Restaurant analyst here at Raymond James. And it's my pleasure to host this fireside with the team from First Watch, which in our view is one of the most interesting growth stories in the restaurant space. I do need to read a quick disclaimer before we dive in. So for those joining via the webcast, please refer to the First Watch Restaurant Group's forward-looking statements disclosure posted on the IR website, and that's below the webcast link.
But First Watch is the scaled leader in the brunch daytime café category. They've got about 570 system-wide units, AUVs $2.3 million, give or take, which they generate in a seven-and-a-half-hour shift, one-shift business, with an average check around $17.
So Chris, I thought I'd turn it over to you for anyone new in the room that might be new to the story, maybe just a high-level overview of the company and anything you want to say about long-term targets.
Yeah, sure. So a couple of points you made are right in there. But yeah, we are the scaled leader in breakfast, brunch, and lunch, kind of this emerged daytime dining category. It was emerging a few years ago, but I think we're fully emerged at this point, number of players in the space. But we've been at it for 40-plus years, started in Pacific Grove, California. We're kind of known for our healthy options on our menu and freshness. We don't have any heat lamps, deep fryers, microwaves.
The seven-and-a-half hours, the one shift a day, is a very compelling proposition for our employees, making us an employer of choice in our industry. I think one of the drivers of our success over the years has been the culture that that creates. Our teams work together all day. We're not managing two shifts. So yeah, those core attributes have been what has driven our growth. And the breakfast daypart has been one that's grown significantly over the years and for many years was the only daypart that had seen growth. And so we were at the forefront of that.
We're now in 29 states, and Monday we'll be in 30 when we open our first restaurant in Massachusetts, which I'm excited about going into New England. But you know what? Our restaurants work everywhere. Our top decile restaurants span 10 states and 20 unique DMAs. And so we've proven our portability years ago, and we went public, as everyone knows, in October of 2021. But nothing's really changed as far as how we run the business and what we do.
So we just continue to hopefully create more evangelists for the brand. And we're excited about our future growth. We've talked in terms of our TAM being 2,200 restaurants in the Continental United States. We've got some visibility into that and feel very strongly that that's an opportunity for us.
Yeah, that's great, and you did give an update yesterday before the conference kicked off with fourth quarter coming in a little bit at the upper end of your expectations. I think comps were about flattish, maybe down a little bit, and traffic down about three, but maybe you just want to talk about what you saw through the fourth quarter, any incremental color you'd like to speak to.
Yeah. Overall, we were pleased with how the quarter ended up. Like you said, at the high end of our range, which was encouraging to us. But our teams have worked really hard controlling what we can control. That was our message for 2024. And our ops team did an amazing job on efficiency, on labor scheduling, all while driving some of the best consumer experience scores we've seen as a company. So felt really good about how we managed a very volatile year and economic environment. And we're excited about 2025.
Yeah. The secret weapon for our company last year was really the operators and how they performed in an environment where we had softer transactions, but they continued to deliver on great restaurant margins. It was really, really thoughtful, the work that they did, and very successful.
Yeah, we'll definitely get into some of that as well. So it was a good year of strong unit growth, very good margins looking back to 2024, though pressure was a little bit, traffic was pressured in a weaker industry environment. Maybe just elaborate on some of the specific factors that impacted your business as you look back on traffic in 2024, and what's the path to getting back to flat and hopefully maybe positive traffic in your mind moving through 2025?
Yeah, definitely the morning meal occasion felt it the most. I think as consumers were considering reducing their dine-out occasions and spend, the breakfast occasion, there's a lot of data that shows that that was the one that was chosen by the consumer predominantly for that pullback. It is a relatively easy occasion to eat at home. But we know, again, with all the previous growth in the segment, that it's an occasion that the consumer loves to have.
So we're looking forward to a change in consumer sentiment that we've already started to see carrying through the year and absence making the heart grow fonder and that occasion coming back. But we continue to, on our growth plan, we were the fastest-growing full-service restaurant company in America the last couple of years. I'm sure when all of 2024 is tabulated, we'll hold that honor again.
We've seen great volumes in those openings. They're performing above our expectations. We continue to have our focus on that growth. As far as 2025 and how to get those customer counts back, we tested a lot of things in 2024, and we learned a lot of things. That'll be part of it, really informed our plan for 2025. When we get to our fourth quarter earnings announcement, we'll talk about some of the things we're going to be doing.
All right. Well, looking forward to that. And a piece of 2024 that we also saw across the industry was the state of Florida. It seemed underperforming national trends. It's a big state for your company, I think 25%, give or take, of your footprint. Are you starting to see Florida's relative performance level out moving through the tail end of 2024? Is it starting to catch up and narrow that gap a little bit?
Yeah, it kind of closed the gap.
Yeah, it closed the gap.
In the fourth quarter, we saw some of that. Florida experienced some great shifts in population and behaviors post-COVID, and I think that there's sort of a return to normalcy that'll be helpful to us, but we're really bullish on the state. We grow in the state of Florida. The state of Florida is growing. I think it's our home state, so we're proud of the emphasis that we have on continuing to grow in a state that's also growing very rapidly.
I think more specifically, we benefited greatly towards the tail end of COVID and post-COVID from the migration to Florida. And Florida is still the number one inbound residential transfer state. And new trade areas pop up all the time. It is important to us. It's very important to us from a growth standpoint. The good news is, even as penetrated as we are in Florida, even specifically here in Central Florida, where we have 25 restaurants, we don't have any market that's fully built out yet.
And new trade areas are popping up in our DMAs on top of that. So Florida is important to us. It's normalizing. Yes, it was a drag, but it was kind of the other side of the benefit that we had. We're looking forward to not only the normalization, but then the continued population growth and how we can take advantage of that.
Yeah, absolutely. Well, in the fall, you alluded to it before, but you tested some targeted new marketing and value tactics to help stimulate traffic. Seemed to make a lot of sense in this highly promotional and value-driven industry backdrop. But without sharing any state secrets, can you talk about the response you saw or how you view the ROI on that spend?
Yeah. So we're only interested in profitable growth. So that was the point of the tests for us to see what kind of responses we got to different things. And really, First Watch has very low brand awareness. Despite having 575 restaurants in soon-to-be 30 states, we have relatively low brand awareness. And that's a blessing, but it also comes with challenges. And so really our focus was on increasing that awareness in an environment where the consumer is being bombarded with price point promotions and things like that.
That's not the tactic we took. The tactic we took was increasing our awareness, right message, right time, right person. If you've listened to our earnings calls, you know we've been investing, talking about investing and investing heavily in technology and consumer data platforms and things like that. And now the harvesting of that is starting.
We were ready and able to do that towards the middle of last year. That's when the testing took place so that we could be more targeted in our marketing. We were really encouraged by the response, the results, and then the analysis that we got from that. What we learned from that is informing our plan for 2025. I'm excited to talk about that soon.
Okay. Great. We look forward to that update as well. I guess asking a question, shifting gears. I know you're primarily focused on dine-in, but off-premise for you and everyone's grown to a lot, obviously during the pandemic, 17%, give or take, I think, of your sales. Third-party, it's been a channel that started to decline more significantly through 2024. By our math, thinking back to third quarter, what seems like five years ago at this point. But by our math, it was about a point comp drag.
But I guess I know you're more focused on this core dine-in experience, but how do you plan to stabilize this part of the business? Maybe you already have through the fourth quarter if you want to speak to how off-premise did through fourth quarter. And how do you see that playing out through 2025?
So I'll just go back to my point about profitable growth. If we wanted to, we could easily affect and impact the traffic component of third-party. Would it be profitable? Probably not. So it too is a volatile channel. We don't have a lot of control over it without spending into it. So basically, we're just working with our partners to develop a partnership that works for both of us where it does deliver the profitable growth that we want. We know we're an important daypart to them.
They have drivers out and about in the morning, and they need orders to pick up, and so just finding that right mix for us. We went from 5% total off-premise pre-COVID to 100% for a period of time during COVID to now a pretty stable off-premise percentage of 17%-18%. Just really working through understanding that and how to optimize that for us is our focus.
Okay. Great. Great. And pricing and value continue to be hot topics in the industry these days. And I guess talk about how you've approached menu pricing over the last few years, how your relative value prop maybe compares to direct competitors and maybe broader competitors. And then anything you want to say about your kind of pricing plans into 2025?
Not that one. So our typical cadence on pricing is to kind of take a visit early in the year and then revisit at the middle part of the year. Typically runs 3%-3.5% overall in terms of pricing. And that over the course of the last few years has been our cadence and our practice outside of the COVID environment. But really the principle that we apply is that we want to defend the margins, but we want to be modestly priced. We take pricing very seriously. We don't want to be in front of our customer.
So we anticipate what inflation is going to be, and we price to offset that. But we want to be there every day with a value for our customer. We don't want to get ahead of them. And so we're trying to use that as part one of the principles of driving our traffic over time. And our traffic growth over the history of the company has been built on being there with a value, being something that a customer can use several times a week.
I think from a relative value standpoint, that consistency and conservatism around pricing for us has improved our relative value. I think if you want to talk about the value players, call it family dining, highly franchised, franchisees have a lot of flexibility on pricing. So in our analysis, when we've looked at markets and comparisons, we've actually seen some family diners outprice us. So our relative value has improved by us just doing what we do and the environment being as challenging as it is.
And understandably, certain concepts have had to do different things. So we're just very focused on that. Pricing, as Mel said, for us is not a profit driver. It's really just to defend the margins. And we have strong restaurant-level margins. So it's really just for us to cover inflation.
Yeah. Yep. Well, we'll shift gears a little bit to unit growth. Obviously, a very important piece of the story. You're in 29. Tomorrow will be 30 states. One of the things that's impressed us is the consistency of the AUVs, whether we're talking about Florida, Texas, Ohio, even Arizona. I guess talk about the success the brand has seen as it's entered the new markets in particular. How are AUVs tracking versus the existing base? And maybe round that out with just your long-term unit growth targets. You mentioned the 2,200.
For us, we're a very data-driven company, and development's no exception. Over time, our plan is to grow more than 10% in terms of the number of stores, restaurants every year, and we knew that to capture that kind of growth, it would require a lot of discipline. It would require a well-conceived development plan, and we developed the kind of information that helps us select sites and move efficiently toward getting them open at the right time.
It's proven over time that the kind of site characteristics that we look for when we open a restaurant don't really change the performance regionally, so it's real site-specific, and as long as we observe those disciplines around what are the characteristics of a successful restaurant in Orlando, those same characteristics work in Phoenix. They work in Chicago. They're going to work in Massachusetts.
So we apply the same sort of selection criteria. And as a result, our restaurants, as they open, they perform very predictably within a pretty narrow range. The things that catch us by surprise are when we maybe have more enthusiasm in terms of an opening and we have our expectation runs from maybe opening at a $40,000 week and we have restaurants that explode into $55,000 weeks. And those catch us by surprise. And we've learned to staff up, particularly in a lot of areas, so that we're ready to meet that kind of demand and that our new customers have a great experience.
Yep. Yep. High-class problem to have.
It's a high-class problem to have.
And within unit growth and thinking about unit economics, obviously something we're very focused on. And I am a restaurant analyst, 20 years. I'm not in construction or design. And I'm not handy around the house. Just ask my wife. But one thing that's impressed me is the look and feel of your restaurants and your average build cost that's in, I think, the $1.5-$1.6-ish range. So maybe just talk a little bit about how you achieve that bang for your buck. And if you could frame out the cash-on-cash return targets for everyone.
You're the author of my book.
Well, I'll talk about the cost and Mel can talk about the investment and return criteria. But yeah, our restaurants have a homey feel. You've heard us talk about it. It's an urban farm feel that kind of brings in the best of farm, but with these urban touches of metals and woods and things like that and harvested wood for our tables and things like that. But it's a warm, inviting environment.
But the way we've set it up is it's a lot of trim work. It's a kit of parts, basically. So we don't have any two First Watches that look alike. We have common elements that our customers recognize when they walk in and it makes them feel comfortable knowing they're in a First Watch.
We've been doing this local mural program in each restaurant where we hire a muralist and they do something that's significant to the community. That helps a lot. But yeah, we've just done a really good job of putting this kit of parts together that we can pull in and out. But we're just at our scale, the elements that we use, we're just able to build it at a 1.6 average, net of TI. So it's been great because then that delivers the returns that we're looking for regardless really of the size of the restaurant.
And Chris is too humble to say that the kit of parts is kind of his brainchild from years ago. And it continues to hold up and to be applied in all of our restaurants. But what we look for, that $1.6 million investment, net of TI, we're looking for the restaurants to reach a $2.6 million AUV by the third year, which generally pencils to about 30%-35% or above, cash-on-cash return and about 18%-20% return on invested capital. And our restaurants, as they have opened, they continue to track toward that.
And it actually exceeds the average AUVs of the legacy system. So those restaurants, they have more promise in terms of their ability to grow, but they're also delivering on good returns on the dollar.
Yep. Yep. Well, with the time we have remaining, maybe we'll touch on ops and margins a little bit. We talked about 2024, flattish comps, slightly negative comps, but store margins were up this year despite that. And can you talk about how you achieved that a little bit, maybe weave in some of the operational wins you saw this year?
Really, I would say the biggest win, the biggest contributor to sustaining the margin during a year when the transactions were soft were the operators' use of data that we've collected and new tools that we furnished them early in the year. But it gave them better real-time information about their labor performance. So this is largely in the labor area. But it's not just the new data or the access to it. It's their commitment to use it to hold themselves accountable and to deliver on those sort of margins.
So they undertook that as really a goal of operations in a time when our transactions were under pressure. And the real magic trick that they pulled off was not only holding the labor there steady, but they also improved their customer experience scores during the year. So they did better with a tighter focus on labor performance. And it's really sort of an underlying success story that we get to brag about because our operators are so focused on delivering that kind of margin.
You know, when things like that get implemented, obviously they're being worked on for 12, 18 months before. So the timing just worked out really well for us that whether it was the full rollout of the KDS, the waitlist management through our app and that system, the optimization of our dining rooms.
Which is work that we had done pre-COVID to look at our average party size and optimize our dining rooms so that when we're full and on a wait, we're 90% full versus full and on a wait and only 70% full because of the table configurations and things like that, upping our bussing procedures to buss the tables more quickly. Little things like the on-deck for the next person rather than we were losing minutes notifying somebody that their table was ready and then they would come up.
So now we bring them up, say, "Your table's going to be ready." So just little tweaks that we made because, I mean, we're picking up minutes. And our focus was for any part of the experience that we control, we want to be as efficient as possible. So obviously that's seating, turning tables for the next party, the ticket times, all those types of things. If our customers want to sit there and enjoy brunch for an hour, that's great.
But even the pay part of it with us launching pay at the table to relieve the congestion that's upfront, all of those things, those were hospitality touches, even though they were either through technology or new procedures. But to us, we're conveying to the customer that we care about them and it's through hospitality, not just opening the door and saying, "Good morning," like we do, but putting all these tools in place to when we did the research, it was, "We love First Watch. We just want to go faster."
And so that's what our focus was. So that was the work leading up to it. And then I would say we benefited from that in 2024 at a time when we really needed to because of the environment. And then we also used 2024 as an opportunity to test some, create more demand. So that was our serve more demand focus. But now on the create more demand, which you already talked about, and so did I, on some of the things that we tested, that's our focus now for 2025.
Yep. Okay. That's your focus and you did pay at the table, obviously. What was that? Probably five, six months ago?
Yeah. Yeah.
So it's still working in. And are there any operational tools or other wins that are opportunities that are on your radar into 2025, or is it more on the demand generation side, as you said?
Well, it's both. It's yes and, so we'll continue to do that, and I think there's a perception that when you launch something that is optimized and it's not, like these are iterative things. So, KDS, when we got it out, we continue to optimize that and learn from that. Same thing with pay at the table. I mean, more people are hearing about it, and same thing with putting your name on our waitlist from your phone.
The adoption is happening as it sits in there and more people see it, and so our goal is to have those things continue to grow. But on a weekend right now, 50% of our customers are taking advantage of the pay at the table, so that's huge because that's when we're that's game day. That's when we're on a wait. That's when people are checking in and trying to check out. That's been a great addition for us. We skipped right over the kiosk at the table and just put it in the power of their cell phone, which is great.
Yep. Well, and for.