Earnings Call Transcript - FWRG Q1 2026

Operator, Operator

Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. First Quarter Earnings Conference Call occurring today, May 5, 2026, at 8:00 a.m. Eastern Time. Operator instructions were provided to participants. This call will be archived and available for replay at investors.firstwatch.com under the News and Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch to begin.

Steven Marotta, Vice President, Investor Relations

Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the first quarter of fiscal 2026 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the condition of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the first quarter performance is a comparison to the first quarter of 2025, unless otherwise indicated. And with that, I will turn the call over to Chris.

Christopher Tomasso, Chief Executive Officer and President

Good morning, everyone. Thank you for joining us to discuss our first quarter results as well as our plans for the balance of 2026. First, I want to express my appreciation to our entire team across the country, more than 17,000 dedicated employees whose commitment to making days brighter drives our success. We're pleased with our first quarter performance as several of our key growth initiatives supported solid financial results. We delivered same-restaurant sales growth of 2.8%, generated restaurant-level operating profit margin of 18.5% and expanded the system to 648 restaurants with the opening of 16 new locations. We believe our first quarter results and the benefits we are realizing from our growth initiatives line up well with our full year expectations. As a result, we are reiterating our fiscal 2026 same-restaurant sales growth and total revenue growth guidance. We're also raising the low end of our adjusted EBITDA guidance. Early last year, we began investing in digital marketing programs and accelerated that effort in the first quarter of 2026. We expanded the rollout of our digital marketing campaign to approximately 75% of our restaurant base, up from roughly one-third in 2025. Based on early analytics, we are already realizing a positive ROI on the increased expense in the markets receiving support for the first time in addition to the positive ROI in markets benefiting from a second year of investment, reinforcing our conviction in the strategy and plan. The campaign is built around a targeted multichannel approach that spans paid social, online video, paid search and connected TV, allowing us to reach consumers in a relevant and engaging way. We're encouraged by the engagement across several key measures. The campaign is attracting first-time customers who may not have previously considered the brand, reengaging customers who had lapsed in frequency and driving greater frequency among our existing customer base. At the same time, we are seeing improvement across key metrics, including gains in both unaided brand awareness and future purchase intent, which we believe are critical indicators of First Watch's long-term growth potential. These early results demonstrate that our increased investment is not only driving near-term traffic and engagement, but also strengthening the brand and building a higher lifetime customer value, so much so that we are pulling forward several million dollars of marketing spend into the second quarter from the back half of 2026. We're also pleased with the performance of our new core menu. As we discussed on our last conference call, we conducted extensive testing of the menu in 2025, our first comprehensive menu update in more than a decade. The primary objective was to elevate the overall guest experience while also simplifying execution and improving efficiency for our restaurant teams. Following the positive test results, we rolled out the new core menu system-wide by late February. Early reads have been positive across a host of KPIs. For instance, the two prior seasonal menu fan favorite items we highlighted, the Barbacoa Breakfast Tacos and the Barbacoa Chilaquiles Breakfast Bowl are both mixing above our expectations and both are higher-margin entrees. In addition, the menu enhancements are driving positive mix of our fresh juices, shareables and add-ons. The new core menu is constructively impacting our consolidated sales mix and overall check composition. We're seeing higher attachment rates and more frequent trade-ups, which have translated into per person check average growth in the first quarter that was incremental to our carried pricing. That dynamic indicates that customers are not only responding well to the updated menu, but also that the new design is encouraging them to explore deeper into our offerings, validating both the strategic intent and the financial discipline behind this important initiative. We also made a tactical decision to extend the duration of our Jumpstart seasonal menu from the traditional 10-week to 20 weeks, a first for our company. This move was motivated by three key objectives. First, the increased repetition realized in the longer limited-time-offering menu window enables our operators to focus on the exceptional execution of the new core menu. Second, we are using the extended time frame of our Jumpstart seasonal menu to evaluate how a longer-tailed marketing campaign could influence future seasonal menu mix as a percentage of consolidated sales. Encouragingly, attachment of our seasonal menu items has improved alongside the launch of the new menu. Even alongside the positive mix we are seeing from the core menu, it's exciting to see attachment to our seasonal offerings strengthen as customers respond enthusiastically to both. Third, we brought back several of our most successful limited time offerings to the menu in order to generate excitement and strengthen customer engagement. Among these returning favorites were the BEC, a Bacon Egg and Cheddar sandwich served on thick artisan sourdough and the Strawberry Tres Leches French Toast. The newest introduction, the Chimichurri Steak & Eggs Hash is now our highest performing seasonal entree of all time. Successful innovations in our restaurants, like those I've been sharing on this call, illustrate the power of the entrepreneurial First Watch culture. Promising ideas quickly rise to in-restaurant testing, which provides for optimization through the working partnership of our culinary and operations teams. The result is our rich portfolio of new initiatives and upcoming offerings. We recently wrapped up testing of the highest mixing new shareable item, Million Dollar Bacon, which will launch in just a few weeks. Moreover, a suite of offerings that are driving higher attachment and boosting the guest experience is going into test now with an expectation that they will earn their way under the core menu early next year. Shifting the spotlight to development and growth. We remain the fastest-growing full-service restaurant brand in the United States and the success of our recent classes reflects the benefits of following our disciplined real estate site selection criteria and our broad appeal. Our preopening period marketing builds anticipation and trial, which has been supported by our operations teams, who work together to ensure we are executing at a high level upon opening in the critical early months following and for years to come. The class of 2025 annualized sales remains solidly ahead of both our underwriting targets and our comp base. And while still early, our recent class of 2026 new restaurant openings is performing even better. Looking ahead, our priorities for 2026 and beyond are focused on driving durable, profitable growth. We're going to expand our presence in the new markets we've recently entered, moving briskly from market entry to market densification. By increasing restaurant density within a local market, we enhance regional efficiencies, broaden our customer base and build additional brand awareness. At the same time, we will continue to be disciplined about where we expand. We are strategically filling in core markets where we already have strong operating leverage while also expanding in emerging markets where we have identified compelling long-term demand and significant white space. The bottom line is First Watch works everywhere. Considering our proven portability, we have the competitive advantage of opening new restaurants in a balanced fashion across core, emerging and new markets on our march to 2,200 locations. We have established ourselves as the leader in daytime dining and continue to grow market share, strengthening our leadership position. When one looks across the landscape, there is simply no other daytime dining brand that brings together our scale, our discipline, our proven ability to grow consistently and the size of the white space still in front of us. Taken together, these attributes truly differentiate First Watch. We're energized by what lies ahead with ongoing innovation leading to growth, and we remain focused on doing what we do best, creating a wonderful place to work for our teams and delivering an experience that keeps customers coming back. And with that, I'll turn it over to Mel.

Mel Hope, Chief Financial Officer

Thank you, Chris. Total first quarter revenues were $331 million, an increase of 17.3% with positive same-restaurant sales growth of 2.8%. Our top line growth results from the positive same-restaurant sales growth, coupled with contributions from 194 noncomp restaurants, including 68 company-owned new restaurant openings and 19 franchise locations acquired since the fourth quarter of 2024. Same-restaurant traffic growth was negative 2%, with weather negatively affecting the quarter by around 100 basis points in addition to our customary planned sales transfer. Excluding those impacts, underlying traffic trends remain consistent with our expectations. Food and beverage expense was 22.6% of sales compared to 23.8%. As a percentage of sales, costs benefited from carried pricing of around 4% and commodity deflation around 1.6%. The commodity deflation was driven primarily by eggs, avocados and a brief favorable market trend in bacon prices. Labor and other related expenses were 33.7% of sales in the first quarter, a 90 basis point improvement from 34.6% reported in the first quarter of 2025. Carried pricing offset 3.7% of labor inflation, while our labor efficiency was essentially flat as compared to last year. We realized restaurant-level operating profit margin of 18.5% in the first quarter of 2026, a 200 basis point improvement over last year. We realized a percentage margin of 0.3% this quarter at the income from operations line. At $39.9 million, general and administrative expenses were 12.1% of total revenue. The increase compared to last year was largely due to the scheduling of our leadership conference in the first quarter and the expansion of our 2026 equity compensation program. First quarter G&A expenses were lower than our plan due largely to the timing of certain activities. Although our full year G&A expense plan remains unchanged, we are applying to the second quarter a portion of the marketing expense planned for the back half of the year, leading to our expectation that total second quarter G&A expenses will approximate the first quarter's. Adjusted EBITDA increased 22.2% to $27.8 million, a $5 million increase versus the $22.8 million reported last year. Adjusted EBITDA margin was 8.4% as compared to the 8.1% margin we realized in the first quarter of 2025. Net loss was $2.7 million. We opened 16 new system-wide restaurants during the first quarter, of which 13 are company-owned and 3 are franchise owned and ended with 648 restaurants across 32 states. The net effect of acquisitions in the quarter, which includes only the impact of purchases made within the last 12 months, increased revenue by about $8 million and adjusted EBITDA by just over $1 million. For further details on the first quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link. Now, I'll provide our updated outlook for 2026. We are reiterating the 1% to 3% range of same-restaurant sales growth, and we continue to expect positive same-restaurant sales growth in each quarter of 2026. Our guidance includes carried pricing of around 4% in the first half of the year, which blends to 2% for the full year. As a reminder, we did not take any price at the beginning of 2026. And as we have done in the past, we'll revisit menu pricing in the coming months. We continue to expect total revenue growth of 12% to 14% with around 100 net basis points of impact from acquisitions. We are reaffirming a total of 59 to 63 net new system-wide restaurants, which will result from 53 to 55 company-owned restaurants and 9 to 11 franchise-owned restaurants. We also plan to close 3 company-owned restaurants this year. Our company-owned new restaurant development pipeline is weighted to the second half of 2026, fourth quarter in particular. We continue to expect full year commodity inflation of 1% to 3%. Restaurant level labor cost inflation is expected to be in the range of 3% to 5%. We're raising the lower end of our 2026 adjusted EBITDA guidance range. Our new range is $133 million to $140 million, up from $132 million to $140 million previously. We're reiterating the net impact from the 19 restaurants we acquired in April last year, which are expected to contribute about $2 million to our adjusted EBITDA this year. We continue to expect capital expenditures of $150 million to $160 million. I want to acknowledge the execution across our entire organization this quarter. I'm proud of our operators, our field leaders and our home office staff who navigated a dynamic environment, including weather impacts, welcoming and training a host of new employees, opening high-volume new restaurants and adjusting to our new core menu. Our updated outlook for the year underscores our confidence in our operators and in our new restaurant development pipeline. We appreciate your continued interest in First Watch. And operator, we'd now like you to open the line for questions.

Operator, Operator

Operator Instructions were provided to participants. Our first question comes from the line of Jim Salera with Stephens Inc.

James Salera, Analyst, Stephens Inc.

Chris, I wanted to start by just asking if you could give us some detail around the outperformance that you guys have seen relative to maybe the overall perception of breakfast. I think a lot of investors are concerned that breakfast is one of the more pressured dayparts in restaurants given the kind of economic backdrop and yet you guys continue to deliver pretty durable same-store sales. So can you just help us kind of bridge that delta you guys are doing versus kind of the broader breakfast category?

Christopher Tomasso, Chief Executive Officer and President

Sure. Thanks. I think for us, it comes down to really three things: experience, execution and value. A lot of the news and noise around breakfast and the softness around breakfast has been targeted more from QSR. Consumers are looking for value, consistency and the experience. We bring that every day. The consumer is putting a high value on that and finding time in their mornings and middays to come see us.

James Salera, Analyst, Stephens Inc.

If we think about some of the potential impacts on the commodity front, given the energy cost increase following the Iran conflict, is there anything you are keeping an eye on or we should be keeping an eye on as you start to contemplate pricing in the back half of the year? I know eggs have still come down significantly, but there's been some fluctuation on some other commodities.

Christopher Tomasso, Chief Executive Officer and President

Yes, we'll be collecting all that information, and it's part of the consideration. We need to know where the customer is, and we consider that as part of the pricing philosophy and thinking that we'll go through. The short answer is absolutely, we think about the pressures that are on the customer from either gas or any other inflation that we see out there.

Operator, Operator

Our next question comes from the line of Jeffrey Bernstein with Barclays.

Jeffrey Bernstein, Analyst, Barclays

Great. Just following up from the comp trend perspective. Obviously, there was a spike in gas prices later in the quarter with the geopolitical concerns and the Iran conflict. I'm just wondering if you could maybe share your thoughts on your ability to work through that, whether there was any change in trend late in the quarter and perhaps into 2Q, if you're willing to share April, just related to the gas price spike. If you can share those sequential trends, that would be great. And then I had one follow-up.

Christopher Tomasso, Chief Executive Officer and President

I think a couple of things from what we just said that I could expand upon. One is the traffic pressure that we felt was impacted more by weather than gas or fuel prices. When I talked about the performance of our menu and our seasonal menu and how guests are electing to spend more and go deeper on our menu, that came a little later because we didn't launch the new menu until February. We've actually been very pleased with how our consumer has interacted with us despite what's going on in the macro. Our core demographic is higher income, and I think we have a little more insulation to that. The behavior we're seeing from our customer, as we innovate and give them new reasons to come in, has been something we've been very encouraged by.

Mel Hope, Chief Financial Officer

And Jeff, our development team does a really good job of locating our new restaurants and the business is close to our customers. In terms of convenience, that's a helpful attribute that our system enjoys in being near the customer and convenient to them.

Jeffrey Bernstein, Analyst, Barclays

Understood. And then just a follow-up. Well, first of all, whether you're willing to share April trends or whether there's been any change in trajectory. But otherwise, you did reiterate that you expect positive comps each quarter of this year. The compares are clearly much more difficult. In fact, the third quarter, they're like 600 basis points more difficult than the quarter you just completed. So just wondering your confidence in that. Maybe there are particular initiatives to support such confidence. I'm assuming marketing is near the top, but your willingness to guide to positive through the rest of the year and what gives you that confidence?

Mel Hope, Chief Financial Officer

Yes. We haven't seen a big shift in the trend in terms of the overall growth or what we have planned for the year.

Operator, Operator

Our next question comes from the line of Brian Vaccaro with Raymond James.

Brian Vaccaro, Analyst, Raymond James

Just to ask on the First Watch value proposition and kind of your thinking on menu pricing. Maybe you could just talk about how you view the relative value proposition and price points specifically versus some direct peers of the broader category. And when you think about menu pricing, assuming something material doesn't change in terms of the consumer backdrop, do you plan to take something in the second half, given there's still some underlying inflation, whether it be food, labor, etc.?

Christopher Tomasso, Chief Executive Officer and President

Brian, you know us well. Our philosophy does not change despite the macro environment. You saw what we did when we had record inflation. We will always lean towards the consumer whenever we can. Sometimes that means taking it on the margin. Sometimes it means we catch up later. We go into the beginning and middle of the year looking at things we control. The seasonal menu is driving mix above our carried pricing. We love that because it differs from taking price on like-for-like items, where a consumer pays one price one day and another price another day. We prefer to build check through innovation. That said, we see the realities of inflation—labor and all of that—and we try to keep a balance. We know from our research that we have tremendous pricing power, but the consumer is under pressure. We'll evaluate a midyear price increase and do what we think is best.

Brian Vaccaro, Analyst, Raymond James

On commodity inflation, any color on how to square the first quarter relief with your reiterated guide for the year? Any color on Q2 expectations versus what's embedded in the second half?

Mel Hope, Chief Financial Officer

We did have some first quarter relief. The pork prices were an unexpected relief for us because our contracts are priced off published agency rates. During the period that the government shut down, the agency prices were held flat rather than continue to ascend, so that was a surprise. Crop-related commodities like avocados and coffee are expected to rise through the year. So even though we enjoyed some relief in the first quarter, we are seeing seasonal increases in some items. Our 1% to 3% guide on inflation in COGS stands pretty firmly.

Brian Vaccaro, Analyst, Raymond James

And can you remind us what your expectations are for G&A for the year?

Mel Hope, Chief Financial Officer

We don't guide to G&A for the year. It's embedded in our adjusted EBITDA guidance.

Operator, Operator

Our next question comes from the line of Andrew Charles with TD Cowen.

Zachary Ogden, Analyst, TD Cowen (on behalf of Andrew Charles)

This is Zach Ogden on for Andrew. You talked about the 1Q mix being driven by the new menu, but that was only fully rolled out for about a month. Is your expectation that mix can actually accelerate further in the balance of the year relative to 1Q?

Christopher Tomasso, Chief Executive Officer and President

Just for clarity, it was about two periods in the quarter. That mix is also driven by the seasonal menu that has our highest mixing item ever, so that's driving it too. We don't plan for mix, but based on what we've seen, as long as the rest of our seasonal menus deliver similarly, I wouldn't be surprised to see positive mix.

Zachary Ogden, Analyst, TD Cowen (on behalf of Andrew Charles)

You talked about the class of 2026 actually being even stronger than the class of 2025. Can you talk about what's driving that? Is that more of a function of the second-gen sites you're shifting into this year, or is that a separate factor?

Christopher Tomasso, Chief Executive Officer and President

The mix of second-gen sites is similar from a percentage standpoint, about half, so it's not necessarily that. We're constantly learning and adapting in site selection and prototype execution and design. Our model allows us to apply a kit of parts to each restaurant, so no two look alike but they have recognizable elements. Every year our new restaurants have gotten better, and we have some standouts in each class. We also have evolved our preopening marketing and building anticipation for openings. We're seeing stronger openings than before, and they carry on from there.

Operator, Operator

Our next question comes from the line of Sara Senatore with Bank of America.

Sara Senatore, Analyst, Bank of America

I wanted to ask about marketing. You mentioned that you're pulling forward marketing, but your annual G&A target is unchanged. Is the implication that even if the ROI remains quite high, you wouldn't increase the annual spend on marketing? Last year looks like you kind of doubled marketing. Given how high the ROI appears to be, would you think about stepping up the marketing budget for the full year?

Christopher Tomasso, Chief Executive Officer and President

G&A is the cocktail of many items. When we throttle up or down marketing spend there may be other areas where we can dial back or push out. We manage G&A throughout the year. Timing shifts from time to time based on what we think is important and what people will respond to at certain times of the year. Those adjustments are ordinary and normal. We are continuing to manage our G&A inside our full year plan.

Mel Hope, Chief Financial Officer

Specific to marketing, by pulling that forward and getting more time to read the results of those dollars being spent gives us the flexibility and optionality to consider stepping up spend later in the year should the environment be conducive to that.

Sara Senatore, Analyst, Bank of America

Mel, you mentioned that the G&A in the first quarter was slightly below expectations. Is that the reason your EBITDA beat was a little bigger this first quarter and the reason you raised the low end of guidance?

Mel Hope, Chief Financial Officer

Yes, that's right—some of the beat was timing-related favorability in G&A.

Operator, Operator

Our next question comes from the line of Brian Mullan with Piper Sandler.

Brian Mullan, Analyst, Piper Sandler

If you look at the restaurants that have had the enhanced marketing tactics in place for longer, maybe the first third of stores, are those performing differently than the stores that got it more recently? Do the benefits build over time, do you get an initial lift followed by more benefits? Any color on that?

Mel Hope, Chief Financial Officer

The lift in the restaurants that received additional marketing spend last year has been sustained. We're continuing to spend in those as well. It was effective for them last year and now this year too.

Christopher Tomasso, Chief Executive Officer and President

That was part of what we wanted to evaluate—the cumulative effect of a group receiving support and then receiving it again the following year. That's part of our overall marketing planning as we go through the rest of the year and into next year.

Brian Mullan, Analyst, Piper Sandler

On the delivery channel, you had really strong growth last year and you have to lap it. Is that in the base now and you can grow more slowly, or should we expect some mean reversion this year?

Mel Hope, Chief Financial Officer

We've continued to see growth there, not to the level we saw last year. It's kind of in the base now, and we expect it to grow similarly to the rest of the system. We're pleased that we set a new level from which we're growing organically.

Operator, Operator

Our next question comes from the line of Jon Tower with Citi.

Jon Tower, Analyst, Citi

Chris, you mentioned your new stores are performing exceptionally well and classes are getting better each year. The competitive backdrop has weakened since the IPO. Can you comment on the company's thinking around development over time and the commitment to that long-term low double-digit percent unit growth you've discussed?

Christopher Tomasso, Chief Executive Officer and President

If you look back at how we've grown, it was through organic company-owned growth, acquisitions, external M&A and franchising. We took opportunities to take footholds in key markets aggressively and continue to do so. We're always looking at capital allocation and what's the best strategy for the next five years. We're comfortable with our current unit growth outlook, but we are always evaluating and will communicate any changes appropriately.

Jon Tower, Analyst, Citi

Can you speak to the complexion of the customer base that you're drawing in with the new marketing campaigns? Are you seeing younger guests relative to your existing base or less affluent consumers move into the stores for the first time?

Christopher Tomasso, Chief Executive Officer and President

We have seen our average age go down for the entire system, much of that driven by new market entries and new restaurants. The channels we're using—digital and social—are targeted and have been effective. We've seen quite a bit of growth in millennials. The overall mix of our customer base is dynamic and changing in the right way. Attracting the next generation of First Watch customers is important for our long-term success. Millennials tend to prioritize experience, which aligns well with our offering—social occasions, group dining and brunch. Our customer cohort is skewing younger, which supports our strategy.

Operator, Operator

Our next question comes from the line of Todd Brooks with Benchmark StoneX.

Todd Brooks, Analyst, Benchmark StoneX

Chris, on the last call you said you were equally excited about the potential for the new menu and the expansion of enhanced marketing as drivers in fiscal 2026. Any surprises in how things performed across Q1 that increased or favored one initiative over the other? And how is Q1 performance bolstering your confidence to maintain the commentary about positive same-store sales in each quarter for the balance of the year?

Christopher Tomasso, Chief Executive Officer and President

My comment about the menu being our number one marketing tool reflects that it's something every customer touches. We can see immediate cause and effect in customer response. I'm not surprised by the positive reaction to the new menu. We derisked it by bringing on customer favorites from the past. We're pleased customers are adding items like potatoes, an extra egg or salmon to avocado toast, indicating willingness to trade up. Building check through the consumer's preferences rather than across-the-board price increases is healthier. The work we've done with KDS, dining room optimizations, digital waitlist management, the evolved menu and increased marketing together are helping us outperform the industry.

Todd Brooks, Analyst, Benchmark StoneX

Any cadence for openings first half versus second half? And can you comment on the anticipated sales transfer you plan to absorb this year with a focus on backfilling in existing markets?

Mel Hope, Chief Financial Officer

Historically we have a big fourth quarter because projects often push into the fourth quarter. The cadence for the remaining quarters of the year is probably similar to last year. We try to improve that over time to eliminate bulges in development that strain operators. Regarding densification and sales transfer, when we underwrite new projects we consider sales transfer. New restaurants need to perform a bit better to offset temporary sales transfer. It's planful and built into our underwriting. We generally don't quantify it publicly because many factors affect new restaurant success, but it's part of our strategic consideration of how we build out markets and fortify the brand against competitive intrusion.

Christopher Tomasso, Chief Executive Officer and President

That sales transfer is a natural headwind to restaurant traffic but a positive since it reflects profitable market share growth. We model and plan for it and have for a while.

Operator, Operator

Our next question comes from the line of Gregory Francfort with Guggenheim Partners.

Gregory Francfort, Analyst, Guggenheim Partners

My first is on labor per operating week growth and it was obviously a lot slower this quarter. Anything to call out besides wage rate, any other onetime drivers? And then a question on capital allocation: the stock has been more pressured than expected. Have you considered buybacks, and how do you think through buying stock versus developing stores given returns and certainty?

Mel Hope, Chief Financial Officer

I didn't catch the very first part of your question when you were garbled on the phone. If you mean labor inflation, our operators had to adjust last year when traffic was under pressure and inflation affected everyone. This year we have a better operating environment, which makes it more predictable to manage crews and drive operational efficiencies. Nothing remarkable—just hard work and good execution.

Gregory Francfort, Analyst, Guggenheim Partners

Got it. And on capital allocation and buybacks?

Christopher Tomasso, Chief Executive Officer and President

I agree on the stock performance. From a capital allocation standpoint, we and our Board always look at opportunities to optimize. We have very good returns on our new restaurants and are creating a network of cash-producing units at high returns. We're taking advantage of that now. We'll continue to evaluate all options.

Mel Hope, Chief Financial Officer

Right now, the right thing for the company is to continue to grow that cash engine. When there is a shift in strategy, we would explain how that would take place. Building the cash engine gives us more options for excess cash in the future. Taking advantage of the returns we're getting and building out markets now is important in the life cycle of the company. Building that cash engine is building value for the future.

Operator, Operator

Our last question comes from the line of Chris O'Cull with Stifel.

Christopher O'Cull, Analyst, Stifel

Chris, can you elaborate on the decision to eliminate the COO position? And what do you see as the biggest areas of opportunity with operations to drive efficiency and improved guest experience?

Christopher Tomasso, Chief Executive Officer and President

As we reviewed our G&A setup, it was a natural evolution. More specifically, the change gets me closer to operations, which is important. I've done that for a long time here, and this structure lets me work more closely with operations leaders. The way we restructured, it added only one direct report to me. We created two Senior Vice Presidents of Operations and split the country, allowing me to be more involved day-to-day in operations execution and strategy—one foot here, one foot in the field. I'm excited about it and expect we will be more efficient and effective with this setup.

Operator, Operator

Thank you. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.