First Watch CEO Chris Tomasso understands some might not fully appreciate the brand’s approach. But he’s been around the industry nearly three decades, making stops at Hard Rock and Cracker Barrel, before joining the daytime concept in 2006 as its CMO. And there are no shortage of cautionary tales of brands drifting when the cards were drawn.
Tomasso says First Watch won’t engage in short-term fixes at the expense of its wider goals, which remain centered on driving traffic through profitable growth, scale, and marketing that levers its core attributes. That remains true today, even as promotions flurry and First Watch grapples with consumer pressures.
The chain’s same-store sales declined 0.3 percent in Q2 as traffic declined 4 percent. Those compared year-over-year to comps growth of 7.8 percent and negative transactions of 1.2 percent (although 7.4 percent ahead of Q2 2019).
Tomasso says First Watch views its present challenge as more macro than losing share in the category. Primarily, weekday breakfast and lunch have softened (customers often replace those occasions with at-home when wallets tighten) and third-party off-premises business has crawled. Secondly, the behavior of First Watch’s repeat customers remains stable, which is encouraging, Tomasso says. But visits from infrequent diners—those who average a single trip annually—have declined, as have visits from lower-income guests.
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In all, it paints what Tomasso believes to be a transitory environment. If First Watch continues to focus on tasks that align with its larger vision, he says, “when we come out on the other side of it, we’ll be in good shape.”
First Watch’s total revenues in Q2 bumped 19.5 percent to $258.6 million and restaurant-level operating profit margin lifted to 21.9 percent from 20.9 percent. Adjusted EBITDA hiked to $35.3 million from $25.8 million in the year-ago period, and net income increased to $8.9 million from $8 million.
The chain opened seven systemwide locations in the quarter across six states and acquired 21 franchise-run units, bringing it to 538 restaurants (459 corporate and 79 franchised) through 29 states. The plan for the year is to bring 52–56 net systemwide locations, net of two corporate closures, to market (45–48 company and nine–10 franchised).
Since May 2023, First Watch has converted 45 franchised units to company owned, including its largest acquisition, which took place in Q2 when it purchased 21 North Carolina stores alongside the rights to develop in the state for $75 million. The units bought have added nearly $100 million in annual restaurant sales and 17 new DMAs for corporate development.
Tomasso said First Watch retained 94 percent of leaders, manager and above, across the 2024 acquisitions, including 100 percent of directors of ops.
The fact First Watch nearly squeaked out flat sales on traffic that improved over Q1—it was 4.5 percent to start the year—Tommaso says, is a sign of how well the brand is operating restaurants right now. Or taking rein of what it can control during turbulent conditions.
All of the brand’s KPIs in the quarter showed it was getting credit for delivering experience, he says. Guest scores improved roughly 10 percent versus the same period last year and growth in per-person average check exceeded carried price as a result of positive mix through menu innovation.
“In short, times are good for us, just not in the usual way,” he says. “Our most loyal customers expect a consistently high experience and are maintaining frequency. We’re delivering on their high expectations.”
Ticket times were more than 20 percent faster than a year ago, Tomasso adds. Employee turnover improved for the sixth straight quarter and Placer.ai data showed First Watch’s traffic share in the period increased against direct daytime competitors.
“If you look at the concepts that are discounting, we’re holding our own without having to do any of that,” he says. “We’re focused on profitable growth, doing things that align with the brand long-term.”
This has been a consistent theme for First Watch. It took 1 percent price during the last week of Q2 and will carry roughly 3.5 percent in Q3. The plan has been to raise to cover inflation, or about 3.5 percent per year, which pulled to a bit over 20 percent cumulative through the pandemic.
Tomasso says First Watch doesn’t want to get in a post-inflation walk-back where it needs to explain to customers why they’re suddenly paying more for an item that was priced lower a few months ago. “And we have that added lever that others don’t,” he says, “which is our unit growth. We’re still doing that low double-digit unit growth and our new restaurants are preforming at or above our expectations, and have been a big bright spot for us and have helped offset the decline in traffic that we’ve seen.”
To put into perspective the breadth, First Watch has added nearly 4,500 additional annual operating weeks to its model since Q2 2023.
Tomasso adds if the brand was noticing check management and things of that nature, however, and looking at its own menu pricing compared to others in the space and saw self-inflicted issues, it would address them. “But that’s really not what we’re seeing,” he says. “It really seems to be an occasion issue right now. So we are focused on our everyday value. What we have launched here recently is really stepping up the communications and focusing on our brand attributes and reminding people why they love First Watch so much. And so that’s kind of our take there. We won’t—I would say, at the discounting level that’s out there right now—that’s just not something that we would do.”
Also helping to hold the fort are weekends. Those, Tomasso says, are still pushing higher peak sales hours than before. Weekend brunch is the loftiest check average occasion for First Watch, and it’s balancing the outsized pressure during the week, “which is why our focus has been on throughput optimization in that we can serve more people when we have the demand rather than trying to create an occasion that maybe the consumer’s not open to at this point,” Tomasso says.
On that topic, he notes the brand’s data doesn’t show the weekday breakfast and lunch occasion transferring somewhere else, like an urban locale or return to work, etc. Rather, “it’s been mostly that occasion is a foregone occasion,” he says. “The consumer is either eating at home or bringing something to work, or something like that. So I don’t see it as a share situation. I think it’s an actual occasion impact.”
“As I’ve shared with investors and our teams, our approach in the current environment is to double down where we already excel,” Tomasso added on an earnings call. “Through our investments in technology, data capture and analytics, we now know and continue to learn more about First Watch customers than ever. We’re putting those insights to work. “
First Watch has accumulated an opt-in database of roughly 7 million customers. Tomasso says the chain is now analyzing and segmenting customer information by visitation patterns to tailor messaging, whether it’s delighting repeat users, reengaging lapsed gusts, or reaching a competitive set. Either way, Tomasso says the focus will be on targeting demand generation across First Watch’s own communication channels as well as paid digital media.
Going back to his earlier point, it’s a differentiated path from some others who are rolling broad-based discounting to ignite traffic. “It’s our opinion that while aggressive promotions drive short-term traffic in some instances, we view that tactic as sacrificing margin from loyal customers while also attracting temporary discount motivated customers with low recurrence rates,” Tomasso says. “We will lean into traffic-driving marketing initiatives the ‘First Watch way,’ focusing on profitable growth with messages that lever our core brand attributes to increase the frequency of targeted consumer groups.”
First Watch expects same-store sales to run negative 2 percent to flat for the year, with a mid-single digit decline in traffic. Tomasso says he doesn’t see the consumer climate improving in 2024.
As the brand works to balance things, it’s leaning on back-end innovations, too. Last year, it created a system to help managers in-restaurant see real-time labor costs. That helps them schedule and staff during weekdays and peak hours. Additionally, they have better hourly management in terms of labor and scheduling. Tomasso explains First Watch was piloting a digital scheduling platform that went “extremely well” and will roll in Q3. It’s a typical platform where employees can look at schedules, trade, and so forth. Previously, it was done manually through the manager. “This will, again, improve our efficiency and free up the manager to focus on other things,” Tomasso says.
There are three other main buckets of First Watch’s technology evolution—KDS, pay-at-the-table, and waitlist management. The brand in March announced a partnership with Up ‘n go to bring the table payment system to 420-plus corporate units. Tomasso shared in Q4 2023, citing a recent week, more than 125,000 customers elected to use the feature. Assuming 30 seconds saved per transaction at the register, it meant saving os more than 1,000 combined customer and employee hours.
That was a historic friction point at First Watch, where guests had to bring checks to the cashier. They could now scan a QR code on the check and pay without an app download or account needed.
The 20 percent ticket time improvement mentioned before, in particular, Tomasso says, is a result of of having the KDS system live for more than a year and getting reps in. “All the KPIs that we have, for the internal metrics, tell us that we’re delivering an incredible consumer experience,” he says, “Our customer experience scores are up, our ticket times are down. We’re much more accurate as it relates to reported wait-time accuracy. If we tell somebody it’ll be about 20 minutes for their table, we’re doing a lot better with that than we were even a year ago.”
