FWRG - First Watch Restaurant: Positive Takeaways From Recent Developments

2023-10-02 13:22:43 ET

Summary

• First Watch was recently named as one of the top places to work based on a recent survey.
• FWRG has completed 17 franchisee acquisitions so far this year.
• My rating for FWRG stays as a Buy, as I have a positive opinion of the company's latest developments.

Elevator Pitch

I stick to my existing Buy rating for First Watch Restaurant Group ( FWRG ) stock.

In my initiation article for First Watch published on July 20, 2023, I highlighted the mismatch between the stock's valuations and the company's growth outlook.

My current write-up offers an update of my thoughts on FWRG's latest developments. I like the fact that First Watch has been recognized as a good employer as per the results of a recent survey. I am also impressed by FWRG's recent franchise acquisitions, which have boosted its growth prospects. First Watch's strategy of having a number of seasonal menus and rolling out more new beverages has made it less prone to check management risks. Taking into account these positive developments, I maintain my Buy for First Watch.

Edge In Talent Recruitment Is Validated By Recent Survey

I previously highlighted in my July 2023 initiation piece for FWRG that "First Watch has an edge over competitors in recruiting talent, due to the company's focus on daytime dining" as people place a greater "emphasis on work-life balance." My point of view has been supported by the results of a workplace survey.

In late September, First Watch issued a media release disclosing that it was "named to Newsweek's Top 100 Most Loved Workplaces for the second consecutive year" which is based on a survey of over two million workers. It is worthy of note that FWRG is the sole operator of restaurants to make the list of the 100 best workplaces. In its press release, First Watch stressed that its "one-shift a day" format enables its staff to "enjoy evenings with their family or friends."

Earlier, FWRG noted at its Q2 2023 earnings briefing in August this year that the company doesn't have the "labor challenges that others experienced and may still be experiencing in some markets." Also, the company's employee turnover rate has historically been on average 20% below that for the broader restaurant sector. This is not that much of a surprise, considering that First Watch enjoys a significant advantage over its restaurant operator peers in hiring new people, given that potential employees don't have to be bothered about night shifts.

First Watch's edge in talent recruitment is expected to translate into relatively more benign wage pressure and stable profit margins for the company. The company doesn't necessarily have to compete on salaries to recruit workers with its reputation as a good workplace. This is important, as labor expenses account for roughly a third of FWRG's revenue.

Franchise Acquisitions Are A Key Growth Driver

A week after reporting its second quarter results at the start of August, FWRG revealed that it bought "six of its previously franchise-owned restaurants, one restaurant under construction and corresponding development rights in Georgia and South Carolina."

Taking into account this recent deal, First Watch has acquired 17 franchisee restaurants in 2023 year-to-date. This was a key factor which led the company to revise its full-year fiscal 2023 financial guidance upwards. In specific terms, the mid-point of FWRG's FY 2023 top-line growth guidance was raised from +18.0% previously to +19.5% now.

Moving forward, FWRG still has 100 restaurants which are run by franchisees, and it is notable that the company currently has options (that don't have an expiry date) to purchase half of these franchised restaurants.

Acquiring existing franchisees is a faster and less risky path of growth for FWRG, as compared to opening new restaurants from scratch or buying over third-party restaurants. First Watch highlighted at its Q2 2023 results briefing that franchisee acquisitions are "a nice complement to our organic growth" and offer "a much easier transition."

Constantly Refreshing One's Menu Has Limited Check Management

As the economy weakens and consumer purse strings get tighter, a key risk factor for restaurant operators is that the average spend per visit declines. This seems to be less of an issue for FWRG, because the company refreshes its menu regularly.

In my July 20, 2023 write-up, I made reference to First Watch's "Spring seasonal menu" which included items like "crab & avocado toast" and a drink that is a mix of "mango, pineapple, strawberry and lime." In the company's FY 2022 10-K filing , FWRG mentioned introducing five "seasonal menus" every year, and increasing its beverages such as different types of "fresh juice".

First Watch emphasized at its Q2 2023 results call that "our customer doesn't appear to be managing the check in the dining room", and shared that the "attachment of beverages is up."

Looking ahead, FWRG should have no lack of new ideas about how to refresh its menu and make its offerings more attractive to consumers, taking into account its recent appointments.

Irene Chang Britt became the company's new independent director in July 2023; she had previous working experience at Campbell Soup ( CPB ) and Kraft Heinz ( KHC ). Separately, First Watch has created a new role known as Chief Brand Officer to be in charge of "implementing demand generation strategies" as highlighted in a September 6, 2023 announcement . FWRG's new Chief Brand Officer, Matt Eisenacher, was formerly Chief Concept Officer for an Italian restaurant prior to being appointed as Senior Vice President at the company four years ago.

Closing Thoughts

I have a favorable view of First Watch because of the company's good growth potential. Recent developments have made me even more confident in the company's business outlook, and this explains my decision to maintain a Buy rating for FWRG.

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