First Watch Restaurant Stock: Awaiting Profitability (NASDAQ: FWRG)


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Investment thesis

As of December 26, 2021, First Watch had 435 systemwide restaurants in 28 states, 341 of which were company-owned while 94 were franchised. The company is opening new restaurants, and its revenue and operational performance are improving.

Its turnover in 2021 is 37.8% higher than the pre-covid level of the year 2019. However, generating profits for shareholders still seems difficult and the company recorded a net loss of -4, $7 million in Q4 2021 when multiple peers reported earnings. Investors would find better options elsewhere in the restaurant industry.

An overview of the company

First Watch Restaurant Group, based in Bradenton, Florida (NASDAQ: FWRG) was founded in 1983. First Watch is a restaurant concept that serves cooked-to-order breakfast, brunch and lunch using fresh ingredients. The company operates during limited hours from 7:00 a.m. to 2:30 p.m. The company has no operations outside of the United States.

As of December 26, 2021, the company had 435 systemwide restaurants in 28 states, of which 341 were company-owned while 94 were franchised. Advent, one of the private equity firms, owns a majority stake in the company. The company has approximately 10,000 employees. First Watch Restaurant went public in October 2021.

Service Overview

The restaurant serves cooked-to-order breakfast, brunch, and lunch. Its menu includes dishes such as Avocado Toast, Smoked Salmon Eggs Benedict, Farm Stand Breakfast Tacos and Lemon Ricotta Pancakes, as well as rotating seasonal dishes such as the Bol Trailblazer, Carnitas Breakfast Tacos, Superseed Protein Pancakes, and a fresh, seasonal rotation. juice.

First Watch Restaurant Group

First Watch Restaurant Group

Source: company website

The rise of the gig economy, flexible working hours and the expansion of remote working – trends that have been further supported by the covid-19 pandemic – are increasing demand for fast and flexible daytime meals , for which the traditional rigid breakfast and lunch periods were not designed. .

Competitive environment

First Watch Restaurant operates in a highly competitive and fragmented industry where it competes directly and indirectly in terms of dining experience, food quality, service, price and location. Its competitors also include grocery store chains and meal subscription services. Marketing and brand reputation can be the key to business growth.

First Watch Restaurant believes it is well positioned to compete with national, regional and local establishments that operate during its opening hours. Consumers are increasingly looking for higher quality breakfast, brunch and lunch experiences and First Watch believes there is no comparable offering in the segment that works at scale. He sees his main competitor as a network of independent restaurants that serve breakfast and lunch in neighborhoods across the United States.

Competitive advantages

As the business focuses on a day shift, it can optimize restaurant operations. It generated average annual sales volumes of $1.8 million per restaurant in 2021, serving just 7.5 hours a day. This focus on the day also helps First Watch attract and retain employees who are passionate about hospitality and are drawn to the company’s “No Night Shifts Ever” philosophy.

First Watch Restaurant Group

First Watch Restaurant Group

“Follow the Sun” is the company’s guiding principle when it comes to sourcing. This means that it incorporates ingredients harvested at maximum flavor and freshness into the menu for each season.

The company’s menu is constantly evolving to keep it fresh and exciting while remaining operationally efficient. Its highly anticipated five seasonal menus, along with the introduction of new platforms, keep customers coming back and spending more money.

According to First Watch, the company’s integrated technology has improved the convenience of its customers when ordering directly from First Watch and its third-party delivery partners.

The alcohol platform reflects the company’s culinary philosophy by combining fresh juices and ingredients with a variety of liquors to create craft cocktails. Craft cocktails were available at 305 restaurants as of December 26, 2021, including company-owned restaurants and franchisees, with clear plans to expand to all restaurants where possible.

For nearly four decades, First Watch has grown primarily through word-of-mouth, with loyal customers drawn to its service, menu and atmosphere. While the company believes organic awareness growth contributes to a local feel, it also recognizes the value of strategically marketing its brand through appropriate channels to increase brand awareness.

Financial performance

First Watch’s total revenue increased 48.6% to $162.6 million in the fourth quarter of 2021 from $109.4 million in the fourth quarter of 2020. The company reported a net loss of -4.7 million in the fourth quarter of 2021, compared to -7.1 million in the fourth quarter of 2020.

First Watch Restaurant Group Financials

First Watch Restaurant Group

Source: 10-K

For the full year 2021, revenue increased 75.6% to $601.2 million from $342.4 million in 2020. The company’s 2021 revenue increased 37.8% from the pre-covid level of $436.4 million in 2019. The company recorded a net loss of $2.1 million for 2021, compared to $49.7 million in 2020. The operating profit margin at the of the restaurant reached 19.5% in 2021, which was higher than 17.4% in the pre-Covid 2019 period.

The company had $51.9 million in cash and cash equivalents and $100.0 million in borrowings outstanding as of December 26, 2021. It had $75.0 million of unused borrowing capacity in under its new revolving credit facility as of December 26, 2021.

Growth prospects

In Q4 2021, First Watch opened five company-owned restaurants and three franchise-owned restaurants, bringing the total system-wide number of restaurants to 435 (341 company-owned and 94 franchise-owned). franchise) in 28 states as of December 26, 2021.

Chris Tomasso, CEO and President of First Watch, said:

Q4 2021 represented one of our strongest quarters of comparable restaurant traffic growth to date, increasing 31.9% from Q4 2020 and 6.1% from Q4 2019.

Outlook 2022:

  • The company expects total revenue to increase by more than 15% from 2021
  • It plans to open 30 to 35 new company-owned restaurants and 8 to 13 franchise restaurants.
  • Projects capital expenditures of $60.0 to $70.0 million for new restaurant projects, planned renovations and new restaurant technologies.


Based on the price-to-sales ratio, First Watch’s valuation looks attractive relative to its peers.

FWRG PS ratio vs peers
Data by YCharts

However, the company suffers losses, even though its sales increase. First Watch believes it has some pricing power and can offset the effects of inflation on its margins.

FWRG bottom line vs. peers
Data by YCharts

As pandemic-related restrictions were lifted, most First Watch peers reported profits. First Watch Restaurant Group’s losses explain its relatively cheaper valuation.

Risk factors

  • Food and drink prices are rising and inflation fears are putting First Watch at risk. The ability to anticipate and react to the evolution of these costs is crucial for the profitability of the company. Increases in fuel prices can also lead to increased distribution costs.
  • The company relies on a single distributor to provide virtually all of its food distribution services in the United States. Likewise, it relies on very limited suppliers for its pork, egg and avocado needs. This increases the risk of supply disruption if suppliers or distributors are unable to meet their obligations.


The demand for fresh and healthy food is increasing, which benefits the company as it focuses on providing freshly prepared food made from quality ingredients. The company’s offsite offering has become more convenient and accessible to customers through its integrated technology and enhancements. On the other hand, the company faces inflation risks, which could continue to weigh on its profit margin.

First Watch is rapidly expanding restaurants. Its comparable restaurant sales are increasing and losses are decreasing. It believes it has some pricing power to offset the effects of rising inflation. However, it might be best to watch this stock from the sidelines until the business becomes profitable.


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