First Watch's Q3 2025 Earnings Call: Contradictions in Marketing Strategy, Menu Pricing, Traffic Trends, and Labor Inflation

Date of Call: November 04, 2025

Financials Results

• Revenue: $316.0M, up 25.6% YOY
• Operating Margin: Restaurant-level operating profit margin 19.7%, up 80 bps YOY; income from operations margin 3.2%

Guidance:

• Updated FY25 same-restaurant sales: ~4% and same-restaurant traffic: ~1%.
• Total revenue growth expected 20%–21% (includes ~400 bps net impact from acquisitions).
• FY adjusted EBITDA expected ≈ $123M (high end of prior range).
• FY commodity inflation ≈ 6%; restaurant-level labor inflation ≈ 4%.
• Target 63–64 new system-wide restaurants (≈55 company-owned, 8–9 franchise), three planned company-owned closures.
• CapEx narrowed to ≈ $150M; blended tax rate ≈ 45%; leadership conference timing adds ~100 bps to quarterly G&A.

Business Commentary:

* Strong Financial Performance: - First Watch Restaurant Group reported total revenue of $316 million for Q3 2025, representing a 25.6% increase compared to the previous year, fueled by a 7.1% positive same-restaurant sales growth and a significant contribution from 167 new company-owned restaurants. - The growth was driven by successful new restaurant openings, positive same-restaurant sales, and strategic franchise acquisitions.

• Improved Same-Restaurant Traffic and Sales:
• The company experienced both same-restaurant traffic growth and same-restaurant sales growth, with the best quarterly performance in over two years, including a notable 2.6% improvement in in-restaurant traffic.

• This was attributed to effective changes in the third-party delivery program and the introduction of a new seasonal menu, which resonated with customers.

• Marketing and Brand Awareness:

• First Watch's marketing investments across connected TV, paid search, and social media have positively impacted brand awareness and increased aided and unaided brand recall.

• Approximately 33% of the restaurant portfolio has benefited from these marketing efforts, with encouraging results in terms of traffic and sales, indicating opportunities for broader expansion in 2026.

• Strategic Restaurant Expansion:

• The company opened 21 new restaurants during the third quarter, with a focus on second-generation sites, which contributed significantly to strong opening week sales.
• The strategy of acquiring and converting second-generation sites has resulted in record-breaking sales, enhancing the brand's presence and market appeal.

Sentiment Analysis:

Overall Tone: Positive

• Management described "strong financial results" with total revenue up 25.6%, same-restaurant sales +7.1% (traffic +2.6%), restaurant-level operating margin 19.7% (up 80 bps), and adjusted EBITDA of $34.1M (margin 10.8%), highlighting record new-restaurant openings and sustained unit economics.

Q&A:

• Question from James Salera (Stephens Inc.): I wanted to ask if you guys might help us deconstruct the traffic results given the strength you're seeing relative to the rest of the industry... how much of the incremental traffic is coming in restaurant versus through the off-prem channel? And how much is increased frequency with loyalists versus new customers?
  Response: Both in-restaurant dining and third-party delivery contributed to traffic improvement; management lacks sufficient cohort data today to split new versus repeat visits and needs more time to determine frequency effects.

• Question from James Salera (Stephens Inc.): What is helping bolster results at new openings like Dover — primo locations, extra front-end work, fanfare, etc.?
  Response: Outperformance driven by improved site selection (many second-generation sites), larger/more visible footprints, strong preopening digital/social marketing and disciplined operational execution at launch.

• Question from Anisha Datt (Barclays Bank PLC): What are your plans to expand marketing efforts in 2026? Do you need greater scale in newer markets before broader initiatives?
  Response: No specific 2026 plan disclosed; marketing focus remains targeted social/digital tactics that are efficient even in lower-density markets and the program's success supports potential expansion next year.

• Question from Andrew Barish (Jefferies LLC): How should we think about near-term (Q4) marketing spend after Q3? Any step-up or step-down?
  Response: Q3 marketing was consistent with Q1–Q2; the prior comment about lower spend related to seasonal Q4 timing — no material change to Q3 cadence.

• Question from Andrew Barish (Jefferies LLC): What operational initiatives are most responsible for handling increased demand?
  Response: A combination of tech and ops improvements (KDS, app, waitlist management), plus product/value actions (complementary coffee, portion/pricing) that boost speed, consistency and labor efficiency.

• Question from Andrew Barish (Jefferies LLC): What was menu price in 3Q and outlook for 4Q?
  Response: Carry pricing in Q3 equated to ~5% on pricing events (full-year ~3.5%); expect about a 5% pricing carry in Q4.

• Question from Todd Brooks (The Benchmark Company, LLC): What was the mix of second-generation sites for the class of '25 and will '26 inflect higher?
  Response: About 50% of 2025 openings were second-generation sites, and management expects a similar ~50% mix in 2026.

• Question from Todd Brooks (The Benchmark Company, LLC): Are you getting first looks at second-gen sites due to landlord preference or is competition for these sites intense?
  Response: As a national credit with strong performance, First Watch frequently receives priority consideration from developers and landlords.

• Question from Todd Brooks (The Benchmark Company, LLC): What were the biggest surprises/insights from leaning into marketing this year?
  Response: The most positive surprise was the high effectiveness of targeted campaigns to re-engage category users and lapsed customers, producing a repeatable playbook for expansion.

• Question from Brian Vaccaro (CGS International): Can you elaborate on the impact of marketing on Q3 comps and regional variation given it covered ~1/3 of footprint?
  Response: Marketing produced consistent positive results across geographies (including Florida); lifts were not isolated to a few markets, which supports broader scalability.

• Question from Brian Vaccaro (CGS International): You noted ~3% commodity inflation in Q3 and guided higher later — can you walk through drivers for the rest of the year?
  Response: Commodity costs moderated for eggs and avocados, while bacon and coffee remained elevated; commodity inflation steps up modestly into Q4 driven by bacon/coffee exposure.

• Question from Jon Tower (Citigroup Inc.): Are new customers acquired via marketing using the brand differently or ordering promoted/seasonal items disproportionately?
  Response: No material change in mix or behavior — marketing primarily restores top-of-mind awareness and brings customers in; mix remains healthy and stable.

• Question from Jon Tower (Citigroup Inc.): Are you changing back-of-house/kitchen design for higher-capacity new stores?
  Response: The standard production line remains unchanged and handles higher volumes; second-gen locations often provide larger back-of-house space (bigger walk-in, prep, dish areas), reducing congestion.

• Question from Jon Tower (Citigroup Inc.): Any other tech initiatives to expect in the next 12–24 months?
  Response: No specific new tech rollouts announced; management noted ongoing innovation (teased AI) but highlighted menu optimization as a primary 2026 focus.

• Question from Isaiah Austin (Bank of America): Is the breakfast daypart stabilizing and are you seeing trade-down to breakfast like in prior downturns?
  Response: Weekday breakfast was the standout daypart in Q3 with strongest traffic; management sees no evidence of a trade-down to breakfast similar to past downturns.

• Question from Isaiah Austin (Bank of America): Any customer metric shifts — higher frequency, improved value scores, awareness?
  Response: Awareness has risen sequentially and value scores have improved; early tests show signs of frequency lift but require more time to confirm.

• Question from Arian Razai (Guggenheim Securities): How has third-party delivery demand evolved since the pricing change and any promotional changes?
  Response: Delivery demand increased meaningfully after program changes and continued to grow over recent quarters; Q3 did not show an outsized one-time spike.

• Question from Arian Razai (Guggenheim Securities): Directionally, what are labor and commodity expectations for 2026?
  Response: Management is in supplier discussions; expects some commodity negotiation and modest labor inflation (including ~+$1 regulatory wage increases in some markets) but provided no firm 2026 guidance.

• Question from Andrew Charles (TD Cowen): What drove the incremental 1.1% price increase in August after 2.8% in July?
  Response: The 1.1% was planned to align pricing spreads between seasonal and core menu items and timed with the seasonal menu launch.

• Question from Andrew Charles (TD Cowen): Third-party delivery AUV rose ~40% — what is the flow-through/profitability impact?
  Response: Delivery is treated as incremental transactions; fully-loaded profitability is roughly similar to in-restaurant (slightly lower), and delivery meaningfully contributes to adjusted EBITDA.

Contradiction Point 1

Marketing Strategy and Impact on Traffic

It involves the company's approach to marketing and its impact on traffic growth, which directly affects revenue and consumer engagement.

What are the key factors affecting your commodity basket for the remainder of the year? - Brian Vaccaro(CGS International)

2025Q3: The strategy of targeting active category users and database marketing has proven effective. - Matt Eisenacher(CMO)

How is marketing impacting traffic growth? - Todd Morrison Brooks(The Benchmark Company)

2025Q2: Traction is seen in certain geographies, targeting increased customer frequency and new users of the category. Improved results in these areas versus the rest of the system. - Matt Eisenacher(CMO)

Contradiction Point 2

Menu Pricing Strategy

It involves the company's strategy for menu pricing, which directly impacts customer spending and profitability.

What were actual menu prices in Q3, and is the Q4 increase about 4%? - Andrew Barish(Jefferies LLC)

2025Q3: Menu carried pricing of all pricing events was about 5% overall in Q3, with a full-year carry of 3.5%. The fourth quarter will see about 5% pricing. - Mel Hope(CFO)

Are consumers noticing the value propositions in restaurants? - Brian Hugh Mullan(Piper Sandler & Co.)

2025Q2: Our pricing strategy is designed to offset cost increases and maintain our value proposition to consumers. Our menu pricing in Q2 included a rollback of a previous increase and a small increase in Q2. - Christopher A. Tomasso(CEO)

Contradiction Point 3

Traffic Trends and Consumer Behavior

It involves the company's assessment of traffic trends and consumer behavior, which are critical for understanding market dynamics and revenue forecasting.

Can you break down the traffic results relative to the industry's performance and explain factors driving growth in restaurant vs. off-premise channels? - James Salera(Stephens Inc.)

2025Q3: There is improvement in in-restaurant dining, and the third-party traffic has also increased, contributing to overall growth. - Christopher Tomasso(CEO)

Will dine-in traffic remain flat or positive in the second half of the year? - Andrew Marc Barish(Jefferies LLC)

2025Q2: We like the dining room traffic trend. No breakdown by sales channel, and we expect consistent trends from the second quarter. - Christopher A. Tomasso(CEO)

Contradiction Point 4

Marketing Efforts and Impact on Traffic

It highlights differing perspectives on the effectiveness and impact of marketing efforts on traffic trends, which is crucial for understanding the company's growth strategy and performance.

Can you break down the traffic results compared to industry trends and what drove growth in restaurant versus off-prem channels? Additionally, how are you boosting traffic from First Watch loyalists versus attracting new customers? - James Salera (Stephens Inc., Research Division)

2025Q3: The specific data on repeat visits versus new customers is not yet available as it requires a larger cohort. Christopher Tomasso: There is improvement in in-restaurant dining, and the third-party traffic has also increased, contributing to overall growth. - Mel Hope(CFO & Treasurer), Christopher Tomasso(CEO, President & Director)

Can you elaborate on the sales and traffic turning positive in March and April, and discuss the 2-year underlying sales improvement from March to April, considering the Easter shift? - Andrew Charles (TD Cowen)

2025Q1: Again, we're iterating as we go along, but we're pleased with the results we've seen. I think it comes to life in the form of the improved traffic trends that we're seeing. And so we're chipping away at it. And we're only in, call it, the second month of that effort. - Chris Tomasso(CEO, President & Director)

Contradiction Point 5

Labor Inflation and Cost Management

It involves differing perspectives on labor inflation expectations, which are crucial for labor cost management and overall financial planning.

How will you execute the marketing expansion in 2026 without discussing the associated spending? - Todd Brooks (The Benchmark Company, LLC, Research Division)

2025Q3: Labor is expected to be around flat at the company at the company level. Certainly, we have some input costs in terms of wages that are increasing. There is some labor inflation built in there. - Mel Hope(CFO & Treasurer)

Is there anything else to consider on the labor front aside from underlying labor inflation? - Jon Tower (Citigroup Inc. Exchange Research)

2025Q1: The biggest one that we're all doing some work on is labor and in order to manage our labor levels and to ensure we have enough to cover the demand, and so we have to call in a lot of extra people to cover shifts. - Chris Tomasso(CEO, President & Director)