10-Q: First Watch Q1 2026: Revenue Up, But Net Loss Widens

First Watch Restaurant Group reports a 17.3% increase in total revenues for Q1 2026, reaching $331.0 million, though net loss expanded to $2.7 million.

Summary

• Total revenues for the thirteen weeks ended March 29, 2026, increased by 17.3% to $331.0 million compared to $282.2 million in the same period of 2025.
• System-wide sales grew by 13.8% to $367.6 million in Q1 2026 from $323.0 million in Q1 2025.
• Same-restaurant sales growth was 2.8%, while same-restaurant traffic growth was negative 2.0%.
• The company opened 16 new system-wide restaurants, bringing the total to 648 (572 company-owned, 76 franchise-owned).
• Net loss for the quarter was $2.7 million, or $(0.04) per diluted share, an increase from a net loss of $0.8 million, or $(0.01) per diluted share, in the prior year's quarter.
• Adjusted EBITDA increased to $27.8 million from $22.8 million in the prior year's quarter.
• Restaurant-level operating profit margin improved to 18.5% from 16.5%.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this filing as negative due to the widening net loss and declining same-restaurant traffic, despite revenue growth and improved restaurant-level margins.

Positives

• Total revenues increased by 17.3% to $331.0 million.
• System-wide sales increased by 13.8% to $367.6 million.
• Same-restaurant sales growth of 2.8% indicates continued customer demand for existing locations.
• Restaurant-level operating profit margin improved to 18.5% from 16.5%, showing better operational efficiency at the store level.
• Adjusted EBITDA increased by 22.2% to $27.8 million, reflecting improved underlying business performance.
• 16 new restaurants were opened, expanding the company's footprint.
• Commodity deflation of 1.6% was experienced in Q1 2026.

Negatives

• Net loss widened to $2.7 million from $0.8 million in the prior year's quarter.
• Same-restaurant traffic growth was negative 2.0%, indicating fewer customer visits to existing locations.
• Income from operations margin decreased to 0.3% from 0.4%.
• General and administrative expenses increased by 32.2%, driven by leadership conference expenses, compensation, and marketing.
• Depreciation and amortization increased by 29.2% due to new and acquired restaurants.
• Interest expense increased by 43.3% due to increased borrowings for franchise acquisitions.

Risks

• Vulnerability to changes in consumer preferences and economic conditions like inflation and recession.
• Inability to successfully open new restaurants or establish new markets.
• Inability to effectively manage growth.
• Potential negative impacts on sales from opening new restaurants in existing markets.
• Decline in visitors to retail centers where restaurants are located.
• Lower than expected same-restaurant sales growth.
• Unsuccessful marketing programs and limited-time new offerings.
• Changes in the cost of food.
• Unprofitability or closure of new restaurants or lower than previously experienced performance in existing restaurants.
• Inability to compete effectively for customers.
• Vulnerability to food safety and food-borne illness concerns.
• Unsuccessful financial performance of franchisees.
• Limited control over franchisees' operations and potential conflicts of interest.
• Geographic concentration of the restaurant base in the southeastern United States.
• Damage to reputation and negative publicity.
• Inability or failure to recognize, respond to and effectively manage the accelerated impact of social media and artificial intelligence.
• Limited number of suppliers and distributors for key ingredients, leading to potential shortages or disruptions.
• Information technology system failures or breaches of network security.
• Failure to comply with federal and state laws and regulations related to privacy, data protection, advertising, and consumer protection.
• Potential liability with gift cards under state property laws.
• Failure to enforce and maintain trademarks and protect intellectual property.
• Litigation with respect to intellectual property assets.
• Dependence on executive officers and certain key employees.
• Inability to identify, hire, train, and retain qualified individuals for the workforce.
• Failure to obtain or properly verify employment eligibility of employees.
• Failure to maintain corporate culture during growth.
• Unionization activities among employees.
• Employment and labor law proceedings.
• Labor shortages or increased labor costs or healthcare costs.
• Risks associated with leasing property subject to long-term and non-cancelable leases.
• Risks related to the sale of alcoholic beverages.
• Costly and complex compliance with federal, state, and local laws, including trade and tax policies.
• Changes in accounting principles applicable to the company.
• Vulnerability to natural disasters, unusual weather conditions, pandemic outbreaks, political events, war, and terrorism.
• Inability to secure additional capital to support business growth.
• Level of indebtedness.
• Failure to comply with covenants under the credit facility.
• Uncertainty regarding the Russia and Ukraine war, war and unrest in the Middle East, and their impact on macroeconomic conditions.

Future Outlook

The company expects annual same-restaurant sales growth to be between 1% to 3%. Full-year commodity inflation is expected to be approximately 1% to 3%, while restaurant-level wage inflation is expected to be approximately 3% to 5%. Capital expenditures are estimated to be between $150.0 million to $160.0 million in 2026, primarily for new restaurant projects and remodels, to be funded by operating cash flow and borrowings under the Credit Agreement.

Management Comments

• The company experienced continued momentum in its operating performance in Q1 2026.
• The increase in total restaurant sales was principally due to a higher number of restaurants and positive same-restaurant sales growth.
• The increase in franchise revenues was due to an increase in the system fund contribution rate, partially offset by a decrease in franchise-owned restaurants.
• Food and beverage costs as a percent of restaurant sales decreased due to menu price increases and commodity deflation.
• Labor and other related expenses as a percentage of restaurant sales decreased primarily due to leverage from menu price increases, partially offset by wage increases.
• The increase in occupancy expenses as a percentage of restaurant sales was primarily due to an increase in company-owned restaurants.
• The increase in general and administrative expenses was mainly due to leadership conference expenses, compensation expenses, and marketing expenses.
• Income from operations and margin decreased as revenue increases were exceeded by increases in general and administrative expenses, depreciation and amortization, and occupancy expenses.
• Net loss and net loss margin increased primarily due to the decrease in income from operations and an increase in interest expense.
• Restaurant level operating profit margin increased primarily due to favorable labor and food/beverage costs as a percentage of sales.
• Adjusted EBITDA margin increased primarily due to an increase in restaurant level operating profit margin, partially offset by an increase in general and administrative expenses as a percentage of revenues.
• Cash provided by operations increased primarily due to higher net earnings and the timing of operational payments.
• Cash used in investing activities decreased due to the timing and amounts paid for new restaurants and capital projects.

Industry Context

StockSavvy.ai notes that First Watch's Q1 2026 results reflect typical pressures in the casual dining sector, including wage inflation and the need to manage operating costs while expanding. The company's focus on daytime dining and fresh ingredients positions it within a growing segment, but the increase in net loss alongside revenue growth highlights the challenges of scaling operations and managing debt.

Comparison to Industry Standards

• The same-restaurant sales growth of 2.8% is within the expected range of 1% to 3% for the company, which is a moderate performance compared to the broader restaurant industry, where some segments are experiencing stronger recovery.
• The negative same-restaurant traffic growth of -2.0% is a concern and contrasts with some competitors who are seeing traffic rebound. This suggests potential challenges in driving footfall to existing locations.
• The improvement in restaurant-level operating profit margin to 18.5% is a positive indicator, suggesting efficient cost management at the unit level, which is a key benchmark for restaurant operators.
• The increase in net loss, despite revenue growth, is a common challenge for growing restaurant chains that are investing heavily in expansion and facing rising operational costs. This is a critical area for investors to monitor, especially when compared to more profitable peers in the fast-casual or quick-service segments.

Legal Proceedings

• The company is involved in various claims and legal actions arising in the ordinary course of business. The ultimate resolution of these actions is not expected to have a material adverse effect on the company's financial position, results of operations, liquidity, or capital resources.

Stakeholder Impact

• Shareholders: The widening net loss and negative traffic trends may impact investor confidence and stock performance. Continued expansion and efforts to improve profitability are key for shareholder value.
• Employees: Wage inflation is noted, and the company is hiring to support growth. Labor shortages or increased labor costs remain a risk.
• Suppliers: The company is experiencing some commodity deflation, which could benefit suppliers if demand remains strong, but also indicates potential pressure on their pricing.
• Creditors: The company has a significant level of indebtedness and is subject to covenants under its credit facility. Compliance with these covenants is crucial.

Next Steps

• Continue opening new restaurants and expanding market presence.
• Manage commodity and wage inflation within expected ranges.
• Monitor and address same-restaurant traffic trends.
• Fund estimated capital expenditures of $150.0 million to $160.0 million in 2026 through operating cash flow and credit facility borrowings.
• Regularly evaluate opportunities to improve liquidity and financial flexibility.

Key Dates

Recommendation

While revenue growth and improved restaurant-level margins are positive, the widening net loss, declining traffic at existing locations, and increased interest expenses present significant concerns. The company's expansion strategy is underway, but profitability challenges need to be addressed before a more positive outlook can be recommended. A 'hold' position allows for monitoring of these key performance indicators and the company's ability to manage its growth and debt.

Keywords

First Watch, Restaurant, Daytime Dining, Breakfast, Brunch, Lunch, Form 10-Q, SEC Filing, Financial Results, Revenue Growth, Net Loss, Same-Restaurant Sales, Adjusted EBITDA, Restaurant Operations, Franchise