First Watch Restaurant Group Inc

Previous wording

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q and our audited consolidated financial statements and notes included in our 2023 Form 10-K. As discussed in “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified in our 2023 Form 10-K, including under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part II, Item 1A. Risk Factors” of our Form 10-Q for the quarter ended March 31, 2024.

Current wording

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q and our audited consolidated financial statements and notes included in our 2023 Form 10-K. As discussed in “Cautionary Note Regarding Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified in our 2023 Form 10-K, including under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Part II, Item 1A. Risk Factors” of this Form 10-Q.

Previous wording

First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. A recipient of hundreds of local “Best Breakfast” and “Best Brunch” accolades, First Watch’s award-winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch. In 2023, First Watch was named a Top 100 Most Loved Workplace® in Newsweek by the Best Practice Institute for the second consecutive year. On October 1, 2021, the Company’s common stock began trading on Nasdaq under the ticker symbol “FWRG.”

Current wording

First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. A recipient of hundreds of local “Best Breakfast” and “Best Brunch” accolades, First Watch’s award-winning chef-driven menu includes elevated executions of classic favorites for breakfast, brunch and lunch. For three consecutive years, First Watch was named a Top 100 Most Loved Workplace® by Newsweek and the Best Practice Institute, including being named the #1 Most Loved Workplace in 2024. On October 1, 2021, the Company’s common stock began trading on Nasdaq under the ticker symbol “FWRG.”

Previous wording

The Company operates and franchises restaurants in 29 states under the “First Watch” trade name and as of June 30, 2024, the Company had 459 company-owned restaurants and 79 franchise-owned restaurants.

Current wording

The Company operates and franchises restaurants in 29 states under the “First Watch” trade name and as of September 29, 2024, the Company had 466 company-owned restaurants and 81 franchise-owned restaurants.

Previous wording

Financial highlights for the thirteen weeks ended June 30, 2024 (“second quarter of 2024”) as compared, unless otherwise indicated below, to the thirteen weeks ended June 25, 2023 (“second quarter of 2023”), reflected the continued momentum of our strong operating performance and include the following:

Current wording

Financial highlights for the thirteen weeks ended September 29, 2024 (“third quarter of 2024”) as compared, unless otherwise indicated below, to the thirteen weeks ended September 24, 2023 (“third quarter of 2023”), reflected the continued momentum of our strong operating performance and include the following:

Previous wording

•System-wide sales increased 10.1% to $299.0 million in the second quarter of 2024 from $271.5 million in the second quarter of 2023

Current wording

•System-wide sales increased 8.0% to $291.8 million in the third quarter of 2024 from $270.3 million in the third quarter of 2023

Previous wording

•Same-restaurant sales growth of negative 0.3%*

Current wording

•Same-restaurant sales growth of negative 1.9%*

Previous wording

•Same-restaurant traffic growth of negative of 4.0%*

Current wording

•Same-restaurant traffic growth of negative 4.4%*

Previous wording

•Restaurant level operating profit margin** increased to 21.9% in the second quarter of 2024 from 20.9% in the second quarter of 2023

Current wording

•Restaurant level operating profit margin** increased to 18.9% in the third quarter of 2024 from 18.7% in the third quarter of 2023

Previous wording

•Net income increased to $8.9 million, or $0.14 per diluted share, in the second quarter of 2024 from $8.0 million, or $0.13 per diluted share in the second quarter of 2023

Current wording

•Net income decreased to $2.1 million, or $0.03 per diluted share, in the third quarter of 2024 from $5.4 million, or $0.09 per diluted share in the third quarter of 2023

Previous wording

•Adjusted EBITDA** increased to $35.3 million in the second quarter of 2024 from $25.8 million in the second quarter of 2023

Current wording

•Adjusted EBITDA** increased to $25.6 million in the third quarter of 2024 from $21.6 million in the third quarter of 2023

Previous wording

•Opened 7 system-wide restaurants in 6 states and acquired 21 franchise-owned restaurants resulting in a total of 538 system-wide restaurants (459 company-owned and 79 franchise-owned) across 29 states

Current wording

•Opened 9 system-wide restaurants in 8 states, resulting in a total of 547 system-wide restaurants (466 company-owned and 81 franchise-owned) across 29 states

Previous wording

Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we commonly discuss the following key operating metrics which we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because management uses these metrics to evaluate performance and assess the growth of our business as well as the effectiveness of our marketing and operational strategies.

Current wording

Throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we commonly discuss the following key operating metrics that we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because management uses these metrics to evaluate performance and assess the growth of our business as well as the effectiveness of our marketing and operational strategies.

Previous wording

Same-Restaurant Sales Growth: the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”). For the second quarter of 2024, this operating metric compares the thirteen and twenty-six-week periods ended June 30, 2024 with the thirteen and twenty-six-week periods ended July 2, 2023, versus the thirteen and twenty-six-week periods ended June 25, 2023, in order to compare like-for-like periods. For the thirteen and twenty-six weeks ended June 30, 2024 and July 2, 2023, there were 344 restaurants and 327 restaurants, respectively, in our Comparable Restaurant Base. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings, and other transitional changes.

Current wording

Same-Restaurant Sales Growth: the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year (“Comparable Restaurant Base”). For the third quarter of 2024, this operating metric compares the thirteen and thirty-nine-week periods ended September 29, 2024 with the thirteen and thirty-nine-week periods ended October 1, 2023, versus the thirteen and thirty-nine-week periods ended September 24, 2023, in order to compare like-for-like periods. For the thirteen and thirty-nine weeks ended September 29, 2024 and October 1, 2023, there were 344 restaurants and 327 restaurants, respectively, in our Comparable Restaurant Base. Measuring our same-restaurant sales growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings, and other transitional changes.

Previous wording

Same-Restaurant Traffic Growth: the percentage change in traffic counts for the thirteen and twenty-six week periods ended June 30, 2024 as compared to the thirteen and twenty-six-week periods ended July 2, 2023 using the Comparable Restaurant Base, in order to compare like-for-like periods. Measuring our same-restaurant traffic growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors because an increase in same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.

Current wording

Same-Restaurant Traffic Growth: the percentage change in traffic counts for the thirteen and thirty-nine-week periods ended September 29, 2024 as compared to the thirteen and thirty-nine-week periods ended October 1, 2023 using the Comparable Restaurant Base, in order to compare like-for-like periods. Measuring our same-restaurant traffic growth allows management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors because an increase in same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.

Previous wording

(1) Comparing the thirteen and twenty-six-week periods ended June 30, 2024 with the thirteen and twenty-six-week periods ended July 2, 2023 in order to compare like-for-like periods. See “Key Performance Indicators” for additional information.

Current wording

(1) Comparing the thirteen and thirty-nine-week periods ended September 29, 2024 with the thirteen and thirty-nine-week periods ended October 1, 2023 in order to compare like-for-like periods. See “Key Performance Indicators” for additional information.

Previous wording

The following table summarizes our results of operations and the percentages of certain items in relation to Total revenues or, where indicated, Restaurant sales for the thirteen and twenty-six weeks ended June 30, 2024 and June 25, 2023:

Current wording

The following table summarizes our results of operations and the percentages of certain items in relation to Total revenues or, where indicated, Restaurant sales for the thirteen and thirty-nine weeks ended September 29, 2024 and September 24, 2023:

Previous wording

The increase in total restaurant sales as compared to the same periods in the prior year was due principally to restaurant sales of (i) $20.9 million and $36.8 million for the thirteen and twenty-six weeks ended June 30, 2024, respectively, from 40 NROs opened between June 25, 2023 and June 30, 2024, (ii) $19.3 million and $28.4 million for the thirteen and twenty-six weeks ended June 30, 2024, respectively, from 39 restaurants acquired from franchisees between June 25, 2023 and June 30, 2024 and (iii) menu price increases.

Current wording

The increase in total restaurant sales as compared to the same periods in the prior year was due principally to restaurant sales of (i) $18.1 million and $43.1 million for the thirteen and thirty-nine weeks ended September 29, 2024, respectively, from 37 NROs opened between September 24, 2023 and September 29, 2024, (ii) $14.9 million and $31.9 million for the thirteen and thirty-nine weeks ended September 29, 2024, respectively, from 28 restaurants acquired from franchisees between September 24, 2023 and September 29, 2024 and (iii) menu price increases.

Previous wording

The decrease in franchise revenues during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily driven by the acquisition of 39 franchise-owned restaurants, partially offset by franchise revenues from the 8 franchise-owned NROs between June 25, 2023 and June 30, 2024.

Current wording

The decrease in franchise revenues during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was primarily driven by the Company’s acquisitions of 28 franchise-owned restaurants, partially offset by franchise revenues from the 7 franchise-owned NROs between September 24, 2023 and September 29, 2024.

Previous wording

Food and beverage costs as a percent of restaurant sales decreased during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year primarily due to the leverage of menu price increases partially offset by commodity inflation.

Current wording

Food and beverage costs as a percent of restaurant sales decreased during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year primarily due to the leverage associated with menu price increases partially offset by commodity inflation.

Previous wording

Food and beverage costs increased during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year primarily as a result of the 40 NROs and 39 restaurants acquired from franchisees between June 25, 2023 and June 30, 2024.

Current wording

Food and beverage costs increased during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year primarily as a result of the 37 NROs and 28 restaurants acquired from franchisees between September 24, 2023 and September 29, 2024.

Previous wording

Labor and other related expenses as a percentage of restaurant sales decreased during the thirteen weeks ended June 30, 2024 as compared to the same period in the prior year primarily as a result of (i) the leverage of menu price increases, and (ii) hourly labor efficiency. These increases were partially offset by wage increases.

Current wording

Labor and other related expenses as a percentage of restaurant sales decreased during the thirteen weeks ended September 29, 2024 as compared to the same period in the prior year primarily as a result of (i) the leverage associated with menu price increases, and (ii) hourly labor efficiency. These decreases were partially offset by wage increases.

Previous wording

The increase in labor and other related expenses during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily due to (i) the increase in the number of restaurants (ii) wage increases and (iii) carrying more managers to staff new restaurants.

Current wording

The increase in labor and other related expenses during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was primarily due to (i) the increase in the number of restaurants and (ii) wage increases.

Previous wording

The increase in other restaurant operating expenses during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was mainly due to the increase in the number of restaurants.

Current wording

The increase in other restaurant operating expenses during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was mainly due to the increase in the number of restaurants and restaurant sales.

Previous wording

As a percentage of restaurant sales, the increase in occupancy expenses for the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily due to higher rent expense and the deleverage associated with negative same restaurant sales growth.

Current wording

As a percentage of restaurant sales, the increase in occupancy expenses for the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was primarily due to higher rent expense and the deleverage associated with negative same restaurant sales growth.

Previous wording

The increase in occupancy expenses during the thirteen weeks and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily due to the increase in the number of company-owned restaurants.

Current wording

The increase in occupancy expenses during the thirteen weeks and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was primarily due to the increase in the number of company-owned restaurants.

Previous wording

The increase in pre-opening expenses during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily from increases in (i) rent, (ii) travel expenses and (iii) the number of restaurants opened and under construction.

Current wording

The increase in pre-opening expenses during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was primarily from (i) increases in rent and (ii) the number of restaurants opened and under construction.

Previous wording

The increase in general and administrative expenses during the twenty-six weeks ended June 30, 2024 as compared to the same period in the prior year was mainly due to (i) $4.3 million in compensation expense from wage increases and additional employee headcount to support growth and (ii) $2.6 million increase in consulting and professional services, information technology, licenses, travel and other miscellaneous expenses.

Current wording

The increase in general and administrative expenses during the thirteen weeks ended September 29, 2024 as compared to the same period in the prior year was mainly due to (i) $1.3 million increase in information technology, licenses, travel and other miscellaneous expenses (ii) $0.6 million increase in compensation expense from wage increases, stock compensation and additional employee headcount to support growth and (iii) $0.6 million increase in consulting and professional services.

Previous wording

The increase in general and administrative expenses during the thirteen weeks ended June 30, 2024 as compared to the same period in the prior year was mainly due to (i) $1.2 million in compensation expense from wage increases and additional employee headcount to support growth and (ii) $0.7 million increase in consulting and professional services, information technology, licenses, travel and other miscellaneous expenses.

Current wording

The increase in general and administrative expenses during the thirty-nine weeks ended September 29, 2024 as compared to the same period in the prior year was mainly due to (i) $4.9 million increase in compensation expense from wage increases, stock compensation and additional employee headcount to support growth and (ii) $4.5 million increase in consulting and professional services, information technology, licenses, travel and other expenses.

Previous wording

Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights. Franchise rights includes rights which arose from the purchase price allocation in connection with the merger agreement through which the Company was acquired by funds affiliated with or managed by Advent International, L.P. (“Advent”) in August 2017, as well as reacquired rights from our acquisitions of franchise-owned restaurants.

Current wording

Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights.

Previous wording

The increase in depreciation and amortization during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was due to (i) additional NRO assets and restaurants acquired from franchisees and (ii) reacquired rights.

Current wording

The increase in depreciation and amortization during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was due to additional NRO assets and restaurants acquired, including reacquired rights from franchisees.

Previous wording

The decrease in Transaction expenses, net during the thirteen-week period ended June 30, 2024 as compared to the same period in the prior year was primarily due to (i) $0.7 million decrease in costs incurred by us in connection with the secondary public offerings of the Company’s common stock by entities affiliated with Advent and (ii) $0.3 million decrease in costs incurred in connection with the acquisition of certain franchise-owned restaurants.

Current wording

The decrease in Transaction expenses, net during the thirteen-week period ended September 29, 2024 as compared to the same period in the prior year was primarily due to decrease in costs incurred in connection with the acquisition of franchise-owned restaurants.

Previous wording

The decrease in Transaction expenses, net during the twenty-six weeks ended June 30, 2024 as compared to the same period in the prior year was primarily due to a contingent consideration liability reduction recognized as a reduction in transaction expenses in the first quarter of 2024.

Current wording

The decrease in Transaction expenses, net during the thirty-nine weeks ended September 29, 2024 as compared to the same period in the prior year was primarily due to a contingent consideration liability reduction recognized as a reduction in transaction expenses in the first quarter of 2024.

Previous wording

Income from operations margin decreased during the twenty-six weeks ended June 30, 2024 as compared to the same period in the prior year primarily due to (i) the increase in occupancy expenses and (ii) higher depreciation and amortization expense driven by our restaurant growth and acquisition of certain franchise-owned restaurants, partially offset by the increase in restaurant sales.

Current wording

Income from operations margin decreased during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year primarily due to (i) deleveraging of certain expenses, including occupancy expenses, as a result of a decline in same restaurant sales and (ii) higher depreciation and amortization expense driven by our restaurant growth and acquisition of certain franchise-owned restaurants partially offset by (i) labor efficiency and (ii) food and beverage costs improving as a percent of sales.

Previous wording

The increase in interest expense during the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was due to (i) increased borrowings associated with franchise acquisitions and (ii) higher interest rates.

Current wording

The increase in interest expense during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was due to (i) increased borrowings associated with franchise acquisitions and (ii) higher interest rates.

Previous wording

The twenty-six week period ended June 30, 2024 includes $0.4 million of debt refinancing charges. Differences in Other income for the comparative periods presented are related to expected fluctuations in insurance recoveries and interest income.

Current wording

The thirty-nine week period ended September 29, 2024 includes $0.4 million of debt refinancing charges. Differences in Other income for the comparative periods presented are related to fluctuations in insurance recoveries and interest income.

Previous wording

The change in the effective income tax rates for the thirteen and twenty-six weeks ended June 30, 2024 as compared to the same periods in the prior year was primarily due to (i) the change in the valuation allowance on deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) the impacts of executive stock-based compensation.

Current wording

The change in the effective income tax rates for the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year was primarily due to (i) the change in the valuation allowance on deferred tax assets, (ii) the benefit of tax credits for FICA taxes on certain employees’ tips and (iii) the impacts of executive stock-based compensation.

Previous wording

Net income and net income margin during the twenty-six weeks ended June 30, 2024 decreased as compared to the same period in the prior year primarily due to the (i) increase in interest expense, (ii) the increase in income tax expense and (iii) the decrease in income from operations margin.

Current wording

Net income and net income margin during the thirteen and thirty-nine weeks ended September 29, 2024 decreased as compared to the same periods in the prior year primarily due to the (i) increase in interest expense associated with increased borrowings to fund acquisitions and higher interest rates, (ii) the increase in income tax expense and (iii) the decrease in income from operations margin.

Previous wording

Restaurant level operating profit margin during the thirteen weeks ended June 30, 2024 increased as compared to the same period in the prior year primarily due to (i) additional restaurant sales contributed by NROs and restaurants acquired between June 25, 2023 and June 30, 2024, (ii) favorable food and beverage costs as a percent of sales and (iii) labor efficiencies. This was partially offset by the increase in (i) wages and (ii) the deleverage of occupancy expenses.

Current wording

Restaurant level operating profit margin during the thirteen and thirty-nine weeks ended September 29, 2024 increased as compared to the same periods in the prior year primarily due to (i) favorable labor and other related expenses as a percent of sales, (ii) favorable food and beverage costs as a percent of sales and (iii) restaurants acquired between September 24, 2023 and September 29, 2024. This was partially offset by the deleverage of occupancy expenses.

Previous wording

Restaurant level operating profit for the twenty-six weeks ended June 30, 2024 increased as compared to the same period in the prior year primarily due to (i) sales growth driven by the increase in menu prices, as well as (ii) restaurant sales contributed by 40 NROs and 39 restaurants acquired from franchisees between June 25, 2023 and June 30, 2024. This was partially offset by an increase in (i) wages and (ii) deleverage of occupancy expenses.

Current wording

Restaurant level operating profit for the thirteen and thirty-nine week periods ended September 29, 2024 increased as compared to the same period in the prior year primarily due to (i) sales growth driven by the increase in menu prices, as well as (ii) restaurant sales contributed by 37 NROs and 28 restaurants acquired from franchisees between September 24, 2023 and September 29, 2024. This was partially offset by an increase in (i) food, labor and other restaurant operating expenses and (ii) deleverage of occupancy expenses.

Previous wording

Adjusted EBITDA increased during the thirteen and twenty-six week periods ended June 30, 2024 as compared to the same periods in the prior year primarily due to the increase in restaurant level operating profit. This was partially offset by general and administrative expenses mainly due to wage increases and additional employee headcount to support growth..

Current wording

Adjusted EBITDA increased during the thirteen and thirty-nine weeks ended September 29, 2024 as compared to the same periods in the prior year primarily due to the increase in restaurant level operating profit. This was partially offset by general and administrative expenses mainly due to wage increases and additional employee headcount to support growth.