First Watch Restaurant Group - Q3 2023

Transcript

Operator (participant)

Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. Third Quarter 2023 Earnings Conference Call occurring today, 1 November 2023 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 opened for for analyst questions, and instructions on how to ask a question will be given at that time. This call will be archived and available for replay at investors.firstwatch.com under the News and Events section. I would like to turn the conference over to Steve Marotta, Vice President of Investor Relations at First Watch, to begin.

Steve 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 earnings release for the third quarter of 2023 on GlobeNewswire and filed this 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. The statements include, without limitation, statements concerning the conditions, the company's industry and its operations, performance and financial conditions, growth strategies, and future expenses.

Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including quarterly report on Form 10-Q. First Watch has 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 reconciliations of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. With that, I will turn the call over to Chris.

Chris Tomasso (CEO and President)

Good morning. Before we share the details of another terrific quarter of growth, I would like to first note that this earnings season marks our eighth quarter since our IPO. While we're still early in our journey, I'm proud of how this organization has established itself as a public company, built credibility with investors, and consistently produced positive results at a high rate of growth over a multi-year time horizon. To everyone listening this morning from the First Watch organization, thank you. Now, on to our third quarter. Our organization once again delivered outsized performance top to bottom. In the quarter, First Watch generated $219.2 million in total revenues, a 17.3% increase versus a year ago.

We opened 13 system-wide restaurants, surpassing the significant milestone of 500 restaurants, ending the quarter with 505 First Watch restaurants across 29 states. Our same restaurant sales increased 4.8%, once again supported by positive dining room traffic. As we've noted in past quarters, expected softness in our off-premises channels has persisted as consumer behavior continues to shift and moderate post-pandemic. Finally, bottom-line growth benefited from easing food and beverage inflation and effective four-wall management by our operators. We also continue to outperform the industry, highlighting the benefit of our differentiation to other full-service operators through our focus on the breakfast, brunch, and lunch day parts. As compared to Black Box Intelligence, First Watch bested the industry by nearly 400 basis points, illustrating our ability to grow traffic share.

Our share growth is also supported by Placer.ai, which showed our consolidated traffic share gaining several hundred basis points against the full-service segment. My confidence in our ability to successfully navigate virtually any environment is higher than ever, especially in light of our consistent growth. Of course, given the macroeconomic backdrop, we remain cautious with respect to the state of the consumer. While we have observed, and in fact benefited from, the strength and resilience of the consumer throughout the year, there's reason to believe that the weight of the environment is beginning to have an impact. But as we have experienced in prior downturns, consumers are less willing to gamble with their discretionary dollars and would rather seek out more familiar and enjoyable experiences that are consistent and deliver value, like First Watch.

Given our long-standing record of exceeding industry traffic trends, we are well positioned to benefit from the consumer's flight to quality. In times like these, the best operators are winning. By that, I mean brands that relentlessly lean into the basics for the benefit of their teams and their customers are winning. We remain confident and unwavering in our commitment to culinary forward food, served by highly trained teams who exemplify our You First mission in a warm and inviting atmosphere and at a tremendous value. We deliver an exceptional dining experience at a compelling per-person average of just $16.35, ensuring that First Watch remains a reliable experience as well as an affordable luxury. Our focus on executing the basics at a high level remains key to our success.

Beyond our financial performance, we know we are well positioned when our employees and our customers are happy. By both measures, we're playing from a position of strength. Both manager and employee turnover have continued to improve throughout the year, including during the third quarter. Our customer experience scores are also at historical highs and continue to be a great indicator of future performance. To further illustrate our focus here, in the quarter, we completed our annual WHY Tour, short for We Hear You, where our Chief People Officer, Laura Sorensen, and Chief Operating Officer, Dan Jones, joined me in speaking with hourly team members from every region in the company. For perspective, that's 22 separate 90-minute tours comprising over 1,900 minutes with more than 300 hourly team members.

There is no more important task that we carry as leaders than to receive feedback and perspective from those that are serving our valued customers every day. We learn what they love about working for First Watch, and how we can do better. Their insights and opinions are invaluable as we seek to continuously improve, but it's our tactical reactions to this frontline information that allows us to affect positive change in real time, so that we're fully supporting our teams and better serving our customers. I finished this year's tour encouraged that our culture in the restaurants and our team's genuine desire to serve our customers and each other is as strong as ever. Our deep bench of human capital gives me confidence in our ability to execute our high growth expansion plans.

Double-clicking on the topic of culture, I'm also pleased to share that First Watch was once again named to Newsweek's list of Most Loved Workplaces. This is especially noteworthy to me because it's largely generated from more than two million employee surveys. We are proud to be the only restaurant brand that made the 2023 list. A remarkable achievement for sure. A strong culture begins and ends with the environment fostered by our general managers in their restaurants on a daily basis. I've always viewed the GM position as the most important role at First Watch. While we are one company, we consider ourselves to be a network of individual neighborhood restaurants, and each of these are led by a general manager responsible for creating a positive environment for their team and customers.

Awards like this demonstrate that we are keeping the culture flame bright as we raise the bar on nationwide expansion. On the topic of nationwide expansion, I'm excited that the quarter ahead will be one of the most prolific in the company's history, and our team is ready. We will open 18-21 new system-wide restaurants across 16 states in the fourth quarter alone. In total, we have over 100 restaurants in various stages of development and more than 120 promotion-ready managers ready to lead them. We believe we are well positioned to capitalize on the white space in front of us. We're in a select group within the public restaurant space, opening new restaurants at a low double-digit pace annually. Our highly portable brand succeeds in both existing and new markets, with our top decile restaurants spanning 10 states and 19 DMAs.

We're targeting third-year AUVs of $2.5 million, with restaurant level operating margins of 18%-20% and cash-on-cash returns of 35% or greater. These attractive unit economics, achieved in one 7.5-hour shift, support our long-term goal of 2,200 domestic First Watch restaurants. Finally, we continue to execute our strategy of complementing strong organic unit growth with the acquisition of certain franchise-owned restaurants and related territories. Earlier this year, we acquired 17 restaurants in the Milwaukee, Omaha, and South Carolina, Georgia markets. Today, we are announcing an agreement to purchase an additional franchise partner with 6 restaurants in the Florida Panhandle and expect that transaction to close later this month. Following these acquisitions, we will have 11 franchisees remaining, who operate 97 restaurants, and of those, 46 are subject to purchase options. I'll reiterate what I said last quarter.

For us, converting franchises to company-owned restaurants is compelling from both a financial and strategic perspective, and represents a significant growth opportunity for our entire enterprise. And before I turn the call over to Mel, while we still have two more months before turning the calendar on the new year, the effort and execution necessary to generate more than 30% Adjusted EBITDA growth, assuming the midpoint of our updated guidance range, is a point of pride for our entire organization and energizes all of us to double down on our commitment to serving more demand in our restaurants. And with that, I'll turn it over to Mel.

Mel Hope (CFO)

Thanks, Chris, and good morning. As Chris shared, we're proud of our teams who continue to deliver strong results quarter after quarter. Same-restaurant sales growth increased 4.8%, and while traffic declined 1.9%, as we expected, our dining room traffic growth remained positive. Total revenues were $219.2 million, a 17.3% increase over the third quarter of 2022, reflecting both same-restaurant sales growth, as well as the sales in our newly opened and acquired restaurants. Our food and beverage costs were 22.6% of sales in the third quarter, which compared to 24.2% in the same period last year.

Costs benefited from 220 basis points of favorability across our Market Basket compared to like last year, which were driven mostly by decreases in pork and avocado costs, as well as leverage from our previous menu pricing actions. Labor and other related expenses were 33.9% of sales in the third quarter, up from 33.3% in the third quarter of 2022, and driven primarily by an increase in the number of managers per restaurant. We ended the period with an average of 3.1 managers per restaurant, compared with 2.8 a year ago. We view a three manager average as a standard of excellence as it provides the bench strength necessary to support our large number of planned new openings.

Restaurant-Level Operating Profit was $40.4 million for the quarter, with a margin of 18.7% an increase versus the 17.3% Restaurant-Level Operating Profit margin in the same period last year. The margin improvement reflects increased leverage from our same-restaurant sales growth, improvement in food and beverage costs, and favorability in other restaurant operating expenses, primarily driven by lower costs of to-go supplies. General and administrative expenses were $25.2 million, approximately $3.5 million higher than in the prior year, primarily due to higher compensation expense from additional headcount to support our rapid growth. Adjusted EBITDA was $21.6 million, reflecting a margin of 9.9%, an improvement versus the 9.1% margin we realized in the third quarter of 2022.

The quarter benefited from just over $1 million in G&A expenses, mostly headcount and departmental projects, that's now expected to be incurred in the fourth quarter. We opened 13 system-wide restaurants during the quarter, of which 10 were company-owned and three were franchise-owned. As we have stated throughout the year, our company-owned restaurant development schedule in 2023 is heavily weighted toward the fourth quarter. This year, we've often been asked about our customer check management. We continue to believe our growing dining room traffic reflects our customers' preference for meaningful experiences. To borrow from one of Chris's statements made earlier this year, the industry-wide shift away from off-premises appears to be a new indicator of check management. And while declining off-premises occasions remain a headwind to our consolidated traffic growth, our teams drove profitable growth in the third quarter, due in part to the increased in-restaurant visits.

Now, I'd like to update our full-year outlook as follows: We are increasing 2023 same-restaurant sales growth expectations to a range of 7%-8%. That's up from our previous range of 6%-8%, and now expect our full-year traffic will be generally flat. We're carrying price of just below 6% in the fourth quarter compared to the prior year. We now expect to open between 37 and 39 company-owned restaurants and 13-14 franchise-owned restaurants this year, with 1 company-owned restaurant closure. On a consolidated basis, we expect a total of 49-52 net new system-wide restaurants. We now expect total revenue growth in the range of 20%-21%. That range is an increase from our previous range of 18%-21%, with acquisitions contributing about 2.5% to total revenue growth.

We now expect full-year commodity deflation of -1% to flat, with net commodity cost inflation for the balance of the year. We continue to expect hourly labor cost inflation to remain in the range of 9%-11%, with overall restaurant-level labor cost inflation in the range of 8%-10%. We're increasing our Adjusted EBITDA guidance to a range of $91 million to $92 million from our previous range of $89 million to $92 million. Acquisitions are expected to contribute about $3 million to our Adjusted EBITDA this year. We now expect a blended tax rate in the range of 26%-28%. We're adjusting our capital expenditures range, not including the capital allocated to the acquisitions of franchise-owned restaurants, to $85 million to $90 million.

This is down from our previous range of $100 million to $110 million, mostly due to the timing of new restaurant openings. 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, $2.5 million in Adjusted EBITDA. In as much as we're in the middle of our budget season, it would be premature to furnish expectations for 2024.

However, among our own modeling assumptions for the first quarter, we see no reason to expect off-premises traffic to reverse its trend. Furthermore, because of the calendar shift, our most productive week of the year falls into the fourth quarter of 2023 and out of the first quarter of 2024. For further details on the third quarter, please review our supplemental materials deck on our investor relations website beneath the webcast. We'll open the line now for questions. Operator?

Operator (participant)

Yes, thank you. At this time, we will begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. Today's first question comes from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein (Managing Director)

Great. Thank you very much.

Mel Hope (CFO)

Hey, Jeff, good morning.

Jeffrey Bernstein (Managing Director)

Good morning. Two questions. The first one on, you know, the comp trends. Seems like your absolute results for the third quarter, close to 5%, were modestly above expectation. But yet we don't get to see the granularity within that or any thoughts on the fourth quarter. So I'm just wondering, you know, you said you had a strong quarter, yet the weight of the macro, I think, was beginning to have an impact, Chris, I think, was your reference. I'm wondering if you could provide some color in terms of what you're seeing, whether it's something specific to First Watch, or whether you're just referring to the broader government data and metrics that lead people to believe there's a slowdown, but perhaps you're not yet seeing it. And then I had one follow-up.

Mel Hope (CFO)

Yeah, I think to get to your question, yeah, you know, I think the industry is seeing some softness overall. But in terms of the guidance on the fourth quarter, I think you know, we've considered what we're seeing in the market today and what we had in the third quarter in terms of the full year guidance. So I think you can back into pretty much what our thinking is about the fourth quarter.

Jeffrey Bernstein (Managing Director)

Okay, but that's not something that I know you said the industry is seeing some softness. If you were just looking at your own results through the third quarter and through October, would you say that First Watch is seeing some softness similar to the industry or not yet evident?

Mel Hope (CFO)

Well, we've consistently talked about our traffic, particularly where the off-prem traffic is concerned, that we've seen that kind of seeking a new home. Don't know exactly where it's going to land at some points, but that traffic has descended throughout the year. While our dining rooms have remained positive, they're probably less positive in the third quarter than they were earlier in the year. So there is, you know, that there's some downward pressure, and I think that's what First Watch is seeing, and that's what the industry is seeing.

Jeffrey Bernstein (Managing Director)

Understood. My follow-up is just on the menu pricing. I think you mentioned that you'll be running roughly 6% in the fourth quarter. Obviously, we're seeing cost pressures abate. I'm wondering why you don't have specific thoughts yet on 2024. How you think about pricing more theoretically, whether you'd be inclined to take incremental price going into next year, or whether, based on the caution around the macro, you'd perhaps not take that incremental price. I'm just wondering how you think about that, outlook going into 2024. Thank you.

Chris Tomasso (CEO and President)

Thanks, Jeff. This is Chris. You know, I would just reiterate our previous, you know, plan and approach on pricing, which is to price to cover inflation. Obviously, we're we have been and continue to be a price laggard. But the, you know, the basis for that is that we're playing the long game here, and we have been, and all the decisions that we've made around staffing and specifically menu pricing, have been with that in mind. So we'll continue to do that. That said, we'll obviously continue to watch the environment, watch the consumer. You know, our focus is on more visits, and again, a long-term view and approach. So that's... We'll, we're gonna stay true to that.

Jeffrey Bernstein (Managing Director)

Sounds good. Thank you.

Operator (participant)

Thank you. The next question comes from Sara Senatore with Bank of America.

Katherine Griffin (VP)

Hi, this is actually Katherine Griffin on for Sarah. Thanks for the question. I wanted to follow up just on the, same-store sales guidance. Just given that it looks like the, you know, the range tightened a little bit higher, 7%-8% versus 6%-8% prior, but traffic has edged down. I guess I was just hoping you could elaborate a little bit more on whether you're, you know, expecting more pricing mix. Is it, you know, benefit from attach or trade up? Any color there would be helpful. Thank you.

Mel Hope (CFO)

The only thing that's really affecting it. I'm trying to really understand the question, but at any rate, I think I've already answered the fact that we, you know, do expect to see the transaction piece continue under some pressure. The only thing that would be different in the fourth quarter is that we're rolling around the Winter Storm Elliott right around last year's holiday period. So there's a little bit of that noise in there, but I'm not sure I'm answering your question, but I'm not sure exactly what more color you need.

Katherine Griffin (VP)

Really just, yeah, just kind of expectation. Yeah, it's really, it's really just the traffic, you know, traffic versus price mix component. I think, again, just sort of following up on the first, the first question, but, that I appreciate the answer, and that's, that's fine. On the, the second question, though, we were just wondering, you know, if you're since you're raising, revenue guidance and new store guidance, but lower CapEx, I'm just curious if we, if we should understand that that means you're finding ways to build more efficiently, if you're seeing less inflation in your build costs, you know, any sort of commentary on, on the build environment as it relates to that guidance?

Mel Hope (CFO)

Yeah, that's a good question. I think the answer to that, though, is that really, developers have caused us to push out some projects that we had expected to be spinning into at this time of the year, and we've kind of been seeing that leakage, you know, throughout the year. So, Eric and his team are working hard to manage new projects and have done a really good job of keeping them on track. But they were, but we would hope to have more projects spending more heavily in the projects in the pipeline right now. But it's really the pace of developers delivering our new sites so that we can begin to finish them out and open them faster. So we're seeing some pace at which we're taking delivery slow down.

Katherine Griffin (VP)

Okay. Thank you.

Mel Hope (CFO)

Yep.

Operator (participant)

Thank you. And the next question comes from Andy Barish with Jefferies.

Andy Barish (Managing Director)

Good morning, guys.

Mel Hope (CFO)

Hi, Andy.

Andy Barish (Managing Director)

Just wondering on, you know, on the commodity basket, you know, the update for this year, and then, you know, on some of the key items, like eggs and potatoes that you've been contracted on, anything to, you know, provide for 2024 at this point yet?

Mel Hope (CFO)

Really not ready to talk about 2024. We'll get to that. But we're kind of sticking to the third quarter, fourth quarter guidance right now.

Andy Barish (Managing Director)

Gotcha. And then just one additional question on the comps. I'm assuming mix was still positive in the quarter. Is that correct? And you know, any change on you know, sort of alcohol or you know, the coffee beverage attach or anything like that that you know, would have been a change in what you've been seeing?

Mel Hope (CFO)

Yeah. Mix remains positive. You know, our LTOs, our limited time offers are so popular that that always falls into our mix category, and they've remained a real push to our mix. Beverage incidences, particularly our, you know, our new premium iced coffees, create a little bit of noise for us because it's a new line, and so we're, you know, we're seeing those mix well. But it's really a small cohort that we're looking at since that's a brand-new line.

Andy Barish (Managing Director)

Then just, just one more follow-up, if I could, Mel, just, you know, you guys had been pointing kind of flattish EBITDA for the quarter. You talked about G&A, some, you know, deferment into the fourth quarter. Anything else that you would, you know, point to in terms of the upside versus your expectations?

Mel Hope (CFO)

In terms of, I guess I would say the thing I would caution people who are modeling the company about is our Pre-Opening Costs in the fourth quarter. Because we have so many projects that will be coming online, so heavily weighted to the fourth quarter, our Pre-Opening Costs will be a substantial contribution to the Adjusted EBITDA formula.

Andy Barish (Managing Director)

Okay. Helpful. Thank you.

Operator (participant)

Thank you. The next question comes from Ella Zhou with Stifel.

Ella Zhou (Equity Research Associate)

Good morning. This is Ella on for Chris. Mel, the company's Adjusted EBITDA guidance for the year implies $60 million to $70 million in EBITDA for the fourth quarter, which would be a year-over-year improvement, but a more modest degree of improvement compared to the third quarter and the year-to-date results. It also appears to imply a lower margin year-over-year. Why would that be the case?

Mel Hope (CFO)

So, I just mentioned the fact that we're heavy enough on Pre-Opening Costs in the fourth quarter, which will be part of the part of the story. And then we mentioned during our scripted comments, that we have about $1 million of timing favorability on G&A in the third quarter that will slide into the fourth quarter. And then our fourth quarter generally has other higher costs as well for our national conference and that sort of thing.

Ella Zhou (Equity Research Associate)

Got it. Thank you.

Operator (participant)

Thank you. The next question comes from Brian Vaccaro with Raymond James.

Brian Vaccaro (Managing Director)

Hi. Thanks, and good morning. I wanted to circle back on the new unit performance, if we could. Could you provide a little more color just on the sales performance on the class of 2023? And then on the CapEx side, where's the average development cost settling out in 2023? And is that settling out, or do you expect that to continue to rise into 2024?

Mel Hope (CFO)

So new restaurants that we built this year, I think the average before tenant improvement dollars, you know, landlords oftentimes give us support when we enter into a lease with them. So I think the average overall is maybe above $1.5 million, and the net is in line with what we've said before, which is $1.4 million or so, net of the TI dollars. And then our new restaurants, in terms of sales on average, I think they're performing in line with our previous expectations.

Brian Vaccaro (Managing Director)

Okay, thank you for that. Just back to the commodity inflation. Mel, I think I heard you say you expect it to tick back into slightly inflationary territory here in the

Mel Hope (CFO)

Yeah, I did.

Brian Vaccaro (Managing Director)

fourth quarter. Could you just walk through kind of what items are kind of moving on you back into slightly inflationary territory?

Mel Hope (CFO)

The one that sticks out to me right now is avocados are ticking up. Some of it's just seasonal, but that's it. You know, we use a lot of avocados. That's the significant mover, I think, in the Market Basket.

Brian Vaccaro (Managing Director)

Okay. And then you mentioned just on pre-opening costs, obviously understand the dynamic there, but outside looking in, that's a number that's pretty difficult for us to estimate given timing, and it's pretty sensitive. Is there any way you could put a little bit of a sharper pencil on your expectation on pre-opening in the fourth quarter? Thank you.

Mel Hope (CFO)

Short, well, I don't know exactly what Pre-Opening Costs are right now for our fourth quarter plan. I think if you look at what the average has been and the average number of projects that we have built through three quarters, it's probably not radically different from that.

Zach Ogden (Equity Research Analyst)

Okay, appreciate it. Thank you.

Operator (participant)

Thank you. The next question comes from Brian Mullan and Piper Sandler.

Brian Mullan (Managing Director)

Hi, this is Ashley on for for Brian. You didn't mention in your prepared remarks, but I believe the KDS system is fully rolled out or is about to be. Can you just talk through some of the benefits you've started to see flowing through the system and the expectations of that in 2024? Do they primarily come from traffic, or do you see some benefits in labor as well?

Chris Tomasso (CEO and President)

There's a number of benefits from the KDS system, you know, starting with, you know, opening up the hiring pool for us, and reducing training time. And, you know, one of the biggest benefits of it is visibility into our ticket times that we didn't have before. So as I've said, we've been establishing benchmarks. We have dashboards and other evaluation tools now that we're using to really measure ticket times at peak times.

And that's been the goal all along, is to improve our performance during peak sales hours and increase those peak sales hours. So, we haven't reported on the impact of that yet. You know, as I've said in the past, the rollout and implementation of that is inning number one as it relates to KDS, and we're continuing to learn a lot about it and tweak and refine the system and perfect it. But we are seeing some data that shows us that we're getting much better ticket times during those peak sales hours.

Brian Mullan (Managing Director)

That's great. Thank you. I was just wondering what commodity inflation was in this past quarter.

Mel Hope (CFO)

Commodity deflation was about 200 basis points, 220 basis points, something like that.

Brian Mullan (Managing Director)

Great. Thank you. I'll pass it back.

Operator (participant)

Thank you. Once again, please press star, then one if you would like to ask a question. The next question comes from John McNamara with Guggenheim.

Joseph McNamara (Managing Director)

Hi, thanks for the questions. I'm just wondering if you guys have any updates on the labor market and turnover, and how turnover has evolved over the last couple of quarters?

Chris Tomasso (CEO and President)

I would say, you know, our, our staffing has continued to improve. You know, Mel mentioned we're, you know, we're at 3.1 managers per restaurant, where, you know, previously we were at 2.8. So, you know, we, we feel good about where we are there. I think overall, you know, inflation or, excuse me, turnover has held pretty steady for us. And, you know, we're, we're, we're in a good place from a staffing perspective, specifically, you know, with the, the bench strength that we think we need to, to support our, our growth and, and obviously, our continued operations.

Mel Hope (CFO)

Turnover, I mean, you asked specifically about that. It's actually been ticking down for us through the year. I think our teams are doing a really, really good job of, you know, training and, and working with the crews. So as we've seen, throughout this year, you know, the whole industry dealt with a lot of turnover, right after the worst, and first big waves of COVID through the first couple of years. And we weren't an exception.

We were I think we stayed, you know, I think we stayed better than the industry throughout that time, but, but, but it was still higher than we like, and we've seen it all year long. We've worked to try and slow the turnover, and it has. It's slowed considerably since 2021. It's kind of been stepping down gradually. So we've seen some improvement. We've got. I like the momentum there for us.

Joseph McNamara (Managing Director)

Thanks. And then just one more. This might have already been asked, but I think I missed it. I know unit growth is heavier in the fourth quarter. Any possibility of any slippage into 1Q of 2024 for that?

Mel Hope (CFO)

Sure, there's always some possibility of that. Once you get kind of close to the holidays, we don't want our trainers to be away from home during holiday times. But if we do have slippage, you know, there might be a couple of projects that would slide, but they, you know, for the most part, you would expect them to open within a couple of weeks of the first of the year. They're not going to impact the overall performance next year or contribution next year.

Joseph McNamara (Managing Director)

Awesome.

Mel Hope (CFO)

You know I would say, I would say this, that, that every project that we have that we expect to open this year is under construction today. So, so it's, you know, there's definitely a race on to the finish line on every day, all of them.

Joseph McNamara (Managing Director)

Appreciate it.

Operator (participant)

Thank you. The next question comes from Andrew Charles with TD Cowen.

Zach Ogden (Equity Research Analyst)

Thank you. This is Zach Ogden for Andrew. I've got two questions on labor. The first one is that in 10-Q, you called out labor inflation is expected to remain in that 8%-10% range. But sequentially, are you seeing that getting better?

Mel Hope (CFO)

On an inflationary basis, not really. I mean, like, a lot of our labor inflation is attributed to, you know, regulatory increases in the minimum wage in different states. And so it's, you know, it's fairly, fairly reliable.

Zach Ogden (Equity Research Analyst)

Okay, thank you. And then the second question is that, are you at the right level of staffing now, or should we include the incremental staffing in our models?

Mel Hope (CFO)

Yeah, we're at the right level now.

Zach Ogden (Equity Research Analyst)

All right, great. Thank you.

Operator (participant)

Thank you. This concludes the question-and-answer session. I will let you turn the call to Chris Tomasso for any closing comments.

Chris Tomasso (CEO and President)

Thank you for your thoughtful questions this morning. We appreciate it. We look forward to finishing the year strong with our continued focus on serving more demand and making days brighter for every First Watch customer. I hope you all have a joyful and restful holiday season. Thank you.

Operator (participant)

Thank you. The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.