Okay.
Yes.
Oh, we started.
I think we might be starting.
Oops, sorry.
Can everybody hear us? Hello, hello everybody. Good morning. It makes sense that First Watch has a morning slot. That seems appropriate.
You bet.
My name is Greg Francfort. I'm the Restaurant Analyst at Guggenheim Securities. I am very pleased to have the First Watch management team, CEO Chris Tomasso, and CFO Mel Hope with me. I am going to read the safe harbor statement for the lawyers. Please see First Watch Restaurant Group's forward-looking statements disclaimer in its 3Q25 earnings release, available on its investor relations website at investors.firstwatch.com.
Management's remarks today may include reference to various non-GAAP measures, including restaurant-level profit, operating profit margin growth, adjusted EBITDA margin. Investors should review the reconciliation of these measures to comparable GAAP measures contained in the release. Now that we have that out of the way, I think you guys have a video to share with us to start, and then we'll go from there.
You keep on running around. I've had enough of these games.
Run around, run around, got a lot of tools, and I still got the crown like a bad tooth. I am cool, I don't gotta act cool. Just follow where I lead you, pack you. Blowing through the budget, the cash ain't nothing. The way I flip bags, straight tens from the judges. Yummy, too big, can't flinch it. Probably gotta plunge it. Word is, this hate is in the making. Word is, I'm bringing home the bacon. Word is, they don't see what it takes to make it.
Put the word on the streets, I'll make it look easy.
My father.
My dawg paid you.
Word on the streets, I'll make it look easy.
I'm an actual tool, it's far too easy.
Word on the streets, I'll make it look easy.
Easy.
Easy.
Easy.
Word on the streets, I'll make it look easy.
Too easy.
Make it look easy, but it's not easy. Without wings.
Yeah, I feel like Ron Weasley.
Live like kings.
Feel the money ain't measly.
It's like staying, honey, you cannot be me.
It is so casual, must be a natural. Heard him say, "Yeah, it was gradual, but it's diagonal going up." Being the capital, super compatible, got me like, "Easy."
I think that song was right off of Mel's Spotify playlist, right?
Mel's Spotify is a...
You guys pre-announced some of your results for the fourth quarter this morning, giving comps, traffic, and unit openings. Maybe, is there any other color you want to add to that? A little bit softer comps than last quarter, which were very strong up seven comps. Any regional or industry? Any thoughts just generally on maybe what took a couple points of a step back?
The fourth quarter was obviously under some pressure. We were optimistic about our traffic coming out of the third quarter that we had, but we finished the year strong. We were positive in traffic for the full year. We were positive in same restaurant sales each month of the quarter, so we enter the year with a little bit more momentum than I understand some of my peers may be facing, but we're excited about 2026.
We did also have positive same restaurant sales for each period in the quarter.
Got it. Yeah. Okay. And maybe take a little bit of a step back on the story. I mean, the last three years, you guys, revenues are up 65%, EBITDA is up 75%. What do you think have been the big wins since you went public, and what are the big things you're proud of what you've accomplished?
I think the big wins are the same as before we went public, which is, it's a result of our focus. The tremendous growth has been a result of our focus on disciplined, thoughtful new unit expansion. We're growing at about a 10% clip every year. Those restaurants are performing very well, which hopefully we'll talk about a little bit later.
The focus on operational excellence, which has led to positive same restaurant sales, positive same restaurant traffic, as Mel mentioned, for not just this year, but for over the long term. And then also strategic franchise acquisitions that we've done over the last, call it, 18 months, where we've bought in some of our franchisees and brought them into the corporate system. So I think that mix of strategy, tactics for us within our strategy is what's led to the growth that you're talking about.
So since going public, I mean, we've doubled our EBITDA. We've added about 250 restaurants to the mix. We've entered a number of new markets successfully. So we feel like we're running on all cylinders.
Yeah, and unit growth has obviously been a huge part of that, but on the traffic side, you had a little bit of a softer 2024 and a better 2025. I guess, what do you think changed? What were you able to do to get traffic to improve to positive in 2025?
Yeah, we talked a lot last year and kind of coming into 2025 about this kind of crawl, walk, run scenario as it related to getting more into marketing than we had in the past. And so we've always been a word-of-mouth concept. We've grown through word-of-mouth. If you look at our S-1 when we went public, we have very low brand awareness, but have had many, many years of positive same restaurant sales and traffic.
And so that's always kind of been through word-of-mouth. What we've added now in the last, call it, 18 months to our arsenal is a marketing acumen that we didn't have before. And that's built on a base of data that we didn't have before. So we know much more about our customers than we ever have. We can be so efficient in what we're doing.
We spent much of 2025 testing a number of different approaches to that. We're able to do it now in a way that is so much more efficient than, say, 10 years ago. There used to be the question about media efficiency, and it would be impossible for a concept like ours to get to media efficiency years ago. Now, I mean, we're targeting households in what we're doing, whether it's through Connected TV, digital, social, those types of things. It's just made us better and stronger.
Then what we've learned through the testing has really been about the timing of the messaging, the recipients of the messaging, kind of these lanes that we're in, and all the different inputs that happen. Again, nothing new. We've talked about this.
We're targeting competitive visitors, different levels of frequency, and then the time of day, and even the time of year. And through our menu innovation, what's the consumer looking for at that time of year? So obviously, this is New Year's resolution time, and we're a perfect place for that, for somebody to come and start the year off with a jump start, as we call it, and eat healthy at First Watch. So we tailor and target our messages like that.
The Kale Tonic is a big part of my New Year's resolution here. Maybe just because you mentioned it just on customer data, what portion of your customer base or how many customers are you able to get data on today, and how are you using it? And what do you think that going forward the next couple of years, what are the big ways you unlock analyzing your customer, knowing who's coming in the door, and then marketing back to them? Because this is going to be a big part of the focus, I think.
Yeah, I think from our owned data to syndicated data and credit card data that we're able to leverage, for example, putting your name on our wait list, which about 50% of our customers do on the weekend. We're on a wait on weekends typically in every restaurant, and 50% of our customers get seated through that wait list.
Well, you give us your phone number, and then you're seated, and we are able to track that check to that person who checked in, then credit card data and order, what they're ordering and all type of things. So we're able to build these profiles of customers, plus our email database and some other tools that we have. We now have seven million records that we feel really good about and having different points, whether you use our Wi-Fi, download our app, those type of things.
And we just didn't have that before. So whereas we used to send out kind of broad-scale messaging that supported the brand, it wasn't specific to the consumer and maybe how they used us and when they used us. And so we're just able to do that better now. And we'll continue. I mean, this process for us has been iterative, the whole thing. I mean, we're constantly updating it and refining it.
And it's exciting. We keep getting better and better. So what we've talked about is what we tested last year, we're looking forward to implementing further. We only put it in about a third of the system last year. And so for 2026, we're looking forward to expanding that. Yeah. As we learn to tailor our marketing more toward that data set, that's going to be a big unlock for us.
Got it. One of the other changes you made, you made some changes to how you're approaching third-party delivery, I think at the beginning of this past year. Can you talk about maybe what that did for you and how it played out similarly versus maybe unexpectedly from what you guys were thinking about?
Sure. Yeah, we partnered with our largest third-party provider and really sat down with them for a strategic session. That said, they let us know that they need us. There's not a lot of delivery players in our day part in the morning like there is at lunch and dinner.
And it was increasingly becoming a bigger part of our business. And so it was an accommodation strategy for us going forward, but still wanted to work with them on how can we optimize this. And we had continued to increase our surcharge to try to offset some of the fees that we were paying to the third-party providers.
I mean, basically, we just reworked the partnership in such a way where they came to us with some data that said, "Hey, if you put your surcharge in this range, we have found that to be the sweet spot to really drive transactions," which is what we look for is to drive the transactions. So it really amounted to us kind of adjusting our surcharge, which showed up in our PPA, by the way.
It might have looked like we had negative mix last year, but it was actually the surcharge from third-party coming down. But it did increase our transactions. Obviously, it increased our revenue and our margin. So everything we set out to do in revisiting that partnership with them has played out. So we weren't really surprised by what happened. We took their insights and their analysis and applied it to our business.
And so we did see significant double-digit growth in that category that we'll be lapping here in February. But we still think that there's opportunities to incrementally grow that channel for us as we go forward. Obviously, we love when people come in the restaurant and we can deliver the full experience. That's really where we make hay and how people think about us.
But we want to meet the customer who's doing the third-party and deliver. And it wasn't just those changes that we made. It was how we operated too in third-party. We have very high customer satisfaction scores on the third-party. We're among the best of their order accuracy and quoting wait times, pickup times. And that just helps with the algorithm and helps us show up better when people do open the platform. So all of those things combined have led to that being a big driver for us.
Maybe then shifting to the in-store experience, and you guys put alcohol in the restaurants in late 2020. I think it was late 2020. Where has that been as a percentage of sales more recently? Or what has that done to your experience, and any other major menu holes that you think need to be addressed or that you're thinking about going forward?
Yeah, I think from the start, I said that alcohol, the introduction of alcohol for us was to eliminate a veto vote. Obviously, there's been a lot of transition in the alcohol environment over the last couple of years. So I'm glad that we stayed true to being a food-forward breakfast, brunch, and lunch concept that also happened to serve alcohol.
There's a lot in our space that are alcohol-forward and serve food. So they might be struggling with that a little bit more than we are. Our mix has stayed about the same. And again, it's something we're happy to offer to eliminate a veto vote. But if you think about our juice program, and by the way, there's Kale Tonics back there if you didn't know.
It's actually very good.
If you think about our juice program, others might call that a mocktail. We've been doing that for 10 years now where we juice all these ingredients in-house every day. And it's now 15% of our mix. So between that, our other beverage offering, coffee is obviously our number one seller. And then the alcohol, we have a very robust beverage program. But it's true to the brand.
We're not getting into beverage platforms that might be popular in QSR and other places, but that are true to the brand. We get to leverage our core attributes of fresh produce in the restaurants every day. So it's nothing for us to be juicing beets and turmeric and all those things and making these great juices.
Maybe let's shift a little bit to the cost side of things. 2025 for you guys specifically, given your cost basket, was a bigger and more inflationary year. Can you walk through maybe what was the biggest components of that? And then how much i f that are we getting past that in 2026? And how do you think about how that plays out?
Sure. Early in the year, we were running 8%, 9%, 10% inflation on some of our key commodities. So coffee, avocados, bacon, and eggs were all extraordinarily high in our experience. During the year, we saw some of that moderate. For the full year, our inflation ran about 6%. So it's still high, but we saw some moderation in the second half of the year.
We still have a couple of commodities that are still, I would call, lofty. Our bacon and our coffee is still running a bit high. But we've seen a lot of moderation in eggs. And we have pretty good vision into what our prices are going to look like for the year because we negotiate the price for a full year on our eggs. So we're ahead of that in advance.
So we have pretty good visibility, and we calculate or factor that all into our modest pricing strategy for the year. Our goal is always to defend our margins. Our restaurants do 18%-20% on a consolidated basis in terms of their restaurant-level operating profit. So we try to defend that margin over time through our anticipation of what is permanent kind of inflation or the stickier kind of inflation.
If we think it's temporary, we'll take some of that on the margin, which we saw in the first quarter of last year and with the expectation that it'll come back to us without us getting ahead of our customer.
Got it. And then maybe the other big cost bucket would be labor. I guess it has probably felt the last 10 years like that was permanent inflation. I don't know. We'll see. But it seems like that may be changing. And you guys have some exposure to some big states where we've seen a lot of minimum wage increases that maybe towards the end of it. How do you think that plays out? And what are you seeing from a turnover perspective in your restaurants?
Minimum wage inflation, regulatory minimum wage inflation has gone up as a regulatory matter. We saw about 4% increase in our overall labor costs last year. We should be rolling off some of those regulatory increases over time. But that's also a factor into how we'll price things on the menu so that we offset it. We have different pricing tiers for different markets so we can address a different kind of inflationary environment in the state of Florida than maybe we might experience in Chicago or somewhere else.
So we've got some flexibility there. But overall, we're still trying to think about defending that margin. In terms of turnover rates, our turnover rates have historically been below industry average. And we've seen a great improvement in those or declining turnover rates for about 10 straight quarters now. And I think that goes to a lot of things.
It's more than just pay. It goes to the environment that they work in, the opportunities they have in a growth concept like ours in order for the ambitious employees to pursue a career. They have an opportunity with us. If you work in restaurants and that's where you want to spend your life, First Watch is a place you might want to be because you have an opportunity to move up in the management because of the rate of growth and the opportunities to operate in new restaurants.
Got it. Thank you. And maybe just then taking a step back on the overall growth of the business and thinking long-term, you guys are a little over 600 stores now. You're past 600 stores now. Where do you think that could be long-term? And how do you approach that from a how do you build up and what analysis do you do to get there?
Yeah, we still see our previously announced total addressable market of 2,200. We still feel really good about that. And again, I use the words methodical and thoughtful on our growth rate. With the kind of returns that we're getting on our new restaurants, there could be a consideration or a bent to be more aggressive on openings.
But for us, it's really important to keep that balance of kind of the core system still delivering that positive same-restaurant sales and same-restaurant traffic, bringing in the new restaurants at the way they're performing. They're meeting or exceeding our underwriting targets. They're meeting or exceeding our average unit volumes. And their ceilings are higher.
They might be above average unit volumes now, but we actually believe from a growth standpoint, call it the class of the last seven to 10 years has more ceiling than maybe our early portfolio just because of where they were and what size they were. So we feel really good about that.
We have obviously a focus on a real estate pipeline and a people pipeline that have to be locked together in order to achieve this growth and do it in a quality way. I think we've all seen a lot of concepts that have grown too quickly and that made the whole concept wobble, and we're just being very thoughtful about this balanced approach to growth of new unit growth, but then also core system growth.
The people pipeline, frankly, is we could go out and find real estate sites easily, but having the people pipeline of veteran managers, which is what we use to open new restaurants in new markets, like we just opened in Las Vegas this year, we had managers move from Ohio and Texas and Arizona to help us launch that market.
As Mel said, it's because they want to be part of that next big market for us and see the opportunity. Our teams do a great job of staying in contact and being aligned along this growth platform. That's why we've been achieving what we have on those new restaurants.
You said in there that if you want to go out there and find sites, they are out there. So has that gotten any easier the last couple of years in terms of site availability? What are you seeing from a development cost inflation? And then Mel, maybe if you could update just where the ROI of a store looks like for First Watch today.
Sure. Well, when we underwrite a project, we're targeting an ROI that runs about 18%-20%. So it kind of mirrors our restaurant-level operating profit. Has it gotten easier? I don't know that it's easy to develop a new restaurant, right? I mean, you're prospecting for new sites and you're competing against everybody who wants similar kind of characteristics of their sites.
But what has become more prominent for us is to get into second-generation sites. A few years ago, there was a lot of commercial real estate development, new lifestyle centers popping up all over. And so first-generation sites, in-cap, great parking, place for us to put our patios and all those characteristics, were pretty frequent. Now we're seeing a lot more of these second-generation sites where somebody needs to get out of a lease or has gotten out of a lease. They're oftentimes larger footprints.
We have plenty of parking for those. But I think that we're on the call sheet for developers now when they're looking to replace a tenant in those kind of sites, and we are very nimble.
Our development team is gifted at going in, conforming our image and our operational back and front of house choreography, staging for it in those restaurants in a variety of situations, so that has actually been more prominent for us, so what I think people maybe don't appreciate about what we do is that because we are very selective, for every one restaurant we approve and develop, we're probably looking at eight or 12 different sites in either the trade area or the market that we can't get into or we choose not to because we just don't think they fit our profile.
When we land a restaurant, our success rate is very, very high because we are very disciplined about only going to those sites where they fit all of our characteristics and that we can count on the kind of returns that you talked about.
Chris, we have two minutes left. For how fast, from a unit growth perspective, you guys are looking at and have delivered the stocks at nine times EBITDA? Can you maybe talk about what you think is maybe underappreciated by the investment community and what you think could be an unlock to shareholder value going forward?
Sure. I think, first of all, I think that the growth to start with, I think, again, being the fastest-growing full-service restaurant company in America. I also realize that we don't fit nicely into any particular bucket when you're trying to consider us against others. But we have the growth of a fast casual, of a strong fast casual. We have solid performance over four decades and proven.
We're not saying we're going to do anything that we haven't been doing for years. And that was true at our IPO as well. So we've just got this long track record of success. I think the metrics around our new units and how they're performing, the way we've evolved the concept. But I realize, again, we're a party of one, right, a group of one.
And I love that for us from a brand perspective, but I think it might be a little bit of a hindrance in the public markets. But those that come to our restaurants and in the investment community that have experienced it for themselves, they quickly understand the differentiation between us and other public companies that serve breakfast.
I mean, it's two totally different scenarios. So yeah, I think, as I said, since going public, we've doubled our EBITDA and added 250 restaurants. And we're on that path to continue doing that. So I would say those two things. Yeah. That sustained growth, I think, is really the story. I mean, even since the IPO, the long-term guidance that we put out then about our growth, we've met all of those metrics.
I think that human nature is, right, to assume that the most challenging environment you've ever been in is the one you're in now. The company's track record of delivering in all kinds of climates and all kinds of economies has been remarkable, and I think today is just one more challenge, and we're doing well on it.
Chris and Mel, with that, we're out of time. Thank you all for being here. Thank you guys for spending some time sharing the story.
Thanks. Appreciate it.