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spk04: Thank you for standing by, and welcome to the First Watch Restaurant Group Incorporated Second 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 instruction on how to ask a question will be given at that time. This call is being recorded today, August 9, 2022, at 8 a.m. ET. and will be archived and available for replay at investors.firstwatch.com under the News and Events section. I would now like to turn the conference over to Rafael Gross, partner at ICR, to begin.
spk08: 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 second quarter 2022 on Globe Newswire and file its quarterly report on Form 10Q with the SEC. These documents can be found at investors.firstwatch.com. Let me now first 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. Such 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 cautionary 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 reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments, or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant-level operating profit margin, adjusted EBITDA, and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures that the comparable GAAP results contained in the company's earnings release filed this morning. And with that, I would now like to turn the call over to Chris.
spk02: Good morning. Thank you for joining us today for our Q2 2022 earnings call. I'm pleased to report that FirstWatch built momentum we reported in the first quarter and achieve continued success and sustained growth during the second quarter. We believe the results we've shared this morning speak to the strength of our brand, the distinctiveness of our offering, and an increasing awareness among consumers. These attributes reinforce our confidence in our ability to meet or exceed our stated short and long-term objectives. Our second quarter same restaurant sales growth was 13.4% year over year and 30.2% when compared to 2019. Increased customer counts continue to be the primary driver of that sales growth. I'm especially proud of our 8.1% same restaurant traffic growth when compared to a strong second quarter of 2021 and 7.4% growth when compared to 2019. This is significant when you consider that in Q2 of 2021, we had already returned to positive traffic versus 2019. Moreover, our traffic has improved sequentially quarter over quarter versus 2019 as well. Our average weekly traffic remained consistent throughout the quarter, and we experienced traffic growth in all three periods. In June, we achieved 4.2% traffic growth year over year. To add a bit of context regarding the strength of that last statement, Placer.ai reported that visits to full-service restaurants in June fell 4% year over year. Our performance clearly distinguishes us from most others in casual dining and the restaurant industry as a whole. On the back of our sales results, our restaurant-level operating profit margin was a healthy 82%, which brings us to 18.9% year-to-date, in line with our expectations, despite a challenging inflationary environment. We continue to stay true to our philosophy of utilizing menu pricing as a means to offset inflation, while continuing to elevate the First Watch experience with high-quality, evolving offerings. As you may recall, we decided early on to take a conservative approach to pricing these past few years, having made strategic decisions to, one, not take any price in 2021 as we work to welcome back our customers, and two, to take only a modest 3.9% increase at the start of this year. While we did see the expected slight impact on margins for the quarter due to increased commodity inflation, we believe our pricing approach was an important factor in driving our increased traffic growth. Additionally, we believe that much of the food inflation we've experienced has peaked, and we expect costs to normalize moving forward. We've improved our absolute and relative value proposition, especially when you consider that our increase is lower than both food away from home and grocery inflation. Customers know they can find fresh, high-quality food at First Watch for a per-person average just over $15. We believe this approach resulted in increased market share over the past year and in prior volatile periods. We did not see any negative traffic impact from our last price increase, nor have we seen what I believe to be an early indicator of pricing resistance, check management by the consumer. In fact, customers are electing to spend more in our restaurants. Overall beverage incidence is up, and our PPA is above our expected level when you consider the pricing. This reaffirms our pricing power, particularly given the value we provide. I want to pause here because as you consider the totality of the continued outsized performance that I just walked through, it becomes even more clear that First Watch is truly special. You've heard me speak about differentiation and our results continue to enforce that fact. For those of you that have had the pleasure of dining at one of our restaurants, you understand. For those who haven't, I highly encourage you to visit us or at least do the next best thing. Check out our website or Instagram and feel the freshness of our experience and our brand. Nobody's doing what we're doing at scale. The talented folks in every first watch are executing a high-quality experience in 450 restaurants that you typically see only in single-unit chef-driven restaurants. We roast vegetables, bake muffins, and juice fresh produce every single day, and our continued traffic growth shows how our commitment to quality is resonating with consumers. It's built deeply into our DNA. Consider this in the context of our most recent seasonal menu. where our queso birria-style barbacoa benedict performed far better than our already high expectations and aligned perfectly with current culinary trends, as you are seeing birria plastered across Instagram and on small independent restaurants' menus. What's most special here is that this menu item was identified and tested close to a year and a half ago, highlighting our ability to identify early trends and operational seamlessly throughout a fast-growing system. This is a unique competitive advantage that has been refined over decades. It ensures that we remain relevant and in a leadership position as we take advantage of the long runway ahead of us. And not only are we dedicated to delivering on that elevated experience for the customer, but we're also dedicated to fostering an environment for our employees that drives satisfaction, retention, and continues to help us attract some of the best and brightest talent in our industry. To that end, we're quite pleased that our staffing levels have stayed relatively consistent, with hourly staffing at 93%, while manager levels have improved slightly and currently sit at 2.8 managers per restaurant. At these levels, we are well positioned to continue to serve our increasing demand at a very high level, particularly with the additional uptake in applications that we've seen recently. At Firstwatch, there's no limit to the growth opportunities for our people, particularly as we continue to execute on our strategic development strategy and create more jobs. Consistent with our plan, we opened nine new system-wide restaurants in seven states during the quarter, including our first restaurant in Asheville, North Carolina, and our third in the Chicagoland area since our debut there last year. We ended the quarter with 449 total restaurants. Our development calendar is weighted slightly toward the back half of this year, as we've noted previously. We're on track and confident in our ability to meet that plan. In fact, thus far in the third quarter, we've opened four new restaurants, with three more slated to open by the end of this month and at least three more in September. The bottom line is we're very restaurants and have been for many years. As a reminder, in 2019, we opened 80 new first watch restaurants between organic growth and the conversion of certain acquired restaurants. We followed with 42 new restaurants in 2020 and 31 in 21. These new restaurants, which have enhanced footprints designed for higher volumes, have AUVs that reliably outperform our legacy locations, which raises my confidence in our ability to deliver on our long-term guidance in this area. Rest assured, strategic growth remains a priority for First Watch and further reinforces the competitive moat we've created and continue to widen. I'd now like to provide an update on a couple of our key initiatives that we've been talking about. Our alcohol program rollout is on track. The offering is now available in more than 75% of the system with a clear path to reaching our desired penetration by the end of this year. Additionally, our kitchen display system, or KDS rollout, is ahead of schedule and beginning to help us serve more demand, particularly during peak hours. We're on track to surpass our goal of leveraging the technology in at least half of our restaurants by the end of this year. In fact, at the end of the second quarter, KDS was in use in 114 restaurants, and today it's active in more than 200. I'm also excited to share that Stephanie Lilac, Chief People Officer of Bumble Inc., has joined the First Watch Board as an independent director. Stephanie is a respected leader in human resources strategy, including DE&I, compensation and benefits, and employee experience, having led these efforts for renowned General Mills and Dunkin' Brands. We're absolutely thrilled to have Stephanie's invaluable perspective on our board. During the quarter, we announced a national partnership with the V Foundation, whose mission it is to achieve victory over cancer. We contribute 25 cents from the sale of every kid's meal in every First Watch restaurant to the organization's Dick Vitale Pediatric Cancer Research Fund. Dick is a dear friend to Firstwatch, spending most days dining at our restaurant near his home in Lakewood Ranch, Florida. We're very proud to partner with him and the V Foundation and to share that through the first half of 2022, we've donated $300,000 to fund pediatric cancer research. Firstwatch is a company focused on quality, profitable growth, and we have a long runway ahead of us. We're executing well against our strategic plan and are benefiting from growing consumer demand, particularly in the daytime dining segment, of which First Watch is the clear leader. We still have relatively low brand awareness, yet impressive guest satisfaction scores, creating an ideal opportunity as we move forward. Consumers are still discovering us, and we're in a great position in our brand lifecycle as we grow toward our long-term potential of 2,200 restaurants in the U.S. We continue to open restaurants that are delivering tremendous results and returns while we reinvest in our brand to ensure long-term relevancy. At the same time, our teams are definitely handling the staffing and supply chain challenges facing our industry as a whole and have managed the volatility in the middle of the P&L extremely well. We've been able to defend our margins, enhance the customer experience, improve our value and attract new customers. Given those factors, coupled with our significant outperformance in the first two quarters of the year, we're raising our guidance, which Mel will speak to shortly. This is a tough environment, and despite a backdrop of macroeconomic uncertainty, FirstWatch is well positioned as we move forward. Now I'll pass the mic to Mel to review our second quarter financial results in further detail.
spk07: Thanks, Chris. So during the second quarter, our system-wide sales of $231.2 million were up $17.1 million over the first quarter of this year. The company's total revenues were $184,500,000. which is $11.3 million higher than the first quarter and $30.5 million more than the second quarter of 2021. Compared to the same quarter last year, our sales grew on the strength of continuing same restaurant sales growth of 13.4%, plus the sales and growth of the 46 restaurants, which have not yet entered our comp group. These non-comp restaurants include the five company restaurants that we opened during the quarter. Chris mentioned that in the second quarter, our same restaurant traffic growth was 8.1% over the same quarter last year and 7.4% over the same quarter in 2019, which predated the pandemic. Increasing our customer traffic count continues to be a key indicator of the quality of our same restaurant sales growth. Dining room recovery versus 2019 grew to 93% for the quarter and weekly off-prem sales volumes remained consistent even as our dining room traffic has continued its recovery. Likewise, our franchise revenues grew to 2.8 million for the second quarter of 2022 due to the increase in sales from franchised-owned restaurants and the addition of 11 franchise restaurants opened since the second quarter of last year. During the second quarter of this year, franchisees opened four new restaurants. Food and beverage costs as a percentage of restaurant sales rose to 24.9% in the quarter. That's up from 23.1% in the first quarter. We experienced inflation of 17.7% in the cost of our commodities, which was higher than we projected for the quarter, but we believe this quarter's inflation is the high watermark for our year. Labor and other related expenses as a percentage of restaurant sales were 32.3% during the quarter, which is consistent with our first quarter. Labor inflation is holding in the range of 8% to 10%, which is consistent with what we expected. At 21.9 million, G&A increased 0.3 million over the first quarter, which was in line with our plan. As we discussed in our last earnings call, G&A was lower in the first quarter due to the timing of some of our planned projects. We intend to continue our investment in staff and in projects that provide for our future growth and the restaurant efficiencies. Net income was $2.7 million for the quarter. Adjusted EBITDA was $17.8 million, and restaurant-level operating profit was $33.1 million, with a margin of 18.2%. Year-to-date, this brings our adjusted EBITDA to $37.2 million, and restaurant-level operating profit to $66.5 million, with a margin of 18.9%. We fielded a lot of inquiries this year about our egg costs. Before the year began, we put in place a full-year supply contract with a favorable pricing formula for our eggs, including our pasteurized cage-free supply. In the second quarter, when the effect of the avian influenza put a significant strain on egg availability, we modified that contract to ensure that we would secure the necessary supply at costs that continue to be favorable to the market rate. As Chris shared in his comments earlier, is committed to delivering the elevated experience that our customers have come to expect and at a great value. In that spirit, we modestly increased our in-restaurant menu prices by 3.9% starting in the first week of our eighth period on July 25th. We do not anticipate this measure is going to have a negative impact on our traffic. I'd now like to shift the conversation to our full year outlook. Given our outperformance in the first two quarters of 2022 and our continued positive momentum, we've raised our guidance on some metrics. We previously shared that we expected same restaurant sales growth in the high single digits. Now we've increased that range to 13 to 15% for the year, driven primarily by our continued positive traffic. We'd also previously shared that we expected total revenue growth in excess of 15% relative to 2021. We now expect that revenue growth to be approximately 20% in total revenues. And lastly, We previously shared that we expected adjusted EBITDA in the range of $67 to $71 million for the year, and we've updated that range to $70 to $72 million. We'd also like to reiterate our previous guidance as it relates to our blended of 33 to 34% for the year. We still expect between $60 and $70 million. And we still expect to open between 30 and 35 new company-owned restaurants and 8 to 13 new franchise-owned restaurants during the year. For some additional detail, please visit our Q2 supplemental materials deck that we added this morning on our investor relations website. We appreciate the opportunity to share these strong results with you and operator. If you'll open the line, we'll start taking questions.
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Chris O'Call from Stiefel. Please go ahead.
spk11: Thanks. Good morning, guys, and congratulations.
spk07: Good morning, Chris.
spk11: Thank you. comps and traffic accelerated sequentially relative to 19 compared to the first quarter. Can you talk a little bit more about or provide some more details around what drove that acceleration, whether there are any meaningful call-outs in terms of just geographies or customer segments that would help us understand the strength of that performance? And then how do you gauge the durability of what you're seeing right now in terms of that top-line number?
spk07: So a couple things come to mind. One, Our increase in both traffic and sales has not been limited in any particular geography. It's been fairly consistent across all the markets we operate in. And the company's history has been that we've grown traffic for decades, but for the pandemic environment. So I guess in terms of the stamina of our growth, we've got a pretty long history of doing this, so we're confident we can continue to build it.
spk02: Yeah, and I'd also, you know, I think it's the sum of all parts, frankly. I think it's the continued work we do around our menu and having constant, you know, menu news through the seasonal menu program. It really is our hours, our focus on service, our teams. I mean, it's everything. You know all the work we've done to – to reposition the brand over the last five or six years. And all of that's really resonating with the consumer. And that and obviously the recovery for us has been more rapid than others. And we see that sequential improvement. Obviously we're still, we're not in what I would call a pure environment yet where we're comping over normalcy every single period. So you do have those ups and downs. But I think if you strip all that out, the trend line is where we want it to be and we're really pleased.
spk11: Great. And then just one other one. I wanted to touch on just the performance of new units, particularly the 21 development class and any updates you can provide around the unit economic performance there relative to your targets. And then maybe some of your learnings have been about the optimal trade area placement going forward based on those stores.
spk07: So our 2021 class of restaurants have all outperformed the average unit volumes of the rest of the system. What we've seen, Chris, actually over the course of the last several years is that we are reaching more mature performance more quickly. We generally plan on doing that within a year or so, and we're doing it in seven or eight months. And that's really a testimony to our trainer's getting out early, our use of veteran managers when we open new restaurants, and frankly, the system has got a history of improving the restaurant performance quickly in our new restaurants. And so we've had a great deal of success, and our development team is observing a pretty data-driven process when we do site selection. By observing that, they're batting 1,000 in terms of selecting restaurant sites that proved to be good performers for us.
spk02: Chris, I would add that just like you see in our mature restaurants in our markets, the same holds true for new restaurants where we're seeing broad success across different geographies. It's really not any kind of regional differences. You specifically asked about the site selection and things like that. And I would just reiterate what Mel said about the discipline that we apply to that and the learnings that we take from every opening. And so it's great to see that consistency across geographies with the new restaurants because that levels out our ability to do our openings like we talked about where it's equally balanced between core emerging and new markets. We don't have to balance everything. more in core markets to offset slower starts in new markets and things like that. So it gives us a lot of flexibility and gives our real estate team a lot of runway to bring sites to real estate.
spk04: That's great to hear. Congrats again. Thanks. Thanks, Chris. The next question comes from Jared Gerber from Goldman Sachs. Please go ahead.
spk06: Good morning. Thanks for the question, and congrats on another really strong top-line quarter. Good morning, Jared. Good morning, Mel. I wanted to just get just one point of clarity on the pricing. So I think you said you took 3.9% pricing in July, so you'll be running, if my math is correct, close to 8% in the back half this year if you combine the two pricing actions. I just want to get a sense, and obviously the traffic trends have certainly been strong, but I want to get a sense of what gives you the confidence that you can kind of take that now with the incremental macro pressures and just how you got comfortable with taking that and also maintaining that high level of traffic performance.
spk02: Yeah, I think, as I stated, we've been conservative in our approach on pricing, and I still think Again, relative to what our industry's taken and what we're seeing in grocery and food away from home, we still feel really good sitting at 8% for the rest of the year or just under 8%. And so, again, the comment about we don't expect any negative impact on our traffic, you know, this is one where we feel like, you know, we can take this price, do what we've done in years past, which is take it to offset the inflation that we're seeing, and then hopefully that – subsides a little bit and we're in a good place, but we're very cautious about taking price, not because we don't believe we have pricing power to do so, but we do like reserving that and we also like to really highlight our value as we go forward here.
spk06: Great, thanks. That's helpful. And then just one other one for me. The labor environment, Mel, I think you said you're about 93% staffing versus the 2019 level, but obviously the top line performance is really impressive. So I'm wondering if there's sort of a scenario here in which the efficiencies, maybe it's gaining through the KDS system rollout, or maybe it's just some benefits of that one-shift model where you had less turnover over the last couple of years, which is driving some greater level of efficiency. Is that allowing you to maybe operate at a lower staffing level but still drive the top line, or should we expect to sort of recapture that remaining 7%?
spk07: Well, obviously, we have been operating at a lower staffing level and driving the top line, so that's true. I still think we're learning. We're still learning about what the KDS system is going to do. You know, we have a very small sample size, I would say, right now with regard to that, but I think the combination of things and kind of Working together to squeeze out more efficiencies may be an outcome we'd look for, but we do that all the time regardless of what is going on. I mean, that's just part of the restaurant business is that you're constantly looking for basis points of savings and labor and input costs. And so I think what you're getting at is are we seeing more of a permanent shift in our in our labor environment, and I don't think we'd be ready to conclude that just yet. We're still operating in a labor market that is improving, but it's still affected by what I would call pandemic or post-pandemic kind of different workplace.
spk06: Awesome. Thanks so much. Congrats again.
spk09: Thanks.
spk04: The next question comes from Jeffrey Bernstein from Barclays. Please go ahead. Good morning, Jeff.
spk03: Good morning. Thank you very much. Two questions. The first one, just on the momentum that you saw from a same-store sales perspective, it seems like you're confident, I guess, that momentum has continued thus far in the third quarter, leading you to raise that guidance. I'm just wondering, you mentioned no sign of slowing traffic, no pushback on the price. Can you just talk about why you believe brand resilience is going to hold up during what seems to be a likely economic slowdown over the next six to 12 months, whether it's historical data to prove that point or trends you've seen more recently, just because it does seem like most in the industry are acknowledging that there will be a slowdown in the back half, just wondering how Firstwatch will be able to navigate better than others. And then I had one follow up.
spk02: Sure. Good morning. It's Chris. I'll say two things. One, We really believe in the differentiation of the brand and our offering and the fact that we're an affordable luxury. Again, for consumers to get the kind of food and experience that we're offering for, call it $15, really sets us apart. And going back to my time here in 08, 09, and 2010, I think in times like this, it's when the consumers... or quality consistency if they are going to reduce the number of times they go out to eat they want to make sure they get it right and all the steps that we took coming out of COVID to communicate that quality and that consistency whether it was the fact that we didn't take anything off of our menu when we returned or the conservative approach to pricing or some of the improvements that we made and some of the frankly the culinary additions that we've had really uh we think will carry us through that. So we also know, Jeffrey, that we've got unmet demand. So that gives us confidence as well. And that's the reason for our focus on improving throughput because we've got unmet demand sitting at our front door that if we can unlock that, you know, that's an even greater opportunity.
spk03: Understood. And then just on the cost side, it was interesting you mentioned on a couple of occasions that you think the – maybe the commodity outlook or inflation has peaked. I'm just wondering, maybe you can share, you know, whether you think that's broad-based across all commodities, or is it something specific to what you are sourcing and E. coli can provide in terms of maybe what percent is locked or what gives you the greatest confidence that we're now in for less inflation going forward? Thank you.
spk07: So, based on just talking with my peers and what I see in the industry, our commodities, which, you know, our five or six you know, commodities remain or the top items remain pretty much the same, you know, avocados, bacon, our bread, our eggs, our coffee beans. Those stay, you know, fairly consistent in terms of our usage across time and at least within that commodity group. I think we expect to see the, you know, as we particularly begin to roll over more inflationary periods from last year, that the ascent of inflation for us would not continue at the same rate. I don't think that that's true in all proteins that I know others are dealing with, but at least for our group, I have some confidence that we would see that soften a little bit for us. And then in terms of pricing, I think I'm right when I say roughly 50% of our market basket has at least fixed price formulas or fixed prices through much of the rest of the year now. So we have some pretty good line of sight to what we believe is going to happen, at least for that 50%.
spk03: Understood. So you'd expect going through the back half of the year that the basket inflation number, I think you said it was like 18% in the second quarter.
spk07: It was 17.7% in the second quarter. Frankly, Jeff, I've proven to be a bad predictor of the amount of inflation. It was more than I expected at the first part of the year, so I feel absolutely certain that we're not going to duplicate that.
spk03: Got it. So we should expect easing in the third and fourth, maybe getting down to single digits, or do you think that's too aggressive in terms of the level of inflation?
spk07: I think that'd be too aggressive. I think we're going to remain in the double-digit territory for the remaining two quarters, which will kind of balance out our year maybe just higher than I predicted, but more along the lines of maybe 15% for the year or something like that.
spk03: Got it. Great to hear. Thank you.
spk04: Thanks, Jeff. The next question comes from Nicole Miller from Piper Sandler. Please go ahead.
spk01: Thank you. Good morning. Good morning. You talked about mix shift kind of qualitatively, and if we put together the pieces of comp and what you gave us on price and traffic, basically mix is, again, up low single digit. So I just wanted to confirm that. And then also... Previously, I think consumers were adding on bacon and adding on beverage. I guess the question is, what the heck are they adding on now?
spk07: Well, we have certainly had some well-performing limited time offers. So that enters into our mix. And you may follow our menu. We've offered some uh, premium items that, you know, frankly have been very well received by our, uh, our guests in the restaurants. Uh, so that's, that's adding to the mix as well. So the, I think that continues to be one of the big drivers.
spk02: Yeah. The, the, um, the other point I mentioned, uh, in my comments was that beverage incidence is up and that's not a small contributor. Uh, so between, uh, the juices and then like Mel said, the, uh, the LTOs and the attachment on those, that's really what's driven our mix.
spk01: Okay, great. And then you also made a comment I found very interesting around your value proposition and even affordability, I suppose, to some degree versus food at home. And I was just curious if there's any way, you know, if that's just like your intuition and I can see how that makes sense. Or if you think that's even more important for the cuisine and even the time of day that you're offering food away from home, do you compete a little bit more with someone saying, gosh, I can replicate this and taking that into account? Or is it just more of an observation?
spk02: Well, despite the incredible sales of our cookbook, I would say that most people would prefer to eat out for brunch really because of the occasion aspect to it. I mean, it's, There is a component where it's not the easiest meal to prepare at home if you want to get creative, per se. And so, again, as an affordable luxury and as an experiential-type brand, that's what we think is the differentiator there. And then as it relates to the inflation and my comment about 2008, 2009, and even into 2010, is we just saw that families were going out for a steak dinner on Friday night for getting together for brunch over the weekend and spend a lot less and have the same kind of social engagement, but do it during the day. And now with all that we've done on the menu from the alcohol and the juices and things like that, it's just very appealing across all demographics to families to take part in that. So that's what gives us comfort there.
spk01: And just really quick with the increased applications, are those happening anywhere in particular or for any position in particular?
spk02: I'd have to look at that and see. I think it's across the board, but let us get back to you on that.
spk01: Thank you so much.
spk02: Thank you.
spk04: The next question comes from Andy Burrish from Jefferies. Please go ahead.
spk05: Hey, guys. Good morning. Good morning. Just trying to kind of contextualize a little bit the revenue guidance increase. Is a lot of it from, you know, the outperformance in the 2Q and then the additional pricing? Is that kind of what you're layered in just given how consistently, you know, you've sort of seen demand trends out there?
spk07: Well, it's our expectation about our continued growth in traffic as well as what you saw in what we've seen the first half of the year, not just the second quarter. Yep.
spk05: And have you continued to see kind of weekday lunch outperform just given that it's an important day part, but obviously one where there's more probably flexibility and capacity. And I think, you know, I think there's been some menu focus as well. Just give us an update there, please.
spk02: Yeah, our weekday traffic in general, trends have improved and they're above weekends. Obviously, we have more capacity during the week, but it's actually spread out pretty nicely between breakfast and lunch on weekday. So that's been a nice one for us. You're right, we had talked, you know, pre-IPO about the focus on lunch, and it's actually spilling over into weekday breakfast as well, which is great. Fantastic.
spk05: And then just a couple of just quick expense questions. On the higher inflation and the egg contract you had, did that, I assume, just kind of, you know, looking at making sure you had some supply during that tough period, cost you a little bit more in the quarter outside of the contract? And then secondly, can you just refresh my memory on kind of other operating expense, what the pressure there has been recently?
spk07: Okay. So eggs, yes, we did see the new egg pricing or the pricing that we had to go through in the second quarter was elevated. um as a result of the avian flu and our you know we move kind of kind of the worst thing that can happen is for us to run out of eggs altogether right so so my focus and our team's focus is on securing supply we do it we do it a little bit cost favorable to the market and we had a uh And we're still a little bit favorable to the market price, but not nearly as favorable as we were in the first quarter. So we did pick up a good bit of cost there. And it'll probably be that way for much of the rest of the year as the flocks are repopulating and growing so that they deliver the kind of eggs that we serve in our restaurants, which we're pretty finished. the high quality of the eggs that we use in our restaurants. In terms of what's in other operating expenses, really the thing that tends to shift around in there was kind of a variable cost. A larger variable cost is the delivery fees associated with our third-party off-premises business. We also have packaging materials that are captured in that number. And then the rest of it are the things that we do to maintain the restaurants or cleaning materials and supplies for the washing machine, that sort of thing, staff uniforms. It's kind of a broad range of stuff that doesn't wind up on the plate of the restaurant or in the pocketbooks of the staff. in terms of payroll.
spk05: Understood. Yeah, nice results, guys.
spk09: Thank you.
spk04: Thanks, Andy. The next question comes from Gregory Frankfurt from Guggenheim. Please go ahead.
spk10: Hey, thanks for the question. My first one is just on the pipeline, maybe for units into 2023. I think you're probably starting to put that together now. Given how strong the comps have been, is there an opportunity to accelerate that at all, or is site selection still a governor on acquiring new sites? I'm just curious what you're seeing on that front as we start to build that up.
spk07: For almost all year, the sites that we're looking at that Eric Hartman's team is delivering to us are really related to next year and the year following, since we're kind of inside the window. of the restaurants that will open this year. In terms of accelerating, as I've mentioned before, we kiss a lot of frogs. We look at a lot of sites and we're very strict about the selection criteria on the restaurants. In terms of accelerating right now, we're going to continue to to build out at the pace that we promised long-term, which is about a 10% growth in the system every year. And I feel like we'll be looking back on that eight years from now and not really apologizing for that kind of a unit growth story.
spk10: That makes sense. And just on the pricing, any quantification of how value scores have been and I would imagine that that's been building pretty well as you've underpriced peers. Just quantification on that would be helpful.
spk02: Yeah, our value scores have remained very consistent through the price increase. Actually, that's been our historical perspective as well. Again, we feel like our pricing relative is conservative. But as we look at the qualitative metrics, too, our NPS scores are solid, our value scores are solid, and obviously the biggest indicator of that is traffic. So with those three things plus others that we look at, that's why we feel like we've actually improved our value proposition. And the other thing, I kind of mentioned it, but it's worth calling out, is we're also doing things... to enhance the customer experience when we do this. So we're not just taking price on a like-for-like product or even experience when we're doing ingredient improvements and things like that. There's some behind-the-scenes things that we're doing to ensure consistency in execution, but then to also, again, make continuous improvements, which we've done for a very long time.
spk07: just conversationally, Greg, I don't know if you ever tried our crab cakes Benedict that we had on the menu in the first LTO of the quarter, but that was simultaneously one of the most popular LTOs, and I think it was as pricey as anything we've ever put on our menu. And customers consumed it to the point where we were in every bit of crab we could find. So frankly, frankly, our, you know, it's, we have a customer who seems to see value in a lot of our, in a lot of our items, even when we take the price up.
spk10: I'm usually a chocolate chip pancakes guy, but maybe just, just the last question for me is, Where do you think on the menu, you've done a lot of work on alcohol and the appetizers on the last couple of years. Where are the biggest opportunities on the menu from here? As you're looking for what you want to redesign or what you want to expand and try to mix going forward, where are the big buckets of what you're looking for for opportunity?
spk07: We've got a lot of runway to maximize the items that we have there now, but culinary innovation is is part of the DNA of the company. I don't know if we'd announce what it's going to be on a call.
spk02: No, but what I will say is, and we've talked about this before, you know, we haven't innovated around alcohol yet. We're rolling out what I would call to be the entry-level platform. And when you think about what we did with the juice platform and how that went from, you know, 3% mix to 15% mix, we're really excited about the opportunities around alcohol and around beverages in general. I think there's opportunity for us in the beverage category, too. To Mel's point, nothing that we're ready to announce yet, but things that are in our process that have us really excited.
spk07: Like the chocolate chip pancake line. Yeah.
spk10: Thanks, guys. Appreciate the thought.
spk04: Again, if you have a question, please press star, then one. Our next question comes from Brian Vaccaro from Raymond James. Please go ahead.
spk12: Thanks, and good morning. Hey, Brian. I want to circle back on the alcohol program. Can you just level set how the program performs here in Q2, either kind of percent of sales mix or guests that are ordering from the platform? And then where is overall awareness on the program and any plans in the second half to add marketing support that can move the needle further, or is that more of a 23 dynamic?
spk07: So in terms of mixing, when we launched the program in the restaurants where we served it in the dining rooms, it was just under 4% of the mix. Currently in the dining rooms where we serve it, it's about 6.5% of mix. So it's been improving over the course of the last, what, 16 months that we've
spk09: than purchasing licenses and installing it in the restaurant. Okay.
spk12: And just in terms of plans to in-store marketing to build awareness further, to what degree have you already done that or are there plans in second half or is that more 2023?
spk07: Yeah, we're still purchasing licenses. So until we have it in as many restaurants as we believe we can get it in, I don't think we're actually trying to move the number up so much. It probably is, just in terms of timetable, you say 2023. That's probably a pretty good timetable. Okay, thank you for that.
spk12: And on the KDS rollout, I understand it's a small sample size, but in the units that have had it for a little longer and are optimizing the system, I'm just curious what benefit, can you give us any more color, the benefit you're seeing on throughput or table terms during peak periods?
spk02: Yeah, we're seeing benefits on ticket times. Also, KDS is one part of an overall improving throughput strategy that we have KDS gets all the all the talk because it's sexy and it's technology but there's a lot of a lot of other things we're doing and so to measure the benefits specifically of that is is you know it's part of a broader initiative for us but everything that we expected it to do it's doing you know from helping us folks sooner, reduce training time because of it. Again, some of those behind-the-scenes benefits. And our accuracy is improving, but obviously the most important factor for us is improved throughput during peak hours, and we're seeing that. And that's why we're being so aggressive in the rollout, so that we can get that rolled out and start talking about it in terms of its impact on the organization.
spk12: All right, great. And last one for me, I just want to ask about labor inflation. I think you said around 8% to 10% in the second quarter. And Mel, I'm just curious how you expect that to trend moving through the second half. Could you start to see wage pressure abate with staffing levels coming back, et cetera? And are there any outsized training costs or other costs that have been associated with this tight labor market that could start to ease from what we've seen in the P&L in the last few quarters? Thank you.
spk07: So the 8% to 10% is kind of what we projected for the full year in terms of our inflation. And I do think that it's, I do think that that wage inflation is probably here to stay through the balance of the year. Our applications are up, you know, in terms of just the number of people applying for positions. And that's always a good sign for us. It's helpful. Haven't seen a lot of increase in training costs. There's probably, you know, probably an increase in the frequency of training. Most of the staff-level positions are trained in the restaurants by veteran managers. And so it probably puts a, you know, it probably adds complexity or a physical strains to do it as often. And we get some, you know, we do a lot of listening to what goes on in the restaurants. And so that frequency of training shows up when it becomes more complex or more frequent. But it hasn't added a lot to our overall cost.
spk09: All right. That's helpful. I'll pass it along. Thank you.
spk04: The next question comes from Andrew Charles from Cowan. Please go ahead.
spk13: Great. Thanks, guys. Good morning. Mel, good morning. Good morning. Mel, just one finer point just on commodity inflation. The 10Q calls out 15% to 17% COGS inflation. Is that the anticipated level for the full year or just for the back half of 2022?
spk07: That was for the full year.
spk13: Great. Thanks. And then you guys obviously called out – strong reception of the brand and new markets, you know, strong class of 2021 openings. And as you continue this expansion path in the Northeast as well as Midwest, is Canada something that's on your, you know, on your radar? Is that an opportunity for growth here as well as just broader international expansion? If you were to pursue it, would that be through a company operated, a company operated angle or perhaps something that we could see franchised?
spk02: I would say, um, It's not on our radar right now. We've still got so much green space in front of us in our core emerging new and then markets we haven't even entered into yet. So not something that we're thinking about. We actually get quite a few inbounds on international expansion, and we're really focused on bringing our unique breakfast, brunch, and lunch to the contiguous 48 for now. But I think obviously down the road, that's an opportunity for expansion, but not in the near term.
spk13: Very good. Thank you.
spk04: This concludes our question and answer session. I'd like to turn the conference back over to Chris Tomasa for any closing remarks.
spk02: Great. Thank you for joining us today. Thanks for your thoughtful questions. We're certainly aware of the obstacles and the macroeconomic uncertainty around the world and here at home, but Firstwatch has overcome its fair share of challenges during our nearly 40 years in operation. So if you can't tell by the call and our tone, we're confident in our unique positioning and our value proposition, and most importantly, I'm really confident in the leaders throughout our organization who continue to adapt and thrive. As we look ahead, we continue to invest in our people, and we continue to invest in our growth. And I want to thank everybody for joining us here today. With that, we'll close it out.
spk04: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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