First Watch Restaurant Group, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023, a 53-week year, compared with the 52-week fiscal year ended December 25, 2022. The company operates and franchises breakfast, brunch and lunch restaurants in the U.S.; at year-end it had 524 restaurants in 29 states (425 company-owned and 99 franchised).
Financial and operating performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total revenue | $891.6 million | $730.2 million |
| System-wide sales | $1.103 billion | $914.8 million |
| Income from operations; margin | $41.3 million; 4.7% | $16.9 million; 2.4% |
| Net income; diluted EPS | $25.4 million; $0.41 | $6.9 million; $0.11 |
| Operating cash flow | $95.3 million | $62.9 million |
| Cash used in investing activities | $123.4 million | $63.1 million |
| Adjusted EBITDA; margin | $99.5 million; 11.2% | $69.3 million; 9.5% |
Restaurant-level operating profit, a non-GAAP measure, was $175.7 million, with a 20.0% margin, versus $128.9 million and 17.9%. Same-restaurant sales growth was 7.6% and traffic growth was 0.2%; the filing uses a 53-week comparison for these 2023 measures. Average unit volume rose 10.7% to $2.25 million.
Company-owned restaurant sales increased 22.0% to $877.1 million; franchise revenue rose 31.7% to $14.5 million. Management attributed sales growth to comparable-store sales, new and acquired restaurants, and $19.2 million of sales in the 53rd week. Menu price increases were a significant contributor to comparable-store growth.
Liquidity, debt and capital needs
Year-end cash and cash equivalents were $49.6 million. Principal debt outstanding was $122.5 million: $92.5 million on the term facility and $30.0 million drawn on a $75.0 million revolver. The term loan and revolver bore rates of 7.70% and 7.72%, respectively, at year-end. The company had a $90.0 million interest-rate swap, paying a weighted-average fixed rate of 4.16% on the notional amount. It reported compliance with debt covenants.
Operating cash flow increased to $95.3 million, while capital expenditures were $84.5 million and cash paid for acquisitions was $39.9 million. The company reported a net increase in cash and restricted cash of only $0.04 million. Operating lease liabilities totaled $481.6 million; undiscounted future operating lease payments were $846.6 million.
Management expects cash from operations, available credit and cash on hand to cover liquidity needs for at least 12 months. Planned 2024 capital expenditures, excluding franchise acquisitions, are approximately $125 million to $135 million.
Material changes and outlook
- Revenue increased 22.1% and net income rose to $25.4 million from $6.9 million. The 53rd week, restaurant growth and acquisitions contributed to year-over-year growth.
- Food and beverage costs fell to 22.5% of restaurant sales from 24.0%, helped by lower pork and avocado costs and pricing. Labor costs rose to 33.5% of sales from 33.1%; management cited wage and staffing pressures.
- The company opened 51 system-wide restaurants in 2023 (37 company-owned and 14 franchised), acquired 23 franchised restaurants, and closed one company-owned restaurant.
- For 2024, management expects 43–47 company-owned and 9–11 franchise-owned openings, one company-owned closure, and 51–57 net new system-wide restaurants. It expects market-basket inflation of 2%–4% and labor inflation of 5%–7%; it increased menu prices about 2% in late January 2024.
- After year-end, the company amended its credit agreement, extending facility maturities to January 2029 and adding a $125 million delayed-draw term facility and $50 million of revolving commitments, bringing the revolver commitment to $125 million. It also agreed to acquire 21 franchised restaurants for approximately $75 million, subject to customary closing conditions; it acquired another restaurant in January 2024 for approximately $3 million.
Risks, contingencies and unusual items
- Financial reporting controls: Management concluded internal control over financial reporting was ineffective at December 31, 2023 due to material weaknesses in the control environment, staffing and segregation of duties, period-end reporting, and income-tax accounting. Remediation was underway, but the weaknesses had not yet been remediated. The previously identified IT general-controls weakness was reported as remediated. The auditor did not opine on internal-control effectiveness.
- Unclaimed property: The company recorded $0.8 million of estimated probable losses in 2023 related to Delaware’s voluntary disclosure program. It cautions that final losses could be higher.
- Other items: 2023 included $1.4 million of impairments and asset-disposal losses, $3.1 million of transaction expenses, and $1.25 million of expenses associated with the Delaware program in the Adjusted EBITDA reconciliation. Other income included insurance recoveries related to Hurricane Ian.
- Business risks: Key exposures include food, wage and occupancy inflation; dependence on a small number of suppliers and one broad-line distributor; restaurant-development delays and higher build costs; geographic concentration in the Southeast; food-safety, labor, cybersecurity, privacy and regulatory risks; and variable-rate debt and covenant requirements.
- Goodwill of $359.9 million and indefinite-lived intangible assets of $139.1 million were not impaired in 2023, based on qualitative assessments. The company reported an immaterial prior-period tax adjustment in 2023 and said its audited financial statements fairly present results in accordance with GAAP.
Important facts for investors to verify
- Assess how much 2023 revenue and comparable-store growth reflects pricing, the additional fiscal week, new restaurants and acquired locations, versus sustained traffic growth.
- Track 2024 labor and food inflation, pricing, restaurant-level margins, and whether development delays or higher construction costs affect planned openings and returns.
- Review progress in remediating the remaining internal-control material weaknesses and the related income-tax and period-end reporting controls.
- Confirm the timing, funding and purchase economics of the proposed 21-restaurant acquisition, and any debt drawn under the expanded facilities.
- Monitor the Delaware unclaimed-property review, lease commitments, debt covenants and interest costs; the filing reports no material adverse outcome from ordinary-course litigation as of year-end.