First Watch Restaurant Group, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 26, 2021 (52 weeks); comparisons are with FY2020 ended December 27, 2020. The company operates and franchises breakfast, brunch and lunch restaurants in the United States. At year-end it had 435 restaurants across 28 states: 341 company-owned and 94 franchised.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $601.2 million | $342.4 million |
| Restaurant sales | $592.3 million | $337.4 million |
| Operating income (loss) | $22.2 million; 3.7% margin | ($47.2) million; (14.0)% margin |
| Net loss | ($2.1) million; ($0.04) per share | ($49.7) million; ($1.10) per share |
| Operating cash flow | $63.0 million | ($18.4) million |
| Capital expenditures | $35.3 million | $26.7 million |
| Adjusted EBITDA (non-GAAP) | $66.3 million; 11.0% margin | ($5.7) million; (1.7)% margin |
FY2021 same-restaurant sales grew 63.0% versus FY2020, and traffic grew 52.6%; sales were 14.3% above FY2019 levels. Average unit volume was $1.786 million, versus $1.119 million in FY2020. Restaurant-level operating profit, a non-GAAP measure, was $115.4 million, or 19.5% of restaurant sales.
Cash and cash equivalents were $51.9 million at year-end. The company had $100 million outstanding under its new term loan and $75 million available under an undrawn revolving facility. The new facilities mature in October 2026; the company reported covenant compliance at year-end. Operating lease liabilities totaled approximately $368.7 million. The company said available cash, operating cash flow and credit capacity should meet liquidity needs for at least 12 months.
Material changes versus FY2020
- Revenue increased 75.5%, reflecting the recovery in restaurant traffic and sales, continued off-premises demand, and new openings. System-wide sales rose 76.1% to $750.7 million.
- Operating results improved substantially as restaurant sales recovered and restaurant costs declined as a percentage of sales. Labor costs were 31.9% of restaurant sales, compared with 35.7%; occupancy was 9.4%, compared with 14.7%.
- Operating cash flow swung to positive $63.0 million. Investing outflows increased as restaurant construction resumed.
- The October 2021 IPO generated $182.1 million in net proceeds. Together with new term borrowing and cash, proceeds funded repayment of the former senior credit facilities. The company recorded a $2.4 million debt-extinguishment loss.
- General and administrative expense rose to $70.4 million, including higher compensation, marketing and public-company costs, as well as $8.0 million of IPO-related stock-based compensation expense.
Outlook, risks and unusual items
- Expansion: Management expected 30–35 company-owned and 8–13 franchise-owned openings in FY2022, and planned more than 130 company-owned openings from 2022 through 2024. Expected FY2022 capital expenditures were $60–$70 million.
- Costs and pricing: Management anticipated FY2022 food-market-basket inflation of 10%–13% and restaurant labor-cost inflation of 8%–10%. In-restaurant menu prices increased 3.9% in Q1 2022; management expected pricing, sales leverage and technology initiatives to offset some cost pressure. More than one-third of the 2022 market basket had fixed prices, about half of that for the full year.
- Key risks: COVID-19 effects and staffing absences; food, energy and transportation inflation; labor availability and wage pressure; supply-chain concentration; competition and execution of expansion; and weather or economic disruption in the Southeast. One distribution center serves 30% of company-owned restaurants, representing 31% of FY2021 restaurant sales. Borrowings carry floating rates; the filing estimates a 100-basis-point rate change would affect annual interest expense by approximately $1.0 million.
- Controls and reporting: Management concluded disclosure controls were not effective at December 26, 2021 because of material weaknesses in the control environment, period-end reporting, income-tax accounting and IT general controls. Remediation was in progress. Management said the financial statements were fairly presented after additional analyses and procedures; the auditor issued an unqualified opinion on the financial statements.
- Unusual items and contingencies: A $2.0 million gain related to terminating a restaurant lease contributed to transaction income. Management did not believe ordinary-course legal matters would have a material adverse effect; the filing provides no clear quantified estimate of potential exposure.
- Ownership: Advent indirectly owned approximately 79% of the common stock. The company did not anticipate paying dividends in the foreseeable future.
Most important facts for investors to verify
- Whether management remediates the disclosed material weaknesses and establishes effective financial-reporting controls.
- Whether projected openings and $60–$70 million of FY2022 capital spending are achieved without weakening liquidity or returns.
- Whether pricing and operating leverage offset food, labor, fuel and other inflation without reducing traffic or customer frequency.
- Debt-covenant headroom, floating-rate exposure, lease obligations and the company’s ability to fund growth while meeting commitments.
- How much FY2021 recovery and non-GAAP adjustments explain reported performance, and whether sales and margins remain sustainable against FY2019 levels.
- Potential effects of Advent’s controlling ownership and any substantial share sales following IPO lockup expiration.