Business context and reporting period
First Watch Restaurant Group, Inc. operates and franchises daytime restaurants serving breakfast, brunch and lunch. This Form 10-K covers the 52-week fiscal year ended December 25, 2022—not standalone 2022 Q4 results. The company reported one operating segment and operated 366 company-owned and 108 franchised restaurants across 29 states at year-end.
Financial and operating performance
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Total revenue | $730.2 million | $601.2 million |
| System-wide sales | $914.8 million | $750.7 million |
| Same-restaurant sales growth | 14.5% | 63.0% |
| Same-restaurant traffic growth | 7.7% | 52.6% |
| Income (loss) from operations | $16.9 million; 2.4% margin | $22.2 million; 3.8% margin |
| Net income (loss) | $6.9 million | $(2.1) million |
| Adjusted EBITDA* | $69.3 million; 9.5% margin | $66.3 million; 11.0% margin |
| Cash from operating activities | $62.9 million | $63.0 million |
Revenue grew 21.5%; company-owned restaurant sales rose 21.4%. AUV increased 13.8% to $2.0 million. Restaurant-level operating profit* rose 11.7% to $128.9 million, while its margin declined from 19.5% to 17.9%. Food costs rose to 24.0% of restaurant sales from 22.7%, and labor costs to 33.1% from 31.9%.
Capital expenditures were $62.2 million, compared with $35.3 million in 2021; operating cash flow less capital expenditures was approximately $0.7 million. Cash and cash equivalents were $49.7 million. Term-loan principal outstanding was $98.1 million, at a 5.89% interest rate; the $75 million revolver was undrawn. Total debt on the balance sheet, including finance leases and a financing obligation and net of issuance costs, was $100.9 million. Operating lease liabilities were $405.0 million. The company reported compliance with credit covenants at year-end.
*Adjusted EBITDA and restaurant-level operating profit are non-GAAP measures; see the filing for reconciliations and limitations.
Material changes versus the prior year
- Same-restaurant sales and traffic growth slowed sharply from 2021’s pandemic-recovery comparisons, but remained positive; 2022 same-restaurant sales were 29.6% above 2019 and traffic was 6.5% above 2019.
- Higher sales and 29 company-owned openings supported revenue and restaurant-level profit growth. However, inflation and increased staffing costs compressed restaurant-level and company operating margins.
- Net income improved from a loss to a profit, aided by interest expense falling to $5.2 million from $20.1 million following the 2021 refinancing and debt repayment. Operating income nevertheless declined.
- Cash from operations was nearly flat, while investing cash outflow increased with restaurant development and technology spending. Year-end cash declined by $2.2 million.
Outlook, risks, contingencies and unusual items
- Management expected 38–42 company-owned and 10–12 franchise-owned openings in 2023, with three company-owned closures, for 45–51 net system-wide additions. Planned 2023 capital expenditures were $100–$110 million.
- Management expected 2023 market-basket inflation of 4%–6% and hourly labor inflation of 9%–11%. A 4.1% in-restaurant menu-price increase took effect in late January 2023. The company had locked prices on about 15% of its market basket; it did not hedge commodity or interest-rate exposure.
- Management said available cash, operating cash flow and credit availability should meet liquidity needs for at least 12 months. A hypothetical 100-basis-point interest-rate increase was estimated to add about $1.8 million to interest expense over the next 12 months.
- Key risks include food and labor inflation, supplier concentration (including single suppliers for eggs and coffee), supply interruptions, consumer demand and pricing sensitivity, staffing, restaurant-development execution, geographic concentration in the Southeast, food safety, cybersecurity, and variable-rate debt and covenant compliance.
- Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end because of material weaknesses in the control environment, period-end reporting, income-tax accounting and IT general controls. Remediation measures were underway but were not yet considered complete. The auditor audited the financial statements, but was not engaged to opine on internal-control effectiveness.
- The company is participating in Delaware’s voluntary disclosure program concerning unclaimed property; any potential loss was not reasonably estimable. The filing identifies ordinary-course legal matters but says their resolution was not expected to materially affect the company. Hurricane Ian-related costs were partly offset by insurance recoveries. No goodwill or asset impairment was recorded in 2022.
- Advent beneficially owned approximately 70% of outstanding common stock. The company did not expect to pay dividends in the foreseeable future. In February 2023, the credit agreement was amended to transition from LIBOR to SOFR.
Important facts for investors to verify
- Review subsequent quarterly results for evidence that traffic, pricing and sales growth are holding up as inflation and pandemic comparisons normalize.
- Track food and labor cost trends, menu-price effects, and whether margins recover from their 2022 contraction.
- Assess execution and funding of the 2023 opening plan and $100–$110 million capital-spending program against cash generation and debt capacity.
- Monitor remediation and testing of the disclosed material weaknesses, along with any changes to reported results or controls.
- Follow the Delaware unclaimed-property review, supplier continuity, floating-rate debt exposure and Advent’s control and share sales.