Perfect. Good morning, everybody. We're going to go ahead and get started. My name is Jim Solera. I'm the restaurant analyst here at Stephens. With us today from First Watch Restaurant Group is Chris Tomasso, President and CEO, and Steve Marotta, Vice President, Investor Relations. Chris, Steve, thanks for joining us.
Thanks for having us.
Before we get started, for those listening on the webcast, please see First Watch Restaurant Group's forward-looking statements disclaimer in its Q3 2025 earnings release, available on its Investor Relations website, at investors.firstwatch.com. For those in the room, this disclaimer can be accessed from your mobile devices as well. Lastly, management's remarks today may include references to various non-GAAP measures, including restaurant-level operating profit, restaurant-level EBITDA, adjusted EBITDA, and adjusted EBITDA margin. Investors, should review the reconciliation of these non-GAAP measures, to comparable GAAP results, contained in the company's Q3 earnings release. To kick things off, we were discussing a little bit before the conversation here. I think 2025 has played out a lot differently than maybe many people expected at the beginning of the year. One consistent theme across the restaurant group has been this focus around value. You've been quite disciplined on pricing.
Can you give us a sense for where you sit now relative to peers? Can you remind us maybe what your average check is and just kind of your overall approach to guest value?
Yeah, sure. I think 2025 really is a culmination of probably two to three years of activity when it relates to pricing, as it relates to pricing, not just for us, but for, I think, our industry in general. If you look at that period of time, we've been very conservative on pricing. That's our approach, that's our philosophy, and has been for nearly four decades. From our perspective, our per-person average, is still below $18. It's a tremendous value for the type of food, the quality ingredients that we serve, a full-service experience, cage-free eggs, all-natural chicken, organic mixed greens, those type of things. For consumers, who care about quality and where their food comes from and the experience, still a tremendous value. Specifically for us, our philosophy, is to price to cover long-term inflation, permanent inflation, I should say, not transitory.
If you listen to any of our earnings calls this year, certainly at the beginning of the year, we got hit really hard from a commodity standpoint. I've been with the company, 19 and a half years and have always had really some protection in our market basket, because of the diversity. Q1, was the first time where we saw, what, four of our top five commodities, seeing double-digit inflation. Obviously, eggs with avian influenza, our version of AI, and other of the top four for us, bacon, coffee, avocados, for example. Hadn't seen that dynamic in a while. At the beginning of the year, we looked at it and we expected around 8%, commodity inflation, but then also looked at it and said, okay, which of these are event-driven and therefore transitory? We chose to be conservative on pricing again.
For the full year, we'll end up being right around 3.5% price, which we talk about it in terms of 2%-4% annually, is what we would expect normal inflation to be. Even with that 3.5%, we did not price to cover the inflation that we're expecting for the year. Even though it's improved a little bit later in the year, we're still expecting around 6%, for the year. That goes back to our philosophy. Our philosophy, is to really focus on driving traffic into the restaurants. Sometimes that means we won't cover fully the inflation that we have that year, but over the long term, I think we will. I think you've seen it in our performance, certainly from a traffic standpoint, that we believe we made the right decision.
In the breakfast space, not necessarily our competitors per se, but in the breakfast space, it's a highly franchised segment. Therefore, franchisees, are free to take as much price as they want, where we as a company-owned concept and brand, have a lot more control. We have full control, really, over our pricing. While we've been conservative, we've seen others in the breakfast space, again, mostly because they're franchised, highly franchised, really take price, because they did not have any other lever in these tough times. We've seen our relative value, improve while we've just kind of stayed the course on what we've done. That's kind of what our approach for this year is. Really, it goes back to, I mean, we did not take any price in 2021. We've been very conservative over the years.
I think that underlying message has been well received by the consumer.
Would you say that on a go-forward basis, the value inherent in your pricing strategy, obviously helps drive traffic? But then beyond that, you're kind of agnostic to what peers do. It's really just focused on what you see in your basket, and how you guys operate just relative to your restaurant, not this peer is taking the price 10%, so we can underprice them by.
Yeah. I think it's important to understand who our competitive set is. From a public company standpoint, really the only ones in our space, in our day parts, are legacy family diners, right? That's not what we are. We don't consider that to be our peer set. Our competitive peer set, is a number of high-quality, regional, sometimes chef-driven mom-and-pops that serve breakfast, brunch, and lunch. We call our competitive set, a herd of cats. We know who they are in every market. We do look at them. We do look at the group you're talking about as well. It doesn't really drive our pricing decisions as much as it's nice to know where we are positioned when we make the decisions that we make. I'll give you a perfect example. There's a very large family diner, all franchised.
We noticed in Dallas, for example, that particular franchisee got very aggressive. Their like-for-like items, so call it a works omelet, even though we have quality ingredients that stand out, a works omelet, for example, they were $2 more, than us for a family dining experience. That is what I was talking about as far as our relative value, really improving, not because of necessarily things that we are doing, but compounded by what others are doing that is outsized and, frankly, I believe, more short-term.
Can you walk us through how you think about balancing, protecting the margins with that affordability component?
Yeah, it's a big focus for us. I think from an investor standpoint, one of the things that I think is a key message, is the fact that we believe our 18%-20% restaurant-level margins, is something that we can maintain on a go-forward basis. There'll be ups and downs and quarters, like there was in Q1. I mean, I remember there was a point last year where people asked if our margins were too high, because they got over 21%. Our target range of 18%-20%, we're pretty confident in our ability to do that. Again, we were over-indexed, in some areas where statutory minimum wage increases, were set up annually. Florida, Arizona, we're about at the end of that too.
We should see some stabilization as it relates to labor inflation as well, which will put us in a really good position.
Can you offer any thoughts? You mentioned inflation earlier, just how some of those key items that have been driving inflation, the restaurant A.I., avian influenza, bacon, coffee, and maybe the interplay that tariffs have there as well, and just since we've seen some recent relief around that.
Yeah, absolutely. Eggs I talked about, that was predominantly driven by avian influenza, and the depopulation of millions and millions of egg-laying hens. We're past that, although that could be an annual occurrence. Nobody knows until it happens. That's significant. Avocados , was certainly an issue. It actually wasn't as much tariff-driven as people think because certain food items were excluded. Coffee, for example, was weather-driven. Our coffee, comes from women-owned farms in Huila, Colombia. While Colombia, specifically wasn't impacted, Brazil was, which shifted a lot of the demand to Colombia, where we get our coffee. We saw huge impacts there. There were tariffs on there. I think just two days ago, it was announced that the tariffs will come off of coffee. We're expecting some relief there. Bacon, is market-driven. It had a lot to do with beef prices.
When I talk about that insulation that we had from having this diverse market basket, if you heard three of those things had really nothing to do with where we get our product or what our product is, it had to do with demand coming into those areas, because of other issues. We expect a normalization this year for sure, or excuse me, in 2026. To what extent, we're not sure yet. The news changes daily. We feel like we weathered the storm this year with those significant outsized increases.
The ever-changing news would make our life so exciting. Dealing with that. Historically, you've been dine-in focused, but off-premise is becoming a bigger and bigger piece of your sales mix. Can you just remind us how much of your business comes from takeout delivery? Are those orders mostly incremental guests? Is there any cannibalization factor, from the dine-in traffic?
Yeah. Our off-premises business is about 20%, of our total. A little bit more than half, of that is third-party. The other is direct. It is and has been an increasing segment for us, since COVID, when we really implemented the ability to order online more easily than pre-COVID. What was the second part of your question?
In relation to cannibalization from dine-in.
Oh, sorry. Yeah. From a consumer standpoint, we believe it's an incremental occasion. It might be the same customer, but it's a customer who has chosen before they've even made any other decision that they're going to get food delivered. We hopefully show up well there. We believe the occasion itself is incremental. The reason we think that is because as our dine-in traffic has improved, that was happening at the same time that our third-party visits, were increasing as well. We would have expected to see some kind of offset there if that were the case, if it was cannibalizing. We think it's another way for us to get our brand out there, and to show up at a time when a consumer is looking to have a morning meal occasion or lunch occasion delivered to their house or their office.
Are there any specific margin considerations, that we need to think about between the dine-in and the off-premise consumer?
I think what I would say at this point is that's all taken into consideration in our ability to deliver that 18%-20%. There are packaging costs, and things like that. We do have a small markup, on those third-party occasions. If you remember from our previous earnings calls, it's less than it was. We reduced our surcharge, which was a big factor in increasing our actual orders, which we had two goals: to reverse the negative traffic trend in that third-party channel, and to really just make more money. We gave up some margin percent, but we accomplished those two goals, and we're happy with where we sit right now.
For the remainder of this year, you guys talked about 4%, same-store sales growth, about 1% traffic. As we look into 2026, what gives you confidence in sustaining that momentum on same-store sales and any particular drivers we should be considering?
Yeah, I think we've had a long track record of positive traffic, positive sales, not every year, but for a vast majority of the years that we've been around. We feel really good about the momentum we have right now. We've talked a lot about our step-up in hospitality, increasing portion size, doing some non-traditional things during these times. Again, something that we think has resonated with the consumer, certainly with our customer. Then kind of our entree into marketing and stepping up our marketing efforts and refining the vehicles and the timing and all those things that we've been doing. We've seen really great results from that. I talked about it on the call. We've really only put that in a third of our system and have been very pleased with the performance.
We are taking all those learnings and considerations into our planning for next year.
You beat me to it. That was my next question.
All right.
Maybe building on that, for the restaurants that are in those test markets, that you guys are running your marketing program, is there any takeaways, you can share with us in terms of those market performances relative to markets that absent marketing, anything with the guest interaction frequency, profile of the guests?
Yeah, we haven't talked about it specifically, but those markets outperformed the control group and the rest of the system, the typical pre and post analysis. That is what gives us confidence in. We did it in a diverse third of the system, so that we could apply it to other markets that mirrored the ones that we put it in as we move forward into 2026. Nothing specific that we've announced on frequency or anything like that, but they've definitely outperformed the other markets.
How do you think about First Watch's, overall brand awareness today? Kind of marrying that together with stepped-up marketing spend, what do you think about as the upside from, I don't know if you look at it from an awareness standpoint, or if there's any kind of key metrics we could think about that you hope to achieve from the stepped-up marketing?
Yeah, we still have very low brand awareness. And it's a fine line for us because we really like to balance not being a chain, in the eyes of the consumer, being more of a network of neighborhood restaurants, if you will, but raising that awareness. I think the tools that we have at our disposal now, digital, social, connected TV, those types of things allow us to do that in a way where we don't seem so mainstream. We're not on television, for example, broadcast television or sponsorships or things like that. We walk that fine line because people like to discover us, and they also like to be the ones who recommend us to their friends and as a local breakfast spot. We're definitely trying to hold on to that as long as we can. But yeah, our brand awareness is low.
We see it as a huge opportunity. We know that we have a really good trial-to-conversion ratio, that if we can get folks to try us, we do a pretty good job of converting them into some kind of frequency into the buckets that we've identified. Yeah, our goal is to just get more trial. I think a big part of why we've been able to also recently grow that awareness is our real estate site selection. High-profile locations, main and main, out on the road, a lot of pre-opening buzz is built by our team and just by the fact of where the restaurant sits. People are starting to go online and find out more about us, and they connect with us on our social and digital channels. I think that's one of the reasons we've been having these outsized new restaurant openings as well.
I want to get into some more detail on the new restaurants. Before we go there, let me just see if there's any questions from the audience.
How much of your traffic do you think is sort of tourist-related versus local? Like in Florida, where you have some areas that are having a really bad housing experience or worse than the nation? And others are also in Florida, you have Europeans, coming down and creating some tourism challenges?
Just repeat the question. Yeah, the question was, how much of the traffic is related to tourism versus local traffic?
Yeah, I think that's a pretty specific question to maybe Florida and Arizona. Even if you just look at, I'll just take Orlando, for example. Most of our restaurants in Orlando, are in the burbs, not in the tourist corridor, if you will. I mean, I don't have the number, but I would say that's not a focus for us as much as it is being in the neighborhoods next to the daily needs co-tenants, where locals are going. I mean, we have some high-volume restaurants, in those tourist corridors, as a lot of concepts do. Our bread and butter, is neighborhoods and suburbs.
What can you share with us about customer demographics? You mentioned on the earnings call, you skew a bit more towards higher-income households. Any changes in the customer demographics? How much do you really know?
Yeah, we know more than we have in the past, and we're learning more every day thanks to a lot of the tools that we've put in place for. Oh, sorry, you wanted to.
Oh, sorry. The question was just regarding customer demographic mix and skew to higher-income consumer.
Right. Yes, our consumer skews higher educated, higher household income. Obviously, that's a big focus for us in our real estate site selection modeling. We've also talked about it being somewhat of insulation for what others are dealing with right now. It's kind of always been the way. I will say over the last, call it, seven years, we've lowered our average age too from like 57 to below 50, which is almost Herculean, in demographic shifts. Again, a lot of that comes from our new restaurant openings and new markets and things where, again, we're just being discovered. I think the way that we've kind of evolved our prototype and our menu, and not being in a legacy market, where we're taking our customers who've been with us for 20 years along for the ride, we're appealing to a whole new demographic.
I think our fresh juices, our alcohol, all of that have helped. I think we have a really nice mix now. We continue to get more and more data on our customers, specifically on their demographics. I would say that we have a good handle on it, and I think that shows up best in our new restaurant openings. Targeting these customers, again, being where their daily needs are, grocery shopping, dry cleaning, those types of things, and being front and center has helped us do that.
Great. You mentioned a little bit on the new unit openings, some of the strength, and a lot of the recent openings, you've seen a lot of fanfare around that. Unit opening growth, has always been a key piece of your story. We have seen a meaningful acceleration in that new restaurant open recently. I believe 3Q, you guys opened 21 restaurants.
That's correct.
What's behind that acceleration? If you could just dive in a little more detail on those strong starts. As you scale while still trying to achieve that 10% annual unit growth, how do you make sure that the new unit quality remains high, that you have enough available sites to choose from?
Sure. Yeah, I think specifically to Q3, with the 21 openings, they never spread out perfectly during the year. That 10%, around 10% target, is what we've been achieving and executing against. A little heavy up in the third quarter, we had an opportunity to move some forward, so we did. Actually, we used to be really good at spreading it out over the four quarters. I know it seems odd to talk about an impact from COVID four years later, five years later, but it kind of got our pipeline a little behind. Every year, we've gotten better and better at getting back to that evened-out opening cadence. That part we have a really good handle on. Making sure that the sites are quality, I'll just tell you that just has to come from a philosophy and a discipline.
I think if you look at a lot of fast-growing restaurant concepts over the years, that's probably where they stubbed their toe, right? Was just going too fast, maybe just having that if we build it, they will come mentality because things were going so well and relaxing some of the site criteria. We do not do that. We know if we stick to that, that we will have successful restaurants. We have proven that. I mean, we do our best to stick to that. We do not really have to sacrifice. We have got a very robust pipeline. I mean, we are approving sites now for late 2027. The 2026 pipeline, is pretty well locked down. We feel really good about reaching our TAM of 2,200 restaurants, through this disciplined approach. We are only in 32 states.
There's no market that we're in that is fully penetrated yet, so we can continue to do the infills. The new restaurants are opening well above projections and well above their underwriting targets. We think it's just a strong muscle for us that we're really getting to flex now after years and years of refining it. The other thing, I think I've said it a lot on our calls, but it's a rarity that our top SL restaurants spanned, what, 14 states, 21 DMAs. We've proven our portability. We know that our concept works everywhere. We just opened in new markets like Memphis and Las Vegas and Salt Lake City and Boise and New England, for example. All those markets are performing extremely well.
That just gives us a lot of confidence in our ability to continue to just stick to our plan, stick to the criteria. We need a solid real estate pipeline, and we need a solid people pipeline, in order to make that happen and do it successfully. The first impression when we open a restaurant is so important. We just put a lot of resources into making sure that that happens. What we've seen is those restaurants are opening above average unit volume, above their underwriting, and then they just grow from there like the rest of the system. Yeah, that's definitely a key strength for us.
I think you've talked about half your new units are second-generation conversions, which seems to be producing great returns, as you've mentioned. How do you compare those to the ground-up builds in terms of sales, margin? I know you have a lot of variance within your kind of legacy restaurant portfolio. Yeah, just maybe start there.
Yeah, I would say five years ago, we could count the number of standalone restaurants in our system on one hand. I think, again, over these five years, these sites have become available. It started out being a little opportunistic, great real estate sites, but maybe some tired brands were in those spaces. It was not a real estate problem. It was a brand problem. We saw that as an opportunity. There is not a lot of competition for those types of sites. We are now getting all the first calls on those sites. Yeah, half of our system in 2025, of our new restaurants, excuse me, will be the second-generation standalone sites. We expect about a similar percentage next year. What that does for us is it gives us a prime location. It gives us dedicated parking.
They're typically a little bit bigger than we would normally build, but we're able to negotiate with the developer or the landlord financials that work for us, again, because there's just not a lot of competition for those sites right now. I mean, I recently visited a conversion of a national seafood concept , that has a 7,000 sq ft, footprint that we took over. We walled off about 3,000 of it. The consumer doesn't even know it's there. The financials work. We don't relax any of our underwriting criteria when we do these sites. People always say, "Well, what kind of synergies, are you getting?" For it having hoods and the restrooms and all those things already in there, it's still more square feet, that we have to build out. A lot of times, we have responsibilities for the exterior, the roof, or things like that.
The underwriting criteria stays the same, the 35% cash-on-cash returns,, and whatnot. They are just doing higher volumes, I think, because of the quality of the sites.
It sounds like there's more than enough of those kind of second-gen reclamation opportunities to support growth for.
Yeah. I mean, yeah, since we already know that half of our 2026 pipeline will be those. You're talking about bars and grills, Italian concepts, bakery cafes, all kinds of concepts. Our highest volume restaurant, was a former national seafood concept, and the site sat vacant, for a couple of years until we came across it. If it's the right real estate, it used to be if something failed in a site, you would question the site. Now, I think we're in an environment, where you got to look at the site on its own and then consider what was in there and really why did it fail. If it's not real estate, then we take advantage of that.
Maybe shifting gears towards what we're seeing from the consumer right now. Like you mentioned at the outset, 2025, has been kind of whirlwind year, all kinds of different pressures for the consumer, all kinds of headline risk, and changes in policy. As we move towards year-end, can you just offer us maybe some insight, what you're seeing from guest behavior? Any hints of incremental softness on traffic, whether industry-wise, or what you guys can see? And then particularly, I think most people assume that maybe breakfast, is a day part that's easier for the guests to give up. What gives you confidence about that part of your business?
Yeah, I think when we look at metrics that kind of give us the insights into there, the first thing is check management, right? Are we seeing less beverages, less shareables, those type of things? We're not seeing any of that. When the customer's coming in, opting for the full experience, we're a multi-beverage occasion, a coffee and a juice. Not seeing check management through any of that, which is usually the first sign. You'll see that first and then a decline in traffic. I also have to say with the third party specifically, in this environment, it surprises me still that that's as robust as it is, considering what the consumer actually pays for that convenience of having it delivered to their house. That's another sign, I guess. From our standpoint, what we're seeing in the restaurants, very, very normal behavior.
As far as looking into it and how we would keep that going next year, I think to continue to do what we do, we have to focus on delivering value. Whether it is opening the front door or these increased portions that we did, being conservative on pricing, I feel like we are well positioned to continue to take advantage of that. As far as the weekday breakfast occasion goes, that was our fastest-growing segment, in the third quarter, which I know surprised a lot of people. It was also the one that got hit the hardest early last year. This is just my opinion, the news was so loud about how bad things were that I think our consumer might have pulled back from that occasion early on. As things went on, realized, you know what?
It's an affordable thing for me. I can do it. I might have overreacted and have started to come back. I still think hospitality wins in this environment. If we can continue to deliver there and the consumer sees us as a tremendous value, I feel good about our position.
Anything we should be considering with the holidays coming up, Thanksgiving, Christmas? Does that disrupt any sort of your kind of normal consumption behavior you see from your guests? Do you get people out of town visitors to go with their family? Just anything you can offer there. Any specific holiday programs that you're excited about?
Yeah. Q4, is actually a little bit of a step up for us. You got a lot of migration, people coming from north down to Florida, those type of things. Snowbird, specifically relocating to Florida, for the time being. I would say the quarter in and of itself, we comped over election day last year. Election day, is big for us because everybody's out and about early. Anytime there's consumer mobility in the mornings, we benefit from that. We were comping over that. We were comping over the hurricane last year in Florida. A lot of noise in November. Our seasonal menu, is what I'm excited about for the fourth quarter. Our cinnamon chip pancakes, are starting to take on a life of their own and maybe even surpassing pumpkin pancakes, dare I say that. It's something we've done year over year now.
Just it gets a lot of chatter. Yeah, that's exciting for us. We don't do anything different per se over the holidays. Again, as people are hopefully out and about doing their shopping, we get their visit while they're doing that.
Outside of, we talked about weekday breakfast. Any other day part considerations we should think about with, again, moving pieces around the holidays? I know weekend brunch is a particularly important day part. Do you see increased number of guests per table? Just any kind of considerations on that?
I don't think we have any data that shows that per se. If you go back to what I said about Mother's Day, being our number one day of the year and our performance this year, having much higher peak sales hours, positive traffic, more throughput, we expect to benefit from that as the holiday business increases too. I imagine there's larger party size, slightly larger party size during those times. In our restaurants where we're near outlet malls and shopping centers, which a lot of these are, we do see a really nice increase.
You talked about restaurant-level margins earlier. As you continue to scale and we bring these new units, into the fold, any commentary on where we should see adjusted EBITDA margins, trend over time and how much opportunity is there to scale, particularly on G&A, and kind of the overall corporate structure as you continue to grow units at a healthy clip?
Yeah. I think as long as we don't have any of these kind of what I would call once-in-a-career commodity impacts, again, I think we'll deliver on that 18%-20% restaurant-level margins. Yeah, we endeavor to improve our G&A, as we grow here. I think as we get better at the openings and the pre-openings and all those things, I think you should expect us to start to do that.
Have you found, given the wide aperture of markets that you open up new restaurants in, that there's an upper bound on AUVs, for some of these new restaurant locations? Maybe, I guess, as a part two to that question, have you found that on some of your legacy restaurants, given that there is such a wide square footage difference from some of the more older restaurants versus new ones?
Yeah. We haven't seen a top-out yet. I mean, we have a handful of restaurants doing almost, well, some above double our average unit volumes, with the same kitchen line. So, we know that we can execute higher volumes. It's really about getting the demand over all of the day parts: weekday breakfast, weekday lunch, weekends, and improving our throughput on those times where we're busy. And then, yeah, some of the restaurants, I mean, I always talk about it. We have 600-some restaurants, many of which are 25 years old or older, that were built to do a million, million, two in average unit volume. So, will they cap out? Yes. You could probably expect those to grow by the price that we take and maybe some increased traffic. But those are also some of our greatest restaurant-level margin drivers. We're also paying 25-year rents on those.
When you hear us talk about a closure, like it's two or three or four closures a year, that's where a lease expired. We're moving it to a new location. The trade area might have moved and taking advantage of that. It's a really, really beautiful mix of these legacy concepts, that maybe from a top line won't get to where the new ones are, but are really the driver of the bottom line as a percent. What we're focusing on is the next 1,500 restaurants, and having both, having the really high volumes and the great flow-through on those. I think sometimes it's important for us to remind investors, specifically about kind of the bifurcation of our portfolio, but the important role that both of those elements play.
If you were to kind of distill, and this might be challenging because you guys have a lot of things going on, but if you were to distill your competitive moat, relative to peers that compete across the same day parts, what are maybe the one or two elements, that you think really differentiate First Watch's offering compared to XYZ?
Yeah. Not in any particular order, but I think the brand positioning, I think the approachability. I think even others that are in our same day part, just call it daytime dining, 7:00 to 2:30, whatever their hours are, they either skew towards indulgent, which makes them a little more special occasion, or kind of a value player. I think we're in a really nice place in the middle where we can get the customer frequency. If you're indulgent, you're typically limited to special occasion visits and celebratory visits. I mean, we have customers that come in every day and order the same thing. That's why our value is important. I think that's why our volumes are what they are compared to most other competitors.
If you remember, in 2015, we did a large acquisition of The Egg, and I, where we had 112 restaurants, and we bought their 105. We opened the same hours, but our AUVs, were like $300,000, more than theirs for the same hours. We deconstructed why that was. Obviously, it made sense to convert all those restaurants to First Watch, which leads me to the second part of it, which is our scale. Our scale, from a behind-the-scenes standpoint, maybe not too in front of the consumer, allows us to buy better and have more robust training programs and people development programs, things like that, that show up as hospitality and service and high-quality ingredients, and at a fair price, but it's because we're at such a scale where we can do that. I think that gets lost sometimes too.
I think all that and then continually evolving. It's so much harder for a concept to try to revert back to what made them special after they've lost it. We've always been kind of a concept that we've adopted a culture of change. We're constantly evolving. We're taking the consumer along with us for baby steps instead of trying to get them from here to here, especially if they've left. If you look at how our prototypes evolved, our culinary and menu, all of those things are behind the scenes, back of house systems and all those things. We're doing all of that so that we can continually evolve. Our new app, that we just rolled out, all of that is meant to kind of stay step by step with the consumer as they evolve as well.
Great.
Yeah. Just can I come back to traffic and comps? Okay. Last year, traffic was down 4%, worse in the first half and the second half, got better. This year, I'd say the industry is much worse in terms of industry trends. You guys had really intense commodity inflation earlier in the year, a lot more price. Traffic's actually accelerated, gotten better. It's just kind of a flip, 2024 versus 2025, what I would have thought, and you're kind of outperforming the industry so much. Do you have any sense why that is? I mean, does it have something to do with just the easy comp concept in 2024 to 2025, or is something else happening this year?
I think we had a disruption last year in that, if you remember, the third-party channel fell off significantly, what, around June? Around June. It was somewhat of a surprise to us. It was trending normally and then took a really significant drop. That really was the driver of our negative traffic last year. We addressed that towards the end of the year and implemented some things in the beginning of this year. What I tell people is, as great as it looks this year from the third-party improvement, it was just as bad last year. We really got that back to normal with slight growth there. Our in-restaurant dining traffic, has continued to improve. I think those two factors, are what's driving it this year. I would say 2024, was the anomaly, that this is more normal for us.
I mean, we just got caught off guard last year with some things that happened in the third-party channel.
Can you speak on that? You're saying some things did, some things didn't.
One of our partners came to us and said, "Hey, we have all this data now." We do not get their data. No restaurant does. They basically said, "There is a sweet spot for your surcharge that we think will help drive your orders, quantity." It was a decision to lower our surcharge so that we would have more visibility in the system, and thereby increase the orders. That is what I was talking about earlier, where we gave up some margin. If you looked at our PPA, throughout this year, the PPA, looked like it was down a little bit, but it was really just that surcharge. We tried to make it clear that we had positive mix in the restaurants. It was not because of that.
I wanted people to really understand and deconstruct the PPA, that it was coming from the reduced surcharge and third-party. That got our visits back up to where they were. Now, really, what we're trying to do is limit the volatility in that channel, especially because we don't have a ton of control like we do in the in-restaurant dining. Yeah, that's why I say I think we're more in a normal state now than what 2024 was. If 2024, had stayed kind of in a normalized state, we wouldn't have seen that big drop-off, and you probably would have seen continued growth for us.
Okay. That's helpful. In a more normal environment, traffic, and this is a tough environment for restaurants right now, stable to positive traffic is kind of the goal.
Yes.
Let's say like 2% plus.
Yeah. We believe we can drive positive traffic. We have said we would finish the year at positive counts. We are encouraged about our ability to do that next year too. That is always our focus. That is what drives the conservative pricing, all those things. The increased hospitality is we want to focus on traffic.
I have one more just to follow up on kind of the operating or SG&A leverage. Revenue, growing 20%. What are the big buckets in there that need to grow along with revenue? I'm just trying to think about the leverage opportunity at that level of revenue growth.
That need to grow along with revenue?
Yeah.
Within G&A.
Yeah. G&A is probably going over 20%.
Yeah.
What has to grow that much to keep it up?
There is a couple of factors there. First of all, 4%, of that growth was from acquisitions, that had been completed over the last 12, from this year versus last year. That is in the sales line. From a G&A standpoint, we are always investing in G&A, in order to assure for that roughly double-digit or double-digit unit growth. There are investments across the business. Real estate, comes to mind given the longevity of that pipeline. There are investments within, but we still endeavor to leverage, I like to call it, G&A, every year and intend to leverage G&A, in any given year. Did that answer the question?
Do you have a lot of district or area managers and things like that as well? It's all in G&A?
There is a DO level, that is in G&A, yes. Yeah. The first level above restaurant hits G&A. Yeah. And we have DOs, regional vice presidents, and vice presidents out in the field.
Okay. And so last one here, just what's an appropriate proportion of growth, G&A, relative to revenue that you think of?
We haven't spoke to that specifically, but again, we're looking to leverage each year.
Okay.
Our long-term targets include roughly 3.5%, same restaurant sales growth, essentially 10%, unit growth. That gets you to about mid-teens for sales growth, with mid-teens adjusted EBITDA growth, with leverage on the G&A line.
Great. Chris, for Paul, if you're going to have any commodity problems in 2026, where would you place your bets?
On where it would happen? Like which commodity?
Yeah.
I mean.
What looks more difficult in '26 than '25?
Eggs, is always a risk because of avian influenza. I think without that external factor, that should be normalized. Still trying to get our arms around bacon, to be honest with you, pork in general, just because there's so many external factors impacting that. Those would probably be the two areas. Coffee, is pretty much weather-driven, so we'll see how that goes. Every once in a while, depending on what happens in California, we'll see some other produce if they have heavy rains, strawberries, oranges, things like that. Normally, the market basket kind of levels it out. I don't see as many of those in 2026, as we saw in 2025. Obviously, we're monitoring it closely.
Great. Maybe just one wrap-up question, Chris. As we look forward, just one, what are you most excited about for First Watch, going into 2026 and beyond?
Yeah. Just our momentum going into it. I really feel like we're starting to continue to differentiate ourselves in this environment. I'm excited about our ability to perform and deliver. We're an operations company, first and foremost. I think we've done a really good job of protecting the margins. We talked a lot about controlling what we can control. I feel like as well as we've done in what's considered to be an extremely difficult environment, that if we see some relief on a couple of fronts for us, we could have a really great future here. I'm really excited about our new market expansion. I just love seeing us open beautiful new restaurants in new markets and just have people who really shouldn't know who we are showing up on day one. That's really exciting.
Awesome. Chris, Steve, thank you guys for your time and your insight. Thank you, everybody, for joining.
Thank you.