First Watch Restaurant Group - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered strong top-line growth but notable margin compression: total revenues rose 16.4% to $282.2M while income from operations margin fell to 0.4% and restaurant-level operating profit margin to 16.5%.
• Results missed Wall Street: EPS came in at ($0.01) vs consensus $0.034*, revenue ~$282.2M vs ~$283.3M*, and Adjusted EBITDA $22.8M vs ~$25.8M*; management lowered FY25 Adjusted EBITDA guidance to $114–$119M and raised the blended tax rate to 45–50%.
• Management attributed the miss to softer in-restaurant traffic (February weather), “Invest in the Guest” initiatives, higher health benefits, 7.7% commodity inflation (eggs, bacon, coffee, avocados), and ~30 bps tariff impacts; April traffic was the best in over two years and Q2 is expected to be the inflation peak.
• Catalyst: guidance cut and higher tax rate (with margins pressured by commodities/tariffs) vs otherwise intact unit growth/revenue outlook; strategic acquisitions (19 restaurants in April) add ~4% revenue growth and ~$7M FY25 Adjusted EBITDA contribution.

What Went Well and What Went Wrong

What Went Well

• 16.4% revenue growth to $282.2M, supported by positive same-restaurant sales (0.7%), new units, and acquisitions; system-wide sales increased 11.5% to $323.0M.
• Best monthly same-restaurant traffic in over two years in April; sequential dine-in traffic improvement trend continued from 2H 2024 into March/April.
• New unit performance exceeded cohort and first-year expectations; robust pipeline and strategic franchise acquisitions (16 in NC/SC; 3 in MO) to strengthen corporate footprint.

What Went Wrong

• Margin pressure: restaurant-level operating margin fell to 16.5% (from 20.8% y/y); Adjusted EBITDA declined to $22.8M, with income from operations margin at 0.4%.
• Cost headwinds: 7.7% commodity inflation (eggs, bacon, coffee, avocados), higher health benefits, and ~30 bps tariff impact; portion-size investments (Tri-Fecta bacon) without price increase further pressured margins.
• In-restaurant traffic below expectations in Q1 (weather-driven February), mix headwinds from third-party delivery (mid-teens traffic growth at lower margin by design).

Transcript

Operator (participant)

Thank you for standing by, and welcome to the First Watch Restaurant Group first-quarter earnings conference call occurring today, May 6, 2025, 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, and the 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 Invest 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 first quarter of fiscal 2025 on GlobeNewswire and filed its quarterly report on Form 10-Q 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 condition 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 the 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 first-quarter performance is a comparison to the first quarter of 2024 unless otherwise indicated.

With that, I will turn the call over to Chris.

Chris Tomasso (President and CEO)

Good morning, everyone. Thank you for joining us today to discuss our first-quarter results. A very special thank you to our entire team across the country, over 16,000 strong. At First Watch, regardless of the season or the economic cycle, we are about growth, bringing our unique breakfast, brunch, and lunch offering to more customers, more often, and in more markets. Our first quarter of 2025 delivered better than 16% total revenue growth, positive same restaurant growth, 13 new system-wide restaurant openings, and the launch of new marketing campaigns across multiple markets. We also realized a lift in our traffic as the improvement in that trend we shared with you in March continued with our first-quarter results. As always, our teams continue their high standard of consistent execution on our service objectives.

As recent headlines attest, the broader macro environment appears even more volatile than when we spoke in March, with rapidly shifting expectations for both consumer demand and input costs. Last year, in describing our organization's primary focus, we often used the phrase "controlling the controllables," with regard to our customer and employee experiences, as well as our management of the business day in and day out. This approach served us well through 2024 and will continue to be a guiding principle. Now, on to Q1 in more detail. 2025 got off to an encouraging start with a return to positive traffic in January, followed by a widely reported weather-driven decline in February, and then a return to positive traffic in March.

In April, we posted the best monthly same restaurant traffic result in over two years, giving us optimism that we're on track to achieve positive traffic for the year. Our better than 16% total revenue growth in the first quarter, driven by a powerful combination of positive same restaurant sales and continued success of new restaurants, illustrates the strength of First Watch's growth strategy. The commitment of our culture to improving operational efficiency has led to the adoption of new technologies and streamlined processes, ensuring we deliver exceptional customer experiences while remaining competitive and agile in an ever-changing macro backdrop. Ticket times, for instance, are an important KPI for us, and they improved once again in the first quarter compared to the year-ago period.

Our investments in the development of our people and their well-being continue to pay dividends, fostering a highly motivated and skilled team, as evidenced in part by our continued reduction of turnover rates. Indeed, the first quarter of 2025 represented the eighth consecutive quarter of improved field-level employee turnover. Our people are a key brand differentiator. Because we recognize the importance of maintaining a positive and productive work environment, we will continue to introduce and prioritize programs that support their personal and professional growth. Like our GM Council, for instance, where a select few of our general managers are chosen to act as sounding boards and problem-solvers for their counterparts across the system. Our enhanced strategic marketing efforts began rolling out across multiple markets in March, and we are pleased with the results thus far.

We have tactically targeted various consumer touchpoints, including social media, digital advertising, and connected TV, to positively influence both reach and engagement. This multifaceted approach is allowing us to connect with a broader but more targeted audience, driving brand awareness and fostering deeper connections with our existing customers. These campaigns are already exhibiting promising results in targeted geographies. As we continue to refine and expand our marketing strategies as the year progresses, we will be able to increase our reach, retention, and frequency to support sustained same restaurant traffic growth. Turning to new restaurant development, we opened 13 company-owned and franchise restaurants during the quarter across 10 states, ending with 584 First Watch locations. In January, we opened our first New England location in Hanover, Massachusetts. In only its first few months, this restaurant is performing well above our expectations and is often on a wait, even on weekdays.

Hanover's success is yet another proof point that supports the fact that the First Watch brand is highly portable and that our total addressable market of at least 2,200 locations in the continental United States is not only realistic but highly attainable. Just two weeks ago, we announced that we will open a flagship location in a high-profile site on Boylston Street, right at the finish line of the Boston Marathon in Boston's Back Bay. The entire New England market represents a significant opportunity for our continued expansion. Towards that end, we recently signed a lease in Nashua, New Hampshire, representing our very first in that state. Speaking of new markets, in addition to our previously announced entry into Las Vegas later this year, we recently signed our first lease agreement in Memphis, Tennessee, where we expect to open our first restaurant in Q3 of this year.

Our strategic expansion into Memphis is also set to advance our footprint across the region, complementing our presence in Nashville, our market we entered more than a decade ago and now have 14 restaurants. Just yesterday, we put our 31st state on the map with our first restaurant in Idaho, specifically in Meridian, a suburb of Boise, yet another market with a lot of white space that also helps us fill in the northwest and builds upon our expansion into Nevada and Utah. One last word on development. As a group, the 2024 and 2025 classes are currently tracking 10% or above both the comp cohort and our first-year sales expectations. This relative outperformance underpins our confidence in delivering double-digit % unit growth targets and in our capital allocation strategy targeting cash-on-cash returns of around 35% and an IRR of greater than 18%.

Additionally, we are pleased to share the completion of our previously announced franchise acquisition of 16 restaurants in North and South Carolina on April 28, as well as the acquisition of three franchise restaurants in Missouri on April 14. These strategic acquisitions bolster our presence in these key states, and the accompanying development rights provide several high-quality trade areas for continued new company restaurant growth. Every year, our strategic planning focuses on innovative methods to create more demand, improve throughput, enhance customer satisfaction, and at the same time, support our entire team. I'd like to highlight a few key initiatives that aim to further strengthen our leadership position and contribute to our continued growth. Last quarter, we mentioned working more closely with our third-party delivery partners to better accommodate the demand dynamics in that channel, given the macro pressures facing the consumer.

Working in partnership with the largest of our two third-party delivery providers, we developed and implemented a strategy that reversed our negative traffic trends in this channel. The channel's traffic lift has outperformed our expectations, and as a result, we are driving more margin dollars, albeit by design at a lower PPA and at a somewhat lower margin. To enhance customer satisfaction and deliver increased value, we doubled the amount of meat in one of our top-selling classic dishes, the Trifecta, and chose not to take price in order to maintain original margin. The timing of an outsized increase in bacon costs, combined with a significant demand shift by customers into this menu item, has placed additional pressure on our margins. We believe taking selective steps like this will ultimately lead to increased customer frequency at the short-term cost of a tighter margin for this high-mixing item.

Our general managers are at the forefront of our customer service. To demonstrate our commitment to hospitality, inspire their creativity, and positively impact their communities, we have empowered and encouraged them to make days brighter for certain customers through surprise and delight acts of kindness. These come to life in the form of a complimentary juice, shareable, or entrée. While there is an impact to our per-person average check, with these actions, we are making an investment in long-term customer retention. Small acts such as these create an emotional connection for our customers and build loyalty in ways points-based loyalty programs simply can't. We believe that the way to effectively manage through uncertain times is to focus on the customer, deliver exceptional value, and meet the customer where they are.

By optimizing our third-party delivery program, amplifying our invest in the guest initiatives, and empowering our leaders to make days brighter for our customers, we are doing just that and building a stronger foundation for future growth at the same time. Inevitably, every year presents a new set of challenges. While our overall first-quarter traffic was a bit lower than our own expectations, specifically as it relates to the in-restaurant channel, we're pleased to see same restaurant traffic growth displaying sequential improvement. April was better than the first quarter, which was better than the fourth quarter, which was better than the third quarter. Near term, our margin profile is being pressured by higher inflationary headwinds in our market basket since our last earnings call, the impacts of new tariff implementation, and the incremental costs of the previously listed initiatives.

We believe that the multiple challenges affecting our current margin profile are transitory and that our day-part dominance, market share, unit growth, competitive positioning, and customer service experience are unmatched across the industry. We have a lot to look forward to in 2025. With our increased marketing activity this year, we're actively building customer awareness in core, emerging, and entirely new markets. Our new restaurant openings continue to exceed expectations. Our growth plan is solid with both our real estate and people pipelines in place to support our continued expansion. Our top-performing restaurants span 14 states and 22 DMAs, showcasing the adaptability and appeal of our brand across diverse regions and illustrating First Watch's widespread popularity. We have nearly 600 system-wide restaurants serving breakfast, brunch, and lunch in 31 states.

We believe that with the higher sales potentials represented in our new openings when compared to the existing portfolio, our future restaurant classes will perform even better. I would like to turn it over to Mel.

Mel Hope (CFO)

Thank you, Chris, and good morning. Total first-quarter revenues were $282.2 million, an increase of 16.4%. Our top-line increase results from positive same restaurant sales growth of 0.7% and the contribution of 115 non-comp restaurants, including 46 company-owned new restaurant openings and 22 locations we have acquired since the fourth quarter of 2023. Same restaurant traffic was negative 0.7%. We are generally pleased that both January and March posted positive same restaurant traffic, though the headwinds experienced industry-wide applied pressure on February results. For the quarter, our in-restaurant traffic was below our expectations.

However, changes we made to our third-party delivery program yielded immediate results with this channel experiencing % traffic growth in the mid-teens and offsetting much of the traffic decline of our in-restaurant dining and direct off-prem sales channels. We also experienced positive sales mix during the quarter. Before moving on to specific income statement inputs, I want to draw your attention to two independent factors that impacted multiple income statement line items. First, growth in the per-person average check was lower than carried pricing in the first quarter due to both the surcharge adjustments we made to our third-party delivery program as well as various in-restaurant marketing initiatives, not check management. Second, and as we've shared before, our new restaurants operate at less efficient margins, with the first 120 days having the steepest climb to maturity.

During the quarter, the contribution from our new restaurants was more pronounced than usual, considering that we've opened 33 new company-owned restaurants in the last two quarters. Food and beverage expense rose to 23.8% of sales compared to 21.8% in the first quarter last year. Costs as a percent of sales benefited from carried pricing of around 2.5%, though this was more than offset by commodity inflation of 7.7%. Eggs, bacon, coffee, and avocados, which comprise four of our top five food cost inputs, are all trading at remarkably high prices and so are increasing our commodity costs. Additionally, food and beverage costs as a percent of sales were impacted by our decision to increase certain portion sizes, as Chris mentioned earlier. Labor and other related expenses were 34.6% of sales in the first quarter, a 130 basis point increase from 33.3% reported in the first quarter of 2024.

Higher health benefit costs were the primary reason for the year-over-year percentage increase due to higher enrollment and higher claims. Restaurant-level labor inflation was 4.1% in the first quarter, and labor efficiency was in line compared with last year. Restaurant-level operating profit margin was 16.5% in the first quarter compared to 20.8% in the first quarter last year. Income from operations margin was 0.4%. We leveraged G&A expenses. As a percentage of total revenue, these expenses declined to 10.7%, a 70 basis point improvement compared to the same quarter last year. The $2.5 million increase versus last year was driven by investments in marketing and in headcount. Adjusted EBITDA was $22.8 million, $5.8 million below last year, with adjusted EBITDA margin slipping to 8.1% from 11.8%. Adjusted EBITDA results were lower than our prior expectations due to three factors.

First, while March traffic improved from February, both months were weaker than we expected. Second, as Chris mentioned, we empowered our managers to surprise and delight certain customers, and the costs associated with this program were higher than anticipated. Lastly, adjusted EBITDA was affected by the increased costs of our healthcare benefit programs. We reported a net loss of $829,000. There were 13 new system-wide restaurants opened during the first quarter, of which 10 are company-owned and three are franchise-owned, and we ended the period with 584 restaurants in the system. The net effect of acquisitions, which includes only the impact of purchases made within the last 12 months, increased first-quarter revenue by about $10.5 million and adjusted EBITDA by about $1.9 million. For further details on the quarter, please review our supplemental materials deck on our investor relations website beneath the webcast link.

Before moving on to guidance, I want to offer some further context on our commodity costs. Four of our top five market basket items, including eggs, bacon, coffee, and avocado, are experiencing high rates of inflation in 2025. While slightly higher since our last earnings call, our consolidated commodity inflation expectations remain in the high single digits for 2025, and we expect the inflated cost to peak in the second quarter. In our experience, outsized inflation tends to be transitory, and as such, we do not intend to fully offset the inflation with increased menu pricing. Now I'd like to provide an outlook for 2025. As I do, please note that our updates incorporate our estimates of the impacts of announced tariffs, which account for roughly 30 basis points of additional costs as a percentage of total revenue.

We're maintaining our estimate of percentage same restaurant sales growth at positive low single digits with flat to slightly positive same restaurant traffic. Our estimate includes the consideration of a 1.3% price action implemented in January and implies carried pricing of around 2.6% in the second quarter and 2% for the full year. As a reminder, our menu pricing disciplines target the offset of what we perceive to be permanent cost inflation, not transitory spikes. We expect total revenue growth of around 20% with a net 400 basis point impact from completed acquisitions. We expect a total of 59-64 net new system-wide restaurants, including 55-58 company-owned restaurants and 7-9 franchise-owned restaurants, with three planned company-owned restaurant closures. Our company-owned new restaurant development pipeline is weighted in the second half of 2025, Q4 in particular.

We expect full-year percentage commodity inflation in the high single digits, driven largely by increases in the four commodities I discussed earlier, as well as the tariffs. Restaurant-level labor cost inflation is expected to be in the range of 3%-4%. We're lowering our adjusted EBITDA guidance to a range of $114-$119 million, which includes the estimated net contribution of about $7 million from acquired restaurants. Our updated estimate of full-year adjusted EBITDA considers the first quarter's underperformance, our lower-than-expected in-restaurant traffic, costs associated with invest in the guest measures, and incremental inflation expectations, among other items. We expect a blended tax rate of 45%-50%. We expect capital expenditures of $150 million-$160 million, not including the capital allocated to franchise acquisitions. Finally, a couple of reminders about the current quarter to help with your financial models.

As Chris mentioned, April's consolidated same restaurant traffic was positive, and though the consumer backdrop remains highly uncertain, our expectation of positive same restaurant traffic in the back half of 2025 remains unchanged. Also, we currently expect the second quarter will represent the peak of our commodity inflation for the year, with some relief in the second half of the year. With a strong pipeline of new restaurant openings and plans to continue driving traffic, we're looking forward to serving our current customers more frequently, as well as introducing new customers to First Watch. Operator, if you'll 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. We ask that analysts limit themselves to one question and a follow-up so that others have an opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we pull for questions. Our first question comes from Andrew Charles with TD Cowen. Please proceed with your question.

Mel Hope (CFO)

Good morning, Andrew.

Andrew Charles (Managing Director)

Good morning, Mel. Thank you, guys. Can you expand on the comment that sales turned positive in March and then traffic turned positive in April? I'm wondering, just given the Easter shift, you can speak to two-year underlying sales improving from March to April.

Mel Hope (CFO)

I think what we're seeing across—I don't have the two-year comp in front of me, but the shift this year caused some favorability, but we're seeing the trend even through the holidays, pulling out the holiday effect. Our traffic continues to be positive across both periods.

Chris Tomasso (President and CEO)

Hey, Andrew. It's Chris. I'll say that we had sequential positive dining traffic improvement for all four quarters last year, and in Q1, taking out February, that trend would have continued.

Andrew Charles (Managing Director)

Okay. And then, Chris, wondering if you could talk more about the trade-off between driving traffic through third-party actions and other initiatives, but doing so at a lower margin. What gives you confidence this is the right approach for the business?

Chris Tomasso (President and CEO)

That it's working. The results that we're seeing are encouraging for us. Our focus right now in this environment, obviously, we've got cost pressures.

We'll talk about that some more, I'm sure, but our focus is on driving traffic in our channels, and specifically in our dining rooms and in the third-party channels. As you know, we had certain headwinds that we spoke about very often in 2024, and our team got to work on addressing those, and we're pleased with the results we're seeing. If you look at what we reported today, a lot of confidence here around our ability to move the needle and get the consumer engaged with us, whether it's the marketing efforts, the moves we make, and partnerships with our third-party providers. The costs that we're dealing with, we are confident that they're not permanent.

We're really focused on the top line, and that's really what's driving the guidance and why we kept a lot of the elements from the top-line perspective of the guidance in place because we are seeing some positive inflection there.

Andrew Charles (Managing Director)

That's helpful. Thank you.

Chris Tomasso (President and CEO)

Sure.

Operator (participant)

Our next question comes from Jim Solera with Stephens Inc. Please proceed with your question.

Jim Salera (Analyst)

Hey, guys. Good morning. Thanks for taking our question. Sure. I wanted to drill down a little bit on some of the learnings from the increased media spend, and particularly engagement that you've seen following some of the new media efforts in March, and if that has any sort of learnings that you can apply more broadly across the network and help support traffic as we have kind of this consumer malaise that we're confronting.

Chris Tomasso (President and CEO)

Yeah.

Again, we're iterating as we go along, but we're pleased with the results we've seen. I think it comes to life in the form of the improved traffic trends that we're seeing, and we're chipping away at it. We're only in, call it, the second month of that effort. We launched it really February, March, so we're starting to see the benefits of that now, which gave us the confidence to hold some of the guidance as it relates to that because we are happy with what we're seeing. The team's just doing a really good job of, A, harvesting the data, leveraging it for the messaging, the timing, all of those things. It really is a highly iterative process where we're making a lot of positive adjustments as we go along.

Mel Hope (CFO)

Yeah, we're learning from markets what are the characteristics that are where the response is quicker than others, and it's helping us to dial it in more directly.

Jim Salera (Analyst)

Okay. Great. If I could maybe ask one on commodity. I believe you guys said Q2 should be the peak on commodity costs. Just any thoughts on is that just you have better visibility into commodities in the back half of the year, or there are some things you're doing on sourcing that help mitigate those costs? Any color around why that's your reason to do that.

Mel Hope (CFO)

Jim, the one thing I would point to is, first of all, we have commodities that are crop-related, so some of them have to do with when the crops come in.

Where we have gone through a season where crops have suffered, we do not expect that to be a permanent sort of item. Where eggs are concerned, for example, that has been a large part of the discussion around our inflation for quite a couple of quarters here. As the flocks are still rebuilding for our—we are finicky about our eggs. They are cage-free, pasteurized, extra-large, shell-in eggs that we use. In order for the flocks to lay extra-large eggs, the hens have to be a certain maturity, and they are replenishing those flocks now. At some point in time, I have to believe that there is going to be a sufficient supply of our kind of specialty bird in order to see some relief there.

Operator (participant)

Our next question comes from Brian Vaccaro with Raymond James. Please proceed with your question.

Brian Vaccaro (Managing Director)

Yeah.

Just a quick follow-up on the marketing spend and just thinking about the potential benefits through the year. Could you elaborate on sort of what percentage of the system had support in the first quarter, or any color on how that could increase in the second quarter or second half, or anything around spend levels? I'm just trying to gauge what we've seen versus what we could see rest of the year.

Chris Tomasso (President and CEO)

Thanks, Brian. It's Chris. I mean, basically, almost the entire system is receiving some kind of support. Obviously, there's heavy ups in certain markets that we're not disclosing, but there are efforts, whether it's digital, social, or some of the more targeted things that are impacting the entire system, and then an elevated level in certain markets where more of the spend is being allocated.

Mel Hope (CFO)

Brian, every market, every restaurant has always received some level of marketing support, so this is more of an emphasis in certain markets.

Brian Vaccaro (Managing Director)

Okay. I guess maybe a high-level question. I'm curious to get your thoughts just on the breakfast category in the U.S. It seems like quick service weakened quite a bit in the first quarter, and then legacy family dining continued to have its challenges. Are there macro factors that might be weighing there that you are less exposed to, or maybe you do see some evidence of the broader headwinds sort of beneath the surface, whether that be softness during the weekdays or any pullbacks you're seeing in the lower range of your income cohorts? Just curious to get your lay of the land on the category.

Chris Tomasso (President and CEO)

Yeah.

We do believe that our higher-income profile customer provides some protection for us against that. I think there's been a lot of discussion around the lower-income consumer pulling back, and you know that's the type of customer that we appeal to, and it makes up the majority of our demographic profile of our customer. So we think there's some protection there.

Brian Vaccaro (Managing Director)

Thank you.

Operator (participant)

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

Jeffrey Bernstein (Managing Director)

Great. Thank you very much. My question is on the 2025 guide. You tempered the EBITDA by roughly $10 million or 8%, but all of the components effectively reiterated. Mel, I know you talked a lot about a variety of headwinds that don't seem to be top-line related, at least in your view. I'm just wondering—it's all about costs over sales here.

I'm just wondering if you could prioritize or bucket for us. Again, you mentioned a number of them, but the primary drivers in order of magnitude, I guess, for that significant EBITDA reduction. I had one follow-up.

Mel Hope (CFO)

I think almost certainly the cost-related issues are the piece that motivated us to bring down our guidance for the full year: more sustained inflation, and obviously the consideration of tariffs, which we hadn't included in our guidance before.

Chris Tomasso (President and CEO)

Jeff, this is a—I mean, I've been here, as you know, almost 20 years, and at least in my time, unprecedented that we'd have four of our top five commodities be under pressure at one time. The diversity of our market basket has been a benefit to us throughout the history of the company, and this is certainly a unique time.

Jeffrey Bernstein (Managing Director)

Gotcha.

My follow-up is just on the comp trend. I'm wondering whether you've seen any change in consumer behavior, whether it's frequency or weekday versus weekend. It does seem like you're encouraged by the sequential traffic uptick, but I know there are some that are concerned. Looks like you're saying you expect to sustain that positive traffic in the second half despite the consumer volatility. I'm just wondering if you can prioritize the primary driver to give you that level of confidence. Thank you.

Chris Tomasso (President and CEO)

Sure. Yeah. I mean, we are encouraged by the trends that we're seeing, and again, it goes back a little ways here as we're chipping away at it. As far as the high-level trends, we're not seeing any big shifts or anything. We're not seeing any check management, as Mel mentioned, which is great.

At least all the signs that we're seeing in our business, we see a healthy customer for us. I'm choosing the word customer because they're the ones that come to us rather than consumer. Obviously, there's some challenges in the environment, but in our four walls and our restaurants and the customers that we're serving, we're encouraged by the trends we're seeing right now.

Jeffrey Bernstein (Managing Director)

Great. Thank you.

Operator (participant)

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

Sara Senatore (Managing Director)

Thank you. I have two questions. I'll start with the first one. Just on the closures this year, I think it's been a while since you've closed restaurants or certainly this number. Can you just talk about the ones that you're closing, and especially in light of how good the new unit economics seem to be? Anything worth noting there?

Mel Hope (CFO)

Like I said, then follow-up. Yeah. I mean, look, we're a system of 500 restaurants, and every year one of the leases or a couple of the leases run to term. If the trade area has moved or something like that, then we might choose to not renew the lease or to relocate the restaurant or something like that. There is nothing remarkable about the three closures that we anticipate having this year. In terms of new units, you ask, new units continue to outperform the rest of the system in terms of their sales volumes and meet our expectations on their pathway to full maturity over time.

Sara Senatore (Managing Director)

Right. Right. These aren't reloads. These are just, like you said, a system of 500. You're going to invariably have maybe a couple more closures than you would have a couple of years ago. Yeah.

Mel Hope (CFO)

Across 40 years, we've got restaurants that have leases that are maybe 25, 30 years old, and so occasionally things move or trade areas go through a regentrification or something like that.

Chris Tomasso (President and CEO)

Sarah, I'll be even more specific. Sometimes there are restaurants in what, at the time we opened them, say, 20 years ago, was really the only trade area to open in, and new trade areas have emerged. Sometimes by closing one, we can open two in adjacent trade areas now, whereby having one in the middle locks out the other two. We constantly do a review of our assets, and as leases expire, we look to be as proactive as we can about optimizing the markets and ideally shooting for the penetration in the market and the density in the market that we believe sets us up best for success.

Sara Senatore (Managing Director)

Okay. Thank you. That's very helpful.

Just on the surprise and delight, I know you said that was a little bit, the pressure on margin was a bit higher than you had anticipated. Sounds like maybe some of the customer sort of choice too in terms of shifting to the higher COGS item with the portion investment. Is there anything maybe in particular with the surprise and delight piece that you can do to perhaps manage that or maybe guidance that you can give to your managers about how to do that most efficiently?

Chris Tomasso (President and CEO)

Yeah. I mean, it was something we rolled out at our annual conference, and you hear us use the term making days brighter, and this was a way to bring that to life. Our managers got way behind it. They got really excited about it.

I mean, we're recognizing first responders and teachers and our neighbors and Little League teams and really putting a big focus around two and a half miles around the restaurants, which is where our customers come from. I mean, it's not this is something that we'll continue to do for the rest of the year. Obviously, there's conversations that go on about managing it appropriately, but we think it's a great program. We think it's a great way to build loyalty, and I think our teams are doing a great job with it, and we'll just manage it appropriately with them as the year goes on.

Operator (participant)

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

Jon Tower (Director)

Great. Thanks.

I know it's early in the process in terms of some of the marketing stuff and even some of the surprise and delight ramping, but I'm curious maybe if you've seen any improvement in some of the consumer scores regarding your value proposition to the guest as you've been ramping some of these things through the system.

Mel Hope (CFO)

Yeah. I think you're right. It's early. I mean, we've been probably 13 weeks with some of this. So we're going to have to have a longer period and more cohort to analyze.

Jon Tower (Director)

Okay. And then maybe just on the labor front, I know it was higher this quarter. You called out health benefit costs kind of ticking higher. Is there anything else that we should consider going forward aside from underlying labor inflation to consider? Is there any investment here that we can talk to the balance of the year? Yeah.

Mel Hope (CFO)

Part of the yep. The other part of the uptick is one that we always have, which is that we carry extra managers because we're opening so many restaurants at such a rapid pace that we carry extra managers so that when we do open a restaurant, we can put a veteran manager into the restaurant. We tend to carry some higher costs there. As we're opening more restaurants each year and opening more rapidly, the fact of the matter is that we're carrying more managers.

Jon Tower (Director)

Got it. Just last one, quick, on the tariff pressure, can you just tell us exactly where that came from? Is that coffee and maybe avocados? Curious where.

Mel Hope (CFO)

A lot of it has to do with supplies that we get from Asia.

There is some on food products, but really a great deal of it has to do with our packaging supplies and paper goods, napkins, that sort of thing.

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

Todd Brooks (Managing Director)

Hey, thanks for taking my questions. First, wondering, and Mel, you gave us some color on the pricing waterfall over the balance of the year, but if we think about the mixed impacts that you highlighted between the GM surprise and delight and DoorDash, the kind of new algorithm around how that business is priced, what do you see as kind of the mixed offsets for those pricing impacts as we look forward?

Mel Hope (CFO)

Todd, when you say mixed offsets, help me understand what you're trying to drill to.

Todd Brooks (Managing Director)

I'm trying to get from the menu pricing that you talked about to what the actual average check growth would be in the forward outlook.

Mel Hope (CFO)

We generally don't guide to mix. Generally speaking, we consider it sort of a flattish in our own projections. If that's helpful. Okay. I didn't know if there had been any delta with that, with what you called out with surprise and delight and the kind of big growth you saw in third-party delivery and the new structure there. Okay. Great. Thanks.

Todd Brooks (Managing Director)

This is more of a just management kind of philosophy question, but in an environment like we're in now, it seems like relative to most that are maybe struggling with a guidance strategy, the top line seems fairly sturdy relative to others.

When you're looking at the revised EBITDA guidance, is there a thought of, "Okay, let's take our swipe at this and really work to incorporate everything plus some cushion," or this is basically best snapshot of where things stand now and what's a pretty fluid cost environment for you?

Mel Hope (CFO)

In terms of just management, I think, look, we're pleased with the invest in the guests that you mentioned. I think the thing that propels our growth over a long period of time is growing share. It's increasing our in-restaurant dining, which is our most profitable and our proudest representation of our brand.

I think those things that we do that create more loyalty, more frequency, remind the guests that we're thinking about them personally and celebrate their attendance in the restaurants, I think those things are management decisions that we believe are going to pay dividends over the long term.

Chris Tomasso (President and CEO)

As it relates to the cost, though, what's included there is all based on our best information right now. We started the year with a higher inflation estimate than others maybe on their calls, and it's based on what we've seen. Like I said, we're in a little bit of a unique situation with the top four of our top five commodities being under some of them double-digit inflation pressure. If you're asking if there's cushion in there, I'll just tell you, I think you know how we operate. We base it based on what we're experiencing now.

As Mel said, we expect Q2 to be the peak of that, and a lot of it has to do with the repopulation of the eggs, of the hens, and the weather-related pressures that we've had, whether it be on coffee or other commodities. Again, it's based on our best information at the time.

Operator (participant)

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

Andy Barish (Managing Director)

Hey, good morning, guys. Wondering if you could comment kind of on the Florida market relative to the system. I know there's been a lot of dynamics down there in that large market for you. Anything you'd like to call out?

Chris Tomasso (President and CEO)

Florida has been great. It's outperformed the rest of the country. I think we've talked a lot about that when it wasn't, when it was underperforming and why we thought it was.

I mean, I'd like to think that we had a really good handle on it when we were explaining in 2024 that it was kind of a releveling, if you will, of post-COVID euphoria and kind of inbounds into Florida, and now it's leveled off. That has been performing really well. We continue to open new restaurants here, and I'll use the same phrase we used all last year. We're bullish on Florida, and nothing's changed.

Andy Barish (Managing Director)

Yeah. Good to hear. Mel, just one other cost item. It looked like you called out an increase. I think it was $2.5 million in R&M and utilities. Was that kind of a variance on the bad side to what you guys expected, or was that sort of in line with what you had been thinking in that area?

Mel Hope (CFO)

Repair and maintenance has been a little bit, I would say, a little bit of a growth area for us in terms of increased costs, but it's not too surprising for us.

Operator (participant)

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

Brian Mullan (Director)

Hey, thank you. Just a question on menu innovation. Last call, you discussed testing an expanded line of beverages. Can you just elaborate a bit on those efforts? What are you seeing in tests and maybe what the next steps would be with that idea if you wanted to move it across the system?

Matt Eisenacher (Chief Brand Officer)

Yeah. Hey, thanks for the question. This is Matt Eisenacher, Chief Brand Officer. We've continued to iterate on different formats for our menus. We are still in the final stages of moving into test for those expanded beverages.

We obviously want to see those in market for quite a bit of time, but obviously, our goal is to continue to drive incremental beverage attachment.

Brian Mullan (Director)

Okay. Thanks. Just a follow-up question on the franchise store base. After this most recent acquisition closes this quarter, just remind us what you have left in terms of options to purchase stores, if anything, just an update.

Chris Tomasso (President and CEO)

There would be about, well, there are 67 franchise locations, and 8 of those are subject to purchase rights.

Operator (participant)

Our next question comes from Chris Oakhall with Stevoll. Please proceed with your question.

Great. Thanks, guys. Good morning. This is Patrick. Good morning.

I was wanting to follow up on the mix conversation, and I was just curious if you could talk about, Mel, the timing of the investment in portioning changes in the Trifecta and then the DoorDash change or the 3P delivery change that you made just in terms of timing in one queue. I'm really just looking to understand whether that mixed impact we saw in the first quarter is reflective of essentially a full quarter of impact.

Mel Hope (CFO)

It would have been early in January on both of those fronts. Is that right? That's correct. Okay. Yeah. If it's not all 13 weeks, it's at least 11 of them.

Got it. That's helpful. Thank you. I think you mentioned, Chris, that ticket times improved again.

I was just curious if you have a sense of sort of the disaggregation of that between KDS system and pay at the table and kind of what those drivers are. I think you guys made some other changes in terms of table utilization as well in the stores. I'm just curious how all that's coming together and if you could kind of rank order the impact that's having on service times.

Chris Tomasso (President and CEO)

Yeah. One, two, and three is KDS. I would say then the dining room optimization and the enhanced busing procedures and, again, what I call the unsexy things that are part of the blocking and tackling but really help with the throughput. I also do not want to not mention the waitlist on the app.

That's a big component of us being able to, quote, "more accurate wait times," stop that look and leave, keep people from falling off the list, those type of things. The pay at the table really isn't a ticket time driver. It's more of a consumer benefit, if you will, because it happens after the meals are out. We are really focused on, as I've said before, the time of the experience that we control. We want to be as efficient as possible.

Of course, our customers can sit as long as they like, but whether it's getting them seated as quickly as possible, getting their food out to them as quickly as possible, allowing them to pay as they want to and when they want to, which is why we put the check down halfway through the meal so that now the power is in the hands of our customers to pay when they want to pay. It really is a toolbox that we've put together that all works really well together. We've actually done some time-in-motion studies in the back of the house that have removed a lot of steps and a lot of latency in different positions. We've really been on, for the past couple of years, a serve-more-demand focus, and it's pretty much touched every part of our four-wall experience.

If you consider the app just outside the four-wall, so that's all worked really well.

Operator (participant)

Our next question comes from Gregory Frankfort with Guggenheim Securities. Please proceed with your question.

Gregory Francfort (Managing Director)

Hey, hey, thanks. I had two questions. The first one, I guess, is for Mel. Just how are you thinking about long-term margins, restaurant margins within the context of maybe your 20% in 2024? I think your guidance would suggest it's going to be down to some degree this year. What is your target for long-term margins and kind of where you want to be in that range? Thanks.

Mel Hope (CFO)

Yeah. I think we've always said that we try to, over the long term, target between 18-20% on the restaurant-level operating profit margins, and that hasn't changed.

Gregory Francfort (Managing Director)

Okay.

Just maybe digging in a little bit more on aggregator performance and the third-party sales being as strong as they were in the quarter, are you seeing anything different from the consumer in terms of how they're responding or the offers that they want to see or just kind of how the aggregators might be dealing with placing First Watch versus other brands? Just any thoughts there?

Chris Tomasso (President and CEO)

Not necessarily for us. I think the biggest benefit that we received was really through the partnership with DoorDash and having them lean in and us lean in on realizing that we could really help each other. We serve a day part that's not as crowded as lunch and dinner, per se. From a consumer standpoint, we haven't really seen much change as far as what the order looks like.

We're not big on discounting on that channel, so that's not really a game that we're in.

Our next question comes from Brian Vaccaro with Raymond James. Please proceed with your question.

Brian Vaccaro (Managing Director)

Yeah. I just had a quick follow-up, kind of high level on just thinking about relative pricing within the category. It seems like some of the family diners have gotten even more aggressive on value in recent months and quarters, but at the same time, they've maintained elevated menu pricing for maybe a higher-for-longer strategy. Many of them are by franchisees, etc. For their core menu prices, they don't appear to be much different than yours and in some cases are even higher based on some of our checks.

I'm curious if that fits with what your pricing studies and internal analytics would show and just sort of how much that pricing differential may have narrowed over the last few years.

Chris Tomasso (President and CEO)

Yeah. It does line up with our research, Brian. It is actually a big part of our strategy, which is why we are working really hard to keep our menu prices down and maybe having some impact on our margins right now because we think our relative value has improved significantly when you think about the quality of the ingredients that we use and what we offer as compared to family diners. I'll go back to what I've said before.

With the highly franchised systems, the mothership doesn't have a lot of control over the menu pricing, which is why us being, call it, 90-plus percent company-owned allows us to make those long-term strategic decisions that ultimately we believe will be the best decisions that we've made. As we prioritize traffic right now and deal with the commodity costs that we're dealing with, we've got two drivers for our growth, right? Our unit growth and our same restaurant sales growth. To us, the best way to build the same restaurant sales is through increased traffic, not through pricing. We're looking to be that everyday occasion. We want to be approachable. We don't want price to be a limiter to us being able to build traffic. We believe we're strengthening the system by acquiring franchisees and by the strategic moves we're making to differentiate ourselves in a challenging environment.

We know we're taking share. Our new restaurants are performing really well, and I think that's why we're just so optimistic about where we are right now and actually using this macro environment as an opportunity to strengthen our position and widen our lead.

Gregory Francfort (Managing Director)

All right. I'll take the rest offline. Thanks so much.

Chris Tomasso (President and CEO)

Thank you.

Operator (participant)

There are no further questions at this time. Now I'd like to turn the floor back over to Chris Tomasso for closing comments.

Chris Tomasso (President and CEO)

Great. Thanks, everyone, for joining us this morning. We appreciate it. It really is an exciting time for First Watch, and we're looking forward to continuing to make days brighter for our customers and our employees in our nearly 600 First Watch restaurants across 31 states now. A special thank you again to our entire team across the system for making days brighter for everyone. Thanks, everyone.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.