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First Watch: Leading the Full-Service Breakfast Recovery

RJ Hottovy
Aug 12, 2022
First Watch: Leading the Full-Service Breakfast Recovery

Key First Watch Metrics

At a time when most restaurant companies are seeing year-over-year (YoY) visitation declines, First Watch’s 2Q22 update was notable because of strong visitation trends throughout the quarter. However, First Watch is not alone on this front, as we’re seeing evidence of a wider breakfast recovery across the full-service restaurant space, which we discuss in greater detail below.

  • Visitation-led growth with little pushback to pricing increases. First Watch reported same-restaurant sales of 13.4%, driven primarily by an 8.1% increase in transactions. This is notable for several reasons. First, unlike most restaurant chains, sales growth is not being popped up by inflation and is being driven by visitation growth. Some of the visitation growth stems from the company’s decision to take a "conservative approach" to pricing, including no price increases in 2021 to attract post-pandemic customers, and a modest 3.9% increase at the start of this year, and enhancing its value proposition during a period of elevated food away from home (consumer price index increase of 7.6% on a trailing-twelve-month basis and food at home CPI increase of 13.1%). According to First Watch CEO Chris Tomasso, the company "did not see any negative traffic impact from [its] last price increase, nor have [they] seen what I believe to be an early indicator of pricing resistance, check management by the consumer. In fact, customers are electing to spend more in our restaurants. Overall beverage incidence is up and our PPA is above our expected level when you consider the pricing." Management pointed out that its average weekly traffic remained consistent throughout the quarter, something data also validates (using January 2022 as a baseline).

  • Setting the pace for the full-service restaurant space. As Tomasso pointed out – thanks for the shoutout! – First Watch’s visitation trends are outpacing trends across the full-service restaurant category. However, the company’s outperformance becomes even more pronounced when comparing visitation trends on a per square foot basis. We’ve compared First Watch’s quarterly visits per square foot to full-service restaurant category averages back to 1Q17 (assuming 3,300 square feet per First Watch location and roughly 6,000 square feet per full-service restaurant location). While First Watch has historically maintained greater visits per square feet relative to the rest of the category, the outperformance has become even more pronounced in recent quarters, with the chain driving almost 50% more visits per square foot relative to the rest of the category.

  • Further evidence of the breakfast recovery. We’ve spoken in the past about the volatility of the full-service breakfast category, but there is further evidence that breakfast-first operators have been gaining visitation market share from the broader category. We mapped 2Q22 YoY change in visitations for full service chains with more than 30 units (below), and found that three of the top-six chains (Denny’s, First Watch, and Waffle House) were breakfast-first chains.

  • What’s driving the full-service breakfast recovery? While First Watch’s core business strategies – including a "one-shift" staffing model (7:00 am-2:30 pm with no night shifts) and focus on fresh ingredients – are helping to drive visitation outperformance, the category’s value proposition also appears to be a key factor in the overall recovery of the full-service breakfast category. Dine Brands (parent company of IHOP and Applebee’s) CEO John Peyton noted that it has seen sales grow about 6%-8% among households earning over $75,000 per year ( data also confirms that IHOP’s restaurant trade areas have seen the largest increase from visitors with households between $75,000-$100,000 in income). Peyton further commented that the lift in visits from higher income households suggests that "guests that often dine at more expensive restaurants are finding Applebee's and IHOP because of their well-known value position" and why the company "performs well during tough times like this" (noting Dine Brands’ outperformance held up relatively strong during the Great Recession in 2008 and 2009. We’ve already pointed out that First Watch’s chain trade area average household income ($69,0000) was higher compared to other breakfast-focused peers, but we would not be surprised to see this figure increase across the category as more consumers (even higher end consumers) look to stretch household budgets.

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RJ Hottovy

Head of Analytical Research,

R.J. Hottovy, CFA has covered the restaurant, retail, and e-commerce sectors for nearly 20 years as an equity analyst and strategist for Morningstar, William Blair & Co., and Deutsche Bank.

R.J. also brings a wealth of experience with early-stage investments as an investment committee member for the IrishAngels / Vitalize venture capital group. Over the past three years, he has advised over 50 foodservice and foodservice tech companies on more than $200 million in early-stage capital raises and M&A transactions.

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