All right, thank you everyone for joining. My name is Brian Mullan. I'm the restaurant and food distribution analyst here at Piper Sandler. Very happy to have the team from First Watch, Chris Tomasso, CEO, Mel Hope, CFO. Thanks for being here, guys.
Thank you.
Sure.
Just maybe start with a really big picture question. You know, I think if we were to kind of go back to the IPO process, a lot of people learned about First Watch, positive traffic in 2017, 2018, 2019, which were years that the industry didn't have positive traffic, so it really stood out. And if you fast-forward to today, traffic for First Watch has been kind of a little bit more in line with the industry. It's not, you know, idiosyncratic. And so I think maybe just the... What I'm trying to ask is, it's been a little surprising it's not doing a bit better relative to the industry versus what we learned from the past. So what do you think is going on? What do you think some of the factors are to be aware of now?
Sure. I think, you know, what we talked about on our last earnings call was, obviously, looking at the macro environment and specifically the breakfast occasion. You're right, we had a track record of incredible same-store sales and traffic growth. But what I'll tell you is, if you look back to 2008 and 2009, when flat was the new up, you know, we weren't immune to that at that point either. But we emerged from that really strong and had then that long growth after that. And so we view this environment where we are right now pretty similarly, with the exception of, we feel like there's a lot more heavy discounting and deep marketing going on right now that we've chosen not to engage in.
And so, you know, while we are more closely aligned with the industry at this point, we're still outperforming on most of the indexes. So our relative performance has held pretty well. But, you know, we've been really focused on the customer experience, maintaining that everyday value. I think, you know, anyone who's followed us knows that we've been very conservative on our pricing actions since COVID, and we came out of COVID, and actually, our comps were extremely stout right after. And so, I think we're starting to see a normalization of that for us.
And then also, you know, just the breakfast occasion in general, as the consumer's kind of being more discerning about how many dine-out occasions they're having, I think, you know, breakfast is getting a disproportionate overlook at this point. And so. But we feel very confident that it's a macro issue that we'll work through this. We know all of our internal KPIs that we track to let us know how we're doing, whether it's ticket times, customer satisfaction, you know, wait list abandonment, all those things are really strong.
We talk about controlling what we can control, which is to continue to improve a great restaurant experience for our customers and to improve our efficiency in the restaurant. We continue to bring a lot through the P&L to the bottom line.
Okay, thank you for that. You know, so let's talk about some of the efforts to stimulate traffic, you know, regardless of the environment, controlling what you can control. You alluded to it, but it's not the First Watch way to do aggressive promoting or broad-based discounting. But on the most recent earnings call, you talked about having an opt-in database, approximately seven million customers, being focused on targeting demand generation-
Mm-hmm
... from your own channels as well as paid digital media. So Chris, please take us through what, what are you doing? How would you describe your abilities to do this versus, say, a couple of years ago?
I mean, our ability to do it is just the opportunity to do it. We didn't have the opportunity to do it a couple of years ago because we didn't have the data, and we've been talking about accumulating this data and kind of culling it, and now we're in the process of the harvesting of it, and so we're in an environment now where we have a lot of test and learn going on, but I think we'll be, you know, exponentially better at it as we go along, and we're already learning a lot, so, you know, we're focusing on the right messaging at the right time to the right consumer for us.
And just having more information about who they are, how they use us, when they use us, is gonna allow us, and is allowing us to be just more efficient in the way we communicate with those folks. And so that database continues to grow. We acquire it through credit card data, when they log into the Wi-Fi, add their name to our digital wait list management system, all those inputs, and then tagging them to individuals, and then now tying it to actual checks and things, will really help us. And so, I'm excited about where we're going with that, and we're in the very early stages of it, but from what I've seen so far, I'm pretty encouraged.
Okay, great. You know, and since I've been following the company, I've heard you say in the past, you know, the idea is First Watch often isn't thought to be a chain when the consumer first has the experience. In fact, my experience was similar. I didn't know.
Right.
And there's an element of that dynamic I'm sure you guys want to keep. I've heard you say.
Yeah.
you know, but as you get bigger, you know, maybe at some point far down the line, spending more on marketing, national marketing, not saying it's close, might be something that could make sense down the line. That would run counter to the idea of people not knowing that you're a chain. So what is your perspective on that shorter term, medium term, longer term, and letting people know that you are a chain and then doing things that large chains do?
Yeah. So we, we absolutely embrace that, that component, and we love it. But we're not naive to think that, you know, at some point, that's not gonna be possible. I mean, I'm a little bit surprised, even at five hundred and fifty restaurants, that we're still able to do it. But a lot of it is because of the way we present ourselves. There's no two First Watch restaurants that look the same. We don't talk about how many locations we have on our menu, all those things. And so, we really try to position ourselves as a network of neighborhood restaurants rather than a chain. And I know that's, that's, you know, just phraseology, but, that- that's our mindset.
And so we talk about things in terms of, if we can do it in one, we can do it in 100. If we can do it in 100, we can do it in 1,000. So what we don't want to happen is, just because of scale, start doing things that are counter to what really got us there. And I think, in the history of the restaurant industry, as you've seen concepts grow, that's typically what happens. You get to a certain point, and you start outsourcing some prep and some other things that, whether you realize it or not, meant something to the consumer, but more importantly, meant something to the employees because it created a sense of pride in what they were putting down, what they were preparing and serving to the customer.
So we really want to stay true to that. I mean, even right now, it is not an easy thing for us to juice kale and apples and carrots and all those things in-house every day, but we're committed to that. And so there's no reason that because of scale, we can't continue to do that. So that's that part of it. When we get to 1,500 restaurants or whatever the magic number is, I don't know, it's gonna be a gut thing when we feel like that we've gotten past that point. I don't think we're near it now. We have very low brand awareness, you know, in the 20%, mid-20s. So we still have that opportunity.
There's just a special component to the consumer discovering us and then wanting to tell other people about it and say, "Let me take you to this great local breakfast, brunch, and lunch place I found that just opened up in my neighborhood." And so we will hug that and hold onto it as long as we can. But again, we're eyes wide open to the fact that at some point, that will shift, and then our philosophy will have to shift as it relates to marketing. I think, you know, I watched Chipotle do that for years. They didn't do any kind of mass media until they got well over, you know, 1,500 restaurants. And so I think we could take a similar path.
I also think that because of our site selection and the fact that no two of our restaurants look the same, you know, our name kind of lends itself to that, too. I think we can hold onto it longer than most people think.
That's great. Thank you for that. Just want to ask about Florida. You know, you have said Florida is underperforming the system in both quarters this year. You know, the gap actually, I think, widened a little in the second quarter versus the first quarter. It's a significant portion of the system, maybe 23%-24%-
Right
... of the system. That can be impactful. You know, when did that start, and what do you think the drivers are around what's going on in Florida, specifically?
There certainly seems to be some sort of settling out going on in Florida. Florida benefited a great deal from, you know, people moving to the state or relocating there temporarily, post-COVID. I think we're returning to a more normal patterns of behavior around either residents or commuting to Florida or vacationing in Florida, that sort of thing, so there's some sort of settling out that's going on there. We're bullish on Florida, though. The kind of growth we've had in Florida, the amount of increasing revenues that we earned from the state of Florida over the course of the last few years, we're absolutely bullish on it.
We called it out, frankly, because others had talked about the fact that it was under more pressure than they saw elsewhere, and we wanted to be sure that in our calls, as we talked about it, that we communicated the fact that we're excited about being in Florida, and you know, moreover, that some of the problems our competitors are having around performance in Florida may have to do with us causing some of those problems.
Understood, and
Actually, I wanna be even more specific to say that it really is just a same-restaurant sales headwind. It's not an opportunity space headwind. I mean, as Mel said, we've expanded aggressively in Florida. We continue to take market share in Florida. So it shows up when we talk about comp sales in Florida. But I mean, there's new trade areas popping up in Florida all the time. It's still the highest in-state migration state in the country, and we're just really well positioned to take advantage of that.
Understood. And just to follow up, understanding the long-term demographics are great, just to tie a bow on it, do you think there's some self-inflicted cannibalization in Florida? Which it might be the right economic decision over the long term, but are you doing a little bit of it yourself, or that's not really what this is about?
I think it's in some cases, it's important that we have some sales transfer. We have some restaurants that are so vibrant on weekends, you know, have so much business on weekends, that we actually need to help sort of let a little bit of the air out of the balloon by locating another restaurant nearby so that we transfer sales and don't allow the customer experience to degrade from just the fact that they're on a long wait list or something like that.
One of the points I always like to make on that is that we project that sales transfer, and we burden the economic criteria of the new restaurant with those lost profits, frankly. That makes it even harder for the new restaurant to hurdle and meet our sales, our investment criteria. Even long term, again, that'll show up in a same-store sales track. Overall, I mean, it's actually, you know, a great bellwether for what we're expecting from the new restaurants. By the way, we're projecting new restaurants at third year, you know, average unit volumes of $2.6 million, where the system's at $2.2 million right now.
So, our growth engine continues to hum, and it continues to deliver for us. And, as Mel said, whether it's to kind of relieve some pressure off of a restaurant or to fortress a market or own a trade area, get the A-plus site and, you know, try to keep a competitive advantage, that's what we've been doing, not just in Florida, by the way.
... So it's a good segue just to sticking with development. I think you've got, I think I heard you say, one hundred and thirty projects in the pipeline, was the last I've heard. It's about 25% of your current system. You know, can maybe comment on the geographic makeup of that pipeline, and, you know, related to that, earlier this year, you announced the two new expansion markets of Las Vegas and New England. Maybe you could touch on those opportunities as a part of the answer and, you know, the pipeline related to those territories.
Sure. So when we're developing projects, I'm not sure I know what the ideal mix is all the time. What we do is plan to open in a restaurant when a market is ready, because we want to be sure that the market can support a new restaurant, not just in terms of meeting a need from the customers, but in terms of moving a veteran operator out of one of our legacy restaurants into the new restaurant and promoting from within. And so we try to be sure that we don't overburden any one market with so many openings that we diffuse the leadership of the entire area by you know moving people around. So you know it puts a little stress on the restaurants.
You have the new leaders coming up. It's an opportunity for the new leaders, but we just try to, again, we try to do it when the markets are ready. We talk about there's, you know, kind of an ideal mix might be. We have a number in our legacy markets or core markets and some in our emerging markets, and then some in our new markets. In terms of Las Vegas and the Boston market, you know, those are obviously, you know, rich territory for us to grow.
I'm not even sure I know what the number is associated with those overall, but I do know that over the long period of time, our continued growth in those markets and attracting the customers in those growing territories are really important to our continued growth.
And we have a beautiful luxury of our restaurants, our new restaurants performing very similarly across geographies. So we don't have to heavy up in one area to compensate for what might be a slow start somewhere else. It's actually we have the discretion to be opportunistic, and with the exception of making sure that we don't overtax operations, we could literally have the mix be whatever we want and have each vintage perform the way we want it to. So you know, a lot of times, you'll have concepts that are strong in one area, and so they heavy up to offset for new market introductions, and we don't have that.
And so, you know, in a place and actually, Las Vegas and Boston are two very different approaches for us. Boston right now is a muffin and donut and coffee breakfast market, and we think we're going to fill a need that is there, that isn't fulfilled at all. Whereas in Las Vegas, it's what we call a breakfast culture, and so there's already people going out for breakfast and whatnot, and we think we'll take our fair share because of our differentiated offerings. So we look at markets in terms of that, but no matter what, we look to get to five restaurants as quickly as possible so that the above restaurant management, all the efficiencies kick in.
In both of these markets, we think we can do that, just like we did in Chicago and just like we've done here in Nashville.
Great. And right now, I think, I hope I have this right, there's no First Watch stores in California.
Correct.
That's a pretty big state. You know, what, not saying tomorrow, but what would it take for you to want to enter that market sometime in the medium term? And do you need to go there to hit the total, you know, the two thousand two hundred restaurants that you've identified or more as your total addressable market?
You bet. I mean, that's part of our plan, is to include California. It's a, you know, it's a fantastic market for us, eventually. But we've got so much green space in the markets we already operate in, that we don't have to be in a hurry, and we can kind of understand the market well before we enter it. We typically spend a great deal of time understanding each market that we go into, before we, you know, before we construct the first First Watch restaurant and move into new territory. California is absolutely on the horizon one day, and we'll, when we're ready, then we'll move in there.
The 2,200 is the contiguous 48, so yeah.
Okay, understood.
Mm-hmm.
And then, staying with development, I know this is not a core part of your strategy, and you don't need to do this, but in the past, when you were private, there was a history of at least once acquiring another concept, successfully converting those locations to your brand. Just given the environment now with the tough industry traffic, I don't know if any smaller subscale competitors, you know, The daytime dining category environment, like, is that something where, regardless of the environment, you could potentially do one day again, or does this increase the probability that something could become available?
Yeah.
Would you be interested in?
I think acquisition has been a big part of our growth story to this point. But I will say it was at the point where you know, we really wanted to get to the size and scale where we owned the segment. And we happened to have one competitor that was West Coast-based, you know, Denver-based, starting to grow east. We were growing east to west. We were starting to come into markets together. I'm speaking of The Egg & I. We decided to acquire them. We were 112 restaurants. They were 105, so we doubled in size. And I think from that point forward, we just took off because, even to this day, our next three largest competitors only make up about 25% of our system.
You know, that solidified us as the scale and scope leader. Conversions are painful. There's not a playbook for them. But we did it very successfully, and some of our highest volume restaurants are ones that we acquired, and some of our greatest leaders in our organizations were ones that came with those acquisitions. But we're at a point now where we have such a head start, and we've built such a wide moat that our philosophy now is just beat them in the street. I mean, we wanna out-position, out-operate, out-execute, and focus on our organic growth.
And then the other aspect of it is, you've heard we're starting to acquire our franchisees back, and so that's another focus as well. Those are much easier. They're already under the First Watch flag. They operate as First Watch. It's really just converting the employees over and the operations and the systems, but that's not a small undertaking either. So we're timing those acquisitions appropriately, mixed in with you know, we're opening about a restaurant a week right now, and so timing the onboarding of those acquisitions at the right time when we're opening restaurants is important. So that's kind of the symphony that we're orchestrating right now to make sure that the system's able to absorb this, and not just do it, but do it really, really well.
You've done a lot of those franchisee acquisitions over the last twelve plus months. Are there any left where you have the contractual right to do more if you want to?
We have about a third of our franchise-
Okay.
Restaurants are still subject to options that we negotiated years ago.
Okay.
And on the rest of them, we have right of first refusal, so,
Okay. And then on development, you referenced this earlier, but I think you're targeting a year three $2.6 million AUV. That actually is above the system average. So are you still seeing that in the units you're building today? Are you hitting those? And then, so everyone understands, what's driving the higher AUVs than the system average as you build?
Yeah, when we underwrite restaurants, we set out their expectations for the next three years with the idea that their new restaurants that we're underwriting are that $2.6 million. They are all on pace, and actually, most of them are running ahead of pace in terms of reaching that $2.6 million, which then converts to, you know, we expect to get that 18%-20% restaurant-level operating profit, and which generally pencils out to about the same 18%-20% return on capital and above 30-35% cash on cash. So that's what we go for in the restaurants. And they're all... You know, when we underwrite them, they're all, their performance today is all on pace for that.
But to answer your question about the why, our site selection, our strategy has evolved over the years. You know, I think we always have to remind people that we've been around for forty years, and a big part of our portfolio is thirty to forty years old, was built to do $1.2-$1.3 million, and you know, now we're and we were taking, like, B-plus real estate. It's just that the founders were focused on paying as little rent as possible and building the business over time. That was a great strategy for a while.
I think when you look at us now, we're taking A or A-plus sites, high visibility, you know, with you know, high traffic areas, great co-tenancy, near daily needs. We're being opportunistic on taking a lot of great second-generation sites of concepts that are closing, and those have been great for us. They're standalone. They're on the edge right on the street, have their own parking, but there's also some things we've done where we've expanded. We're doing bigger patios. We have found that in and of itself creates a draw from the street. When you see a nice patio, I mean, who doesn't love having brunch outside, and climatizing those patios in markets where there's you know, they feel the full effect of the seasons.
So all those things, plus what we've done in restaurant, I think are all driving those AUVs to where they are now.
Okay, thank you. Just a shift over to the restaurant operation side a little bit. You know, when we look at the restaurant level margins, trailing twelve months, they're actually running about 21% for First Watch, which is actually above the 18%-20%, which is-
Yep
... which is interesting. So from the outside, the natural question would be, are they running above your comfort level, or do you think that this is a place that they could stay, and you want to retain them north of twenty?
Part of that represents the efficiencies of our operators, that they brought to the table over the course of the last year, and that they've helped to support those margins. But if you just kind of look at the mix in our company, the legacy restaurants, the older restaurants, they generally average maybe 100 basis points, 200 basis points higher than that, just routinely. The mix of how many newer restaurants are in that number, where our new restaurants, on average, that cohort might run 14, 15% as they're on path to maturity. And that, you know, the first months of operation, that will tend to kind of bring that number down a little bit.
But that's also the real opportunity for us, is to bring the new restaurants to maturity efficiently so that they're delivering the above, you know, 20% margins overall. But yeah, we're happy with it. It has but it has, let's say, you know, somewhat to do with the mix of newer restaurants and that overall performance of the company.
And the way we're achieving it is to answer the second part of your question, where we don't believe it's too high, because it's not from cutting labor or portion sizing or things like that. It's through employing tools for the operations team, scheduling tools or other things that help them operate the restaurant better. From the consumer-facing side, it's been nothing but improvements on the experience, reducing friction, all those kind of things. So we like the way we've gotten there.
Okay, thank you. And we are, you know, getting close to out of time. It's a consumer and tech conference, but it's a consumer conference, so just on the consumer, I know it's a million-dollar question, but what is your read on the consumer? What are you watching internally to kind of keep that view informed and updated? And, you know, you've been doing this, you've been in the industry for a while. Have you ever seen an environment like this before? We're not in a recession, I don't think. Maybe we are.
Yeah
... but the traffic is running, the industry traffic is tough.
Yeah.
So, just, yeah.
I mean, just from that perspective, it feels a little bit like 2008 and 2009. I think the big difference here is just the amount and the depth of the discounting and promotion that's out there now, that I don't remember it being that dramatic in 2008 and 2009. And then also, I think the consumer behavior, the actual metrics don't really tell the full story. I think there's a consumer sentiment. I think, you know, maybe the negativity around the election, I think waiting for interest rate impact, there's just a lot of uncertainty, and I think that's causing just a general malaise, and you also don't see, in the consumer behavior, consistency.
So it's a little herky-jerky right now, which makes it really hard to, you know, to plan and to execute. So that's why our strategy has been to stick to our long-term strategy and not deviate from it, but keep an eye on the consumer environment.
Thank you for those thoughts, and something positive: You're gonna grow regardless, and so we'll leave it at that. Thank you for doing this.
Thank you.
We really appreciate it.
We love you.