First Watch Restaurant Group, Inc. (FWRG): A Bear Case Theory

Core Thesis - First Watch Restaurant Group, Inc. (FWRG) is facing significant challenges despite a recent beat-and-raise quarter, primarily due to a one-time benefit from falling egg prices rather than sustainable operational strength [2][4] Company Overview - FWRG operates 600 locations, with 85% owned and concentrated in the Southeast, focusing on the premium daytime breakfast and brunch market [3] - Average unit volumes are $2 million, with historically strong restaurant-level margins, but new unit growth in major markets is pressuring margins due to higher rents and rising capital expenditures, which have nearly doubled to $1.8 million per location over four years [3] Financial Performance - The company reported a one-time tailwind of approximately $7 million from falling egg prices, but unit economics are deteriorating, and same-store sales growth is decelerating [2][4] - Consensus EBITDA expectations for FY26 appear overly optimistic, projecting a 35% downside to $11.72 per share, with potential for a 60% downside if multiples align with peers [5] Structural Challenges - Franchisees are exiting, indicating structural challenges within the business [2] - The aggressive rollout of large new units is temporarily masking negative traffic trends, but as the benefits from new store ramp-ups fade, same-store sales are expected to decelerate significantly [4] Management and Strategy - Management incentives are linked to adjusted EBITDA growth rather than durable value creation, promoting a growth-at-any-cost strategy [6] - Rising leverage of 2.4x EBITDA and limited free cash flow generation are contributing to financial strain [4][6] Investment Outlook - FWRG is viewed as a compelling asymmetric short due to negative cash flow trends, rising costs, and weakening fundamentals, with multiple catalysts likely to drive a material rerating over the next twelve months [6]