Summary
First Watch is one of the most recent restaurant IPOs to debut, and the stock has dropped nearly 40% from its initial IPO high of $25.40.
The company was founded in 1983 and now has over 430 locations, and is focused on breakfast and lunch, with healthy made-to-order dishes using fresh ingredients.
With a two-year stacked comp sales growth rate of ~19% and a goal for double-digit unit growth in 2022, it is easily one of the best growth stories industry-wide.
However, with the stock trading at nearly 20x EV/EBITDA and more than 60x FY2023 earnings estimates, I don’t see enough of a margin of safety here for starting new positions.
lolostock/iStock via Getty Images It’s been a rough H2 for the restaurant industry, attributed to the realization that inflation is less transitory than anticipated and that higher wages are needed to keep restaurants staffed. One name that’s had its IPO debut into this challenging environment is First Watch Restaurant Group ( FWRG ). With a two-year stacked comp sales growth rate of ~19% and a goal for double-digit unit growth in 2022, it is easily one of the best growth stories industry-wide. However, with the stock trading at nearly 20x EV/EBITDA and more than 60x FY2023 earnings estimates, I don’t see enough of a margin of safety here for starting new positions. (Source: Company S-1)
First Watch Restaurant Group (“First Watch”) is a Daytime Dining concept that serves made-to-order breakfast, brunch, and lunch, with a focus on fresh ingredients. The brand’s chef-driven menu has received hundreds of awards, including being named one of TripAdvisor’s ( TRIP ) best Restaurants of 2019. Some of its menu items that differentiate it from other breakfast/lunch brands are the following: A.M. Superfoods Bowl
Farm Stand Breakfast Tacos
Lemon Ricotta Pancakes, Carrot Cake and Pecan Pancakes
Power Breakfast Quinoa Bowl
Lemon Dressed Organic Mixed Greens
Red Medicine, Morning Meditation, and Kale Tonic fresh juices
The company had its IPO debut in early October, and raised over $190 million, selling 10.9 million shares at $18.00. On its second day of trading, the stock hit a high of $25.40, but it’s since plummeted 40%. To date, the company has ~430 restaurants in 28 states, with just over 75% of its store base being company-owned and the remainder franchised. Let’s take a closer look at the small-cap restaurant name below: (Source: Company Filings, Author’s Chart)
First Watch released its Q3 results in mid-November, reporting quarterly revenue of $157.4 million, up 58% from the year-ago period. Meanwhile, system-wide sales recorded strong growth, coming in 39% vs. 2019 levels despite First Watch being one of the only brands to not take price in 2021, focusing on traffic instead. The strong performance was driven by same-store sales growth of 46.2% year-over-year and 19.2% on a two-year basis, helped by a 4.8% increase in traffic on a two-year basis and a higher average check. The increase in average check has been helped by a favorable mix and the recent introduction of an alcohol program, which is now available at ~65% of system-wide restaurants. (Source: Company S-1)
Looking at the chart above, we can see that First Watch’s same-store sales growth has recovered much quicker than many other restaurant concepts, with positive traffic starting in Q2 2021 vs. 2019 levels and remaining elevated since. Based on guidance for same-store sales of ~32.5% in Q4, this strong performance is set to continue. Finally, it’s worth noting that of the 17 new restaurants opened this year, average unit volumes are coming in 16% above its legacy restaurants, with these being very encouraging numbers. Based on guidance, First Watch hopes to open 32 system-wide restaurants in FY2021, translating to mid-single-digit unit growth. (Source: Company Filings, Author’s Chart)
Moving over to First Watch’s store count above, we can see that the company has seen steady growth over the past few years, reporting a unit growth rate of ~8.3% relative to FY2017 levels (437 restaurants vs. 318 restaurants). Based on company guidance of double-digit unit growth in FY2022, we are expected to see an acceleration in unit growth rates. This would make First Watch one of the highest-growth companies industry-wide from a traffic, same-store sales, and unit growth standpoint. Assuming the company can meet the lower end of its FY2022 guided range, First Watch will end FY2022 will 485 restaurants, up from ~437 at the end of this year.
(Source: Company S-1)
Meanwhile, when it comes to long-term aspirations, the company has very ambitious goals. […]
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