First Watch (FWRG) Q3 2025: 25% Revenue Jump Anchored by Second-Gen Site Surge

2025-11-04 | By EarningsIQ Research

First Watch’s disciplined expansion and operational rigor propelled a 25% revenue surge, with second-generation sites fueling record-breaking new restaurant openings. Management’s focus on long-term traffic growth over aggressive pricing, combined with targeted marketing and digital investments, has set the stage for continued market share gains and robust unit economics. Guidance was raised as strong new unit performance and margin expansion underpin confidence heading into 2026.

Summary

• Expansion Muscle: Second-generation site conversions are driving outsized new unit volumes and accelerating market penetration.
• Margin Integrity: Strategic restraint on pricing actions preserved guest traffic and sustained restaurant-level margin expansion.
• Marketing Leverage: Targeted digital campaigns and a revamped app are increasing brand awareness and engagement, with further scaling planned.

Performance Analysis

First Watch delivered a standout quarter with total revenue up 25.6% year-over-year, marking nearly five years of consistent double-digit quarterly growth. The results were driven by a three-pronged engine: robust new restaurant opening (NRO) performance, positive same-restaurant sales growth of 7.1%, and accretive franchise acquisitions. Notably, same-restaurant traffic growth of 2.6% marked the best in over two years, reflecting both in-restaurant and third-party delivery gains.

Restaurant-level operating profit margin expanded to 19.7%, up 80 basis points year-over-year, as operational execution and labor efficiency offset 3% commodity inflation, particularly in bacon and coffee. General and administrative expenses leveraged lower as a percent of sales, despite higher absolute spend to support growth. Adjusted EBITDA margin rose to 10.8%, with $34.1 million in adjusted EBITDA, up $8.5 million versus last year. Franchise acquisitions added $9.1 million in revenue and $1.6 million in adjusted EBITDA, highlighting the incremental contribution of portfolio expansion.

• New Restaurant Outperformance: Nine of the ten highest opening week sales in company history came from units opened in the last 12 months, with second-generation conversions leading the charge.
• Traffic and Channel Mix: Both in-restaurant dining and third-party delivery traffic grew, with delivery now contributing over 3% to same-store sales and showing consistent demand post-program changes.
• Menu and Mix Stability: Despite headline sector concerns, First Watch maintained positive sales mix and saw no evidence of check management or trade-down behavior.

The company ended the quarter with 620 system-wide restaurants, opening 21 new locations (18 company-owned) in Q3 and remains on pace for 63 to 64 openings in 2025. The strong unit economics, with average cash-on-cash returns of 35%, reinforce the sustainability of the growth algorithm.

Executive Commentary

Strategic Positioning

1. Second-Generation Sites as a Growth Lever

Second-generation site conversions, which comprised about half of 2025’s new openings, are delivering exceptional volumes—some exceeding 190% of average unit volume (AUV, average sales per restaurant). These sites offer larger back-of-house space and prime visibility, enabling efficient launches and rapid ramp-ups. The brand’s reputation now earns it first calls from landlords, giving First Watch a structural advantage in site selection.

2. Relentless Operational Execution

Operational investments in kitchen display systems (KDS), app and waitlist management, and labor management have created a frictionless guest experience and boosted throughput. The company’s single-shift, daytime dining model continues to reduce turnover and attract top talent, supporting both guest satisfaction and margin stability. Labor inflation was contained at 3.6% in Q3, with improved efficiency as rising transactions leveraged fixed costs.

3. Disciplined Pricing and Value Proposition

First Watch’s deliberate restraint on menu pricing amid commodity volatility—taking only a 1.1% price increase in Q3 and carrying 3.5% for the year—protected traffic and reinforced the brand’s value positioning. Management signaled confidence in sustaining 18 to 20% restaurant-level margins long-term, prioritizing lasting traffic gains over short-term margin maximization.

4. Marketing and Digital Platform Expansion

Digital marketing investments, including connected TV, paid search, and social media, were deployed in less than one-third of markets but drove measurable gains in brand awareness and guest engagement. The newly relaunched app, now with a five-star rating, and a growing customer database (7 million identified guests) are enabling more precise micro-marketing. The marketing playbook is set to scale further in 2026 as learnings are applied to new geographies.

5. Menu Innovation and Brand Consistency

The new core menu, set for systemwide rollout in early 2026, is designed to improve readability, broaden appeal, and streamline operations by rotating in high-performing seasonal items. Consistent positive mix and stable guest behavior, even as awareness rises, highlight the strength of the brand’s offering and positioning with an affluent customer base.

Key Considerations

First Watch’s Q3 results underscore a business firing on all cylinders, with expansion, operational execution, and brand investments converging to deliver sector-leading performance. However, the path forward will require continued vigilance as macro and industry dynamics evolve.

Key Considerations:

• Unit Growth Quality: Second-gen conversions are not only accretive but also scalable, supporting market share gains without sacrificing return hurdles.
• Brand Awareness Opportunity: With marketing deployed in only a minority of markets, further investment can unlock incremental traffic and frequency.
• Labor and Commodity Cost Management: While inflation has moderated in some baskets, regulatory-driven wage increases in key states remain a watchpoint for 2026.
• Traffic and Mix Durability: Sustained positive mix and lack of check management suggest resilience, but consumer sentiment and competitive response could shift if macro conditions worsen.
• Digital Platform Leverage: Early success with the new app and customer data platform paves the way for more personalized marketing and loyalty initiatives.

Risks

Key risks include continued commodity and labor inflation, especially as minimum wage hikes take effect in large markets. While management has demonstrated strong cost control, any significant input price spikes could pressure margins if pricing restraint continues. Competitive intensity in daytime dining and broader consumer pullback also pose threats, though First Watch’s affluent customer mix currently insulates it from lower-end softness. Execution risk remains as the company scales unit growth and marketing across new markets.

Forward Outlook

For Q4 and full-year 2025, First Watch guided to:

• Same-restaurant sales growth of approximately 4% (raised from low single digits)
• Same-restaurant traffic of approximately 1% (raised from flat to slightly positive)
• Total revenue growth of 20 to 21%
• 63 to 64 new system-wide restaurants, with 55 company-owned and 8 to 9 franchise-owned
• Annual adjusted EBITDA of approximately $123 million, the high end of prior guidance
• Capital expenditures of approximately $150 million

Management highlighted strong new restaurant performance, positive marketing ROI, and robust real estate and people pipelines as drivers of continued confidence. Key watchpoints for the next quarters include:

• Scaling digital and marketing investments to new markets
• Monitoring wage and commodity cost trends as contracts are renewed

Takeaways

First Watch’s disciplined approach to expansion, pricing, and operational investment is delivering best-in-class results, with clear levers for continued outperformance.

• Unit Economics Strength: Second-gen site strategy is delivering record AUVs and accelerating market share gains, with ample runway as landlord preference and brand awareness build.
• Margin and Traffic Balance: Pricing discipline and operational efficiency are supporting both traffic growth and margin expansion, a rare feat in the current restaurant landscape.
• Digital and Marketing Scale: Early success in targeted campaigns and platform upgrades set up a multi-year opportunity to drive incremental occasions and frequency as awareness rises.

Conclusion

First Watch’s Q3 results reflect a business with strong executional discipline and a clear value proposition, delivering sector-leading growth while building long-term brand equity. With proven new unit performance, robust margin management, and scalable marketing and digital initiatives, the company is well-positioned to capitalize on its large addressable market and extend its leadership in daytime dining.

Industry Read-Through

First Watch’s outperformance highlights the value of disciplined expansion, operational rigor, and targeted marketing in casual dining, especially as broader industry traffic remains muted. The success of second-generation site conversions and digital engagement strategies provides a template for other full-service operators seeking to drive unit economics and brand relevance. The company’s ability to maintain positive mix and traffic without aggressive pricing suggests that value and experience remain critical differentiators, even in a volatile cost environment. Competitors will need to match both operational excellence and brand investment to keep pace in the evolving daytime dining landscape.

FWRG Consumer Discretionary Restaurants Unit Growth Second Generation Digital Marketing Daytime Dining Margin Expansion