First Watch will take more traffic, even if it costs more

April traffic hit a two-year high. | Photo: Shutterstock

First Watch is OK with taking some short-term pain for long-term gain.

The daytime-dining chain is investing aggressively in boosting traffic at a time of consumer uncertainty, even if it means sacrificing some margin in the process.

It is increasing portion sizes without raising prices, for instance, and empowering managers to give away the occasional free juice or entree. It also changed its pricing structure on DoorDash to drive more business there, albeit at lower margins.

First Watch’s same-store traffic was down 0.7% year over year in the first quarter, but it turned positive in April, when the chain saw its best same-store traffic result in over two years. Third-party delivery traffic, meanwhile, shifted from negative to positive in the mid-teens in the first quarter.

But restaurant-level margins fell more than 4 points year over year, to 16.5%, and First Watch reported a net loss of $829,000. It also downgraded its earnings expectations for the year.

Its stock price plunged after the results were announced Tuesday and was down more than 17% when markets closed.

Food and labor inflation were responsible for much of the chain’s bottom line troubles. Like most restaurants these days, First Watch is paying more for eggs, bacon, coffee and avocados, all of which are selling for “remarkably high prices,” said CFO Mel Hope. Commodity inflation was 7.7% in the quarter. Labor inflation also rose 4.1% due to an increase in benefits costs and the hiring of extra managers to help open new locations. 

But First Watch’s traffic-driving investments also had some impact on its profitability. The “surprise and delight” free giveaways cost more than the chain had anticipated, Hope said. And the doubling of meat portions in the popular Tri-Fecta breakfast increased demand for the dish just as bacon prices were spiking.

These are trade-offs the chain says it is willing to make. “[We have] a lot of confidence here around our ability to move the needle and get the consumer engaged with us,” CEO Chris Tomasso said during an earnings call Tuesday. “But the costs that we’re dealing with, we are confident that they’re not permanent. So we’re really focused on the top line.”

On the surprise and delight program specifically, Tomasso said managers are excited about it and that it’s a great way to build loyalty. “I think our teams are doing a great job with it and we’ll just manage it appropriately with them as the year goes on,” he said.

Signaling its confidence in this approach, First Watch left its top line guidance for the year unchanged. It still expects same-store sales growth in the low single digits and same-store traffic of flat to slightly positive. 

But it significantly lowered its forecast for earnings before interest, taxes depreciation and amortization (EBITDA). It’s now expecting EBITDA of $114 million to $119 million, down from $124 million to $130 million. 

Hope said this was primarily due to higher costs and the impact of tariffs on packaging and paper supplies.

On the development front, Bradenton, Florida-based First Watch continues to open new restaurants at a fast clip. It opened 13 new locations in the quarter in 10 states and now has 584 total. 

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