First Watch Restaurant Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Second fiscal quarter ended June 26, 2022 (13 weeks); year-to-date period covers 26 weeks. Comparisons are with the corresponding periods ended June 27, 2021. Financial statements are unaudited.
Business context
First Watch operates and franchises daytime restaurants focused on breakfast, brunch and lunch in 28 U.S. states. At quarter-end, it had 350 company-owned and 99 franchise-owned restaurants, versus 335 and 88, respectively, a year earlier. It opened nine system-wide restaurants during Q2: five company-owned and four franchise-owned.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | 26 weeks 2022 | 26 weeks 2021 |
|---|---|---|---|---|
| Total revenue | $184.5 million | $154.0 million | $357.6 million | $281.1 million |
| Income from operations | $5.1 million | $12.3 million | $12.8 million | $16.2 million |
| Net income | $2.7 million | $3.8 million | $7.3 million | $1.8 million |
| Diluted earnings per share | $0.05 | $0.08 | $0.12 | $0.04 |
| Operating margin | 2.8% | 8.1% | 3.6% | 5.8% |
| Adjusted EBITDA (non-GAAP) | $17.8 million | $22.2 million | $37.2 million | $35.2 million |
Q2 system-wide sales rose 20.0% to $231.2 million. Same-restaurant sales grew 13.4% and traffic grew 8.1%; management also reported Q2 growth of 30.2% in same-restaurant sales and 7.4% in traffic compared with Q2 2019. The comparable-store base was 304 restaurants in 2022 versus 270 in 2021; the unusually high 2021 year-over-year comparisons reflect the pandemic recovery period.
Q2 restaurant-level operating profit, a non-GAAP measure, was $33.1 million, down 2.9%, and its margin fell to 18.2% from 22.5%. For the first half, restaurant-level operating profit increased 18.8% to $66.5 million, while margin declined to 18.9% from 20.2%. Q2 food and beverage costs were 24.9% of restaurant sales, up 2.8 percentage points; labor costs were 32.3%, up 2.0 points.
For the 26 weeks, operating cash flow was $31.8 million, capital expenditures were $26.6 million, and cash used in investing activities was $26.9 million. Cash and cash equivalents were $53.6 million at June 26, 2022. Borrowings were $98.8 million, excluding unamortized issuance costs, and $75.0 million was available under the revolving credit facility. Total operating and finance lease liabilities were approximately $393.0 million; executed operating leases of approximately $40.9 million had not yet commenced.
Changes and management commentary
- Revenue growth reflected higher comparable-store sales, menu pricing, traffic and restaurant additions. In-restaurant dining sales increased 24.1% in Q2, while take-out sales decreased 7.5%.
- Profitability was pressured by inflation in food, supplies and wages, staffing costs, and higher general and administrative expenses, including stock-based compensation, marketing and public-company insurance costs. Menu price increases partially offset these pressures.
- Interest expense fell to $1.1 million in Q2 from $6.3 million, and to $2.1 million for the first half from $12.6 million, primarily due to lower debt and reduced rates under the new credit facilities. This helped lift first-half net income despite lower operating income.
- Stock-based compensation was $5.1 million for the first half, compared with $0.3 million in the prior-year period.
Outlook, risks and contingencies
- Management expected food-market-basket inflation of 15%–17% and restaurant labor-cost inflation of 8%–10% for the balance of 2022. It implemented a 3.9% in-restaurant menu price increase in late July 2022.
- Management estimated 2022 capital expenditures of $60 million–$70 million, primarily for new restaurants, remodels and in-restaurant technology. It stated available cash, operating cash flow and credit-facility availability should meet liquidity needs for at least the next 12 months.
- The company disclosed previously identified material weaknesses in internal control over financial reporting, including weaknesses in financial close, income-tax accounting and IT controls. Management concluded disclosure controls were not effective as of June 26, 2022; remediation was ongoing, and the company could not estimate its cost or completion timeline. Management said additional review procedures supported fair presentation of the interim financial statements.
- The company entered Delaware’s voluntary disclosure program concerning unclaimed property. Any resulting loss was not reasonably estimable. Ordinary-course legal matters were not considered material as of quarter-end.
- The filing gave no specific revenue or earnings guidance. Forward-looking statements are subject to risks and uncertainties; management noted no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether pricing and sales growth can offset continued food, labor and supply inflation without further margin deterioration.
- Progress on remediation and independent testing of the disclosed material weaknesses in internal controls.
- Execution and funding of the $60 million–$70 million 2022 capital plan, and resulting cash, debt and liquidity needs.
- Potential exposure under Delaware’s unclaimed-property review, which the filing says cannot yet be estimated.
- How non-GAAP Adjusted EBITDA and restaurant-level operating profit reconcile to GAAP results; these measures have limitations and may not be comparable across companies.