First Watch (FWRG)

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 GAAP loss of $0.01 per share was significantly 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 can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years.

With $1.06 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 grew its sales at an exceptional 19.2% compounded annual growth rate over the last five 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’s year-on-year revenue growth was 16.4%, and its $282.2 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 20% over the next 12 months, similar to its five-year rate. This projection is admirable and suggests the market is baking in 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 584 locations in the latest quarter. It has opened new restaurants at a rapid clip over the last two years, averaging 9.6% 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 gives us insight into this topic because it measures organic growth at restaurants open for at least a year.

First Watch’s demand rose over the last two years and slightly outpaced the industry. On average, the company’s same-store sales have grown by 2% per year. This performance suggests its rollout of new restaurants could be beneficial for shareholders. When a chain has demand, more locations should help it reach more customers and boost revenue growth.

In the latest quarter, First Watch’s year on year same-store sales were flat. This was a meaningful deceleration from its historical levels. We’ll be watching closely to see if First Watch can reaccelerate growth.

Gross profit margins are an important measure of a restaurant’s pricing power and differentiation, whether it be the dining experience or quality and taste of food.

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 21.4% gross margin over the last two years. Said differently, First Watch had to pay a chunky $78.60 to its suppliers for every $100 in revenue.

In Q1, First Watch produced a 18.2% gross profit margin, marking a 4.3 percentage point decrease from 22.5% in the same quarter last year. First Watch’s full-year margin has also been trending down over the past 12 months, decreasing by 1.2 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).

First Watch was profitable over the last two years but held back by its large cost base. Its average operating margin of 3.3% was weak for a restaurant business. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, First Watch’s operating margin decreased by 1.5 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.

In Q1, First Watch’s breakeven margin was down 4.7 percentage points year on year. Since First Watch’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, and administrative overhead increased.

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 five years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, First Watch reported EPS at negative $0.01, down from $0.12 in the same quarter last 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 to perform poorly. Analysts forecast its full-year EPS of $0.17 will hit $0.36.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

First Watch broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

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 1.8%, lower than the typical cost of capital (how much it costs to raise money) for restaurant companies.

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 $25.09 million of cash over the last year, and its $837.5 million of debt exceeds the $18.61 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 struggled to find many positives in these results. Its full-year EBITDA guidance missed significantly and its EBITDA fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 5.3% to $17.60 immediately after reporting.

Updated: May 21, 2025 at 10:36 PM EDT

Before deciding whether to buy First Watch or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

First Watch isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years and Wall Street believes it will continue to grow, its relatively low ROIC suggests management has struggled to find compelling investment opportunities. And while the company’s new restaurant openings have increased its brand equity, the downside is its cash burn raises the question of whether it can sustainably maintain growth.

First Watch’s P/E ratio based on the next 12 months is 39.7x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $20.91 on the company (compared to the current share price of $15.55).

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.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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