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spk11: Thank you for standing by and welcome to the First Watch Restaurant Group Incorporated First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, the conference call will be open for analyst questions and instructions on how to ask a question will be given at that time. This call is being recorded today, May 10, 2022 at 8 a.m. Eastern Time and will be archived and available for replay at investors.com. under the news and events section. I would now like to turn the conference over to Raphael Gross, partner at ICR, to begin.
spk00: Good morning, everyone, and welcome. I am joined here today by First Watch's Chief Executive Officer and President, Chris Tommaso, and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the first quarter, 2022, on Globe Newswire and filed his quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. Let me now cover a few housekeeping matters before introducing Chris. 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. These statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial condition, growth strategies, and future expenses. Any such statements should be considered in conjunction with questionary statements in the company's earnings release and the risk factor disclosure in its filings with the SEC, including its most recent annual report on Form 10-K and quarterly report 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 the comparable gap results contained in the company's earnings release filed this morning. And with that, I'd now like to turn the call over to Chris.
spk09: Good morning. Just a few short weeks ago, I shared our results from a record 2021, and I'm happy to once again share that our strong performance has carried into 2022. Before I dive into that performance, I want to take a minute to talk about why we believe we've been able to deliver exceptional results like we reported again. morning and give you a little background on those results. We're in the position we are today because of how we came to be back in the early 80s. Back then you would have been hard pressed to find another restaurant that served breakfast, brunch and lunch without moonlighting as a dinner place. Daytime dining was almost unheard of and First Watch was built differently. The fun side of the story of our beginnings and our daytime only hours is that our founders wanted to be able to play golf in the afternoons. That was certainly true. But more importantly, they wanted to give our staff the same opportunity to have evenings free to spend with their families. After spending many years in the restaurant industry themselves, working many long days and late nights, they set out to create a concept where those with the spirit of hospitality could have a fulfilling career in an industry they love and still have quality time to spend with their family and friends doing things they enjoy. That focus on family and on quality of life has been a part of First Watch ever since, even before work-life balance was a trending topic. And frankly, it's one of the attributes that drew me personally to First Watch in the first place nearly 16 years ago. When I joined back in 2006, I had two young children, one of whom actually graduated from college this past weekend. Moving to Sarasota, Florida with my young family was a big decision, but the opportunity to join an organization with the same priorities, with a focus on people, family, and balance, was something nearly non-existent in this industry and an opportunity I couldn't pass up. Some of the hours weren't the only innovation our founders brought to First Watch. They were taking an approach to the menu that was focused on freshness, quality, and creativity, which back then and still today was a stark contrast to the diners and greasy spoons around the block. That passion for innovation is still at the core of who we are, sourcing fresh produce that's delivered to our more than 440 restaurants throughout the week and introducing seasonal menus five times a year, highlighting only the best of what's in season at that time, whether for our entrees or our fresh juice program. We've always offered something different. Today, we obviously are living in unique times, and it's in times like this that I get even more excited to share the First Watch story. Remember, we've been doing this for nearly 40 years and have been a high-growth concept for most of those. Despite the current environment, Our brand has thrived, just as it did during difficult times in the past, and I believe this can largely be credited to our non-traditional model. We realize that we do not fit neatly into industry categories, and as I've said before, we embrace that. We are instead focused on our customers' evolving needs, and the first watch experience for both our customers and our employees has never been more relevant than it is today. Our long track record of strong traffic growth is not an accident. We offer a progressive trend forward menu that has consistently introduced menu items before they hit mainstream. And we do it at a price point and value that allows for, and I would say, encourage frequency. We're fortunate to attract an affluent customer base, yet we continue to see growth from an emerging group that tends to skew younger, a bit more digitally focused, and seeks out great food. My point here is that we cannot be easily defined, and that is because we offer a highly differentiated experience, and this experience is serving a unique need for our communities right now. More than ever, people are seeking connection, and we know that our customers often describe First Watch as a place to, quote, take a time out or a mini vacation in their hectic day. We serve as a neighborhood gathering place, and we don't take this for granted. I believe this unique positioning is a large contributor to our continued strong traffic and dining room recovery. And with that, let's review our Q1 results. We benefited from an accelerated recovery from COVID impacts. In fact, starting in Q1 of 2021, we began seeing positive same restaurant sales versus 2019. And that recovery continued steadily throughout the past year. Year over year, our same restaurant sales growth was 27.2%. And when compared to our strong first quarter of 2019, it was 26.1%. driven primarily by same restaurant traffic growth of 3.4%. I realize that this puts us in rare error. Moreover, despite the challenging operating environment, I'm especially proud that we delivered a solid restaurant-level operating profit margin that surpassed our expectations. Our performance accelerated toward the end of the quarter, bringing system-wide sales for the quarter to $214 million, with $173 million in total revenues. That's a 36% increase over the first quarter of 2021. We opened seven beautiful new First Watch restaurants during the quarter, including six company-owned and one franchise, bringing our system total to 441 at the end of the quarter. These seven restaurants opened across five states and seven DMAs, from St. Louis to Miami to Pittsburgh. And our new restaurants, regardless of geography, continue to consistently achieve annualized sales that exceed the average unit volumes of our existing restaurants. That proven portability is what unlocks expansion opportunities for the future of our brand, once again reinforcing our confidence in our plans to grow to about 2,200 domestic restaurants and to continue to grow our average unit volumes. As we opened those seven new restaurants during the quarter, we maintained our average of 2.7 managers per restaurant, keeping our talent pipeline full with strong leaders who are prepared to take on the general manager position for our upcoming new restaurant openings. Firstwatch has always prioritized professional development for our employees, and during the first quarter, we relaunched our week-long culture and leadership training program, which we call FARM. It's short for the Firstwatch Academy of Restaurant Management. We hosted 50 managers during the quarter for this immersion experience in our home office here in Bradenton, Florida. On our last earnings call, you might remember that I mentioned that First Watch CPO Laura Sorenson was in Anaheim to accept ADP's prestigious Culture at Work Award. I'm proud to share she brought home the hardware. This honor was bestowed by the largest payroll provider in the world, which serves more than 80% of Fortune 500 companies and more than 900,000 total clients. First Watch was one of only five award recipients this year and the only company across all industries that was recognized for outstanding culture. This achievement is a big point of pride for our organization, and it speaks to the incredible teams operating our restaurants every day. If you've been to First Watch or if you follow us on social media, you know all about our commitment to continued menu innovation and the positive results it drives. Our dedication to early trend spotting and culinary research comes to life in our rotating seasonal menus and always expanding menu platforms. During Q1, we featured several craveable dishes on our Jumpstart seasonal menu, including the Trailblazer Bowl, the Carnitas Breakfast Burrito, Super Seed Protein Pancakes, and the star of the show really was our Purple Haze Juice. This refreshing beverage was an immediate success, quickly developing a cult-like following. We responded to an overwhelming amount of customer pleas and added it to our menu permanently. This color-changing lavender lemonade is made with butterfly pea flower tea, and it's now available year-round alongside our fresh kale tonic and morning meditation juices. This Instagrammable addition pays off with incrementality and is just another example of selected pricing as we continue to watch our customers choose to spend more to enhance their brunch experience. Now for an update on our restaurant technology, specifically as it relates to our kitchen display system rollout. Every new company-owned restaurant is opening with these systems, and we continue to install them in more of our existing restaurants each week. When we last spoke about our fourth quarter and fiscal 2021 results, I shared at that time that KDS was live in about 20 of our restaurants. Now, about six weeks later, it's up and running in more than 65 first-watch restaurants. We're conducting an efficient rollout with plans to have KDS in more than half of our company-owned restaurants by the end of this year. I've had the opportunity to visit some of the restaurants with KDS, and I also attended a recent new restaurant opening that incorporated the technology. And I'm so encouraged by the overwhelming support for this project by our teams and the positive energy that exists throughout the organization around its rollout. As we stated before, we have tremendous demand, some of which remains unfulfilled. And I'm proud of our teams in our restaurants and our home office and the steps we're continuing to take in order to help capture that demand while we also expand our footprint. And now to discuss our first quarter results in greater detail, I'll pass the phone to Mel.
spk07: Thank you. We appreciate you joining us this morning. As Chris mentioned at the beginning of the call, our first quarter performance accelerated at the end of the period and our teams powered through the period's operating challenges. to deliver some solid financial results. In late March of this year, which happened to be very close to the end of our first quarter, we filed our first annual report on Form 10-K. In that reporting cycle and when we held our earnings call, we furnished some expectations about our first quarter based on what we experienced during the first two-thirds of the quarter. Frankly, We beat our own expectations. During March, we experienced a surge in our restaurant sales across all channels, which allowed us to further leverage our fixed costs and expand our restaurant-level operating profit margin, which finished the quarter at 19.6%. Furthermore, the increased sales and traffic we experienced in March have continued into our second quarter. Our same restaurant sales growth was 27.2% driven by our same restaurant traffic growth of 21.9%, which we achieved despite the negative impacts in January from the Omicron variant and from winter storms. As we've mentioned before, we believe our emphasis on building same restaurant sales through traffic growth is a key measure of our success. Not only did our first quarter traffic grow by nearly 22% on a one-year comp basis, it also exceeded 2019's pre-pandemic traffic by 3.4%. After we chose not to increase our prices in 2021, we did take a 3.9% menu price increase in early January of 2022. As we've shared before, we believe we have additional pricing power should we determine to revisit our menu prices later this year due to continued inflation and our variable costs. As for that inflation, our market basket was up about 15% in the first quarter. Despite that, Our food and beverage costs as a percentage of restaurant sales came in at 23.1%, which is actually down 50 basis points from Q4 of 2021. Labor and other related expenses as a percentage of restaurant sales for the quarter landed at 32.3%, which is also 50 basis points lower than the fourth quarter of last year. That downward trend in labor percentage was primarily the product of the surge in March sales that I mentioned earlier, and our teams continue to operate nimbly in a tight labor market. Our operating level profit was $33.4 million, and our restaurant level operating profit margin was, as I mentioned, 19.6% for the quarter. We had indicated that we expected our restaurant-level operating profit margin would be only slightly ahead of our fourth quarter last year due to the macroeconomic issues we were aware of. However, the margin leverage created by our March sales moved our first quarter margins favorably, and it moved them quickly. Adjusted EBITDA was $19.4 million, and our adjusted EBITDA margin was 11.2%. While these strong metrics were driven by our top-line growth and improvement in our restaurant-level operating profit, first quarter G&A spending benefited from a $1.3 million timing shift into our second quarter. In addition to making note of the timing of the G&A falling in the second quarter, I'll give you some additional points we're seeing thus far in the current quarter. As I mentioned earlier, the sales momentum that surged in March has continued into our second quarter. Through April, inflation has increased our cost of goods sold by 130 basis points above the first quarter. Our labor percentage started the period holding flat to the first quarter. Additionally, we expect to open at least eight system-wide restaurants before the end of this quarter. Now I'd like to shift the conversation to our full-year outlook. To better help you calculate our income tax expense, we wanted to share that we currently use 33% to 34% blended rate in all of our forecasts. Given our strong performance in Q1 coupled with the macroeconomic conditions, I'd also like to reiterate our outlook for fiscal 2022. For the full year, we expect same restaurant sales growth in the high single digits with continued positive traffic as we begin to lap quarters in 2021 that had more than fully recovered from COVID. We plan to open 30 to 35 company restaurants and eight to 13 franchised restaurants. We expect revenue growth in excess of 15% and a return to approximately 34% labor as a percentage of restaurant sales by the end of the year. Based on these considerations, we expect adjusted EBITDA for the full year in the range of 67 to $71 million. When it comes to commodity inflation, we continue to see cost increases in our market basket, as well as fuel surcharges associated with our deliveries, and we expect 10 to 13 percent commodity inflation for the full year. And finally, our capital expenditures during 2022 are still expected to range between 60 and 70 million dollars. We appreciate our opportunity to discuss our results with you, and operator, if you'd please open the line for questions now, we'll be happy to field some.
spk11: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Chris O'Call from Stiefel. Please go ahead.
spk12: Thanks. Good morning, guys. Hey, Chris. Good morning. So, Chris, you mentioned the March sales momentum continued into April, and, Mel, I think you did as well, but did you guys quantify what the comp was in April?
spk07: We don't issue comps. We speak publicly about it on a period-by-period basis.
spk12: Okay, that's fair. And then, Can you help us understand, Mel, what the benefit to the margin was of that surge in the comp as you went through the quarter and how we should be thinking about restaurant margin in the second?
spk07: Yeah, in that third period with the surge in sales, we saw most of that come out in labor. Our labor ran very efficiently during that period. You know, the sales were surging and we were still running on thin crews, and so we One of the things that we've taken steps is to catch up on our staffing consistent with the kind of surge in sales that we're seeing now.
spk12: Okay. And then, you know, we're pleased to see the four-year inflation guidance intact with many companies having raised theirs recently. Is this because the company had contracts in place on commodities that have recently spiked, or is there another way the company is mitigating the commodity inflation?
spk07: Most of our contracts run 30 to 45 days out in terms of fixing the pricing. We do have a couple of things that we price during the year, but I think as much as anything, it's the effect of our supply chain team solving for those kinds of issues in real time. And we do expect, you know, we did run higher inflation, but we had built it into our plan certainly for the first and second quarter. And we should expect to see some tapering off simply, you know, partly as we start to roll over a little bit of inflation last year.
spk12: Great. Thanks, guys. Thanks.
spk11: Our next question comes from Jeffrey Bernstein from Barclays. Please go ahead.
spk10: Great. Thank you very much. Just a question on the full year guidance. It seemed like the first quarter was I know it handily beat consensus expectations, talked about them, and I think you mentioned it beat your own. I'm just wondering what leads you to perhaps reiterate the guidance rather than raise the guidance effectively flowing through the first quarter. I'm just wondering whether that's purely conservatism or maybe there are some macro factors that are leaving you cautious, especially with the sales momentum going into the second quarter, just trying to understand that. what's keeping you from raising the full year guidance at this point?
spk07: Sure. I think that's a good question, Jeff, and good morning, by the way. Listen, you know, we gave what we think was some, you know, good guidance on the full year. A million three of our call it out earning in the first quarter was related to timing in GNA. So I think we're still within the band of the original guidance that we gave, and we're also looking at the backdrop of, you know, a lot of people whispering about that. challenging economy and recession, that sort of thing. We're a new registrant, and I want to be sure that we're thoughtful about the guidance that we give. But we're really optimistic about the year and enthusiastic about the performance. In a few weeks, we'll take another look and try and update if we can.
spk10: Understood. And just because you mentioned the whisper of the macro backdrop, I'm just wondering how you guys see yourself positioning from a potential economic slowdown and maybe whether you've already seen any change in consumer behavior. I mean, it seems like the sales are still strong, but any change in traffic or mix that would lead you to perhaps take a more cautious view with a slowing economic backdrop?
spk09: Hey, Jeff, it's Chris. Great question. I'd say that looking back on our performance during tough economic times in the past, we performed very well. I kind of referenced that a little bit in my commentary, but Also, as we're sitting here now, we don't see any early signs of that, at least when we talk about the increase in our traffic and sales and the momentum that we have. We typically look for check management by the consumer to be the first sign of any potential issues, and we're not seeing that at all. In fact, our PPA is up, and we're pleased with the demand we're seeing, but also we with how the consumer is behaving when they are interacting with us.
spk10: Sounds great. Lastly, the restaurant margin. I know in the past you said you would take price to defend the margin, and I know you mentioned earlier that you'll reconsider later in the year. I'm just wondering, what would you be looking for to raise the margin? Is the goal to hold that margin flat, or how do you measure that relative value to give you confidence that you have more of that price and power?
spk07: Yeah, there's no really one metric that's a trigger point for us. We evaluate, probably every restaurant company evaluates pricing constantly based on margin, and we certainly look at it very closely. So as we go through the year, as we look closely at what our actual experience is and where we have – pricing needs or inflation that we're not offsetting, then we'll constantly take a look at it and reevaluate it. But we did have a very good first quarter, and I can just tell you that we constantly look at this.
spk10: Great. Thank you. Thanks.
spk11: The next question comes from Nicole Miller from Piper Sandler. Please go ahead.
spk01: Thank you. Good morning. Could you just talk a little bit more about 2Q inflation? So if COGS are up about 130 basis points sequentially, what is the embedded level of inflation? And could you talk a little bit about items that are up or even maybe down?
spk07: Our inflation for the second quarter is really tracking pretty close to where we were in the first quarter. I think we built in And our plan and what we're seeing is still a little high, like 15% on the market basket. In the first quarter, the things that tend to run higher are sort of some high-volume commodities like bacon and avocados, for example, that we use a great deal of. So when inflation spikes, they tend to drive the cost a little bit. we're having the same you know we're experiencing the same thing plus to go packaging continues to be a inflator of our overall restaurant operating costs as packaging availability and and cost of it you know just continue to be something that we're you know we've learned to have to deal with over the course of the last couple of
spk01: All right, that's very helpful. Thank you. And then on KDS and just technology at large, remind us, you know, I'm starting to think about KDS, you know, can it go faster? Is it going slower? Originally a very offensive, you know, offense measure probably makes things easier in the back of the house, makes people happy. Is it just defense now with, you know, the challenging macro? Kind of how does that play out and what comes behind it? Thanks.
spk09: Thanks, Nicole. Chris, I'll take that one. I would say that our philosophy around the benefits of KDS haven't changed at all, which really is to reduce friction and increase our throughput in our high-demand period. The good news about it is, you're right, the teams have taken to it. They look forward to it coming in their restaurants. As it relates to the rollout cadence, I'd say that We're encouraged by our ability to get the equipment necessary now. I think you'll see us continue with our aggressive rollout of that. And, again, our goal is to get it rolled out as soon as we can and as soon as we can train it and get it operational in restaurants. But, again, we're opening all new restaurants with it to start with. So basically reiterating everything we said before, it's still very much for us being on offense and really trying to increase those peak demand hours.
spk01: Thanks again.
spk11: The next question comes from John Tower from Citi. Please go ahead.
spk13: Hi, morning. Thanks for taking the question. I appreciate it. And Chris, congrats on the recent college grad. I'm curious if you can dig into your outlook for new store availability and the pipeline itself. I'm just curious to know if you're Seeing anything in the competitive landscape, obviously it seems like the consumer is a bit more challenged than it had been in recent periods. And then on the flip side, there's quite a bit of inflation out there in the marketplace, whether it's on bill costs, the actual input themselves. So I'm just curious what you're seeing on the landscape, if there's more availability than in the past, and if you guys can perhaps even accelerate unit growth beyond what you're already doing today.
spk09: Hi, it's Chris again. I'll take this one as well. We feel very confident in our ability to execute against our development plans, both for the rest of this year and for the follow-on years. Our team's done a really great job of filling that pipeline with sites in various stages of development. We have seen some cost increases, but nothing that our team hasn't been able to manage. That, alongside availability of certain elements that we need to build the restaurants, again, they're managing very well. We're on track and we feel good about it. As far as the competition for the sites, these are markets that we've been in for a long time. We've had relationships with developers in those markets and we've leveraged those relationships even more so now. As far as acceleration goes, again, we're sticking to what we've put out there for our growth algorithm on new restaurant growth. Again, just feel very optimistic about our ability to achieve that.
spk07: At this point in time, John, any project that's on the calendar for this year, we're already spending dollars into it. The development teams have probably turned them over more to either construction or site management type of management folks, but most of our prospecting for new restaurant sites has now turned to 2023 projects, 2024 projects, and that's coming along based on what I can see. The pipeline continues to to fill and be ready. You know, they're looking at way more projects than will actually reach our calendar because some things fall out of bed. But, frankly, our team's out there prospecting for new sites and identifying them. And so I haven't seen any softness in terms of the pace. I think they're working very hard, but I don't think we're seeing any fall off.
spk09: Sorry, let me add one more thing there, this. The performance of our new restaurants, I think, speaks to the quality of the sites that they've been able to get despite increased competition, specifically in the suburbs, as we've all heard about. So the fact that we're able to get these superior sites that are delivering basically third-year sales in their first year is what has us so optimistic about our ability to continue our growth.
spk13: Just kind of following up on that point on the new store performance, are you doing anything differently now versus, say, two to three years ago when you get into new markets in terms of building brand awareness before you even open those doors? Is there grassroots marketing programs that you have in place now that weren't there before?
spk09: I think it actually starts with the sites themselves and the buildings themselves. We use the word prototype here. We obviously don't have a prototype because we don't build from the ground up, but Meaning, from our perspective, what elements does the restaurant have? We have spent a lot of time and a lot of effort really evolving that prototype and putting in elements that we've talked about before, whether it's a much larger, more visible patio, indoor-outdoor bars, garage doors that open up to the outside, things like that that have really raised the profile of the restaurant. We're getting them sites that are at or near the epicenter of the trade area, high-profile sites out on the street. And so in that I've been here 16 years, I can tell you that's not what we did 16 years ago. And so just like our concept has evolved, so has our real estate site selection strategy, and I think that's paying off big. We are also much more engaged in digital marketing now. And we leverage that prior to each opening to build anticipation and excitement. And frankly, I think people now are more familiar with our brand. And so there's an excitement level that comes to us opening in a market that maybe wasn't there 15 years ago. And I think that we've earned that over all of these years. And I think all those elements, not to mention our great training teams and folks that we send to the restaurants to help open them. All of those things are what is really leading to the success that we're seeing there.
spk13: Great. And then just last one for me. On the KDS stuff, I know you'd mentioned it was live in 20 stores in the fourth quarter, so it's still fairly early days. But is there anything you can call out with respect to either comp performance or perhaps even just actual versus theoretical waste at the stores? I'm just curious. Any differentiation you can pull out between those stores versus the rest of the comp base would be great.
spk09: It is early days. Again, this almost has as much to do with our ability to hire and train people faster and then to also, again, improve ticket times. I'll give you one factoid. Two of our restaurants that had KDS in it, they were the top two sales restaurants for the company on Mother's Day, which is our biggest day of the year. So definitely see that... when we're at peak sales hours, and so we've been able to deliver some higher peak sales hours in those restaurants as well.
spk07: The benefits where we have it in the restaurant, so we're already realizing, are just in terms of simplifying the back-of-the-house operations, and the teams just enjoy some efficiencies of having a more predictable flow of food prep and... and what the KDS systems are really used for in terms of helping them get things served hot and timely. So we're already benefiting from those, but as the cohort grows, we should be able to tease out some statistics. Thank you. Appreciate the time.
spk11: The next question comes from Andy Burrish from Jefferies. Please go ahead.
spk04: Hey, guys. Good morning. Good morning, Andy. Thanks. Just a couple of things to level set on where you are on dining room sales and off-premise mix currently, please.
spk09: Sure. So our dining room traffic has recovered to about 90% to 92% of where it was pre-COVID, and our off-premise sits around 22%.
spk03: Got it.
spk07: And that off-prem, that's been fairly consistent across our last two or three quarters.
spk04: Yeah. And where are you on the alcoholic beverage rollout in terms of percentage of stores and then the mix in those stores, please?
spk03: Are we at 200 and...
spk07: I don't have the figure in front of me.
spk09: I think we're probably still about, we're probably about 70% of the system rolled out right now.
spk03: Got it.
spk04: And then just a couple things on the cost side that you've mentioned in the past, Mel. I think you've said you're relatively channel agnostic in terms of margins, but you cited packaging costs. Again, I assume that's still a little bit of a headwind just on the to-go side of things.
spk07: Yeah, I mean, it takes a little bit of a bite out of the overall margin, but we have a surcharge associated with our off-premises business, and so it offsets It offsets the bulk of that cost.
spk04: And then just one other quick question on near-term. Did you see some of the egg inflation from some of the bird flu issues, or does that move relatively quickly?
spk07: Actually, we have a contract. The fact is, no. We had a contract that we set in December that fixed the cost of our eggs during the period, and so the inflation and the cost of eggs that others saw, we didn't experience.
spk03: Great. Nicely done. Thanks, guys. Thanks.
spk11: The next question comes from Andrew Charles from Cowan & Company. Please go ahead.
spk08: Great. Thanks, guys. One quick one for me, just, Mel, on the favorable commodities this year, favorable COGS, I should say, in the quarter, how much of that would you attribute just to the improvement in beverages that you guys are seeing between the role of alcohol in 70% of stores, the success of the new Purple Haze juice, just trying to better understand that amid 15% commodity inflation for the quarter?
spk09: Yeah, this is Chris. Our overall beverage incidence is up, and that's analysis that we did prior to introducing Purple Haze. Obviously, we wanted to test for cannibalization. We've always had two core juices and a seasonal, and so we did test the Purple Haze coming in as a core juice and what impact that would have, and it was accretive, obviously, or we wouldn't have done it. But we've seen our overall beverage incidence increase.
spk03: And the alcohol, which we've talked about in the past.
spk11: Terrific. Thank you.
spk03: Yep.
spk11: The next question comes from Gregory Frankfurt from Guggenheim Securities. Please go ahead.
spk02: Hey, Greg.
spk11: Thanks, guys.
spk02: How you doing, Mel? My first question was just a follow-up to Andy. I think you said you were mostly fixed on your egg contracts in the first quarter, but I think you also said earlier in the call that that most of the contracting you've been doing is 30 to 45 days. Is that part of the reason why things step up in the second quarter is those contracts are rolling off or you continue to fix eggs maybe longer out than you're doing the rest of the commodity basket?
spk07: In this case, we had a contract for eggs and potatoes that are fixed for a longer period of time. Um, we're certainly having to watch that market carefully because of some of the other noise in there, but, uh, but, uh, that's, that's not driving the second quarter inflation.
spk02: Got it. Just maybe we've heard from some others that the staffing environment's gotten a little bit better. Can you maybe comment on, on staffing and turnover and then maybe even, um, kind of where you're seeing labor inflation right now?
spk07: So we're, um, couple, couple of things. Um, Certainly, the most pivotal staffing position for us that we monitor most closely is the turnover in managers. Historically, we've run about 20% less than the industry. I think now, for a while there, we were sort of middle of the pack during some of last year, but we're now about 10% better than the industry. and our number of managers overall has improved, and so we're seeing some real gains there that are important. I think in terms of overall staffing, we're not, you know, in terms of hourly or front and back of house staff, we have seen an uptick in applications, and I think we've seen some improvement overall. We're not precisely where we want to be in terms of developing the kind of bench strength we're used to operating under, but it's improved a good bit this year.
spk02: And maybe lastly, both of you guys have been doing this a long time. Wall Street seems to be very concerned about the consumer environment going forward. How do you see, what are you looking at as you read the tea leaves and just overall thoughts on maybe where the consumer's headed for the next nine to 12 months. Thanks.
spk07: Well, I know what we're looking for, right? You know, Chris has mentioned that the response to First Watch's offerings in 2008, which was, I guess, the most analogous downward economic period that we draw from, that the company... continued to thrive during that period of time. What... As we look at, you know, what we're seeing right now, we're certainly not seeing any customer response today, and we're... Chris has mentioned the fact that we'd be looking for people managing checks, maybe dropping a beverage or dropping a shareable off their check, and we're not seeing that right now. So... I can't tell you where things are headed for sure. I just know that today we're not seeing any softness in that kind of behavior.
spk09: And Greg, what we saw in 08-09 was the consumer really just became more discriminant about where they went out to eat and how they spent their money. you know, we've really worked hard to position ourselves to be there in a sweet spot. Again, I think part of our decision not to take price last year, our relative conservatism around taking price this year thus far is really meant to make sure that we drive that value proposition. In times like that, they look for consistency, they look for value, they look for quality. And we have our entire team focused on all of that to make sure that should what we're hearing happen, again, we believe that we'd be able to perform well relatively back then.
spk03: Thank you both.
spk11: The next question comes from Sarah Senatore from Bank of America. Please go ahead.
spk06: Thank you. I wanted to ask about, you mentioned the surge in sales and labor running. I mean, that sort of feels like it's been a theme actually for the industry throughout the pandemic where even last year you saw potentially a benefit to margins from that. I guess what I'm trying to understand is, two things. One is, is there anything that makes you kind of rethink how your labor matrix might work or is there technology? I'm just thinking about going forward you know, if there's more volatility in the labor market or even on the other side, is there a way to actually have perhaps a tighter labor model? And then the other piece of that is just, do you know if there was any impact on your top line, you know, whether it's slower service or anything like that? Again, I'm trying to understand sort of what the implications are other than just, you know, having better than expected margins for a short period of time.
spk07: So let me come back to the second part of the question. I may have to ask you a question to understand what your question is. But on the first one, with regard to labor or what we're learning, our company is constantly evaluating the efficiency back in the front of the house. So I don't think we've made any major changes in the operations. We always look at... optimizing our labor, considering the volume, or we've got, you know, we've had to digest a significant new sales channel over the course of the last year or so, and how do we, you know, how do we properly staff around, you know, a pretty robust off-premises business. So those things, you know, those things we're constantly building into the labor matrix, but frankly, you Frankly, those kinds of savings come in basis points. There's not a lot of low-hanging fruit. In this industry, Sarah, you're constantly looking for basis points to shave in terms of overall cost. We've made the same sort of improvements based on the changes in our business that you would expect that a restaurant company would make as we go along and along.
spk09: And then on the second part of your question, we track NPS and promoter score closely, and I'll just tell you that over the quarter, our NPS score sequentially improved month over month. So as far as your question about either the customer experience or whatnot, we believe we're still delivering it at a very, very high level.
spk07: And to just give you a little bit more color on this, When we have a sales surge like we had in March, and really the customer response has been so favorable this spring, what happens in the early days of that is restaurant managers across the company have set their schedules according to Department of Labor requirements or state requirements. So they've set schedules for sometimes two and three weeks out. So if you have an abrupt shift in your sales like we enjoyed during March, then it takes them a little bit of time just to staff back up and to kind of recalibrate the staffing.
spk09: And, again, I know I've said this before, but I think it's important. One of the key benefits of being a company-owned system is the opportunity and flexibility. the ability to share employees from restaurant to restaurant. So, you know, if we see that one restaurant is, you know, their sales are increasing exponentially, we can send a server or a cook from a neighboring restaurant and help with the staffing there if we need to. So that's been a good benefit as well.
spk06: Okay. So just so I kind of piece it all together, you know, the service wasn't as great as the MPS scores were improved, but the reason – to sort of think about staffing back up is just right now you're kind of putting out fires and moving people around, but that's not necessarily a sustainable model, even though the impact on the business didn't materialize.
spk07: Yeah, we'd like to have more bench strength in our restaurants. I mean, they're working hard and obviously delivering on good results. And so... But we'd prefer to be staffed at those levels we were prior coming into the pre-pandemic.
spk03: Thank you.
spk11: The next question comes from Jared Garber from Goldman Sachs. Please go ahead.
spk05: Hi. Good morning, guys, and thanks for all the callers today.
spk09: Hey, Jared.
spk05: I just wanted to circle up. on maybe how the consumer, if at all, is using the brand differently. I know that there's an opportunity at weekday lunch, maybe shifting some folks or getting some repeat business from the weekend brunch crowd. And then, Chris, you also noted that you're seeing some younger consumers come into the brand, and I don't know if that's a one-quarter thing or that's more likely over time, but I just wanted to get a sense of of maybe what you think is driving that. Is it some of the menu innovation that you're doing? And maybe that purple haze drink is something that can continue to drive that along with alcohol. So I just wanted to get a sense of how you're seeing the consumer interact with the brand maybe differently from the past based on some of the strategic initiatives that you guys have put in place.
spk09: Sure. I think it actually started a number of years ago when we did what I would call the shift to urban farm and the focus on our restaurants and our menu and tying that all together. I think we started to see that trend. So it's not a this quarter thing. I think we started to see our average age go down over these years. I think when you look at our menu and the innovation around there, when you look at what our restaurants look like going forward, all of our new restaurants that we build, but even the ones that we're going back and remodeling and bringing to that same look and feel, we see an impact. I just think we're broadening our appeal and we're basically filling the pipeline with the next generation of First Watch customers because of the actions we've taken. And then as far as your question about weekday, the weekday day part is growing faster than our weekends are, and so we're very encouraged by that. I think you know we look at it in terms of three day parts, weekday breakfast, weekday lunch, and then we weekends we just call brunch, and so the weekday breakfast and weekday lunch are both seeing growth, and so that's been encouraging for us. Now, some of that's been a lot of the suburbanization of the workforce. I think we're seeing a lot of that where people have more time during the week to do things like that, and we're benefiting from that, but I think it might also be their introduction to first watch and I think we're getting them to fall into one of our you know regular frequency buckets once they experience us we've always said that you know we have a very trial to frequency conversion rate and so as we get more people to try us whether it's through our high-profile new restaurant sites in new and existing markets or again because of this consumer shift I think that's what you see us you see us benefiting from
spk03: Great. That's really helpful. And just one follow-up quickly.
spk05: Can you just remind us on how much of the system is sort of converted or currently designed in that urban farm design? If I recall, it was the vast majority, but I just want to make sure that I'm correct on that.
spk09: Yes. It's now all of it, the whole system.
spk05: Great. Thanks. Congrats.
spk07: Thank you. Thanks, Stuart.
spk11: This concludes our question and answer session. I would like to turn the conference back over to Chris Tommaso for any closing remarks.
spk09: Great. Thank you all for joining us this morning. Appreciate the thoughtful questions and your time. As you've probably heard me say a couple times this morning, we're very optimistic about our second quarter and the year ahead, and we really look forward to connecting with you all again in a few months. And with that, hope you have a great day and a great week. Thanks.
spk11: The conference has now concluded. Thank you for attending today's presentation. You may now
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