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spk04: Thank you for standing by and welcome to the First Watch Restaurant Group Inc. Third 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, November 7, 2022, at 8 a.m. Eastern Time and will be archived and available for replay at investors.firstwatch.com.
spk01: under the news and events section i would now like to turn the conference over to raphael gross partner at icr please begin good morning everyone and welcome i am joined here today by firstwatch's chief executive officer and president chris tomaso and chief financial officer mel hope this morning firstwatch issued its earnings release for the third 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 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 to the comparable GAAP results contained in the company's earnings release filed this morning. And with that, I would like to turn the call over to Chris.
spk05: Good morning, and thank you for joining us. First Watch had another fantastic quarter where we experienced positive trends and improvement across several key areas of the business. We achieved same-restaurant sales growth driven in part by an increase in same-restaurant traffic. We accelerated our new restaurant development. Management staffing increased, and we benefited from an easing of commodity inflation. Our confidence in the continued momentum we are experiencing with consumers to drive sustainable growth remains higher than ever. This morning, I look forward to sharing our third quarter highlights. I'll also provide an update on Hurricane Ian's impact on our Florida business and discuss the national recognition as a beloved workplace that we recently received. Afterward, I'll pass the call to Mel to dive into our quarterly results in greater detail. In an environment where economic uncertainty and global turmoil dominated the news cycle, First Watch experienced great strength. System-wide sales for the third quarter were up 19.2% year-over-year. We achieved 12% same-restaurant sales growth, driven in part by 3.7% same-restaurant traffic growth when compared to a successful third quarter of 2021. Performance brings our year-to-date same restaurant sales and traffic growth to 17% and 10.6% respectively. And when we compare our Q3 results to 2019, same restaurant sales growth was 32.7% and same restaurant traffic growth was 7%. This brings our geometric three-year stacks to 36.1% and 10.4% respectively. We know that very few brands out there are generating traffic-driven growth in this environment. In fact, Black Box Intelligence recently reported that September was the industry's seventh consecutive month of traffic declines. And in Q3, the industry as a whole was down 4.6% in traffic, though as you know, First Watch saw the opposite. Our traffic grew 3.7% during the same period. Our continued same-restaurant performance appears to be consistently among the best in the industry, demonstrating the enduring strength of the First Watch brand. And because of these continued strong results, we'll again be raising certain elements of our full-year guidance, which Mel will elaborate on shortly. Breakfast and brunch occasions continue to grow as consumers crave elevated experiences and opportunities for meaningful social interactions, and we show up very well here. We continue to see evidence that consumers truly recognize our unique positioning and our overall value proposition and are seeking out our highly differentiated offerings. According to Technomic data, we maintain high ratings related to food quality and health and wellness. And in addition to appealing to a high-income consumer, we've seen a desirable balancing out of our customer base with strong growth among the millennial and Gen Z segments, who now make up a majority of our heavy users, according to Technomic, filling that pipeline of future diners. Growth in these segments is undoubtedly related to our increased relevance, and these customer groups have the highest stated likelihood of increasing usage at restaurants, especially during the breakfast day part. And in an environment where consumers are nervous about inflation, breakfast or lunch at First Watch is an affordable luxury and an appealing alternative to more expensive meals like dinner, with our elevated and on-trend menu made with fresh, high-quality ingredients at a per-person average just under $15.50. Our scale is an advantage here, and as the leader in dining, we continue to see a long runway ahead. Further to the point of continuing relevance, our seasonal menu program serves as a key differentiator and a traffic driver. We introduced our fall menu in late August, featuring unique takes on some classic favorites like our brisket corned beef hash and modern croque madame. Just one week ago, we unveiled our holiday menu, which includes a braised barbacoa breakfast burrito and shareable gingerbread spiced donut holes. And now, across most of our restaurants, you can enjoy a refreshing mimosa or Bloody Mary made the way only First Watch can. We're proud of the investments we've made in developing our award-winning culinary strategy, and this approach continues to propel the First Watch brand forward, build tremendous loyalty among both staff and customers, and create buzz throughout the year. Our teams embrace a culture of innovation. As an organization, we continue to invest in resources to support evolution and growth on the culinary, operational enhancement, and human capital fronts. We've been pleased to see continued increases in applicant flow, and our team's focus on hiring has resulted in continued improvement in staffing levels. In fact, during Q3, we returned to full management staffing for the first time since before the pandemic. We opened 11 system-wide restaurants during the third quarter, and we will open an additional 17 in the fourth quarter. This brings our full year total to 44, which is above the midpoint of our previously announced full year guidance range. Our company-owned restaurants, open to date in fiscal 2022, continue to boast annualized AUVs above our comp group average and have maintained that momentum regardless of geography, which reinforces our proven portability. Our kitchen display systems, or KDS, continue to be a popular upgrade among our staff. In addition to efficiencies in our day-to-day execution, the system also streamlines our onboarding and training process for both our hourly employees and our managers. KDS is now active in more than 300 restaurants. We're ahead of schedule with this rollout and now anticipate it will be active in every company-owned Firstwatch restaurant by early next year, with plans for our franchise restaurants to implement the system next year as well. With the capital spent on this system, we will reap the intended benefits in 2023. Firstwatch has delivered tremendous growth and success for decades. Throughout that time, our organization has managed through challenging times, including economic crises, natural disasters, and, of course, the COVID-19 pandemic. These challenges are by no means easy to navigate, but I can assure you that each time we faced an obstacle, we've continued to invest in people, we've continued to invest in our brand, and we've continued to invest in our growth. Our customers trust us, and they've shown unwavering support for their neighborhood first watch during each difficulty we faced. and in every instance, we've emerged stronger than before. About five weeks ago, we provided an update on Hurricane Ian and its effects on our Florida business after the Category 4 storm hit southwest Florida during the first week of our fourth quarter. At that time, we shared most importantly that every First Watch employee had been accounted for and that 10 of our restaurants remained temporarily closed. Later that same week, following our update, we were able to reopen nine of those 10 restaurants while we reopened while we began to rebuild one 35-year-old restaurant that sits right on the intercoastal waterway in Naples that had sustained substantial damage. I'm proud to share that next week, our training team is heading to Naples, preparing to reopen that final restaurant two weeks from today. The team is thrilled to return to their home restaurant, reunite with their longtime colleagues, and, of course, welcome back our loyal customers. Through the storm's destruction and Southwest Florida's ongoing recovery, we once again saw the absolute best in our people. They showed up for each other and for our communities. Through our Youth First Fund, thus far we've been able to provide tax-free grants to more than 230 of our employees in need in Southwest Florida, which is helping them get back on their feet more quickly. Companies talk about culture all the time. In my 16 years with First Watch, I've seen firsthand our culture come to life through inspiring actions, particularly during difficult times. A few weeks ago, First Watch was honored nationally as one of Newsweek's Top 100 Most Loved Workplaces. In fact, we were the top-ranked full-service restaurant concept. When the culture our people have built over the past 39 years is noticed and appreciated with recognition like this, it makes me so proud. I want to personally congratulate and thank our teams in every First Watch restaurant and in our home office. This one is because of you, and it's for you. And with that, I'll pass the mic to Mel to share our third quarter results.
spk09: Thanks, Chris, and good morning, everybody. During the quarter, First Watch restaurants realized system-wide sales of $235.2 million, which is, as Chris mentioned, a 19.2% year-over-year increase. Total revenues for the company were $186.9 million, including sales of $184 million in the company-operated restaurants and $2.9 million of franchise revenues. Total revenues were $29.4 million more than in the same period last year, or up almost 19%. The growth in our comp sales and traffic, which Chris also noted, was 12% and 3.7% respectively. Overall growth in comp sales and traffic was driven by the continued recovery of our dining rooms, which increased to 93.3%, in the third quarter relative to our pre-pandemic levels in the third quarter of 2019. Starting in the fifth week of the quarter, sales benefited from a menu price increase of roughly 3.9%. This increase has not affected our dining room traffic, and we continued to achieve year-over-year growth in our third-party delivery sales and traffic through the rest of the quarter. As a percentage of restaurant sales, our food and beverage costs were 24.2%, which is a 70 basis point improvement from the second quarter. Commodity inflation of our market basket costs topped out earlier in the year and trended down to 11.2% during the third quarter. We anticipate 12 to 14% inflation during the fourth quarter as we lose some benefit of lapping a short-term spike in egg prices that was contained in the third quarter last year. Labor and other related expenses were 33.3% of restaurant sales, which is an increase of 100 basis points from the second quarter. Our management staffing reached a target goal of 2.9 managers per restaurant by the end of the quarter. That's the highest it's been since pre-COVID. Over the next several quarters, we're focusing on optimizing our staffing as our restaurants have returned to a more normal seasonality. General administrative expenses at $21.7 million were slightly lower than the second quarter. Our net income includes costs of approximately $1.6 million incurred in connection with the secondary offering we completed during the quarter. As a reminder, These issuance costs are non-deductible for tax purposes, and so the associated provision for income taxes is also higher. Our year-to-date net income is $7.4 million. Adjusted EBITDA was $17 million with a margin of 9.1%, bringing our year-to-date adjusted EBITDA to $54.2 million with a margin of 10%. Restaurant-level operating profits. was $31.9 million with a margin of 17.3. Our year-to-date restaurant-level operating profit is $98.4 million with a margin of 18.3%. I, too, want to echo Chris's comments about the determination of our teams to swiftly reopen our restaurants impacted by Hurricane Ian. Our fourth quarter got off to a slower start than we had planned. but our team's efforts minimized those effects. All things considered, we're raising certain elements of our full-year guidance. Based on our sales results, we now expect full-year same restaurant sales growth at the top end of our previously shared range of 13% to 15%, including continued positive traffic. We now expect year-over-year total revenue growth will be in the range of 20 to 22%. We expect to open 12 new company-owned restaurants and five new franchise-owned restaurants during the fourth quarter. This brings us to 30 new company-owned restaurants and 14 new franchise-owned restaurants in 2022 for a total of 44 new system-wide restaurants. This is above the midpoint of our previously shared range. Capital expenditures should land in a range of $60 to $63 million and will include the capital spending associated with rolling out our KDS system to our company-owned restaurants. And we confirm our previous fiscal 2022 guidance with respect to adjusted EBITDA in the range of $70 to $72 million. Finally, we've increased our blended tax rate to 40 to 41% due to the non-deductible secondary offering costs along with the increase of certain permanent book-to-tax differences. For some further detail, you can visit our third-quarter supplementary materials deck on our investor relations website. I want to thank you for the opportunity to share our continued success with you, and if the operator would please open the line, we'll be happy to take some questions.
spk04: Certainly. And we will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please stick up your handset before pressing the keys. To withdraw your question, please press star then two. And our first question today will come from Jared Garber with Goldman Sachs. Please go ahead.
spk00: Hi, great. Morning, Jared. Morning, how are you?
spk09: Fine, thanks.
spk00: I wanted to get a little bit of a sense on the new store productivity. Chris, I think you mentioned continuing to see really strong sort of ramps and new markets on those new units that you opened. I think in the release today, you said you opened new restaurants across, I think, nine different states. Some of those presumably are states you're already in, like Florida. but presumably some are new as well. So could you just give an update on new store productivity and what you're seeing in the new stores that are opened in the last three to six months in some of those newer markets? Thanks.
spk09: So most of our new restaurants now are annualizing its sales of about $2.2 million, which is above the system average.
spk00: Great. And then I guess anything just in terms of productivity ramps or productivity in new markets versus core markets?
spk09: They're performing pretty similar across different geographies. And frankly, that's been the history of the company that it's less about the locations of where they are unless there's some outside of that, but has more to do in terms of geography, but has more to do with the site selection so that when we you know, when we observe our site selection principles, they pretty much have a fairly predictable ramp.
spk05: Chair, this is Chris. One thing I'd add there is for us, we feel like that's a tremendous advantage for us to be able to balance out where we open, you know, a good mix of core emerging and new markets like we've talked about in the past, so we don't have to weight it heavily more towards mature to get the volumes that we're looking for. We're able to do that, as Mel said, across geographies.
spk00: Great. Thanks for that. And then I guess just one more on the higher level sort of consumer outlook. Clearly, you know, First Watch is getting its share of traffic, positive traffic share. Just wanted to get a sense of if you're seeing anything in terms of check management from diners or guests that are coming in. Maybe there's a little bit of a shift there. potentially lower beverage attach, lower add-on attach. Is there anything you're seeing with that respect, or maybe not, and consumers still continue to spend and trade up at first watch? Just curious what you're seeing there. Thanks.
spk05: Thanks. No, actually, just the opposite. I mean, obviously, the first measure of that is the growth in traffic. But from a check management standpoint, we're not seeing that at all, not seeing folks manage their check. our beverage attachment is up. So all the signs that we're seeing are positive. And we think that's because of the focus that we've placed on just delivering a great experience for both our team and our customer during this time. We believe that as we move further into this economic environment, that the strong will get stronger. So we're really focused on within our four walls and making sure that we deliver a tremendous value and an incredible experience. And I think, you performance in our traffic is showing the dividends there.
spk03: Great. Thanks so much. And our next question will come from Andy Barish with Jefferies. Please go ahead. Good morning, guys. How are you? Great. How are you?
spk13: Good. Good. Just two quick ones for me. I mean, one we've been seeing across the industry, the other operating expense line. you know, certainly elevated any, you know, any color there, you know, relative to, I guess, probably primarily utilities. But, you know, how we should expect that continuing into the fourth quarter. And then I had one other one after this.
spk09: Yeah, so that line does experience some inflation, too. And, yeah, the utilities are in there. But also, we run repair and maintenance projects. through that line item as well. And our repair and maintenance expenses have, like every contractor expense, has been the product of some inflationary increase as well. And we've got a 35-year-old system, so we're nearly four decades now. So frankly, We're having to get back into some of the restaurants where, over the course of the last several years, we're visiting those restaurants and spending more time on the repair and maintenance costs. But it is something that we continue to see some increased inflation rolling through there. But I think it's, in terms of what I look at going forward, I don't see any reason to be optimistic that it's going to come down tremendously, but we'll continue to manage it.
spk13: Gotcha. And then your comments just, you know, on the 4Q start. I mean, the guide at, you know, at 15-ish for the year implies about eight in the fourth quarter, which is basically what you're running on, I think, on pricing. So maybe where are you now? How much? Hurricane impact was in there for the first week or two of October, as you mentioned. Do you expect a ramp as the quarter goes on with what's expected to be a strong holiday season? Any color on that that could help us out?
spk09: Generally speaking, we would expect it to improve as we go through the balance of the year. Beyond the hurricane costs, though, there are other Fourth quarter cost, just to think about one, we have our national conference that occurs in the fourth quarter. We have a Sunday holiday shift where Christmas falls on a Sunday this year. So that important day, our crews are not serving. We have the cost of the shelf registration and then the hurricane. during the fourth quarter. So we're looking for a strong fourth quarter, but I do want to be sure I temper everybody's results a little bit about the fact that we come into the quarter continuing to deliver on growing traffic and growing sales, but I don't want people to get too far in front of us on that. And we've built all that into our annual guidance that we put out.
spk03: Okay. Appreciate that. Thanks, guys. Yep.
spk04: And our next question will come from Andrew Charles with Cowen. Please go ahead.
spk12: Great. Thanks. Um, Chris, can we just go over alcohol for a second? I'm just curious that, uh, as of last update is around 75% of the system, um, looking to complete rollout to all the stores that can obtain a liquor license by the end of the year. Curious, you know, where, where you guys are with that, if that's still the right target and, um, where you guys are seeing that mix and recognizing that, uh, that obviously you haven't started to build awareness of this yet because you're more focused on just implementation, but just really read where is alcohol mixing for you guys?
spk05: Yeah, sure. So I'll answer the first part of your question. We have alcohol in about 83% of the system right now. So on track, if not ahead of the rollout. So we do expect to have that in place by the end of the year at the latest of next year. And alcohol continues to increase in mix, so we're getting more and more emboldened by the attention that it's gaining from the consumer. We think it's a traffic driver, and we're really looking forward to innovating around that platform once we get it rolled out.
spk12: Super. And then, Mel, I just want to come back to the other operating expenses that were a bit elevated. You called it repair and maintenance. Is the KDS rollout going ahead of schedule? Does that have any impact there, or is that more capitalized?
spk09: No, most of the KDS system is CapEx for us. There's probably, you know, when they get in and they install it, there's probably some costs that they pick up at the time. But for the most part, it's not driving repair and maintenance increases. Got it. Okay, that's helpful.
spk03: Thanks, guys.
spk04: And our next question will come from Jeffrey Bernstein with Barclays. Please go ahead.
spk10: Great. Thank you. Two questions. The first one, just following up on the comp trends, just wondering, I got the impression that trends improve sequentially through the third quarter. So just trying to confirm that. And I thought when you said about a soft start in October, I wasn't sure whether you were talking about the system due to more of the broader macro or whether you were purely talking about the hurricane. Just trying to get a sense for that and what initiatives you might implement if trends were to slow, which, again, I don't get the sense that you're seeing that at all, but just trying to get a sense for what levers you might pull if you saw a slowdown in your business, and then one follow-up.
spk05: Yep. I'll just answer it directly. Traffic grew sequentially each month during the third quarter, and all day parts were up.
spk09: And my reference to the slow start was that the hurricane actually hit us that first quarter. I mean, excuse me, the first week of the fourth quarter. Fourth quarter, yeah.
spk10: Got it. But otherwise, other than that impact, you're not really seeing any underlying change in trend. But just curious, what might you do? Are there levers that you would pull from a value perspective, or do you kind of stick to your kind of core, regardless of maybe what the competitors are doing?
spk05: Yeah, we've already begun that work a year ago, which is definitely not discounting. We don't see ourselves going down that path. Again, we're focused heavily on taking care of the customer and innovating around our menu, just doing what we need to do to make sure that we're a tremendous value to the consumer. I will say this, that our industry research has seen that searches on Yelp, for example, for restaurants are down versus 2019. We think consumers are being less promiscuous with their dining dollars, and so they're sticking more to what they know and trust. We've been called out as a restaurant that people can trust. In fact, we were second in the industry, according to Technomic, in a consumer ranking on restaurants that I trust, and our positioning with the more affluent customers. We really just feel like we're well-positioned for both the near and long term.
spk10: Understood. And my follow-up is more on the margin side. I know you're not giving any guidance per se looking into 23, but directionally speaking, it does seem like investors are excited that sales seem to be holding up, and for sure in your case, and menu pricing seems to be outsized. And as you mentioned, maybe inflation is easing a little bit. So with that kind of a trifecta, it seems like there's the potential for significant margin expansion and earnings growth there. Just wondering whether that's all directionally accurate going into 23, or are we underestimating maybe the inflation impact or the pricing not being enough to fully offset? Just trying to get your directional thoughts on what could be a compelling or attractive fundamental outlook into 23.
spk09: Well, what I can tell you about 2023 is that we're certainly planning on battling back the cost of the inflating prices and that sort of thing. I don't think that we're going to get a lot I think the pace of inflation may slow, but I don't think we're necessarily expecting to see real prices drop a great deal. I think we still have to continue to shave basis points in the business, but we'll have some good 2023 guidance out there as we get closer and have a better visibility into what's happening. Great. Thank you, guys.
spk03: Thank you.
spk04: And our next question will come from Brian Baccaro with Raymond James. Please go ahead.
spk11: Hi, good morning. Thanks for taking my questions. I wanted to ask on the commodity inflation front, you noted moderating inflation. Could you give a little more color on where you're starting to see some pressure ease, some of the puts and takes within that line? And I know the world can turn on a dime these days, but any early reads on where food inflation could trend for your business in 23?
spk09: So, Brian, you know, earlier in the year, we were pushing 18% inflation in the, you know, late in the first quarter. And then the second quarter, we've begun to roll over inflated costs last year now that we're into the fourth quarter. So we've seen some you know, relaxation across the rollover effect. So if you just think about our largest commodities, bacon, potatoes, avocados, eggs, coffee, they're all elevated in price, but we're starting to roll over their elevated periods last year as well. So I don't know that we're actually seeing a whole lot of abatement, although bacon kind of bounces around from time to time. and we probably are getting a better price today than we were earlier. But for the most part, it's the rollover effect that we're seeing.
spk11: All right. Thank you for that. And I also wanted to ask about KDS and some of the other changes you're making in the back of the house for sort of a post-COVID reality where your AUVs are north of 2 million, et cetera. But I think you said it's in 300 units. Could you elaborate how that's benefiting just the employee or guest experience? And is there any way to maybe parse out the ones that have had it in for longer, quantify the list and benefit to throughput or comps or perhaps any cost savings that might be associated with this?
spk09: Thank you. Big question there, but I'll try to run down some things I know. First of all, the KDS system, is still in its infancy in our environment as we're still rolling it out. But it's also part of a package of things that we do. It's a KDS standalone. We're driving out other changes in terms of the effectiveness of our staffing as well as our allocation of staffing, our our organization of the kitchens and that sort of thing. And KDS sheds light on different elements. Maybe we're preparing food at and need to get it to the tables faster or something like that. So for us, it shows a lot of different opportunities. And we're excited about those. What the immediate benefit is, once we roll it out in a restaurant, is that it simplifies the complexity of operating the restaurants based on a call, a verbal system or the helm's judgment about the time to prepare guests' orders. And as a consequence, it allows us to, you know, it opens us up to the ability to hire more back of house people who come from systems who already have a KDS and a reader system and they've already trained on it and they become some apostles for it. So, you know, just by increasing the number of qualified applicants, it helps us to deal with turnover better or fewer training costs and allows us to improve that. They're not sexy things in the back of the house, but they are realities of the restaurant business.
spk03: Thank you, Mel.
spk04: And our next question will come from Nicole Miller with Piper Sandler. Please go ahead.
spk08: Good morning. Thank you. Two quick ones. The first, as you exit this year and enter the new year, I think like 390 basis points of price would fall off. And historically, that would be an annual, call it 2% to 3% price opportunity. Should we think about that more as a return to normal?
spk05: What I'd say here is that Just as we've been in the past, we intend to be nimble and thoughtful as it relates to pricing, and we'll make decisions as needed, but we'll keep our value proposition in mind. We mentioned earlier that we'd most likely be getting back to a normal cadence of the number of times we do it throughout the year, but with our focus on building traffic through trialing and also increasing frequency with our core customers, we've just, as you know, been intentionally conservative with our pricing. And we will try to continue along that path, hoping that we see some easing in costs. But from a cadence standpoint, I think, as we've said before, we'll most likely get back to that twice a year.
spk08: Okay. I mean, it's interesting because price is so sticky, so there's an opportunity, but it doesn't mean you want to flex it. But to confirm, it is usually in one queue would be a normal period. It's just a question of how much. Is that right?
spk09: That's been our history, Nicole. Okay. We don't really visit it until we've actually adjusted the menu prices. We don't announce when we're going to do it, but we'll take a close look at the right timing with that value proposition in mind.
spk08: And then the thinking of labor as one of your biggest assets, especially returning to the, I guess, fully staffed levels you're looking for. Can you talk about how you got there? I mean, was it applicant flow or, you know, better applicant flow? Was it an ability to just take on those applications and process them? And really, you know, what is the cost of labor today? Not just from a dollar per hour perspective, but how have you enhanced the total benefits package to be at these staffing levels? Thank you.
spk05: Sure. This is Chris. I think the first piece is that, you know, Back during COVID times, I mentioned on previous calls that we did not do sign-on bonuses or those type of things. We focused on our internal teams being advocates and evangelists for the environment and the experience of working for First Watch, and that benefited us well during COVID, and it's benefited us since then. I will say that we've done a tremendous amount of work around the employee proposition and benefits and other things, and I think that's helping us too. But also, I think being, again, the fastest-growing full-service restaurant company in America helps us attract people when the applicants are out there. And so we think we show up really well when they're looking for jobs and our No Nights Ever ad pops up right in front of them. It's appealing, and we get our fair share of applicants. So it's a lot of those things. And honestly, it's at a perfect time for us as we continue to ramp up our growth. to have the management pipeline that we have in place to support that growth is really important right now, so we feel like we're in a really good place.
spk08: Thank you.
spk04: And our next question will come from Chris O'Call with Steeple. Please go ahead.
spk06: Thanks. Good morning, guys. Good morning, Chris. Mel, the low and the high ends of your EBITDA guidance imply a pretty wide range for the fourth quarter. I was just hoping you could help us understand What are some of the key factors that could determine whether you land at the low or high end of the range?
spk09: I really was alluding to the same things I mentioned a few minutes ago, that we have going through that quarter. We know we have some costs that are a little bit unique to the fourth quarter in that we lose the Sunday business. We have shelf registration costs. We have the conference costs. We have the effects of the which we're, in some respects, while we know the hard costs associated with a hurricane, we're also evaluating the business flow-through of, you know, adjusted traffic and that sort of thing in those affected restaurants during some period of time. And so knowing that and knowing just the, you know, environmental issues, I would say, or the economic issues in the economy we're operating in. There's a little bit of caution that I've built into our range there.
spk06: Okay. And then my second question relates to development. And I know the company's on track to hit its guidance for the year, but is the company planning to make any adjustments to maybe its approach for development next year, given challenges to opening restaurants will probably continue, it sounds like, next year? And then I was hoping you could also just give us a sense of how the company store pipeline is shaping up for next year.
spk09: Will we be adjusting our development would be the first thing. We have what I think is a very data-driven and a healthy approach to how we select sites. I don't think you would expect to see us make any major changes. on the way we develop the restaurants and develop sites. You still have to, as I say, kiss a lot of frogs in order to find the sites where you want to open. And I know our development team is working hard to get out there.
spk06: Well, and, Mel, what I was asking more around was just – given the delays in permitting, given the delays in construction, are there any other changes you're making in terms of just that process so that you can ensure you get openings on time?
spk09: I mean, there are no major changes. I mean, our teams already are very – they work on a schedule, and we're very confident in our long-term guidance on growth of new restaurants.
spk05: I'll jump in, Chris, and say that, you know, our – Ability to deliver on our unit growth I think speaks for itself this year and certainly going into the fourth quarter and our team has done an absolutely incredible job of what I call seeing around the corner and Identifying what those challenges in whether it's supply chain or permitting and whatnot and have built a pipeline That's that's sufficient for us to reach our long-term goals And which we would you know count next year in there as well so we feel really good about our process from from start to finish and Perfect. Thanks, guys.
spk04: And our next question will come from Gregory Frankfort with Guggenheim Security. Go ahead.
spk02: Hey, thanks for the question. I had a couple. The first was just maybe a follow-up to Andy's question. I think it was Andy. I'm getting that the implied comp for the fourth quarter out of 15 would be something closer to 9 to 10. So maybe if you could just check my math and then I had two questions.
spk09: Well, we haven't really got it directly to the fourth quarter on that, but that sounds on the ballpark. Okay, got it.
spk02: And just in terms of, I think you made a comment of trying to claw back some margin next year. And it feels like the big question is kind of every restaurant company tries to do that is should you try to run pricing ahead of off inflation next year? And do you need to do that to get margins back higher? And I'm just curious, how you're thinking about that framework. And as maybe commodity inflation comes down, do you think you should try to run pricing ahead of some of your cost inflation next year? And do you think the consumer is going to allow that?
spk09: So a couple of things on that point. As long as I've been in the restaurant industry, there is always a battle for margin points and clawing back costs, right? And so I think every restaurant company spends a great deal of effort trying to claw back or claim basis points improvement with more efficiencies or lower costs and that sort of thing. So yes, we'll be continuing that battle just like we always do. In terms of solving for it at the top line, it's not as easy as just taking the number and saying we're going to increase it by pricing. So We're very thoughtful about staying committed to the value proposition that we present to our guests. We think our customers see us as a value. We don't want to lose that position with the customer. As we think about pricing, timing of pricing, what it will be, what it will be on, where it will be, that science will you know, take place pretty thoughtfully about making sure that we preserve the value proposition with our customer.
spk02: Thanks. And maybe if I can sneak one more in. I think in terms of the changes to your unit growth guidance this year, it skewed a little bit more franchise than even the high end of that range that you had projected earlier in the year. Do you expect the franchise mix of your store openings to maybe pick up in the next couple of years versus where you were expecting before? Is that kind of one-off to this year? I don't.
spk09: I don't expect it to change.
spk03: Thank you, guys. Appreciate it.
spk04: And our next question will come from Sarah Sanatori with Bank of America. Please go ahead.
spk07: Great. Thank you so much. A follow-up question on mix and then a separate question, if I may. First is just the gap between check and price was, I think, a bit wider this quarter, so I actually suggest some more positive mix. I wanted to make sure I'm looking at that the right way and also ask what was the driver of that? Was it just more off-premise or other kinds of trade-up or to higher-priced items? I know you mentioned you're not seeing any trade down, but just trying to sort of disaggregate a little bit what that might be. And then, like I said, I have a follow-up, a different question, please.
spk05: Sure. As far as the mix is concerned, I think, again, that's one of the true benefits of our seasonal menu program where we have menu news out there, you know, five times a year, ten weeks at a time. It builds excitement for our staff and our customers. And so you'll see customers trading into that seasonal menu. I think that's where we see some of the mix. And then also keep in mind as the alcohol continues to roll out, we'll see a mix impact there as well.
spk07: Okay, great. So it was less about higher average check on delivery, which I guess is probably pretty similar to your in-restaurant check and more about, like you said, the seasonal menu and some beverage attached.
spk05: Yeah, the transactions on off-premise was pretty much flat. Obviously, the dollars were a little bit elevated because of the surcharge and the price increase that we took.
spk07: Got it. Okay. And then my question, you mentioned, you said that users are a little bit less promiscuous now. I mean, we often see that when the demand environment gets a little under pressure, people less willing to take a risk, if you will, on occasions or on concepts that aren't as consistent. So I'm just curious, is that what you think is driving this change in usage, just people feeling a little tighter purse strings, or are you seeing something about loyalty, something specific to First Watch that's just sort of gradually edging up your frequency or your loyalty among guests?
spk05: Yeah, I think it's... It's what we've been focusing on, which is delivering consistency and value and an incredible experience during these times. I stand behind what I said, that I think consumers, if they choose to dine out less, they're going to go to the restaurants they trust. They're going to go to the restaurants that they know they'll get a good value. And just as importantly, they know that it'll be a consistent experience. They don't want to risk their dollars when they're being more decisive about where they go. That and the audience that we appeal to, the fact that breakfast and brunch continues to be a growing day part, and it is an experience where people feel like they can splurge a little bit, and they're able to do it at our restaurants at a very reasonable price point. So all that work that we've been doing with being conservative on our pricing, the evolution of our prototypes, the building out of the environment to attract that customer, is what we believe sets us up for that.
spk07: Right. So it's sort of the core value proposition as opposed to say, you know, we're getting lists from our off-premise business. We're able to identify people and market to them directly. That's still an opportunity to come. Right now it's just offering a better experience in a time when that's what consumers really want.
spk05: Yeah, and I think that's, you know, a very important – for us is that recovery of in-restaurant dining, which we have seen tick up sequentially. And so it's at its highest it's been for us for a period. And we look to that as a key indicator of driving that in-restaurant traffic and also how we're going about doing it through these steps that we're talking about, which is, to your point, focusing on the fundamentals and making sure that we deliver what the consumer is looking for at this time.
spk07: Got it.
spk04: Thank you. And our next question will come from John Tower with Citi. Please go ahead.
spk14: Great. Thanks for taking the question. Good morning. Hey, John. Hey, thanks for making the time. Just a few from me, if I may. First, where are you seeing the traffic growth coming from? Is it concentrated on weekends and you're seeing maybe faster table turns in part due to the KDS? Or are you seeing it spread throughout the weekdays? I'm just curious to kind of get some color there.
spk05: Yeah. As I mentioned earlier, the traffic growth was sequentially, you know, it grew sequentially across each month of the quarter. But more importantly, I guess, all day parts are up. So we're, you know, we're seeing it across the entire business. And then in reference to off-premises, we talked about how that from a dollar standpoint, or excuse me, from a transaction standpoint, has remained steady. So That growth's come across all of our operating hours, and we've talked about it in the past. We look at three very distinct day parts, weekday breakfast, weekday lunch, and then weekends is we just call that brunch. And in all instances, we're seeing that traffic growth. I think what's important for us is to be able to unlock those peak sales hours where we have unmet demand, and that's – the critical nature of KDS and some of the other initiatives that, that Mel has talked about so that we can really unlock that because our off premise business pretty much mirrors our in restaurant dining. So when we're busy in the restaurants, we're busy with off premise orders. So, um, that's why we're so focused on that, that, uh, increased throughput during those times. Got it.
spk14: So no specific period stood out during the third quarter. It was all pretty much across the board.
spk03: Correct.
spk14: Okay, cool. And then, um, in the model, I know seasonally, or at least hard to tell in the model, but the labor cost per operating week stepped up sequentially this quarter. And Mel, I know you've mentioned that you got some of the management staffing at the stores near or above pre-COVID levels, or at pre-COVID levels, excuse me. I'm curious, how should we think about that going forward? Is there an opportunity to kind of manage that lower going forward, or is that a line where it's just going to be pretty sticky because of underlying inflation?
spk09: I'm kind of counting on our 33 to three and a half percent that we've enjoyed being pretty sticky. Early in the year, we had signaled that we were Felt like the 34% level was kind of optimal and for us has been sort of the, you know, kind of a good level of staffing to have in our restaurants. I think we've learned a bit about ourselves and also we've taken some price. And so I think that 33 to 33 and a half percent is a level I'm not expecting to see shift abruptly over a long period of time. From quarter to quarter, we might see some movement up or down, but we want to be a little careful about that.
spk14: Got it. And then the last one for me, in terms of thinking about CapEx beyond new store growth, and obviously this year KDS has been an important piece, and I know there'll be some more of that rolling through next year, but Are there any other initiatives that we should be thinking of in terms of CapEx spend into the next, say, two to three years?
spk09: We don't have anything that we'd be ready to announce right now, and we'll probably get a much better indication of what it will be for next year when we give guidance for next year.
spk14: Got it. All right. Thanks for the time.
spk04: And this will conclude our question and answer session. I'd like to turn the conference back over to you, Chris Mosser, for any closing remarks.
spk05: Thank you for joining us for this morning's call. I appreciate it. These results reiterate our strategic positioning as leaders of not only a growing daytime dining segment, but also of the restaurant industry as a whole. We always appreciate the opportunity to share First Watch's progress. And as our operators across the nation gear up to lead us through another holiday season, we look forward to closing out a strong 2022 together. Thank you.
spk04: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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