First Watch Restaurant Group, Inc. — Q3 2021 Form 10-Q
Reporting period: 13 weeks ended September 26, 2021; year-to-date figures cover 39 weeks. Comparisons are with periods ended September 27, 2020, when COVID-19 temporarily suspended restaurant operations and depressed results. The company operates and franchises daytime restaurants; it had 428 locations across 28 states at quarter-end (337 company-owned, 91 franchised).
Financial and operating highlights
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Total revenue | $157.4m | $99.7m | $438.6m | $233.0m |
| Operating income (loss) | $7.2m | $(8.6)m | $23.3m | $(42.5)m |
| Net income (loss) | $0.8m | $(11.1)m | $2.5m | $(42.6)m |
| Operating margin | 4.6% | (8.8)% | 5.4% | (18.5)% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $44.3m | $(20.4)m |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $27.1m | $22.2m |
- Q3 same-restaurant sales increased 46.2% and traffic increased 40.1% year over year; versus 2019, sales were up 19.7% and traffic 4.8%. Year-to-date same-restaurant sales and traffic rose 75.0% and 61.6%, respectively, against pandemic-depressed 2020 comparisons.
- Q3 restaurant-level operating profit, a non-GAAP measure, was $30.2m (19.5% margin), versus $9.8m (9.9%). Adjusted EBITDA, also non-GAAP, was $17.0m (10.8% margin), versus $2.6m (2.6%). Year-to-date Adjusted EBITDA was $52.1m versus a loss of $9.2m.
- Q3 restaurant sales grew 57.7% to $155.1m. In-restaurant dining sales rose 79.1%; off-premises sales were $31.8m, up from $29.5m. Management noted dining-room traffic had recovered to nearly 90% of pre-pandemic levels, but said continued off-premises volumes were uncertain.
- Q3 food and beverage costs increased to 23.1% of restaurant sales from 22.4%, primarily reflecting higher pork costs. Labor costs improved to 32.6% from 34.7%, and other restaurant operating costs to 15.6% from 20.2%, mainly through sales leverage.
Balance sheet, liquidity and debt
- At September 26, cash and cash equivalents were $51.9m; current assets were $66.7m and current liabilities $85.0m. Total debt, net of unamortized discounts and issuance costs, was $291.3m, including $3.6m current debt. Operating lease liabilities totaled $362.1m.
- Year-to-date cash increased by $13.0m, to $52.1m including restricted cash. Operating cash flow of $44.3m less investing outflows of $27.4m and financing outflows of $3.8m drove the increase.
- At quarter-end, unused borrowing capacity under the former senior facilities was $21.1m; the company reported compliance with financial covenants. Management said available cash, operating cash flow and credit availability were expected to meet liquidity needs for at least 12 months.
- Subsequent IPO and refinancing: On October 5, 2021, the company sold 10.9m shares at $18 per share and received $182.1m in net proceeds, used to repay the same amount of senior-facility borrowings. On October 6, it entered new facilities comprising a $100m term loan and $75m revolver, maturing in 2026. The company said it repaid the former senior facilities using IPO proceeds, new-facility proceeds and cash on hand; it expected to record a $2.4m debt-extinguishment loss in Q4.
Outlook, risks and notable items
- Management intends to open more than 130 company-owned restaurants from 2022 through 2024. New locations may weigh on margins, which are generally lower during a restaurant’s first 12 months. Estimated fiscal 2021 capital expenditures were $30m–$35m.
- Management cited a challenging labor environment, higher commodity costs and uncertainty about the durability of pandemic-era off-premises demand. The filing provides no specific revenue or earnings guidance.
- Public-company readiness costs and expenses related to increased headcount and bonuses contributed to higher general and administrative expenses. The filing also describes a $1.0m contingent consideration liability tied to tax savings owed to former stockholders.
- Disclosure controls were deemed ineffective at quarter-end because of material weaknesses in financial reporting, income-tax accounting and IT general controls. Management reported remediation work underway and said additional testing and time are needed; it could not estimate remediation costs.
- The company reported ordinary-course legal matters that management did not consider material, and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether the recovery in comparable sales and traffic persists against less-distorted comparison periods, and how results compare with 2019.
- Whether labor, food-cost inflation and restaurant openings affect margins, and whether off-premises sales remain durable.
- Post-IPO debt balances, interest costs, covenant headroom and liquidity after the refinancing and repayment of the former facilities.
- Progress in remediating the disclosed material weaknesses and the effect of public-company costs and stock-based compensation.
- Execution and funding of the planned 2022–2024 restaurant expansion and the estimated 2021 capital spending.