First Watch Restaurant Group - Q2 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to the First Watch Restaurant Group Inc. Q2 2023 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, the conference call will be opened for analyst questions, and instructions on how to ask a question will be given at that time. This call is being recorded today, August 1st, 2023 at 8:00 A.M. Eastern Time, and will be archived and available for replay at investors.firstwatch.com under the News and Events section. I would now like to turn the conference over to Steve Marotta, Vice President of Investor Relations at First Watch, to begin.

Steven Marotta (VP of Investor Relations)

Good morning, welcome. I'm joined here today by First Watch's Chief Executive Officer and President, Christopher Tomasso, and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the Q2 of 2023 on GlobeNewswire, and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. Let me cover a few housekeeping matters before introducing Chris. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the condition of the company's industry and its operations, performance and financial condition, growth strategies, and future expenses.

Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and risk factors, disclosure in our filings with the SEC, including quarterly report 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. With that, I'd like to turn the call over to Chris.

Christopher Tomasso (CEO and President)

Thanks, Steve. Good morning. First Watch showed continued growth and success during the Q2. Our top line results were driven by healthy 7.8% same restaurant sales growth and the outside performance from the significant number of new and non-comp restaurants we opened. Bottom line growth was bolstered by easing food and beverage inflation. Our traffic trend improved sequentially throughout the quarter, principally due to more favorable comparisons as we moved past the post-Omicron recovery benefit that we experienced over the prior year. In-restaurant traffic was up low single digits, offset by fewer off-prem occasions, which resulted in an overall traffic decline of 1.2% for the quarter, although we continued to outperform casual dining overall by 510 basis points, according to Black Box Intelligence, highlighting our ability to grow market share in any environment.

Encouragingly, when our customers do visit us in the restaurants, and more of them did, they're opting for the full experience. This shift by the consumer back to in-person experiences and social occasions is a really good thing for us. During the time of necessity, we were pleased to accommodate the consumer for their off-prem occasion, and we will continue to do so. We are even more pleased with the ongoing pivot back to our dining rooms. Simply put, the totality of our in-restaurant service touchpoints generates a significantly better customer impression compared with that of off-prem. We often field questions regarding the current state of our customers. We have seen no indications of check management.

In fact, in Q2, we realized positive year-over-year trends in beverage attachment and guest-selected pricing or mix, driven by the introduction of new menu items such as Specialty Iced Coffees and our Bacon Cheddar Cornbread shareable. Seemingly, the single indication of price, price sensitivity we've seen has been in the third-party delivery channels, where, like many in the industry, we're experiencing fewer occasions. The first and second quarters are typically our highest average weekly traffic quarters and contain several special occasions that people choose to celebrate at First Watch. Mother's Day is our busiest day of the year, and this year, as they have in years past, our teams delivered. As a testament to our progress on increasing throughput, we were pleased to see a 400 basis point increase in Mother's Day same-restaurant traffic and an 800 basis point increase when we consider dine-in traffic exclusively.

Even more, we managed those record traffic levels while improving our customer satisfaction scores year-over-year. In short, it was the highest sales day in company history, reaffirming that our evolving operating model positions us well to capture more demand and improve the customer experience. As has been the case for many years, we continue to experience success with our new restaurant openings. This is in part due to strategic enhancements we've made, which is resulting in higher profile locations with increased seating capacity, larger and more attractive patios and indoor/outdoor bars, just to name a few. These initiatives have driven average unit volumes that we had not seen previously, and as a result, our new restaurant AUVs continue to exceed the comp group. We continue to innovate with far more room to optimize over the long term, and we're encouraged by the impact we're already seeing.

In the Q2, we opened 9 system-wide restaurants, including 6 company-owned locations. When you consider the number of restaurants we will open this year and our clearly defined path to 2,200 domestic locations, we expect the long-term growth associated with new restaurant openings and franchise acquisitions to continue to fuel our value creation. Our teams are very proud, as they should be, and I'm excited to see us continue to raise the bar. We remain confident in the opportunity and the growth algorithm that underpins our long-term guidance. We focus on 2 pipelines to drive our growth, people and restaurants. As we sit here today, we have more than 100 new restaurants in various stages of development and in excess of 120 promotion-ready managers teed up to lead them.

The powerful combination of First Watch's proven portability and vast landscape of untapped markets represents a long runway for future growth. When you couple that with our impressive historical cash-on-cash returns, the potential becomes clear. Finally, we've continued to execute against our strategy to drive long-term value through the acquisition of franchise-owned restaurants and related territories. In the Q2, as we shared on our last call, we acquired 6 franchise restaurants in the Omaha market. Most recently, we acquired 5 additional franchise restaurants in the Milwaukee area, and we expect to close on an additional 7, including one under construction in South Carolina and Georgia within the next 30 days. Following these acquisitions, we will have 12 franchisees who operate 100 restaurants, and of those, 51 are subject to purchase options. As a reminder, our franchise-operated restaurants perform similarly to our company-owned restaurants.

For us, converting franchises to company-owned restaurants is compelling for both a financial and strategic perspective and represents a significant growth opportunity for our entire enterprise. Our impressive Q2 results exemplify our consistent long-term track record of operational excellence. First Watch was built over four decades by keeping our eyes on the horizon while simultaneously focusing on exceptional execution, consistency, delivering value, and driving traffic. I believe we are well positioned to thrive in virtually any economic environment. We are, as always, looking forward to creating and serving more demand. Before I turn it over to Mel, I want to welcome our newest board member, Irene Chang Britt. Irene's deep experience in both operations and corporate governance, with food and beverage brands in particular, will be a terrific asset to First Watch, and we're thrilled with her addition. Mel?

Mel Hope (CFO)

Thanks, Chris. Good morning, everybody. As Chris mentioned, our Q2 was strong. Same-restaurant sales growth was 7.8%, driven by our price increase and favorable mix, partially offset by an expected traffic decline of 1.2%. Overall, the sales growth exceeded our expectations. Our traffic was softer early in the quarter, given the difficult comparisons, and it improved each month. Moreover, as Chris mentioned, our dining room traffic continues to comp positively. Customers responded to our seasonal menus and pricing, and we saw a favorable seasonal menu mix and beverage attachment versus the same period last year. We continue to drive profitability as well, and I'm going to expand on that in just a minute. Total revenues were $216.3 million, a 17.3% increase over the Q2 of 2022.

Our food and beverage costs were 22.4% of sales in the Q2, compared to 24.9% in the same period last year. Costs benefited from deflation of 470 basis points across our market basket, which was significantly more favorable than we had anticipated. The biggest movers were decreases in our pork and avocado costs. Labor and other related expenses were 33.2% of sales in the Q2. That's up from 32.3% in the Q2 of 2022 and driven mostly by increased staffing levels needed to serve our growing dining room traffic. Restaurant Level Operating Profit was $44.4 million for the quarter, with a margin of 20.9%, an improvement versus the 18.2% Restaurant Level Operating Profit in the same period last year.

The margin improvement reflects increasing sales leverage, the 250 basis point improvement in food and beverage costs, and favorability in other restaurant operating expenses, primarily our to-go packaging. General and administrative expenses were $25.3 million, approximately $3.3 million higher than in the prior year, primarily due to compensation increases and new headcount to support our rapid growth. Adjusted EBITDA was $25.8 million, with a margin of 11.9%, an improvement versus the 9.6% margin we realized in the Q2 of 2022. We opened nine system-wide restaurants during the quarter, of which six were company-owned and three were opened by our franchisees. Recall that our company-owned restaurant development schedule still remains heavily weighted toward the end of this year, the Q4 in particular.

At the beginning of the Q3, we modestly increased our menu prices, primarily in markets affected by statutory increases in minimum wage. The average of this increase across all company restaurants was 1%. As a result, in the back half of the year, we carry price of 6% compared to the prior year. Now I'd like to update our full year guidance as follows: We are reiterating same-restaurant sales growth of 6 to 8% in 2023, but now with marginally positive traffic growth for the full year based on our recent trends. We're reiterating our expectations of opening between 38 and 42 company-owned restaurants and 10-12 franchise-owned restaurants, and we may close up to 3 company-owned restaurants, resulting in a total of 45-51 net new system-wide restaurants.

We now expect commodity inflation to be in the range of flat to up 2%, which is lower than our previous expectation of 2 to 4%. We expect net deflation in commodity costs for the balance of the year, though not nearly as steep as we experienced in the Q2, as the rollover of costs last year will abate as the year progresses. We continue to expect hourly labor inflation to remain in the range of 9 to 11%, with an overall restaurant-level labor inflation in the range of 8 to 10%. We now expect a blended tax rate in the range of 28 to 31%. We continue to estimate capital expenditures totaling between $100 million and $110 million, not including the capital allocated to acquisitions of franchise-owned restaurants.

At this point, given our first half performance and the acquisition of 18 franchise-owned restaurants this year, we're increasing certain elements of our full-year outlook as follows: We now expect total revenue growth in the range of 18 to 21%, up from 16 to 20% previously, and we expect Adjusted EBITDA in the range of $89 million to 92 million, which is also up from our previous range of $80 million to 85 million. As a reminder, our fiscal 2023 is a 53-week year, and our guidance includes the extra week's contribution, which we estimate to be $10.5 million in total revenues and $2.5 million in Adjusted EBITDA.

I'm going to hover over that for just a minute because we understand that the contributions of our acquisitions can create some challenges in modeling our growth, which we think is a nice problem to have. To be clear, before giving effect to the acquisitions, our projected fiscal year 2023 total revenue growth would be in the range of 15.5 to 18.5%, and our Adjusted EBITDA would range between $86 million and $89 million. Given the typical seasonality of our business, the incremental G&A investments, and the timing of pre-opening expenses associated with the accelerated pace of our openings, we expect Q3 Adjusted EBITDA to be flat to slightly above our year-ago results, including the acquisitions. For further details on the Q2, please review our supplemental materials deck on our investor relations website beneath the webcast.

With that, operator, we'd like to open the line for the questions.

Operator (participant)

Thank you, sir. If you would like to ask a question, please press star then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Today's first question comes from Jon Tower at Citi. Please go ahead.

Jon Tower (Managing Director and Senior Equity Research Analyst)

There we go. Turn off the mute. Morning. Thanks for taking the, the question. I appreciate-

Mel Hope (CFO)

Morning, Jon.

Jon Tower (Managing Director and Senior Equity Research Analyst)

Taking the time. Morning. I'm curious, the, the thinking around taking the pricing in the back half of the year, can, can you talk about what motivated you to go in that direction, given that you are seeing a little bit more by way of deflation on the food cost basket? I know labor inflation's running relatively high. Curious to get your thinking around why the incremental price going into the Q3 here.

Mel Hope (CFO)

Yeah. Our, you know, our, our philosophy has always been to take price to offset inflation. We took it generally in the states where the statutory minimum wage will be increasing during the back half of the year.

Jon Tower (Managing Director and Senior Equity Research Analyst)

Okay, it's purely the labor piece of the equation and not...

Mel Hope (CFO)

That was what we targeted, yes.

Jon Tower (Managing Director and Senior Equity Research Analyst)

Okay, great. Then in terms of the, the franchise acquisition, it's great that you guys are rolling it up and seeing opportunities. I know you'd mentioned on the call there's another 51 subject to purchase options. How can we think about timing around that? Is it something where you could do it tomorrow, or is it something where it's more of a multiyear type of outlook?

Mel Hope (CFO)

It's, it's not going to be tomorrow. We, you know, it'll be paced when it's appropriate for the restaurants. We really don't have an indicated timing just yet, but we'll make sure that we make it clear when we do, and that you can, you, you know, that, that people can understand it. The, but the options to purchase are evergreen, so we do it when it's, when it's, you know, when it's, when it's helpful to them and helpful for us.

Jon Tower (Managing Director and Senior Equity Research Analyst)

Great. Then just last 1 from me. I, I know, a part of this strategy is kind of building out and/or bumping out existing stores, with some capacity expansion, larger patios, et cetera. Can, can you talk about perhaps the opportunity that exists in the system today for that and, and any potential CapEx requirements, and/or sales you're-- lifts you're seeing from these remodels?

Christopher Tomasso (CEO and President)

Hey, Jon, it's Chris. I'll take that one by saying that, you know, we're constantly looking at our, our legacy fleet and, and taking that kit of parts that we've, that we've built with all these enhancements and, and seeing which ones can take, you know, which of those elements. Honestly, our focus is on, you know, the next 1,500 restaurants. That's where we see the greatest opportunity and employing a lot of the tactics that we've developed. So.

You know, we have a regular market refresh strategy that's in place for the legacy restaurants and markets, and sometimes it means moving restaurants in a trade area where we've been for 25, 30 years, which a lot of times when we talk about potentially closing 3 restaurants, it's really a lease is up, and we're, we're, we're going to move to a, a, you know, a better spot in the trade area. It's all of those things are part of our, our, our fleet review, if you will. Where we can put some of the new elements that we're seeing great impact on, we will. To be honest with you, a lot of them are constrained by square footage and, and other things where we can't do those. We do look at where we can do that.

Alcohol was a great example, where we went back and, and put that in as many restaurants as we could. You know, we've got that built out now to where we think it's fully penetrated as far as where we can be, where it makes sense.

Mel Hope (CFO)

Got it. Thanks for taking the questions.

Christopher Tomasso (CEO and President)

Mm-hmm.

Operator (participant)

Thank you. Our next question comes from Andrew Barish with Jefferies. Please go ahead.

Andrew Barish (Managing Director and Senior Equity Research Analyst)

Hey, good morning, guys. Just firstly, wanted to circle back on Jon's question there. Just, can you give us your thoughts on kind of balancing these franchise acquisitions and new restaurant openings, just from a people and infrastructure perspective? What, what changes, what hasn't? You know, just trying to get comfortable with that increased pace of acquisition.

Christopher Tomasso (CEO and President)

Sure. Andy Barish, you've been, you've been following us long enough to, to have been with us when we acquired and converted all The Egg & I's. What I can tell you is, you know, we talked about fueling the jet in midair back then when we were converting all those restaurants, plus, doing a, a, you know, a respectable amount of our own organic openings. This is much easier than that because these are already First Watch branded restaurants. They perform similarly to our fleet, as I've said, and, it's a much easier transition. We see it as a nice complement to our organic growth.

But I will tell you that the, the transition operationally, is what we spend the most time on, because we want to ensure that there is no disruption to the customer experience, when we do these acquisitions. We do it in constant communication with the franchisees, and, and like Mel said, at a timing that makes sense for both of us.

Andrew Barish (Managing Director and Senior Equity Research Analyst)

Just following up on that, I assume, a lot of the team and staffing, you know, there's continuity there, just given the performance of the restaurant, sounds like they're, you know, they're, they're in line with company-owned stores.

Mel Hope (CFO)

There is, and we, you know, we also carry sufficient staff in advance of the acquisitions so that we're in a position to take over the management of the territory and the restaurants, as seamlessly as possible.

Andrew Barish (Managing Director and Senior Equity Research Analyst)

Understood. Then, just finally on, on the deflation outlook, still in the second half, but not, you know, not as favorable. How much are you baking in, you know, some moves here and, you know, avocado costs are up and pork costs and things like that?

Mel Hope (CFO)

When you say, how much we're baking in, I mean, what we've guided to is that we're going to be flat to up 2%. So it's, it's built into that equation, if, if that's what that is.

Andrew Barish (Managing Director and Senior Equity Research Analyst)

Okay. Much appreciated. Thanks, guys.

Mel Hope (CFO)

Thank you, Andy.

Operator (participant)

Thank you. Our next question today comes from Jeffrey Bernstein with Barclays. Please go ahead.

Pratik Patel (Equity Research Analyst)

Hi. Thanks.

Mel Hope (CFO)

Hey, Jeff.

Pratik Patel (Equity Research Analyst)

Good morning. This is Pratik on for Jeff. Thanks for taking the question. You alluded to off-premise declines during the quarter. Can you peel some of that back for us and, and, explain some of the drivers of that and, and where you are in terms of the current mix versus, pre-COVID levels?

Christopher Tomasso (CEO and President)

Sure. I think it's, it's pretty well known that the, you know, that, that we don't get a lot of data, we meaning the restaurant industry, we don't get a lot of data from the third-party providers. I can tell you what our take on it is, is that, you know, I, I talked about it a few months ago, where, you know, that might be the indicator of, of check management now. I think that's what you're seeing across the board, and, and that's what we're seeing. It is the most expensive dining occasion, for, I'm pretty sure, every concept. It doesn't surprise us that there's some, some pressure there. Although off-prem still represents about 18% of our overall sales, and just to remind you, it was about 5%, pre-COVID.

Significant growth in that area for us, I think, you know, we've done a great job of accommodating and, and excelling in that area, our focus remains on the in-restaurant dining, I think we're seeing those results, you know, in, in the traffic in restaurants continuing to grow.

Pratik Patel (Equity Research Analyst)

Got it. That makes sense. Then, if we could pivot to your in-restaurant occasions, some of your peers have alluded to some check management there as well. Maybe not necessarily trade down, but, you know, not getting that second beverage or maybe not getting as many, you know, side orders. Can you just talk about what's happening in your restaurants?

Mel Hope (CFO)

Well, that, that's exactly what Chris spoke to in his prepared comments, that we, you know, we look for check management. Exactly the things you're talking about, the attachment of beverages, maybe the shareable items. We haven't experienced it. Our attachment of beverages is up. Our customer doesn't appear to be managing the check in the dining room.

Christopher Tomasso (CEO and President)

I, I also want to add that I think our seasonal menu strategy, specifically the innovation around that, is a big driver of that, as we have menu news, you know, five to six times per year. We're introducing new platforms like we did with the specialty cold caffeinated beverages. There's some excitement around our menu constantly throughout the year, and we've seen that show up in, in positive mix.

Pratik Patel (Equity Research Analyst)

Understood. Appreciate the color, guys. Thanks.

Christopher Tomasso (CEO and President)

Mm-hmm.

Operator (participant)

Thank you. Our next question today comes from Christopher O'Cull with Stifel. Please go ahead.

Christopher O'Cull (Managing Director and Senior Equity Research Analyst)

Yeah, thanks. Chris, I know you mentioned traffic improved sequentially through the quarter. So I was curious if you could help us understand the magnitude of the acceleration you saw sequentially, and maybe how the trend you saw toward the end of the quarter compares to the guidance that you guys provided for marginally positive traffic for the year?

Mel Hope (CFO)

I, I actually don't think we have it in the room, what the, what, what the traffic was month by month by month. We just, you know, as, as a, as a rule, we were, you know, If you just kind of think about the environment last year, we were rolling over a, a tougher comparison with regard to, I guess, people coming out of the kind of the Omicron event last year. As they circulated, we, we had a, you know, we had more, we had more traffic in the restaurants, so we're rolling over, rolling over that. As that kind of worked off through last year, we saw, you know, we just saw an increase through the period. We don't, we don't typically break it down by, by month publicly.

Christopher O'Cull (Managing Director and Senior Equity Research Analyst)

Okay. And then, I guess, Chris, I was hoping you could expand on your comments around the 100 restaurants that are in development. How many of those units are currently under construction? What are you targeting in terms of how far ahead you stay in that development funnel, just given how much harder it is to build stores relative to pre-COVID?

Christopher Tomasso (CEO and President)

Yeah. When I talk about 100 restaurants in various stages of development, we talk about those in terms of ones that have been approved by our real estate committee, which means they've been blessed to move forward. About 20 of those are under construction currently, and the rest of them are either in various stages of lease negotiation or permitting or design.

Christopher O'Cull (Managing Director and Senior Equity Research Analyst)

Okay. Just lastly, Mel, you mentioned the development was weighted toward the Q4 this year. Should we expect the Q3 openings to be similar to the number opened last year in the third?

Mel Hope (CFO)

Let me see how many did open last year. It's probably going to be a little bit ahead of that, but, but, but that's, that's similar kind of weighting. I think that's probably fair.

Christopher O'Cull (Managing Director and Senior Equity Research Analyst)

Okay, great. Thanks, guys.

Mel Hope (CFO)

Yes, sir. Good to talk to you, Chris.

Operator (participant)

Thank you. Our next question today comes from Gregory Francfort with Guggenheim Securities. Please go ahead.

Gregory Francfort (Senior Analyst)

Hey, hey, thanks thanks for the question. I had a couple, just first one, maybe can you talk a little about the labor market outside of statutory inflation, just what you're seeing either in turnover or anything like that would be helpful.

Mel Hope (CFO)

First of all, we don't have any shortages of labor, and frankly, have, you know, not experienced the kind of, I guess, labor challenges that others experienced and may still be experiencing in some markets. We just, we just haven't had that, that kind of a, you know, access to labor issue that I think others have had. Access is good. Since we've been at-- You know, we look at the number of applications for open positions, and I know the applicants for positions returned to kind of pre-COVID levels for us, well more than a year ago now. Turnover elevated during the worst of the pandemic and the recovery of the pandemic. It's now kind of returning to, returning to earth.

We've typically, you know, our history is that we've had better turnover statistics than our industry, for both the hourly as well as managers, by maybe 20% or so, running maybe 20% lower. We haven't quite returned to that kind of favorability yet, but we're moving in that direction.

Christopher Tomasso (CEO and President)

I, I will say that, that our turnover in Q2 versus Q1 improved by 500 basis points, so we're, we're definitely seeing some positive momentum there.

Gregory Francfort (Senior Analyst)

Awesome. Thanks. Then maybe just on, the, the new sites you guys have been opening up the last maybe one or two at, at higher volumes. Can you just remind us how, how much bigger, either in square footage or capacity, those are? It seems like that's been successful. Do, do you, do you have thought of maybe continuing to either expand the footprint or, or, is that something that might be something you can actually keep doing, where maybe you can do 2.4, 2.5 on a, on a larger footprint or a larger, seating capacity?

Christopher Tomasso (CEO and President)

Yeah, that's a, that's a, a conversation we have, frequently here. Our, our footprint has increased over, you know, Again, we've been around 40 years, so our early restaurants were, you know, 3,000 sq ft and, and, you know, we're probably, our average is closer to four now with what we've been building over the past five years. But it's a delicate balance between, you know, the, the kitchen throughput potential, and, and servicing the customer the way we want to. Also, frankly, in our ability to penetrate markets. We've learned over the last, you know, five years or so that we can, we can more densely populate, markets with larger footprints. So, so that's what we're looking at now.

We I mean, as I said, we're seeing volumes we had never seen before, and we know that it's because of a lot of the, the work that we've put into our, our real estate site selection model, and the elements that I've talked about that we've, we've added on to the prototype.

Gregory Francfort (Senior Analyst)

Great. Maybe one last one. Now, now, there's been a lot of concern, I guess, out there in the market about just the consumer potentially slowing into the end of this year or 2024. You know, but there's also a lot of kind of tailwinds. I'm curious, your, your overall take and thoughts on kind of that backdrop and consumer health into the end of the year, early next year?

Mel Hope (CFO)

As we shared earlier, we haven't seen any check management from our customers in our dining rooms. You know, obviously, there's something going on with regard to the expensive off-premises occasions. Built into our guidance is certainly some, you know, some caution about the choppiness of the economy and the sustained concern about recession being around the corner, having not yet experienced what we would call the worst of it.

Gregory Francfort (Senior Analyst)

Thank you.

Operator (participant)

Thank you. Our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Katherine Griffin (VP and Equity Research Analyst)

Hi, thank you. This is Katherine Griffin on for Sarah. Thanks for the question. I wanted to ask Chris, just to follow up on your comments on the guest-selected pricing, that, you know, seeming to hold up well. I just wondered if there's anything notable to call out in terms of, you know, customer demographics, whether it's by age cohort, income cohort, or geographically, just anywhere maybe you've seen relative strength in terms of, you know, seeing that guest-selected pricing hold up?

Christopher Tomasso (CEO and President)

No, nothing specifically. I think it's been across the board for us. Even, even when I look at our, our growth by day parts, pre-11:30 A.M. and post-11:30 A.M. are pretty similar. I, I think we're just getting more folks in the dining room across all of our, you know, demographic groups and, and psychographic groups. What we're seeing is as I said, they're, they're opting for the full experience. When I talked about the, the specialty cold caffeinated, you know, that's really helping to drive our, our beverage attachment. The, the Bacon Cheddar Cornbread, a shareable, for example, is driving check, and it's also, it's also contributing to an occasion. That's what we're seeing is.

I think, I think the same phenomenon you're seeing in travel, where, where people are wanting experiences, you're starting to see it in dining out occasions, too. You know, dining out as groups, enjoying a shareable together, at least this is what we're seeing, indulging in an extra beverage, for example. Frankly, you know, opting into our seasonal menus, which, for the most part, are, are higher priced items than what's on our core menu. Everyone knows they're for a limited time, and they're also pretty special with some, some, you know, special proteins or, or like our Strawberry Tres Leches French Toast, that's, you know, pretty decadent. We're, we're seeing that, and I think that's what's contributing to our, our overall contribution.

Katherine Griffin (VP and Equity Research Analyst)

Great. Thank you. Thank you. Thanks for the color. Then just as a follow-up, I wanted to also just touch on your comments on sort of where you see additional room for optimization. If you could just speak to sort of if, if it's, you know, if it's menu innovation or just other areas of the, of the operations model, that would be helpful to get some color on. Thank you.

Christopher Tomasso (CEO and President)

You're welcome. I, I'll, I'll say that it's across the board. Every opportunity that we have, you know, within our four walls or outside our four walls, to innovate and improve the customer experience is on the table. We've been doing that for a long time. We'll continue to do it. You know, we were one of the first to have waitli-- you know, waitlist management systems for our customers. We're still looking at back-of-the-house improvements. We've talked about our dining room table optimization, the indoor-outdoor bars, all those things that will either create more demand or help us serve more demand. Those are our, those are our two focus areas. When, when we talk about innovation around the menu, it's to, it's to create more demand.

When we talk about, dining room optimization and, and KDS systems and things like that, that's to serve more demand that we know we have sitting outside our front door. We've got them in those 2 buckets, and, and everything's on the table.

Katherine Griffin (VP and Equity Research Analyst)

Great. Thanks, Chris.

Christopher Tomasso (CEO and President)

Mm-hmm.

Operator (participant)

Thank you. Our next question today comes from Andrew Charles at TD Cowen. Please go ahead.

Andrew Charles (Managing Director and Senior Equity Research Analyst)

Great, thanks. With KDS implementation complete, and now the teams are getting a feel for them in the back of the house, you know, have you seen the benefit to traffic from faster throughput than you forecasted? And I'm curious as well, if you help quantify the impact to 2Q traffic from faster table turns.

Mel Hope (CFO)

Quick answer is no, we haven't quantified the traffic from faster table turns. We. The KDS system, I think, I think what Chris was trying to illustrate, not only for the KDS system, but other operational efficiencies that we've applying in the restaurants, particularly as we've learned to operate better in these higher volume restaurants, which is, you know, over the course of the last few years, has been something that we've been excited, excited about, but we've also, we're also learning about our own system as we've opened these big volume restaurants.

Chris called out Mother's Day, which was a, an historically busy day, for us, and it was enabled by the, you know, cocktail of different things, KDS, as well as, as well as, server, servers on the floor, back-of-house improvements, those sorts of things, were all part of, all part of this helping increase that throughput. I know I have a breakdown for you.

Christopher Tomasso (CEO and President)

Andrew, this is Chris. One of the things we've mentioned is getting KDS rolled out is really just the starting line. A great example I'll give you is: We now have visibility into ticket times and cook times that we never had before because of our manual process. We're creating the benchmarks now, to start to focus on and work on improving, and we've been pleasantly surprised by the impact that we're seeing, even week over week, with just the visibility into those metrics.

Andrew Charles (Managing Director and Senior Equity Research Analyst)

That's great. Then, Chris, is there anything you'd point to on efforts where you're leaning in to stem the delivery traffic headwinds, or, or these transactions that you're less worried about chasing, just given a lower margin profile?

Mel Hope (CFO)

Yeah, we're, we're focused on our in-restaurant dining customer. Like I said, we'll continue to accommodate the off-premise occasion. We don't feel like we have a lot of influence there. You know, we could, we could market into it, but as you know, we're traditionally not a mainstream marketer. We, you know, our, our marketing spend is much lower than most in our industry, and we're certainly not gonna, you know, use those bullets to-- on a third-party occasion. Our focus is still gonna be on, on in-restaurant, and then as long as we continue to see it grow like we have, I, I think we can say that we're winning there.

Andrew Charles (Managing Director and Senior Equity Research Analyst)

Very good. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star then one. Today's next question comes from Maddie Schipper with Raymond James. Please go ahead.

Maddie Schipper (Equity Research Associate)

Hi, this is Maddie, on for Brian Vaccaro. Just a quick-

Mel Hope (CFO)

Hi, Maggie.

Maddie Schipper (Equity Research Associate)

Hi, how are you? Just a quick question on labor. In the last thank you, there was noted a new labor scheduling tool/protocols. Can you just provide some more color there? What capabilities this has added compared to the prior tools, protocols you were using? Is there any way to quantify the benefit?

Mel Hope (CFO)

can't quantify the benefit, but the, but the tool itself gives our operators a cleaner look at how labor's running, how scheduling is running, how they can throw it up against expected traffic. As a consequence, it gives them just improved insight into how to run a business, and it helps them control their front and back of house scheduling, you know, in, in this. It's just easier, easier tool, more accessible, easier for them to evaluate evaluate where their staffing goes. When I, I say I can't really quantify the benefit, what I can say is that I, I know that we are, we operate with more efficiency, and it comes out in our overall percentage labor.

but, I don't have, I don't have something that I can tell you that tool did this in the labor percent.

Maddie Schipper (Equity Research Associate)

Okay, thank you. Then just quickly on other OpEx, what are you seeing in terms of utility and other inflationary cost lines in that, in that line? How do you expect that to play out going forward?

Mel Hope (CFO)

Utilities and other costs have typically run higher, and they're all, the, the expected inflation of those is included in our overall flat to 2% up.

Maddie Schipper (Equity Research Associate)

That's helpful. Thank you so much.

Mel Hope (CFO)

Okay.

Operator (participant)

Thank you. Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Christopher Tomasso (CEO and President)

Great, thank you. Thanks, everyone, for your thoughtful questions. We look forward to finishing the year strong with a continued focus on serving more demand and creating memorable experiences for every First Watch customer. Thank you.

Operator (participant)

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.