First Watch Restaurant (FWRG) - 2025 Q2 - Quarterly Report

Part I - Financial Information This section presents the company's unaudited financial statements and management's analysis of its financial condition and operational results Item 1. Financial Statements (Unaudited) Unaudited financial statements show increased assets and liabilities, revenue growth, but declining net income due to rising costs and interest expenses Consolidated Balance Sheet Highlights (as of June 29, 2025) | Account | June 29, 2025 ($ in thousands) | December 29, 2024 ($ in thousands) | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | 19,177 | 33,312 | ▼ -42.4% | | Total assets | 1,675,993 | 1,514,356 | ▲ 10.7% | | Long-term debt, net | 250,009 | 189,043 | ▲ 32.2% | | Total liabilities | 1,074,680 | 918,967 | ▲ 17.0% | | Total equity | 601,313 | 595,389 | ▲ 1.0% | Consolidated Statements of Operations Highlights | Metric | Thirteen Weeks Ended June 29, 2025 ($ in millions) | Thirteen Weeks Ended June 30, 2024 ($ in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | $307.9M | $258.6M | ▲ 19.1% | | Income from Operations | $7.3M | $16.4M | ▼ 55.5% | | Net Income | $2.1M | $8.9M | ▼ 76.4% | | Diluted EPS | $0.03 | $0.14 | ▼ 78.6% | | Metric | Twenty-Six Weeks Ended June 29, 2025 ($ in millions) | Twenty-Six Weeks Ended June 30, 2024 ($ in millions) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenues | $590.1M | $501.0M | ▲ 17.8% | | Income from Operations | $8.4M | $28.7M | ▼ 70.7% | | Net Income | $1.3M | $16.1M | ▼ 92.1% | | Diluted EPS | $0.02 | $0.26 | ▼ 92.3% | Consolidated Statements of Cash Flows Highlights (Twenty-Six Weeks Ended) | Cash Flow Activity | June 29, 2025 ($ in thousands) | June 30, 2024 ($ in thousands) | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | 59,570 | 56,893 | ▲ 4.7% | | Net cash used in investing activities | (132,849) | (135,355) | ▼ 1.9% | | Net cash provided by financing activities | 59,144 | 73,863 | ▼ 19.9% | | Net decrease in cash and cash equivalents | (14,135) | (4,599) | ▲ 207.4% | - During the second quarter of 2025, the company acquired 19 franchise-operated First Watch restaurants for a total cash purchase price of approximately $56.2 million[33][34] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 19.1% driven by new restaurants and sales, but profitability declined due to 8.1% commodity and 3.9% wage inflation Recent Developments and Business Trends Q2 2025 saw 17 new restaurants, 19.1% revenue growth, and positive same-restaurant traffic, but faced 8.1% commodity and 3.9% wage inflation Q2 2025 Key Performance Highlights (vs. Q2 2024) | Metric | Q2 2025 ($ in millions) | Q2 2024 ($ in millions) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $307.9M | $258.6M | ▲ 19.1% | | System-wide Sales | $346.2M | $299.0M | ▲ 15.8% | | Same-restaurant Sales Growth | 3.5% | -0.3% | ▲ 3.8 p.p. | | Same-restaurant Traffic Growth | 2.0% | -4.0% | ▲ 6.0 p.p. | | Restaurant Level Operating Profit Margin* | 18.6% | 21.9% | ▼ 3.3 p.p. | | Adjusted EBITDA* | $30.4M | $35.3M | ▼ 14.0% | - The company experienced its first quarter of positive same-restaurant traffic growth (2.0%) since Q1 2023 and expects this positive trend to continue through the second half of the year[80] - Significant cost pressures were observed, with commodity inflation at 8.1% in Q2 2025, driven by eggs, coffee, avocado, and bacon, with full-year commodity inflation now projected to be between 5% and 7%, and restaurant-level wage inflation at 3.9% in the quarter[81][82] Results of Operations Q2 2025 restaurant sales grew 19.4% but operating costs, including food, beverage, and labor, increased as a percentage of sales, leading to a 55.5% decline in income from operations - Total restaurant sales increased by 19.4% in Q2 2025, driven by $30.1 million from 55 new restaurants opened in the last year and $7.0 million from 19 acquired franchise locations[101] - Food and beverage costs rose to 23.6% of restaurant sales in Q2 2025, up from 21.8% in Q2 2024, primarily due to commodity inflation in eggs, coffee, bacon, and avocados[106] - Labor and other related expenses increased to 33.2% of restaurant sales from 32.8% in the prior year, driven by higher wage rates and health insurance costs[108] - Pre-opening expenses surged 91.8% to $3.5 million in Q2 2025, reflecting an increase in pre-opening rent and a higher number of new restaurants under construction[118] - Net income for Q2 2025 fell sharply to $2.1 million from $8.9 million in Q2 2024, a decrease of 76.3%, as rising operating and interest expenses outpaced revenue growth[137] Non-GAAP Financial Measures Reconciliations Reconciliations of non-GAAP measures show Q2 2025 Adjusted EBITDA at $30.4 million and Restaurant Level Operating Profit at $56.8 million Adjusted EBITDA Reconciliation (Thirteen Weeks Ended) | (in thousands) | June 29, 2025 | June 30, 2024 | | :--- | :--- | :--- | | Net income | $2,106 | $8,900 | | Depreciation and amortization | 18,136 | 14,536 | | Interest expense | 4,003 | 3,381 | | Income tax expense | 1,470 | 4,879 | | Stock-based compensation | 2,790 | 2,452 | | Transaction expenses, net | 919 | 725 | | Other adjustments | 955 | 452 | | Adjusted EBITDA | $30,379 | $35,325 | Restaurant Level Operating Profit Reconciliation (Thirteen Weeks Ended) | (in thousands) | June 29, 2025 | June 30, 2024 | | :--- | :--- | :--- | | Income from operations | $7,313 | $16,447 | | Less: Franchise revenues | (2,904) | (3,104) | | Add: General and administrative expenses | 33,185 | 27,189 | | Add: Depreciation and amortization | 18,136 | 14,536 | | Add: Other adjustments | 1,046 | 878 | | Restaurant level operating profit | $56,776 | $55,946 | Liquidity and Capital Resources The company holds $19.2 million cash and $87.4 million credit availability, projecting $148.0 million to $152.0 million in 2025 capital expenditures - As of June 29, 2025, the company had $19.2 million in cash and cash equivalents and $87.4 million available under its $125.0 million revolving credit facility[150] - Estimated capital expenditures for 2025 are projected to be between $148.0 million and $152.0 million, excluding capital for franchise acquisitions[152] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risk is commodity price volatility, with 2025 inflation projected at 5% to 7%, and no other material changes to market risk exposure - The company updated its full-year 2025 commodity inflation projection to a range of 5% to 7%[158] Item 4. Controls and Procedures Disclosure controls and procedures were deemed ineffective due to ongoing material weaknesses in internal control over financial reporting, with remediation efforts underway - The CEO and CFO concluded that as of June 29, 2025, the company's disclosure controls and procedures were not effective due to ongoing material weaknesses in internal control over financial reporting[162][164] - The company is implementing remediation efforts, which include: - Hiring new leadership with public company experience in finance, accounting, and IT - Augmenting staff with expertise in income tax, internal audit, and legal - Establishing formal policies for delegation of authority, account reconciliation, and journal entries - Designing and implementing enhanced period-end financial reporting controls and a formal management Disclosure Committee[165][166] - Changes to internal controls were made during the quarter ended June 29, 2025, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting as part of the remediation plan[168] Part II - Other Information This section covers legal proceedings, risk factors, and other pertinent information not included in the financial statements Item 1. Legal Proceedings The company is involved in ordinary course legal actions, not expecting a material adverse effect on financial position or operations - The company states that it does not currently believe any ongoing legal proceedings will have a material adverse effect on its financial condition or operations[170] Item 1A. Risk Factors No material changes to risk factors have been reported since the 2024 Form 10-K disclosure - No material changes have been made to the risk factors disclosed in the 2024 Form 10-K[171] Item 5. Other Information Chief People Officer Laura Sorensen adopted a Rule 10b5-1 trading plan for up to 246,625 shares, effective through June 30, 2026 - On June 11, 2025, Chief People Officer Laura Sorensen adopted a Rule 10b5-1 trading plan for the potential sale of up to 246,625 shares, valid through June 30, 2026[176][177]