First Watch Restaurant Group - Q4 2025

Transcript

Operator (participant)

Thank you for standing by, welcome to the First Watch Restaurant Group Inc. Q4 earnings conference call, occurring today, February 24, 2026, at 8:00 A.M. Eastern Time. Please note that all participants are currently in a listen-only mode. Following the presentation, the conference call will be open for analyst questions, instructions on how to ask a question will be given at that time. This call 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 Steven Marotta, Vice President of Investor Relations at First Watch, to begin.

Steven Marotta (VP of Investor Relations)

Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso, and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the full year and Q4 of fiscal 2025 on GlobeNewswire and filed its annual report on a Form 10-K with the SEC. These documents can be found at investors.firstwatch.com. 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, outlook, growth plans and 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 the company's filings with the SEC, including our 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.

Any reference to percentage growth when discussing the Q4 or full year performance is comparison to the Q4 of 2024 and fiscal 2024, respectively, unless otherwise indicated. With that, I will turn the call over to Chris.

Chris Tomasso (CEO and President)

Thanks, Steve. Good morning, everyone. Thank you for joining us to discuss our 2025 results as well as our plans for 2026 and beyond. 2025 was noteworthy for First Watch, and I'm proud of our team's performance throughout the entire year. Our total revenue growth was more than 20%, and same restaurant sales grew by 3.6% with positive same restaurant traffic. We also opened 64 new restaurants across the system. Our 2025 new restaurant class represents the most openings in our company's more than 40-year history and exemplifies the depth of our development pipeline and our ability to execute against our growth opportunity. As always, I want to thank our more than 17,000 employees nationwide, without whom this would not be possible.

I'm particularly pleased with the results, considering that according to Black Box, industry traffic was negative and casual dining was only slightly positive as a result of macro environment pressure throughout the year. Despite the headwinds, our teams effectively executed on our growth strategies, and we excelled by focusing on controlling what we can control and by playing the long game. For example, we successfully and patiently navigated through soaring commodity inflation early in the year. We were able to balance preserving the value proposition for our customers by carrying moderate pricing while still delivering restaurant-level operating profit margins of 18.5%, well within our targeted long-term range. To strengthen our performance in the third-party delivery channel, we enhanced our key partnerships with two primary goals in mind. First, to drive traffic in that channel, and second, to do so profitably. We achieved both.

We also successfully launched our new digital marketing initiative to roughly one-third of our comparable restaurant base, generating a positive return on our investments. The results were compelling in building brand awareness and driving traffic, and we are excited about rolling it out to a wider base of restaurants in 2026. Stepping even deeper into marketing and our focus on the customer, throughout 2025, we advanced our multi-year effort to enhance our paid marketing and customer analytics capabilities. Following disciplined testing in 2024, we deployed a more sophisticated marketing strategy across select geographies and drove consistent increases in both aided and unaided awareness and increased customer visits. These results have given us the confidence to expand the program further to the majority of the comp base in 2026, and we're excited to continue leveraging this evolving competency.

Our marketing strategy is data and audience-driven, with heightened personalization from what might have been possible for us just a few years ago. We segment our markets using population data, market awareness, and competitive intensity. Our objective is to serve the right message to the right consumer at the right time and to nurture that relationship into a first-party connection and ultimately a restaurant visit. Tangible benefits have been realized from Connected TV, online video, paid search, and programmatic digital that connects to household and transaction insights, as well as our owned data. Along with our focus on staying top of mind is our obsession with delighting customers the moment they walk into our restaurants. This comes to life through our innovative seasonal menus, warm hospitality, and concerted effort to make days brighter.

We're proud to see this focus pay off. In 2025, our restaurants earned a range of awards and accolades that underscore the strength of our execution. We were pleased to be named to Yelp's Most Loved Brands list, ranking number four among other highly distinguished and well-known consumer brands. This recognition validates that we have created a welcoming environment known for great food and great service. In the spirit of continuing to raise the bar, I'm happy to announce that earlier this month, we rolled out a new core menu to all First Watch restaurants, the first significant redesign and reengineering of our menu in almost 10 years. Our overarching objective with this redesign is to meaningfully elevate the experience for our teams and our customers.

This effort again reflects the extensive feedback we've gathered over the past several years, reinforcing our commitment to continuous improvement and ensuring the long-term relevance of our brand. We added some of our most popular seasonal menu items to the core menu, including two dishes that feature a premium protein in the form of Barbacoa: the Barbacoa Breakfast Tacos, and my favorite, the Barbacoa Chilaquiles Breakfast Bowl. Other permanent additions include our best-performing sweet item, Strawberry Tres Leches French Toast, and an additional shareable, the Holey Donuts. We know our customers will be excited by the return of these beloved items and will also appreciate the work we did to improve menu navigation and add common customer-requested add-ons. At the same time, we used this effort as an opportunity to address slow-moving items, eliminate single-use SKUs, and reduce complexity for our back-of-house teams. We're very optimistic about this initiative.

In addition to improving our core menu, we also took the opportunity to elevate the design of our seasonal menu as well. With inspiration from our food ethos of Follow the Sun, we introduced more color, vibrancy, and thoughtful illustrations to better tell the story of our rotating menu and the innovative items that we introduce each season. Currently, we're featuring the Chimichurri Steak & Eggs Hash, as well as the return of the bacon, egg, and cheddar sandwich, otherwise known as the B.E.C., served on thick artisan sourdough. Our new core and seasonal menu initiative is comprehensive and was vetted and tested for more than one year in a meaningful number of First Watch restaurants. One final marketing topic related to our delivery channel. As our industry has continued to rapidly evolve, we too have evolved. We're committed to meeting our customer where they are.

Our delivery efforts in 2025 reflected that principle. While our digital marketing priorities illustrate our primary focus on the direct relationship with our customers, our information indicates that the delivery occasion is largely incremental, but likely not always with a unique customer. Said differently, we believe consumers and our customers specifically, seek a variety of occasions in their everyday lives, by leaning into delivery, we are better positioned to stay top of mind for an eventual in-restaurant occasion. We continue to test and measure a variety of ways to grow our share of total occasions while driving positive margin dollars. Shifting to real estate development and growth. 2025 was yet another record-setting year, highlighted by our high number of openings and strong new restaurant performance.

As a group, the 2025 restaurant class is exceeding our expectations, with first-year sales trends running 19% above their underwriting target. We also achieved the highest opening week sales on record at our Cosner's Corner, Virginia, restaurant, which generated more than $90,000 in first-week sales, reinforcing the strength of our model. In Boston, we followed our initial suburban entry with a high-profile flagship opening on Boylston Street in January, helping establish brand visibility in one of the most dynamic urban centers in the country. Our disciplined approach to market analytics and site selection allowed us to confidently enter five major markets in 2025: New England, Las Vegas, Salt Lake City, Boise, and Memphis, each of which represents a meaningful long-term growth opportunity for our brand. In fact, as a group, these markets, as of today, represent up to a 155 unit opportunity.

Our class of 2026 restaurants are essentially scheduled, and we are already deep into 2027 and 2028 site selection. We remain the fastest-growing full-service restaurant brand in the United States and are exceptionally well-positioned to build on our record performance. Our priorities for the year include deepening our presence in newly entered markets as we shift from market entry to market densification, while continuing to strategically fill in core and emerging markets. We know and have demonstrated for many years that when we adhere to our disciplined, data-driven approach to site selection, we can meet and even exceed our investment return metrics. These plans, combined with the strength of our team and the proven effectiveness of our development strategies, gives us confidence in our ability to continue to deliver sustainable, best-in-class growth as we march toward our target of 2,200 restaurants.

In 2025, we continued to make significant investments in our talent pipeline and leadership development, aligning with our strategic growth priorities. As I mentioned on last quarter's conference call, First Watch was named America's number one most loved workplace by the Best Practice Institute for 2025, a recognition we also earned in 2024. Just last month, based solely on employee voting, we were named in Glassdoor's list of 25 best places to work in consumer services in 2026. These accolades are welcome, but what matters most is that it represents direct employee feedback and experiences at First Watch. Our general managers play a crucial role in our success. In 2025, we updated the GM job description to reflect a renewed focus on operational excellence and people development, providing robust tools, techniques, and best practices for managing employee development.

This comprehensive approach ensures our restaurant-level leaders are empowered to nurture talent and maintain high standards throughout our operations. These initiatives, among others, further strengthen our organization as the results have made clear. Restaurant-level employee turnover declined in 2025, and we realized a 40% increase in applicant volume compared to the prior year. Looking ahead, industry data from Black Box continues to point to yet another challenging year, with their current outlook calling for a roughly 3% industry-wide same restaurant traffic decline in 2026. Despite that backdrop, we remain confident that the initiatives we have put in place position First Watch to once again outperform the industry, just as we did in 2025. We believe our disciplined execution and strategic investments will continue to drive market share gains in 2026.

There is no one in our daypart with the combination of scale, operational acuity, proven growth, and total addressable market as First Watch. In fact, with consideration to those attributes specifically, no one even comes close. We're the segment leader, and we'll continue to increase our share. There's a lot to be excited about in 2026 and beyond, and we look forward to making days brighter for our employees and our customers every day. Before I pass it over to Mel, I want to address the announcement we made this morning regarding Mel's decision to retire later this year. This transition to retirement is much deserved and will be well-planned. Mel's been with First Watch since 2018 and was a critical part of our IPO in 2021.

While he will certainly be missed, I'm optimistic about our company's promising future and next steps related to his retirement, including an executive search that will start immediately. Mel will continue as CFO until we have his successor in place and onboarded. He also plans to stay on as an advisor until the end of 2026 to ensure a completely seamless transition. Mel, I want to thank you for your dedicated service and partnership for all these years. We wish you and Trish nothing but the best in this next stage of life. With that, I'll pass it over to Mel.

Mel Hope (CFO)

Thank you, Chris. That's very generous. I'm proud and grateful to be a member of your team, and I'm glad to play a role in facilitating a smooth transition. Let's return to the discussion of the company's performance. Total Q4 revenues were $316.4 million, an increase of 20.2%, with positive same-restaurant sales growth of 3.1%. Our top-line growth in the Q4 is attributed to positive same-restaurant sales growth, 179 non-comp restaurants, including the 78 company-owned and new restaurant openings, and the 19 franchise locations acquired since the Q3 of 2024. Same-restaurant traffic growth was negative 1.9%. Food and beverage expense was 22.9% of sales, compared to 22.7%.

As a percent of sales, costs benefited from carried pricing of around 5%, partially offset by commodity inflation of 1.1%. Excluding vendor contributions related to our 2024 leadership conference, which were reported in the prior year results, food and beverage expense as a percent of sales for the Q4 of 2025 would have been lower versus the Q4 of 2024. Labor and other related expenses were 33.5% of sales in the Q4, a 20 basis point improvement from 33.7% reported in 2024. Carried pricing offset the impact of 3.1% labor inflation in the Q4, while our labor efficiency was essentially flat compared to the Q4 last year.

We realized restaurant-level operating profit margin of 19% in the Q4 of 2025, a 20 basis point improvement compared to the Q4 of 2024. Our income from operations margin was 2.9%. At $31.8 million, general and administrative expenses were 10.1% of Q4 revenue, which was a 160 basis point improvement versus the prior year. The favorability as a % of total revenue was largely driven by the timing shift of our leadership conference and also benefited from levering certain home office expenses. Later on this call, I'll share a bit of good news about our expanded equity compensation program. Adjusted EBITDA increased 38.7% to $33.7 million, a $9.4 million increase versus the $24.3 million reported last year.

Adjusted EBITDA margin grew to 10.6%, compared to 9.2% we realized in the Q4 of 2024. Our 2025 income tax benefit was $10.7 million and includes a sizable non-cash benefit. Specifically, our year-end 2025 assessment of the future realization of the company's accumulating FICA tip credits was more favorable than in years prior. The recognition of our net deferred tax assets includes the effect of this year-end determination. Net income was $15.2 million, and net income margin was 4.8%. We opened 13 new system-wide restaurants during the Q4, of which 12 are company-owned and 1 is franchise-owned, and we finished 2025 with 633 restaurants across 32 states.

The net effect of acquisitions, which includes only the impact of purchases made within the last 12 months, increased Q4 revenue by about $9 million and adjusted EBITDA by about one and a half million dollars, and full year by about $35 million and $6 million, respectively. For further details on the Q4, please review our supplemental materials deck on our investor relations website beneath the webcast link. Now I'll provide our initial outlook for 2026. We are expecting same-restaurant sales growth to be between 1% and 3%. As a reminder, our pricing philosophy is such that we evaluate menu pricing at the beginning of the year and again around mid-year, with the objective of offsetting what we view as permanent inflationary pressures. We manage the business with a disciplined focus on sustaining same-restaurant sales growth while protecting the long-term health of the brand.

Given our current outlook for commodity inflation, and importantly, in keeping with what we believe is in the best interest of our customers, we elected not to take any pricing at the outset of 2026. Therefore, our guidance includes carried pricing of around 4% in the first half of the year, which blends to about 2% for the full year. We expect total revenue growth of 12%-14%, with around 100 net basis points impact from acquisitions. We expect a total of 59-63 new system-wide restaurants, including 53-55 company-owned restaurants and 9-11 franchise-owned restaurants, with 3 planned company-owned restaurant closures. Our company-owned new restaurant development pipeline is somewhat weighted to the second half of 2026, the Q4 in particular.

We expect full-year commodity inflation of 1%-3%, driven by increases in coffee and bacon, partially offset by expected deflation in eggs and avocados. Restaurant-level labor cost inflation is expected to be in the range of 3%-5%. Our adjusted EBITDA guidance range is $132 million-$140 million, including the net impact from 19 restaurants we acquired in April last year, which are expected to contribute about $2 million to our adjusted EBITDA this year. We expect capital expenditures of $150 million-$160 million. While we do not typically provide quarterly earnings guidance, we believe you may find a few considerations helpful to your models. First, we expect positive same-restaurant sales growth in each quarter of the year, including our Q3, when we will face our most robust comp comparison.

Second, as it relates to the Q1, we elected not to take price in January and experienced several weather-related disruptions during the month, which reduced operating days in our comp base. Third, as noted on our last call, we held our leadership conference in January of 2026 and accordingly expect G&A expense to be materially higher in the Q1 than any other quarter this year. Lastly, as was mentioned earlier, we strengthened the alignment of our operational incentives with the interests of our shareholders by enhancing our equity-based compensation for senior leadership and expanding eligibility to include our divisional operators. These actions reinforce accountability across the organization and better position the company to attract and retain talented colleagues who drive results.

The equity compensation program does not impact our adjusted EBITDA, and the related accounting charges associated with the incremental non-cash awards will be recognized in G&A, which may limit our ability to lever G&A this year. Four years after our IPO, I'm proud of the results our company has delivered, and we remain fully committed to driving similarly strong performance ahead. We have grown our system from 428 restaurants at the time of our IPO to 633 at the end of 2025, and nearly doubled adjusted EBITDA along the way, compelling evidence that the growth strategy is working and that our execution remains both disciplined and consistent. These milestones reflect the strength of our model, the quality of our teams, and the momentum we have built.

Our real estate and talent pipelines are the healthiest they've ever been, giving us confidence in our ability to achieve our growth objectives for both 2026 and beyond. With that, operator, will you please open the line for questions?

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that analysts limit themselves to one question and a follow-up so that others have the opportunity to do so as well. One moment, please, while we poll for questions. Our first question comes from Jim Salera with Stephens. Please proceed with your question.

Jim Salera (Analyst)

Hey, Chris and Mel. Good morning. Thank you for taking our question. Mel, first of all, it's been great working with you. Congratulations on an incredibly successful career. I wish you all the best, whatever comes up next for you.

Mel Hope (CFO)

Thanks, Jim.

Jim Salera (Analyst)

I wanted to maybe drill down a little bit on the commentary for FY 2026. Mel, I appreciate the commentary around, you know, pricing and how that should flow through the year. Could you just give us a sense for what you're underwriting for the industry for 2026 and kind of how your expectations layer on top of that? Maybe if you could also provide some color on the mix component of your tickets.

Mel Hope (CFO)

When you say underwriting for the industry.

Jim Salera (Analyst)

So I think-

Mel Hope (CFO)

Are you asking me, you asked me to speculate about the, a climate that we're gonna be operating in?

Jim Salera (Analyst)

Yes. I take it your guide kind of implies, you know, sort of down modest traffic for the industry and you guys being, you know, in line to modestly better. Just any details on that you can provide?

Mel Hope (CFO)

Yeah, I think, you know, Jim, I think there's reason to be cautious about the environment that we're operating in now. I think, historically, for our particular category and different cohorts of peer comparisons against Black Box data, we seem to outperform that quarter-over-quarter. I don't expect that particular characteristic to come to an end, but I do think that the entire category has reason to be cautious here in February about what's gonna ensue for the balance of the year.

Jim Salera (Analyst)

Mix as a component, I know you gave us some details on pricing, but just how should we think about mix progressing through the year? That be a relative headwind still, or maybe some opportunity for that to turn positive?

Mel Hope (CFO)

You know, in our, in our guidance, we don't typically project where the different components would come out for the year. What, you know, what we do with our same restaurant sales is what we're guiding to is that 1%-3% for the full year, and we'll take a read on how we defend within that range as the year progresses.

Chris Tomasso (CEO and President)

Jim, I can also give some insights there. I think, well, I know we've saw positive mix from our core menu test rollout. Taking that to the entire system, we believe we have some mix upside there, which was one of the consideration factors with not taking price in Q1 like we have in years past. Then on the Black Box, to be more specific, in, you know, in my commentary, I talked about their current projection for the year is roughly a 3% industry-wide, same restaurant traffic decline. As we've done in the past, we've outperformed the industry and, you know, that's kind of the position we're taking now that Mel's exactly right.

There's a reason to be conservative based on, you know, what the industry-wide impact in Q4 specifically, and even more specifically in December. You know, we've been able to, you know, outperform the overall industry, and there's no reason for us to believe that we won't do that again for 26.

Operator (participant)

Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Jeffrey Bernstein (Managing Director and Senior Restaurant Analyst)

Great. Thank you very much, and I echo the congratulatory comments from Mel. Hope you,

Mel Hope (CFO)

Thanks.

Jeffrey Bernstein (Managing Director and Senior Restaurant Analyst)

get to enjoy retirement.

Mel Hope (CFO)

Thanks, Jeff.

Jeffrey Bernstein (Managing Director and Senior Restaurant Analyst)

Sure. My question is just on the 2026 unit growth. Looks like we're looking for maybe 9%-10% net growth. I know the long term ago has been for many years, kind of low double digits. I'm just wondering, you know, maybe how you think about the constraint to greater growth, whether it's real estate or people. It just seems like on an ever larger base, maybe be worthwhile considering lower the long-term guidance to maybe more the high single digit range, because I know the focus is really on getting the operations right. It's really not about the speed of openings, considering you have so much runway ahead. Just wondering whether we should expect more tempered growth or whether there's some reason why 2026, you know, might be a little bit more subdued. Then I had a follow-up.

Chris Tomasso (CEO and President)

This is Chris. I think, you know, Our long-term targets of around, you know, a low double-digit unit growth, we've exceeded that in the last couple of years. You know, there'll be ebbs and flows as it relates to that. The reality is, you know, the absolute number of restaurants continues to increase when you stick to that percentage. We're always gonna look at it in terms of what's best for the overall organization. The number one priority is the health and performance of the core system. As we continue to grow and that number continues to go up, you know, we'll monitor it and make sure that it's not putting any undue strain, you know, on the system.

I will say that, you know, regardless of the actual number or the percent, I mean, we're delivering quality growth year after year. Our, our 2024, 2025 NRO classes are delivering average weekly sales that are higher than their underwriting targets and our comp base. You know, the class of 2025 alone is 19% higher than their underwriting targets. We're really focused on the quality growth, and the number will ebb and flow, like I said, year to year, but I think that's a good long-term target for us, and that's why we kind of restated that.

Mel Hope (CFO)

It's also a good time for me to just kind of slip in here real quick, that our earnings release was a little bit awkwardly worded about our new restaurant opening guidance, which was 59-63 net system-wide restaurants. The net is 3 restaurants that the company own, that we expect to close this year.

Jeffrey Bernstein (Managing Director and Senior Restaurant Analyst)

Understood. My follow-up, Chris, in your prepared remarks, or I should say, even in the press release, you talked importantly about the evolving digital marketing platform. I know it's more focused on direct marketing, but I'm just wondering if you can share, maybe since that seems like that's the biggest initiative for this year to drive comp, maybe your greatest learnings from the tests, the greatest opportunity this year, maybe the dollar spend, any kind of broad brush commentary you can share on the excitement around the evolution of that program? Thank you.

Chris Tomasso (CEO and President)

Sure. Thanks, Jeff. I'll let Matt talk about the specifics. I just want to make it clear, I'm excited about a number of levers we have this year. Marketing is certainly one of them. What we saw in the test was very encouraging to us, and we're excited to expand it to a majority of the system this year. I got to say, I'm just as excited about our new core menu rollout. When you think about the transformation of First Watch over the years and the acceleration of our growth, it came about 10 years ago when we did a similar exercise. What we've seen in test there is also why I'm encouraged about 2026. Matt, if you want to give some specifics on the marketing.

Matt Eisenacher (Chief Brand Officer)

Yeah, sure. Hey, Jeff, it's Matt Eisenacher. As Chris said, you know, there's a variety of levers. I echo his sentiment that we're really optimistic about the new core menu. Obviously, we're excited to be able to scale our marketing program from last year, where we focused on particular geographies, and now we'll be scaling that to the vast majority of our comp base. It allows us to continue to use those things that worked last year and amplify those, you know, starting to put more emphasis into video and driving awareness. You know, last year, we saw in those geographies an increase in both aided and unaided awareness.

You know, you have that, and then the relaunch of all of our new digital platforms, like our new app, you start to see how you can drive trial, and then you have the analytics to be able to get more efficient with that media spend over the long term. All of those things kind of play together.

Operator (participant)

Our next question comes from Sara Senatore with Bank of America. Please proceed with your question.

Sara Senatore (Senior Research Analyst)

Thank you. Maybe just a couple of questions on the commentary about the comp expectations through the year. Not necessarily looking for kind of quarter by quarter guidance, but, you know, you mentioned that you expect comps to be positive in the Q1, even with the kind of weather, and I assume that's kind of firm only as opposed to taking into consideration the current, you know, weather impact. I just wanted to clarify, as you think through the doors being closed, you know, presumably traffic will be, you know, there'll be a headwind, but you have 5 points of price.

You know, I guess, is it safe to assume that it's, you know, it's sort of modestly positive, and then as you get through the year, you know, you mentioned that the toughest compare in the Q3, but I think your pricing implication was that, you know, price might be in the low single digits in the second half of the year, just given the average of around two. Again, I wanted to understand kind of your confidence or how you're thinking about the drivers of traffic, both with the headwind earlier in the year and then the more difficult traffic compares at least in the Q3. I do have one quick follow-up, please.

Mel Hope (CFO)

The full year guidance, at 1%-3% is, you know, already incorporates what we're seeing in sort of in the current environment, as you mentioned. You know, we're deliberately guiding only the same restaurant sales because we have different, we have different timing coming on board with regard to the new menu, with regard to rolling some fairly robust, third-party delivery sales last year. Just the general environment. You know, a little bit harder for us to be confident in exactly what the cadence is going to be.

I do think that we're probably currently looking at, you know, maybe a more challenged quarter by weather than the rest of the year, we do have some, you know, it does get a little bit tougher in the Q3.

Chris Tomasso (CEO and President)

I will say that owur year-to-date trends are improved versus December. You know, we believe we're on track to meet our annual same-restaurant sales guidance, when you kind of carry that forward.

Sara Senatore (Senior Research Analyst)

Okay, thank you. Just sort of thinking about the cadence. I appreciate the color. Just the follow-up was on the new, you know, the 2025, and I apologize if I missed this somewhere. I know you mentioned you're 19% higher than underwriting targets. I know your sort of underwriting targets are, I think, the bar is a little bit lower than what we've been seeing in the, in the past. How do the AUVs compare, I guess, to previous, cohorts to, you know, earlier years? Are you still seeing, you know, kind of increasing new unit volumes? Is that, largely consistent with kind of the size of the footprint or anything different there as you think about the returns on the new units?

Chris Tomasso (CEO and President)

As you know, we've grown AUV significantly over the years. Just a reminder of our 2026 unit economics, you know, third year sales expectations of $2.8 million, the 18%-20% restaurant level operating profit margins, you know, that we talk about that penciling out to an 18% IRR and a 35% actualized cash on cash return. Yes, the AUVs continue to increase. When we talk about, you know, a class being higher than their underwriting targets, I can't think of a year where that number hasn't been higher than the year before from an AUV and underwriting standpoint. Just healthy underlying growth for us on a new unit standpoint.

As far as what's driving that, you know, we have talked about the bigger footprints. We haven't necessarily seen a correlation on size of the restaurant, per se, but we know that when we stick to our underwriting criteria, our site selection criteria, the data that we use, that it sets us up for, you know, success. We've proven that year-over-year, and we feel that we'll be able to do that in 2026. Like I said, on the call, or Mel said, we're well underway for 2027 and 2028. I mean, if anything, you know, growth is a strength for us, the unit growth and the performance, and again, it's quality growth.

Operator (participant)

Our next question comes from Andrew Charles with TD Cowen. Please proceed with your question.

Andrew Charles (Managing Director and Senior Research Analyst)

Great, thank you. Mel, best wishes for retirement. Hope the next chapter, you know, gives you more time for golf. Chris or Matt, you know, in marketing, you guys talked about a positive return on spend. Can you help us understand what you're observing with the same-store sales outperformance at those one-third of stores that are utilizing marketing efforts versus the two-thirds that aren't? Just really looking ahead, you know, I think you said the vast majority of the comp base will benefit from marketing. How soon is that planned to scale? Is that more of a first half or a second-half driver?

Matt Eisenacher (Chief Brand Officer)

Yeah, sure. Happy to take those. I think as we stated last year, in those select geographies, we did see a several hundred basis point lift in traffic pre, post, test, control. You know, we're applying the same playbook and strategies to this year with a couple optimizations. It's not like we're deploying radically different strategies than we did last year. We're just scaling it to 2 more restaurants. To your second question on the cadence of the spend, we actually just started moving into markets. Obviously, that takes time to build, and like last year, you know, that will extend throughout the year. We do try to align that with our seasonal or our seasonality. You can think about the spend following our seasonality.

obviously, you probably have more in the first half of the year, and then would taper down as you go throughout the rest of the year.

Andrew Charles (Managing Director and Senior Research Analyst)

Okay. Mel, if you could just help us understand the cadence of commodity and labor inflation as we think about 2026. You know, I was thinking on the commodity side, theoretically, you should see a more tame, you know, first half of the year, just given what you're lapping over. On the labor side, you know, you got the Florida minimum wage increase going on for September 30th, any help on the cadence would be helpful.

Mel Hope (CFO)

I think that we expect the inflation to be somewhat higher in the second half of the year, so quarters 3 and 4 than we're experiencing right now and in the Q2.

Operator (participant)

Our next question comes from Jon Tower with Citi. Please proceed with your question.

Jon Tower (Director and Senior Research Analyst)

Thanks. Mel, congrats. Maybe starting off, Chris, you had mentioned obviously, the new menu, or the core menu improvements you're excited about. I think you had talked about even 10 years ago or so, seeing some fairly strong growth post changes. I'm curious, aside from obviously, hitting on things that consumers want more of, are there actual operational improvements as well? It sounds like you reduced some of the SKUs, but, you know, we expect, you know, better speed of service, any other benefits that you can speak to from this core menu enhancement?

Chris Tomasso (CEO and President)

Yeah. I, you know, a lot of those efforts, we talked about a lot in 2024 and 2025 with the back-of-house improvements, improving our throughput, especially during peak sales hours. The efforts around the, the menu, will definitely deliver some efficiencies. Like I talked about, you know, removing some single use item SKUs, bringing back some of these favorites and, things that we, the teams have executed before as seasonal menu items. There's a muscle memory there that will help them execute that. Really, this is, this is much more, heavily weighted toward the consumer side, and, and the appeal and bringing back some of these favorites.

It does have some back-of-house benefits, like reducing prep time and things like that, but that wasn't the main focus.

Jon Tower (Director and Senior Research Analyst)

Got it. Makes sense. Maybe just kind of flip into the backdrop. Curious, in your guidance for the year, Mel, how you're thinking about tax refunds and how that might be impacting your business, or asked differently, in the past, when you've seen elevated tax refunds, how has the business responded?

Mel Hope (CFO)

Yeah, that's interesting. Historically, we've believed that our typical customer isn't doesn't react necessarily to tax refunds in terms of attendance in our restaurants. We're certainly aware of it, and it's just gonna be easier for us to read after it, after it occurs. You know, our customer demographic tends to skew a little bit higher on the household income scale. As a consequence, we've oftentimes been a little bit insulated from certain cost pressures in terms of going down and when there's a, you know, a windfall or a refund, tax refunds, we may not benefit quite as much as you see in, you know, quick service restaurants.

Jon Tower (Director and Senior Research Analyst)

Great. Thanks for taking the questions.

Mel Hope (CFO)

Thanks.

Operator (participant)

Our next question comes from Andy Barish with Jefferies. Please proceed with your question.

Andy Barish (Managing Director, Equity Research)

Hey, guys, congrats, Mel. Just trying to frame up how we should think about the delivery business, you know, within the context of your, you know, your guidance. I know I've seen some free delivery offers and things like that. Can you know, kind of maintain sales in 2026 versus the, you know, the big growth, excuse me, the big growth that you saw in 2025? One quick follow-up as well.

Chris Tomasso (CEO and President)

Sure. Andy, this is Chris. We, you know, obviously, we've been really pleased with our progress in this channel over the past year. Our teams worked really hard to create a true partnership with those vendors that we work with. So we're happy with the third party where it is and direct off-prem as a direct off-prem as a percentage of our overall mix. You know, we're not specifically commenting on future traffic assumptions in that channel, but we also didn't fund free delivery.

I mean, it was a much deeper partnership on how we got together and aligned on goals, which really is about transactions for both of us and then margin for us, and we achieved both of those, and we'll continue to work to build on that.

Andy Barish (Managing Director, Equity Research)

Got you. Then on the new unit growth, just want to be clear, on the company-owned side, it'll be 56-58 gross, and then the 3 closures that had been primarily contemplated?

Mel Hope (CFO)

That's right.

Andy Barish (Managing Director, Equity Research)

Okay.

Chris Tomasso (CEO and President)

You got it.

Andy Barish (Managing Director, Equity Research)

Is the kind of market densification, I guess, implying you're not gonna go into 5, you know, 5 new major markets as you did in 25? Is there a, you know, a little bit of an NRO margin benefit that we should see, or is it, you know, not as material, just given the size of the company now?

Chris Tomasso (CEO and President)

Are you talking about When you say margin benefit, can you expand on that?

Andy Barish (Managing Director, Equity Research)

Yeah, just densifying existing markets, which is obviously positive, and not going into, I'm presuming, as many new markets, which is also, you know, obviously positive, as it takes a little time to ramp margins in those newer markets.

Chris Tomasso (CEO and President)

Yeah. If you'll recall, you know, we have very similar performance for our NROs across geographies, so that's not really a large consideration. Where that really shows up, though, Andy, is in pre-opening costs and training costs. If we do it in a core market, we can pull trainers and staff from around the region, whereas if we're going remote, like we did in Las Vegas or when we entered Boston or New England, you know, the pre-opening costs are higher. The margin performance, you know, is pretty similar across geographies and kind of the maturity of the market.

Mel Hope (CFO)

Hey, Andy, I think I misspoke in response to your question. The range of new company restaurants, which is what I think you were asking about, is net of the 3 closures that we expect to execute this year. That range at 53-55 is the net range, so it considers the closings.

Andy Barish (Managing Director, Equity Research)

Okay. Thank you.

Mel Hope (CFO)

Sorry about that.

Operator (participant)

Our next question comes from Todd Brooks with The Benchmark Company. Please proceed with your question.

Todd Brooks (Senior Analyst and Managing Director)

Hey, thanks. Mel, I add my congratulations on your upcoming retirement. A couple more follow-up type questions here, but wanted to dig in on the enhanced marketing efforts. Correct me if I'm wrong, but my understanding of the focus in 2026 in the test, kind of third of the base, was finding breakfast daypart users that weren't necessarily First Watch customers and stimulating them to try the brand. Was that the case for the entire year, and is there another lever that gets pulled as you broaden the program out, where we actually use the enhanced marketing efforts into the existing First Watch customer base in an effort to drive additional frequency there as well?

Matt Eisenacher (Chief Brand Officer)

Yeah. Hey, Todd, it's Matt Eisenacher again. It's a good question. You know what? I would say we're really taking the playbook of what we saw work last year and applying that this year. The strategy would be the same as you stated, where we're using information and customer data to target those that are already active in the breakfast daypart. I mean, we're still in the early stages of a marketing lever here at First Watch, and we see that as a responsible way to be efficient with our dollars. Now, again, if you, if you look, you know, many years out, eventually you can start to move outside and start to grow the overall occasion. You know, as we all know, that could be a little bit more difficult. You know, we are for this year...

Yes, to answer your question, that was the focus all of last year as well, and will be this year as well.

Todd Brooks (Senior Analyst and Managing Director)

Matt, any pivot to some of the effort being against existing First Watch customers versus just overall category users, or does that measure of overall category users include your existing customer base?

Matt Eisenacher (Chief Brand Officer)

Yeah. As we talked about before, we apply different strategies, channels, and creative, if we have, you know, not seen you before or if you're part of our customer base. You know, if we're trying to introduce the brand to you, we want to establish that we're a great place for everyday breakfast. You know, as we start to get more information on you, we'll start to kind of pulse through our seasonal menu program, given that you know who we are. We have a variety of segmentations and cohorts, and our first-party audience is part of that as well.

Operator (participant)

Our next question comes from Brian Mullan with Piper Sandler. Please proceed with your question.

Brian Mullan (Director and Senior Research Analyst)

Thanks, would just like to hi, and echo Mel, congrats on the retirement.

Mel Hope (CFO)

Thank you.

Question.

Brian Mullan (Director and Senior Research Analyst)

No problem. Can you just comment on what you've seen lately across, you know, the day parts between weekday breakfast, weekday lunch, and the weekend business? Just curious if there's any notable differences or if they're more behaving similarly, and how you expect those to behave in 2026?

Chris Tomasso (CEO and President)

We talked about, I think on the last call, that we saw strength in the weekday breakfast segment. We certainly saw that in Q4 and all of last year. Then in Q4, also, weekends also slightly outperformed. Sorry, not just Q4, but also for 25 as well. Whereas we saw some weakness, I think back in 24 in weekday breakfast, we recovered that in 25 specifically.

Brian Mullan (Director and Senior Research Analyst)

Okay, thanks. Just menu innovation, just high level, the beverage offerings, just wondering what the team is working on, if anything, and what's the biggest opportunity over the next few years?

Chris Tomasso (CEO and President)

Beverage category for us continues to be a big driver. You know, we launched our fresh juice program, I think, almost 10 years ago now, and it still continues to, you know, blow us away at the mix of those items. We have a new juice on every seasonal menu, and, you know, thoughtfully, over the years, we've added a couple of those juices to the core menu. We've also innovated around cold caffeinated beverages, which is now a permanent part of our menu, and those do well. So we're absolutely looking at the beverage category as an opportunity, in addition to the alcohol platform that we rolled out a couple of years ago. So we see opportunity there in our innovation pipeline.

Operator (participant)

Our next question comes from Gregory Francfort with Guggenheim Partners. Please proceed with your question.

Gregory Francfort (Senior Analyst)

Hey, hey, thanks for the question. I guess my first question is just on the pricing. You guys, I think you guys evaluate pricing twice during the year. I'm just wondering, as you looked at the guidance, what you embedded. I guess there's no pricing in the first half, incremental pricing. Do you embed an assumption for a pricing increase in the second half?

Chris Tomasso (CEO and President)

We talked about the carried pricing of it'll end up being 2% blended for the year. Honestly, for our same-restaurant sales guidance, the 1%-3%, it's really based on a combination of a number of potential impacts this year that we may not have had in years past, and a number of levers that we have, whether it's the new core menu, the increased marketing activity, mix upside from our seasonal menus, and pricing is one of those levers as well. We'll look at that and see where we are mid-year and make that decision. I think, you know, based on the consumer environment right now and doing what's right for the customer, that's why we elected not to take any price at the beginning of this year.

Mel Hope (CFO)

In other words, we won't make that call until the Q2.

Gregory Francfort (Senior Analyst)

Okay, got it. Then just on your margin outlook, I think the implied assumption is maybe just a little bit under 19% for the year. What would it take, I guess, to get back towards the high end of the 18%-20% long-term range that you guys have targeted, maybe in 2027 or 2028? Thanks.

Mel Hope (CFO)

There's, you know, there's a lot of influence on the overall margin, based on the number of juvenile restaurants that we have in the mix. Our, you know, our legacy cohort, the comp cohort, is, you know, consistently delivers, you know, 200 or more basis points above the consolidated. Because we have such high volume, new restaurants that are, you know, getting to mature margins, or they currently are on the road to that, they have an impact on the margin, and it kind of is outsized because their sales are so large, they tend to over-index on the average.

Really, you know, probably the immediate driver to get margins, you said to the upper end of the range, would be to accelerate the growth of the more juvenile restaurants in terms of their margin production during the year. You know, we see a lot of opportunity in that, but also, there's sort of a natural curve when you have a new restaurant and have new crews and you're operating in new areas, you know, they, we press to get them to mature margins as swiftly as possible, but, you know, they also have a life cycle, and we don't want to tarnish the customer experience by being too hasty.

Chris Tomasso (CEO and President)

Gregory, I think if you think about, you know, our philosophy of pricing to defend margins, I mean, if there ever was a year where that was challenged, it was last year, we were able to deliver, you know, 19% margins in Q4, 18.5% for the year, you know, right smack in the middle of that range. So, we've got some relief, hopefully this year on the commodity side. I think, you know, our ability to hit in that range, and our history of doing that is well documented, and I think we'll continue to be able to do that, when we leverage our philosophy.

Operator (participant)

As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. Our next question comes from Brian Vaccaro with Raymond James. Please proceed with your question.

Brian Vaccaro (Managing Director)

Thanks. Mel, congrats on your retirement. I'm still gonna email you on egg inflation, so I hope that's okay.

Mel Hope (CFO)

I'm your inside informant.

Brian Vaccaro (Managing Director)

Just 2 quick ones for me. On the G&A side, you've leveraged that line, I think, about 60 bps in 2025, and you did mention the new executive comp plan as well. Could you just level set, you know, or give us a ballpark on your G&A expectations in 2026, just to make sure we're all on the same page? Any guardrails you could provide there?

Mel Hope (CFO)

We don't, we don't guide to G&A, but I would say that I, you know, we continue to expect to lever our cash-based G&A, as we continue to grow. The, the non-cash piece is what would be challenged in order for us to overcome the increase this year. We'll, we'll try and communicate that clearly when it, as we, as we publish our results going forward, so that people understand how we're looking at that, at that, you know, cash-based leverage.

Brian Vaccaro (Managing Director)

Okay. All right. Thank you. On the commodity inflation outlook, the up 1%-3% for the year, maybe just unpack that a little bit further, just kind of the puts and takes, what that might embed for eggs or other key commodities? I guess the other question I had, as you lap, I think, around 8% in the first half, and obviously, you finished with closer to 1%. As you lap that 8%, are there any quarters that you would expect to see deflation on a year-over-year basis?

Mel Hope (CFO)

Among some of our commodities, I do expect that we're gonna see some deflation. The egg prices. Are we deflating on avocados? We haven't seen a lot of relaxation in the inflation in terms of our coffee or our pork prices at this point. We do have some favorability in a couple of big things. Still having to wait out what's happening with the market on a couple of others.

Brian Vaccaro (Managing Director)

Thank you.

Operator (participant)

We have now reached the end of our question and answer session, which concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.