First Watch Restaurant Group, Inc. (FWRG) Q3 2021 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the First Watch Restaurant Group Third Quarter 2021 Earnings Conference Call. [Operator Instructions] The conference call is being recorded today, November 9, 2021, at 8:00 A.M. Eastern Time and will be archived and available 1 hour post conference call. At this time, I'd like to turn the conference call over to Raphael Gross, Managing Director of ICR. Please go ahead.

Good morning, everyone, and welcome. I'm joined today by first First Watch's Chris Tomasso, Chief Executive Officer and President; and Mel Hope, Chief Financial Officer. Last evening, we issued our earnings release for the third quarter ended September 26, 2021, on GlobeNewswire and filed our quarterly report on Form 10-Q and earnings release on Form 8-K with the SEC. These documents can be found at investors.firstwatch.com. Let me now first cover a few housekeeping matters before introducing Chris. During our prepared remarks and in responses to your questions, certain items may be discussed, which are not based on historical fact and, therefore, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, without limitation, statements concerning the conditions of our industry and our operations, performance and financial condition, growth strategies, product development efforts and future expenses. Forward-looking statements can be identified by words such as anticipates, intends, plans, seeks, believes, estimates, expects and similar references to future periods or by the inclusion of goals, forecasts or projections. These forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. These factors include, but are not limited to, those described under risk factors in our amendment #1 to Form S-1 registration statement filed with the SEC on September 22, 2021, and in other filings that we may make with the SEC. Should one or more of these risks or uncertainties materialize or should any of our assumptions prove incorrect, our actual financial condition, results of operations, future performance and business prospects may vary in material respects from the performance described in these forward-looking statements. In addition, any forward-looking statements made by us today speaks only as of the date in which it is made. First Watch undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, our remarks today will include references to various non-GAAP measures. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our third quarter 2021 earnings press release. And with that, I'd like to now turn the call over to Chris Tomasso, First Watch's CEO and President.

Thanks, Ray. I want to start by saying what our team say to tens of thousands of consumers every day, and that is good morning. What they don't say is welcome to First Watch's inaugural earnings conference call. It's exciting for us to have this public forum to share this -- our First Watch story with you. As most of you likely know, we recently completed our initial public offering, and we're proud to be a NASDAQ-listed company. First and foremost, I want to thank all of the First Watch employees whose hard work not only made our IPO successful, they made it possible. There are many people listening today who may be fairly new to the First Watch brand story, and I consider it my privilege to introduce a few distinctives about our concept. For nearly 40 years, we've deliberately laid a foundation of excellence, which has helped position us for this next chapter in our story. At First Watch, we serve a different customer [indiscernible] breakfast and brunch concept. We tend to align closely with consumer brands, whose customer base is skew much healthier, have greater disposable income and seek quality food. If you've ever visited one of our restaurants, you know that our experience is an elevated one. Our focus is on being distinguishably different from our competition. We believe we accomplished this by delivering an elevated menu in an environment that definitely balances warrant and hospitality with speed and convenience. This unique combination, coupled with our very strong culture, is why we believe we've enjoyed such a passionate response from the consumer for decades. Why we were able to recover so quickly from the impact of COVID and why we continue our track record of delivering exceptional results. That's a combination that's hard to find, and that is Daytime Dining. In 2020, amidst the pandemic, while headlines were continually broadcasting a bleak outlook for the restaurant segment, our recovery and momentum demonstrated otherwise. Starting in March of this year, we began to consistently achieve positive same-restaurant sales growth measured against pre-COVID results, and we returned to positive traffic in Q2 and haven't looked back. As I said, we have a long track record of delivering sales, unit and profit growth as a result of our broad brand appeal, compelling economic proposition and difficult to replicate business model. I'd be remiss not to point out that prior to the emergence of COVID, we consistently achieved positive sales growth averaging 6.3% annually from 2014 to 2019, and we delivered same-restaurant traffic growth averaging 1.4% annually during that same 6-year period ended December 2019. I think it's also important to point out that through 2019, our 2-year stack same-restaurant sales were 12.5%. So when I share our Q3 results, keep in mind that we are comparing to a very strong base. From a traffic perspective, Q3 2021 marks one of the strongest quarters in First Watch's nearly 40-year history. Our system-wide sales in Q3 were an impressive $197.4 million, which is up over 58% over the same quarter last year and up 38.8% over the same period in 2019. Same-restaurant sales grew 46.2% compared to last year and 19.7% over the same period in 2019, while same-restaurant traffic grew 40.1% compared to last year and 4.8% over the same period in 2019. Embedded in our Q3 results is strong continued usage of our off-premises channels even as our dine-in sales have continued to improve. We've retained 100% of the off-premises sales that increased significantly during the hit of the pandemic, which accounted for $31.8 million in Q3 2021, up from $29.5 million in Q3 of '20. In terms of profit [indiscernible] using our non-GAAP measures, restaurant-level operating profit margin improved to 19.5% as compared to 9.9% in the same period last year and 16% in the third quarter of 2019. Adjusted EBITDA increased to $17 million from $2.6 million last year and $7.7 million from the comparable quarter of 2019, representing 118.8% growth over that period. These results paint a clear picture of the effectiveness of our continued strategic execution and award-winning approach that have created a broad consumer appeal and establish First Watch as an undisputed leader in the Daytime Dining category. Before I pass the mic to First Watch's CFO, Mel Hope, to elaborate further on our strong Q3 performance, I would like to share a bit more of our brand story with you since this will be our only inaugural earnings call. We spent nearly 4 decades building a strong foundation of operational and culinary excellence, specializing in breakfast, brunch and lunch in a way that only First Watch can. We're the leaders of the Daytime Dining segment, a segment that we played a large part in establishing. And together with our small community of franchise partners, we operate 428 First Watch restaurants in 28 states. Long term, we have the potential to open more than 2,200 restaurants in the U.S. One key factor that makes our concept fairly unique is that our restaurants are open for just one shift a day, from 7:00 a.m. until 2:30 p.m. Our one-shift-one-focus approach enables us to be the best at what we do by allowing us to really specialize and optimize our operations. It helps us attract and retain employees who share our passion for hospitality and crave a work-life balance that's very hard to come by in this industry. I want to reiterate that for a moment. The results we're sharing today were achieved in 1, 7.5-hour daily shift. Let me tell you why this is so important. Our no night shifts ever proposition is a key recruiting differentiator and it drives high employee satisfaction and retention. Historically, our turnover has been about 20% to 30% lower than industry average. Likewise, our preference of promoting from within has led to exceptional tenure of operations leaders with our general managers having been with us for an average of 5 years, our directors of operations 10 years, and our regional vice presidents and vice presidents of operations, having average tenure of 14 and 15 years, respectively. This has always been critical for our brand, but it's even more important today, helping us stay somewhat insulated from the staffing headwinds currently affecting the restaurant industry. To that point, while we are not currently staffed at optimal levels, we have not faced the labor shortage crises that we've seen other concepts face in this environment, meaning we have not had to alter or reduce hours, nor have we had to close on certain days due to lack of staff. 90% of our general managers, 100% of our directors of operations and 75% of our tenured hourly employees returned following our COVID closure period. So we started in a stronger position than many others have reported. Our teams have worked incredibly hard to meet strong consumer demand, and these results show that they are succeeding. In addition to our singular day [indiscernible], our creative approach to Daytime Dining is built on a commitment to freshness that appeals to a growing segment of consumers seeking to live healthier lifestyles and who truly value quality food in their daily routines. Chef Shane Schaibly, who joined our team back in 2014, leads our culinary strategy, and he and his team have developed menu items and platforms that have contributed greatly to our success, differentiated us from others in our space and widened our competitive moat. Our award-winning menu is small by industry standards with fewer than 60 entrée items, but it's highly curated and includes classic favorites like eggs, bacon, pancakes and waffles, along with First Watch specialties like our Pesto Chicken Quinoa Bowl and AM Superfoods Bowl made with coconut milk chia seed pudding. Every dish at every First Watch is made to order. And unlike other legacy breakfast concepts, you will not find microwaves, deep fires or heat lamps in any of our restaurants. You can count on that. Our fresh use program is anchored by our Morning Meditation and [ K-oconic ] offerings, which are prepared in-house daily from only the freshest fruits and vegetables. We've recently expanded upon that program by developing an alcohol platform, which offers crafted cocktails like our Pomegranate Sunrise and our Cinnamon Toast Cereal Milk, along with classics such as Bloody Marys and mimosas. Our approach to the menu does not stop for items though. We're proud of our seasonal menu program, which incorporates premium in-season and on-trend ingredients into 5 seasonal menus per year. We capitalize on long-term consumer trends and attract a broad mix of customers from morning traditionalists to a growing segment of trendy aspirationals. And while we've grown primarily through word of mouth, we have tremendous customer loyalty and engagement and an evolving following of younger, healthier, more affluent, more tech-savvy and more adventurous customers that simply appreciate great food. Now that you have a better understanding of our foundational brand pillars, let's dive into the story behind these strong Q3 results I shared with you. We anticipate much of our success during the quarter to executing against a defined set of strategies. The first is continued menu innovation. Our summer seasonal menu, our version of a limited time offer or LTO, ran from early June to mid-August. That menu featured 3 entrees highlighting seasonal ingredients and our Elote Mexican Street Corn Hash and fresh Watermelon Wake-Up juice served as the stars of the show. Our fall seasonal menu, which ran through the end of October, received rave reviews led by a braised Short Rib Omelet and our fresh Carrot Crush juice. And we just introduced our holiday seasonal menu last week, which includes My Absolute Favorite, the Million Dollar Breakfast Sandwich, featuring our Million Dollar Bacon and Mike's Hot Honey, alongside 3 other entrees and our fresh Red Medicine juice. The second strategy is around our alcohol program. We've all had Bloody Marys and mimosas a brunch before but let me tell you our alcohol program at First Watch, it's not your run-of-the-mill offering. Our cocktails are unique and reflect the culinary innovation our customers expect from our brand. Many of our cocktail offerings combine our fresh use with a variety of liquors, serving alcohol in a way that, again, only First Watch can. This is a highly incremental sales growth platform for us, which was clear in Q3, and it opens up new occasions for our customers to enjoy and improved our appeal to new demographic segments. As of the end of Q3, we had 281 restaurants serving alcohol, including 215 company-owned and 66 franchise restaurants. That reflects about 65% of the First Watch system and an increase of 37 restaurants over Q2. We'll continue the expansion to more restaurants throughout our system where feasible. For the quarter itself, alcohol accounted for 2.2% of in-restaurant sales at all company-owned restaurants and 3.4% when we look at only restaurants where alcohol is served. These alcohol sales are incremental. They deliver high margins and are highly profitable given the strong margins. More importantly, we remain confident in the long-term opportunity to further innovate within this platform and elevate the social occasion of brunch. Next, I want to dive into new restaurants for a moment since it's such an important component of our long-term growth algorithm. Our development team led an initiative to optimize a program that provides both a warm and welcoming in-restaurant experience and the opportunity to efficiently fulfill the strong demand we're now seeing for takeout and delivery. We responded quickly to the obvious shift in channel mix, and we're able to effectuate designs to optimize our growing off-premises business in the 17 new company-owned restaurants we've opened so far this year. Those restaurants are averaging about 16% above-average unit volume of our legacy restaurants while maintaining our high cash-on-cash returns. We opened 5 new system-wide restaurants in Q3 and have already opened 7 new system-wide restaurants in Q4, bringing our year-to-date total new system-wide restaurant openings to 30. We expect to open additional 2 before the end of the year. Those 2 openings will bring us to a total of 32 new system-wide restaurant openings in 2021 and a total of 437 system-wide restaurants at the end of the year. And our approach to strategic growth doesn't stop there. Looking ahead, we have multiple levers to continue our growth in sales and profits. First, we intend to increase our brand footprint by continuing to open new restaurants based on a disciplined strategic model with a long-term opportunity to expand our current system by 4 to 5x to about 2,200 restaurants in the United States. We have a long history of successfully developing new restaurants across multiple geographies, while increasing our average unit volumes with minimal cannibalization. And even with all the challenges brought on by COVID, we've invested in our growth and [indiscernible] new restaurants, and these units have performed exceptionally well, as I referenced earlier. Additionally, we intend to drive restaurant traffic and build sales on the heels of our long track record of consistent growth across both metrics. Our runway is based on a defined set of strategies that include continuous menu innovation and strategic expansion of our current offerings, like the alcohol program that I mentioned. Increasing accessibility through our off-premises channel by focusing on in-restaurant infrastructure in both existing restaurants and as part of our new restaurant prototypes. And by increasing our brand awareness by leveraging our high consumer engagement, new customer acquisition and strategically applying advertising dollars across appropriate channels. Simply put, we're enthusiastic about the future of this brand. Our strong foundation has supported our multiple growth levers, strong unit economics and proven portability, and we built the track record of sales and traffic growth. Looking ahead to 2022 as it relates to new restaurants, we're on track to achieve our planned 10% to 12% unit growth compared to 2021, with restaurants in both new and existing markets. Our long-term financial goals consist of low double-digit unit growth, mid-teens growth in both restaurant sales and adjusted EBITDA and same-restaurant sales growth of approximately 3.5%. We view these goals as very attractive for our industry and highly achievable based upon our historical success. The continued positive momentum we [ see ] this morning and the results Mel will further elaborate on shortly serve to differentiate First Watch. Our strong results continue to show that we are really serving a different occasion to a different customer. We look forward to continuing to execute on our strategic goals and to solidify our position as the leader in the Daytime Dining category. And with that, I'd like to turn it over to my friend and First Watch's CFO, Mel Hope, to review our Q3 results in greater detail.

Thanks, Chris. I'm going to begin with our recent IPO. On October 5, we closed on our registration of 10,877,850 shares of common stock, including the full exercise of the green shoe at a price of $18 per share. Net proceeds from the offering were approximately $182.1 million after underwriting discounts and commissions. So for the third quarter. Total revenues were $157.4 million, which was 57.8% higher than the same quarter last year and 43.6% higher than the third quarter of 2019. Of those total revenues, our restaurant sales in the quarter were $155.1 million, representing an increase of 57.7% compared to last year. This sales increase is the result of same-restaurant sales growth of 46.2% as well as [ $0.3 ] million of third quarter sales recognized in the 19 new company restaurants that have opened since September 27, 2020. I want to go back and hover over that 46.2% same-restaurant sales growth for just a moment. On a 2-year comp basis, so compared to 2019, our same-restaurant sales growth was 19.7%. For those of you who are newer to our story, I want to emphasize that at First Watch, we have a long history of delivering on sales growth that is built on the growth and traffic. To that end, of the 46.2% same-restaurant sales growth, 40.1% is an increase related to traffic. And perhaps more relevant is the traffic increase on a 2-year basis, which is 4.8%. The remainder of our same-restaurant sales growth above the traffic growth on both a 1-year and a 2-year basis is due to the combined growth of the average check per person and the mix of items selected by our customers. As we've introduced new platforms like our shareables and our alcohol program, our customers have elected to increase the check size by frequently adding items to the mix. And then the balance of the same-restaurant sales growth above that traffic figure I gave you and our increase from mix is due to price increases, which typically average about 2.5% to 3% annually. For the period, franchise revenues were $2.4 million, representing an increase of 69% compared to last year. That increase was primarily related to the rebound of the sales, which our franchisees have enjoyed as well as franchise revenues recognized from 11 new franchise-owned restaurants, which have opened since September 27, 2020. Working down the income statement. At $35.9 million third quarter food and beverage costs were 23.1% of restaurant sales, which was 70 basis points higher than the prior year and was 100 basis points prior than we incurred in the second quarter of this year. So as you might expect, costs have trended upward. Our supply chain team have been effectively managing challenges in partnership with our distributors and suppliers. But nevertheless, we are projecting 4% to 7% inflation associated with the cost of our market basket over the next several quarters. Labor and other related expenses of $50.6 million represent 32.6% of restaurant sales in the third quarter of 2021. This labor is lower than we consider to be optimal, and we expect that our teams' hiring and training efforts will continue to close that gap over the coming months. During the fourth quarter, we're expecting 100 to 150 basis point increase in our labor as a percentage of restaurant sales. That's an increase over the third quarter. Other restaurant operating expenses were $24.2 million in the third quarter, which at 15.6% of restaurant sales is a 460 basis point decrease from 20.2% in the prior year. This decrease is primarily due to sales leverage. Occupancy expenses were $14.2 million in the third quarter, an increase of $1.1 million over the prior year due to the growing number of First Watch restaurants. Advancing down our third quarter income statement, our restaurant-level operating profit was $30.2 million, an increase of $20.5 million compared to the same quarter last year. As a percentage of restaurant sales, restaurant-level operating profit margin was 19.5% compared to 9.9% in the same quarter last year. This improvement was primarily driven by the rapid and steady recovery of our in-dining room sales and traffic while growing our off-prem sales as well as the operating results of 19 new company-owned restaurants that have opened since the third quarter of last year. A quick reminder here that restaurant-level operating profit and margin are both non-GAAP measures, which are reconciled in both our press release and in the 10-Q. As compared to the prior year, general and administrative expenses increased $5.7 million to $17 million in the third quarter. This increase was driven by more normalized spending in the current year and includes increased headcount to support our sales growth initiatives and operations, our performance bonuses and increased marketing expenditures, partially offset by the reduction in consulting fees and other expenses incurred in connection with our IPO readiness project in 2020. Adjusted EBITDA increased to $17 million in the third quarter of 2021 from $2.6 million in the third quarter of 2020. The increase is driven by the rapid and steady recovery of our dine-in restaurant sales while growing off-premises sales and the operations of 19 new company-owned restaurants, partially offset by the increase in our G&A costs. For additional comparability, adjusted EBITDA increased 118.8% compared to the third quarter of 2019. As a percentage of total revenues, adjusted EBITDA margin was 10.8% relative to 2.6% in the third quarter of 2020 and 7.1% in the third quarter of 2019. The depreciation and amortization increased $0.4 million to $8.2 million from $7.8 million in the same quarter last year, again, mainly due to the increase in our restaurant count. Interest expense increased $0.3 million to $6.1 million from $5.8 million in the prior year due primarily to payment in kind interest incurred in 2021. I also want to note that on October 6 of this year, shortly after quarter end, we paid off our old debt facility and entered into a new credit agreement that provides for $100 million Term A facility and a $75 million revolving credit facility that's running at a current interest rate of 2.63%. Income tax expense of $0.5 million in the third quarter of 2021 compared to an income tax benefit of $3.3 million in the prior year results from our forecasted income in 2021 versus a loss in the prior year. Additionally, there's a considerable shift in the effective rate associated with estimated tax credits for FICA tax, taxes paid on our restaurant cruise tip wages. This quarter's performance brings our year-to-date net income to $2.5 million and $0.06 a share. And then finally, with respect to the balance of the year, I want to revisit the guidance points that appeared in the release. We expect in our first -- in our fourth quarter, we'll realize same-restaurant sales in the range of 31.5% to 33.5%. Adjusted EBITDA in the range of $10.2 to $11.2 million. New restaurant openings will include 5 company-operated restaurants and 4 franchisee restaurants. And then one last heads up. We refinanced our debt, and we recognized a noncash charge of $2.4 million associated with retiring the old debt facility in the fourth quarter. And so with that, let me turn the call back over to Chris.

Thanks, Mel. We are absolutely pleased with our strong Q3 performance, which would not have been possible without the dedication and hard work of our entire team from every person in each of our restaurants throughout the system to our experienced, nimble and dynamic leadership team and home office. And speaking of our leadership team, I'm pleased to share that last month, we hired a Chief Operations Officer, Dan Jones. Dan will play a key role in driving implementation of people-centric initiatives [ in restaurants ]. During such a significant period of growth for our brand, this was the right time to create this new role, and we see tremendous value in the extensive experience that Dan brings to the table. Before joining us here at First watch, Dan served as COO of Cava Mezze Grill for about 5 years, where he was responsible for Cava and Zoes Kitchen brand operations, including overseeing facilities and catering. During his time at Cava, the business grew from 18 total units to 120 Cava units and 160 Zoes Kitchen restaurants. We're very much looking forward to working with Dan as we write the next chapter in First Watch's history. In closing, as the leader in Daytime Dining, it used to be saying that phrase, by the way, we have a proven track record of execution, we have a phenomenal opportunity ahead of us to significantly expand our system. Our brand may have been founded almost 40 years ago, but we mean it when we say we're just getting started. And before we open the line for Q&A, I want to let you know that in December, we'll be participating in the Barclays Eat Sleep Play Conference. And in January, we will participate in both the ICR conference and the Jefferies 11th Annual Winter Summit. We hope to see some of you at these events and others in the coming year. Lastly, I would like to once again thank our team members and our franchisees for their outstanding commitment to the First Watch brand. Together, they've been instrumental in our success and provide me with utmost confidence in our future. Thank you again for joining us this morning. We appreciate your interest in First Watch. And operator, please open the line for questions.

[Operator Instructions] And our first question today comes from Gregory Francfort from Guggenheim.

I had 2. The first was just on -- I think one of the concerns right now in the environment is labor and hiring. You did a great job on touching on the single daypart and what that does for you. Can you maybe talk about staffing for growth and the double-digit unit growth? And either what you're doing on the managerial front to get ahead of that? And if you're still able to -- how much confidence you have in the double-digit unit growth in the current labor environment?

Sure. Thanks, Greg. I'll start with the second part of your question. We have very high confidence in our ability to execute against the growth numbers that we talked about. Again, we've been opening a lot of restaurants for a lot of years. And so we have a system for that. And I'll just give you some insights into it. We have 127 managers in our MIT program and 429 active operations managers. And of these, we've identified that 20% of them a ready now for the next level. So 110 managers for the 35 new restaurant openings we have in the coming year. Obviously, that also relies on our ability to continue to attract and hire new managers that take their place, but we've been steadily increasing our efforts there and seeing more and more applications come in and onboarding more managers. So again, we feel very confident. We average about 40% from an internal hourly promote for each manager. So that helps us fill that pipeline as well. And again, the other 60% are external hires. So just to reiterate, that's really where our no night shifts ever proposition comes in today more than ever and really allows us to attract folks who are looking for that work-life balance, but still want to stay in the hospitality industry. We're we've been consistently receiving about 2,000 applications per week even in this challenging environment. So I'll just reiterate that we're confident in our ability to open the restaurants that we said we could and would.

Maybe the other question I had was just on thoughts on pricing and pricing power, which -- it seems like the full-service space is getting a little more confident, taking a bit more pricing over the next 6 to 12 months. And can you maybe talk about what your plans are on that front? And why First Watch might be in a better position from a pricing power perspective than some of its peers?

Yes, absolutely. I think it's safe to say that we believe that we have pricing power that we are a pricing power concept. I'll start by just talking about our philosophy on pricing in general, which is to really only take price to cover inflation. And in years past, when you look at the results that we've shared in the S1 and otherwise of our many years of performance, that's been the pricing philosophy, about 2% to 3% of price a year, and the rest came from traffic and mix. 2020 was a unique year, and we actually -- excuse me, 2021, we've taken no price this year. And the reason for that is that, again, to Mel's point, we're focused on traffic. And we just felt like coming out of the pandemic, our focus should be on getting people in the restaurants and getting our in-restaurant dining numbers back up, and we didn't think taking pricing in the face of that was the way to do that. I'll also say that part of that philosophy was when we came out of our COVID closure, again, I know we're kind of out on an island by ourselves on this. We didn't reduce our menu at all. Again, because we're focused on customer counts, we didn't want to take anything off the menu that somebody came to us for, even if it was a low seller. Our focus was on getting everybody back and not disappointing any of our customers. Again, we're in a unique environment from a [indiscernible] standpoint now and from inflation. So I think you'll see us get back to our cadence of looking at annual price increases. But for right now, we haven't announced anything that we are doing for next year. But when we do, we will certainly announce that.

Our next question comes from Sara Senatore from Bank of America.

Two questions, please. The first is on the -- back on the labor topic. Could you maybe just talk about any specific initiatives you have to get back to full staffing, you said hiring and training. And also, I know you haven't had to truncate hours, but maybe give some color on operational impact. Is it keeping you from seeding as many guests as you like or turning tables fast enough? Just trying to understand what the implications may be for top line from staffing up fully. And then I have a quick follow-up on the pricing question.

Sure. I think once it was obvious that there were going to be staffing challenges many months ago, our team decided to focus our efforts on our existing team members. So whereas you might have seen sign-on bonuses and things like that, we held off doing that and really focused on our team members. And what we did is we increased referral bonuses for folks to refer people to come work for us because we believe that our employees are our greatest ambassadors, are best evangelists. And they can tell the story about what it's like to work at First Watch and not work at night and not work 24 hours a day. And so we increased those referral bonuses. That helped us a lot. And again, we're spending more on outside advertising as well. But most of our efforts and our resources were focused internally. We provided our managers -- all of our managers with multi-month thank bonuses for their efforts during the toughest challenging -- the challenging times leading up to, call it, the end of the federal benefits. And our management staffing levels have increased sequentially month-to-month. And we're happy with the direction that we took there. But obviously, it's a challenge, and we're working to get to fully staffed. In the past, we -- prior to COVID, our management par was about 2.7 managers per restaurant. I'm happy to say that we're sitting at that par right now. And so now the management that we're looking for are the ones that are going to fuel our growth in really 2023 because I already mentioned that we're set up for 2022. So that's our philosophy. It's a pipeline. It's a farm system, if you will, but it's what we've been doing for a long time.

Great. And then just on the check question. We have heard from others that consumers are seeking to maybe treat themselves, spend up a little bit, even to the point where they might be trading up to restaurants that they might not have previously patronized. I know you said that your customer base tends to be slightly higher income. Maybe could you just talk about the trade-up or the attach, how that compares to [indiscernible] what you've seen in the past certainly, sounds like it's a lot more, but I know the pandemic has kind of obscured what's going on in check dynamics and whether you've even seen perhaps new customers coming in, just in this environment where consumers are feeling a little bit more like they want to indulge themselves?

I think we've always had -- frankly, the company has got an innovative history. So while our mix is quite attractive now, we've always had good mix as we brought along our shareables have been very popular. Our fresh juice program that was introduced years ago is a popular add on to our checks. Our alcohol program is showing the same sort of enthusiasm with the customers. So frankly, that's not a new thing for us, and it does work to help us protect our margins.

And I think -- this is Chris. I think also, Sara, you're exactly right. We call that guest elected pricing, and we think that's what's embolden us to position ourselves as having pricing power. And also was one of the factors that led to us not taking price this year because the consumer was increasing their check on their own, adding on the juice, adding on the alcohol, ordering an extra shareable for the table. And so we've seen that for many months now.

Our next question comes from Jared Garber from Goldman Sachs.

Congrats on a first strong quarter. The comp trends throughout the quarter obviously remained pretty strong. Wondering if you could comment on the pacing of those trends throughout the quarter. Obviously, we know industry faced headwinds in August and September from Delta variant and some macro issues. And then wondering if you could also comment sort of on your October trends potentially and just give us a sense of if your same-store sales guidance for the fourth quarter is kind of where you're running now or you're embedding some sort of either acceleration or deceleration based on macro and/or other trends you're seeing in the business?

So our comp trend has been fairly consistent through the quarter. I didn't see a lot of movement from the Delta variant. There might have been some in there, but it wasn't enough to attribute everything to that, and there's a lot of other noise that goes on through any period. So the trend was pretty consistent, and our guidance for the fourth quarter takes into account what we've seen already through the fourth quarter. So it's [indiscernible].

Great. And I wanted to just ask a quick question on the cost environment. One of the things you noted in the 10-Q, I believe, was highly -- or inflationary pressures due to pork, most notably probably on that Million Dollar Bacon. I just wanted to get a sense, I think one of the things you use as sort of a lever is that seasonal menu and then the addition of the Million Dollar Bacon Sandwich on that seasonal menu. I wanted to just get a sense of how you're thinking about the addition of that when you are seeing some inflationary pressure, more specifically, I would assume on that bacon item?

Yes. Well, in pork, in particular, our bacon pricing contracts are -- we should see some moderation in the prices that we're paying for pork. The entire market basket is included in the prediction of inflation, but pork, in particular, should begin to chain to abate somewhat.

Okay. And if I can just sneak one more in quickly. On the labor side, are you seeing any more or less pressure if you think about the daypart or the weekday versus weekend mix there? Obviously, we know a lot of your business comes on the weekend at that brunch daypart. I'm just wondering if you're seeing staffing shortages impacting the top line on the weekends versus during the week of that week time, lunch daypart, any incremental color there would be very helpful.

Yes. This is Chris again. I'd say if you heard some of the reports leading up to today, most of the challenges around staffing, at least in our industry, have been in the evening, late night and overnight shifts. And with us not operating in those dayparts, we haven't had those challenges. So I mean, it's one shift. So we don't really have the breakfast or lunch. Is there pressure in one area or the other, if anything, it'd be weekend or weekdays, but we're not seeing anything like that, that's disproportionate. So I think it's just a general market-level availability of employees in general for us. And what was the last part of your question?

No, that does it for me. Appreciate the color there.

And our next question comes from Andy Barish from Jefferies.

Just one more quick one. As you look to bridge the labor guide from 3Q to 4Q, can you give us a rough sense of kind of how much of that is increased hours versus kind of the underlying wage inflation, if you can tease that out and share with us?

There's a couple of things going on, Andy. I'm not sure I can land on one simple formula for you. But because our crews have been running lean, we've also run a lot more over time. So what we're going to probably experience as we move toward full staffing is that we may see a little bit of a hydraulic effect, a little bit less over time, a little bit more straight time and our -- and most of our staffing, most of our labor costs increase are associated with just -- particularly just primary hours and excess hours.

Got it. Helpful. And then can you give us a look to '22 on how you're thinking about the KDS rollout and what that may bring the brand in terms of unlocking some capacity opportunities?

Sure. Just real quick, our KDS systems, as you mentioned, we plan to do a rollout in starting in the first half of next year provided the equipment is available. We have a pretty ambitious plan to get it rolled out over the course of 24 [ months ] in terms of what we believe the effects of that is in the pilot group that we've tested during the year. It's been -- I can just tell you, it's been promising in terms of cutting down on waste, improving our efficiency and service times. I think that there's an intangible benefit -- or I guess it's a tangible benefit that I don't -- that I can -- that I'll share that may not be able to put $1 or $2. But it allows us to take a new crew member who isn't familiar with the complexity of a First Watch kitchen, which is a pretty darn, complex place and allows them to ramp up to speed in terms of their kitchen duties more quickly than using sort of a call-and-response methodology. So our expectation is that, that opens us up to hiring more people who -- and then cutting down the training costs associated with it.

And I'm sorry, Mel, I missed the timing expected of the rollout to the system.

So we'll begin in earnest in the first half of next year. There's a -- the hardware for the KDS systems and the volume that we need as part of the supply chain snag on technology where I suppose some of these screens might be sitting on docs in Asia. So assuming that the supply is there and we can get the hardware to our shores, we begin to roll out in the first half of next year, and it's a 24-month process.

And our next question comes from Chris O'Cull from Stifel.

I just had one -- I had one clarification than a question. Mel, I was hoping you could give us a little more clarity around the 100 to 150 basis point sequential increase in labor costs. Are you guys already seeing that level of increase in the quarter-to-date period?

We are, and we're projecting that once the quarter is complete, but that's kind of where to land.

Okay. And then....

By the way, Chris, I mean, I think it's important to say that we desire to move where we want to be sure that we're completely staffed and that we're not overtaxing the crews that are in the restaurants today who are operating a little bit of a leaner environment during the COVID culture.

Yes. No, I completely agree. And then one other question is, you mentioned you were close to 90% in dining room levels. How is that distributed across the system? Are you seeing some pockets where you've recovered completely? And I guess, what is the kind of the lower bound of dining room recovery that you've seen?

It's fairly consistent across geographies for us. I don't think I can answer the second part of your question about what the lowest part is. I'd probably have to get back to you on that one. But it's in certain markets that have been slower to recover, call it, New Jersey, Detroit, just ones that kind of got out of COVID later than perhaps the rest of the country.

Our next question comes from Nicole Miller from Piper Sandler.

Great numbers across the top line, across the system. I was wondering if you could dig down a little bit, I'm thinking about the peak hour or 2 during the day that could obviously be different across the fleet. But in those cases where you're back to peak historical levels, what kind of ground are you gaining there? And I'm thinking about brunch in particular, that is very busy, and there's sort of an unlock opportunity increase in terms of increasing throughput.

So I'm going to have to ask you to ask that question again so that I understand it.

The sales are back where they were before, right?

Yes.

But in the hour or 2 of the day where you were really, really busy, are you higher than you were before? I mean there's no capacity constraints here, right? So like how do peak periods now compared to peak periods before?

So at our busiest time. So let's take Saturday and Sunday, which is, for us, an exciting and challenging time for the crews in terms of the pace of the business. The -- our capacity is what it was in 2019. It's not -- there's not -- we're no more constrained. We have -- in other words, a dining room tables, and seating are the same. We've -- in many cases, we've expanded the patios in order to accommodate more guests that was a real emphasis of ours during 2020 and through 2021. So to the extent that we have some unmet demand during those periods, and we do, then it's similar to what we were experiencing during 2019.

All right. And then I wanted to drill down on some geographies. So not to take away from your execution, but there's like the notion of population growth states, Florida, Texas, Arizona, it almost could give you an embedded comp. So Florida is a legacy market, and you obviously do really great with your highest AUVs, but can you talk about the trends in those states? And are you still comp positive, for example?

Yes. Those are some of our strongest markets, not only in volumes, like you mentioned, but also in same-restaurant sales and traffic growth.

And I would say our real estate and growth strategy really sort of tends to select markets that are experiencing population growth or more density or more neighborhoods and that sort of thing. So by definition, we tend to operate well in those markets. And so we've seen pretty consistent stand.

And if you'll remember, our average unit volume, the band for our average unit volumes is pretty tight state by state, market by market. There's not a vast difference overall. And again, our top decile restaurant span, I think, 10 states. So with that tight band of AUVs and the geographic spread of our top performers, I think we're seeing just a consistent performance overall throughout the system.

And our next question comes from Jeffrey Bernstein from Barclays.

Great. Two questions. One, just on the unit growth. Broadly speaking, the projected percentage growth is outsized. Most of your peers and sit down or casual dining struggled to accelerate growth above the low single-digit range. So I'm just wondering if you could talk about the greatest, what you think, the challenge and therefore, a risk to the outsized growth, perhaps putting aside COVID right now, but the fact that you're opening up more units than ever before. Is it staffing, that would be the biggest challenge or maybe finding the real estate or lack of familiarity in new markets? Kind of how do you think about the biggest risk as you open up more and more units well above what peers have seemingly been able to accomplish?

Yes. So I guess I would answer that the size of the opportunity so far outpaces what we see as the risk to that opportunity is -- I mean, causes us to focus on keeping up with the opportunity and exploiting the opportunity more than the risk. I'm not sure that I could tell you a risk that actually keeps me up at night in terms of pace. We just want to do it thoughtfully so that our operators in the markets where we're moving into are able to prepare and staff the restaurant.

And I would say, again, just we're not talking about doing something that we haven't been doing for a while. So we have processes and procedures and a pipeline and just a philosophical approach to it. So if there's any challenges, they would be macro and external, not on our -- the way we go about doing it and the disciplines that we apply to it. So I've been asked, are we seeing more pressure or more competition for space in the suburbs because that emerged during COVID. And I'll just tell you, we look for a sites, and there's always competition for a sites than there has been before COVID than there is now. So here, again, there's no one doing what we do. We leverage our hours. It's a benefit for us -- or to landlords and developers to have a concept in their center that opens the center up early in the morning. We can -- they can double count parking and share our parking with [indiscernible] concept. So there's a lot of benefits there. So I don't see availability of sites as a challenge. When we've been opening restaurants, we've been having great success in staffing them, ironically, probably more than existing restaurants. I think the excitement of us coming to a market helps play a role in that, and our teams do a great job of kind of setting up this hiring -- these hiring events when we go into markets. And then the last point you made about maybe brand awareness or whatnot, we look at existing core and emerging markets for our growth every year, and we do a mix of those. And as we've stated, this past year, we entered Chicago. And by all intents and purposes, we should have little to no brand awareness in Chicago. And that market has emerged as one of our strongest new markets in years, and we're excited about the growth potential that we have there.

Understood. And then the follow-up was just on the pricing front, which I was surprised to hear, I guess, right, you really run no pricing or no price increases this year. But as we think about looking to '22, I think you said you'd reassess. Just wondering when you do see levels of outsized inflation, is that something that you'd consider to be more than the 2.5% to 3% that I think you talked about historically. It would seem like you could either price to whatever level to hold margins flat if you think you have pricing power or maybe you'd price more modestly, if you're willing to let the margins take a hit because you really want to focus on the traffic. So I'm just wondering as you think about 22, what's kind of the thought process around the level of pricing you might consider?

Yes. I think one of the key decision factors that we use is the inflation that we're seeing, do we believe it's transitory? Or do we believe that it's more of a long-term reset? An example I'll give is we survive the impact that avian flu had on egg prices a number of years ago. We survived the rough avocado market, same thing. It was felt like it was about the same time as the avian flu. So that's a big factor in our approach. And so here, I think we're -- we believe that this is not transitory per se, but more of a reset. So I think that's why I mentioned that we would revisit going back to our cadence of a price increase for '22 that addressed inflation for us. But in general, we are very conservative pricing organization. And thankfully, we're pricing into positive traffic. And as -- and we also know that we're pricing into unmet demand. So we could be bolder than we are, and I'm sure a lot of folks are thinking that. But again, with our focus on driving customer counts, we think it's the right thing for us.

And our next question comes from Andrew Charles from Cowen.

Chris, this quarter looks like the business had a higher mix of dine-in sales when compared to the first half of the year, but it looks like alcohol mix in that same kind of mid-3% for in-store sales at store the offer it. So just I'm curious, how are you building awareness of alcohol sales to a community store guests?

We're -- I mean, we're really not. We're rolling it out, what I would say, softly and quietly right now in the restaurants where we operate it. I think once we have it in the majority of the system or where we think it's going to be, I think you'll start to see us get behind it more. But for right now, it's really just about telling the customers that are in the restaurants that -- where we serve alcohol that we have it, and that's what's driving that mix right now.

Got you. That makes sense. And then if I recall correctly, alcohol is ordered by about 7% of guests and juice, which is a bit more established on the menu as ordered by about 14% of guests. Do you think juice could serve as a leaning indicator, alcohol just seeing there's runway to double the alcohol mix from what you're seeing now?

I think it's definitely a leading indicator. And we've seen that with basically all new platforms and products like sharables and things like that. They just -- they build momentum. It becomes a little bit of a flywheel. Keep in mind, we've been telling people for 33 years that we don't serve alcohol, so to be telling them for 6 months that we do. And in doing all those years of saying that, I think, is going to take us a little bit of time. But we also believe that, that's a platform that allows for innovation once we get it rolled out. So I would say that what we put out now is kind of a baseline of our offerings and that you'll see us start to innovate around that because you started at 2% of sales when it began. And like you said, it's 14% to 15% now. So that's what we do. We launch, and we innovate, and we grow platform.

Juice success gives us a road map to how we might grow the alcohol. I'm not sure we know that the 14% is kind of the target we would peg there, but we don't know enough yet on that performance. What we do know and what we rely on is that we've had a successful experience in promoting and creating demand for the juice program and that we're already seeing similar kind of performance of alcohol in the restaurants where we offer it.

And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Mr. Tomasso for any closing remarks.

Great. Thanks. Thank you, everybody, for joining us for our inaugural earnings call. We really appreciate it. As you can tell, we're very proud of our Q3 results, and we look forward to sharing more of our First Watch story with you as we move forward in the years to come. So thank you very much.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.