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spk03: Good morning and welcome to the First Watch Restaurant Group fourth quarter 2022 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Steve Murata, Vice President of Investor Relations. Please go ahead.
spk07: Good morning, everyone, and welcome. I'm 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 fourth quarter and fiscal year 2022 on Globe Newswire and filed its annual report on Form 10-K with the SEC. These documents can be found at investors.firstwatch.com. Let me 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 statement should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in our filings with the SEC, including our annual report on Form 10-K. 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 file this morning. And with that, I would like to turn it over to Chris. Thanks, Steve.
spk08: Good morning. 2022 was another stellar year for Firstwatch. To start, we continued to outperform the industry in a number of key areas, perhaps most significantly in same restaurant sales growth of 14.5% versus 2021 and 29.6% when compared to 2019. Importantly, this comp group was led by 7.7% same restaurant traffic growth versus 2021 and 6.5% when compared to 2019. System-wide sales increased 21.9% year-over-year, growing to $914.8 million from $750.7 million. Total revenues increased 21.5% year-over-year, and adjusted EBITDA increased 4.5%. All of our growth metrics are even more noteworthy when you consider that they were achieved amidst a challenging macro environment during a year when the industry as a whole experienced year-over-year same restaurant traffic declines of three percent according to black box to us strong traffic share represents the truest measure of consumer appeal and the overall health of a concept as the pioneer of the daytime dining segment our consistent year-over-year traffic growth is yet another indication that consumers recognize the highly differentiated offering that first watch provides and the continued growing awareness of our brand. It is further evidence that our strategies are driving our desired results and gives us great confidence in our ability to achieve our long-term growth targets. I'm especially proud of what our team's accomplished on a development front, delivering 43 new restaurant openings in 2022. Our 29 company-owned restaurants opened in 2022 are achieving annualized AUVs that are about 7% above our comp group AUV of $2 million and well above their projected first year sales targets. More notably, these restaurants across all geographies appear to be building off of those volumes as they continue to mature. What's most exciting to us is that we are seeing volumes higher than we've ever experienced before. Prior to 2022, our weekly sales record was just shy of $70,000. With that in mind, I'd like to share about a new restaurant that we opened in November in Virginia. It had week one sales of just under $75,000. Over the next few weeks, the team there went on to break that record three more times, culminating at more than $110,000 in sales in its fifth week of operation. Year to date, this new restaurant has a weekly sales average of nearly $90,000, well above the company's previous weekly sales record. Since this record setting opening, we've seen others in our 2022 vintage break that $75,000 weekly sales threshold as well. These higher sales are not an anomaly. Our strong new restaurants from 2022 are still trending well above our comp group AUVs, and their high volumes appear to be sticky. We believe that one of these exceptional restaurants from our 2022 vintage will be our first $4 million restaurant. Achieving $4 million in sales in one seven and a half hour daily shift will be an amazing accomplishment for sure. Considering the comp group's consistent traffic and sales growth, Coupled with the exceptional performance of our new restaurants, it becomes abundantly clear that our biggest opportunity as a company now and for the foreseeable future is to serve more consumer-led demand. So our entire organization is focused on it. It's an enviable position to be, and we don't take it for granted. Our team has worked diligently over many years to put us in this position by evolving the brand to ensure relevance, broadening our appeal, and meeting the consumer's ever-changing needs. We've driven higher AUVs by unlocking tremendous upside potential in our restaurants through some key initiatives that I'll walk you through today. Admittedly, these efforts aren't necessarily shiny and sexy, and none of them have to do with robots or chat GPT technology, but they are transformational nonetheless and are designed to minimize or eliminate the look and leave phenomenon. That's when customers arrive at our restaurant to find a busy dining room and lengthy wait time and make a decision to go elsewhere. This is the unfulfilled demand at our doorstep that represents an outsized opportunity for us to continue to push our long-term sales and traffic growth to new heights. In 2023, we are focused on five primary strategic initiatives, both front of house and back of house, that are helping to serve this demand. First, our evolving real estate strategy. We're opening more restaurants to serve more demand, investing in A sites and a growing number of larger standalone units. and often taking over second generation locations from closed casual and fast casual concepts that have failed to evolve. The larger footprints of these new locations are one factor in our ability to generate higher volumes while maintaining or improving our returns on invested capital. We also see little to no cannibalization, even when infilling core markets. And in the rare instances when we have seen cannibalization, This has been strategically planned as a means to serve excess demand and underwritten in our new restaurant pro forma. Second, back of house process enhancements and kitchen equipment upgrades. We're installing double make lines in many of our kitchens to simultaneously accommodate both off-prem volumes and peak hours in the dining room. We're investing in double dishwashers and wider griddles that allow for more pancakes or sandwiches to cook at the same time. And we're in the early phases of leveraging energy efficient smart ovens that ensure a faster and more consistent cook time every time. Third, our kitchen display systems, or KDS. We completed the rollout to all of our company-owned restaurants ahead of schedule at the end of 2022, and we continue to optimize the system. KDS is a critical piece in driving higher throughput, and more importantly, in setting us up to scale to our goal of 2,200 domestic locations. Fourth, role specialization. We're testing a more specialized approach to some key job functions, particularly in the back of the house. We're leveraging positions such as a dedicated expediter role and a dedicated beverage position to allow us to free up more time from our servers in the front of house. We've been pleased to see that in the restaurant testing this, specialization has allowed our servers to serve more tables and drive elevated customer satisfaction. Fifth, optimizing the dining room experience for both customers and employees. From the customer's perspective, that comes to life by leveraging technology to alleviate pain points using what we call our front of house management system, which builds upon our waitlist system. Similar to the way we view KDS as the heart of our kitchens, this is the heart of our front of house. Up to 30% of our weekend traffic flows through our waitlist management system, showcasing the magnitude of demand on these key days. This system allows us to track consumer behavior in our dining rooms. It's allowing us to focus on increasing seat utilization, table turns, reducing waitlist abandonment, and frankly, serving more demand. And not only do these initiatives allow us to more efficiently serve the growing demand for our offering, they help reduce food waste and ensure our teams have the tools they need to deliver a fantastic customer experience in every first watch, every time. In 2022, we serve more customers than ever before. And yet, our wait times were actually shorter than in the prior year, and our customer satisfaction scores held strong above industry averages. 2023 marks our 40th year in business, and a 40-year-old brand doesn't establish itself as a growth concept without a dedication to evolution. Our success meeting evolving consumer preferences and adapting to an ever-changing marketplace fueled my belief that Firstwatch is just getting started. We know that our success rests on the strength of each Firstwatch employee throughout the system, And we've done much to strengthen our position as an employer of choice. Just last week, we announced several exciting enhancements to our benefits, including extended parental leave and programs that focus on mental health and well-being. I've never been more excited to be part of this organization. We're all working together towards serving more demand and specifically towards serving the person who's already seeking us out. We're not paying to acquire the incremental customer. They're knocking on our door. We're prepared to deliver another year of growth behind some of the best operators in the business. First Watch has a plan, and we're sticking to it. And now I'd like to turn the call over to Mel to review the fourth quarter in greater detail. Mel?
spk05: Thanks, Chris. I'm going to start by focusing on our fourth quarter performance and expanding on the operational results that we announced on January the 9th. As we shared then, same restaurant sales growth in the quarter was 7.7%. Total revenues were $185.7 million, which is an increase of 14.2% over the fourth quarter of 2021. As we indicated during our November 7th earnings call, the fourth quarter got off to a slow start as Hurricane Ian temporarily closed 85 of our restaurants. Through the middle of the quarter, traffic picked back up despite some lingering impacts of the hurricane. However, during the last week of the quarter, both winter storm Elliott and a holiday shift negatively impacted our traffic in almost all our markets. We estimate that this combination of events reduced our traffic by about 210 basis points, or roughly 3.1 million of restaurant sales. Our food and beverage costs were 23.7% of sales in the fourth quarter. We continue to experience inflation of about 7.7% across our market basket, where our top five commodities are eggs, potatoes, coffee, avocados, and bacon, which comprise about 35% of the basket. Given that eggs have been a hot topic, we believe it's helpful to add a little bit more color about how we address our egg supply. We understand that the industry production is projected to approach full recovery around the middle of this year. As in the prior year, we're again purchasing our eggs and potatoes under a fixed price agreement. These annual pricing agreements served the company well by securing supply and protecting us from the most severe volatility of the stock market. They also give us reliable line of sight on our costs associated with these two commodities, which together make up about 15% of our food costs. Labor and other related expenses were 34.5% of sales in the fourth quarter. up from 33.3% in the third quarter and 32.8% in the fourth quarter of 2021. The increase year over year was in part due to hourly inflation of 11.4% and the impact of certain inefficiencies in our reaction to the choppy fourth quarter traffic. In January of 2023, We upgraded some of our labor dashboards and improved our processes around labor management. Thus far, our first quarter labor as a percent of sales has been trending favorably. Our restaurant-level operating profit was $30.5 million for the quarter, with a margin of 16.7%. In the quarter, we believe our 65 non-comp restaurants had about 360 basis points of potential margin improvement to reach the similar performance of our 301 comp restaurants, which are obviously our most mature units. I want to call out pre-opening costs specifically, which were $1.8 million in the fourth quarter and $5.4 million for all of 2022. Our pre-opening rent alone increased $833,000 dollars year over year as we deliberately negotiated with landlords to enter units earlier and work alongside the developers' contractors to bring about the earliest opening dates possible. Earlier access better positions us not only to meet our development schedule, but also place our new restaurants on the path to realizing more mature margins sooner in the following year. Adjusted EBITDA in the fourth quarter was $15.1 million with a margin of 8.1%. We believe we have about $1.2 million in unrealized adjusted EBITDA due to the impacts of the aforementioned storms and the holiday shifts. General administrative expenses was $21.8 million down from the fourth quarter last year when we inferred a stock compensation expense of $5.3 million at the time of the IPO. We opened 16 new restaurants during the quarter, 11 of which were company-owned and five of which were opened by our franchise partners. Our net income includes costs of about $400,000 incurred in connection with our shelf registration filed on November the 7th. I'm not going to spend time taking listeners back through the full year results that are in our earnings release and in our 10-K, but I would reiterate Chris's comment. that our teams overcame a challenging economic climate to deliver another remarkable year of growth at First Watch. And frankly, I could not be more proud of them. Given my earlier statement that the fourth quarter was softer than expected due to several significant events, I want to share a few things about what we're experiencing in the first quarter of 2023, which ends on March 26th. The holiday calendar shift I mentioned earlier that negatively impacted our fourth quarter in turn benefited us early in the first quarter, and we broke out of the gate fast. The beginning of the quarter was also positively impacted by our lapping of the Omicron variants last year. Through the second period of the first quarter, our same restaurant sales and traffic growth was 15.7% and 8.5% respectively. I'd like to remind you that in March of 2022, we began rolling much stronger comps. And as such, the current month poses a formidable same restaurant sales comparison. Early in the quarter, we rolled over the 3.9% price increase we took in January of 2022. And during the fifth week of the quarter, we took a 4.1% increase. Averaging those for the first quarter, we have 6.9% increased price in place. We opened six system-wide restaurants thus far in the quarter. And finally, as a reminder, and just to keep things interesting, 2023 is a 53-week fiscal year for us. Our fourth quarter will be a 14-week quarter, and we expect the impact of that extra holiday week to be roughly $10 $1.5 million in sales and $2.5 million in adjusted EBITDA. Our full year outlook is as follows. We expect same restaurant sales growth at 6% to 8% in 2023, built on positive traffic growth for the year. We expect total revenue growth in the range of 15% to 19% and adjusted EBITDA in the range of 76% to 81 million. Both of these numbers include the 53rd week. We expect commodity inflation of 4% to 6% and hourly labor inflation of 9% to 11%. We expect to open between 38 and 42 company-owned restaurants and 10 to 12 franchise-owned restaurants. And we expect these openings to be weighted more heavily in the back half of the year, similar to our cadence in 2022. We also plan to close three company-owned restaurants, resulting in a total of 45 to 51 net new system-wide restaurants in 2023. Given the increasing pace of new restaurant openings, we expect capital expenditures between $100 and $110 million. In addition to the increase in the number of projects into which we will be investing this year, we're also continuing to invest in sites with more square footage, indoor-outdoor bars, larger patios, and expanded back-of-house equipment to accommodate our higher sales volumes. We have seen an increase in the expected build-out costs of our new restaurants, which now average $1.4 million net of tenant improvement allowances on a per-restaurant basis. We expect sales in these restaurants to average $2.5 million in their third year of operation with restaurant-level operating profit margins in the range of 18 to 20 percent. This delivers a planned cash-on-cash return above 35 percent in that third year. We've updated these unit economic figures in the investor information that we post quarterly on our investor relations website. We expect our blended tax rate to be 36 to 38 percent in 2023. And while we don't guide the quarterly results, I do want to take a moment to share some of our planning considerations that are going to influence the growth trend of our adjusted EBITDA during 2023. While just over half of our adjusted EBITDA growth is allocated in the first half of the year, the first quarter will represent less of that allocation given the three-week gap between the pricing actions as well as the formidable March comparison that I mentioned earlier. Similarly, in the third quarter, our planned ramp of both pre-opening expenses and G&A investment may cause adjusted EBITDA during that quarter to be roughly equal to the same period a year ago. Finally, I'd also like to reiterate the company's long-term annual financial targets, which have not changed. These include percentage unit growth in the low double digits, Annual same restaurant sales growth of about 3.5%. Restaurant sales and adjusted EBITDA percentage growth in the mid-teens. For further detail on the fourth quarter or the fiscal year, please visit our supplemental materials deck on our investor relations website. At this time, I'm going to ask the operator to open the line for your questions.
spk03: We will now begin the question and answer sessions. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.
spk02: At this time, we will pause momentarily to assemble the roster. And our first question will come from Andy Barish of Jefferies.
spk03: Please go ahead.
spk01: Hey, guys. Good morning, Andy. Good morning, everyone. Could you remind us just on the pricing as it rolls out for the year, what you're expecting, you know, for the full year 23? Okay.
spk05: Historically, we visited price in the middle of the year and in the first quarter. We don't really announce what our pricing plans are for the year until after we have it rolled out.
spk01: Just digging in, Mel, a little bit more to the 360 basis point gap between your non-comp and comp unit restaurant-level margin. That widened from 3Q. Is that a number, just given the ramp-up in growth and other things, that looks like it's peaking and thus we can – see a little bit less drag from those non-com stores as we move forward?
spk05: I think in the immediate future, Andy, that we should expect to see something kind of similar to that. Those restaurants, just as a reminder, I think what we've talked about before in the past is that those restaurants are also kind of over-indexing on the margin because they're extremely high volume. There's more dollars on average for those 65 non-comp restaurants. And as long as we're continuing to see that sort of outperformance at the top line, I think we may continue to see, as long as we're always trying to grow in that above 10% level every year on a relative basis. I think that spread and the maturity is... You know, that represents our opportunity. I don't know that we're going to close the gap too much as long as we keep pace with the openings.
spk01: And just finally, does a lot of that, I imagine, show up in labor? And I assume some of that is intentional, you know, just to get these restaurants off to the great starts that you're seeing, obviously. So, yeah, just flesh that out a little bit for us.
spk05: Yeah, we run higher labor in those restaurants as a result of new openings. We have more food waste, right? So you have some elevated food costs as well. But you're right, for the most part, I think the biggest impact is around carrying heavier labor in those restaurants.
spk04: Okay, thanks, Justin.
spk02: The next question comes from Jeff Bernstein of Barclays.
spk03: Please go ahead.
spk06: Hi. Good morning. This is product on for Jeff. Thanks for taking the question. Appreciate the top and bottom line guardrails you guys have provided for 2023, but I just wanted to touch on restaurant margins and what is embedded into your guidance. And then maybe just on a longer term outlook, what is the minimum and expected? Like, what are some of the levers you can pull to kind of, you know, protect those margins? What additional pricing may you be willing to take over time? And, you know, what, I guess, in a normal year, quote, unquote, whatever that means, what level of pricing would be needed to keep restaurant margins flat year over year? Thanks.
spk05: So there's a lot in that one single question. Historically, the companies targeted that 18% to 20% range on restaurant-level operating profit. And our budgets are generally built around reaching that kind of performance, not only in the comp group, but growing into that with our non-comp restaurants that are newer. if that gets at that detail. And then, you know, I think in terms of pricing to offset inflation, which is, you know, we tend to, you know, we tend to try and defend the margins. We'll take a look at that in the middle of the year again if we, you know, if necessary. But right now, built into our guidance is what we think is sufficient assumptions about pricing.
spk04: Got it. Appreciate that.
spk03: The next question comes from Chris O'Call of Stiefel. Please go ahead.
spk10: Thanks. Mel, I believe you mentioned 9% to 11% labor inflation for this year. That seems higher than what we've heard from other restaurant companies. Is that increase primarily related to wages? And if so, is the company trying to catch up to kind of the market level wages? No.
spk05: I mean, our – particularly around our hourly employees, Chris, our hourly employees already – make more than the regulatory minimum wages by a good bit. But we do operate in states like Florida, Colorado, Arizona, where the regulated minimum wage is going to be going up by step function each of the next few years, including this year. So I think that's where you're seeing most of our wage inflation.
spk10: Okay, and then I think you said labor in 1Q was trending favorably. I was hoping you could clarify whether you're trending below the first quarter last year or if we should be thinking about that comment more on a sequential basis from the fourth quarter, I guess.
spk05: I was more thinking of it sequentially.
spk04: Okay. Okay, great. Thanks, guys.
spk02: The next question comes from Andrew Charles of TD Talent.
spk03: Please go ahead.
spk11: Great, thanks. Recognized it's about 8.30 in the morning, but Chris, hopefully we get an update on alcohol. I know that it was something that you were planning to roll out to all the stores that could have it by the end of the year 2022. Just curious, you know, if you were able to achieve that, how many stores it is. And also, you know, now that, you know, you basically should be running with all the stores that can carry a liquor license, What's the plan in 2023 to market this and bring awareness that you guys do offer alcohol, recognize in the last 39 years you've been telling your guests that you don't serve alcohol?
spk08: Yeah, happy to talk about alcohol any time of day. Actually, 830 in the morning is the best time for alcohol. It's in about 85% of our restaurants now, which is up slightly from Q3. At the end of Q4, that's where it was. It's sitting around 6.1% of mix in the restaurants that sell it. And our team's been working hard on the innovation behind that and some tests and nothing to announce yet, but it's a focus for us. As we've said all along, once we get it rolled out to the system in those restaurants that we can, that's when we'll start to innovate. So I think you'll start to see something there in the later part of this year.
spk11: Great. And then, Mel, one for you. Appreciate all the color on eggs. You know, curious, how long is that fixed-cost contract in place for? And, you know, totally get that the expectation is that you're going to see normalized egg prices in the middle of the year. But I guess what I'm wondering is that is there a period where you're uncontracted, where you could potentially see some volatility in egg prices before they fully kind of get to a normalized pricing range?
spk05: Our eggs and potatoes are contracted for all of 2023. So we entered this year with the same kind of contract that we had last year, which was a 12-month fixed-price contract. And because of the fixed-price aspect, I don't expect a lot of volatility.
spk04: That's great. Thanks for the call.
spk02: The next question comes from Gregory Frankfurt of Guggenheim. Please go ahead.
spk12: Hey, thanks for the question. My first one is just maybe a clarification. Can you tell us how much the comparisons get tougher in March just as we think about what you guys are baking into kind of the step-up in comparison?
spk05: How much? Well, there was apparently a lot of – there was – A lot of spring break revenge trending last year, we think, during March. So I don't actually know what the amount is off the top of my head, but in any event, we don't break down months within quarters too much. But it was a pretty hefty spring break experience that people enjoyed last year.
spk12: Got it. Thanks. Just... As you look at development for this year, can you talk about, it seems like a lot of your competitors have had a tougher time finding sites and equipment and dealing with permitting, and you guys continue to open up pretty quickly. Can you talk about what you're seeing on those fronts and what may be different in the industry?
spk08: Yeah, I mean, it's an absolute strength for us, and that's why we're leaning into it and why we did what Mel talked about where we took control of the sites earlier. basically took control of the of the situations that were facing anybody who was building anything this past year and took control of the of the space to control the timeline so that's why we were able to stay so tight with our development schedule and why we feel confident in our in our development schedule for this year too even though it's elevated from last year And even though it's backloaded into the second half of the year, that's merely a function of the pipeline rebuilding from COVID. So we were able to execute a backloaded development schedule in 2022, and we believe we'll be able to do it really well. And not only just get them open, but get them at these high volumes that we're talking about and performing as well as they have been.
spk12: Got that. Thanks. And then maybe just a last one on CapEx. A pretty big step up from this year. Is there any, they're going to specific projects, maybe on the technology side, any help there would be great.
spk05: The lion's share is new restaurant openings. The number of projects that will open this year has increased, but moreover, in order to meet what we expect to be the same sort of long-term goals growth ambitions that we set forth for next year, we'll already be spending into more projects that will open in 2024. So as we get to the back half of the year in order to continue to accelerate, we're seeing a lot of acceleration in the pace of our CapEx investment. I mean, we're happy to do it because it's part of the pleasure of working for a growth brand, we're growing fast and investing a lot of dollars for great returns.
spk04: Thanks, guys. Appreciate it.
spk03: The next question comes from Brian Vaccaro of Raymond James. Please go ahead.
spk09: Hey, Brian. Hey, good morning. Thanks for taking my questions. I just wanted to circle back on the quarter-to-date strength that you've seen and Given the Omicron lapse that caused a lot of variability, I was hoping you could help us tease out how you view underlying trends. Could you comment on sort of either the three-year or the year-on-year you're seeing kind of Jan and Feb, or maybe even average weekly sales, just to sort of tease that out a bit as we move through the months here?
spk05: I don't have anything on the three-year in front of me. What we do know is that, at least relative to the industry, for casual diners and for full service, that our trends are continuing with sort of the relative outperformance versus those categories. And I'm thinking about we use black box data, like I think a lot of you guys do and our peers do. So it's pretty much followed that kind of trend, but with our typical outperformance versus the categories.
spk09: Okay. Okay. That's helpful. And pricing, I just wanted to make sure our notes were correct on that. I think you said you took the 4.1% as you lapped 3.9% effectively. So does that mean you'll be sort of in that 8% range, assuming you take no additional until you get into July? Is that sort of your next most significant lap?
spk05: What we said was for the full quarter, that average price was about 6.9%. So we rolled off the 3.9% that we took in the first quarter, excuse me, the first full week of 2022. And then in the fifth week of this year, we took 4.1%. So the average for the quarter is 6.9. In that quarter-to-date period is the 6.9. Is that correct? For the full quarter, it'll average to about 6.9%. Oh, I'm sorry.
spk09: Okay. Okay. Okay. All right. I'll circle back on that. And then just last one for me. On commodity inflation, you talked about running up, I think, 4% to 6% is your expectation. Is that relatively stable through the year, or perhaps there's some difference in terms of year-on-year inflation worth noting, first half versus second half? Thanks very much.
spk05: I'm going to speculate a little bit, but I think we're seeing it slow. It's still growing. I mean, we're paying more now than we did for the same items last year, but I think it's just growing at a slower rate. a slower pace, and I think that we would hope to see that continue to abate as we go through the growth pattern.
spk04: Okay, thank you. I'll pass it along.
spk02: The next question comes from Sarah Senatore of Bank of America.
spk03: Please go ahead.
spk00: Great. Thank you so much. I wanted to get some insight onto the new units that you talked about. You know, the volumes are so much sort of materially higher. Is there some color you can give on, is it the footprints bigger? Because I know it sounds like that's part of the build cost going up. Are you seeing differences in day parts? you know, or off-prem versus on-prem, I'm just trying to understand to what extent this is about optimizing the footprint of the restaurant versus, you know, different markets, you know, versus something else. And on a related note, here's to confirm, it sounds like, you know, the actual transaction or traffic volume is also much higher. I know you don't have a ton of price on the menu, but I just wanted to make sure I was understanding it's not just, you know, most of that difference is not ticketing.
spk08: Yeah, on the new restaurants, Sarah, it's a sum of all parts. I think it's the bigger footprint, the more prominent patios, all those five kind of key initiatives that I talked about, as many of those getting implemented into the new restaurants as possible. These restaurants are high profile. Again, we're a 40-year-old portfolio of restaurants. So as the real estate site selection process has evolved, as our operations process improvement has evolved, all of those things come to play in the new restaurants. So really, we're building the restaurants to accommodate the demand that we're seeing out there. And that's led us to larger restaurants and some of these other attributes, the optimized dining rooms. the dedicated to go pick up areas, things like that. So all of it. I mean, it really is. There's no one silver bullet. It's all those things combined that are driving those volumes.
spk00: Great. And then, sorry, just in terms of clarifying, it's transaction or traffic, presumably, as opposed to check. That's different. So it's the mix of day parts or off-prem, on-prem look pretty similar on the whole?
spk08: Yeah, it's very similar. They're on similar price tiers as other restaurants in their markets. It really has to do with busier hours and, frankly, busier peak hours. So that's where we've been able to pick up that volume.
spk00: I see. Sorry, just one more on this, and then I'll hand it off. Some of those initiatives you talked about, you know, some of the parts are, I think, applicable even to some of your existing restaurants or your more mature restaurants to the extent that they're sort of operational improvements. You know, is that the case? And could that be a driver of same-store sales going forward as you think through deploying some of this?
spk08: Yeah. The way we're approaching it is we now have a kit of parts that deliver independently, and we size them independently. Not all of those can be applied to all of our restaurants throughout the system, as I've mentioned before, with some of the physical limitations that we have. However, when it's process improvement, new busing procedures, activities around our front of house management system, those type of things that we can apply, we are and we do. And that's actually been and will continue to be a big part of why the core system, even as aged as it is, continues to grow both traffic and sales.
spk00: Great. Thank you so much. You're welcome.
spk02: The next question comes from John Tower of Citigroup.
spk03: Please go ahead.
spk13: Great. Thanks for taking the question. I'm curious. So the EBITDA guidance for the year, when backing out the extra week, would suggest growth that's below the longer-term trend that you've been targeting. So I was Just hoping, Mel, you could maybe break down what the puts and takes are on that. What's really weighing on it? Are we seeing outside costs on pre-opening potentially hitting more so than historically?
spk05: Yeah, when we set the range, we wanted to be sure that we had a bottom end that considered a bit of the recessionary backdrop that we're operating under. And we're understandably cautious in this environment. But I would say that when we look back at the last few years, there's been some abnormality in the performance, but our growth really has been pretty respectable for the last few years. So frankly, we've built in a little bit of caution in that range that we've put out.
spk13: Okay. So I'll take that as conservatism. My words, not yours. So I'm just curious, in terms of the labor inflation, how much does the role specialization that you'd mentioned, I think, Chris, in your prepared remarks with the back of the house, dedicated expediters and beverage runners or makers, How much is that weighing into the inflationary outlook on labor?
spk04: The role specialization. The beverage attendant and all that.
spk08: It's not really. I mean, it's part of an overall process improvement and time and motion study and things that we've done. It actually, you know, the way we work is it's a I'll use the beverage position as an example. It's keeping the servers out of the beverage alley and out on the front more. And this person that's doing the beverages also handles and is the server for the counter and bar area, for the community tables and those type of things. So there's really not an incremental expense. It's more, again, just a specialization of roles.
spk13: Got it. So no incremental labor hours, just people... I guess, specializing where they should be.
spk08: Yeah, and you know what? We get questions about the ROI on KDS, and that's another example where I talk about a dedicated expediter. By having the KDS system in the restaurants, that allows us to free up what we used to call the helm position to act as that dedicated expediter. So, again, one of the key benefits to KDS for us is another role specialization opportunity that actually improves our efficiency in the kitchen.
spk13: Awesome. And then just the last piece, Chris, you'd mentioned a bunch of back-of-house enhancements. I believe the kitchen, installing second make lines, double dishwashers. I think you'd mentioned double grills and potentially smart ovens. When should we expect some of this stuff to start hitting the stores? And I'm assuming the expectation is speed of service. But is there anything else related to it, perhaps, you know, on the double grills, the ability to cook things that you haven't been able to cook in the past?
spk08: Yeah, so those enhancements are being made in as many of our new restaurants as possible. And as I mentioned earlier, we're applying as many of those as we can. A lot of that is contemplated in the increased capex that we spoke about earlier, some of these enhancements. It's a little disparate because not all restaurants can take all elements, like I said. So we're looking at those opportunities. And we also have a, you know, what's basically market revitalization program where we go into a market and remodel restaurants and things like that. And when we're doing that, we consider, you know, whatever of those elements we can add at that time as well. So it's going to be a rolling opportunistic rollout.
spk13: Great. Okay. I'll pass it along. Thank you.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Chris Tommaso for any closing remarks.
spk08: Thank you all for joining us today and for your questions. Before I close, I do want to formally welcome Steve Murata, who joined our team as the company's first ever Vice President of Investor Relations and had his first speaking role today. I think he did a great job. Welcome, Steve. We're happy to have you. Thank you. So this year officially marks 40 years of FirstWatch. That's 40 years of growth, innovation, and operational excellence. We were founded on the premise of daytime dining, specializing in breakfast, brunch, and lunch, without moonlighting as a dinner spot. We were founded on the idea that people can work in hospitality and still be home in the afternoons and evenings with their families. We were founded with a spirit of pushing the limits and daring to be different, and those guiding principles continue to serve us well today. Thanks again for joining us.
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