Business context and reporting period
First Watch Restaurant Group, Inc. operates and franchises daytime restaurants focused on breakfast, brunch and lunch in 29 U.S. states. This unaudited Form 10-Q covers the 13 weeks ended September 25, 2022, compared with the 13 weeks ended September 26, 2021; year-to-date figures cover 39 weeks. The company had 356 company-owned and 103 franchise-owned restaurants at quarter-end.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Total revenue | $186.9 million | $157.4 million | $544.4 million | $438.6 million |
| Operating income | $2.6 million | $7.2 million | $15.4 million | $23.3 million |
| Net income | $46,000 | $783,000 | $7.4 million | $2.5 million |
| Operating margin | 1.4% | 4.6% | 2.9% | 5.4% |
| Adjusted EBITDA (non-GAAP) | $17.0 million | $17.0 million | $54.2 million | $52.1 million |
| Adjusted EBITDA margin (non-GAAP) | 9.1% | 10.8% | 10.0% | 11.9% |
Q3 system-wide sales rose 19.2% to $235.2 million; same-restaurant sales grew 12.0% and traffic 3.7%. Restaurant-level operating profit, a non-GAAP measure, increased 5.4% to $31.9 million, but its margin declined to 17.3% from 19.5%. For the 39-week period, same-restaurant sales rose 17.0% and traffic 10.6%.
Food and beverage costs were 24.2% of restaurant sales in Q3, up 1.1 percentage points year over year; labor costs were 33.3%, up 0.7 points. The filing does not report a single consolidated gross-margin measure.
Cash, debt and liquidity
- Cash and cash equivalents were $49.4 million at September 25, 2022, versus $51.9 million at December 26, 2021. Cash from operations for the 39 weeks was $46.6 million, compared with $44.3 million.
- Capital expenditures were $45.0 million year to date, versus $27.1 million; investing cash outflow totaled $45.7 million. Cash and restricted cash decreased $2.5 million over the period.
- Management reported $98.8 million of outstanding borrowings, excluding unamortized debt issuance costs, and $75.0 million available on the revolving facility. The balance sheet reports $5.6 million current and $95.9 million long-term debt, net.
- Operating and finance lease liabilities totaled approximately $400.7 million. The company had approximately $35.0 million of executed operating leases not yet commenced.
- Management said cash, operating cash flow and available credit should meet liquidity needs for at least 12 months. It estimated 2022 capital expenditures of $60 million to $70 million.
Changes, outlook and risks
- Revenue growth reflected comparable-store sales, menu price increases, delivery sales and restaurant openings. Eleven system-wide restaurants opened during Q3: seven company-owned and four franchised.
- Operating income and margins fell despite higher sales, primarily due to commodity and supply inflation, higher wages and staffing, and increased public-company, stock-compensation and other corporate costs. Lower interest expense supported year-to-date net income growth.
- Management expected market-basket inflation of 12% to 14% in Q4 and restaurant labor-cost inflation of 8% to 10% for the balance of the year. No specific revenue or earnings guidance is provided in the supplied filing text.
- A secondary offering by Advent-affiliated selling stockholders generated no proceeds for the company; First Watch recorded approximately $1.6 million of related costs. These costs contributed to Q3 transaction expenses and tax effects.
- The company committed to approximately $9.5 million of minimum product purchases under a vendor agreement. Potential liability from Delaware unclaimed-property matters was not reasonably estimable; the company entered the state’s voluntary disclosure program and was evaluating its options.
- Disclosure controls were deemed ineffective because previously identified material weaknesses in financial reporting controls remained unremediated. Management said additional post-closing procedures supported fair presentation of the reported financial statements; remediation and testing were ongoing.
Most important facts for investors to verify
- Whether food, labor and other cost inflation moderates, and whether menu pricing can sustain restaurant-level margins.
- Execution and returns on restaurant openings and planned $60 million to $70 million of 2022 capital spending.
- Debt balances, revolver availability, lease commitments and cash-generation capacity as expansion continues.
- Progress in remediating material weaknesses and achieving effective disclosure controls.
- Resolution and any potential financial exposure from the Delaware unclaimed-property review.