Is First Watch (FWRG) Poised for a Comeback Amid Record Expansion and Mixed Operational Trends?

First Watch Restaurant Group (FWRG) has long been a bellwether for the casual dining sector, leveraging its breakfast-centric model to carve out a niche in a competitive market. In 2025, the company appears to be doubling down on its growth strategy, with record expansion efforts that have driven system-wide sales and revenue increases. Yet, beneath the surface of this optimism lie persistent operational headwinds-rising labor costs, margin pressures, and inconsistent customer traffic trends-that could test the durability of its comeback.

Expansion Fuels Growth, But at What Cost?

First Watch's 2025 expansion strategy has been nothing short of aggressive. The company opened 64 new system-wide restaurants, including 55 company-owned units, across 32 states, pushing its total addressable market to an estimated 2,200 locations. This expansion has directly translated into financial gains: system-wide sales rose 20.9%, and total revenues increased 25.6% year-over-year. Even same-restaurant sales growth, a critical metric for assessing operational health, improved by 3.6% for the fiscal year.

However, such rapid growth comes with inherent risks. The company's unit economics have shown signs of strain. In Q4 2024, same-restaurant sales dipped by 0.3%, and traffic fell 3.0%, raising concerns about weakening demand. While Q4 2025 saw a rebound in same-restaurant sales (+3.1%) and modest traffic growth (+0.5%), these figures mask underlying volatility. Franchisee exits and margin pressures from inflationary forces-particularly in food and labor costs- remain red flags.

Labor and Cost Pressures: A Looming Challenge

Labor costs, a perennial challenge for restaurant operators, have worsened for First Watch. In Q1 2025, labor expenses as a percentage of sales climbed to 34.6%, up from 33.3% in Q1 2024. The company attributed this to higher health benefit costs and the need to staff additional managers to support new openings. With labor inflation at 4.1% for the quarter, scaling operations without eroding profitability will require careful cost management.

Food and packaging costs also rose to 18.6% of sales in Q2 2025, reflecting broader supply chain challenges. To mitigate these pressures, First Watch has implemented cost-saving measures, such as increasing portion sizes for popular items like the Trifecta without raising prices-a move aimed at boosting customer satisfaction while maintaining margins. Yet, such initiatives carry risks: surprise discounts or "delight acts" by managers, while effective in the short term, could normalize price concessions and further compress margins.

Customer Satisfaction: A Mixed Picture

Customer satisfaction metrics tell a nuanced story. For the full fiscal year 2025, same-restaurant traffic grew 0.5%, and sales rose 3.6%, suggesting sustained brand loyalty. Q3 2025 performance was even stronger, with 2.6% traffic growth and 7.1% sales growth. These figures underscore the effectiveness of First Watch's marketing and menu innovation strategies.

Yet, Q4 2025 revealed cracks in the foundation. While sales growth in existing locations remained positive, traffic declined by 1.9%, signaling potential fatigue in customer engagement. This divergence between sales and traffic highlights a critical question: Is First Watch winning customers through higher spending per visit, or is it relying on price incentives to maintain sales? The latter scenario could prove unsustainable in a post-promotion environment.

The Path Forward: Balancing Ambition and Prudence

First Watch's 2025 performance demonstrates its ability to execute on growth, but the company must now prove it can sustain profitability amid rising costs. Its adjusted EBITDA guidance of $123 million for 2025 reflects confidence in its model, yet achieving this target will require stabilizing unit economics and curbing labor inflation.

The key to a successful comeback lies in First Watch's ability to harmonize expansion with operational discipline. If the company can maintain its same-restaurant sales momentum while optimizing labor and food costs, it could emerge as a leader in the casual dining sector. However, if margin pressures persist or customer traffic falters, the risks of overexpansion-franchisee dissatisfaction, declining unit economics, and eroded investor confidence-could derail its progress.

For now, First Watch remains a study in contrasts: a company with a clear growth trajectory but one that must navigate a minefield of operational challenges. Investors will need to watch closely as the company's strategies play out in 2026.