First Watch (FWRG)

Breakfast restaurant chain First Watch Restaurant Group (NASDAQ:FWRG) reported Q3 CY2025 results beating Wall Street’s revenue expectations, with sales up 25.6% year on year to $316 million. Its GAAP profit of $0.05 per share was $0.02 below analysts’ consensus estimates.

Company Overview

Based on a nautical reference to the first work shift aboard a ship, First Watch (NASDAQ:FWRG) is a chain of breakfast and brunch restaurants whose menu is heavily-focused on eggs and griddle items such as pancakes.

Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.

Competitors offering breakfast fare include IHOP owner Dine Brands (NYSE:DIN), Denny’s (NASDAQ:DENN), The Cheesecake Factory (NASDAQ:CAKE), and private company Waffle House.

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $1.17 billion in revenue over the past 12 months, First Watch is a mid-sized restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can still flex high growth rates because it’s working from a smaller revenue base.

As you can see below, First Watch’s sales grew at an excellent 18.8% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new restaurants and increased sales at existing, established dining locations.

This quarter, First Watch reported robust year-on-year revenue growth of 25.6%, and its $316 million of revenue topped Wall Street estimates by 1.9%.

Looking ahead, sell-side analysts expect revenue to grow 17.4% over the next 12 months, similar to its six-year rate. Still, this projection is noteworthy and suggests the market sees success for its menu offerings.

Number of Restaurants

A restaurant chain’s total number of dining locations often determines how much revenue it can generate.

First Watch operated 620 locations in the latest quarter. It has opened new restaurants at a rapid clip over the last two years, averaging 10.2% annual growth, much faster than the broader restaurant sector. This gives it a chance to become a large, scaled business over time.

When a chain opens new restaurants, it usually means it’s investing for growth because there’s healthy demand for its meals and there are markets where its concepts have few or no locations.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at restaurants open for at least a year.

First Watch’s demand within its existing dining locations has been relatively stable over the last two years but was below most restaurant chains. On average, the company’s same-store sales have grown by 1.8% per year. This performance suggests it should consider improving its foot traffic and efficiency before expanding its restaurant base.

In the latest quarter, First Watch’s same-store sales rose 7.1% year on year. This growth was an acceleration from its historical levels, which is always an encouraging sign.

First Watch has bad unit economics for a restaurant company, giving it less room to reinvest and grow its presence. As you can see below, it averaged a 21.2% gross margin over the last two years. That means First Watch paid its suppliers a lot of money ($78.82 for every $100 in revenue) to run its business.

This quarter, First Watch’s gross profit margin was 21.5%, in line with the same quarter last year. On a wider time horizon, First Watch’s full-year margin has been trending down over the past 12 months, decreasing by 1.8 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs (such as ingredients and transportation expenses).

Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the business in motion, including food costs, wages, rent, advertising, and other administrative costs.

First Watch was profitable over the last two years but held back by its large cost base. Its average operating margin of 3% was weak for a restaurant business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, First Watch’s operating margin decreased by 2.3 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. First Watch’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, First Watch generated an operating margin profit margin of 3.2%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

First Watch’s full-year EPS flipped from negative to positive over the last six years. This is encouraging and shows it’s at a critical moment in its life.

In Q3, First Watch reported EPS of $0.05, up from $0.03 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects First Watch’s full-year EPS of $0.08 to grow 289%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Over the last two years, First Watch’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 2.2%, meaning it lit $2.15 of cash on fire for every $100 in revenue.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

First Watch historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.1%, somewhat low compared to the best restaurant companies that consistently pump out 15%+.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

First Watch burned through $30.41 million of cash over the last year, and its $982.9 million of debt exceeds the $20.71 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the First Watch’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of First Watch until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by how significantly First Watch blew past analysts’ same-store sales expectations this quarter. We were also glad its EBITDA outperformed Wall Street’s estimates. On the other hand, its EPS was in line. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 9.6% to $17.40 immediately after reporting.

Updated: December 3, 2025 at 9:38 PM EST

When considering an investment in First Watch, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

First Watch isn’t a terrible business, but it isn’t one of our picks. Although its revenue growth was exceptional over the last six years, it’s expected to deteriorate over the next 12 months and its cash burn raises the question of whether it can sustainably maintain growth. And while the company’s new restaurant openings have increased its brand equity, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

First Watch’s P/E ratio based on the next 12 months is 53.5x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $22.36 on the company (compared to the current share price of $17.93).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.