First Watch Restaurant Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Thirteen weeks ended March 31, 2024, compared with thirteen weeks ended March 26, 2023. Financial amounts below are in millions unless noted.
Business context and performance
First Watch operates and franchises daytime dining restaurants in 29 states. At quarter-end it had 432 company-owned and 99 franchise-owned restaurants, 531 system-wide. It opened nine system-wide restaurants during the quarter. Company-owned restaurant count increased from 370 a year earlier, while franchise-owned locations declined from 114, reflecting franchise restaurant acquisitions.
- Total revenue rose 14.7% to $242.4 million; restaurant sales increased 15.1% to $239.3 million. Franchise revenue fell 8.6% to $3.1 million.
- System-wide sales increased 9.4% to $289.6 million. Comparable same-restaurant sales grew 0.5%, but traffic declined 4.5%; management attributed sales growth chiefly to 4.4% carried pricing and positive mix.
- Net income declined 22.9% to $7.2 million; diluted EPS was $0.12 versus $0.15. Net margin fell to 3.0% from 4.4%.
- Operating income decreased 19.9% to $12.3 million; operating margin fell to 5.1% from 7.4%. Non-GAAP restaurant-level operating profit increased 13.1% to $49.9 million, while its margin declined to 20.8% from 21.2%.
- Non-GAAP Adjusted EBITDA increased 4.3% to $28.6 million, but its margin fell to 11.8% from 13.0%.
Costs, cash flow, debt and liquidity
- Food and beverage costs were 21.8% of restaurant sales, down from 22.4%, as menu pricing more than offset commodity inflation. Labor costs rose to 33.3% of restaurant sales from 33.0%; occupancy costs rose to 8.0% from 7.7%.
- General and administrative expense increased 21.8% to $27.7 million, and depreciation and amortization increased 34.6% to $12.3 million. Management cited growth-support staffing, wage increases, restaurant openings and acquisitions. Interest expense rose 36.3% to $2.6 million, primarily from higher borrowings and rates.
- Operating cash flow was $25.0 million, compared with $21.1 million. Capital expenditures were $28.6 million, versus $14.5 million; investing cash outflow totaled $32.0 million, including $3.4 million for acquisitions. Cash and cash equivalents declined to $43.2 million from $49.6 million at year-end.
- At March 31, debt under the credit facilities was $122.5 million, excluding unamortized issuance costs; total debt including finance leases and financing obligation was $125.7 million net. The company also reported $485.7 million in operating lease liabilities. It had $102.5 million of revolving-facility availability, after a $1.7 million letter-of-credit reserve, and $125.0 million available under the delayed-draw term facility.
- On April 12, the company drew $97.5 million under the delayed-draw facility. On April 15, it used approximately $75.0 million of borrowing proceeds to acquire 21 franchise-operated restaurants and used $22.5 million to repay revolving borrowings. Management said available cash, operating cash flow and credit availability should meet liquidity needs for at least the next 12 months.
Outlook, commentary and notable risks
- Management estimated 2024 commodity inflation of 2.0%–4.0% and restaurant-level labor inflation of 5.0%–7.0%. Planned 2024 capital expenditures were approximately $125 million–$135 million, excluding capital allocated to franchise acquisitions. The filing provides no specific full-year revenue or earnings guidance.
- Management noted industry traffic weakness, harsh January weather and consumer pull-back. First Watch’s positive comparable sales were supported by pricing despite lower traffic.
- The company hedges a portion of variable-rate debt: $90 million of notional swaps at a weighted-average fixed rate of 4.16%, maturing in October 2026. Debt otherwise remains exposed to interest-rate changes.
- Disclosure controls and procedures were deemed ineffective as of March 31 because previously identified material weaknesses in internal control over financial reporting remained unremediated. Management reported additional review procedures and ongoing remediation; it stated the financial statements fairly present results in all material respects.
- Advent sold shares in a secondary offering and ceased to be a majority owner, but retained approximately 45% ownership and significant influence over stockholder matters. The company is no longer a Nasdaq “controlled company.”
- The company recorded a $0.8 million reserve for estimated losses related to Delaware unclaimed-property matters; management cautioned actual losses could be greater. Ordinary-course legal matters were not considered material at quarter-end.
Important facts for investors to verify
- Whether same-restaurant traffic stabilizes and comparable sales remain positive as pricing and mix effects evolve.
- Whether labor, commodity and occupancy costs pressure restaurant-level and consolidated margins further.
- How the 21-restaurant acquisition performs, its final purchase-price allocation, and the effect of additional borrowing on interest expense and leverage.
- Progress in remediating internal-control material weaknesses and the timing of management’s effectiveness assessment.
- Actual 2024 capital spending and inflation compared with management’s stated estimates, alongside the company’s substantial lease commitments and remaining credit availability.
- Potential outcome of the Delaware unclaimed-property review and the implications of Advent’s continuing significant ownership.