First Watch Restaurant (US:FWRG)2023-07-31 16:00markdown Part I. Financial Information [Item 1. Financial Statements (Unaudited)](index=5&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The unaudited financial statements for the twenty-six weeks ended June 25, 2023, show significant growth in revenues and net income compared to the prior year, with total assets increasing to $1.16 million and net cash from operating activities rising to $55.6 thousand [Consolidated Balance Sheets](index=5&type=section&id=Consolidated%20Balance%20Sheets) As of June 25, 2023, total assets grew to $1.16 million from $1.10 million at year-end 2022, primarily driven by an increase in cash and cash equivalents and goodwill, while total liabilities rose to $616.8 thousand Consolidated Balance Sheet Highlights (in thousands) | Account | June 25, 2023 (in thousands) | December 25, 2022 (in thousands) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $66,765 | $49,672 | | Goodwill | $350,491 | $345,219 | | Total assets | $1,162,618 | $1,104,446 | | **Liabilities & Equity** | | | | Total current liabilities | $109,161 | $99,980 | | Long-term debt, net | $92,174 | $94,668 | | Total liabilities | $616,781 | $581,311 | | Total equity | $545,837 | $523,135 | [Consolidated Statements of Operations and Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income) For the second quarter of 2023, total revenues increased 17.3% year-over-year to $216.3 thousand, with net income rising significantly to $8.0 thousand, and for the twenty-six weeks ended, revenues grew 19.6% to $427.7 thousand, with net income more than doubling to $17.3 thousand Q2 2023 vs Q2 2022 Performance (in thousands, except per share data) | Metric | Thirteen Weeks Ended June 25, 2023 (in thousands) | Thirteen Weeks Ended June 26, 2022 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $216,300 | $184,453 | +17.3% | | Income from Operations | $11,343 | $5,053 | +124.5% | | Net Income | $7,959 | $2,707 | +194.0% | | Diluted EPS | $0.13 | $0.05 | +160.0% | YTD 2023 vs YTD 2022 Performance (in thousands, except per share data) | Metric | Twenty-Six Weeks Ended June 25, 2023 (in thousands) | Twenty-Six Weeks Ended June 26, 2022 (in thousands) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $427,706 | $357,565 | +19.6% | | Income from Operations | $26,674 | $12,813 | +108.2% | | Net Income | $17,319 | $7,347 | +135.7% | | Diluted EPS | $0.28 | $0.12 | +133.3% | [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the first twenty-six weeks of 2023, net cash provided by operating activities increased significantly to $55.6 thousand, while cash used in investing activities was $37.2 thousand, primarily for capital expenditures and an acquisition Cash Flow Summary (in thousands) | Cash Flow Activity | Twenty-Six Weeks Ended June 25, 2023 (in thousands) | Twenty-Six Weeks Ended June 26, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $55,583 | $31,812 | | Net cash used in investing activities | ($37,170) | ($26,945) | | Net cash used in financing activities | ($1,245) | ($3,165) | | **Net increase in cash** | **$17,168** | **$1,702** | [Notes to Unaudited Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) Key notes detail a business acquisition of six franchise-owned restaurants for $8.2 million, strong growth in in-restaurant dining revenue, and the execution of a variable-to-fixed interest rate swap on $90.0 thousand of debt - On May 1, 2023, the company acquired six franchise-owned restaurants for approximately **$8.2 million** in cash[29](index=29&type=chunk) - On June 23, 2023, the company entered into variable-to-fixed interest rate swaps with an aggregate notional amount of **$90.0 thousand** to hedge its variable rate debt, paying a fixed rate of **4.16%**[39](index=39&type=chunk) - Subsequent to the quarter's end, the company acquired five more franchisee restaurants for **$8.6 million** and executed an agreement to acquire another six operating restaurants for approximately **$13.9 million**[68](index=68&type=chunk)[69](index=69&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes the strong Q2 2023 performance to a 7.8% growth in same-restaurant sales and expansion, with revenue growing 17.3% to $216.3 thousand and Adjusted EBITDA rising 45.1% to $25.8 thousand, driven by sales leverage and moderating commodity inflation [Recent Developments and Financial Highlights](index=23&type=section&id=Recent%20Developments%20and%20Financial%20Highlights) In Q2 2023, the company demonstrated robust growth with a 17.3% increase in total revenues and a 7.8% rise in same-restaurant sales, while profitability improved significantly with Adjusted EBITDA increasing to $25.8 thousand Q2 2023 Key Financial Highlights vs. Q2 2022 | Metric | Q2 2023 | Q2 2022 | | :--- | :--- | :--- | | Total Revenues | $216.3 million | $184.5 million | | Same-Restaurant Sales Growth | 7.8% | 13.4% | | Same-Restaurant Traffic Decline | (1.2)% | 8.1% | | Restaurant Level Operating Profit Margin | 20.9% | 18.2% | | Net Income | $8.0 million | $2.7 million | | Adjusted EBITDA | $25.8 million | $17.8 million | - The company opened **9 system-wide restaurants** (**6 company-owned**, **3 franchise-owned**) and acquired **6 franchise-owned restaurants** in Q2 2023[74](index=74&type=chunk) [Results of Operations](index=27&type=section&id=Results%20of%20Operations) The analysis of operations for Q2 2023 reveals a 17.0% increase in restaurant sales, driven by 7.8% same-restaurant sales growth, with food and beverage costs decreasing due to lower commodity prices, while labor costs rose due to wage increases - Restaurant sales for Q2 2023 increased by **17.0%** to **$212.6 thousand**, driven by **7.8% same-restaurant sales growth** and **$28.5 thousand** from restaurants not in the comparable base[96](index=96&type=chunk)[97](index=97&type=chunk) - Food and beverage costs as a percentage of restaurant sales decreased by **2.5 percentage points** in Q2 2023 compared to Q2 2022, primarily due to lower commodity costs, especially for pork and avocados[102](index=102&type=chunk) - Labor costs as a percentage of restaurant sales increased by **0.9 percentage points** in Q2 2023, driven by average hourly labor increases and additional staffing for dining rooms[105](index=105&type=chunk)[106](index=106&type=chunk) [Non-GAAP Financial Measures Reconciliations](index=34&type=section&id=Non-GAAP%20Financial%20Measures%20Reconciliations) The company provides reconciliations for non-GAAP measures, showing Adjusted EBITDA of $25.8 thousand for Q2 2023, a 45.1% increase, and Restaurant Level Operating Profit growth of 34.2% to $44.4 thousand, excluding specific non-operating items Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | Thirteen Weeks Ended June 25, 2023 (in thousands) | Thirteen Weeks Ended June 26, 2022 (in thousands) | | :--- | :--- | :--- | | Net income | $7,959 | $2,707 | | Depreciation and amortization | $9,441 | $8,400 | | Interest expense | $2,037 | $1,126 | | Income taxes | $2,032 | $1,336 | | Stock-based compensation | $2,125 | $2,808 | | Transaction expenses, net | $1,744 | $300 | | Other adjustments | $178 | $914 | | **Adjusted EBITDA** | **$25,816** | **$17,789** | Reconciliation of Income from Operations to Restaurant Level Operating Profit (in thousands) | Line Item | Thirteen Weeks Ended June 25, 2023 (in thousands) | Thirteen Weeks Ended June 26, 2022 (in thousands) | | :--- | :--- | :--- | | Income from operations | $11,343 | $5,053 | | Less: Franchise revenues | ($3,713) | ($2,771) | | Add: G&A, D&A, and other expenses | $36,768 | $30,797 | | **Restaurant level operating profit** | **$44,398** | **$33,079** | [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) As of June 25, 2023, the company maintained a strong liquidity position with $66.8 thousand in cash and $75.0 thousand available under its revolving credit facility, with projected capital expenditures for 2023 estimated between $100.0 thousand and $110.0 thousand - The company holds **$66.8 thousand** in cash and cash equivalents and has full availability of its **$75.0 thousand** revolving credit facility as of June 25, 2023[153](index=153&type=chunk) - Projected capital expenditures for fiscal year 2023 are estimated to be between **$100.0 thousand** and **$110.0 thousand**[155](index=155&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to interest rate risk on its variable rate debt, which it mitigated by entering into an interest rate swap agreement on June 23, 2023, to hedge $90.0 thousand of its outstanding variable rate debt at a fixed rate of 4.16% - To manage interest rate risk, the company entered into a variable-to-fixed interest rate swap on June 23, 2023, covering **$90.0 thousand** of its variable rate debt at a weighted average fixed rate of **4.16%**[161](index=161&type=chunk) [Item 4. Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were not effective as of June 25, 2023, due to previously identified material weaknesses in internal control over financial reporting, despite which the financial statements are asserted to be fairly presented, with remediation efforts underway - The CEO and CFO concluded that disclosure controls and procedures were **not effective** as of June 25, 2023, due to ongoing **material weaknesses** in internal control over financial reporting[165](index=165&type=chunk) - The company is implementing remediation efforts, which include hiring new leadership with public company experience, augmenting financial reporting capabilities, and designing new period-end financial reporting and IT controls[168](index=168&type=chunk)[172](index=172&type=chunk) Part II. Other Information [Item 1. Legal Proceedings](index=39&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in various claims and legal actions arising in the ordinary course of business but does not believe their ultimate resolution will have a material adverse effect on its financial position or results of operations - The company reports **no legal proceedings** that are expected to have a **material adverse effect** on its financial condition[173](index=173&type=chunk) [Item 1A. Risk Factors](index=39&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 25, 2022 - No **material changes** to the risk factors disclosed in the 2022 Form 10-K have occurred[174](index=174&type=chunk) [Other Items (Items 2, 3, 4, 5, 6)](index=39&type=section&id=Other%20Items) Under Items 2, 3, 4, and 5, the company reports no unregistered sales of equity securities, no defaults upon senior securities, no mine safety disclosures, and no other information, with Item 6 listing the exhibits filed with the report - The company reported **'None'** or **'Not applicable'** for Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, Mine Safety Disclosures, and Other Information[175](index=175&type=chunk)