staff and the restaurants so that they're ready and understand a little bit of the needs at the corporate level, but also how we can serve them, how they you know, what they can ask for. It also develops a little bit of a community among managers in the restaurants across the country. That's another way that we really try to invest in more and more training because as we've gotten bigger, we wanna be sure we're more personal with all of our managers.
Yep. Yep. All right. Well, when I step back, I guess I survey the landscape of full-service restaurants, there's not too many where it's, you know, you can count them on one hand where per-store sales volumes are up 35%-40% versus 19%. And I sometimes get the question, "Where's all that share coming from?" You know, obviously, already taking it from other breakfast concepts, but I'm curious and I've asked you this before, but to what degree do you think you're taking share from other occasions, from a dinner occasion? I know from personal experience, when I go at 10:00 A.M. for breakfast and I've spent my money and I've taken on my 800 calories plus, I'm usually not itching to go out to dinner that night.
Right.
Maybe on Saturday night. Just curious about it and how that speaks to kind of the emergence of breakfast and brunch as a category for more and more consumers over the last five years.
Yes.
Just curious in regards to that.
Sure. There's a couple of avenues there that I would say. One is the majority of breakfast occasions are still eating at home. So those out-of-home breakfast occasions continue to grow. You know, I was asked the other day, "How do I feel about, you know, QSR jumping into breakfast and things like that?" And we love it. If they're gonna spend $10s of millions telling the consumer to go out for breakfast, we're gonna get more than our fair share of it. So we love that. We've always benefited from that over the years when Starbucks and Taco Bell and others got into breakfast. It just raises the profile. And so we benefit there.
The other part of it is, you know, we, we are I don't like the word, but a lot of people, you know, call us a disruptor in the breakfast space in that if you think about, at least from scale, us and the, the others, there just hasn't been a lot of evolution, not a lot of relevancy, hasn't kept pace with the consumer, tastes and trends. And that's exactly what we are. I mean, we're we have quality ingredients. The consumer cares about that. We have, healthy items. The consumer cares about what they're eating now. And so, and then, you know, the environment that we offer is very different too. So, even when there's specific daytime-only competitors with us, we still stand out because of those differentiators that, that make us who we are.
So we think we're taking share there from what I would call, you know, legacy family diners.
And then, you know, I don't think we'll compete necessarily on convenience occasions when somebody wants a drive-through. But, you know, if we're in the rotation, we get our share of visits. And then, the last piece of it, your question about stealing from dinner and things like that, I think certainly in times like this, where the consumer is pinched, and we saw it in 2008, 2009, it's very easy to do what you just said where, as a family, we're gonna decide to go out for brunch. Again, our per-person average is $16.50. It's very approachable. And maybe you skip a steak dinner or some more expensive occasion, but you still want the social occasion. You still want the hospitality. And brunch is a great way to do it. It's in the daytime.
Your day hasn't gotten away from you yet. You're still happy because nothing bad's happened to you that day. And we greet you with a fresh pot of coffee, and it's a great way to start your day. So, we do think that we can take occasions from dinner restaurants. And then one last point I'll make is I talked about our lunch business. We believe there's opportunity, continued opportunity for stealing occasions from bakery cafés, for example. Again, who maybe haven't have focused more on convenience versus really what the consumer started going to them for. And if you think about the role that we play now, you know, with our freshmade items and even still at weekday lunch, 50% of the things ordered on our menu are breakfast.
So, we just have a very unique positioning where, you know, even on that for the third shift employee, a doctor or a nurse is getting off at 7:00 A.M., and it's their dinner time. They come in our restaurants. We do really well in their hospitals 'cause that third shift comes off, and they want soup and a sandwich. We're open and ready to serve them that. So, I think it's all of that put together.
All right. All right. That's great. So pricing and value are some hot topics these days in the current environment. Talk about how you've approached menu pricing over the last few years and how your relative value proposition compares to the peers, however you define them, and maybe touch on your pricing plans in 2024 if you would?
So typically, our typical cadence with pricing is we generally look at it early in the year, and then we revisit it in the middle of the year depending on whether or not I've done a good job of anticipating what inflation's gonna be through the year. We announce in our comments yesterday, we disclose that we had taken 2% more pricing to the core menu during January of this year. And so, our philosophy though has been to be very modest about it. If you look at Chris talks about the per-person average in the mid-$16, it, we're, that's an advantage for us relative to most of our competitors out there. We think it's important to really price so that we're building transactions. We don't wanna get ahead of the customer.
We wanna be sure that we're seen as having an everyday value that meets them where they are because the value of that customer returning over the course of the next, you know, 5, 10 years, is really important to how we've grown. So if you look at our track record of growing traffic, of growing occasions, we were positive in traffic last year, even as off-premises business kind of has tried to find a new lower home. People tend to be managing their wallets a little bit around that expensive off-premises occasion now. But we were positive last year. I think that speaks to the strength of the influence around modest pricing and being careful about that. So our philosophy has been, "Let's offset inflation.
Let's but maintain the pricing power that maybe sits there unused, but it's good to have that dry powder. But we don't intend to exploit pricing just in order to earn revenues. It's important that we're we wanna win this for the next, you know, three decades, not just the next quarter.
Yeah. Yeah. I'm thinking about it in terms of, also relative to, say, the legacy family diners. It seems like they, you know, held their pricing higher for longer, if you will.
Yeah.
I think you've taken quite a bit less price cumulatively versus 2019 relative to those peers and thinking about that relative value proposition.
We have. We didn't take any price in 2021, when everybody was taking a lot of price. But we were actually getting a very high per-person average at that time that we saw some revenge spending going on, so we didn't feel like we needed to price into it. So, you know, when you think about our average has been 2%-4% a year when we have a whole year where we didn't take any but still delivered tremendous results and then kept our conservative approach the following years, we believe since 2019 that we've improved our relative value proposition and our overall value proposition with our consumers. And then to Mel's point, our focus coming out of COVID, 100%, was to get the customer back in our restaurant.
We've made decisions since then that focus on that more than short-term gains.
Yeah. Yeah. Of course, we need to talk about unit growth, a very important piece of the story. Maybe just talk about the success that the brand has seen as it's entered new markets. How have AUVs tracked versus your existing base? And maybe just round that out for, again, those new to the story kind of with your long-term growth targets.
Yeah. So I start with this, which I mentioned on our call yesterday just to level set. You know, everyone thinks we might be a Florida concept, and we're a third of our restaurants aren't in Florida. But our top decile restaurants span 10 states and 20 DMAs. So we've long ago proved our portability. And to me, one of the greatest assets of our concept is the fact that our volumes are pretty consistent across geographies. So even with new market entry and expansion, we can have a very balanced growth strategy where we can put restaurants all over the country. It doesn't tax any one area operationally. We can spread it out and not worry about low volumes over here that we need to open heavier over here so that we can offset that.
So, for the past, you know, four or five years, our new restaurant openings have in their first year exceeded our average unit volumes for the whole company. So and, you know, as comps have exceeded their underwriting targets. So that's been a real strength for us. And like I said, our prototype has evolved. We now have bigger footprints, more standalones, bigger patios. And that we've been informed over the time that we've been doing this about what works, how close we can put restaurants together. And I'll be honest with you, we did a huge acquisition in 2015 of our largest competitor where we basically doubled in size. We went from 100 to 200 restaurants. And some of their restaurants were near us. And when we converted them to First Watch, we saw both of them go up.
And that emboldened us, frankly, to shrink the radius around where we could put restaurants. And that's what's helped us fuel our growth for the past, you know, call it almost 10 years now. So, those are all key elements for us. And, as far as the growth rate, you know, we're talking about call it 10% unit growth, on average, low double digits.
Chris challenged us a couple of years ago to develop the $3 million prototype. We knew that there were some people who were doing $3 million at breakfast. And one of the things that we learned and grew confident in was, you know, bigger footprints and changing the choreography of the service in the restaurants so that we could serve more customers or optimize tables or open up bigger patios so that you have a different, you know, different service occasions out there. And so just the expanded service, the one of the things that I think I'm proudest of our developers for really figuring out was that the smaller footprint restaurants that we are doing so well in could we convert that to a, you know, to a larger format?
And so now we have that and have the confidence to go into those kinds of sites when it's appropriate for, you know, the trade area and for the population in the area. It's been a fun thing to see.
Yeah. Yeah. And, and touching on, on unit economics, you know, I-I'm not an expert in construction or design, and I'm not very handy around the house, so you can ask my wife about that. But one thing that has impressed me is just the look and feel of your restaurants, especially some of the newer classes over the last several years, and, and keeping that in context of an average build cost that might be $1.4 million-$1.5 million on some of these bigger boxes. But frame the, the, the your unit economic targets, if you would, but also talk, talk to us about how you achieve that bang for your buck, if you will.
Sure. So, probably our, the restaurants that we're approving now are probably, first of all, they probably won't open until, what, 2025. So, so if we bid them out today, probably the, the build cost net of TI dollars we're getting is probably running more, probably the best updated thing would be more, more like $1.6 million or, or, or higher. So, so it has been trending up with the larger footprints. We have more elective, bells and whistles that we put in the restaurants and that and that sort of thing, but also inflation has driven it up, some too. So the build costs are higher. However, we still underwrite them exactly as we've done before. If we're paying more for the for the project, if we're paying more for the restaurant, we expect the same kind of return.
So we're still looking for that 18%-20% restaurant-level operating profit by year number three, about $2.6 million now in sales would, you know, offset the, go against the $1.6 million or so build cost. But we're still looking for the same 35% or so cash on cash returns, call it 18%-20%, return on invested capital. We don't sacrifice those underwriting criteria just because we have a bigger footprint. It's frankly, it's, I kind of think of it as if we build a bigger restaurant, it's kind of like building a restaurant and a third or a restaurant and a half. We're expecting a restaurant and a third more revenue, and consequently more contribution to profit. And so we build to that.
All right. The other point about that, excuse me, is we are in a situation where we have unmet demand. When you look at a First Watch on the weekend, we can be on a 1.5-hour, 2-hour wait. So, you know, we feel good about doing things like this because we know there's this unmet demand sitting at our front door that either goes somewhere else or decides not to go at all. As we continue to look at that and build restaurants and also deploy technology that helps us alleviate that as well, like I talked about yesterday, our pay at the table initiative. If you our host area, our lobby area is just a beehive on the weekends, people trying to check in, people trying to pay, people waiting for their tables.
And so, you know, through our research and talking to our consumers, you'll find out where the pain points are and identifying solutions that work for us, work for them, and solve that so that we can get what we're really focused on is our peak sales hours being higher than they've ever been before. So KDS, all those things have helped us do that. So that's where we're getting that improved throughput, and that's where you're seeing our sales drivers. Yeah. Makes sense. We've got just a few more minutes here, but maybe we'll talk about some near-term trends and results. Yesterday, you reported very strong fourth quarter adjusted EBITDA for the fourth quarter. Comps were up 5%, which you had told us a couple of months ago.
But you also noticed that quarter to date is off to a softer start as most in the industry have seen given the weather and some tough compares. But just curious to get your take on the health of your consumer. Seeing any changes in behavior in recent months that would, you know, suggest something's changed, or is it mainly, you think, the sort of weather and the compares issue?
Yeah. That's what's most encouraging for us is our consumer is behaving the way they have been, which is, A, there's more of them coming in our restaurants where, you know, our dine-in traffic was positive for last year. And they're opting for the full experience. Our check average is higher than the price we've taken. Our beverage incidence is up. We're not seeing any check management in the restaurant. Really, the only headwind we're facing right now is to what Mel said on the off-prem, you know, which doesn't surprise me, frankly. I mean, it's a very expensive way to use any restaurant as a consumer with all the fees and memberships and delivery costs and things like that.
So, the part we're focused on, the in-restaurant dining experience, you know, we're very encouraged by the signals we're getting from the consumer because you don't just go from, you know, positive traffic to, you know, negative traffic without seeing some check management steps in between. The consumer will wanna manage their check first before deciding not to go to a place that they like to go anymore. So that's why we're laser-focused on consistency, and on value, because if the consumer is gonna, you know, go out less, they don't wanna gamble with their dollars. They wanna know they're gonna get a great value and a great experience. And so that's really where we've put our efforts.
All right. Well, unfortunately, we can't make this a one-hour fireside. It's gotta stay to the time. So we'll wrap it there, and we'll see you guys in the breakouts and your meetings.
Thank you.
Thanks.
Thank you.