10-K: First Watch Reports 2025 Growth, Navigates Inflation

First Watch Restaurant Group, Inc. reported a 20.3% increase in total revenues to $1.2 billion in 2025, driven by new restaurant openings and positive same-restaurant sales growth, despite commodity and labor inflation.

Summary

• Total revenues increased 20.3% to $1.2 billion in 2025 from $1.0 billion in 2024.
• System-wide sales increased to $1.4 billion in 2025 from $1.2 billion in 2024.
• Same-restaurant sales growth was 3.6% in 2025, with same-restaurant traffic growth of 0.5%.
• The company opened 64 new system-wide restaurants (55 company-owned and 9 franchise-owned) across 23 states in 2025.
• Acquired 19 operating restaurants from franchisees in two separate transactions during 2025.
• As of December 28, 2025, the company operated a total of 633 restaurants across 32 states, with 560 company-owned and 73 franchise-owned.
• Average Unit Volume (AUV) reached $2.3 million per restaurant in 2025.
• Net income increased to $19.4 million in 2025 from $18.9 million in 2024, primarily due to a favorable income tax benefit.
• Adjusted EBITDA increased to $120.9 million in 2025 from $113.8 million in 2024.
• Income from operations decreased to $27.5 million in 2025 from $38.9 million in 2024, and the margin decreased to 2.3% from 3.9%.
• Restaurant level operating profit increased to $224.1 million in 2025, but the margin decreased to 18.5% from 20.1% in 2024.
• Commodity inflation was 5.0% in 2025, largely driven by eggs, coffee, avocado, and bacon.
• Restaurant level labor inflation was 3.7% in 2025.
• Successfully remediated previously identified material weaknesses in internal control over financial reporting as of December 28, 2025.

Sentiment

Score: 6

Explanation: StockSavvy.ai views this as a mixed report. While the company demonstrates strong top-line growth and successful expansion, profitability margins have compressed due to inflation and increased operating costs, partially offset by a tax benefit. The successful remediation of internal control weaknesses is a positive, but the increased debt and potential future equity raises warrant caution.

Positives

• Achieved strong top-line growth with total revenues increasing 20.3% to $1.2 billion and system-wide sales growing to $1.4 billion in 2025.
• Delivered positive same-restaurant sales growth of 3.6% and positive same-restaurant traffic growth of 0.5% in 2025.
• Expanded its footprint significantly by opening 64 new system-wide restaurants and acquiring 19 franchise-owned restaurants in 2025.
• Reported an increase in net income to $19.4 million and Adjusted EBITDA to $120.9 million in 2025.
• Successfully remediated previously identified material weaknesses in internal control over financial reporting as of December 28, 2025.
• Maintained a strong 'You First' corporate culture, leading to being named the #1 Most Loved Workplace for the second year in a row in 2025 and achieving employee turnover rates well below the industry average.
• Implemented new customer-facing technology platforms, including pay-at-the-table, a new ordering system, and a redeveloped app, to enhance customer experience and operational efficiency.
• Demonstrated commitment to community and ethical sourcing through initiatives like Project Sunrise and donations to Pediatric Cancer Research ($2.0 million donated as of December 28, 2025).

Negatives

• Income from operations decreased by 29.3% to $27.5 million in 2025, indicating pressure on core operating profitability.
• Income from operations margin declined to 2.3% in 2025 from 3.9% in 2024.
• Restaurant level operating profit margin decreased to 18.5% in 2025 from 20.1% in 2024, primarily due to increased food and beverage costs and other restaurant operating expenses.
• Adjusted EBITDA margin also saw a decline to 9.9% in 2025 from 11.2% in 2024.
• Experienced significant commodity inflation of 5.0% in 2025, particularly affecting costs for eggs, coffee, bacon, and avocados.
• Labor inflation at the restaurant level was 3.7% in 2025 and is expected to be 3% to 5% in 2026, posing ongoing cost challenges.
• Interest expense increased by 32.1% to $16.7 million in 2025, driven by increased borrowings for acquisitions.
• Three company-owned restaurants were closed in 2025, indicating some underperforming locations.

Risks

• Vulnerability to changes in consumer preferences and economic conditions such as inflation, recession, and new health trends (e.g., weight loss drugs).
• Inability to successfully open new restaurants or establish new markets, or new restaurants not performing as well as anticipated.
• Challenges in effectively managing growth, potentially straining existing management systems, financial controls, and information systems.
• Opening new restaurants in existing markets may adversely impact sales at existing company-owned and franchisee-owned restaurants due to market saturation.
• A decline in visitors to retail, lifestyle, or entertainment centers where restaurants are located could adversely affect sales.
• Lower than expected same-restaurant sales growth or same-restaurant traffic growth.
• Unsuccessful marketing programs or limited-time menu offerings.
• Changes in the cost of food (e.g., pork, coffee, eggs, avocados, potatoes, bread, cheese, fresh produce) or disruptions in the supply or delivery of such ingredients.
• Inability to compete effectively for customers against national, regional, and local restaurants, as well as non-traditional market participants.
• Vulnerability to food safety and food-borne illness concerns, which could decrease sales and increase costs.
• Financial performance issues of franchisees, limited control over their operations, and potential conflicts of interest.
• Reliance on a limited number of suppliers and distributors for several frequently used ingredients (e.g., two pork suppliers, one egg supplier, one coffee supplier).
• Geographic concentration of system-wide restaurant base in the southeast U.S. (41% of restaurants, 22% in Florida), making the company disproportionately affected by regional conditions.
• Damage to reputation and negative publicity, even if unwarranted, potentially amplified by social media and artificial intelligence.
• Information technology system failures or breaches of network security, including increased risks from remote working.
• Failure to comply with federal and state laws and regulations relating to privacy, data protection, advertising, and consumer protection.
• Potential liability with gift cards under the property laws of some states.
• Failure to enforce and maintain trademarks and protect other intellectual property, or adverse litigation outcomes related to intellectual property.
• Inability to identify, hire, train, and retain qualified individuals for the workforce, leading to labor shortages or increased labor costs.
• Failure to maintain corporate culture as the company grows.
• Potential unionization activities among employees.
• Risks associated with sustainability activities, including environmental, social, and governance matters.
• Costly and complex compliance with federal, state, and local laws, including labor, employment, food safety, and alcoholic beverage control regulations.
• Exposure to litigation, including class action lawsuits, which can be costly and divert management attention.
• Risks associated with leasing property subject to long-term and non-cancelable leases.
• Impact of changes to future tax laws, unanticipated tax liabilities, and the ability to realize deferred tax assets.
• Risks related to the sale of alcoholic beverages, including licensing and dram shop statutes.
• Impairment in the carrying value of goodwill or indefinite-lived intangible assets.
• Risks associated with changes to accounting estimates or principles.
• Level of indebtedness ($267.6 million outstanding as of December 28, 2025) and potential failure to comply with credit facility covenants.
• Volatility in credit and capital markets affecting refinancing or additional financing capabilities.
• Reliance on operating subsidiaries for funds as a holding company.
• Anti-takeover provisions in Delaware law and organizational documents could impede a change in control.
• Exclusive forum jurisdiction in Delaware courts could limit stockholders' ability to obtain a favorable judicial forum.
• Future offerings of debt or equity securities may dilute common stock or reduce its market price.
• No anticipated dividends on common stock in the foreseeable future.
• Significant fluctuations in quarterly results of operations due to seasonality and other factors.
• Dilutive impact from grants under equity incentive plans.
• Loss of executive officers or other key employees.
• Lack of access to additional capital to support business growth.
• Uncertainty regarding geopolitical conflicts (e.g., Russia-Ukraine war, Middle East) and their related impact on macroeconomic conditions, including inflation.

Future Outlook

The company expects annual same-restaurant sales growth in 2026 to be between 1% and 3%. Commodity prices are anticipated to increase approximately 1% to 3% in 2026, primarily due to coffee, while labor inflation is projected at 3% to 5%. First Watch plans to open 59 to 63 net new system-wide restaurants in 2026 (53-55 company-owned and 9-11 franchise-owned) and close three company-owned restaurants. Capital expenditures for 2026 are estimated at $150.0 million to $160.0 million, primarily for new restaurants and remodels, to be funded by cash from operations and Credit Agreement borrowings. A new seasonal and core menu was relaunched in early 2026.

Management Comments

• "Our focus on one daytime shift enables us to optimize restaurant operations while generating an average unit volume of $2.3 million per restaurant in 2025 in only 7.5 hours per day. This daytime focus also provides us with a competitive advantage, allowing us to attract and retain employees who are passionate about hospitality and drawn to our No Night Shifts Ever approach, among other attractive benefits."
• "We believe First Watch has the potential for more than 2,200 restaurants in the continental United States."
• "Our development approach has proven that First Watch has tremendous portability across markets, with new restaurants boasting a consistent and strong average unit volume across all geographies."
• "We view these innovations [customer technology platforms] as critical to maintaining relevancy across generations and ensuring that First Watch evolves with societal trends."
• "Our turnover measures well below the industry average and has improved sequentially over the last two years for both managers and hourly team members, enabling us to better provide consistent and memorable dining experiences for our customers."
• "Management concluded the Company’s internal control over financial reporting was effective as of December 28, 2025."

Industry Context

StockSavvy.ai notes that First Watch's continued expansion and focus on 'Daytime Dining' positions it well within a competitive and fragmented restaurant industry, particularly as consumers increasingly seek higher-quality breakfast, brunch, and lunch experiences. The company's emphasis on fresh ingredients and a strong employee culture ('You First') differentiates it from traditional fast-casual and casual dining competitors. The positive same-restaurant sales and traffic growth in 2025, despite broader economic pressures and commodity inflation, suggests resilience and effective strategy execution in a challenging market. The investment in technology for off-premises sales and in-restaurant efficiency aligns with industry trends towards digital integration and enhanced customer convenience.

Comparison to Industry Standards

• Recognized by FSR Magazine as the fastest-growing full-service restaurant company in the United States based on unit growth.
• Named a Top 100 Most Loved Workplace for four consecutive years by the Best Practice Institute, and in 2025, was named the #1 Most Loved Workplace for the second year in a row, as featured in The Wall Street Journal.
• Named one of Yelp's Most Loved Brands nationwide in 2025.
• Employee turnover measures well below the industry average and has improved sequentially over the last two years for both managers and hourly team members.

Corporate Governance

Legal Proceedings

• The company is involved in various claims and legal actions that arise in the ordinary course of business, but does not believe their ultimate resolution will have a material adverse effect on its financial position, results of operations, liquidity, or capital resources.
• A significant increase in the number of claims or amounts owing under successful claims could materially adversely affect the business.

Stakeholder Impact

• Shareholders: Face potential dilution from future equity offerings, no anticipated dividends, and market price fluctuations due to mixed quarterly results. Anti-takeover provisions may limit the opportunity to receive a premium for their shares.
• Employees: Benefit from a strong 'You First' culture, competitive benefits (e.g., no night shifts, healthcare, 401k, tuition reimbursement, emergency fund, Calm App, EAP, high school diploma program, discounts, pet insurance), and professional development opportunities. Risks include labor shortages, increased labor costs, and potential unionization.
• Customers: Benefit from a focus on fresh, made-to-order food, an evolving seasonal menu, and enhanced technology for ordering and payment. Potential negative impacts could arise from food safety concerns or shifts in consumer preferences.
• Suppliers/Creditors: The company's reliance on a limited number of suppliers creates risk for supply chain stability. Increased indebtedness and the need to comply with credit facility covenants impact creditors.

Next Steps

• Open 59 to 63 net new system-wide restaurants in 2026 (53-55 company-owned and 9-11 franchise-owned).
• Close three company-owned restaurants in 2026.
• Fund estimated capital expenditures of $150.0 million to $160.0 million in 2026 primarily with cash generated from operating activities and borrowings under the Credit Agreement.
• Relaunch a new seasonal and core menu in early 2026, based on employee and customer feedback.
• File Definitive Proxy Statement relating to the 2026 Annual Meeting of Stockholders within 120 days after December 28, 2025.
• Continue to evaluate opportunities to improve liquidity position to enhance financial flexibility.

Key Dates

Recommendation

First Watch demonstrates strong operational execution in terms of revenue growth and expansion, successfully opening new restaurants and acquiring franchises. The positive same-restaurant sales and traffic growth indicate continued customer demand. However, the decline in operating income and margins due to persistent inflation in commodities and labor costs is a concern. While net income saw a slight increase due to a tax benefit, the underlying profitability trend is negative. The successful remediation of internal control weaknesses is a positive for governance. Given the mixed financial performance, but strong underlying business model and growth strategy, a 'Hold' recommendation is appropriate as investors should monitor how the company manages inflationary pressures and improves profitability margins in the coming periods.

Keywords

Restaurant Group, Daytime Dining, Breakfast, Brunch, Lunch, Casual Dining, Franchise, Restaurant Expansion, SEC Filing, 10-K, Financial Performance, FWRG, Food Service, Hospitality, Corporate Governance, Risk Factors, Employee Culture, Sustainability, Technology, Supply Chain, Commodity Costs, Labor Costs, Delaware Corporation