First Watch Restaurant Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2023; comparisons are with the thirteen weeks ended March 27, 2022. First Watch operates and franchises breakfast, brunch and lunch restaurants. At quarter-end it had 370 company-owned and 114 franchise-owned restaurants in 29 states.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $211.4 million | $173.1 million |
| Restaurant sales | $208.0 million | $170.7 million |
| Income from operations | $15.3 million; 7.4% margin | $7.8 million; 4.5% margin |
| Net income | $9.4 million; $0.15 diluted EPS | $4.6 million; $0.08 diluted EPS |
| Operating cash flow | $21.1 million | $8.0 million |
| Capital expenditures | $14.5 million | $11.4 million |
- Revenue increased 22.1%; system-wide sales rose 23.6% to $264.7 million. Same-restaurant sales grew 12.9% and traffic grew 5.1%.
- Restaurant-level operating profit, a non-GAAP measure, rose 31.9% to $44.1 million; its margin improved to 21.2% from 19.6%. Adjusted EBITDA, also non-GAAP, increased 41.6% to $27.4 million, with a 13.0% margin versus 11.2%.
- Food and beverage costs declined to 22.4% of restaurant sales from 23.1%; labor costs increased to 33.0% from 32.3%. Management cited menu pricing, sales leverage and lower pork and avocado prices as margin supports, partly offset by higher wages and staffing.
- Cash and cash equivalents were $54.4 million at quarter-end. Long-term debt, net of issuance costs and including the current portion, was $99.0 million; the term loan balance was $96.3 million. The $75 million revolving facility was undrawn. Operating lease liabilities totaled $411.2 million.
Changes, outlook and key risks
- Net income more than doubled and operating margin expanded, while interest expense rose 89.6% to $1.9 million, primarily due to higher rates. The term facility rate was 6.64% at March 26, 2023. The credit agreement switched from LIBOR to SOFR effective March 27, 2023.
- Management expects 2023 commodity inflation of 2%–4%, hourly restaurant wage inflation of 9%–11%, and overall restaurant-level labor inflation of 8%–10%. It estimated 2023 capital expenditures of $100–$110 million, primarily for new restaurants and remodels. The filing gives no specific full-year revenue or earnings guidance.
- Management said liquidity, operating cash flow and credit availability should meet needs for at least 12 months. Q1 results benefited from menu price increases, stronger traffic and favorable comparisons, including prior-year Omicron effects and a calendar shift. Management noted tougher traffic comparisons later in the quarter.
- The company opened 10 system-wide restaurants in Q1. On May 1, 2023, it acquired six restaurants and related franchise and development rights for $8.2 million in cash.
- Disclosure controls were deemed ineffective because previously identified material weaknesses in internal control over financial reporting remained. Management reported remediation work but said weaknesses would not be considered remediated until controls had operated effectively for a sufficient period and were tested.
- The company is participating in Delaware’s voluntary disclosure program regarding unclaimed property; any potential loss is not currently reasonably estimable. Ordinary-course legal matters were not considered material. Other cited risks include food and labor cost inflation, labor availability, restaurant expansion execution, consumer demand, long-term lease commitments and indebtedness.
Important facts for investors to verify
- Whether traffic and same-restaurant sales momentum persist as comparisons become more challenging, and how much growth depends on menu pricing and new openings.
- Whether labor and commodity inflation remain within management’s stated ranges and how those costs affect restaurant margins.
- Progress and testing of remediation for the disclosed internal-control material weaknesses.
- Actual 2023 capital spending, restaurant opening pace, debt costs and liquidity after the six-restaurant acquisition.
- Developments in the Delaware unclaimed-property review, for which the potential loss is not estimable.