First Watch Restaurant Group, Inc. Q3 FY2026 earnings call

• Sales Performance: Total revenue grew 10.7%, driven by positive same-restaurant sales (+1%) and contributions from non-comp locations. Same-restaurant traffic declined 1.9%, attributed to planned strategic sales transfers from new openings and brand broadening. Over a two-year horizon, same-restaurant sales increased 8.1% with traffic up 0.8%.
• Profitability & Margins: Restaurant-level operating margin was 19.4% (down 30 basis points YoY) due to higher food/beverage costs and controllable expenses. Adjusted EBITDA rose 17% to $39.7 million, with margin expanding to 11.4%. General and administrative expenses showed leverage, improving by 60 basis points to 10.1% of revenue.
• Strategic Marketing Initiatives: Management launched a pilot for "TikTok Go" in Q4 to test online-to-offline discovery tools, leveraging TikTok's large user base. Additionally, local linear television advertising pilots showed encouraging results in building awareness in challenging markets, complementing digital investments.
• Development & Growth: The company remains America's fastest-growing full-service restaurant brand, with 53 net openings year-to-date across 22 states. New restaurant classes (2025/2026) are outperforming comp units and underwriting targets. The pipeline is robust, with sites developed for late 2028.
• Operational Efficiency: Efforts to improve labor efficiency through better alignment of management staffing with restaurant maturity have begun to yield benefits. Wage inflation was approximately 4.1%. Food and beverage costs were 22.3% of sales, impacted by commodity deflation in bacon and avocados but offset by turkey sausage price increases.

First Watch operates as a single reportable segment (full-service daytime dining restaurants). For the third quarter of fiscal year 2026, total revenue was $349.9 million, representing an increase of nearly 11% year-over-year. The company opened 16 new system-wide restaurants during the quarter, contributing to growth alongside positive same-restaurant sales. Revenue contribution is entirely from this core restaurant segment.

• Full-Year Same-Restaurant Sales: Raised guidance to approximately 2% growth, up from the previous range of 1.5% to 3%.
• Total Revenue Growth: Raised guidance to approximately 13.5%, up from the previous range of 12.5% to 14%.
• Adjusted EBITDA: Raised guidance to approximately $136 million, at the high end of the previous range ($133–$136 million).
• Unit Growth: Guided to 60 net new system-wide restaurants in 2026 (53 company-owned, 9 franchise-owned), including closures.
• Commodity Inflation: Revised to be approximately flat for the full year, down from the previous expectation of flat to +1.5%, driven by reduced inflation expectations for bacon and avocados.
• Labor Cost Inflation: Expected to be around 4% for the full year.
• Capital Expenditures: Reduced guidance to approximately $145 million, down from the previous range of $145–$150 million.
• Long-Term Targets: Raised long-term adjusted EBITDA annual growth target through 2028 to greater than 15%, up from the prior 11%–14% range. Other long-term targets (same-restaurant sales 2–4%, total revenue growth 10–13%) remain unchanged.
• Future Unit Guidance: Announced that future annual unit growth targets will be disclosed on the prior year’s third-quarter conference call to maintain flexibility amid rising interest rates.

• Consumer Environment: The consumer landscape remains dynamic and challenging, with persistent pressure on discretionary spending, though First Watch’s higher-income demographic appears somewhat insulated.
• Interest Rates: Rising interest rates are impacting the cost of capital and potentially affecting developer activity, reinforcing the need for flexibility in development pace.
• New Restaurant Performance: While current classes are outperforming, there is inherent risk in scaling operations and ensuring consistent performance across a diverse geographic footprint.
• Marketing Effectiveness: New marketing initiatives (TikTok, linear TV) are in pilot phases; their ability to sustainably drive traffic and transactions at scale is not yet fully proven.
• Cost Inflation: Although currently favorable, commodity and labor cost inflation could revert to normal or higher ranges in future periods.

Q: Jim Salera asked about near-term consumer trends following sequential traffic deceleration and sought details on the drivers behind the raised adjusted EBITDA growth target (>15%).

A: CEO Chris Tomasso noted that First Watch’s higher-income, educated customer base remains resilient with stable behavior. CFO Ashlee Weisser explained that the EBITDA growth is driven by redeploying labor from new openings to accelerate maturity of existing stores and improved G&A leverage from historical investments. Tomasso added that reduced unit count lowers long-term headwinds from planned sales transfers.

Q: Todd Brooks asked about the competitive landscape, noting competitors seem less aggressive in expansion compared to First Watch’s continued growth.

A: Tomasso confirmed that many competitors in the daytime dining segment are contracting or slowing down. First Watch has secured key market positions ('fortressing') and holds an undisputed lead, allowing it to continue aggressive growth while focusing on shareholder value creation without needing to race for every site.

Q: Aisling (for Sara Senatore) asked how much of the Q4 same-store sales outlook (~1%) reflects pricing step-downs and whether weekday breakfast trends differed from weekend brunch.

A: Weisser clarified that carry pricing steps down slightly in Q4 due to the roll-off of August promotions. She noted that Q4 historically sees a step-down from Q3, which is already factored into guidance. Regarding breakfast, weekday trends mirrored weekend performance, with no significant evidence of trading in from QSRs, but overall performance met expectations.

Q: Andy Barish asked about the shift in marketing spend timing and its impact on Q4, given the unpredictability of the quarter.

A: Weisser explained that some marketing expenses originally timed for Q3 were shifted to Q4 to capitalize on potential upside in a historically unpredictable period. This timing adjustment contributed to the strong G&A leverage seen in Q3 and aims to support better-than-expected Q4 results.

Q: Brian Vaccaro asked for elaboration on store-level profitability initiatives and whether store margins contribute to the >15% EBITDA growth target.

A: Weisser cited right-sizing management staff per restaurant (reducing fractional manager overhead) as a key driver. She confirmed that restaurant margin improvement is indeed part of the 'new algorithm' for future growth, supporting the elevated EBITDA targets through 2028.