First Watch Restaurant Group, Inc. (FWRG) Earnings

Management highlights

- Traffic and Sales Trends * Comparable restaurant traffic improved 160 basis points sequentially from Q1, reaching positive traffic in June 2026; Q2 same-restaurant traffic was effectively flat (-0.4% reported), with the small negative driven entirely by expected sales transfer from new restaurant openings that is within underwriting expectations. * First Watch outperformed the broader casual dining industry and overall restaurant sector in Q2, per Black Box data. - Marketing and Brand Building * Expanded data-informed marketing strategy implemented in early 2025 has driven significant brand growth: unaided awareness increased 50% and aided awareness increased 15% over that period. The brand ranks in the top decile for future purchase intent among national and regional breakfast competitors. * Current marketing focuses on increasing visit frequency from existing customers and building consideration among new customers; 17% of new customers from 2026 targeted acquisition campaigns have already returned for a second visit, above the company's historical average. * The strategy prioritizes targeted video advertising (YouTube, connected TV) for localized demographic targeting, and expanded influencer/social media tactics to drive authentic, customer-centric engagement; the company uses a test-learn-act framework to reallocate spend to the highest-ROI channels, messages, and markets. - Menu Innovation * The new core menu launched in February 2026 has delivered expected positive sales mix, with increased engagement across offerings, higher add-on participation, and more selection of premium options; per person check growth has outpaced carried pricing for two consecutive quarters. * Seasonal limited-time offering (LTO) strategy continues to drive strong results: the winter/spring 2026 Jumpstart menu featured the all-time best-selling LTO (Jimmy Cherry Steak and Eggs Hash), and the current summer LTO Chipotle Steak and Queso Hash is on track to become the second best-selling LTO of all time. The summer menu's Honey Butter Biscuit Bites is the highest-mix shareable appetizer since Million Dollar Bacon. * Culinary innovation is a core competitive advantage that keeps the brand fresh and differentiated, with cross-functional collaboration to test new offerings that work for both customers and restaurant operations. - New Restaurant Development * First Watch maintains its position as America's fastest-growing full-service restaurant brand, with a robust pipeline of over 100 active development projects. The company entered its 33rd state (New Hampshire) in Q2, where the opening location has materially outperformed sales expectations. * 2025 and 2026 new restaurant classes are outperforming both the comp restaurant base and original underwriting sales targets, with the 2026 class tracking to a 35% three-year cash on cash return against a $2.8 million three-year sales target and $1.8 million net build-out cost. The company's total addressable market remains over 2,200 U.S. locations. - Long-Term Strategic Update * After exceeding original long-term growth targets set post-IPO, management and the board have optimized long-term strategy to balance unit growth and free cash flow generation. Starting in 2027, the company will target 50 company-owned new restaurant openings per year (55 total system-wide), down from prior higher unit growth targets, to enable self-funding of all organic growth and capital expenditures while building balance sheet strength.

Guidance

- Updated 2026 full-year guidance includes the following revisions from prior targets: * Same-restaurant sales growth range revised upward to 1.5% to 3% from 1% to 3% previously; management still expects positive same-restaurant sales in all four quarters of 2026, with Q3 growth expected to be at or below the low end of the range due to a challenging year-over-year comparison. * Total revenue growth range revised upward to 12.5% to 14% from 12% to 14% previously, with ~100 basis points of the growth contribution from completed acquisitions. Full-year carry pricing is expected to hit ~3.6%, following a 2.9% price increase implemented at the start of Q3. * Net new system-wide restaurant range narrowed to 60 to 62, with 53 to 54 company-owned openings and 9 to 10 franchise-owned openings (this reflects 2 total closures year-to-date, with openings balanced between H1 and H2 after pulling some openings into Q2, remaining company-owned openings weighted to Q4). * Full-year commodity inflation guidance revised downward to flat to +1.5% from 1% to 3% previously; this reduction is fully offset by the temporary higher cost impact of strong demand for premium beef menu offerings. * Restaurant-level labor cost inflation expected to come in between 3.5% and 4.5%. * Adjusted EBITDA guidance set to a range of $133 million to $136 billion; the downward revision from original expectations is entirely due to stronger-than-anticipated demand for higher-cost premium beef LTO offerings, which management views as a positive signal of product innovation strength. * Capital expenditure guidance lowered to $145 million to $150 million from $150 million to $160 million previously, driven by timing shifts of certain development spend to 2027. * Marketing investment is set at ~2% of total 2026 revenue, up 40 basis points from 2025. - Updated long-term targets starting in 2027: * 55 total system-wide new restaurant openings annually (50 company-owned, 5 franchise-owned). * 2% to 4% same-restaurant sales growth (positive underlying traffic net of planned sales transfer from new openings). * 10% to 13% total annual revenue growth. * G&A expense growth lower than total revenue growth. * 11% to 14% annual adjusted EBITDA growth. * Positive free cash flow starting in 2027, increasing annually thereafter.

Segment performance

First Watch operates as a single-segment daytime full-service restaurant business with 665 total system-wide restaurants at the end of Q2 FY2026. Total Q2 2026 revenue increased 15.2% year-over-year to $354.7 million, driven by 3.4% same-restaurant sales growth, contributions from 132 non-comparable restaurants (including 57 company-owned new openings and 19 acquired franchise locations from Q2 2025), and a $2.4 million revenue contribution from recent acquisitions. Food and beverage expense was 23.5% of total revenue, a 10 basis point YoY improvement, driven by 3.7% carried pricing and 1.6% commodity deflation (led by eggs, avocados, and bacon, partially offset by higher coffee prices and unanticipated higher mix of premium beef offerings). Labor and related expenses were 32.9% of total revenue, a 30 basis point YoY improvement driven by staffing model optimizations and sales leverage, partially offset by 4.1% wage inflation. Restaurant-level operating profit margin hit 18.8%, a 20 basis point YoY improvement. General and administrative expenses were $38.7 million, or 10.9% of total revenue, up YoY due to timing of marketing spend and additional headcount to support growth. Adjusted EBITDA increased 13.5% YoY to $34.5 million, with an adjusted EBITDA margin of 9.7%. Net income for the quarter was $2.3 million. 18 new system-wide restaurants opened in Q2 (14 company-owned, 4 franchise-owned) with 1 franchise closure.

Risks & headwinds

- Q3 2026 has the most challenging year-over-year comparable sales base of any quarter in 2026, which is expected to result in Q3 same-restaurant sales growth at or below the low end of the full-year guidance range. * Commodity prices, particularly for high-cost items like beef and coffee, can create unexpected margin pressure if customer demand for premium offerings featuring these items outpaces original planning. * Maintaining higher historical unit growth rates would require increasing G&A investment for additional development, training, and support staff, and would require reliance on credit facility funding for capital expenditures rather than self-funding from operating cash flow. * Current overall First Watch brand awareness remains relatively low compared to industry peers, representing a continued growth opportunity but requiring sustained marketing investment to address.

Analyst Q&A

• Q: Todd Brooks (Benchmark Stonex) asked for an update on Q2 exit traffic trends, drivers of improving momentum, and confirmation that positive same-store sales will hold in the challenging Q3 comparison. He also asked what overall traffic would be if the sales transfer impact from new restaurants were excluded. /

  A: Chris Tomasso confirmed management remains confident Q3 will deliver positive same-store sales, after sequential improvement through Q2 that resulted in positive traffic in June. The improvement comes from the combination of strong menu innovation, successful LTOs, and expanded marketing investments working together. Ashlee Weisser stated that excluding sales transfer impact, Q2 same-restaurant traffic would have been positive, and full details on sales transfer will be shared at the November 2026 Investor Day. (267 chars)

• Q: Brian Vaccaro (Raymond James) asked how the beef LTO cost headwind will moderate in the second half of 2026, and asked for an update on influencer marketing traction and expansion plans. /

  A: Ashlee Weisser explained the beef headwind is tied to the current summer LTO, which was in the quarter for 1 of 3 months in Q2 and will be present for 2 of 6 months in the second half, so the impact will moderate as expected after the LTO concludes in mid-August. Chief Brand Officer Matt Eisenacher stated influencer marketing has been a bright spot in the media mix in 2026, driving increased paid performance and organic user-generated content, and the share of influencer spend will continue to increase in 2027. (358 chars)

• Q: Jim Solera (Stevens Inc.) asked what capital allocation priorities management will pursue once free cash flow turns positive starting in 2027. /

  A: Ashlee Weisser stated all options are on the table. Additional marketing investment is a strong candidate given the current opportunity to grow low brand awareness and proven returns from recent marketing spend, alongside menu innovation investment. Larger capital allocation options (including debt paydown, incremental business investments, and share repurchases) will be discussed with the board in 2027, with no decisions finalized yet. (264 chars)

• Q: Gregory Frankfurt (Guggenheim Partners) asked how management settled on 50 annual company-owned openings as the optimal long-term target. /

  A: Chris Tomasso explained the adjustment comes from a position of strength, as the company's new restaurants continue to perform very well. Management modeled multiple growth scenarios, balancing the goal of reaching the 2,200+ location total addressable market with the new priority of self-funding all growth, generating free cash flow, and strengthening the balance sheet. The lower target also avoids the incremental G&A investment that higher ongoing unit growth would require, with full details to be shared at Investor Day. (312 chars)