FWRG Q1 Earnings Call: Margin Pressures Offset Traffic Improvements and Expansion

Breakfast restaurant chain First Watch Restaurant Group (NASDAQ:FWRG) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 16.4% year on year to $282.2 million. Its non-GAAP profit of $0.01 per share was $0.03 below analysts’ consensus estimates.

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StockStory’s Take

First Watch's first quarter results reflected a mix of steady top-line growth and mounting cost pressures. Management attributed revenue gains to positive traffic trends in key periods, continued expansion into new markets with 13 restaurant openings, and targeted marketing campaigns that improved customer engagement. CEO Chris Tomasso cited sequential improvements in restaurant traffic, particularly in March and April, as well as operational investments that drove further efficiency and lower employee turnover.

Looking ahead, management signaled that persistent inflation in core food commodities and higher labor and benefit costs will weigh on margins throughout the year. CFO Mel Hope flagged that four of the company’s top five commodities are experiencing high inflation, and that new tariffs and selective customer-facing initiatives are expected to continue pressuring profitability. Despite these headwinds, Tomasso emphasized the company’s confidence in its unit growth strategy and its ongoing marketing efforts to support traffic, while acknowledging that margin recovery will depend on relief from commodity costs and careful cost management.

Key Insights from Management’s Remarks

Management’s remarks outlined several operational and market factors that shaped the quarter’s results, highlighting the interplay between growth initiatives and profit headwinds.

• Traffic Trend Recovery: Sequential improvements in restaurant traffic, with April achieving the best monthly result in over two years, supported optimism for sustained traffic growth in upcoming quarters.
• Marketing and Customer Engagement: Enhanced digital and targeted marketing campaigns, initiated in March, led to stronger brand awareness and customer frequency, particularly in select geographies. These efforts are expected to scale further in 2025.
• Third-Party Delivery Optimization: Strategic changes with delivery partners resulted in a reversal of negative traffic trends in that channel, though at lower per-order margins.
• Commodity and Labor Cost Pressures: Higher costs in eggs, bacon, coffee, and avocados, as well as increased health benefits and labor, drove margin compression. Management cited these as largely transitory but significant in the current environment.
• Expansion into New Markets: Openings in new states, such as Massachusetts and Idaho, demonstrated the brand's geographic portability and provided evidence for management’s long-term growth target of over 2,200 U.S. locations.

Drivers of Future Performance

Management’s outlook for the remainder of 2025 focuses on driving top-line growth through new restaurant openings and marketing, while navigating cost inflation and macro uncertainty.

• Inflation and Tariff Impact: Ongoing high-single-digit inflation in key commodities and new tariffs are expected to pressure margins, with peak cost impact anticipated in the second quarter before some relief later in the year.
• Growth Through New Units: Continued double-digit percentage growth in restaurant openings, especially in untapped markets, is viewed as the primary engine for revenue expansion.
• Customer-Facing Initiatives: Programs like “surprise and delight” and increased portion sizes are intended to build loyalty and frequency, but may continue to affect short-term profitability if not carefully managed.

Top Analyst Questions

• Andrew Charles (TD Cowen): Asked about the sustainability of positive traffic trends and the trade-offs between driving traffic at lower margins; management expressed confidence in the approach, citing encouraging recent results.
• Jim Salera (Stephens Inc.): Inquired about learnings from increased media spend and engagement; leadership noted early positive impacts and ongoing adjustments to optimize effectiveness across markets.
• Sara Senatore (BofA): Sought clarity on planned restaurant closures and the margin impact of customer loyalty programs; management described closures as routine and emphasized the long-term value of loyalty investments despite near-term cost pressures.
• Brian Mullan (Piper Sandler): Asked for updates on menu innovation and beverage expansion; management confirmed continued testing of new beverage options to drive incremental sales.
• Gregory Francfort (Guggenheim Securities): Queried long-term margin targets and third-party delivery dynamics; management reiterated a restaurant-level margin target of 18-20% and discussed partnership benefits in off-premise channels.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will track (1) whether traffic trends remain positive in both dine-in and delivery channels, (2) if commodity and labor cost inflation begin to ease as anticipated in the second half of the year, and (3) the success of new market entries and continued restaurant expansion. The effectiveness of marketing initiatives in driving repeat visits and the impact of loyalty programs on customer retention will also be important indicators of progress.

First Watch currently trades at a forward P/E ratio of 40.8×. Should you load up, cash out, or stay put? The answer lies in our free research report.

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