First Watch delivered another strong quarter of sales and traffic gains, illustrating consumers’ appetite for brunch remains strong – despite an increasingly uncertain macroenvironment.
Headlines from the company’s Q1 2023 include a systemwide sales increase of 23.6%, driven by same-store sales growth of 12.9% and traffic growth of 5.1%, which executives said exceeded their expectations. Restaurant-level margins grew to 21.2%, from 19.6% over the same period last year. Total revenues increased by 22.1% to $211.4 million, from $173.1 million in Q1 2022. Additionally, the company opened 10 new restaurants in seven states in Q1.
During the earnings call Tuesday morning, CEO Chris Tomasso said the company is continuing to focus on growing traffic share and much of that transaction growth has come from the company’s dine-in business as executives noted “softness” in the off-premises business.
“Most of the transaction pressure came from the off-prem business. The declines were sequential since about the middle of the quarter. At the same time, dining room traffic is recovering to pre-pandemic levels,” CFO Mel Hope said during the call.
Tomasso added that off-premises business has become a “bellwether” of check management.
“For years, the industry has focused on check management as signs of the consumer feeling some pressure. Let’s be honest, third-party delivery occasions are very expensive,” he said. “It doesn’t surprise me that’s where we see the consumer starting to pull back. It’s a discretionary occasion, so it’s not a surprise to us. We’re happy to have more people in our dining room.”
Hope said this off-premises pullback has impacted not just delivery transactions, but also takeout transactions, though he said many of those takeout customers are shifting to the dining room. Because of this shift, Tomasso added that the company is “focused on the dining room more than ever.”
“We believe off-prem is an incremental occasion for us. Over the last two years, off-prem has been a way to introduce First Watch food to new customers and as they become more discretionary and … if we wowed them with our food, and hopefully we did, we get them to come into the restaurants,” he said.
Although the company’s consumers appear to be “more discretionary,” First Watch isn’t seeing any behavior changes from its dine-in cohort, and Tomasso said beverage attachments are actually up, while sharables remain steady. As First Watch sharpens its dine-in focus, it will continue to “lean into menu innovation.” That includes innovation around its alcohol program and sharables, as well as its successful seasonal menus. Alcohol is now available in 87% of the company’s restaurants and is trending at around 6% of the sales mix.
The company is also balancing menu pricing to maintain its positive traffic. Q1 pricing came in at around 6.9%, which is over a full percentage below the full-service category average.
“We don’t consider where we are to be aggressive. We still feel like we’re lagging when you look at what everyone else is taking [for pricing],” Tomasso said. “We still believe we have pricing power and feel good about where we are from a relative value standpoint.”
Hope believes this well positions First Watch as the economic picture remains murky, and as predictions of a recession linger.
“We’re already well positioned with regard to pricing if there is a recession,” he said. “But if people become more discriminating about where they’re going to use their dollars, they’re typically choosing restaurant brands they trust, and I think we’re well trusted and that puts us in a good position if we face a recession.”
First Watch this week acquired six franchised restaurants as per its intent to drive long-term growth through a company-owned footprint. The restaurants are all located in the Omaha, Nebraska, market, and the company expects this accretive acquisition to deliver about $1 million in adjusted EBITDA for the balance of the year. As of this week, First Watch has 14 franchisees operating 109 restaurants and, of those, 60 are subject to purchase options. The franchised restaurants, executives said, perform in line with company owned restaurants.
“These franchisees have done an incredible job of introducing the brand to new markets. The restaurants look and feel exactly like company-owned restaurants,” Tomasso said. “This [franchise acquisitions] is an efficient use of capital. We’re predominantly company-owned and we want to move that way.”
Contact Alicia Kelso at [email protected]