Newly public First Watch Restaurant Group Inc. only serves breakfast, brunch and lunch, so none of its staff ever works a dinner rush.
That’s a selling point during a tight labor market, according to Chris Tomasso, chief executive of the company, which began trading on October 1. First Watch restaurants operate one shift, from 7 a.m. to 2:30 p.m. and have one main menu with all dishes made-to-order. According to the company’s prospectus, there are no microwaves, heat lamps or deep fryers in its kitchens.
“Back in 2019, that was one of the toughest labor markets we have ever seen with the lowest unemployment in a long time. We were still fully staffed. We were still an employer of choice,” Tomasso told MarketWatch.
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“Now we’re able to differentiate ourselves again. One shift per day, you get to have a wonderful job in the hospitality industry and you’re still able to be home with your families.”
Not only is First Watch able to find interested candidates, Tomasso says the company can keep them, with the average tenure for those at the director and regional director level exceeding a decade.
“All of that combined means we don’t have to deal with the same kinds of crises,” said Tomasso.
““The period between 2 p.m. and 6 p.m. is kind of a dead zone for a lot of restaurants. It’s really a lot of expenses for a lot of restaurants. We don’t have that dead zone.””
— Chris Tomasso, chief executive, First Watch Restaurant Group Inc.
Labor shortages have turned into a problem for a number of companies, including dining chains that have struggled to fill open positions. Domino’s Pizza Inc.
attributed declines in its third-quarter earnings to staffing issues.
See: Domino’s says U.S. orders declined in third quarter due to impact of staffing shortages
And BJ’s Restaurants Inc.
said during its third-quarter results that it had to cut menu items and operating hours due to staffing challenges.
Companies have raised wages and added perks like education and childcare benefits to attract and retain workers. But most restaurants are open in the evenings to serve dinner and even late night food and drinks. Not the case with First Watch.
“The period between 2 p.m. and 6 p.m. is kind of a dead zone for a lot of restaurants. It’s really a lot of expense for a lot of restaurants. We don’t have that dead zone,” said Tomasso.
It also allows the company to specialize in a couple of dayparts. “Expanding into dinner would just make us another restaurant company,” Tomasso said.
Even with the benefit of this focus, First Watch lists its supply chain as a risk factor. As of the end of 2020, the company got all of its coffee from one supplier, all of its pork from two suppliers, all of its eggs from two suppliers, and 80% of its avocadoes from one supplier.
“The cancellation of our supply arrangements with any one of these suppliers or the disruption, delay or inability of these suppliers to deliver these major products to our restaurants or distribution centers due to problems in production or distribution, inclement weather, unanticipated demand or other conditions may materially and adversely affect our results of operations while we establish alternative supplier and distribution channels, all of which may materially and adversely affect our results of operations while we establish these alternate supplier and distribution channels,” the prospectus said.
First Watch was founded in 1983 and, as of June 2021, had 423 restaurants across 28 states. The majority of those locations, 335, are company-owned and the remaining 88 are franchised. The company stopped offering franchises in 2017 and expects to see that part of the business diminish further.
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Florida is the company’s biggest market with 102 locations. (Texas is second biggest with 55, according to the prospectus.) That concentration offers another risk.
“If a catastrophe, such as a fire or extreme adverse weather conditions such as storms, floods, severe thunderstorms and hurricanes, were to occur at the distribution center that services the concentration of our restaurants located in Florida, we would be at immediate risk of product shortages because that distribution center supplies 30% of our company-owned restaurants as of Dec. 27, 2020, which collectively represented 32% of our restaurant sales for fiscal 2020,” the prospectus said.
About 41% of the company’s system-wide restaurants are in the southeast, which the company also identifies as a risk factor, as it could be “disproportionately affected by conditions in this geographic area.”
While First Watch doesn’t plan to expand into dinner, it did accelerate the addition of alcohol in its restaurants during COVID-19.
Alcohol is now offered in 244 restaurants and, in the fiscal second quarter of 2021, accounted for 3.6% of in-restaurant sales at company-owned restaurants.
“These incremental alcohol sales are highly profitable,” the company’s prospectus said. “More importantly, we remain confident in the long-term opportunity to innovate within this platform to further elevate the social occasion of breakfast, brunch and lunch.”
As more people have moved to the suburbs, where many First Watch restaurants are located, and work-from-home has increased, the company also sees an opportunity to grow its lunch business. Some 6% of First Watch’s weekday customers in 2019 purchased a lunch entrée.
First Watch had a net loss of $49.7 million in 2020, wider than the $45.5 million loss in 2019. Revenue totaled $342.4 million in 2020, down from $436.4 million the previous year.
First Watch is an emerging growth company, which means it does not have to make the same disclosures required of bigger public companies. A business remains an emerging growth company until it reaches a number of milestones, including annual revenue of more than $1.07 billion.
First Watch is based in Bradenton, Fla. and, in 2017, entered into a merger transaction with funds affiliated with or managed by private-equity firm Advent. Post-IPO, Advent is expected to own about 81% of First Watch’s outstanding common stock.
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As of June 27, 2021, the company had $345.2 million of goodwill and $137.8 million of indefinite-lived intangible assets. A test for these two items is conducted on the first day of the fiscal fourth quarter each year. First Watch didn’t recognize impairment charges in 2020 but did have a non-cash impairment charge of $29 million in the fiscal second quarter of 2019.
First Watch’s debt as of June 27, 2021 was $288.8 million. The company intends to use the proceeds from the IPO to repay the borrowings from its senior credit facilities. The company does not intend to pay a dividend for the foreseeable future, and says that its ability to pay a dividend is restricted by the terms of its senior credit facilities.
Tomasso has served as director and CEO since Dec. 2019. He served in these roles for First Watch Restaurants, Inc., a wholly-owned subsidiary of the company, in the years leading up to 2019, and was chief marketing officer from Aug. 2006 to Dec. 2015.
Mel Hope has been chief financial officer since Dec. 2019.
Four of the company’s directors are also members of the Advent team. And Lisa Price, founder of hair and skincare company Carol’s Daughter, also sits on the board.
First Watch stock was trading early Monday at $22.22. The stock began trading on Oct. 1 after pricing at $18, the midpoint of the $17-to-$20 expected range.
The Renaissance IPO ETF
has gained 6.7% for the year to date while the S&P 500 index
is up 21.1% for the period.