First Watch Restaurant Group, Inc. (FWRG) September 2026 Conference Transcript

Hi, Piper Sandler. I'm very happy to have the team from First Watch, CEO Chris Tommaso and CFO Ashley Weiser. We also have Steve Marotta from the Investor Relations in the audience. After that video, please review the forward-looking statements, disclaimer, posted here in this room. And for those of you listening on the webcast, posted in the most recent investor presentation on the company's Investor Relations website. Thank you for being here. I think maybe a good place to start.

Last month, you issued new long-term targets. still a very attractive top and bottom line algorithm but on balance maybe slightly lower company-owned unit growth a little bit of an increased focus on free cash flow generation maybe just to set the stage here can you give a little more a bit of context around these new targets how they came to be and why is now the right time to make these tweaks sure so we're just about at the five year anniversary of our IPO and becoming a public company and at that time we had set out some some you know long-term growth targets and you know I'm proud of the team for delivering on and even exceeding those targets over the five years and one of those was ten percent unit growth low double-digit unit growth and we actually came in around a little bit over eleven percent and we knew that at some point ten percent unit growth would would be a challenge as we as we've grown especially as quickly as we've grown so we felt like now is a good time to reevaluate that again five years did what we said we're going to do let's look to the next five and we've been the fastest growing full-service restaurant company in America the last five years we still will be and so providing some clarity and some certainty around how many restaurants will open is something that's helpful for our team and we think it's helpful in the way we communicate that too. And the focus there was to maintain our fast growth and our industry-leading growth, but also focus on strengthening the balance sheet through free cash flow generation. And we looked at a number of different scenarios and felt like this one worked really well for us to accomplish those goals. So yeah, we're excited about that.

Okay, thank you. And then kind of sticking to development, as you look at the pipeline, how should we think about new markets versus existing markets over the next few years and the reason I'm asking because in the new targets you indicated you expect positive traffic moving forward net of planned sales transfer which implies that there is some sales transfer so if you just give a little extra context on what the sales transfer has been historically or how you were thinking about that moving forward with these new targets yeah we haven't we haven't quantified externally what that sales transfer is but what I would say is by capping the unit growth and therefore the percentage reducing one of the benefits of that will be a reduction in the sales transfer that we've experienced

so we haven't really talked much about the sales transfer because we're aware of it it's not something that happens to us we plan for it you know we we burden the the new restaurants that we're building with any cannibalization or sales transfer that we expect and we're pretty good at projecting what that is So the investment hurdle rates are they reflect that and but it is a natural headwind for same restaurant sales and traffic that I don't think it's fully appreciated because there's frankly nobody growing at the rate we are in casual dining. So that that is one of the benefits of our new long term growth algorithm, especially from a unit count perspective. And as far as we're concerned, our team, you know, we did we did 50 last year. We're going to do around 50 this year. And so we have the team in place that's ready to do it, and we know how to do it really well. And as far as your question about new emerging or core markets, that's really one of the beautiful things about our model is that we've proven our portability, but more importantly, our consistency across geographies. And we have the flexibility to open where we want, when we want. And so we take a number of things into consideration. We have all of our trade areas mapped out, but there's also an operational consideration and the teams that are needed to open those restaurants. We never want to overburden one market with too many openings. So that gives us some tremendous flexibility to open geographically where we want and then the market type, whether it's poor, emerging, or new. So in this past year, we entered the New England market. We now have four here.

We entered Las Vegas. we entered Boise Memphis so a lot of great new markets for us and we've been received very very well and kind of along those lines of things going well in development for each of the last few years use for productivity has remained very impressive you recently talked about class of 26 is yet again exceeding your underwriting targets and the comp stories you know if you look forward would you expect that trend to continue for the foreseeable future or is there reason and you know not precise guidance for your but big picture is there a reason to kind of moderate the new story UV expectations at some point as you densify in more markets how do you think about that I you know if we base the

future on what we've seen you know we don't expect anything to change it really comes down to the discipline that we apply to our site selection and to our market qualifications and things like that so we know that if we stick to that criteria and don't waver and don't try to talk ourselves into something that's that's not showing up in our model that will be successful we have a very high success rate when we when we do that and as far as the returns go we don't expect we don't expect anything different than what we've experienced you're in 32 states at your end of 25 one big state you're not in yet is

California I'm curious if you were looking at opportunities there at this point and if you're not formally looking I'm sure you're thinking about it so what are some factors you consider to ensure that any entrance in that large state would be successful and just how do you think about that market different from others the the irony is we started in California our first restaurant was in California so and then the the founders moved to Florida and we've kind of grown from there and sold our three restaurants in California to our general managers at that time.

Yeah, look, we have a TAM of 2,200 restaurants. We're sitting just below 700. We can't get there without California, but we still have a lot of green space before we get out that far. And so it's definitely on our radar. It's part of our consideration set for our TAM, but I would say it's not in the near future for us. We just have so many markets to penetrate and enter again we're just now getting into New England we're not in the Pacific Northwest we have a lot more to do out west the mid-Atlantic has been tremendous for us specifically the DMV Delaware Maryland Virginia has some of our highest volume restaurants in the system and so a lot more densification can happen there and believe it or not we still have lots of room to grow in Florida and in Arizona and Texas even though that those three states make up a majority of our restaurants so you know a long way to go but it's on the radar okay then you know I believe over the last few years with second-gen sites or conversions whatever you might refer that they've played a bigger role maybe than they had historically at first watch you know if you assess the landscape today is that opportunity still attractive and therefore you still doing these and expect to do these it's very attractive I think you know it's funny that it's called a strategy I think it's it probably is now but how it started was opportunistic great sites became available when what I would call legacy brands weren't able to sustain in those those spots anymore but if you think about some of the you know bar and grills and other and other concepts great real estate it wasn't a real estate issue it was probably a relevancy of the brand issue and so we've looked at those sites and and once we realized I mean that the site characteristics are amazing we have right on the road visibility our own dedicated parking they're a little bit bigger than we've done in the past but our team has done a great job of making them feel smaller I think I've mentioned before we'll wall off you know a couple thousand square feet that the consumer doesn't even recognize that there's there's anything behind it in exchange for that visibility so that's that's driven some of our higher new unit openings. But as much as I hate to say it, there's more and more of those becoming available. And I mean, we, you know, we are the first call. We can convert them very quickly. The landlord wants to get the rent as soon as possible. And we can, we've proven we can do that. So it'll, it'll continue to be a part of our, of our opening portfolio.

Okay. Well, pivot here, you know, pivot over to marketing.

I want to ask about the marketing strategy maybe just remind everyone what were the changes you made early last year and then have those changes now you know covered or reached the entire base of stores and you know and then separately you know how do you see the marketing strategy evolving from here kind of what's the current conversation like between you and your marketing department I can take that one so about two years ago we started really testing into marketing and understanding how could it work for first watch we're almost 700 restaurants but have a vibe of being really local and so it was important for us to maintain that and let people feel like we're their neighborhood restaurant so it had to be super authentic for us and also had to make sense from a return perspective so we started testing in 24 felt pretty good about what we saw in tests expanded to about a third of the system in 25 so last year a third of the system received incremental marketing spend and this year we've expanded that to 75% so we're continuing we call it a test learn and act model so we're testing different things we're learning from them and then we're adjusting our strategy going forward based on what message what channel what media type works in each specific market thank you for that and I've also speaking to market I've heard you speak about you know you're trying to drive another visit from existing customers we were also trying to attract new guests maybe could you just split those apart and address kind of the tactics behind each objective and if you know are you seeing success with each is one a little nothing's easy but easier more seamless than the other and just talk about those kind of separately yeah I mean we're it's definitely both and I think what what we're seeing is that it's really important for us to have the appropriate message for the type of customer we're trying to drive so if you're new to first watch we're going to make sure that you see something that explains our brand a little bit more, less about just the food and more about what is the experience you're going to get, how are we different than other companies that you might dine with, and then if you're an existing customer, we're looking for ways to bring you back, something new and exciting, remind you why you love First Watch. One of the things we know from our internal research is that once someone has been to a First Watch, they love us. We're in the top decile for future purchase intent against regional, national, really great brands. And so if we can just get them to come in, if we can build that awareness, we can keep a customer for life. And so, you know, sometimes it's just a reminder keeping them top of mind why First Watch is their favorite place.

Thank you for that. And, you know, on the most recent earnings call, you actually gave some stats around both aided and unaided brand awareness. They've both been improving. Maybe just give a little more context.

What was the starting point? where are you now and you know my perception would be there's still a lot of room to go on that so if you could confirm that and how you think yeah context so we've seen a really big shift in unaided awareness which is the hardest to move we've seen it increase 50% over about early last year when we really started this and 15% in aided awareness and so we're really excited about that movement but transparently our awareness is very low relative to the industry and so we agree with you there's a great opportunity there and we're seeing the media that we're doing move the needle but there's still room

to go and we're really excited about about continuing to see that process me for further context that IPO we were at 11% aided awareness and now we're in the low 40s so that's still really low but we've made great progress and so that's what's encouraging for us. We still see that as the biggest opportunity for us to drive traffic into restaurants.

I always ask you this. It might even be annoying because I think it's far away, but how big would First Watch need to be where you'd start to entertain the idea of some sort of national messaging and then wanting to maintain that local, maybe there's a little tension at some point, you are a chain. So how do you think about that?

Yeah, I think that's something we have to monitor look it's really about the effectiveness and the return you know we're we're as you said we're only in 33 states so you get a lot of spillover in national advertising that in California is a great example you'll pay a lot of money to have presence in California for advertising and it won't really do us any good so we'd much rather focus on and you can these days be much more targeted in your media but get the same kind of impressions that you would get from a national campaign and so we have that balance of you know presenting ourselves as a network of neighborhood restaurants rather than a chain and if we can do that through digital social connected TV and even some linear TV where you get the feel of national but you're able to buy it by by cable households then I think I think that's what you're gonna see us do for a period of time it would take a while for us to be what we would be called media efficient for national campaign okay and then we'll move over to the menu you know but maybe take us through the changes you made to the core menu in February and then maybe do you have is it two more you're seeing some mixed tailwinds you have two more quarters of benefit from that or and then might you look to make more changes next year or maybe that's necessary so just how you

feel about those changes?

Yeah, so the first thing we did was completely redesign the menu, and with that redesign comes a re-engineering. So we went from basically a brown craft paper menu with a black type to a much more bright and colorful menu. We moved some things around. We highlighted some different things. We added some customer favorites to the menu. Two beef dishes prior to this, the only beef on our menu was a roast beef sandwich. Now we have barbacoa tacos and barbacoa chilaquiles breakfast bowl. We added our most popular sweet item, which is a strawberry tres leches French toast. These are things that people just, you know, I know my personal email got full of, you have to put these things on the menu. Don't just have them on the seasonal menu. And then we did what we called, you know, we addressed customer hacks that we learned from talking to our servers about things like they were asking us more for help. Our servers were We're like, hey, people are wanting to add salmon to their avocado toast, and we don't know how to charge for that. Can there be a key on that? Well, yes, there can be a key on it, but let's really address what the real issue is, that there's a pull for that. So if people are asking for it and it's not on the menu, what happens if we put it on the menu? We put it on the menu, standardized the pricing by the tiers, and so that made the server's life easier. And lo and behold, it's something that the consumer wants, and we already had it in-house. So those type of things, we put the beverages on the menu. we did a lot of things to give things prominence and it's exceeding our expectations from a mixed standpoint to your question about how many more quarters we would get our visitation is very similar to most casual diners so you know around two times a year so if you just think about that I think we have a lot longer runway of benefit from this than you would think and this was the first time we had a really serious overall to the menu in ten years so I doubt we would do it again in two it has it has you know we want to give it time to season and settle in and and if it keeps performing the way it is we're going to be really happy with it that's great and and thank you for that and then you know on the most recent earnings call you talked about being particularly excited about a handful of innovative tests I think they're focused on higher capacity day parts not sure what you can or can't reveal but any any kind of teaser and then maybe an obvious and you know I'm not sure but why why the higher capacity day parts in in in this case the focus of these tests nothing we can share right now we will be we have an investor day on November 12th but we'll be sharing some more information about that but really have some some initiatives that we're excited about ideally you know in any business if if you can fill the times when you have the capacity it's incremental right we I think we spent a lot of time over the last couple years you've been along for the ride on the setting us up to serve more demand with the KDS system the dining room optimization the weightless management you know implementation but then optimization of that and now we're in a create more demand scenario with the marketing and some of these initiatives that we're excited to talk about that will really focus on on weekdays maybe some of that will be good material for the marketing team when it comes.

You kind of touched on this a little bit, but maybe just touch or give an update on the consumer behavior you're observing across the three-day parts. I think there's a weekday breakfast, a weekday lunch, and then you have the weekend. Are there any differences, or is it more uniform and similar, and just any thoughts on the consumer backdrop for the rest of the year?

We're seeing it be rather similar. There's a little bit of differences across the three-day parts, but for the most part, nothing super notable to share. From a consumer backdrop perspective, we're seeing it's this really weird dissonance between what people say and what they do. And so all of the trade press, everything you read, talks about consumer sentiment being really low and everyone being super pressured by gas prices. And we do skew to a higher income demographic. So I think there's a little bit of insulation from that. But even everything else that we see, people are still spending. And so I think there's a little bit of a, the world's kind of tough right now, but I'm going to continue to live my life. And so, you know, we joke that if we didn't read the news, we wouldn't know it was as bad as people say it is because we're not seeing that in our business. So we're, you know, hoping to continue to see that.

Thank you. And then I wanted to ask about the balance sheet capital allocation. Is there a target leverage level you're looking to get to? And, you know, how do you envision or do you envision share repurchases playing a role in capital allocation over the next several years? Or is there like a leverage level you'd want to get to first, just how you're thinking about that?

Yeah, I don't think we're going to share a specific leverage target publicly ever. But I would say use of our capital is first and foremost to what we know today is the highest returning, which is our organic growth, and funding that from free cash flow. outside of that we'll use any excess cash from a from from generation and however we want to I would say I think cap share repurchases could be one of the options but really the new strategy and the focus on the balance sheet is about continuing to build strength in the balance sheet and also give us some flexibility so that when there are chances for us to buy back shares or if another opportunistic thing comes up that that would be beneficial to us and our shareholders, we've got the ability to do that, which we don't currently have today.

Okay. Thank you. And then I'm going to move over to some of the operating expense lines just quickly, just a question on food and beverage. Maybe a good opportunity to remind us what you're currently thinking on food basket inflation, kind of 3Q, 4Q.

And is there anything worth calling out in terms of mix from some of the menu items or any LTOs that investors should be aware Yeah, so are we updated our guidance in the last call for the year to be flat one and a half percent food cost inflation on the year So the second half will be obviously a little bit higher than that based on what we've reported here to date I think the key part to remember is that we've got this great benefit from let's call it flat to neutral Inflation very low inflation for us but we aren't seeing that flow all the way to food costs because of our LTOs and Chris mentioned that seasonal menus and the innovation we did with the menu and adding beef we added a beef menu item in the past two LTOs and they both performed very well our number one and number two seasonal menu items ever and the second one outperformed our expectations by 25% so the huge win from a customer perspective but it came with a higher food cost and so we ate away some of that inflation favorability so that's finished now and the remainder of the third quarter in the fourth quarter we're back to non beef menu items but it's something we're really excited about because to see that level of interest from the customer shows us that people are really looking for the innovation that we that we create but we can do so at a potentially higher price point because of how interested people were so

we can continue to manage margin okay thank you and then I guess we are coming up on time so with the time we have left you know maybe open-ended what are you hoping to accomplish at the end at the November investor day you know anything you want to leave the audience with in regards to first watch the strategy the opportunity and maybe is there anything you think it's a generic question I think it's very relevant here anything you think misunderstood with your story and your company yeah I think you know we're blessed to be a category of one as far as our positioning you know yes we're in casual dining but we're daytime only concept.

We're the only one that's a public company that can say that. And so I think there's some nuances about our business, especially the part about our growth. Again, you know, I can't think of another company that would say they're tamping down their growth to open 50 restaurants a year, but that's the position we're in. And so I think when you look at us as compared to the rest of the environment, I just think there's some differences in our model and in, you know, how we're executing against our plan that we're going to go deeper on. We're going to go deeper on in our pricing philosophy and strategy. We'll go deeper on the sales transfer and how we look at that strategically and how that has changed from this high growth period where there were a lot of competitors in our space to where we are now. It's just that it's a different environment. We've clearly established ourselves as the leader in the segment by size, scale, but also through execution and and kind of recognition and so how do we how do we you know not only you know enjoy that position but leverage it and and widen that gap between us and the next closest competitor and really on the segment very good looking forward to it thank you both for being here thank you