First Watch Restaurant Group, Inc. — Q1 2022 Form 10-Q
Business context and period. The unaudited quarter comprised 13 weeks ended March 27, 2022, compared with the 13 weeks ended March 28, 2021. First Watch operates and franchises daytime dining restaurants in 28 states. At quarter-end it had 346 company-owned and 95 franchise-owned restaurants; seven system-wide restaurants opened during the quarter.
Financial and operating results
- Revenue: Total revenue was $173.1 million, up 36.1% year over year. Restaurant sales were $170.7 million; franchise revenue was $2.4 million. System-wide sales, including franchise restaurants, rose 35.6% to $214.1 million.
- Comparable sales and traffic: Same-restaurant sales growth was 27.2% and traffic growth was 21.9%. Versus Q1 2019, management reported growth of 26.1% in same-restaurant sales and 3.4% in traffic.
- Profit: Operating income was $7.8 million, compared with $3.8 million; operating margin increased to 4.5% from 3.1%. Net income was $4.6 million, or $0.08 per diluted share, versus a net loss of $2.0 million, or $0.05 per share.
- Restaurant-level and adjusted measures: Restaurant-level operating profit, a non-GAAP measure, was $33.4 million and its margin was 19.6%, versus $21.9 million and 17.5%. Adjusted EBITDA, also non-GAAP, was $19.4 million, up from $13.0 million; margin was 11.2%, versus 10.2%.
- Costs and margins: Food and beverage costs rose to 23.1% of restaurant sales from 21.5%, and labor costs to 32.3% from 31.9%. Other restaurant operating costs declined to 16.0% from 17.6%, and occupancy costs to 8.4% from 10.6%. G&A increased 63.7% to $19.6 million, including higher stock compensation, staffing, marketing, insurance, and public-company costs.
- Cash flow: Operating cash flow was $8.0 million, versus $5.8 million. Investing cash use was $11.5 million, including $11.4 million of capital expenditures; financing cash use was $1.9 million. Cash and restricted cash decreased $5.3 million to $46.8 million. Operating cash flow less capital expenditures was approximately negative $3.4 million.
- Debt and liquidity: The company reported $99.4 million of outstanding borrowings, excluding unamortized costs, and $75.0 million available under its revolving facility. Cash and cash equivalents were $46.5 million. Operating lease liabilities totaled approximately $376.1 million; these are separate from borrowings. Management said available cash, operating cash flow, and credit-facility availability should meet liquidity needs for at least 12 months.
Material changes and management commentary
Results improved substantially from the prior-year quarter, which was affected by COVID-19 dining-room restrictions. Management attributed higher sales to comparable-store traffic, menu price increases, sustained off-premises sales, and 20 company-owned openings since the prior-year quarter. In-restaurant dining sales rose 52.5%, while delivery sales increased 1.3% and take-out sales declined 4.2%. Lower interest expense—$1.0 million versus $6.3 million—also supported the return to profitability, reflecting lower debt and reduced rates under the October 2021 credit agreement.
Management expected market-basket inflation of 10%–13% for the balance of 2022 and higher delivery fuel surcharges. It estimated 2022 capital expenditures of $60–$70 million, primarily for new restaurants, remodels, and in-restaurant technology. The filing provides no specific full-year revenue or earnings guidance.
Risks, contingencies, and unusual items
- Inflation and labor: Commodity costs, including pork and avocados, wage increases, tight labor availability, and staffing levels may pressure margins. Management also noted sensitivity of dining-room traffic recovery to new COVID-19 variants.
- Unclaimed property: The company entered Delaware’s Voluntary Disclosure Agreement Program on April 22, 2022 to review potential abandoned-property obligations, including unredeemed gift cards. Any potential loss was not reasonably estimable; amounts due could materially affect financial condition and results.
- Internal controls: Previously reported material weaknesses remained unremediated, and management concluded disclosure controls and procedures were not effective as of March 27, 2022. Remediation was ongoing; management stated additional post-closing procedures supported fair presentation of the financial statements.
- Other items: Transaction expenses were $0.3 million, primarily a termination fee related to one restaurant closure. The effective tax rate was 32.9%, influenced by forecasted taxable results, deferred-tax valuation allowances, and limits on certain compensation deductions. Ordinary-course legal matters were not considered material at quarter-end.
Important facts for investors to verify
- Whether comparable-store traffic and sales growth persist after the prior-year COVID-19 comparison effects and menu price increases.
- Actual commodity inflation, delivery surcharges, wage and staffing costs, and resulting restaurant and company-wide margins.
- Progress and potential financial exposure from Delaware’s unclaimed-property review and any related gift-card liabilities.
- Remediation of material weaknesses, including financial close, tax accounting, and information-technology controls.
- Execution and funding of the $60–$70 million capital expenditure plan, restaurant openings, and the company’s liquidity and debt obligations.