Okay. Hello, everyone. My name is Brian Mullen. I'm the Restaurant and Food Distribution Analyst at Piper Sandler. Very happy to have the team from First Watch, CEO Chris Tomasso, CFO Mel Hope. Thank you for being here.
Sure.
Just to start, I think last quarter was a really positive update. The business returned to positive traffic. I think June was the best month of the quarter, and July got off to a good start as well. Hoping we could just unpack some of the drivers there, talk about what you're seeing in the delivery business, and talk about what you're seeing in the dining room as well.
Yeah, sure. Q2 was great for us. A lot of positive momentum. You know, sequential improvement in basically all aspects of the business. We kind of addressed some headwinds that we had in 2024 around our third-party delivery channel and also kind of a mismatch of Florida specifically as it related to the rest of the system, was a headwind for us. One of those headwinds we addressed directly with our revisiting our relationship with our third-party delivery providers. The other one was what we had kind of been saying all along about Florida in that there was a stabilization that was coming, with Florida kind of benefiting from COVID and having that normalized now.
That led, and a lot of the other initiatives that we've put into place, our conservatism around menu pricing and some other things that we did in Q1, increasing portion sizes, adding some touches of hospitality in the restaurants, trying to stand out in the environment that we're in right now. I think those things started to pay dividends for us in Q2.
That's great. On the in-restaurant traffic piece, slightly negative in the same quarter, but sequentially, it's getting better. Just taking a step back, I know historically this has always generally been positive at First Watch, and you want to get it back there. A big picture question around advertising as it relates to that. How is advertising used at First Watch historically? How has that evolved over maybe, say, the last 12 months? How do you see that changing from here?
Yeah, I think we're in the early stages of what I would consider to be a sophisticated approach to marketing our brand. I can say that, being the former CMO for a lot of years, we were fortunate to rely heavily on word of mouth for our growth over decades. We talked a lot about, let's say over the last 18 to 24 months, getting more sophisticated, acquiring more data, getting more insights into our customer and the consumer overall, both in our segment, folks that use us, folks that are in our day parts, but maybe we're not in their consideration set. Then, starting to leverage all those assets. We've built our team up. We have partnered with some really great third-party providers to help us do that.
Now, we tested a lot of things in Q3 and Q4 of last year and kind of saw what worked, what didn't work, and really what gave us the ROI that we're looking for. Those are the things that we're now deploying on a more strategic basis this year. I think you're just going to continue to see us get better and better at that as time goes on. Things like relaunching our app and other aspects where we're able to collect data is just helping us make more informed decisions around who to target, when to target them, what kind of creative works and all of that. Not necessarily new for the industry, but new for us, and we're pleased with the progress we're seeing there.
I wanted to ask you about brand awareness. Is that something you track today? Does it look very different in different regions of the country? Is that something you want to proactively work to grow because there's a relationship with sales, or is maybe just opening units at this point the most natural way? How do you think about that topic?
First of all, with our unit growth, we believe that that's a contributing factor to increasing brand awareness. We're now up over 600 restaurants. We're opening, you know, 55 to 65 restaurants a year. We think that helps. A direct correlation between brand awareness and traffic, we're still working on quantifying that. We do know that if we can raise our brand awareness at key points with the consumer, meaning the points where they're making decisions to go out to eat for breakfast, brunch, or lunch, that we can impact that occasion. How that plays into overall brand awareness over time, that's something we're going to be tracking as we go along. We think we've done a good job now of uncovering the tactics, the vehicles, and the messaging to get the returns that we want on our marketing spend.
Understood. Just last one on this thread of thought, you've got 600 plus restaurants today. Again, it's me asking, not you guys pushing, but even if you're not ready now, is there a point down the line where national advertising could make sense? Is that a number of restaurants thing? Is that a geographic diversity thing? I always know there's a balance with, it's always for a lot of people. Some people don't know First Watch is a gem. On the one hand, you don't want to impair that. On the other hand, national advertising can be impactful. How do you think about that?
Yeah, we'll evaluate that. I think the good news is the way the world is today, it's very different from how it was 20 years ago. You know, you had no other choice but to go to national advertising before. Now, with connected TV and digital and all those things, you can actually not have the overspill and the waste that you might get in national advertising if you're not fully efficient, by really being more thoughtful and targeted about where you go. We have more options now to reach more people without kind of wasted spend of national advertising. Will we get there someday? Possibly. Not sure if it'll ever be the right mix for us. It takes a lot to get media efficient from a growth standpoint to really warrant that.
I think we can achieve basically the same positive impact, but do it in a more efficient way.
Okay, great. I want to ask a bit about the menu. You talk about the beverage platform you have. Can you just remind everyone, you know, the beverages you sell, juices, non-juices, and where do you see the opportunities to continue to grow that platform and what you're working on?
I think many people probably don't realize that our number one selling item on our menu is coffee. We've done a lot of work around beverage innovation over the years, whether it was the introduction of our fresh juice program, where we're juicing kale and apples and cucumbers and all those things, beets in our restaurants to make these juices. That's been a big addition for us. A couple of years ago, we introduced alcohol. A year and a half ago, we introduced cold caffeinated beverages. We're always looking at innovation in the beverage category. There's obviously a lot of attention on the beverage category right now. We think we have creative license and we have the permission from our guests to do that, and we'll continue to do that. Just look for us to continue to innovate in that area.
When we look at success or failure as it relates to those things, it's typically beverage incidents. In the case of alcohol, for example, that really was meant to address a veto vote by the consumer. If our beverage incident or alcohol incidents remain about where it is right now, we're pleased with that because we believe that's bringing in a guest that we otherwise would have lost if we didn't have that offering.
I was going to ask about that. Are you pleased with alcohol? I understood it sounds like you are. I ask always just because I think in general it seems like there's a little bit of a societal preference or less of it at some of the full-service diners. Are you seeing the demand for it, especially in the occasions that you thought you would?
Our incidences remain relatively flat. I think the, I don't know if everybody's heard of this sober curiosity term yet, but sober curiosity is the consumer questioning themselves about how alcohol plays into their lives. With the consumer that we attract, first of all, it's great that we're not a boozy brunch place. We're not alcohol forward. We're food forward that also serves beverages and alcohol. I think that puts us in a really solid position. Our juice program is, other than coffee, our number one selling platform. We sell more juice than we do soft drinks, and that's straight down the middle of the fairway of what the sober curiosity, sober curious consumer might be looking for, which is, it's actually a badge of honor now to, when you go out with a group, focus on health and those types of things.
Our Kale Tonics, our Morning Meditation, our fresh juice drinks like that play a role in that. Because we're not as heavily reliant on alcohol, I think we're in a really good place to have it as an accommodation for the consumer that wants to do that, but then really expose them to this breadth of fresh beverages that we offer. I'm not so worried about the declining alcohol incidents that the environment is seeing right now. We welcome it.
Understood. I think you either have or will soon be relaunching all of the customer-facing digital properties. Maybe talk about what you're doing there. Is this a natural evolution or perhaps something more than that, where you think you can move the needle on transaction growth or just the consumer experience? What are you doing there?
Yeah, we did just recently relaunch our app. If you haven't downloaded it or updated since we've done that, I encourage you to do it. We're in the early stages of measuring the impacts of that. We're always looking at ways in which to remove friction from our customer's experience with us. The app, at least qualitatively, we've got over 2,000 reviews since we launched it less than 60 days ago and 4.9 stars. Clearly, from that perspective, we've achieved what we wanted to. Some of the things we've added around simplifying the adding your name to our waitlist, geofencing around our restaurants so it automatically checks the consumer in before they get into our restaurant, so we know they're there. Some of those things actually have huge operational benefits to us for throughput to make us as efficient as possible, which therefore creates a better experience for the customer.
There's a lot of things like that on there. There are some things that might not have an ROI, but are really important to the consumer, like the way in which they can move around and the nutritional information and build their meal. If they're following a certain diet, keto, protein, whatever, they're able to do that in our app and look in advance and see how they can eat and how they can move around our menu and find something that works for them. All of those things, and we'll continue to build on that too, but we're happy with the new application.
Yeah, the new platform also provides a good way to add additional functionality over time as well. Great, pivot here. I want to talk about development. I think you're targeting $2.7 million for year three AUVs. Yep. Maybe just talk about the classes of 2024 and thus far 2025. How are they doing, and are you pleased with the results over the last year and a half?
Yeah, our new restaurants over the course of the last several years have continued to break out fast. They're ahead of the underwriting criteria. They're ahead of our legacy fleet. Our new restaurants are, I think they're demonstrating really an opportunity for the company to continue to expand and grow in different kinds of venues. We have a very nimble development team. Even though we're seeing different kinds of venues that are available to us today than maybe we were a few years ago, these restaurants have allowed us to develop in larger locations, larger footprint type locations as well as adapt the choreography of the restaurant to some of those new venues.
Thank you. I guess it ties to what I just asked, but the new store productivity has been great, running in excess of 100% depending on how you calculate it. As you look out over the next several years with what you know about your pipeline, would you expect that dynamic to continue for the foreseeable future? I want to be cognizant you're entering some newer markets too. Maybe that is an offset. How do you think about it?
Yeah, we don't relax our underwriting criteria for new restaurants in any market. We expect them to perform with the, our expectation is that when we open a restaurant by the third year, they're going to get to that $2.7 million AUV. We underwrite them to get to a restaurant-level operating profit of 18 to 20%, which generally pencils out to about a, you know, 35% cash on cash return and generally an IRR in the neighborhood of that 18 to 20% as well. Regardless of the venue, regardless of the geography, we underwrite them to get us the kind of returns that we expect.
I would add, that's not aspirational. That's based on what we've seen. We're very fortunate that we can open restaurants across any geography really and see that kind of performance. We don't have to heavy up openings in one area that's kind of a shoe-in to do well to get to that average. It really is, the average is pretty darn close regardless of the geographies and regardless of the maturity of the market. It's a really nice place to be for us so that we can grow when and where we want to grow without having to think about that.
Great. You know, the brand has been around a long time, public for a few years, but the brand's been around for a long time. If we just think about the last few years since you've been public, what have you learned about entering, understood the underwriting doesn't change, but what have you learned about operationally entering a new market? Has the new market playbook, has it evolved? Is it tried and true and similar to what it always was? How do you take that into, say, some of the newer markets, Northeast, Las Vegas, or wherever you're looking?
Not since we've been public per se, but probably about 10 years ago is where we kind of saw an inflection of new restaurant performance. It really had to do with a kind of a philosophical change in the type of sites we were going after. Historically, and when I started with the brand 19 years ago, we were picking C sites, opening below average unit volume, and then just growing from there, which was great from a same-store sales perspective every year because they were growing. When we realized that we could focus on A sites, start higher, and still see that growth, we're paying more for the sites than we used to, but like Mel said, our expectations are higher and the return criteria is there. You don't have the pain, I guess, of spending a lot in marketing to get it up to average unit volume.
I would say it's been an evolution over the last 10 years, but every year we feel like we're learning more and more about that. We've definitely learned that if we stick to our criteria, our site selection criteria, and we're disciplined and we don't talk ourselves out of certain things because of other factors, we have a high degree of confidence in those restaurants' performance. We have a couple of tools that we use that, what I say is, keep us from making a really bad mistake. We don't use them to predict the sales per se, but we use them to kind of cover our downside. If something indexes low, we will look at it and we'll rationalize it, but we also put a lot of weight in it if it indexes low, based on the site model and all the criteria that we've input into it.
Probably the biggest difference I've seen over the course of the last recent years has been more second-generation space. We probably four years ago, five years ago, saw almost exclusively first-generation space that was attracted to us. Now we've seen more second-generation space. We've had to become more nimble in order to take our operating principles and apply them from smaller footprint and oftentimes bigger footprint locations, but they meet our criteria in terms of visibility and parking and access and egress. We have a much wider variety of restaurants I think that we're looking at now.
I was going to ask you, is it right that I think you just said four or five years ago, maybe you were doing very little conversions, next to nothing?
We could count the second-generation spaces on one hand, and now we're opening more than that a year. It was few and far between before.
Do you see that opportunity increasing? Maybe it's a little bit of an obvious question, but you know, what's behind some of the recent increase in opportunities that you are seeing?
Some of the legacy brands are maybe not finding the real estate as attractive as maybe they used to. Some of them have gotten long in the tooth, and some of them need to reduce their size. It's also not just restaurants, it's different kinds of venues. I think it depends on what's happening in the commercial real estate market as to whether or not that balance will continue. Right now, I think commercial real estate developers are operating in maybe what was a higher interest rate environment than it was just a few years ago. Maybe there's a little bit of slowdown in the new development. We're seeing more of the second-generation space. We'll have to see what happens over time with the real estate market.
The targeted new unit economics on a second-generation space, does that change for you?
No, change.
Okay. Shifting gears, I'd love to hear what are you seeing in that? You're the leader in the daytime dining category. Over the last few years, it's been growing. What are you seeing right now from a competitive standpoint? The consumer clearly has a preference for this model versus some of the legacy family dining. Just what are you seeing out there?
I think what you're seeing is, you know, we focus on ourselves. I think what you're seeing is, we continue to take market share. We continue to make it difficult for others to enter markets just based on our growth and our penetration and the fact that we're taking the main and main sites and fortressing markets, maybe not intentionally, but certainly thoughtfully. I think you've, you know, from a direct competitor side, I think you heard a lot more in years past about aggressive growth plans that I think are being pulled back on now. We're taking advantage of that as best we can. We still have the pedal down on growth. We're still the fastest growing full-service restaurant company in the U.S., and I don't see that changing anytime soon. Our focus really is on us and how are we executing, how are we delivering to the customer.
I don't want to say we don't worry about the competition, but we have such a big lead, both in size and scale, but also in our operational acumen and our ability to leverage our scale for purchasing and other things that it's really about competing against ourselves tomorrow and doing better than we did today. I think that'll continue to help propel us to the heights that we've already seen and beyond.
Yeah. On the last call, you made some interesting comments about just customer demographics. Ten years ago, maybe you leaned a little heavier boomer, you know, now skewing more towards Gen Z and Millennial. You know, how much would you say of that is just naturally occurring versus maybe is the organization making a deliberate decision to influence that outcome and ensure that you do well in that with those consumers over time? Any thoughts on why that?
Yeah, if you look at how we've evolved our prototype, how we've evolved our menu, how we present and talk about ourselves, our brand voice, what we highlight. A lot of that we think we're driving. The other interesting piece of it is over the past four or five years, and it takes a while to shift demographics, years like that. If you think about, you know, Nashville is a market that we came into in 2011, when we have our new prototype and our new offering and our new menu, and that's the first experience that somebody has with First Watch versus maybe going with their parents, you know, 25 years ago in Florida or in Ohio. The way we present ourselves now serves us very well in attracting that demographic, certainly from a culinary standpoint, from a brand voice standpoint. We think that's how we're building it.
I always say we're right down the middle of the fairway of what that generation is looking for, from, you know, where does their food come from, how is it prepared. We don't have deep fryers, heat lamps, or microwaves. The juice program, all those things, quinoa bowls, avocado toast when it was as hot as it could be. All of those things just appeal to that demographic. That's really important to us because that's our pipeline of our next generation of users. We love our legacy customers who have been with us for a long time. I think what we've done really well is evolve in increments so that we've been able to keep our existing customer base with us while attracting the new customer base. When you walk into a First Watch on a Saturday, the demographic variety that's in there is pretty amazing.
I don't think you see that in a lot of places. I feel good about us building that next generation customer and making sure that we're delivering a high value occasion for them right now.
That's great. Question on kind of the consumer breakfast. You know, First Watch is doing well this year, but it's not a secret in the industry. Some pockets of traffic struggles for the industry. Breakfast is an occasion you've acknowledged that maybe is more easily cut out for the consumer. You've recently had a very large QSR player kind of highlight how breakfast is maybe the worst performing day part on the QSR side. You're obviously a very different occasion. Does what's going on there with the folks on value, does it matter at all for your business, do you think?
Not from a value perspective. I think they're more of a convenience occasion. I said what I said about breakfast being more discretionary, but I was also speaking to that in 2024 when the consumer was being bombarded with discounts. I think what we saw at that time was the consumer following those discounts and perhaps going to brands and occasions that they weren't in the past because it was a great value to do so. Sooner or later, those prices and those discounts come off. We've tried to just stay the course and be the everyday value. I also think that hospitality is more in favor right now than it has been in the past. I think you might be seeing that in the pressure that some fast casuals are seeing in QSR.
That's really where we've leaned in with increasing portions, doing some free coffee when we're on a wait, all of those things. I think the consumer is rewarding us for that.
Okay. Thank you. With the time I've left, I just wanted to ask you quickly, your Certified General Manager program, is that something you've always done? Is that newer? Just explain that and how that helps with the growth.
It's a new program that we launched last year. Really what it's meant to do is increase our promote from within to managers, where the fact of the matter is with as many restaurants as we're opening, call it, let's say 60 restaurants a year, we need three managers per restaurant. We need to hire a lot of managers. We want to promote from within as much as we can, and then fill the pipeline with managers in our training program who will then move up to be general managers themselves. The Certified General Manager program's done just that. It's reduced our turnover at the ops manager level and increased our internal promotes.
That's great. We'll leave it there. Thank you both for being here.
Thank you, Joan.
Appreciate it.