First Watch Restaurant Group, Inc. — Q3 2023 Form 10-Q
Reporting period: 13 weeks ended September 24, 2023; year-to-date comparisons cover 39 weeks. The company operates and franchises daytime dining restaurants in 29 states. At quarter-end, it had 402 company-owned and 103 franchise-owned restaurants, or 505 system-wide.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Total revenue | $219.2 million | $186.9 million | $646.9 million | $544.4 million |
| Operating income | $7.7 million | $2.6 million | $34.4 million | $15.4 million |
| Operating margin | 3.6% | 1.4% | 5.4% | 2.9% |
| Net income | $5.4 million | $46,000 | $22.7 million | $7.4 million |
| Diluted EPS | $0.09 | Less than $0.01 | $0.37 | $0.12 |
| Adjusted EBITDA (non-GAAP) | $21.6 million | $17.0 million | $74.9 million | $54.2 million |
| Restaurant-level operating margin (non-GAAP) | 18.7% | 17.3% | 20.3% | 18.3% |
Q3 system-wide sales rose 14.9% to $270.3 million. Same-restaurant sales increased 4.8%, while same-restaurant traffic declined 1.9%; management attributed sales growth primarily to menu pricing and restaurant growth. Food and beverage costs improved as a share of restaurant sales, but labor costs increased as a share. Management said lower commodity and to-go supply costs and sales leverage supported margin improvement, partly offset by higher wages and staffing.
For the 39 weeks, operating cash flow was $73.0 million, compared with $46.6 million a year earlier. Investing used $82.6 million, including $52.8 million of capital expenditures and $30.4 million for acquisitions. Financing used $0.1 million. Cash and restricted cash declined $9.7 million to $40.2 million.
Balance sheet, debt, and liquidity
At September 24, 2023, cash and cash equivalents were $39.9 million. Term-facility borrowings were $95.0 million before unamortized costs; total debt, including finance leases and the financing obligation, was $97.8 million net. The $75 million revolving facility was undrawn. The term facility matures October 2026. A $90 million interest-rate swap hedges part of the variable-rate debt; the company pays a weighted average fixed rate of 4.16% on the swap notional and receives three-month SOFR.
Operating lease liabilities totaled $463.4 million, with approximately $76.6 million of executed operating leases not yet commenced. Management expects cash from operations, available cash, and credit-facility availability to meet liquidity needs for at least 12 months.
Changes, outlook, and notable items
- Q3 revenue grew 17.3%; net income rose to $5.4 million from $46,000. The 2022 comparison includes a very small profit base.
- During the first 39 weeks, the company acquired 17 operating franchise restaurants and one location under development. It opened 20 company-owned and 12 franchise-owned restaurants and recorded one company-owned closure. A subsequent agreement to acquire six more operating restaurants for approximately $9.2 million was subject to customary closing conditions.
- Management expected full-year 2023 commodity costs to range from 1.0% deflation to flat, hourly labor-cost inflation of 9%–11%, and overall restaurant-level labor-cost inflation of 8%–10%. It estimated 2023 capital expenditures of $85 million–$90 million, primarily for new restaurants and remodels. The filing provides no specific full-year revenue or earnings guidance.
- Higher interest rates increased interest expense year over year. Other income included insurance recoveries related to Hurricane Ian; a $1.0 million release of a valuation allowance for certain state loss carryforwards reduced year-to-date tax expense.
- Disclosure controls and procedures were deemed ineffective because previously identified material weaknesses in internal control over financial reporting remained unremediated. Management reported additional review procedures and ongoing remediation efforts, and said the financial statements fairly present results in all material respects.
- The company is participating in Delaware’s voluntary disclosure program concerning unclaimed property; any potential loss is not currently reasonably estimable. Ordinary-course legal matters were not considered material, and the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-sales growth can persist and traffic recover, given Q3 traffic declined while pricing contributed to sales growth.
- Whether labor inflation, staffing needs, and new-store costs constrain margins as commodity costs ease.
- Execution and returns on restaurant openings, franchisee-restaurant acquisitions, and the planned capital program.
- Debt-service exposure and liquidity under changing rates, including the terms and effectiveness of the interest-rate swap and the substantial lease commitments.
- Progress and testing of remediation for internal-control material weaknesses, and developments in the Delaware unclaimed-property matter.
- How much reported earnings growth reflects ongoing operations versus tax effects, insurance recoveries, and non-GAAP adjustments.