Hey, everyone. I'm Brian Vaccaro, the restaurant analyst here at Raymond James, and we're excited to have the team from First Watch here today. In our view, one of the most interesting and underappreciated growth stories in the restaurant space. So I'll read a quick disclaimer, and then we'll just dive right in. So 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 Restaurant-Level Operating Profit Margin, adjusted ebitda, and adjusted ebitda margins. investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's Q3 earnings release. So with that out of the way.
Thank you for doing that.
Thank you, Mel.
Thank you.
Thank you for joining us today. So for anyone that might be new to the story in the room, Mel, maybe just kick us off with a 60-second overview of the company, maybe some quick highlights on the 2025 performance.
So First Watch, if you're unfamiliar with the brand, is a breakfast, brunch, and lunch location. We serve sort of an elevated offering. We don't have heat lamps. We don't have microwave ovens. We don't have deep fryers. Food is freshly prepared. If you go to the website, you'll see some very attractive pictures of the elevated offerings out there. The company's operating model is generally 7:00 A.M. to 2:00 P.M. We pride ourselves on our culture, the You First culture, as part of the secret sauce of how we've grown. We went public in 2021 with about 428 restaurants. We're now over 620 restaurants in the system. We've doubled our Adjusted EBITDA in that time.
2025 has been an interesting year for us as we have continued like we have every year with about 10% growth in terms of the number of restaurants in the system. Our positive Same-Restaurant Sales continue to deliver on our long-term promise. And the company has enjoyed a lot of momentum for a lot of years. So I'm very proud of what we've done in an interesting, challenging market.
Yep, yep. Well, we'll dig into some of those drivers in a second, but I want to just ask you a high-level question. When we step back and sort of survey the landscape of full service back to 2019, full-service restaurants, First Watch, your personal sales volumes are up nearly 50% over that time period.
Sure.
Our unit growth, up 50%, well ahead of the average casual dining concept that might be up in the low to mid-teens and family dining that is barely positive. I know there's a lot of factors, but what are some of the most important drivers of those strong share gains in your view?
So it's really built on a couple of pillars. And we say, look, we're an operations company. The way the restaurants are operated, the data-driven approach that our operations are led by Dan Jones, our Chief Operating Officer. He is a very data-driven kind of leader with a soft touch, but in terms of driving out efficiency by using the data that has become more rich in our environment over the last few years, he's able to hold his teams accountable. And we've seen them become more efficient. And you know in our business, what gets measured gets done. So if you're looking to reduce your ticket times or service times by measuring it and racking and stacking the performance of the restaurants, then there's a response from the restaurants because people are competitive and they don't want to finish last.
One pillar is that, and then secondly, we're also data-driven on the development side, so when we go into new restaurants, we have attributes of our most successful restaurants that inform our site selection philosophy. We want to have three sides of light. We want to have great access and egress. We want to have good cotenancy. We want all of those things, and the development business means you kiss a lot of frogs, so for every one restaurant that we choose to proceed on the project with, there's probably eight to 11 that we reject, but the site selection criteria that we use have helped us to make sure that each class is opening more successfully than the legacy group in terms of sales.
That's part of the growth story as well, just being very particular about the sites in which we locate the restaurants. Their performance has proven to be fairly predictable. When we observe our selection criteria, we're pretty reliably able to say that restaurant is going to perform in this range, and we want that to, so that's how we choose to get there. I'll add this one thing. One of the benefits to our being more of a national brand now and the size that we have means that as commercial developers are looking for occupants on either first or second-generation space, I think we're on the call list now because we open the center early in the morning with vibrant foot traffic. We get the lights going. I think we're an attractive national credit.
As a consequence, I think that helps us sort of get first mover advantage on a lot of the kind of sites that fit those criteria.
Yeah, absolutely. One of the pet theories that I've had is that maybe in this post-COVID world or just in the last five, six years, that some consumers may have discovered elevated breakfast and brunch and maybe have traded out of dinner in some instances. Maybe instead of going out on Saturday night, they go to Saturday morning, and it's still that it's an attractive price point relative to dinner. But I guess I'll just ask you, any data supporting that view that you've seen? Because you step back and you're in pretty rarefied air. I mean, up 50% on a stack basis compared to.
Our data. It's interesting you would say that. In 2008 and 2009, we thought we saw that when the economy was a little bit depressed, that maybe some people were forgoing a nice dinner out the evening before, but they were not changing their habits, or maybe they were trading into a full-service breakfast occasion. It's been mostly anecdotal, though. I don't have great data on the full-service dinner business to know if there's either credit card tokens or something that I would measure, but I would say that I think our offering has been, and probably it's been a little bit more resilient in terms of the consumer because we do have customers who are a little bit higher household income. We do think of value as one. We want to be sure that our pricing philosophy doesn't get us ahead of the customer.
And so there is a value pricing options on our menu every single day. So we kind of appeal to that. But then we want to be sure that we have that same persuasive, gracious service that First Watch is known for. That means value is more than just a price, but it's the whole experience, which is something that we focus on a great deal.
Yeah, absolutely. We'll definitely touch on that value critical kind of equation there. But let me ask you about your recent comp trends. I mean, the third quarter comps were up 7%, well ahead of expectations. And a component of that was that dine-in has been improving. You've been launching some new marketing initiatives that seem to be gaining traction. Is there any color on how that's benefiting brand awareness in those markets where you're deploying that? Or just what tactics are proving most effective? Maybe you could expand a little bit on that.
So the longer story is that we piloted sort of a suite of marketing initiatives last year. And by even going longer back, the company hasn't been big into the marketing game. We've been more word of mouth, sort of guerrilla marketing, sort of social media only. And we kind of like that posture. We like being the discovery of the brand. And we like our customers thinking that we're sort of the neighborhood location that they found. But now we're getting big enough where we can't really rely on that as much. And so we piloted a suite of things last year. And then this year, in about a third of our system, we unrolled a more coordinated plan. We sort of took the pilot results last year and said, how do we mix these with Connected TV, with social media, with direct contact?
And we were also able to expand some of our contacts through data that was available to us through others. So not only our own rich database, but also helped to identify customers who maybe had a propensity to dine out for breakfast, but weren't necessarily in our database, or more density around the restaurants in terms of contacts and that sort of thing. So I think that the combination of those things on a more coordinated basis motivated a lot of response. And in the markets where we've offered that additional marketing, it's proven that those restaurants have outperformed the rest of the system. And so we're delighted to see as we sort of grow into a new era for the company, we're delighted to see that there is a response to the customers or from the customers to our marketing and our style of marketing.
All right, that makes a lot of sense. We talked about value for a second there, but just critically important, seems critically important in a current consumer backdrop. And that value equation, sort of what you pay versus what you get. And maybe we could start in the denominator of that equation and maybe talk about some of the investments that you've made this year into the guest experience or even the last year or two and how that might be driving any tangible improvement in sort of your internal guest sat metrics?
So we want to delight the guest. So we have some benefits that allow us to do that. One is we're operating in one shift. So our crews get a lot of reps in. It's one menu, one shift, one team. They're getting a lot of reps in, which allows us to upgrade the service to the customer a great deal. We have a lot of control over both the training and the expectations of the staff, and they learn to operate well as a team. So mark that up as one important piece that our consistency of great service in the restaurants is very important to customer satisfaction. Then we also think about what we call investing in the guest.
Early in the year, for example, we increased the size of our entrees, a couple of the entrees in order to just improve the value equation without changing the menu price, adding a couple of slices of bacon or something like that. But we increased the volume for that piece. But we also did some other things like, for example, during COVID, we quit serving coffee to guests who were waiting for a table. And if you've been to a First Watch, so you know you can wait for a table, particularly during our peak hours on Saturdays and Sundays. And so we had gone away from it because customers didn't like that extra interaction with people, social distancing and all that. And when we went away from it, we kind of let it go away from what we did ordinarily. But we reintroduced that now.
So when people are on a wait, we'll serve coffee to them, complimentary, to just improve that experience, and then we've upgraded our app, so our app that people add on their phones, which includes enhancements to the waitlist where we have app-ahead seating and somebody can kind of see where they sit in that. We changed the platform so that over time we can engage more with the customer through the application as it goes forward, so we've done those things that I think are probably particular to us and are very First Watch-y, and You First is the phrase that we use in our company. We try to be sure that what we do puts others first.
We think of that as long-term investment for that customer who's going to be there for the next five and ten years as opposed to just trying to hit a target for a quarter or a period.
Yep, yep, understand. On menu pricing, I want to ask a question on just how do you think about that. So on the one hand, really menu pricing and affordability. But on the one hand, you've taken quite a bit less pricing than your peers looking back over the last five years, maybe 10%-15% less depending on who you're comparing yourself to. On the other hand, your average check is around $17, in that ballpark, which some may view as expensive for breakfast. So I guess walk us through that decision tree you've kind of been working through this year. What are some of the data points that give you confidence in your pricing power, et cetera? Maybe just walk us through.
Look, I get the question about pricing all the time. It has a lot to do with how we project inflation to go for the year. But we don't price necessarily to offset all inflation. We price to offset what is, I call it defending the margins, but we price to offset what we think is a permanent type inflation, and we'll take to our margins something that we think is temporary or something like that, so I think that's kind of part of our pricing philosophy is to just be sure we're there every day with that kind of decision, but you ask about the decision tree. It first starts with what do we think is going to happen and whether it's permanent or not in terms of our cost structure.
And then how much of that do we believe is the permanent piece for which maybe we need to defend our margin? Frankly, what's been helpful to us in the last several years has been the operator's emphasis on more throughput and efficiency so that while we might not be able to lever commodity costs as much, we're able to lever the labor costs a little bit more just by making sure that we have the right staffing in the restaurants, that the choreography between the front of the house and the back of the house is optimized, and that people understand how to measure and manage their crews better. So some of the tools that we've brought on the last few years have helped us to manage through some of that as well. So our operators are a pretty proud group. They don't like being outperformed by other restaurants.
Yep, yep. Well, I guess dovetailing off of menu pricing, maybe we'll talk about food cost inflation a little bit. I think this year up around 6%, if I'm not mistaken. There were some big impacts from eggs and bird flu, but also coffee, avocados, bacon, the list goes on.
Four big ones, yeah.
Four big ones. So we've also seen some big breaks in the second half. And so maybe you could walk us through some of the puts and takes just within the basket as you see it. And do you have any first takes on what 2026 looks like or the potential for any kind of slight deflation you might be seeing?
I'll tell you what I think, but that hasn't been worth very much when people ask me how good I've been at predicting inflation. We started off the year, I think the first half of the year, we were probably north of 8% in terms of inflation, and you named them. We were at historic highs on bacon, avocados, coffee, and then the eggs were affected by a huge resurgence in avian influenza. We have enjoyed some relaxation in that over time, and now I think we're expecting it to be 6% for the full year, so it's come down a bit. Going into next year, we're in conversations with suppliers now on what we believe is going to be some, what's going to happen with those commodities next year. Bacon remains high.
Coffee remains high, but we've seen a lot of, we enjoyed a lot of crop and egg production or restoration of laying flocks in the back half of the year. I feel optimistic about where that would go. Next year, you among others mentioned to me you're going to see some deflation in your overall costs. I've never worked in this company when there was actually deflation, but we are coming off some highs, and we're trying to get a good handle on it. We have pretty good insight into where things are going for the next 45 or 60 days, which is going to inform how we think about pricing and our budgets for next year, but there's a lot to be learned from the way the inflation has flipped around the last couple of years.
As I said before, I've been a poor estimator of it, frankly, even though I feel like I know as much as anybody about our market basket.
We won't hold it against you because it's been quite volatile and hard to predict.
And I'm paid to worry about everything. So I do. I'm mission accomplished.
Well, maybe on the wage growth front as well, just wage inflation. I think you've been seeing around 4% this year in 2025. But you obviously have a big presence in Florida. And Florida for many years has been on this path towards $15, which I think they'll hit next year. And then kind of rising from at a CPI rate from there. Is there a reason for optimism that looking out over beyond 26, but thinking over like a multi-year timeline that you think maybe you'll see sub 4% inflation or maybe there's some offsets you do have to put up?
I don't want to put a figure on it, but I do think it's going to stabilize. I mean, what I remind people of is that when we have a $1 increase in the minimum wage in the state of Florida, for example, where we have a large concentration of restaurants, it's not just on that $15 person, right? It's also half of our staff are subject to tip wages. So it's a $1 on what is probably a sub $5 minimum wage for tipped employees. So just the math is the inflation of wages because of regulatory increases in the state of Florida is really more profound than just a $1 on $14 or a $1 on $15. So I think people sometimes underestimate that.
The other thing that I think, and I go back to what our operators, I give them a lot of credit for, has been their focus on efficient labor in the restaurants, holding each other accountable, and using data that's been provided by some of the IT investments that we've made in the last few years, including the KDS system, which gives us service time, better service time data, more complete service time data, and allows them to manage their crews. So as we've learned to use data better, they've deployed it in the restaurants and they've seen some improvements in the overall labor. And you really start leveraging labor when your transactions are ascending, which is what's important to us because labor doesn't move linearly with your transactions.
If we have a server in the back of the, excuse me, if we have a cook in the back of the restaurant making 44 entrees an hour and suddenly that cook has to make 47 entrees an hour, we don't go out and get another cook. They're just some built-in efficiencies. So increasing transactions are helpful to leveraging labor.
Yep. All right. With the time we have left, maybe we'll touch on unit growth, obviously a very important piece of your story. You talked about targeting 10% plus annual growth. Your new units continue to open above your existing AUVs. Maybe just unpack some of the factors that are driving that really strong new unit volume growth in recent years.
Sure. I would say that the development team is just as data-driven as our operators, so as we've selected new sites and as sites are coming available to us, we're getting more and more knowledgeable about what are the success factors in the restaurants, either the larger footprints, which have had to change some of the choreography in our restaurants. There's a lot of second-generation space that's been available to us this year and will be in the next couple of years. As we've changed the choreography of the restaurants, that's allowed us to have more confidence to move into bigger footprints, whereas probably seven years ago, the average size of a new unit might have been 4,200-4,300 sq ft. Now we're seeing a lot of much larger sites because brands have vacated good locations or they've come available to us.
As we've understood how to be confident moving into some of those spaces, each one different from the other and our ability to operationalize them and to have the same kind of service delivery that we're used to in all of our restaurants, that's enabled us to move into locations that I think are frankly smarter than the legacy fleet, and so we've seen continuing improvements in terms of both our expectations of the restaurants and their delivery on those. It's been very exciting.
Yeah, yeah. Well, I'll squeeze one more in before we wrap up. So in addition to talking about unit growth and the rates, you're targeting a cash-on-cash return of around 35%, maybe just for, again, folks who might be new to the story. Walk us through the details within that target. And maybe you could also just quickly touch on the free cash flow outlook. Obviously, 2025 was hit by the margin compression, especially in the first half of the year. But how do you think about free cash flow going forward?
Okay, so real quick, this is sort of the big equation that we have on restaurants. And this is for any restaurant that, with the average for any restaurant that we open, we don't relax the return criteria. So typically speaking, the average is that by the third year, they get to about $2.6 million in sales. It costs us about, generally speaking, about $1.75 million after some TI dollars to construct a restaurant or to put it in place. If we, in that year three, if we deliver on that 18%-20% Restaurant-Level Operating Profit, which is four-wall EBITDA for those who are more familiar with that term, that generally gets us to that near 35% or above cash-on-cash return. It's generally a return on investment of about the same thing. And that's what we go for.
So if we pay more for a restaurant and we like the site characteristics, we have to expect more of the sales figure. We need it to deliver more at the top line. We don't relax the return criteria. And by staying in those boundaries, we're able to fairly consistently predict the performance of the restaurants over time. So in terms of our growth and the free cash flow, if you look at our statement of cash flows or something like that, we want the operating cash to pay for the construction of new restaurants. 2024, I think, was maybe the first year we hadn't done that. But our goal is we'll leverage for strategic acquisitions. We bought out a number of our franchisees over the course of the last several years.
But we want, and we design the system so that the operating cash pays for not only the investment in new restaurants, but also the investment that we have to make in the fleet annually in order to make sure that we don't let any of them get behind in terms of the image or that we don't come up on a day when we have some regrets about the appearance of the restaurants. We want every restaurant to look bright and appealing. And so that's our philosophy.
All right. Well, unfortunately, we're out of time, but thanks so much for your time today, Mel.
Thank you. I appreciate it. Always good to see you.
You too.
Thank you.
Thank you.