First Watch's Revenue Growth Can't Mask Profit Woes as Stock Slumps

First Watch Restaurant Group (NASDAQ:FWRG) reported Q1 2025 results that underscore a stark contradiction: revenue rose 16.4% to $282.2 million, yet its stock price fell sharply, dropping 2.74% in premarket trading. The disconnect lies in a collapse of profitability metrics, rising operational costs, and cautious guidance that overshadowed top-line momentum. This article explores why investors punished the stock—and whether the pain is justified.

Revenue Growth, But at What Cost?

First Watch’s top-line expansion was driven by aggressive expansion: 13 new restaurants opened in Q1 (bringing total locations to 584) and contributions from recent acquisitions. System-wide sales rose 11.5% to $323 million, while same-restaurant sales inched up 0.7%. However, this modest growth relied on price hikes rather than increased customer visits—same-restaurant traffic actually declined 0.7%.

The problem? Costs rose faster than revenue. Food and beverage expenses jumped 27.6% year-over-year to $66.6 million, while labor costs surged 21.5% to $96.8 million. Combined with pre-opening costs for new locations and supply chain pressures, these expenses eroded margins.

Profitability in Freefall

The financial results painted a dire picture:
- Net income swung to a $(0.8) million loss ($0.01 per share), compared to $7.2 million profit ($0.12 per share) in Q1 2024.
- Adjusted EBITDA fell 20% to $22.8 million, with margins contracting to 8.1% from 11.8%.
- Operating margin collapsed to 0.4%, down from 5.1%, signaling severe inefficiencies.

Guidance Cuts Signal Long Road to Recovery

Management revised its 2025 Adjusted EBITDA guidance to $114–119 million, down from a prior range of $124–130 million. Even with projected 20% revenue growth (including a 4% boost from acquisitions), the company now expects margin pressures to persist. CEO Chris Tomasso acknowledged the challenges: “We’re navigating macroeconomic headwinds while investing in growth.”

Investors, however, are skeptical. The lowered guidance suggests that scaling profitability may require years, not quarters. Meanwhile, capital expenditures of $150–160 million for new locations and remodels will strain cash flow further.

Why the Stock Slump?

The market’s reaction reflects three critical concerns:
1. Profitability Sustainability: Can First Watch manage costs while expanding? The Q1 results show a 400-basis-point margin contraction in just one year.
2. Traffic Troubles: Declining same-restaurant visits despite price hikes suggest customers are price-sensitive or shifting to competitors.
3. Debt and Liquidity: While not explicitly mentioned, the net loss and capital-heavy growth strategy raise questions about financial flexibility.

Is There a Silver Lining?

The company has a robust development pipeline, with plans to add 59–64 locations in 2025. Same-restaurant sales guidance of “low-single-digit growth” for the full year hints at stabilization. Additionally, franchise-owned units (now 14.7% of total locations) require less upfront capital, potentially easing cash flow pressures.

Conclusion: A Risky Bet on Turnaround

First Watch’s Q1 results reveal a company caught between growth ambitions and margin realities. While revenue growth is undeniable, profitability has cratered, and investors are demanding proof that management can reverse the trend.

The data is clear:
- Net income dropped 106% year-over-year, while EBITDA fell $5.8 million.
- Same-restaurant traffic decline of 0.7% signals underlying demand issues.
- Guidance cuts underscore that profitability recovery is not imminent.

For investors, FWRG’s stock drop reflects skepticism about its ability to balance growth and cost control. Unless margins rebound sharply—and traffic improves—this remains a high-risk play. With the restaurant industry already struggling (Zacks Industry Rank: bottom 23%), First Watch’s path to profitability is far from certain.

Final Take: Avoid FWRG until profitability stabilizes. The stock’s 2.74% premarket drop isn’t a blip—it’s a warning that the company’s expansion party may have come at the expense of its bottom line.