First Watch Restaurant Group Stock

Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. Third Quarter Earnings Conference Call occurring today, November 3, 2026, at 8:00 a.m. Eastern Time.

[Operator Instructions] This call will be archived and available for replay at investors.firstwatch.com under the News and Events section.

I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch, to begin.

Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Ashlee Weisser. This morning, First Watch issued its earnings release for the third quarter of fiscal year 2026 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com.

This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses.

Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant-level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the third quarter performance is a comparison to the third quarter of 2025, unless otherwise indicated.

The format for today's call will begin with Chris, our Chief Executive Officer, who will provide a review of our operational highlights from the third quarter as well as an overview of the business. Ashlee, our Chief Financial Officer, will then discuss our financial results for the quarter, provide the outlook for the balance of 2026, and then we will open the line for questions.

And with that, I will turn the call over to Chris.

Good morning, and thank you for joining our third quarter earnings call. As always, I'd like to acknowledge our entire team across 33 states for delivering best-in-class experiences and making days brighter for our customers and each other.

In the third quarter, we delivered total revenue growth of 10.7%, reflecting positive same-restaurant sales in comparable restaurants and continuing strong performance in our non-comp restaurants. Same-restaurant sales increased 1%, while same-restaurant traffic was down 1.9%, largely reflecting planned strategic sales transfer from our broadening of the brand's reach and serving a growing customer base in increasingly more convenient ways.

Q3 represents our strongest quarterly sales comparison of the year as same-restaurant sales in the same quarter last year increased 7.1%. Our top line results are even more compelling over a 2-year horizon, with same-restaurant sales increasing 8.1% and same-restaurant traffic up 0.8%. We believe that our top line results effectively demonstrate the long-term resilience of our business model.

Same-restaurant sales growth in the third quarter was essentially in line with our original expectations, both when we reported our second quarter results and when we provided our initial outlook at the beginning of the year. We're pleased with our consistent performance in what remains a highly dynamic consumer environment.

We're especially encouraged by the progress we're making across the organization to further advance strategic initiatives designed to strengthen brand awareness, broaden consumer consideration, create more opportunities for customers to engage with the brand and support future growth.

As we continue to grow, expanding our customer base is vital. Equally important is maintaining a disciplined approach to improving profitability. This is increasingly evident in our financial results.

During the third quarter, a broad set of initiatives spanning restaurant-level operations and corporate efficiencies contributed to restaurant-level operating margins of 19.4%, G&A expense leverage of 60 basis points and an overall 17% increase in adjusted EBITDA.

Our efforts are delivering results across the income statement and reflect consistent execution and diligence from our teams even as we continue scaling the business. The benefits are even more visible over a longer period with both restaurant-level operating profit and adjusted EBITDA increasing at high teens percentage rates year-to-date.

The consumer landscape continues to evolve, and we are continuing to build strategies that evolve with it. First Watch offers a differentiated and highly relevant menu with a selection that translates naturally into engaging content across digital platforms where more and more consumers are turning for exploration and connection. Our seasonal innovations and quality ingredients provide a steady stream of compelling stories to tell across these emerging content and social platforms.

Against that backdrop, we're excited to start testing the online to offline services with TikTok GO in the U.S. aimed at encouraging local discovery. Together, we are working on a pilot in Q4. Considering that TikTok attracts 200 million active monthly users, we're proud to have been invited as one of the restaurants in their first group for their test. This new relationship will introduce First Watch and our differentiated menu to a highly engaged audience.

While we're not able to share further details at this stage, we view this relationship as a progressive way to enhance our ability to reach new audiences and it complements the investments we have already made across paid social, online video, connected television and influencer marketing while creating an additional opportunity to turn awareness and engagement into traffic and transactions.

Turning to another early-stage pilot. We're encouraged by the initial performance of an additional demand generation tactic that reaches a meaningfully distinct audience. As part of our 2026 media testing, we added local linear television in one of our larger markets where building awareness has historically been more challenging. The channel's broad reach and efficient CPM made it an attractive complement to our targeted digital investments.

Following encouraging initial results, we expanded the pilot to a second market where early performance has been similarly positive. We believe linear television could provide another efficient way to build awareness and support traffic in select markets.

Moving on to development. First Watch remains America's fastest-growing full-service restaurant brand. In the third quarter, we opened a total of 16 new system-wide restaurants across 11 states and have opened 53 restaurants across 22 states year-to-date. Our real estate pipeline continues to be robust, and we are already developing sites for opening in the back half of 2028.

As has been the case all year, the sales volumes of our 2025 and 2026 restaurant classes are outperforming both the comp restaurant base and our financial underwriting targets. We continue to perform consistently across geographies and markets, which provides us with a high degree of flexibility for new restaurant planning. In fact, 2 of our top 3 2026 NRO first week performances occurred in the third quarter, one in Attleboro, Massachusetts and the other in Jackson, Tennessee.

We have the operating talent pipeline to support our growth and a proven restaurant-level operating model to execute our strategy and advance toward our total addressable market of more than 2,200 restaurants in the continental United States.

Considering that our recent restaurant classes continue to deliver compelling sales volumes and returns across an increasingly diverse footprint, our conviction in the portability of the brand has reinforced the value in allocating capital towards new unit investment and ultimately, our ability to reach our total addressable market.

We are on track to open approximately 55 system-wide restaurants in 2027. Beyond that, we plan to be nimble and adaptable as it relates to future capital allocation with a focus on optimizing both capital returns and free cash flow.

We're excited to share the financial and operational advantages of our plan more fully during our Investor Day in Boston next week. In short, the new plan benefits the income statement, accelerates free cash flow generation and strengthens the balance sheet. We can do all of that while maintaining our position as an aggressively growing full-service restaurant brand, extending our lead in the daytime dining segment and building an even stronger, more durable and financially flexible company.

And with that, I'll turn the call over to Ashlee.

Thank you, Chris. As Chris mentioned, our third quarter results reflect the strength of our organization and are exemplified by positive same-restaurant sales growth that closely align with both our original expectations for the year and the updated outlook we provided to you on our second quarter call. We also delivered strong overall revenue and adjusted EBITDA growth while maintaining our underwriting discipline across our entire development pipeline.

Total third quarter revenues increased nearly 11% to $349.9 million, with same-restaurant sales growing 1%. Our top line growth was driven by positive same-restaurant sales growth and the contributions of 147 non-comp restaurants, including 54 company-owned new restaurant openings since the third quarter of 2025.

Same-restaurant traffic declined 1.9%, including the impact of planned sales transfer associated with new restaurant openings. Sales transfer incorporated into our underwriting requirements has remained relatively consistent and continues to be well within our expectations.

Carried pricing was 3.6% in the third quarter. Mix was slightly negative and comps and promos were modestly higher than in the prior year, driven by a stronger response to our annual e-mail campaign.

Food and beverage expense was 22.3% of sales, 10 basis points higher than the third quarter of 2025. Commodity deflation of approximately 40 basis points was driven primarily by bacon and avocados, partially offset by an increase in turkey sausage prices. The year-over-year comparison as a percent of sales included lapping the benefit from vendor credits that were captured in the third quarter of 2025. And as communicated previously, COGS was impacted by the steak LTO that ended in mid-August.

Labor and other related expenses were 32.6% of sales in the third quarter, unchanged from the same quarter last year. Our more balanced spread of new restaurant openings across quarters creates opportunities to improve labor efficiency, including better alignment of management staffing with restaurant maturity and operating needs. Wage inflation was approximately 4.1% in the third quarter.

Restaurant-level operating profit margin was 19.4% in the third quarter, a decline of 30 basis points compared with the prior year, primarily reflecting higher food and beverage expense and controllable costs as a percent of sales.

Income from operations represented 3.2% of total revenue in the third quarter. General and administrative expenses were $35.2 million or 10.1% of total revenue, improving 60 basis points when compared to 10.7% in the year ago quarter. The improvement was primarily driven by greater leverage of our existing head count as the business continues to scale under the new plan. Notably, we also levered consolidated G&A, inclusive of an increase in marketing investments when compared to last year.

Adjusted EBITDA increased to $39.7 million, an increase of $5.6 million compared to the prior year. As a result, adjusted EBITDA margin increased to 11.4% versus 10.8% in the third quarter of 2025. Third quarter adjusted EBITDA benefited from approximately $1 million of expenses now anticipated to be incurred in the fourth quarter. The timing benefit was related to both repairs and maintenance and marketing. Our adjusted EBITDA growth in the third quarter as well as similar year-to-date results is particularly notable, given the challenging consumer environment that persists.

These results reflect disciplined expense management and greater productivity across the organization. Importantly, we achieved these gains while continuing to invest in the customer experience, our development pipeline and the long-term health of the brand. We believe our performance thus far in 2026 demonstrates the strength of our operating model and our ability to drive profitable growth across a range of consumer environments.

Net income was $4.8 million. For further details on our third quarter results, please review our supplemental materials deck available on the Investor Relations section of our website.

Based on our year-to-date performance and the trends we have experienced early in the fourth quarter, we are updating several elements of our full year outlook. We now expect full year same-restaurant sales growth of approximately 2% compared with our previous range of 1.5% to 3%. Our pricing guidance remains unchanged and includes carried pricing of around 3.6% for the full year and around 2.9% for the fourth quarter. Additionally, we expect a similar impact on same-restaurant sales mix in the fourth quarter as we experienced in the third quarter.

Total revenue growth is now guided to approximately 13.5% compared with our previous range of 12.5% to 14%, including approximately 100 basis points of net contribution from previously completed acquisitions. We are guiding to 60 net new system-wide restaurants in 2026, including 53 company-owned openings and 9 franchise-owned openings, partially offset by the closure of 1 company-owned and 1 franchise restaurant.

Full year commodity inflation is now expected to be approximately flat compared with our previous expectation of flat to up 1.5%. This is primarily driven by reduced inflation expectations in bacon and avocado. Restaurant-level labor cost inflation is now expected to be around 4%. Looking ahead to next year, we do not expect either commodity inflation or labor inflation to be outside of our normal ranges.

We are guiding adjusted EBITDA of approximately $136 million, now at the high end of our previous range of $133 million to $136 million. This includes the roughly $2 million impact to adjusted EBITDA from the 19 restaurants we acquired in April of last year. And finally, capital expenditures are now expected to be approximately $145 million compared with our previous range of $145 million to $150 million.

Looking ahead, we remain confident in our ability to sustain aggressive unit growth. As Chris noted earlier, we expect to open approximately 55 new system-wide restaurants in 2027. Since we last updated our long-term targets, the interest rate environment has changed with rising rates impacting the cost of capital for all parties.

While we have not yet seen any related change in developer activity, the potential effects of rising rates, together with our floating rate borrowing exposure, reinforce the value of preserving optionality as it relates to our pace of development. This reflects both the evolution of our business and our view on how best to create long-term shareholder value.

Taken together, we believe it is prudent to remain flexible regarding our annual opening target beyond 2027. Going forward, we will disclose each forthcoming year's unit growth target on the prior year's third quarter conference call. Importantly, this enhanced flexibility does not change our confidence in the long-term growth opportunity or the earnings power of the business.

Reflecting our confidence in the initiatives currently underway, we are raising our outlook for adjusted EBITDA annual growth through 2028 to greater than 15%, above our prior long-term target of 11% to 14%. Our remaining growth targets through 2028 are unchanged from our prior plan: same-restaurant sales growth of 2% to 4%, including positive underlying traffic net of planned sales transfer; total revenue growth of 10% to 13%; G&A growth below total revenue growth; and positive free cash flow beginning in 2027 with further growth each year thereafter.

As we look ahead, we remain confident in the strength and durability of the First Watch model. Our year-to-date performance has demonstrated our ability to deliver profitable growth, expand margins and execute on our development strategy despite challenging industry and market dynamics.

Combined with compelling new restaurant returns, significant white space for expansion and a disciplined approach to capital allocation, we believe we are well positioned to create substantial long-term value for our shareholders.

Operator, we would like to now open the line for questions.

[Operator Instructions] Our first question comes from Jim Salera with Stephens Inc.

I wanted to start off just maybe more near term, what you guys are seeing with consumer because while it's encouraging to hear about some of the marketing engagement, we did see sequential decel on the traffic from 2Q to 3Q. And so any color you guys can offer just on what you're seeing with the guests, where you have some bright spots and maybe some incremental people coming in and just kind of any areas of pressure that you might see a little bit less engagement with the guest would be helpful.

Sure. Thanks, Jim. I appreciate the question. I think we're seeing a similar trend as we did coming out of Q3. And again, as we've talked about a lot on a lot of previous calls, our consumer is higher income, higher educated, maybe a little more insulated from some of the impacts that are out there right now. And also, I think most importantly is we're not seeing any kind of difference in their behaviors when they come in the restaurant.

So we feel like if we can, again, control what we control and focus on our innovation and as we start to ramp up the marketing that we'll be able to more successfully get those consumers in our door. We were really happy with our 2-year trend here going against a very significant positive comp in the third quarter of last year. So the fact that we were able to have a 2-year stack positive comp and positive sales for us is a win in this environment.

Okay. Ashlee, I wanted to ask a follow-up question on little bit of longer-term outlook based on your commentary about the adjusted EBITDA growth through 2028. Can you just give us some pieces there? Is that primarily because the unit growth slowing is going to allow for better G&A leverage? Or just any components that we should think about that are going to aid in hitting that 15% or above target?

Jim, if I answer your full question, it will ruin the surprise on Investor Day. No, I'm teasing. It's a couple of things, and we definitely will talk more about this next week. But one part of it is we'll be able to redeploy some of the labor that we use to open new restaurants to help our new restaurants get to maturity faster. And then there will also be other -- again, I don't want to ruin next week, but we have a couple of things we want to share with you just around our investment that happened historically around G&A and what that looks like going forward.

So I think those 2 components are really what drive a lot of the confidence in the ability to drive adjusted EBITDA even at potentially a lower unit growth rate.

Helpful. We look forward to seeing you guys in Boston next week.

I do want to add one thing there, sorry. Also, the reduced unit count will reduce the headwinds associated with the planned sales transfer when you think about it from a long-term perspective.

Our next question comes from Todd Brooks with StoneX.

Congrats on lapping that 7.1% successfully, positive number. Good to see. Quick question, and you didn't call it out on the call, but I look at your store footprint and just kind of the path that the Isaias took on a weekend and kind of maybe Friday through Sunday impacts with flooding and the storm. Is there anything material to call out from Isaias' hit on quarter-to-date Q4 that maybe informs where the same-store sales guidance for the full year fell out?

No, nothing of note.

Okay. Great. And then secondly, and I know that 55 units next year and a variable rate based on environment. But I just -- I want your latest take on kind of the competitive environment in daytime dining and what you're seeing for openings from other concepts. And my sense is that there's not the same urgency because you're not seeing these concepts grow in the current consumer backdrop, but I wanted to make sure that that's an accurate read.

Very insightful, Todd. I'd say you're exactly right. We've been on a kind of a race to key markets. And you've heard us talk a lot about fortressing markets and securing the A sites. And if you remember, at the time of our IPO, there was a lot of chatter by those specifically in our segment, at least espousing aggressive growth. And we just haven't seen that. In fact, we've actually seen contraction.

So from our perspective, we have a very significant lead in our category. We're the undisputed leader in it. And we can still continue to be an aggressively growing concept and widen our lead, but while also focusing on some other aspects of the business that will drive shareholder value.

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

This is [ Aisling ] on for Sara. Just congrats on the results. I think the 2% full year same-store sales outlook implies something close to 1% in 4Q, and that's against an easier traffic compare in 3Q. Just how much of that reflects the carried pricing stepping down as last August's action rolled off? And just any color you're willing to give on how consumers are responding to the marketing trends quarter-to-date?

Yes, that's a great question. Thanks for asking, [ Aisling ]. So I think, first, to answer your question, pricing does step down a bit just based off of the roll-off. Let me get you that exact number. The second piece is we have seen the past couple of Q4s, I think, 2 or 3 years' worth of Q4, we've seen a step down from Q3. And each year has been something a little bit different.

So like last year, if you'll recall, there was a belief that folks stepped out of restaurants and retail had a really large Q4. So we've built that into our Q4 numbers since the beginning of the year. So no huge change there from what we were anticipating. We haven't seen anything that caused us to be spooked out or anything like that. We just know the past couple of Q4s have been a little unpredictable. So that's the key driver there.

Got you. That makes sense. And just a follow-up on breakfast. I know that, like, QSR breakfast trends, they kind of stayed -- they've stayed pretty soft and some of the other full-service brands are leaning more into value. Are you seeing any evidence of customers kind of trading into First Watch from either side of that equation? And did weekday breakfast hold up relative to weekend brunch this quarter?

Yes. So weekday breakfast was similar trends to the weekend. So yes, and we don't have great visibility into whether they're trading from QSR, but we've continued to see performance relative to what we expected. So we feel really good about that. And then to answer your question, we're going to be at about 3% pricing. So there was a step down, just under 3%.

Our next question comes from Andy Barish with Jefferies.

Nice job, Ashlee, on the G&A management in your early days as CFO. I was just wondering what else was kind of in there? I think originally, you guided down to kind of $1 million sequentially, wound up being better than that. And then my follow-up is just more on the marketing shift. I know as you guys have ramped marketing, the fourth quarter has kind of been a little lighter. Just given your comments here on the unpredictability of the 4Q, is that some of the thought process into moving a little more marketing spend into this quarter?

Yes. Very astute observation. So thank you for the congratulations, but it's certainly not a me thing on the G&A; it's all of First Watch, just really focused on scaling what we've already had and being really diligent in how we think about adding expenses to the G&A line. Some of it was timing, like you mentioned, of marketing spend. And yes, we're shifting that into the fourth quarter because we think there's an opportunity there just based on the unpredictability in the past. And so we're hoping that, that offsets some of that and allows us to have a better-than-expected quarter.

[Operator Instructions] Our next question comes from Brian Vaccaro with Raymond James.

I just wanted to go back to the mix dynamics you're seeing. I think you said it stepped down, down 70 bps or so year-on-year in the quarter. Can you just elaborate on sort of the comps and promo impact we're seeing within that? And then are you seeing any signs of check management or changes in consumer behavior as well?

So I'll start in reverse. No signs on the check management yet. Really what drove our mix down, which you're right about the aggregate amount, it was 2 things. One, we had an annual e-mail offer that had higher redemptions than normal. Some of that is because we've cleaned up our database and they've really improved, from a marketing perspective, the testing around the e-mail subject line and things like that, that have caused us to see higher redemption rates. So that's one component.

And then the second component really isn't a check management thing, although it might look like it because it sits in mix. One of our LTO items just had a lower price point, and it came in -- the mix came in a little bit below what we saw equivalent last year. So that pulled it down a little bit.

Okay. Great. That is very helpful. And then I guess my follow-up, in your prepared remarks, you mentioned some initiatives that drove improved store-level profitability. Can you elaborate on some of those initiatives? And then to what degree do those initiatives -- you talked about 15% plus adjusted EBITDA growth. Is there a store margin component within that outlook through '28?

You're welcome. Yes. So some of the drivers there were just, again, really focusing on controlling what we can control. And then it ladders back to what we talked about last quarter, which was the rightsizing of managers in our restaurants. And again, as I mentioned on last quarter, the count of managers per restaurant rounds to roughly the same number, but that fractional restaurant manager does add up to savings. So that's a part of it as well. And then moving forward, restaurant margins are definitely part of the new algorithm for the future.

Our next question comes from Matt Curtis with D.A. Davidson.

I just wanted to circle back for a second on the LTOs. I was wondering if you can tell us a little bit more about how the fall menu LTO or LTOs rather performed. I think they were launched in mid-August. And if you can maybe separate out a little bit more of the contribution from the fall menu between traffic and ticket. I think you had a Godfather Bowl that had a lot of buzz online at least.

Yes. So the fall LTO overall performed pretty well. It was largely in line with our expectations. I think the Godfather Bowl was the item I mentioned earlier that came with a lower price and performed at a lower mix than we typically see for that equivalent spot on our menu. But to your point, it got great buzz, and we were really excited about the innovation there and the street credibility we got from folks with that. So it was a balance there.

And then we really don't split out our traffic by what's LTO-driven versus what's base business. We don't have super great visibility into that, and we don't want to share a number that is not at least directionally accurate. For us, the LTO allows us to have news and share with our returning customers and customers that may not have heard about us, some of the innovation and our focus on freshness. So it's more about that than necessarily attaching a traffic number to it.

Okay. Understood. And then maybe one on restaurant-level margin. I apologize if I might have missed this during your prepared comments. But I think last quarter, you said flat restaurant-level margin for the year was probably about right. Is that still basically the ballpark of what you're thinking?

Give me one moment. I believe we end up in -- that's probably fair. Give me one second. Matt, let us answer that offline because I know we have a one-on-one with you, just so that you guys are waiting for me to get the answer. Sorry about that.

We have reached the end of our question-and-answer session, which now concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you. Thank you for standing by and welcome to First Watch Restaurant Group Incorporated's second quarter earnings conference call occurring today on August 4th, 2026 at 8 a.m. Eastern Time. Please note that all participants are currently in a listen-only mode. Following the presentation, the conference will be held on August 4th, 2026 at 8 a.m. Eastern Time. in for analyst questions and instructions on how to ask a question will be given at that time. This call will be archived and available for replay at investors.firstwatch.com under the news and events section. I would now like to turn the call over to Stephen Murata.

of investor relations for First Watch to begin. Hello everyone. I am joined by First Watch's Chief Executive Officer and President Chris Tommaso and Chief Financial Officer Ashley Weiser. This morning, First Watch issued its earnings release for the second quarter of fiscal year 2026 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com. This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Those statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial outlook, growth plans and strategies, and future investments. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosures in the company's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

The first watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAP measures, including restaurant level operating profits, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. should review the reconciliation of these non-GAAP measures to compare all GAAP results contained in the company's earnings release file this morning. references to percentage growth when discussing the second quarter performance as a comparison to the second quarter of 2025, unless otherwise indicated. The format for today's call will begin with Chris, our Chief Executive Officer, who will provide a review of our operational highlights from the second quarter, as well as an overall overview of the business. Ashley, our Chief Financial Officer, will then discuss our financial results for the quarter and provide the outlook for the balance of 2026. Following these remarks, Chris and Ashley will jointly provide an update on our long-term targets before we open the call for questions. And with that, I will turn the call over to Chris.

Thanks, Steve. Good morning, and thank you for joining our second quarter earnings call. Before I begin, I'd like to express our gratitude to our team of more than 18,000 employees for bringing our U-First culture to each of our 665 restaurants across 33 states. We're pleased to report another strong quarter of growth for First Watch, led by a total revenue increase of 15.2%, supported by positive sitting restaurant sales growth of 3.4% and the continued strong performance from our new restaurant openings. Our comparable restaurant traffic improved sequentially through the quarter, culminating with positive traffic for the month of June. For the quarter, same restaurant traffic growth was essentially flat, but represented a 160 basis point improvement versus the first quarter. outperform both the casual dining segment and the industry overall, according to Blackbox. Benefits from our marketing investments were a significant contributor to our Q2 performance. Since implementing an expanded marketing strategy early last year, brand awareness has been building and we believe contributing to our improved SIGM restaurant traffic trends and overall SIGM restaurant sales growth.

Our marketing objectives are focused on driving at least one more visit from existing customers, while also positioning First Watch squarely in the consideration set for new customers. That focus is showing up in customer behavior. In targeted acquisition campaigns run this year, 17% of new customers have already returned for a second visit, which is tracking higher than average. We're not just reaching new customers, we're bringing them back. To do that effectively, we are leaning into targeted data-informed marketing tactics that allow us to reach consumers where they are, speak to them with greater relevance, and evaluate the return on that spend with more precision than traditional broad-based marketing alone. We have We have built a foundational capability that will continue to serve us well as we grow. A key aspect of our brand building strategy is the expanded use of video, including YouTube and connected television. channels enhance our ability to target specific demographic groups within markets, tailoring the message at a more localized level, and tracking response with better visibility down to the restaurant level.

Utilizing this test, learn, and act model, we have richness of data to analyze, allowing us to evaluate the performance of each tactic. With this knowledge, we're able to shift dollars toward the channels, markets, and messages that are demonstrating the highest levels of performance. Finally, we're continuing to enhance our capabilities when using influencer and social media tactics, allowing us to showcase the brand in a more authentic and customer-centric way. We view these efforts as important building blocks to create awareness, deepen engagement, and ultimately to convert that into restaurant traffic over time. First Watch continues to rank among the top tier of customer favorites, placing in the top decile for future purchase intent among well-recognized national and regional breakfast competitors. These results demonstrate that our marketing investments are not only increasing awareness of the first watch brand, but also strengthening occasion consideration and supporting conversion of potential customers into regular customers. We're encouraged by the performance as indicated by unaided brand awareness increasing more than 50% and aided brand awareness increasing 15% since early last year.

This remains a very large opportunity for Firstwatch, as overall awareness of our brand is relatively low from an industry standpoint. We will continue to monitor our suite of metrics, including ROI, to determine the effectiveness of our spend. Our new core menu, launched in February 2026, is contributing to positive sales mix, validating the work we've done to evolve and optimize the menu. From improving navigation to enhancing offerings, we are giving our customers even more reasons to visit. The new menu delivers precisely the kind of meaningful contribution we anticipated. find customers engage more broadly across our offerings with increased participation in add-on items and a higher propensity to select more premium options throughout the meal occasion. As a result, we experienced positive menu mix with per-person check average growth outpacing carried pricing in the second quarter as it did in the first quarter. Layered on top of a highly productive and optimized core menu is our seasonal menu strategy, which gives us a fresh platform multiple times per year.

This allows us to tell a highly relevant and engaging brand story by highlighting the flavors of the season and presenting compelling limited time only offerings that create many news and excitement while driving mix. Culinary innovation remains a significant competitive advantage at First Watch and we believe this helps keep the brand fresh and relevant and differentiates us from other in our category. Our seasonal jumpstart menu, which ran from early January to late May, featured our best-selling LTO entree of all time, the Jimmy Cherry Steak and Eggs hash, and contributed to our positive mix of 50 basis points in the second quarter. We are now in the final weeks of our summer menu, and our data shows that the Chipotle Steak and Queso Hash will be our second best-selling LTO item of all time when this menu concludes in mid-August. It also features our newest shareable, Honey Butter Biscuit Bites, which is trending to be our highest mixing shareable since Million Dollar Bacon. These are great examples of our culinary team's ability to create menu excitement that our customers love. It also provides compelling content for our marketing team to leverage across all channels.

Looking ahead, and if you follow our social channels, you'll see our customers are eagerly awaiting the return of our fall seasonal hit, Pumpkin Pancakes. Behind the scenes, innovation remains an important driver of growth and differentiation for Firstwatch. Our culinary operations and marketing teams collaborate to develop, test, and refine ideas that are both compelling for our customers and practical for our restaurants. We are particularly excited about a handful of innovative tests focused on higher capacity day parks currently in the works. Now, I'd like to shift to new restaurant growth. First Watch remains America's fastest growing full service restaurant brand. Our real estate pipeline is as robust as ever, with more than 100 projects in various stages In the second quarter, we opened a total of 18 new system-wide restaurants across 15 states, reaching new, emerging, and core markets.

We also continue to expand our geographic footprint during the quarter. We opened in Nashua, New Hampshire, which not only marks our initial entry into the Granite State, but also represents our third restaurant in the Boston DMA since we entered the market in January 2025. This restaurant has generated weekly sales volumes materially above our expectations since opening. Firstwatch's growth in infrastructure remains strong, and I'm particularly pleased with the performance of our newest restaurants. The sales volumes of our 2025 and 2026 restaurant classes continue to outperform both the comp restaurant base and importantly, their underwriting targets. We have the people pipeline to support our real estate pipeline and the right formula to execute our strategy at the restaurant level to reach our total addressable market of more than 2,200 locations. We believe First Watch occupies a truly distinctive place in casual dining.

We're the leader in daytime dining, a category that has disrupted a large segment within casual dining and is expected to continue to experience substantial growth according to Technomic Inc. Our unique position continues to strengthen as more customers discover the brand and we capture additional market share. Importantly, there is no other concept in daytime dining that brings together our level of national scale, innovation, operational consistency, proven unit growth capability, and meaningful long-term development opportunity. Before I close, I'd like to again thank Mel for his leadership as CFO over the past eight years. His contributions are too numerous to list, and we look forward to leveraging his experience as he continues to serve in an advisory role in the months ahead. I also welcome Ashley to her first quarterly conference call as CFO. Since joining First Watch, Ashley has made a tremendous impact throughout the entire organization through her disciplined financial leadership, sound strategic judgment, and clear focus on execution.

We're delighted to have her lead our value creation strategy during our next phase of growth. Ashley.

Thank you, Chris, for the warm welcome, and thank you, Mel, for your mentorship, partnership, and friendship. I'm honored to take the baton from Mel, build upon the exceptional foundation he helped create, and partner with our talented teams across the organization to drive the next chapter of this brand. As I step into this role, I remain focused on disciplined and profitable growth, operational excellence, and allocating capital to the highest return opportunities across the business with the goal of creating sustainable long-term shareholder value for all owners of the business, including our investors and employees who share in our success. Our second quarter reflects the strength of that foundation, highlighted by strong revenue growth, positive same restaurant sales growth, improving trends in same restaurant traffic and restaurant level profitability, as well as continued momentum across our development pipeline. Total second quarter revenues increased 15.2% to $354.7 million, with same restaurant sales growing 3.4%. Our top-line growth was driven by the positive same restaurant sales growth, contributions from 132 non-comp restaurants, including 57 company-owned new restaurant openings, and the growth of the restaurant's sales. since the second quarter of 2025, and the 19 franchise locations acquired in the second quarter of 2025. While same-restaurant traffic growth was negative 0.4%, it does include the impact of planned sales transfer as we continue to make Firstwatch more accessible and convenient to more customers and increase overall market share.

The level of sales transfer we are experiencing is well within our expectations and underwriting standards. Food and beverage expense was 23.5% of sales and improved 10 basis points when compared to the second quarter of 2025. We benefited from carried pricing of around 3.7% and commodity deflation of approximately 1.6%. Commodity deflation was driven primarily by eggs, avocados, and bacon. partially offset by an increase in coffee prices. I want to spend a few more moments providing detail around our food and beverage costs as a percent of sales, since the modest improvement we experienced in the quarter masked some notable moving parts. Some good news is that commodity inflation remains below historical trends. The new news is that beef, which was not part of our core menu in the prior year, has become a more meaningful FACTOR IN OUR FOOD AND BEVERAGE COST PERFORMANCE THIS YEAR SINCE THE INTRODUCTION OF OUR BARBACOA BREAKFAST TACOS AND BARBACOA CHILIQUILES BREAKFAST BOWL ALONG WITH SEASONAL OFFERINGS WHICH FEATURE PREMIUM STEAK.

WHILE OUR BEEF COSTS WERE IN LINE WITH OUR EXPECTATIONS, STRONGER THAN ANTICIPATED DEMAND FOR OUR FEATURED BEEF OFFERINGS INCREASED OVERALL COGS BY JUST UNDER 100 basis points year over year. Our current stake LTO has materially outperformed test results, resulting in a larger mix shift than originally planned. We view this as evidence of the appeal of our product innovation and the potential pricing power of highly differentiated offerings. This impact is temporary, and we expect it to moderate substantially as the current LTO concludes. Our approach, as always, remains a focus on balancing value, innovation, and profitability. SHIFTING TO LABOR. LABOR AND OTHER RELATED EXPENSES WERE 32.9% OF SALES IN THE SECOND QUARTER, A 30 BASIS POINT IMPROVEMENT FROM THE SECOND QUARTER OF 2025. THIS FAVORABILITY WAS PRIMARILY DRIVEN BY POSITIVE CHANGES WE IMPLEMENTED IN OUR STAFFING MODEL ALONG WITH LEVERAGE FROM HIGHER SALES, PARTIALLY OFFSET BY 4.1% OF THE wage inflation.

All of this resulted in restaurant level operating profit margin of 18.8% in the second quarter of 2026, a 20 basis point improvement over last year. Our income from operations margin was 2.3% in the second quarter. General and administrative expenses were $38.7 million or 10.9% of total revenue. The increase compared to last year was largely due to timing of marketing spend, as well as increased headcount to support our growth objectives. Adjusted EBITDA increased 13.5% to $34.5 million, a $4.1 million increase versus the $30.4 million reported last year. adjusted EBITDA margin was 9.7% in the second quarter of 2026. Net income was $2.3 million. We opened 18 new system-wide restaurants during the second quarter with 14 company-owned, four franchise-owned, and one franchise closure, and concluded the quarter with 665 restaurants operating in 33 states. The net effect of acquisitions in the quarter, which includes only the impact of purchases made within the last 12 months, was an increase in revenue of about $2.4 million and an adjusted EBITDA of $0.4 million.

For further details on the second quarter, please review our supplemental materials deck on our Investor Relations website, the Needs to Be. the webcast link. A key priority for me as we share guidance is a disciplined, transparent, and accountable approach to how we communicate our outlook and execute against it. This means clarity around the assumptions supporting our guidance, directness about the associated risks, balance realism regarding the opportunities ahead, and consistency in how we measure progress. We recognize that credibility is earned through performance, not promises, and our entire team focused on delivering those results. Based on what we know today, we believe our plan is achievable, and we are committed to demonstrating that through consistent execution and clear communication. each quarter. Now I'll provide our updated outlook for 2026. Our updated outlook reflects continued same restaurant sales resilience, strong execution across our restaurants, disciplined cost management, and confidence in the opportunities we see for the balance of the year, including a high quality pipeline of new restaurant openings.

With that in mind, we are increasing the low end of our same restaurant sales growth range to 1.5 to 3% from 1 to 3% previously. Given our second quarter results, combined with the sales trends quarter to date, we continue to expect positive same restaurant sales growth in each quarter of 2026. However, as a reminder, the third quarter does offer by far the most challenging year-over-year comparison of any quarter this year. So while we continue to expect positive same restaurant sales growth in Q3, we continue to anticipate it to be at or below the low end of our 2026 range. Our guidance includes a price action of 2.9% taken at the beginning of the third quarter and as a result, carry pricing of around 3.6% for the full year. We are increasing total revenue growth to a range of 12.5 to 14% from 12 to 14% with around 100 net basis points of impact coming from previously completed acquisitions. We narrowing the range of net new system wide restaurants to 60 to 62 with 53 to 54 coming from company owned restaurants and nine to 10 franchise owned restaurant openings.

One company owned restaurant and one franchise restaurant have closed this year. Based on successfully pulling forward a handful of openings into the second quarter, our NRO schedule this year is fairly balanced between the first half of the year and the second half of the year, though our remaining company-owned new restaurant openings remain weighted towards Q4. We now expect full year commodity inflation at flat up 1.5% down from up one to 3% in our prior guidance. This is primarily driven by reduced inflation expectations, which will be fully offset in food and beverage expense as a percent of sales by the temporary impact of beef based menu offerings that I mentioned earlier. Restaurant-level labor cost inflation is now expected to be in the range of 3.5 to 4.5%. We are also adjusting our 2026 adjusted EBITDA guidance to $133 million to $136 million. The guidance revision to adjusted EBITDA is entirely the result of stronger than anticipated customer demand for our new premium protein feed-based offerings, which carry a higher cost of goods profile than our broader menu mix.

While heightened demand is creating some near-term margin pressure relative to our original expectations, we view the response as a positive indicator of the strength of our innovation pipeline, the appeal of the product, and the perceived value customers experience at FirstWatch. Moving forward, we will remain disciplined in evaluating margin mitigation opportunities while maintaining the strength of our innovation pipeline. making decisions that support the long-term health of the brand. Lastly, as a result of the pull forward of marketing dollars into the third quarter from the fourth quarter, combined with the timing of corporate spend, third quarter G&A is expected to be about $1 million less than Q2. For those that model marketing expense, we are modestly investing around 2% of total revenue this year, up approximately 40 basis points from last year. Due mostly to the timing of certain development spend falling into next year, we are lowering our expectation for capital expenditures to a range of $145 million to $150 million, down from our prior guidance of $150 million to $160 million. I am incredibly excited about the opportunities ahead. We have a differentiated brand, attractive unit economics, a substantial runway for growth, and a team that consistently delivers results.

Those strengths give me confidence in our ability to create meaningful, long-term value for our customers, team members, franchisees, and shareholders.

With that, I'll turn the call back over to Chris before we move to Q&A. Thank you, Ashley. In as much as we are sharing our current thinking about 2026, Ashley and I would like to spend a few additional minutes on how we are evolving our optimal long-term growth strategy and targets. Since our IPO in 2021, we have exceeded our annual long-term growth targets of low double-digit percentage unit growth, same restaurant sales growth of approximately 3.5%, and mid-teens percentage growth for both revenues and adjusted EBITDA. Historically, achieving those targets provided a solid strategic foundation for us to fund our organic growth and maintain our existing asset base, utilizing cash flow from operations. That industry-leading growth and focus on ensuring our long-term relevance resulted in FirstWatch capturing substantial market share within our segment and expanding our brand. As we have often shared, our new restaurants continue to perform exceptionally well across diverse geographies which now span 33 states. Recent classes have exceeded sales volumes of the current comp group and are also on track to meet or exceed our underwriting return metrics.

And while it's early, our class of 2026 is performing even better. As a reminder, our class of 2026 30-year sales target is $2.8 million, with $1.8 million in net build-out costs. And our current actualized three-year cash-on-cash return is around 35%. This consistent ongoing success validates that investing in new restaurant growth remains a highly attractive use of capital. In recent years, however, maintaining these long-term unit growth targets has required us to access our credit facility in order to fund a portion of our capital expenditures. As we look toward the future, our management team and board evaluated how best to adapt and optimize capital allocation to current conditions. In framing our approach, we prioritize two planning principles.

First, to extend our leadership position within the growing daytime dining segment, a category we believe we've come to define. Anchored on the success of new restaurant classes and our proven portability, we are as confident as ever in our ability to achieve our total addressable market of more than 2,200 restaurants in the continental United States. and maintenance capex from the robust underlying cash flow from our highly productive base, while generating excess free cash to strengthen the balance sheet. To that end, we are modestly revising our long-term targets, reflecting an optimized balance between new unit growth and free cash flow. Our plan to open between 53 and 52 before new company operated restaurants in 2026 remains unchanged and we are on pace to do so. Beginning in 2027 and for the foreseeable future, our target will be to open 50 company-operated new restaurants annually.

This modest change to development achieves the principles Chris just outlined, builds on the already strong foundation of our business, supports positive free cash flow, reinforces our balance sheet, and provides greater flexibility in how we deploy capital over time. The change will have little impact on adjusted EBITDA in either the short or long term as our plan moderates G&A investment that a more aggressive growth rate would have necessitated and reallocate certain resources to accelerate margin enhancing initiatives. In line with the proceeding, we are amending our annual long-term targets to be as follows. Around 55 new system-wide restaurant openings, with around 50 of those company-owned and around five franchise-owned. Same restaurant sales growth of 2% to 4%, including positive underlying traffic, net of planned sales transfer from new restaurant growth. Total revenue growth of 10% to 13%. G&A expense growth lower than total revenue growth.

Adjusted EBITDA growth of 11% to 14%. Positive free cash flow beginning in 2027 and increasing each year thereafter. Relatedly, we are pleased to announce that we are hosting an investor day in Boston on November 12th, where we will provide a comprehensive overview of our new long-term strategic plan and the key drivers supporting sustainable growth and long-term value creation. For further details on long-term targets, please review the investor deck on our investor relations website, which will be posted following our conference call. Operator, we would like to now open the line for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. We ask that you please limit to one question and one follow-up question. Our first question is from Todd Brooks with Benchmark Stonex. Please proceed.

Hey, thanks for taking the questions and Ashley, welcome to the CFO seat. Good to have you here. Thanks, Todd. Couple questions, if I may. Chris, it was highlighted in the release about the momentum building across the quarter. positive traffic in June. Can you talk about drivers and then continuation? Because I do think, and it was good to hear the reiteration of the positive same-store sales in each quarter of the year, but I think investors have been worried about the ability to deliver that in Q3. So any talk about exit rate and same-store sales or quarter-to-date trends relative to the exit rate would be helpful.

Yes, thanks Todd. I think I'd start by reiterating what Ashley said that we feel confident in our statement that we should experience positive sales in every quarter, including the challenging comp quarter of Q3. We did see sequential improvement through Q2 that culminated with positive traffic in June, so we were pleased with that. But we know what we're heading into Q3, but still feel good about it. As far as drivers go, I mean, you heard us talk a lot about the menu, the the LTO, the marketing, I think really it's the combination and the cocktail of all those things kind of working together for us. We just continue to up the ante on ourselves, frankly, from a culinary innovation standpoint, from a unit development standpoint, and from a marketing standpoint. So just feeling really good that we have a lot of things going the right way.

Okay, great. And just my follow up and I'll jump back in. You talked about traffic and you talked about sales transfer being a drag. I know a lot of people focus on in restaurant traffic. Is there any way to frame up for us traffic? what the delta is if you don't have the, or if you adjust for the impact of sales transfer, what type of traffic growth you're generating in the restaurants. Thanks.

Todd, we're not sharing the exact sale transfer yet. We're going to give a little bit more color at our investor day on the 12th of November, but what we can say is that it would have been positive.

Okay, perfect. Thanks, Ashley. Our next question is from Brian Vaccaro with Raymond James. Please proceed.

Hi, thanks and good morning. And Mel, congratulations on the retirement. And Ashley, huge congrats on your new role. Look forward to working with you more. On the store margin dynamics, I just had two quick ones on that if I could. So the COGS line, Q2 came in above our expectations, and you highlighted the beef impact there. As we think about the second half COGS outlook, can you help us sort through how much the beef had? should moderate. I think the LTO ends on August 10th, if I'm not mistaken.

Correct me if that's wrong, but kind of help us sort through the second half beef headwind, but also your commodity guide. I think the inflation you're still assuming a return to slight inflation in the back half. Maybe you could just parse through some of those second half dynamics for us.

Yes, absolutely. So I'll start with inflation first. You're correct. We are anticipating a return to some inflation in the second half. If you'll recall last year, we experienced a really high egg inflation only for the first half of the year. So that's the that's a key driver of the deflation in the first half that we will not experience. in the second half. That's the main driver of the inflation piece. From a mix shift perspective, you're right, it's largely driven by the LTO. And one way to think about it is we had the LTO for about a month in Q2, so about a third of the quarter, and we'll have it for about two months.

months of the second half, so about a third of the second half. I don't know if that gives you enough color to frame up how you might want to model that. Yes, no, that's very helpful. And then I guess as a follow-up, just shifting back to some of the marketing efforts and the new digital local, a lot of good, I guess, incremental color on that. Appreciate that. But can you talk about the influencer side of things specifically it seems like some brands have had quite a bit of success there in recent years within the full service space so can you help frame to what degree you are engaging and seeing some traction on that specifically versus plans to maybe dial that up moving through the next six to 12 months. Thank you. Hey, Ron, it's Matt. I'm an equity brand officer. I'll speak to that. I think that this was a meaningful step forward this year in.

influencers and organic being a larger part of our paid media mix. I I would anticipate that continuing to increase into next year, but we've seen a lot of traction with that and so much so that because of the paid efforts, we've actually seen more organic UGC contribution as well. You know, the more people see our brand and see, you know, the items on their feeds, you know, they also want to start posting about it as well. So it's been one of the bright spots of our media.

Our next question is from Jim Solera with Stevens, Inc. Please proceed.

Hey, Chris. Ashley, good morning. Thanks for taking our question. Chris, I wanted to start off and just ask a little bit about the first step time customers and the frequency of returning for a second visit. Just give us some detail around, you know, are those solo occasions? Do they bring someone with them and then. And if I can squeeze one other question into my question, are they one of the primary drivers of that mix-up lift because there's such a strong pull from some of the seasonal offerings?.

I don't think we have the data to answer the first part of your question right here, but I would say the second part, in order to have the mixed benefit that we saw, I think it comes across the entire customer base, minus our heaviest users who typically tend to order the same thing. every time, but I think the appeal, if you will, of the seasonal menus and of the items on the new menu, for that matter, I think is much more broad, and we're seeing that across the user base.

And, Ashley, I wanted to ask, given the updated long-term guidance, particularly encouraging to hear the positive free cash flow in FY27, have you given any thoughts to what that – what your capital allocation priorities are going to be as you start to free up more and more resources? Should we expect to see incremental investments on the marketing side, given the success you guys have seen in the near term? that help support more menu innovation? Can you kind of walk us through, or maybe share repurchases, how you're thinking about, you know, allocating that incremental capital.

available? Yes, I think everything's on the table. When we think about marketing, you know, we're looking at a lot of different metrics, and we know that marketing, our key area for improvement is awareness. So as we continue to see that improvement, we see results and we measure it, it's definitely a conversation we'll have around investing more there. And then when it comes to larger capital, Alex, decisions. You know, nothing's off the table. We can have conversations with the board as appropriate next year. But some things in the consideration set obviously are debt paydown, investments in the business, share repurchases could be on the table.

Great. I appreciate it. Thank you. Our next question is from Brian Mullen with Piper Sandler. Please proceed.

Hi, this is Allison Archer, I'm on for Brian. Thank you for the question. Just curious if you could parse out how much of the traffic strength was attributed to the marketing efficiency and spend changes and how we should think about that impact on traffic going forward.

Yes, that's a great question. We're not able to parse it out totally in a way that I think would be helpful to your modeling. We do measure it and we look at it across a variety of things, but I don't think we could give you an answer that would help you to go forward. What we can say that I think might be helpful is our marketing is not a call to action based marketing. It's more of a brand awareness, brand building, you know, getting to know the brand kind of approach to the messaging. And so that takes a little bit longer to build and we expect it to last a little longer as well.

Thank you. Our next question is from Sarah Senator with Bank of America. Please proceed.

Hi, thank you for taking my call. This is, sorry, my question. This is Grace on for Sarah. You mentioned that marketing objectives are focused on driving at least one more visit from existing customers, also bringing in new customers. And I know you said that 70% of new customers have already returned for a second visit. So does that mean that more of your traffic growth in June came from new customers rather than increased frequency among existing customers? Or is that traffic growth evenly split? And then can you remind us what your average customer frequency looks like? And then I have one follow up question. Thank you.

Yes, I'll take the first part. I think here again, we're seeing the benefits across those. those user groups, both existing customers and first time customers. a really good trial to conversion ratio. And so we work really hard to get that first time visit. We feel like we can, you know, once we get them in the door and wow them with our experience and our food and our atmosphere, that they'll fall into some kind of frequency bucket. So, but we actually, in both of those areas, We've seen positive returns on, again, first-time customers and frequency. So we're not discussing the percentages of each one and what the makeup is, but suffice it to say both those areas are important. responding well to our efforts. What was the second question? I think your second question, Grace, was around frequency.

Matt, do you want to take that? Yes, sure, I can take that. Yes, on customer frequency, our studies show that casual dining is somewhere in the range of two to three times per year, and our frequency is well within that range as well.

Okay, okay, thank you. And then my follow up question is that you mentioned relatively low brand awareness is an opportunity. Would you be willing to share what brand awareness is? And then what does industry average look like? Because you said that aided brand awareness increased by more than 50%, but the gap is still wide.

Yes, this is Matt again. We're going to spend a lot of time on that in our investor day on November 12th. As we said, we saw the unaided growth 50%, which was, as you know, unaided bread awareness is a tough thing to grow. So seeing that grow by 50% is a big deal and we'll dimensionalize that more on November 12th.

Okay, thank you. As a reminder, to Star 1 on your telephone keypad if you would like to ask a question. Our next question is from Gregory Frankfurt with Guggenheim Partners. Please proceed.

Hey, thanks. I had two questions. The first was, I think you alluded to some changes you recently made to labor scheduling that have been helping out on the margins. What were the big changes that you made there?.

Yes, and I wouldn't say it's a huge change in labor scheduling. It was really more around right-sizing the number of managers in our restaurants. So we we're still averaging just under three. I think we've moved by a fraction of a point, but that fraction of a point makes a really big difference on our restaurant base. So just going through and adjusting the par based on what was appropriate on volume. Okay.

Okay, got it. And then maybe, Chris, one for you. Just the 50 stores and kind of having that number flatline, how did you come up with that as the right level as you look to the pushes and pulls and going higher or lower than that? Thanks.

Yes, I think that's exactly right. We looked at the pushes and the pulls and at all kinds of factors related to what maintaining that 10% unit growth rate meant for us. And at some point we would have had this conversation about kind of level setting on the unit growth. So we ran a bunch of models, as you can imagine, and really felt like this was a really good mix of you know, first of all, we're doing this from a position of strength, right? We open restaurants really, really well. But we wanted to look at that balance and drive the free cash flow and give us some balance sheet strength and some optionality down the road. you know, of all the models we looked at, we just felt like this worked the best for us. And we even looked at things, Greg, like, you know, what additional GNA would be needed to maintain that growth rate? I mean, when you're opening, you know, at our rate, when the percent stays the same and the number of restaurants goes up 10 or 12 per year, you know, you have to start looking at additional folks and development and training and the NRO teams and all those things. And so we considered that as well.

So, and again, I know we keep saying this, but we're going to provide a lot more color on that at investor day, because I know these are, these are kind of top line, you know, philosophies and, and we want to, we want to really share the thinking behind all of these things because we feel really good about it.

Okay, thank you very much. Uh-huh. There are no further questions at this time. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. First Quarter Earnings Conference Call occurring today, May 5, 2026, at 8:00 a.m. Eastern Time. [Operator Instructions] This call will be archived and available for replay at investors.firstwatch.com under the News and Events section.

I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch to begin.

Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the first quarter of fiscal 2026 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com.

This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the condition of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses.

Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the first quarter performance is a comparison to the first quarter of 2025, unless otherwise indicated.

And with that, I will turn the call over to Chris.

Good morning, everyone. Thank you for joining us to discuss our first quarter results as well as our plans for the balance of 2026. First, I want to express my appreciation to our entire team across the country, more than 17,000 dedicated employees whose commitment to making days brighter drives our success. We're pleased with our first quarter performance as several of our key growth initiatives supported solid financial results.

We delivered same-restaurant sales growth of 2.8%, generated restaurant-level operating profit margin of 18.5% and expanded the system to 648 restaurants with the opening of 16 new locations.

We believe our first quarter results and the benefits we are realizing from our growth initiatives line up well with our full year expectations. As a result, we are reiterating our fiscal 2026 same-restaurant sales growth and total revenue growth guidance. We're also raising the low end of our adjusted EBITDA guidance.

Early last year, we began investing in digital marketing programs and accelerated that effort in the first quarter of 2026. We expanded the rollout of our digital marketing campaign to approximately 75% of our restaurant base, up from roughly 1/3 in 2025.

Based on early analytics, we are already realizing a positive ROI on the increased expense in the markets receiving support for the first time in addition to the positive ROI in markets benefiting from a second year of investment, reinforcing our conviction in the strategy and plan.

The campaign is built around a targeted multichannel approach that spans paid social, online video, paid search and connected TV, allowing us to reach consumers in a relevant and engaging way. We're encouraged by the engagement across several key measures. The campaign is attracting first-time customers who may not have previously considered the brand, reengaging customers who had lapsed in frequency and driving greater frequency among our existing customer base.

At the same time, we are seeing improvement across key metrics, including gains in both unaided brand awareness and future purchase intent, which we believe are critical indicators of First Watch's long-term growth potential. These early results demonstrate that our increased investment is not only driving near-term traffic and engagement, but also strengthening the brand and building a higher lifetime customer value, so much so that we are pulling forward several million dollars of marketing spend into the second quarter from the back half of 2026.

We're also pleased with the performance of our new core menu. As we discussed on our last conference call, we conducted extensive testing of the menu in 2025, our first comprehensive menu update in more than a decade. The primary objective was to elevate the overall guest experience while also simplifying execution and improving efficiency for our restaurant teams. Following the positive test results, we rolled out the new core menu system-wide by late February.

Early reads have been positive across a host of KPIs. For instance, the 2 prior seasonal menu fan favorite items we highlighted, the Barbacoa Breakfast Tacos and the Barbacoa Chilaquiles Breakfast Bowl are both mixing above our expectations and both are higher-margin entrees.

In addition, the menu enhancements are driving positive mix of our fresh juices, shareables and add-ons. The new core menu is constructively impacting our consolidated sales mix and overall check composition. We're seeing higher attachment rates and more frequent trade-ups, which have translated into per person check average growth in the first quarter that was incremental to our carried pricing. That dynamic indicates that customers are not only responding well to the updated menu, but also that the new design is encouraging them to explore deeper into our offerings, validating both the strategic intent and the financial discipline behind this important initiative.

We also made a tactical decision to extend the duration of our Jumpstart seasonal menu from the traditional 10-week to 20 weeks, a first for our company. This move was motivated by 3 key objectives.

First, the increased repetition realized in the longer LTO menu window enables our operators to focus on the exceptional execution of the new core menu. Second, we are using the extended time frame of our Jumpstart seasonal menu to evaluate how a longer-tailed marketing campaign could influence future seasonal menu mix as a percentage of consolidated sales.

Encouragingly, attachment of our seasonal menu items has improved alongside the launch of the new menu. Even alongside the positive mix we are seeing from the core menu, it's exciting to see attachment to our seasonal offerings strengthen as customers respond enthusiastically to both.

Third, we brought back several of our most successful limited time offerings to the menu in order to generate excitement and strengthen customer engagement. Among these returning favorites were the BEC, a Bacon Egg and Cheddar sandwich served on thick artisan Sordough and the Strawberry Tres Leches French Toast.

The newest introduction, the Chimichurri Steak & Eggs Hash is now our highest performing seasonal entree of all time. Successful innovations in our restaurants, like those I've been sharing on this call, illustrate the power of the entrepreneurial First Watch culture. Promising ideas quickly rise to in-restaurant testing, which provides for optimization through the working partnership of our culinary and operations teams.

The result is our rich portfolio of new initiatives and upcoming offerings. We recently wrapped up testing of the highest mixing new shareable item is Million Dollar Bacon, which will launch in just a few weeks. Moreover, a suite of offerings that are driving higher attachment and boosting the guest experience is going into test now with an expectation that they will earn their way under the core menu early next year.

Shifting the spotlight to development and growth. We remain the fastest-growing full-service restaurant brand in the United States and the success of our recent classes reflects the benefits of following our disciplined real estate site selection criteria and our broad appeal.

Our preopening period marketing builds anticipation and trial, which has been supported by our operations teams, who work together to ensure we are executing at a high level upon opening in the critical early months following and for years to come. The class of 2025 annualized sales remains solidly ahead of both our underwriting targets and our comp base. And while still early, our recent class of 2026 NROs is performing even better.

Looking ahead, our priorities for 2026 and beyond are focused on driving durable, profitable growth. We're going to expand our presence in the new markets we've recently entered, moving briskly from market entry to market densification. By increasing restaurant density within a local market, we enhance regional efficiencies, broaden our customer base and build additional brand awareness.

At the same time, we will continue to be disciplined about where we expand. We are strategically filling in core markets where we already have strong operating leverage while also expanding in emerging markets where we have identified compelling long-term demand and significant white space. The bottom line is First Watch works everywhere.

Considering our proven portability, we have the competitive advantage of opening new restaurants in a balanced fashion across core, emerging and new markets on our march to 2,200 locations. We have established ourselves as the leader in daytime dining and continue to grow market share, strengthening our leadership position.

When one looks across the landscape, there is simply no other daytime dining brand that brings together our scale, our discipline, our proven ability to grow consistently and the size of the white space still in front of us.

Taken together, these attributes truly differentiate First Watch. We're energized by what lies ahead with ongoing innovation leading to growth, and we remain focused on doing what we do best, creating a wonderful place to work for our teams and delivering an experience that keeps customers coming back.

And with that, I'll turn it over to Mel.

Thank you, Chris. Total first quarter revenues were $331 million, an increase of 17.3% with positive same-restaurant sales growth of 2.8%. Our top line growth results from the positive same-restaurant sales growth, coupled with contributions from 194 noncomp restaurants, including 68 company-owned new restaurant openings and 19 franchise locations acquired since the fourth quarter of 2024.

Same-restaurant traffic growth was negative 2%, with weather negatively affecting the quarter by around 100 basis points in addition to our customary planned sales transfer. Excluding those impacts, underlying traffic trends remain consistent with our expectations.

Food and beverage expense was 22.6% of sales compared to 23.8%. As a percentage of sales, costs benefited from carried pricing of around 4% and commodity deflation around 1.6%. The commodity deflation was driven primarily by eggs, avocados and a brief favorable market trend in bacon prices.

Labor and other related expenses were 33.7% of sales in the first quarter, a 90 basis point improvement from 34.6% reported in the first quarter of 2025. Carried pricing offset 3.7% of labor inflation, while our labor efficiency was essentially flat as compared to last year. We realized restaurant-level operating profit margin of 18.5% in the first quarter of 2026, a 200 basis point improvement over last year.

We realized a percentage margin of 0.3% this quarter at the income from operations line. At $39.9 million, general and administrative expenses were 12.1% of total revenue. The increase compared to last year was largely due to the scheduling of our leadership conference in the first quarter and the expansion of our 2026 equity compensation program.

First quarter G&A expenses were lower than our plan due largely to the timing of certain activities. Although, our full year G&A expense plan remains unchanged, we are applying to the second quarter a portion of the marketing expense planned for the back half of the year, leading to our expectation that total second quarter G&A expenses will approximate the first quarters.

Adjusted EBITDA increased 22.2% to $27.8 million, a $5 million increase versus the $22.8 million reported last year. Adjusted EBITDA margin was 8.4% as compared to the 8.1% margin we realized in the first quarter of 2025.

Net loss was $2.7 million. We opened 16 new system-wide restaurants during the first quarter, of which 13 are company-owned and 3 are franchise owned and ended with 648 restaurants across 32 states. The net effect of acquisitions in the quarter, which includes only the impact of purchases made within the last 12 months, increased revenue by about $8 million and adjusted EBITDA by just over $1 million. For further details on the first quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link.

Now, I'll provide our updated outlook for 2026. We are reiterating the 1% to 3% range of same-restaurant sales growth, and we continue to expect positive same-restaurant sales growth in each quarter of 2026.

Our guidance includes carry pricing of around 4% in the first half of the year, which blends to 2% for the full year. As a reminder, we did not take any price at the beginning of 2026. And as we have done in the past, we'll revisit menu pricing in the coming months. We continue to expect total revenue growth of 12% to 14% with around 100 net basis points of impact from acquisitions.

We are reaffirming a total of 59 to 63 net new system-wide restaurants, which will result from 53 to 55 company-owned restaurants and 9 to 11 franchise-owned restaurants. We also plan to close 3 company-owned restaurants this year.

Our company-owned new restaurant development pipeline is weighted to the second half of 2026 Q4 in particular. We continue to expect full year commodity inflation of 1% to 3%. Restaurant level labor cost inflation is expected to be in the range of 3% to 5%. We're raising the lower end of our 2026 adjusted EBITDA guidance range.

Our new range is $133 million to $140 million, up from $132 million to $140 million previously. We're reiterating the net impact from the 19 restaurants we acquired in April last year, which are expected to contribute about $2 million to our adjusted EBITDA this year. We continue to expect capital expenditures of $150 million to $160 million.

I want to acknowledge the execution across our entire organization this quarter. I'm proud of our operators, our field leaders and our home office staff who navigated a dynamic environment, including weather impacts, welcoming and training a host of new employees, opening high-volume new restaurants and adjusting to our new core menu.

Our updated outlook for the year underscores our confidence in our operators and in our new restaurant development pipeline. We appreciate your continued interest in First Watch.

And operator, we'd now like you to open the line for questions.

[Operator Instructions] Our first question comes from the line of Jim Salera with Stephens Inc.

Chris, I wanted to start by just asking if you could give us some detail around the outperformance that you guys have seen relative to maybe the overall perception of breakfast. I think a lot of investors are concerned that breakfast is one of the more pressured dayparting restaurants given the kind of economic backdrop and yet you guys continue to deliver pretty durable same-store sales. So can you just help us kind of bridge that delta you guys are doing versus kind of the broader breakfast category?

Sure. Thanks. I think for us, it comes down to really 3 things: experience, execution and value. So I think a lot of the news and noise around breakfast and the softness around breakfast really has been targeted more and coming more from QSR. And I think you've seen a lot in the environment here about consumers really looking for value, consistency and the experience. And I think we bring that every day. And so I just think that the consumer is putting a high value on that and finding time in their mornings and middays to come see us.

If we think about some of the potential impacts on the commodity front, given the energy cost increase following the Iran conflict. Is there anything you are keeping an eye on or we should be keeping an eye on as you start to contemplate pricing in the back half of the year? I know eggs have still come down significantly, but there's been some fluctuation on some other commodities.

Yes, we'll be collecting all that information, and it's part of the consideration. We need to know where the customer is, and we consider that as part of the pricing philosophy and thinking that we'll go through. So it's -- the short answer to your question is absolutely, we think about the pressures that are on the customer from either gas or any other inflation that we see out there.

Our next question comes from the line of Jeffrey Bernstein with Barclays.

Great. Just following up from the comp trend perspective. Obviously, there was a spike in gas prices later in the quarter with the geopolitical concerns and the Iran conflict. I'm just wondering if you could maybe share your thoughts on your ability to work through that, whether there was any change in trend late in the quarter and perhaps into 2Q, if you're willing to share April, just related to the gas price spike. If you can share those sequential trends, that would be great. And then I had one follow-up.

Yes. I think a couple of things from kind of what we just said that I could expand upon. One is the traffic pressure that we felt really was impacted more by weather than gas prices and fuel prices and other pressures. So -- and then when you heard me talk about the performance of our menu and our seasonal menu and how the guests are electing to spend more and go deeper on our menu and add shareables and things like that. That came a little bit later, obviously, because we didn't launch that menu until February.

So we've actually been very pleased with how our consumer has interacted with us despite what's going on in the macro. So we're fortunate that we -- our core demographic is higher income. And I think we have a little more insulation to that. And I think the behavior that we're seeing from our customer, certainly as we innovate and give them new reasons to come in and work around our menu has been something that we've been very encouraged by.

And Jeff, our development team does a really good job of locating our new restaurants and the business is close to our customers. So in terms of just convenience, I think that's a helpful attribute that our system enjoys in terms of being near the customer and convenient to them.

Understood. And then just a follow-up. Well, first of all, whether you're willing to share April trends or whether there's been any change in trajectory. But otherwise, you did reiterate that you expect positive comps each quarter of this year. The compares are clearly much more difficult. In fact, the third quarter, they're like 600 basis points more difficult than the quarter you just completed.

So just wondering your confidence in that. Maybe there are particular initiatives to support such confidence. I'm assuming marketing is near the top, but your willingness to guide to positive through the rest of the year and what gives you that confidence?

Yes. We haven't seen a big shift in the trend in terms of the overall growth or what we have planned for the year.

Our next question comes from the line of Brian Vaccaro with Raymond James.

Just to ask on the First Watch value proposition and kind of your thinking on menu pricing. And maybe you could just talk about how you view the relative value proposition and price points kind of specifically versus some direct peers of the broader category. And when you think about menu pricing, assuming something material doesn't change in terms of the consumer backdrop, do you plan to take something in the second half, given there's still some underlying inflation, whether it be food, labor, et cetera?

Brian, you know us well. You know you're not going to get that answer, but I appreciate you asking. Our philosophy does not change despite the macro environment. You saw what we did when we had record inflation. We will always lean towards the consumer whenever we can. And sometimes that means taking it on the margin. And sometimes it means we catch up a little bit later on.

So I'd just tell you that we go into the beginning of the year and the middle of the year, really looking at things that we control. I think you heard me say that the seasonal menu is driving mix above our carried pricing. We love that, obviously. It's -- that's very different than taking price on a like-for-like item and a consumer paying one price one day and another price another day. So -- that's how we like to build check is through innovation and things like that.

That said, we see the realities of inflation and other things, labor and all of that, and we try to keep that nice balance. We do know from our research that we have tremendous pricing power, but we also know that the consumer is under pressure. So we really try to walk that fine line. But we go into, and we're about to do it here in the next couple of weeks, a full evaluation of that. And I will say that we feel good that our consumer, our customer is behaving a little bit differently than what we're seeing and hearing out there.

And I think it's because of the cocktail of things that we've put out there and put in place 18 months ago. The menu that we launched now has been something we've tested for 18 to 24 months. Same with the marketing and media. You know how we've kind of done the crawl walk run on that.

Well, that's all leading to kind of bring together of all those things for our benefit and for the consumer's benefit. So the direct answer to your question is we're going to evaluate it here for a midyear price increase, and we'll do what we think is best.

All right. You know, I had to take a shot at it, but I appreciate that. On commodity inflation, just a quick follow-up. Obviously, nice to see a little bit of year-on-year relief here in the first quarter, Mel, you noted some brief bacon relief maybe, but you obviously reiterated the guide for the year. So can you help us square those 2 a bit? And any color you can provide sort of on your Q2 expectations versus what's embedded in the second half?

So we did have some first quarter relief. The pork prices were a little bit unexpected relief in terms of price for us because our contracts are priced off published agency rates. And during the period that the government shut down, the agency prices were held flat rather than continue to ascend during the period. So that was a little bit of a surprise to us on an important commodity, but also our crop-related commodities of avocados and coffee continue to be expected to rise some through the year. So even though we enjoyed some relief in the first quarter, we are seeing sort of the seasonal increases in some of those. So we're -- our 1% to 3% guide on inflation in COGS, we're standing on that pretty firmly.

All right. And then maybe just one more quick one. Thanks for the color on the G&A pull forward into Q2. Pretty clear on that. But can you just remind us what your expectations are for G&A for the year?

We don't guide to G&A for the year. It's just embedded in our adjusted EBITDA guidance.

Our next question comes from the line of Andrew Charles with TD Cowen.

This is Zach Ogden on for Andrew. So you talked about the 1Q mix being driven by the new menu, but that was only fully rolled out for about a month. So is your expectation that mix can actually accelerate further in the balance of the year relative to 1Q?

Yes. Just for clarity, it was about 2 periods in the quarter. So -- and again, it's also -- that mix is also driven by the seasonal menu that is out right now that has our highest mixing item ever. So that's driving it, too. But yes, we don't plan for mix, but based on what we've seen as long as the rest of our seasonal menus deliver the way the first one has or similar to it or on a year-over-year basis, I wouldn't be surprised to see positive mix.

Got it. And then you talked about the class of 2026 actually being even stronger than the class of 2025. So can you talk about what's driving that? Is that more of a function of the second-gen sites you're shifting into this year? Or is that a separate factor?

I think the mix of second-gen sites is similar from a percentage standpoint, about half. So I wouldn't say it's necessarily that. I just -- to Mel's point, we're just -- that's an area where we are constantly learning and adapting as we either in site selection or prototype execution, design, those type of things. And that's one of the beauties of our model where we can kind of do those things. We have a kit of parts that we apply to each restaurant. So no 2 of them look alike, but they have very recognizable elements.

And we're just constantly getting better. I think if you go back and look at our -- the performance of our new restaurants over the last 7, 8 years, you'll see that every year has gotten better than the last, and we have some standouts in each class. And so that's something that we just continue to innovate around and get better.

Actually, I want to add one more thing to that. We've also -- with that comes the evolution of our preopening marketing and building the anticipation for the openings and that type of thing. So we're seeing stronger openings than we've ever seen before, and then they just carry on from there as well.

Our next question comes from the line of Sara Senatore with Bank of America.

I wanted to ask about marketing. You mentioned that you're pulling forward marketing, but your annual G&A target is unchanged. I guess is the implication that even if the ROI remains quite high, you wouldn't increase the annual spend on marketing? I'm just looking at -- I think last year, I know what you report in your 10-K is maybe not comprehensive, but it looks like you kind of doubled marketing last year. So just trying to understand, given how high the ROI appears to be, whether you would think about just stepping up the marketing budget for the full year? And then a quick follow-up.

I guess -- probably an easy way to think about it is that G&A is the cocktail of a lot of different items, too. So when we maybe throttle up or down the marketing spend. There may be some other areas where we can dial back or push it out. So we manage G&A throughout the year. So the timing shifts from time to time based on what we think is important and what people will respond to at certain times of the year. So those adjustments, I mean, they're ordinary and normal. So we are continuing to manage our G&A inside what our full year plan is.

But specific to marketing, what I would say is by pulling that forward and getting more time to read the results of those dollars being spent gives us the flexibility and optionality to consider doing what you mentioned, Sarah, later in the year should the environment be conducive to that.

Okay. Got it. And then, Mel, just on the -- you also mentioned that the G&A in the first quarter was slightly below to the same point, below your expectations. And is that the reason your EBITDA beat was a little bigger this first quarter than the full year guidance raised at the low end. Is that how I should think about it, which is some of that beat was maybe timing of G&A?

Yes, that's right, some favorability.

Our next question comes from the line of Brian Mullan with Piper Sandler.

Just a question on marketing also. If you look at the restaurants that have had the enhanced marketing tactics in place for longer, so maybe the first third of stores, are those performing differently than the stores they got it only more recently? I think what I'm really trying to ask is do the benefits build over time, do you get an initial lift and maybe followed by more benefits? Any color you could shed on that?

Yes. The lift in the restaurants that enjoyed some additional marketing spend last year has been sustained. So we're continuing to spend in those as well. So it's been effective for them not only last year when it was introduced there, but now in this year as well.

And obviously, that was part of what we wanted to evaluate was the cumulative effect of a class, if you will, or a group receiving support and then receiving it again the following year what we should or could expect when that happens. And so that's part of our overall marketing planning as well, certainly as we go through the rest of the year and then into next year.

Okay. And then as a follow-up, could you just comment maybe on the delivery channel broadly or generally speaking, really strong growth last year, you have to lap it. Is that kind of in the base now and you can grow more slowly? Or would you expect a little mean reversion this year? Just any comments on the balance of the year?

We've continued to see growth there, not to the level that we saw last year. But what we said earlier was that it's kind of in the base now, and we expect it to grow similarly to the rest of the system. And we're pleased that we kind of set a new level that we're growing from organically at this point.

Our next question comes from the line of Jon Tower with Citi.

Chris, this one is for you. I'm just curious, obviously, you mentioned earlier that your new stores are performing exceptionally well, and they continue to build new class year after year after year, getting better in terms of productivity. The backdrop, though, within the competitive set has certainly weakened, at least based on what we can look at in terms of where you guys were thinking around the time of the IPO versus today.

So I'm just curious if you can comment on the company's thinking around development over time and the commitment to that long-term low double-digit percent growth for units that you've spoke to over time.

Sure. I think if you look back at how we've grown and how we got to this leadership position over the years, it was through our organic company-owned growth, acquisitions, sizable ones for that matter, external M&A and franchising at some point. This was really at a time when we had a lot of players in our space, in our direct space, at least espousing that they were going to have aggressive growth.

And so we absolutely took the opportunity to take footholds in markets -- key markets for us and did so aggressively, and we continue to do that now. But that said, we're always looking at our capital allocation, what's the best strategy for the next 5 years, that type of thing. And so we're comfortable with our current unit growth outlook right now, but we are always evaluating. And if that changes, we'll obviously communicate that appropriately.

Okay. And then maybe just switching up a little bit. In terms of -- you talked about the new menu and the marketing helping with building brand awareness and it sounds like traffic too, to some extent. Can you speak to maybe any complexion of the customer base that you're drawing in with the new marketing campaigns? Are you seeing maybe younger guests come in relative to your existing base? Are you seeing less affluent consumers move into the stores for the first time versus kind of the core base that you have out there?

Yes, that's a great question. We have seen our average age go down for the entire system. And a lot of that's driven by the new market entries, the new restaurants. And if you look -- I mean, if you look at the way our marketing is the channels that we're using, it's a little bit of a self-fulfilling prophecy with our focus on digital and social and that type of thing. So it's something that we're targeting.

But we've actually seen quite a bit of growth in millennials. And so just the overall mix of our customer base now is dynamic and is changing, but it's going in the right way. And that's why we talk about attracting the next generation of First Watch customers so that we've been around 43 years and to kind of set us up for the next couple of decades by having a strategy like this. And as we've seen with other concepts, that's not an easy thing to do to keep your current customer base happy and engaged and coming while you engage and onboard, if you will, that next generation.

So I think our teams have done an incredible job doing that. And I'm really pleased with the mix of our consumer. We haven't seen anything from -- you mentioned about higher income and that type of thing. Obviously, millennials from an income standpoint, act more like a high-income cohort in the way they choose to prioritize certain things that are important to them. And I think experience is one of those things. So that's a group that's willing to lean in on that.

So I just think our offering is so ideal for this kind of transition to broadening our demographic appeal, the social occasion, the social gathering, group dining, brunch, those type of things. So yes, just long answer to it, we are seeing our customer cohort skew a little younger.

Our next question comes from the line of Todd Brooks with Benchmark StoneX.

Chris, you had said on the last call that you were equally as excited about the potential for the new menu versus the expansion of the enhanced marketing activities to be drivers of the business. here in fiscal '26. I guess, a, any surprises in how things performed across Q1 that either increased or maybe have you favoring one of the initiatives as a driver versus the other? And b, how is kind of the Q1 performance and what these key tactics are delivering kind of bolstering your confidence to still maintain the commentary about positive same-store sales in each quarter for the balance of the year?

Yes. My comment comes from my philosophy of the menu being really the #1 marketing tool. It's something every one of our customer touches. We can -- there can be a cause and effect relationship immediately that you can see and how customers respond to what you've done, how you've innovated. And so I'm not surprised by what we're seeing from the new menu. I think even before we got it in test, there was a level of excitement around here about how it's being presented.

We derisked it by bringing on some customer favorites from the past. And so I'm just really pleased that the consumer responded the way we expected them to. We've been very pleased by some of the add-ons like potatoes becoming million potatoes and add an egg and adding salmon to your avocado toast. And these aren't things that we just sat around and talked about. These are things that through our Y tour in speaking with our hourly employees, we hear that customers were adding salmon to the avocado toast.

And so why not put it out there and see, okay, if people are willing to ask for it when it's not on the menu, if we put it on there and raise the profile of that, would we see the penetration and we absolutely have. So building the check that way in a way that the consumer wants to do it, again, versus just increasing prices on like-for-like items to me is the most healthy way to drive check, and we've seen that.

I will say that, I think all of these things together, whether it's all the work that we did a couple of years ago with the KDS system and the dining room optimizations and the digital waitlist management improvements now coupled with the evolved menu and the increased marketing, I think, is all a really nice mix that's helping us to outperform the industry and deliver results like this.

That's great. My follow-up and then I'll jump back in queue. Obviously, a really strong opening quarter here in Q1. And I think, Mel, you talked about still looking for a second half and fourth quarter focused balance to the openings for the year. Any cadence you give us first half versus second half on openings? And you talked about densifying markets here in '26. You had the strong same-store sales performance, almost up 3%. But what -- can you share with us kind of the anticipated sales transfer that you plan to absorb this year with more of a focus on backfilling in existing markets?

Yes. So in terms of the cadence of openings, we historically kind of have a big fourth quarter just because human nature tends to push projects a little bit heavier into the fourth quarter. And so I think at least for the average throughout each of the remaining quarters of the year, it's probably pretty similar this year to last year as we continue to try and improve that over time so that we can eliminate bulges in the development that put strain on our operators.

So I would -- I'd kind of look to the cadence that we had last year as pretty similar for us this year. And then in terms of densification and sales transfer, when we underwrite new projects, we always consider the sales transfer and we -- and the new restaurants need to cover for that. They need to perform a little bit better in order to sort of pay back the other restaurants that experienced some temporary sales transfer. But that's all pretty planful for us and built into our overall underwriting.

So when we say that, restaurants are outperforming or they're doing according to plan, we've already determined what we believe is the sales transfer. And it's generally within our range of expectations overall. We don't typically quantify it, because there's lots of factors that go into the success of building out a market or fortifying a market or cutting off competition or some of those other advantages as well. So we know what it is internally. We don't speak to it publicly very much. But generally, it's part of all the strategic consideration of how we build out a market and how we fortify the brand against a competitive intrusion as opposed to our own sales transfer.

And Todd, I think that's one of the things that -- the point that sometimes gets lost on us because there aren't many, if any, high-growth full-service concepts out there that we do have -- we're a high-growth concept. We have sales transfer as we fortify these markets and do that. It's not immaterial, and it's just a natural headwind to restaurant traffic. But we view it as a positive one rather than any weakness in the core business because for us, same-restaurant traffic is certainly one of the metrics we look at, but there are so many other ones that we do as well. But for us, the profitable market share growth, the attractive new unit returns, all of those things together for us is what we look at and evaluate. So as Mel said, we model for it. We plan for it in the new restaurants, and it's something we've had for a while.

Our next question comes from the line of Gregory Francfort with Guggenheim Partners.

I have 2 questions. My first is just labor per operating week growth and it was obviously a lot slower this quarter. And anything to call out maybe besides wage rate, just any other kind of onetime drivers?

Of the labor inflation, you kind of got garbled at the first part of your question on our phone. Can you just say it again?

Yes. Sorry, just labor operating week growth. You got more leverage on that line than maybe I expected. Any call-outs or anything else that might continue through this year?

No. I think our operators -- just compared to the first quarter of last year when there was -- when our traffic was under so much pressure and the inflation was affecting everybody. I think our operators had to adjust, but it wasn't sort of a linear adjustment. This year, we have a better operating environment, and that makes it a little bit more predictable in the restaurants in order to manage the crews and to drive operational initiatives through the organization that are efficiencies or staffing, that kind of thing. So nothing remarkable. It's the hard work in Elbow Grease of a good operating crew.

Got it. That's helpful. And then maybe this question is for Chris. Obviously, the stock has been maybe more pressured than you or I would have expected. And the returns are still better to develop than they are maybe to buy back stock. But I guess, have you considered potentially doing that? And are there other ways to maybe signal to the market your enthusiasm? And I'm just curious kind of how you think through that piece of the capital allocation, maybe the returns on buying stock versus developing stores, even if it's a lower return, maybe it's more certain. Just any thoughts there?

I'd say the answer to your question is that I agree with you on the stock performance. And I'll just go back to my point that we are evaluating capital allocation. And we have very good returns on our new restaurants. We're creating a vast network of cash-producing machines at high returns and something that the consumer is interested in, right? So we wanted to take advantage of that. But overall, I'd say that from a capital allocation standpoint, we, as a management team and our Board, always look at opportunities to optimize that. And so we'll continue to do that.

And I think Chris is exactly right. Right now, the right thing for the company to do and our strategy is to continue to grow that cash engine, cash production engine. And the day that there is a shift in strategy, we owe the market a lot of explanation about how we -- how that would take place. But you want that cash engine to be as big as it can be. Therefore, you have more options of what to do with the excess cash at the time you make that shift.

So I think continuing to build with the kind of returns we get out of our restaurants, the -- our capacity, the way we're building out markets, I think taking advantage of that now is important in the life cycle of the company right now. So building that cash engine is building a lot of value for the future.

Our last question comes from the line of Chris O'Cull with Stifel.

Chris, can you just elaborate on the decision to eliminate the COO position? And maybe what you see as the biggest areas of opportunity with operations to drive efficiency and maybe even improved guest experience?

Yes, absolutely. I think as we looked at our overall G&A setup, and there were a couple of things. It was just a natural evolution for us. And -- but more specifically, it got me closer to operations, which I think is important. It's something that I've done for a long time here in this company and the opportunity to work more closely with the operations leaders. The way we restructured it, it only added one direct report to me.

We created 2 SVPs of operations and basically split the country, and I'm able to now be more involved in a day-to-day basis on ops execution and ops strategy, frankly, and kind of be that one foot here, one foot in the field. And I'm excited about it. I think the team is excited about it, but I know we'll be a lot more efficient and effective because I can be more involved.

Thank you. This now concludes our question-and-answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. Fourth Quarter Earnings Conference Call occurring today, February 24, 2026, at 8:00 a.m. Eastern Time [Operator Instructions] This call will be archived and available for replay at investors.firstwatch.com under the News and Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch to begin.

Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the full year and fourth quarter of fiscal '25 on Globe Newswire and filed its annual report on 10-K with the SEC. These documents can be found at investors.firstwatch.com.

This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses. Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our annual report on Form 10-K and quarterly reports on Form 10-Q.

First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law. Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant-level operating profit margin, adjusted EBITDA and adjusted EBITDA margin. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the fourth quarter or full year performance is a comparison to the fourth quarter of 2024 and fiscal 2024, respectively, unless otherwise indicated. And with that, I will turn the call over to Chris.

Thanks, Steve. Good morning, everyone. Thank you for joining us to discuss our 2025 results as well as our plans for 2026 and beyond. 2025 was noteworthy for First Watch, and I'm proud of our team's performance throughout the entire year. Our total revenue growth was more than 20% and same-restaurant sales grew by 3.6% with positive same-restaurant traffic. We also opened 64 new restaurants across the system. Our 2025 new restaurant class represents the most openings in our company's more than 40-year history and exemplifies the depth of our development pipeline and our ability to execute against our growth opportunity.

As always, I want to thank our more than 17,000 employees nationwide without whom this would not be possible. I'm particularly pleased with the results considering that according to Black Box, industry traffic was negative and casual dining was only slightly positive as a result of macro environment pressure throughout the year. Despite the headwinds, our teams effectively executed on our growth strategies, and we excelled by focusing on controlling what we can control and by playing the long game. For example, we successfully and patiently navigated through soaring commodity inflation early in the year.

We were able to balance preserving the value proposition for our customers by carrying moderate pricing while still delivering restaurant-level operating profit margins of 18.5%, well within our targeted long-term range. To strengthen our performance in the third-party delivery channel, we enhanced our key partnerships with 2 primary goals in mind: first, to drive traffic in that channel; and second, to do so profitably. We achieved both. We also successfully launched our new digital marketing initiative to roughly 1/3 of our comparable restaurant base, generating a positive return on our investments.

The results were compelling in building brand awareness and driving traffic, and we are excited about rolling it out to a wider base of restaurants in 2026. Stepping even deeper into marketing and our focus on the customer. Throughout 2025, we advanced our multiyear effort to enhance our paid marketing and customer analytics capabilities. Following disciplined testing in 2024, we deployed a more sophisticated marketing strategy across select geographies and drove consistent increases in both aided and unaided awareness and increased customer visits. These results have given us the confidence to expand the program further to the majority of the comp base in 2026, and we're excited to continue leveraging this evolving competency.

Our marketing strategy is data and audience-driven with heightened personalization from what might have been possible for us just a few years ago. We segment our markets using population data, market awareness and competitive intensity. Our objective is to serve the right message to the right consumer at the right time and to nurture that relationship into a first-party connection and ultimately, a restaurant visit. Tangible benefits have been realized from connected TV, online video, paid search and programmatic digital that connects to household and transaction insights as well as our owned data.

Along with our focus on staying top of mind is our obsession with delighting customers the moment they walk into our restaurants. This comes to life through our innovative seasonal menus, warm hospitality and concerted effort to make days brighter. We're proud to see this focus pay off. And in 2025, our restaurants earned a range of awards and accolades that underscore the strength of our execution. We were pleased to be named to Yelp's Most Loved Brands list, ranking #4 among other highly distinguished and well-known consumer brands.

This recognition validates that we have created a welcoming environment known for great food and great service. In the spirit of continuing to raise the bar, I'm happy to announce that earlier this month, we rolled out a new core menu to all First Watch restaurants, the first significant redesign and reengineering of our menu in almost 10 years. Our overarching objective with this redesign is to meaningfully elevate the experience for our teams and our customers.

This effort again reflects the extensive feedback we've gathered over the past several years, reinforcing our commitment to continuous improvement and ensuring the long-term relevance of our brand. We added some of our most popular seasonal menu items to the core menu, including 2 dishes that feature a premium protein in the form of Barbacoa, the Barbacoa Breakfast Tacos and my favorite, the Barbacoa Chilaquiles Breakfast Bowl. Other permanent additions include our best-performing sweet item, Strawberry Tres Leches French Toast and an additional shareable, the Holey Donuts.

We know our customers will be excited by the return of these beloved items and will also appreciate the work we did to improve menu navigation and add common customer requested add-ons. At the same time, we use this effort as an opportunity to address slow-moving items, eliminate single-use SKUs and reduce complexity for our back-of-house teams. We're very optimistic about this initiative. In addition to improving our core menu, we also took the opportunity to elevate the design of our seasonal menu as well.

With inspiration from our food ethos of Follow the Sun, we introduced more color, vibrancy and thoughtful illustrations to better tell the story of our rotating menu and the innovative items that we introduce each season. Currently, we're featuring the Chimichurri Steak & Eggs Hash as well as the return of the Bacon Egg and Cheddar sandwich, otherwise known as the BEC served on thick artisan sourdough. Our new core and seasonal menu initiative is comprehensive and was vetted and tested for more than 1 year in a meaningful number of First Watch restaurants.

One final marketing topic related to our delivery channel. As our industry has continued to rapidly evolve, we too have evolved. We're committed to meeting our customer where they are. Our delivery efforts in 2025 reflected that principle. And while our digital marketing priorities illustrate our primary focus on the direct relationship with our customers, our information indicates that the delivery occasion is largely incremental, but likely not always with a unique customer. Said differently, we believe consumers and our customers specifically seek a variety of occasions in their everyday lives. And by leaning into delivery, we are better positioned to stay top of mind for an eventual in-restaurant occasion.

We continue to test and measure a variety of ways to grow our share of total occasions while driving positive margin dollars. Shifting to real estate development and growth. 2025 was yet another record-setting year, highlighted by our high number of openings and strong in-restaurant performance. As a group, the 2025 restaurant class is exceeding our expectations with first year sales trends running 19% above their underwriting target. We also achieved the highest opening week sales on record at our Cosner's Corner, Virginia restaurant, which generated more than $90,000 in first week sales, reinforcing the strength of our model.

In Boston, we followed our initial suburban entry with a high-profile flagship opening on Boylston Street in January, helping establish brand visibility in one of the most dynamic urban centers in the country. Our disciplined approach to market analytics and site selection allowed us to confidently enter 5 major markets in 2025: New England, Las Vegas, Salt Lake City, Boise and Memphis, each of which represents a meaningful long-term growth opportunity for our brand.

In fact, as a group, these markets as of today represent up to 155-unit opportunity. Our class of 2026 restaurants are essentially scheduled, and we are already deep into 2027 and 2028 site selection. We remain the fastest-growing full-service restaurant brand in the United States and are exceptionally well positioned to build on our record performance. Our priorities for the year include deepening our presence in newly entered markets as we shift from market entry to market densification while continuing to strategically fill in core and emerging markets.

We know and have demonstrated for many years that when we adhere to our disciplined data-driven approach to site selection, we can meet and even exceed our investment return metrics. These plans, combined with the strength of our team and the proven effectiveness of our development strategies, gives us confidence in our ability to continue to deliver sustainable, best-in-class growth as we march toward our target of 2,200 restaurants. Also, in 2025, we continue to make significant investments in our talent pipeline and leadership development, aligning with our strategic growth priorities.

As I mentioned on last quarter's conference call, First Watch was named America's #1 Most Loved Workplace by the Best Practice Institute for 2025, a recognition we also earned in 2024. And just last month, based solely on employee voting, we were named in Glassdoor's list of 25 Best Places to Work in Consumer Services in 2026. These accolades are welcome, but what matters most is that it represents direct employee feedback and experiences at First Watch. Our general managers play a crucial role in our success.

In 2025, we updated the GM job description to reflect a renewed focus on operational excellence and people development, providing robust tools, techniques and best practices for managing employee development. This comprehensive approach ensures our restaurant-level leaders are empowered to nurture talent and maintain high standards throughout our operations. These initiatives, among others, further strengthen our organization as the results have made clear. Restaurant-level employee turnover declined in 2025, and we realized a 40% increase in applicant volume compared to the prior year.

Looking ahead, industry data from Black Box continues to point to yet another challenging year with their current outlook calling for a roughly 3% industry-wide same-restaurant traffic decline in 2026. Despite that backdrop, we remain confident that the initiatives we have put in place position First Watch to once again outperform the industry just as we did in 2025. We believe our disciplined execution and strategic investments will continue to drive market share gains in 2026.

There is no one in our daypart with the combination of scale, operational acuity, proven growth and total addressable market as First Watch. In fact, with consideration to those attributes specifically, no one even comes close. We are the segment leader and we'll continue to increase our share. There's a lot to be excited about in 2026 and beyond, and we look forward to making days brighter for our employees and our customers every day.

Now before I pass it over to Mel, I want to address the announcement we made this morning regarding Mel's decision to retire later this year. This transition to retirement is much deserved and will be well planned. Mel has been with First Watch since 2018 and was a critical part of our IPO in 2021. While he will certainly be missed, I'm optimistic about our company's promising future and next steps related to his retirement, including an executive search that will start immediately.

Mel will continue as CFO until we have a successor in place and onboarded. He also plans to stay on as an adviser until the end of 2026 to ensure a completely seamless transition. Mel, I want to thank you for your dedicated service and partnership for all these years. We wish you and [ Trish ] nothing but the best in this next stage of life. And with that, I'll pass it over to Mel.

Thank you, Chris. That's very generous. I'm proud and grateful to be a member of your team, and I'm glad to play a role in facilitating a smooth transition. Let's return to the discussion of the company's performance. Total fourth quarter revenues were $316.4 million, an increase of 20.2% with positive same-restaurant sales growth of 3.1%. Our top line growth in the fourth quarter is attributed to positive same-restaurant sales growth, 179 noncomp restaurants, including the 78 company-owned new restaurant openings and the 19 franchise locations acquired since the third quarter of 2024.

Same-restaurant traffic growth was negative 1.9%. Food and beverage expense was 22.9% of sales compared to 22.7%. As a percent of sales, costs benefited from carry pricing of around 5%, partially offset by commodity inflation of 1.1%. Excluding vendor contributions related to our 2024 leadership conference, which were reported in the prior year results, food and beverage expense as a percent of sales for the fourth quarter of 2025 would have been lower versus the fourth quarter of 2024.

Labor and other related expenses were 33.5% of sales in the fourth quarter, a 20 basis point improvement from 33.7% reported in 2024. Carried pricing offset the impact of 3.1% labor inflation in the fourth quarter, while our labor efficiency was essentially flat compared to the fourth quarter last year. We realized restaurant level operating profit margin of 19% in the fourth quarter of 2025, a 20 basis point improvement compared to the fourth quarter of 2024. Our income from operations margin was 2.9%. At $31.8 million, general and administrative expenses were 10.1% of fourth quarter revenue, which was a 160 basis point improvement versus the prior year.

The favorability as a percent of total revenue was largely driven by the timing shift of our leadership conference and also benefited from levering certain home office expenses. Later on this call, I'll share a bit of good news about our expanded equity compensation program. Adjusted EBITDA increased 38.7% to $33.7 million, a $9.4 million increase versus the $24.3 million reported last year. Adjusted EBITDA margin grew to 10.6% compared to 9.2% we realized in the fourth quarter of 2024.

Our 2025 income tax benefit was $10.7 million and includes a sizable noncash benefit. Specifically, our year-end 2025 assessment of the future realization of the company's accumulating FICA TIP credits was more favorable than in years prior. The recognition of our net deferred tax assets includes the effect of this year-end determination. Net income was $15.2 million and net income margin was 4.8%. We opened 13 new system-wide restaurants during the fourth quarter, of which 12 are company-owned and 1 is franchise-owned, and we finished 2025 with 633 restaurants across 32 states.

The net effect of acquisitions, which includes only the impact of purchases made within the last 12 months increased fourth quarter revenue by about $9 million and adjusted EBITDA by about $1.5 million and full year by about $35 million and $6 million, respectively. For further details on the fourth quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link.

Now I'll provide our initial outlook for 2026. We are expecting same-restaurant sales growth to be between 1% and 3%. As a reminder, our pricing philosophy is such that we evaluate menu pricing at the beginning of the year and again around midyear with the objective of offsetting what we view as permanent inflationary pressures. We manage the business with a disciplined focus on sustaining same-restaurant sales growth while protecting the long-term health of the brand. Given our current outlook for commodity inflation and importantly, in keeping with what we believe is in the best interest of our customers, we elected not to take any pricing at the outset of 2026.

Therefore, our guidance includes carried pricing of around 4% in the first half of the year, which blends to about 2% for the full year. We expect total revenue growth of 12% to 14% with around 100 net basis points impact from acquisitions. We expect a total of 59 to 63 new system-wide restaurants, including 53 to 55 company-owned restaurants and 9 to 11 franchise-owned restaurants with 3 planned company-owned restaurant closures. Our company-owned new restaurant development pipeline is somewhat weighted to the second half of 2026, the fourth quarter in particular.

We expect full year commodity inflation of 1% to 3%, driven by increases in coffee and bacon, partially offset by expected deflation in eggs and avocados. Restaurant-level labor cost inflation is expected to be in the range of 3% to 5%. Our adjusted EBITDA guidance range is $132 million to $140 million, including the net impact from 19 restaurants we acquired in April last year, which are expected to contribute about $2 million to our adjusted EBITDA this year.

We expect capital expenditures of $150 million to $160 million. While we do not typically provide quarterly earnings guidance, we believe you may find a few considerations helpful to your models. First, we expect positive same-restaurant sales growth in each quarter of the year, including our third quarter when we will face our most robust comp comparison. Second, as it relates to the first quarter, we elected not to take price in January and experienced several weather-related disruptions during the month, which reduced operating days in our comp base.

And third, as noted on our last call, we held our leadership conference in January of 2026 and accordingly expect G&A expense to be materially higher in the first quarter than any other quarter this year. Lastly, as was mentioned earlier, we strengthened the alignment of our operational incentives with the interest of our shareholders by enhancing our equity-based compensation for senior leadership and expanding eligibility to include our divisional operators. These actions reinforce accountability across the organization and better position the company to attract and retain talented colleagues to drive results.

The equity compensation program does not impact our adjusted EBITDA and the related accounting charges associated with the incremental noncash awards will be recognized in G&A, which may limit our ability to lever G&A this year. 4 years after our IPO, I'm proud of the results our company has delivered, and we remain fully committed to driving similarly strong performance ahead. We have grown our system from 428 restaurants at the time of our IPO to 633 at the end of 2025 and nearly doubled adjusted EBITDA along the way, compelling evidence that the growth strategy is working and that our execution remains both disciplined and consistent.

These milestones reflect the strength of our model, the quality of our teams and the momentum we have built. Our real estate and talent pipelines are the healthiest they've ever been, giving us confidence in our ability to achieve our growth objectives for both 2026 and beyond. And with that, operator, will you please open the line for questions.

[Operator Instructions] Our first question comes from Jim Salera with Stephens.

Mel, first of all, it's been great working with you. Congratulations on an incredibly successful career, and I wish you all the best, whatever comes up next for you.

Thanks, Jim.

I wanted to maybe drill down a little bit on the commentary for FY '26. Mel, I appreciate the commentary around pricing and how that should flow through the year. Can you just give us a sense for what you're underwriting for the industry for '26 and kind of how your expectations layer on top of that? And maybe if you could also provide some color on the mix component of your tickets.

When you say underwriting for the industry, you asked me to speculate about the climate that we're going to be operating in.

Yes. So I think your guide kind of implies sort of down modest traffic for the industry and you guys being in line to modestly better? Just any details that you could provide?

Yes. I think, Jim, I think there's reason to be cautious about the environment that we're operating in now. I think historically, for our particular category and different cohorts of peer comparisons against Black Box data, we seem to outperform that quarter-over-quarter. So I don't expect that particular characteristic to come to an end, but I do think that the entire category has reason to be cautious here in February about what's going to ensue for the balance of the year.

And then mix as a component, I know you gave us some details on pricing, but just how should we think about mix progressing through the year that be a relative headwind still or maybe some opportunity for that to turn positive?

Yes. In our guidance, we don't typically project where the different components would come out for the year. What we do with our same-restaurant sales is what we're guiding to is that 1% to 3% for the full year, and we'll take a read on how we defend within that range as the year progresses.

Jim, I can also give some insights there. I think -- well, I know we saw positive mix from our core menu test rollout. And so taking that to the entire system, we believe we have some mix upside there, which was one of the consideration factors with not taking price in Q1 like we have in years past. And then on the Black Box, to be more specific, in my commentary, I talked about their current projection for the year is roughly a 3% industry-wide same-restaurant traffic decline.

So as we've done in the past, we've outperformed the industry, and that's kind of the position we're taking now that Mel is exactly right. There's a reason to be conservative based on what the industry-wide impact in Q4 specifically and even more specifically in December. But we've been able to outperform the overall industry, and there's no reason for us to believe that we won't do that again for '26.

Our next question comes from Jeffrey Bernstein with Barclays.

Great. I echo the congratulatory comments from Mel. I hope you get to enjoy retirement. My question is just on the 2026 unit growth. It looks like we're looking for maybe 9% to 10% net growth. I know the long-term algo has been for many years, kind of low double digit. I'm just wondering maybe how you think about the constraint to greater growth, whether it's real estate or people, it just seems like on an ever larger base, maybe be worthwhile considering lower the long-term guidance to maybe more of the high single-digit range because the focus is really on getting the operations right.

It's really not about the speed of openings considering you have so much runway ahead. So just wondering whether we should expect more tempered growth or whether there's some reason why 2026 might be a little bit more subdued? And then I had a follow-up.

This is Chris. I think we -- our long-term targets of around a low double-digit unit growth. We've exceeded that in the last couple of years. There'll be ebbs and flows as it relates to that. The reality is the absolute number of restaurants continues to increase when you stick to that percentage. So we're always going to look at it in terms of what's best for the overall organization. The #1 priority is the health and performance of the core system.

And so as we continue to grow and that number continues to go up, we'll monitor it and make sure that it's not putting any undue strain on the system. But I will say that regardless of the actual number or the percent, I mean, we're delivering quality growth year after year. Our 24, 25 NRO classes are delivering average weekly sales that are higher than their underwriting targets and our comp base and the class of 2025 alone is 19% higher than their underwriting target. So we're really focused on the quality growth. And the number will ebb and flow, like I said, year-to-year, but I think that's a good long-term target for us, and that's why we kind of restated that.

It's also a good time for me to just kind of slip in here real quick that our earnings release was a little bit awkwardly wording around -- worded about our new restaurant opening guidance, which was 59 to 63 net system-wide restaurants and the net is 3 restaurants that company-owned that we expect to close this year.

Understood. And my follow-up, Chris, in your prepared remarks, or I should say even in the press release, you talked importantly about the evolving digital marketing platform. I know it's more focused on direct marketing. But I'm just wondering if you could share maybe since that seems like that's the biggest initiative for this year to drive comp, maybe the greater learnings from the tests, the greatest opportunity this year, maybe the dollar spend? Any kind of broad brush commentary you can share on the excitement around the evolution of that program?

Sure. Thanks, Jeff. I'll let Matt talk about the specifics, but I just want to make it clear. I'm excited about a number of levers we have this year. Marketing is certainly one of them. What we saw in the test was very, very encouraging to us, and we're excited to expand it to a majority of the system this year. But I got to say I'm just as excited about our new core menu rollout.

When you think about the transformation of First Watch over the years and the acceleration of our growth, it came about 10 years ago when we did a similar exercise. So what we've seen in test there is also why I'm encouraged about 2026. And Matt, if you want to give some specifics on the marketing.

Yes, sure. Jeff, it's Matt Eisenacher. So as Chris said, there's a variety of levers. I echo his sentiment that we're really optimistic about the new core menu. Obviously, we're excited to be able to scale our marketing program from last year where we focused on particular geographies and now we'll be scaling that to the vast majority of our comp base and it allows us to continue to use those things that worked last year and amplify those, starting to put more emphasis into video and driving awareness.

Last year, we saw in those geographies an increase in both aided and unaided awareness. And so you have that and then the relaunch of all of our new digital platforms like our new app, you start to see how you can drive trial and then you have the analytics to be able to get more efficient with that media spend over the long term. So all of those things kind of play together.

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

Maybe just a couple of questions on the commentary about the comp expectations through the year. Not necessarily looking for kind of quarter-by-quarter guidance, but you mentioned that you expect comps to be positive in the first quarter even with the kind of weather. And I assume that's kind of firm only as opposed to taking into consideration the current weather impact. But I just wanted to clarify, as you think through the doors being closed, presumably, traffic will be -- there'll be a headwind but you have 5 points of price.

So I guess, is it safe to assume that it's sort of modestly positive? And then as you get through the year, you mentioned the toughest compare in the third quarter, but I think your pricing implication was that price might be in the low single digits in the second half of the year, just given the average of around 2%. So again, I wanted to understand kind of your confidence or how you're thinking about the drivers of traffic, both with the headwind early in the year and then the more difficult traffic compares in -- at least in the third quarter? And then I do have one quick follow-up, please.

So the full year guidance at 1% to 3% is -- already incorporates what we're seeing in sort of in the current environment, as you mentioned. We're deliberately guiding only to same-restaurant sales because we have different timing coming on board with regard to the new menu, with regard to rolling some fairly robust third-party delivery sales last year. So there's -- and then just the general environment. So a little bit harder for us to be confident in exactly what the cadence is going to be. But I do think that we're probably currently looking at maybe a more challenged quarter by weather than the rest of the year. And then we do have some -- it does get a little bit tougher in the third quarter.

I will say that our year-to-date trends are improved versus December. And so we believe we're on track to meet our annual same-restaurant sales guidance when you kind of carry that forward.

Okay. So just sort of thinking about the cadence, I appreciate the color. And then just the follow-up was on the new 2025, and I apologize if I've missed this somewhere. I know you mentioned 19% higher than underwriting targets. I know your sort of underwriting targets are, I think the bar is a little bit lower than what we've been seeing in the past. So how do the AUVs compare, I guess, to previous cohorts to earlier years? Are you still seeing kind of increasing new unit volumes? And is that largely consistent with kind of the size of the footprint? Or anything different there as you think about the returns on the new units?

As you know, we've grown AUV significantly over the years. And just a reminder of our 2026 unit economics, third year sales expectations of $2.8 million, the 18% to 20% restaurant level operating profit margins that we talk about that penciling out to an 18% IRR and a 35% actualized cash-on-cash return. So yes, the AUVs continue to increase. So when we talk about a class being higher than their underwriting targets, I can't think of a year where that number hasn't been higher than the year before from an AUV and underwriting standpoint.

So just healthy underlying growth for us on a new unit standpoint. As far as what's driving that, we have talked about the bigger footprints. We haven't necessarily seen a correlation on size of the restaurant per se, but we know that when we stick to our underwriting criteria, our site selection criteria, the data that we use that it sets us up for success. And we've proven that year-over-year, and we feel that we'll be able to do that in 2026. And like I said on the call or Mel said, we're well underway for 2027 and 2028. So I mean, if anything, growth is a strength for us, the unit growth and the performance. And again, it's quality growth.

Our next question comes from Andrew Charles with TD Cowen.

Great. And Mel, best wishes for retirement. I hope the next chapter gives you more time for golf. Chris or Matt, on marketing, you guys talked about a positive return on spend. Can you help us understand what you're observing with the same-store sales outperformance at those 1/3 of stores that are utilizing marketing efforts versus the 2/3 that aren't? And then just really looking ahead, I think you said the vast majority of the comp base will benefit from marketing. How soon is that plan to scale? Is that more of a first half or a second half driver?

Yes, sure. Happy to take those. So I think as we stated last year in those select geographies, we did see a several hundred basis point lift in traffic pre-post test control. And so we would -- we're applying the same playbook and strategies to this year with a couple of optimizations. So it's not like we're deploying radically different strategies than we did last year. We're just scaling it to more restaurants.

To your second question on the cadence of the spend, we actually just started moving into markets. Obviously, that takes time to build. And like last year, that will extend throughout the year. We do try to align that with our seasonality. So you can think about the spend following our seasonality. So obviously, you probably have more in the front half of the year and then would taper down as you go throughout the rest of the year.

Okay. And then, Mel, can you just help us understand the cadence of commodity and labor inflation as we think about 2026. I was thinking on the commodity side, theoretically, you should see a more tame first half of the year, just given what you're lapping over. On the labor side, you got the Florida minimum wage increase going on for September 30, but any help on the cadence would be helpful.

I think that we expect the inflation to be somewhat higher in the second half of the year, so quarters 3 and 4 than we're experiencing right now and in the second quarter.

Our next question comes from Jon Tower with Citi.

Maybe starting off, Chris, you had mentioned, obviously, the new menu or the core menu improvements you're excited about. I think you had talked about even 10 years ago or so, seeing some fairly strong growth post changes. So I'm curious, aside from obviously hitting on things that consumers want more of, are there actual operational improvements as well? It sounds like you reduced some of the SKUs, but should we expect better speed of service? Any other benefits that you can speak to from this core menu enhancement?

Yes. A lot of those efforts we talked about a lot in '24 and '25 with the back-of-house improvements, improving our throughput, especially during peak sales hours. The efforts around the menu will definitely deliver some efficiencies like I talked about removing some single-use item SKUs, bringing back some of these favorites and things that we -- the teams have executed before as seasonal menu items.

So there's a muscle memory there that will help them execute that. But really, this is much more heavily weighted toward the consumer side and the appeal and bringing back some of these favorites. But it does have some back-of-house benefits like reducing prep time and things like that, but that wasn't the main focus.

Got it. Makes sense. And maybe just kind of flipping to the backdrop. Curious in your guidance for the year, Mel, how you're thinking about tax refunds and how that might be impacting your business? Or asked differently, in the past, when you've seen elevated tax refunds, how has the business responded?

Yes, that's interesting. Historically, we believed that our typical customer isn't -- doesn't react necessarily to tax refunds in terms of attendance in our restaurants. But we're certainly aware of it, and it's just going to be easier for us to read after it occurs. But our customer demographic tends to skew a little bit higher on the household income scale. And as a consequence, we've oftentimes been a little bit insulated from certain cost pressures in terms of going down and when there's a windfall or a refund -- tax refunds, we may not benefit quite as much as you see in quick service restaurants.

Our next question comes from Andy Barish with Jefferies.

Congrats Mel. Just trying to frame up how we should think about the delivery business within the context of your guidance. I know I've seen some free delivery offers and things like that. Can you kind of maintain sales in '26 versus the big growth that you saw in '25? And one quick follow-up as well.

Sure. Andy, this is Chris. We -- obviously, we've been really pleased with our progress in this channel over the past year. Our teams worked really hard to create a true partnership with those vendors that we work with. And so we're happy with the third party where it is and as a direct off-prem as a percentage of our overall mix. And we -- we're not specifically commenting on future traffic assumptions in that channel, but we also didn't fund free delivery. I mean it was a much deeper partnership on how we got together and aligned on goals, which really is about transactions for both of us and then margin for us. And we achieved both of those, and we'll continue to work to build on that.

Got you. And then on the new unit growth, so I just want to be clear, on the company-owned side, it will be 56 to 58 gross and then the 3 closures that have been primarily contemplated.

That's right.

Okay. And is the -- is the kind of market densification, I guess, implying you're not going to go into 5 new major markets as you did in '25. Is there a little bit of an NRO margin benefit that we should see? Or is it not as material just given the size of the company now?

Are you talking about the -- when you say margin benefit, can you expand on that?

Yes. Just densifying existing markets, which is obviously positive and not going into, I'm presuming as many new markets, which is also obviously positive as it takes a little time to ramp margins in those newer markets?

Yes. If you will recall, we have very similar performance for our NROs across geographies. So that's not really a large consideration. Where that really shows up, though, Andy, is in preopening costs and training costs. If we do it in a core market, we can pull trainers and staff from around the region, whereas if we're going remote like we did in Las Vegas or when we entered Boston or New England, the preopening costs are higher. But the margin performance is pretty similar across geographies and kind of the maturity of the market.

And Andy, I think I misspoke in response to your question. The range of new company restaurants, which is what I think you were asking about is net of the 3 closures that we expect to execute this year. So that range at 53% to 55% is the net range, so it considers the closings.

Our next question comes from Todd Brooks with Benchmark [ Stone ].

Mel, I add my congratulations on your upcoming retirement. A couple of more follow-up type questions here, but I wanted to dig in on the enhanced marketing efforts. And correct me if I'm wrong, but my understanding of the focus in '26 in the test kind of 1/3 of the base was finding breakfast daypart users that weren't necessarily First Watch customers and stimulating them to try the brand. Is -- was that the case for the entire year? And is there another lever that gets pulled as you broaden the program out where we actually use the enhanced marketing efforts into the existing First Watch customer base in an effort to drive additional frequency there as well?

Yes. Todd, it's Matt Eisenacher again. So it's a good question. I was saying we're really taking the playbook of what we saw work last year and applying that this year. The strategy would be the same as you stated, where we're using information and customer data to target those that are already active in the breakfast daypart. I mean we're still in the early stages of a marketing lever here at First Watch.

And so we see that as a responsible way to be efficient with our dollars. Now again, if you look many years out, eventually, you can start to move outside and start to grow the overall occasion. But as we all know, that could be a little bit more difficult. So we are -- for this year. And yes, to answer your question, that was the focus all of last year as well and will be this year as well.

So Matt, any pivot to some of the effort being against existing First Watch customers versus just overall category users? Or does that measure of overall category users include your existing customer base?

Yes. So as we talked about before, we apply different strategies, channels and creative if we have not seen you before or if you're part of our customer base. If we're trying to introduce the brand to you, we want to establish that we're a great place for everyday breakfast. As we start to get more information on you, we'll start to kind of pulse through our seasonal menu program given that you know who we are. So we have a variety of segmentations and cohorts and our first-party audience is part of that as well.

Our next question comes from Brian Mullan with Piper Sandler.

I would like to just echo Mel congrats on the retirement. Can you just comment on what you've seen lately across the dayparts between weekday breakfast, weekday lunch and the weekend business? Just curious if there's any notable differences or if they're more behaving similarly and how you expect those to behave in 2026?

So we talked about, I think, on the last call that we saw strength in the weekday breakfast segment. And we certainly saw that in Q4 and all of last year. And then in Q4, also weekends also slightly outperformed -- sorry, not just Q4, but also for '25 as well. So whereas we saw some weakness, I think, back in '24 in weekday breakfast, we recovered that in '25 specifically.

Okay. And then just menu innovation, just high level, the beverage offerings. Just wondering what the team is working on, if anything? And what's the biggest opportunity over the next few years?

Yes. The beverage category for us continues to be a big driver. We launched our fresh juice program, I think, almost 10 years ago now, and it still continues to blow us away at the mix of those items. We have a new juice on every seasonal menu. And thoughtfully over the years, we've added a couple of those juices to the core menu. We've also innovated around cold caffeinated beverages, which is now a permanent part of our menu, and those do well. So we're absolutely looking at the beverage category as an opportunity in addition to the alcohol platform that we rolled out a couple of years ago. So we see opportunity there for -- in our innovation pipeline.

Our next question comes from Gregory Francfort with Guggenheim Partners.

I guess my first question is just on the pricing. You guys -- I think you guys evaluated pricing twice during the year. And I'm just wondering, as you looked at the guidance, what you embedded? I guess there's no pricing in the first half, incremental pricing, but do you embed an assumption for a pricing increase in the second half?

So we talked about the carried pricing of -- it will end up being 2% blended for the year. But honestly, for our same-restaurant sales guidance, the 1% to 3%, it's really based on a combination of a number of potential impacts this year that we may not have had in years past and a number of levers that we have, whether it's the new core menu, the increased marketing activity, mix upside from our seasonal menus and pricing is one of those levers as well.

But we'll look at that and see where we are midyear and make that decision. But I think based on the consumer environment right now and doing what's right for the customer, that's why we elected not to take any price at the beginning of this year.

In other words, we won't make that call until the second quarter.

Okay. Got it. And then just on your margin outlook, I think the implied assumption is maybe just a little bit under 19% for the year. What would it take, I guess, to get back towards the high end of the 18% to 20% long-term range that you guys have targeted maybe in '27 or '28?

There's a lot of influence on the overall margin based on the number of juvenile restaurants that we have in the mix. So our legacy cohort, the comp cohort is consistently delivers 200 or more basis points above the consolidated. And then because we have such high volume new restaurants are getting to mature margins or they currently are on the road to that they kind of -- they have an impact on the margin. And it kind of is outsized because their sales are so large, they tend to over-index on the average.

So really, the -- probably the immediate driver to get margins, you said to the upper end of the range would be to accelerate the growth of the more juvenile restaurants in terms of their margin production during the year. And we see a lot of opportunity in that, but also there's sort of a natural curve when you have a new restaurant and have new crews and you're operating in new areas that we press to get them to mature margins as swiftly as possible, but they also have a life cycle, and we don't want to tarnish the customer experience by being too hasty.

And Greg, I think if you think about our philosophy of pricing to defend margins, I mean, if there ever was a year where that was challenged, it was last year, and we were able to deliver 19% margins in Q4, 18.5% for the year, right smack in the middle of that range. And so we've got some relief, hopefully, this year on the commodity side. But I think our ability to hit in that range and our history of doing that is well documented, and I think we'll continue to be able to do that when we leverage our philosophy.

[Operator Instructions] Our next question comes from Brian Vaccaro with Raymond James.

Mel, congrats on your retirement. I'm still going to e-mail you on egg inflation, so I hope that's okay.

I'm your inside informant.

But just 2 quick ones for me. On the G&A side, you've leveraged that line, I think, about 60 bps in '25. And you did mention the new executive comp plan as well. So could you just level set or give us a ballpark on your G&A expectations in '26, just to make sure we're all on the same page. Any guardrails you could provide there?

So we don't guide to G&A, but I would say that we continue to expect to lever our cash-based G&A as we continue to grow and the noncash piece is what would be challenged in order for us to overcome the increase this year. But we'll try and communicate that clearly when it -- as we publish our results going forward so that people understand how we're looking at that cash fixed leverage.

Okay. All right. And on the commodity inflation outlook, the up 1% to 3% for the year, maybe just unpack that a little bit further, just kind of the puts and takes, what that might embed for eggs or other key commodities? And I guess the other question I had, as you lap, I think, around 8% in the first half, and obviously, you finished with closer to 1%. But as you lap that 8%, are there any quarters that you would expect to see deflation on a year-over-year basis?

Among some of our commodities, I do expect that we're going to see some deflation. The egg prices, are we deflating on avocados? But we haven't seen a lot of relaxation in the inflation in terms of our coffee or our pork prices at this point. So we do have some favorability in a couple of big things, still having to wait out what's happening with the market on a couple of others.

We have now reached the end of our question-and-answer session, which concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. Third Quarter Earnings Conference Call occurring today, November 4, 2025, at 8:00 AM Eastern Time. [Operator Instructions] This call will be archived and available for replay at investors.firstwatch.com under the News & Events section.

I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations at First Watch. Please go ahead.

Hello, everyone. I am joined by First Watch's Chief Executive Officer and President, Chris Tomasso; and Chief Financial Officer, Mel Hope. This morning, First Watch issued its earnings release for the third quarter of fiscal 2025 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investors.firstwatch.com.

This conference call will include forward-looking statements that are subject to various risks and uncertainties that could cause the company's actual results to differ materially from these statements. Such statements include, without limitation, statements concerning the conditions of the company's industry and its operations, performance and financial condition, outlook, growth plans and strategies and future expenses.

Any such statements should be considered in conjunction with cautionary statements in the company's earnings release and the risk factor disclosure in the company's filings with the SEC, including our Annual Report on Form 10-K and quarterly reports on Form 10-Q. First Watch assumes no obligation to update these forward-looking statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

Lastly, management's remarks today will include references to various non-GAAP measures, including restaurant-level operating profit, restaurant level operating profit margin, adjusted EBITDA and adjusted EBITDA margin.

Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in the company's earnings release filed this morning. Any reference to percentage growth when discussing the third quarter performance is a comparison to the third quarter of 2024, unless otherwise indicated.

And with that, I will turn the call over to Chris.

Good morning, everyone. We appreciate you joining us to discuss our third quarter performance. We're pleased to report strong financial results with same-restaurant traffic growth and same-restaurant sales growth sequentially higher for the fourth consecutive quarter and restaurant-level operating profit margin materially improving from earlier this year.

These results are made possible by our more than 16,000 employees nationwide, and we are truly grateful for their commitment. Total revenue increased 25.6% compared to the third quarter of last year, fueled by three growth drivers: strong new restaurant opening performance, positive same-restaurant sales of 7.1% and accretive strategic franchise acquisitions.

Restaurant-level operating profit margins expanded, reflecting solid operational execution across our entire organization. Notably, sales at our newly opened restaurants continue to be very strong across all geographies with some of our newest locations setting first week sales records.

Simply put, despite an increasingly difficult environment, First Watch delivered solid top- and bottom-line results, and we continue to strengthen our leadership position in daytime dining, placing us among casual dining's strongest performers. Our third quarter financial results are representative of our long-standing approach to growth.

Total revenue increasing more than 25% [ crown's ] nearly 5 years of double-digit percentage quarterly growth. Our aggressive unit expansion, anchored as always, by a very clear set of underwriting standards continues to drive our success with 21 system-wide restaurants opened across 14 states during the third quarter.

We are on pace to meet our target of 63 to 64 new restaurant openings for the year, representing nearly 11% system-wide growth in 2025. At First Watch, we are constantly evolving to ensure long-term relevancy and meet the needs of both the consumer and our employees. We are focused on delivering steady, thoughtful enterprise-wide progress built on a solid operational foundation, giving us the confidence in our ability to continue delivering on our high-growth algorithm.

We prioritize our long-term market position and traffic growth over short-term margin protection. This is particularly evident in menu pricing. With a volatile commodity environment in early 2025, we quickly evaluated the prospects of short- and long-term commodity inflation and carefully considered our competitive value proposition.

As a result, we chose not to implement pricing actions that would have offset what we view as transitory increases in commodity costs. The positive results we reported last quarter and today reinforce our confidence in those pricing decisions. There aren't many metrics where we lag, but we're pleased to be laggard when it comes to pricing. The result of a steadfast pricing strategy is that our long-term margin profile is and always has been secure.

We may experience variances from time-to-time or in any given quarter, but we're confident in our ability to deliver annual restaurant level margins of 18% to 20% over the long-term. Our sustained high-return capital investments continue to deliver, and we are opening restaurants that meet or exceed our underwriting targets. This is a compelling way to use our capital with average cash-on-cash returns of approximately 35%.

In addition to those superior returns, our aggressive unit growth is increasing our market share by expanding our brand presence and overall awareness, thereby widening our competitive moat. As I mentioned, our new restaurants are opening stronger than ever in both new and existing markets.

In fact, 9 of our 10 highest opening week sales in company history were achieved in restaurants opened within the last 12 months. In new markets, too, like Boston, Las Vegas and Memphis, we've opened stronger than anticipated, and it's clear that our brand and our unique offering has enviable broad appeal and proven affordability.

One of the many strengths of our business is that unlike some other restaurant concepts, our new restaurant openings in both new and emerging markets are performing exceptionally well. I spoke last quarter about the strategy of converting second-generation sites into highly productive First Watch restaurants. Of the 21 restaurants we opened in Q3, 13 were second-generation sites.

Of the 10 highest opening week sales, NROs in 2025, 9 have been second generation. For reference purposes, some of these restaurants are opening at volumes that are more than 190% of our average unit volume, which is a powerful proof point for the benefits of this approach and in our ability to operate higher and higher AUVs, powering the brand forward.

I want to highlight one particular NRO that exemplifies the ongoing strength of our brand and our disciplined execution. Our new First Watch location in Dover, Delaware, situated in the state capital and the state's second largest city opened during the final week of the third quarter. This location had opening week sales that exceeded 185% of our comp base average, underscoring the strong demand for our concept and the strategic value of the site.

We signed a lease for this restaurant in January of 2025 and advanced it through our standard construction timeline without delay. The fact that we successfully opened a short 8 months after lease signing reflects the operational rigor and efficiency of our entire team and demonstrates one of the many benefits of these second-generation sites.

These historic opening week sales performances are a result of the alignment of our real estate, construction, talent and development teams, bolstered by the heightened preopening consumer interest and demand generated by our efficient NRO-related marketing initiatives.

In short, our teams collaborate well to ensure that our restaurants are go for launch and that we enter markets, trade areas and neighborhoods in a way that establishes a high baseline that we can build upon for many years to come.

Across the organization, our teams are now even more skillful at opening new locations in core emerging and new markets, and we remain highly confident in our expansion strategy for 2026 and beyond. No full-service restaurant company is opening at anything close to our pace, making it daunting for segment competitors to enter markets where we have an established presence.

Furthermore, even in markets that we have yet to penetrate, our eventual entry often positions them in short order. We are targeting between 63 to 64 gross new locations for 2025 and the breadth of our new restaurant opening successes can be seen in the first three quarters of 2025, where we opened 51 new restaurants in 30 markets across 21 states.

I've shared this before, but I think it bears repeating that our top decile restaurants span 14 states and 22 DMAs with consistent AUVs across all 32 states, giving us confidence in our ability to grow to a total addressable market of 2,200 locations within the continental United States. Our people platform continues to reach new heights as well. Restaurant-level employee turnover, a critical industry metric, has improved for 10 consecutive quarters and continues to outperform industry benchmarks.

We recently completed our annual W.H.Y. Tour and the feedback was overwhelmingly positive with employee satisfaction tying directly to our culture, the quality of life offered and the extensive benefits available to them. There's no question that our daytime dining single-shift scheduling model remains a standout feature.

Our distinctive benefits such as backup childcare and elder care, complementary personal and professional coaching and free telemedicine services also mean a tremendous amount to our team, and we believe differentiates us from other foodservice employers. Team members consistently share that working at First Watch enhances their mental and physical well-being.

Among all of the numerous advantages already cited, the opportunity for career growth most often tops the list. As the fastest-growing full-service restaurant concept in the United States, we believe we provide career paths that are simply unmatched anywhere else in the industry. So where have our efforts led?

Well, First Watch was just recently named America's #1 Most Loved Workplace by the Best Practice Institute for 2025, a recognition we also achieved in 2024. Achieving top honors in any year is a significant accomplishment. Earning this distinction two years consecutively is unprecedented. I'd like to extend my gratitude to our entire organization for their efforts in making this possible and modeling our You First culture day in and day out.

By prioritizing our employees and creating an environment that attracts the best and brightest in our industry, we are proud to provide a wide array of personal and professional growth opportunities. This is a remarkable achievement of which we are all extremely proud of. The performance of our enhanced marketing investments in 2025 has been highly encouraging.

This marks the third consecutive quarter of increased marketing spend versus last year, providing us with three full quarters of compelling evidence. Our integrated campaigns spanning connected TV, paid search, social media and other channels are intentionally coordinated, driving higher aided and unaided brand awareness.

Notably, the markets we targeted for investment in 2025 represent less than one-third of our overall restaurant portfolio, providing us an opportunity to significantly expand our reach in the future. Building on the insights gained from this year's activities, we are optimistic about expanding marketing programs in 2026.

We're also in the midst of a comprehensive relaunch of our digital platform, encompassing both consumer-facing enhancements and back-of-house improvements. As an example, our newly relaunched app introduced in the second quarter has already garnered thousands of positive ratings and reviews and currently maintains a 5-star ranking, supporting favorable customer response to the new interface.

We're in the very early innings of capitalizing on our digital platform. Behind the scenes, we're collecting valuable data on a granular level. We are also making significant upgrades to our customer data platform, geolocation capabilities, order experience and CRM systems.

Our database of identified customers now sits at around 7 million, the majority of which are connected to various social media and online presence platforms, enabling us to better execute targeted micro marketing campaigns.

Technology advancements across our marketing department contributed to the exceptional performance of a targeted digital campaign launched in September, which, despite hitting less than half of last year's recipients, delivered more than 2x the response rate and engagement to last year's campaign.

Depending on where you live or which of our restaurants you may have visited recently, you may have seen our new core menu that's been in test for some time. This new menu has been redesigned and reengineered to improve readability, broaden appeal, optimize mix and streamline operations. It features high-performing previous seasonal menu specials, which replaced some lower mix items.

The qualitative and quantitative metrics thus far have been encouraging, and we are expecting to roll this menu out system-wide early next year. We're acutely aware of recent headlines across the restaurant sector regarding a slowdown in consumer activity, specifically tied to discrete demographics.

Our brand continues to be over-indexed to a more affluent consumer, and we remain underexposed to current demographic pressures. First Watch's menu innovation, consistency and value proposition provide for an unparalleled customer experience. In short, our platform has supported quarterly double-digit total revenue growth for the better part of the last 5 years.

During that same time period we've opened more than 230 restaurants, delivering on our stated goal of low double-digit percentage annual unit growth. Our 3-year NRO AUV targets have risen from $1.6 million to $2.7 million, and we were recognized as America's Most Loved Workplace twice.

Our expansion from a little known regional restaurant brand just 10 short years ago to a national chain with dominant segment market share was accomplished by an organization focused on and dedicated to consistent, reliable and quality growth.

Considering our proven track record and abilities across the entire enterprise, combined with a total addressable market that is over 3x our current size, we remain committed to that same consistent, reliable and quality growth for years to come.

And now I'd like to turn it over to Mel.

Thank you, Chris, and good morning. Total third quarter revenues were $316 million, an increase of 25.6%. Our third quarter revenue growth was driven by positive same-restaurant sales growth of 7.1%, including positive traffic of 2.6% and the contribution of 167 non-comp restaurants, including 66 company-owned new restaurant openings and 19 locations we've acquired since the second quarter of 2024.

Our same-restaurant traffic growth and same-restaurant sales growth in the third quarter represent our best quarterly result for both metrics in over two years. Our in-restaurant traffic improved once again, marking the strongest performance in 7 quarters. Traffic growth in the third-party delivery channel increased substantially during the third quarter, a continuation of recent trends and a direct result of the changes we made to that program earlier this year.

The month of September represented our highest rate of same-restaurant sales growth of the entire year. Concurrent with the launch of our fall seasonal menu in late August, we instituted a price increase of 1.1%, bringing our full year carry pricing to around 3.5%. We again experienced positive sales mix during the quarter.

Food and beverage expense in the third quarter was 22.2%, a decrease of 20 basis points from the third quarter last year, benefiting from carry pricing, partially offset by 3% commodity inflation in the quarter. Bacon and coffee were the primary drivers of commodity inflation. Labor and other related expenses in the third quarter were 32.6% of sales, a 100 basis point decrease from the third quarter of 2024.

Restaurant level labor inflation was 3.6%, a combination of carry pricing outstripping labor inflation and marginal labor efficiency contributed to the improvement as a percent of sales. Restaurant level operating profit margin was 19.7% in the third quarter, an 80 basis point improvement from the third quarter last year. General and administrative expenses increased to $33.7 million from $27.7 million in the third quarter of 2024.

As a percentage of total revenue, these expenses decreased to 10.7%, representing 30 basis points of leverage when compared to the same quarter last year. The income from operations margin was 3.2%. Adjusted EBITDA was $34.1 million, $8.5 million higher than last year, with adjusted EBITDA margin increasing to 10.8% from 10.2%, a 60 basis point improvement from the third quarter last year.

We reported net income of $3 million. We opened 21 new system-wide restaurants during the third quarter of which 18 were company-owned and three were franchise-owned, and we ended the quarter with 620 system-wide restaurants. The effect of our franchise acquisitions, which includes only the impact of purchases made within the last 12 months, increased our third quarter revenue by about $9.1 million and adjusted EBITDA by about $1.6 million.

For further details on the third quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link. Based on our quarter-to-date trends and plan for the balance of the year, I'd now like to provide our updated outlook for 2025. We are updating our guidance for same-restaurant sales growth to approximately 4% from positive low single digits in our prior guidance.

We estimate same-restaurant traffic of approximately 1% from flat to slightly positive in our prior guidance. We expect total revenue growth in the range of 20% to 21% with a net 400 basis point impact from completed acquisitions. We expect 63 to 64 new system-wide restaurants, including 55 new company-owned restaurants and 8 to 9 new franchise-owned restaurants with three planned company-owned restaurant closures.

We took advantage of the opportunity to pull forward a few openings into the third quarter and at the same time, push a couple of projects into the new year. We're now guiding fiscal year 2025 commodity cost inflation to be approximately 6% from a range of 5% to 7% in our prior guidance and restaurant level labor cost inflation to be approximately 4% from a prior range of 3% to 4%.

Our annual adjusted EBITDA projection is now approximately $123 million, the high end of our prior guidance range of $119 million to $123 million. This includes the expected net contribution of approximately $7 million from acquired restaurants. In an effort to assist you in your near-term modeling of our G&A, our annual leadership conference will be held in the first quarter of 2026 compared to our previous conference, which was held in the fourth quarter of 2024.

This is equivalent to just under 100 basis points in quarterly G&A expenses as a percent of sales. Please note, our initial fiscal year 2025 guidance contemplated this timing shift. We expect a blended income tax rate of approximately 45%. We are narrowing our expectations for capital expenditures to approximately $150 million from $148 million to $152 million in our prior guidance. This does not include the capital allocated to franchise acquisitions.

Since our initial public offering four years ago, we've expanded the total of system-wide restaurants from 428 locations to 620 at the end of the third quarter. In that same period of time, our adjusted EBITDA has more than doubled. We're proud of the many growth milestones we've surpassed and are similarly excited to close out a strong 2025. Both our real estate and our people pipelines have never been healthier, providing a high degree of confidence in our ability to execute our near-term and long-term growth strategies.

And with that, operator, would you please open the line for questions?

[Operator Instructions] Our first question comes from the line of Jim Salera with Stephens Inc.

I wanted to ask if you guys might help us deconstruct the traffic results given the strength you're seeing relative to the rest of the industry, which has seen pretty muted trends on the traffic side. Can you just give us a sense for how much of the incremental traffic is coming in restaurant versus through the off-prem channel? And then maybe if you could give us some commentary around how much of the traffic is increased frequency with kind of First Watch loyalists versus maybe bringing in some new folks that have a newfound appreciation for your value proposition?

Sure. Okay. So with regard to the second part of the question first, the full-service restaurants generally had a frequency that would suggest that we probably need a longer period of time to really read what the response to marketing has been regarding whether or not we've got repeat visits versus new customers.

Our marketing programs have been targeted at increasing occasions without regard to whether or not there are new visits or recurring visits. So I don't have a lot of data on that for you yet. We may over time, but we just need a larger cohort.

And Jim, once again, we did see improvement in in-restaurant dining. It's continued to improve quarter-over-quarter. And obviously, we have the benefit of the third-party traffic increases as well. So I would say both channels contributed to the growth.

Great. And then as a follow-up, if you could just speak to what's helping bolster the results at some of these new openings. You mentioned Dover significantly ahead of the overall kind of fleet average. Is it just that these are really primo locations that real estate partners are coming to you with? Are you doing some extra work kind of on the front end to make sure there's a lot of fanfare around the restaurant opening? Just anything you can kind of give us there to explain the strength?

Yes. We -- this is -- our new restaurants outperforming the core has been a trend for us for a number of years now. But we talked this quarter about some record-setting locations. And we talk constantly about how we're evolving our real estate site selection process, evolving the facility itself. So yeah, some of these second-generation sites specifically are -- they're larger. They're right upfront on the road.

We're really making the patio a significant feature that is inviting from the road. And so we benefited from that. That said, we have some restaurants that aren't bigger and are more maybe end caps that we've done that are achieving high volumes, too. So I think it's also a confluence of our brand recognition expanding, the site themselves acting as billboards.

I think our -- the work our marketing team has done on the social and digital channels to create that buzz before we open. I used the term in the prepared remarks of go for launch, like I just feel like in every aspect of these new restaurants, we're set up really well to A, build that preopening demand and then from an operational perspective, really deliver when they come in the restaurant. And it's really important when you're doing those kinds of outsized volumes to Wow people.

Those first reviews are really, really important. And our teams have done just an amazing job of all that. So yeah, this is -- this comes from many years of opening a lot of restaurants. We talk about it as being one of our strongest muscles, and we just continue to flex it and it continues to drive value for us.

Our next question comes from the line of Jeff Bernstein with Barclays.

This is Anisha Datt on for Jeff Bernstein. I wanted to ask a question on marketing. What are your plans to expand marketing efforts in 2026? And can you share specifics on the strategy? Do you need to reach greater scale in some of your newer markets before rolling out broader marketing initiatives given that about 1/3 of stores benefited from your initial efforts this year?

We haven't done any indication about 2026 with regard to the overall plans for the company. So probably need to steer clear of that one for the time being. But the marketing, obviously, the more density you have in markets and in more markets, the marketing can become more efficient in some types of marketing.

But our focus has been very much on social and digital type marketing, which is very targeted. And our team is very accomplished at making sure that we're efficient even in markets where we don't have a lot of density.

I think the big takeaway from the -- our marketing efforts and therefore, the results is that it's been successful. We're very pleased with it. We've only deployed it to a minority of our markets. And so the opportunity for us to invest and expand that in 2026 and beyond is very encouraging to us and something we're really excited about.

Our next question comes from the line of Andy Barish with Jefferies.

Nice results. And I just wanted to go back to that as well. I think September was your toughest lap and you still hurdled that, as you mentioned, with the best quarter. How does the -- and I think the marketing in the 3Q was a little bit lower because of AUVs. Can you just kind of let us know what the fourth quarter plan on that is a little bit more of sort of the near-term look?

Yeah. Actually, that comment about the lower spend really had more to do with Q4 because of the seasonality of our business when we talked about it last quarter. But Q3 was pretty consistent with the first two quarters. So no step-up or step down there.

Got you. Okay. And then -- on the operations side, I mean, a lot of things were put in place kind of going back over the last few years. What's sort of really showing through that you would highlight as more demand is now generated and you're obviously handling it with one of the best comps in the industry?

Certainly, the KDS, the implementation of the KDS system. But I also don't want to shortchange the consumer-facing investments we made around the app and waitlist management and some operational things we did. So Andy, you've heard us talk about this since we first announced that we were rolling out KDS.

We don't look at -- I mean, we look at each one individually from a return standpoint. But as far as what's driving the business, we think it's all of those things, whether it goes back to touches like the complementary coffee, our pricing strategy, the way we've increased portion sizes over this time and that type of thing.

So we're really trying to just make it so that everywhere the consumer and specifically our customer looks, our value gets better and better, whether it's the time it takes for their food to get to the table, the visibility they have into the weight process, opening the front door, just efficiency and execution and consistency.

And we think in turbulent times like this, those are the things that the consumers really value and then turn to, specifically the consistency part. They just don't want to put their dollars at risk.

And our operators really have focused a great deal on I'd call it, blocking and tackling in terms of the labor management and focusing on execution in the restaurants. And when you see rising transactions, the labor really benefits from that in a growth company like ours where that transaction growth trickles down to more efficient labor.

Yeah. And just finally, what was actual menu price in the 3Q? And then does that look like about 4% in the 4Q?

So in Q3, the carry pricing of all pricing events carried about 5% overall, and we're 3.5% or roughly for the full year.

And about 5% in the fourth quarter.

And about 5% in the fourth quarter. Okay.

Our next question comes from the line of Todd Brooks with Benchmark StoneX.

Congrats on some real positive outlier results here in the quarter. I wanted to, Chris, dig in a little bit more on the second-generation sites. If you look at the class of '25, what was the mix of second gen? And then if we start to look out to the pipeline for '26, are we inflecting second-gen openings higher if you look at the mix of total openings?

Yeah. So as I mentioned on the last call, we're looking more and more at the second-generation sites. About 50% of what we opened in '25 were second gen, and we expect that to be a similar percentage for '26.

Okay. And is the competition -- I'm hearing other concepts try to talk about second generation as well. Does the benefits to the -- that First Watch has as a brand as far as landlord desire for First Watch to be a tenant, are you getting first looks at these type of locations versus kind of new development where they want you in the center or is it more competitive to land these sites in this environment?

I think we're -- as a national credit now in our performance, we're probably on the Rolodex of every commercial developer, if Rolodexes still exist. So I do think we get first calls.

Okay, great. And then just wanted to loop back on the marketing. I know we're not going to get detailed '26 plans yet but is there a -- you guys are very thoughtful in what you've done to drive the growth of the brand.

Is there a thought of this is 1/3, 1/3, 1/3 type of process as far as how much of the base gets touched or how do we iterate out of kind of the -- I think it was Florida plus the Southeastern markets. I guess, tactically, how do we iterate this in '26 if we don't want to talk about how we spend against it in '26?

Yeah. I think we'll take the learnings that we've gotten from this year's efforts and look at next year, look at the markets. Obviously, still efficiency and density is a factor, seasonality and other things. So it's not necessarily 1/3, 1/3, 1/3. We're not approaching it that way.

We're really just looking at it from an ROI perspective and where we can make the most impact, get the returns we want and drive the traffic. So it's -- the best thing I can tell you is that it's fluid, but it's going to all be based on the learnings that we've received so far.

Okay. And just a quick follow-up there, Chris, or I don't know if Matt's there as well. But the biggest kind of surprises out of the first real three quarters of leaning into this effort, if you're looking at where the efficacy of the program has been.

The biggest positive surprises.

The biggest surprise -- this is Matt, Chief Brand Officer. So the biggest surprises, I think we have seen a lot of success in targeting our media within the category and using transactions to identify people that are already active in the category and may have lapsed or has not been to a First Watch in a while. So when you ask about kind of the momentum, I think we've built a playbook on not trying to convince people to necessarily build a new occasion within this daypart.

But I think there's a lot of low-hanging fruit by being the leader in the category and simply being top of mind for those that are already going out to full service and especially full-service breakfast. So it's very database and gives us a lot of confidence.

I think as you thought about strategies to go into next year, I think we think we've built a playbook over the last three quarters, and that's given us confidence. So we don't see a lot of derivation in the short-term on changing those strategies. The opportunity is really taking it into more geographies. And I think we'll talk about that over the next few quarters.

And Todd, you might remember that we piloted these last year. So in terms of surprises, I think the reason we piloted them was to -- so that we could select those things that would perform predictably. And I think they've been predictably positive.

Our next question comes from the line of Brian M. Vaccaro with Raymond James.

Just on the third quarter comps, can you elaborate a little bit on the impact? You talked a lot about the new marketing efforts, but just elaborate a little bit more on the impact you think the marketing is having on your sales trends.

And I heard you say that it covered about 1/3 of your footprint, if I heard correctly. So I was thinking maybe some more color on sort of the regional trends that you're seeing or what that scatter plot might look like kind of mapped against the new advertising initiatives.

So this is Matt again. We haven't really seen much variation. I think the results have been very consistent across geographies. I mean we've talked in the past how important the state of Florida is for us. And our results have been pretty consistent.

And that's, frankly, why it gives us confidence. It's not like we're seeing particular markets succeed and others not respond. I think for us we know our awareness is low. And so simply by being top of mind, being consistently top of mind for category users, we've seen very consistent results, and that will inform how we think ahead in 2026.

All right. That's helpful. And I want to ask on commodity inflation as well. I think it was around 3% you said in the third quarter, and the guidance implies that that kind of steps back up maybe into the mid-single-digit range in 4Q. Am I reading that right? And maybe you could just walk through some of the puts and takes within your basket moving through the rest of the year?

So it does step up a little bit in the fourth quarter. Kind of the general trend, Brian, this year has been that we started with our four largest commodities all being at historic highs, and we've seen some moderation in most of those, less so in bacon and coffee, but a great deal in terms of the cost we were paying for our [ shell in ] eggs and for our avocados. And that trend has held pretty steady through the year. The moderating commodities that continue to moderate and then coffee and the bacon have continued to be high.

Our next question comes from the line of Jon Tower with Citi.

I'm going to go back to the marketing because why not. I'm just curious, in terms of what you're seeing with these new customers that are coming in, in response to the marketing so far, are they using the brand differently than how you've seen other customers come in, say, the first time when they are introduced to the brand?

So for example, are they coming in and say you're marketing in these over social channels a certain piece of the menu, whether it's value-centric or a seasonal piece, are they coming in response to that and ordering that immediately when they come in first time or are they choosing different pieces of the menu versus what you normally see?

So I'm curious to see if it's kind of you're pushing one thing and they're going after that or they're just getting introduced to the brand and coming because they're seeing the brand for the first time and utilizing it differently than what you normally see in the past from other consumers that aren't getting -- haven't been marketed to?

Yeah. I'd say it's more of the latter, but with a clarification that we're not seeing any difference in behavior. It's more of a reminder of top-of-mind brand awareness, getting them in the door. But our mix hasn't changed much at all.

As a matter of fact, we're still seeing positive mix like we have for a while now, no signs of check management, all healthy signs for us. It's just that we're raising our awareness and getting more customers in the door. Matt, I don't know if you want to add something there.

Yeah, Jon. So Chris is right. We don't see much of a difference in mix. But what I'll go back to the strategy of we're tracking people and staying top of mind for category users. So if you're someone who hasn't been the First Watch in a while, we're not necessarily speaking to you about our seasonal menu. We're establishing that we are breakfast.

We try to communicate breakfast. And then as we see you transact and you moved into our owned audiences, then we start to talk to you about our seasonal menus. So I just wanted to make sure it was clear. It's not necessarily that we're trying to drive new users in behind the seasonal menu, and that might be why we're not seeing a large fluctuation in mix.

Okay. I appreciate that. And -- then maybe on the new stores, and I appreciate all the color around the second-gen locations. Are you guys doing anything differently as you're moving into these new markets and you're building out, I believe somebody in the past, you've spoken to having slightly bigger footprints on these locations.

The back of the house, are you doing anything differently with respect to the kitchen to handle perhaps more capacity with seating in the front of the house or maybe new equipment or anything like that in these new stores, particularly as you maybe move into markets that are slightly denser than what you've had in the past?

I think one of the most encouraging things about these volumes that we're seeing is that our line, which is where the food comes right out of and goes to the customer is and has been the same for a long time, save some adjustments here and there as part of our ongoing evolution.

But no. I mean, so the encouraging part is we realize now and know that these lines can do very high volumes, really high sales hours. But when we're taking over these spaces, to be honest with you, most of the time, they have much larger back of houses than we're accustomed to, but we put our standard line in there.

But what it does afford us is a larger walk-in cooler, a bigger dish area, more prep area. So just not as congested perhaps as if we were building our 3,800 square foot restaurant. But no, the line itself being able to handle these types of volumes gives us a lot of encouragement about our ability to do these high unit volumes for a long time to come.

Cool. And then just lastly, you've ticked off a bunch of stuff with respect to technology in the past several years, whether it's the KDS, whether it's consumer-facing technology on the wait list or the app. Is there anything else that we should be thinking about in the next several -- maybe in the next 12 months or 24 months that you guys are tackling to either improve the guest experience or the employee experience?

I feel like you're leading me to say AI. So I'm just going to say AI, it's not, okay. Look, we're constantly innovating, looking at every aspect of our business. And some things are big, some things seem small but have great impact.

And so we'll just continue to evolve. We don't have anything teed up that we're ready to talk about right now. Our focus, as we teased last time was on a new menu, and we talked about it a little bit here. So optimizing the menu and is a big focus for us for 2026.

Our next question comes from the line of Sara Senatore with Bank of America.

This is [ Isaiah Austin ] on for Sarah. Just a broad question about the breakfast daypart. I think earlier, we saw signs that it was stabilizing this year. Is that something that you guys continue to see? And kind of in the same vein, I think previously, we had heard from you all that you guys weren't seeing the same kind of trade-down benefit from dinner to breakfast and brunch that you guys experienced during the Great Financial Crisis. Do you feel like you're starting to see signs of that now? And then I have a quick follow-up after.

Actually for us, weekday breakfast was the standout daypart in our growth in Q3. It was the best traffic of all our -- all three of our dayparts, which, as a reminder, we look at weekday breakfast, weekday lunch and then weekends, we just call brunch. So we've been very encouraged by what we saw at weekday breakfast.

Got it. And anything on the trade down just that you guys were experiencing like a couple of decades ago versus now? Do you see similar trends?

I don't think we have evidence of that. Don't really know. I mean some of that -- some of the direct data associated with that, I don't think we see the same thing today.

Perfect. And then just in light of the great quarter, is there anything that you all are seeing as far as your customer metrics, like higher frequency or improved value scores? Maybe if you have any measure of awareness, just kind of thinking about the drivers behind this quarter and where it can go from here?

This is Matt Eisenacher again. You asked about awareness. We have encouragingly seen a steady increase in awareness, which is, again, encouraging for us given our known low awareness. So every quarter, we've seen sequential improvement in awareness and moderation and improvement in our value scores as well. I mean, Mel mentioned it earlier, we are a little more cautious in reporting on frequency in full service I think if you want a longer time horizon.

But we have been able to test the post period in a variety of the channels and tactics we've been employing, and we've seen some indications of positive lift following those, which would tell us that there's likely a resulting in improved frequencies. But again, I think it takes more time to be definitive in that. But we've seen a lot of encouraging signs across all those metrics.

Our next question comes from the line of Greg Francfort with Guggenheim.

This is Ari Razai for Greg. Congrats on a great quarter. I think delivery contributed just over 3% to the same-store sales in the quarter. And it looks like it accelerated from the last quarter. Can you talk about how demand has grown in that channel since you made that pricing adjustment, maybe like any other changes in promotional activity in that channel?

Sure. Just to clarify, did you say how demand is affected in that channel?

Correct.

Yes. We've seen demand increase significantly over the past, call it, [indiscernible] three quarters, and that trend has held. So we keep -- we talk about the positive impact of the changes we made to that program. And again, that's continued.

This is Matt. Chris has made a good point that we did see improvement once we made the changes to the program earlier in the year, but the results have been fairly consistent. There wasn't a meaningful increase in that channel in the third quarter that might have outsized driven the rest of the comp.

Got it. Understood. Super helpful. And a quick follow-up. I know it's too early to talk about guidance in 2026, but maybe if you can touch directionally on labor and commodity inflation, that would be super helpful.

I can tell you that at present, we're talking with suppliers about our costing for some key commodities for next year. And so we'll probably have more information on that later in terms of labor inflation, I expect it to be -- or I'm hoping that it's a little bit more normal than maybe we've seen in the last few years.

We have some built-in inflation as the regulatory minimum wages are increasing in some of our large markets by another $1 or so. So there'll be -- there's certainly some labor inflation, but I'm not ready to really guide to what we're building into our models for 2026 yet.

[Operator Instructions] Our next question comes from the line of Andrew Charles with TD Cowen.

Typically, you guys visit pricing around January, around July, give or take. But I guess I'm curious, what drove the decision to take that incremental 1.1% price increase that you mentioned in August following the 2.8% in July?

Yeah, Andrew, that 1% was contemplated in our pricing strategy early in the year. However, it affected some items that had a relation to the seasonal menu that we were rolling out. So we needed to time it with that so that we maintain those relationships if that makes sense.

There were some items. We look for certain spreads between a seasonal item and a core menu item. And we had that particular situation here. So we just held back 1% so that we could time it with the launch of the seasonal menu.

Okay. I got you. And then separately, Mel, the third-party delivery AUV, if we look at the Q, looked to be up about 40% in the quarter. Can you speak to the flow-through that you're seeing on that profitability and the impact that's having in driving profitability as well?

So the profitability on third-party delivery would be -- we generally view it as a transaction just like any other transaction with a different top line. And so as a result of the fact that oftentimes we have fewer beverage deliveries than we do in the restaurants. I think the profitability, at least [indiscernible] level probably runs pretty close to the standard. If you're fully loaded, maybe it's a little bit more, little bit profitable, a little less. Okay. A little bit less.

But in that it's -- we view it as an incremental occasion. I think it's important to keep that in perspective that majority of those transactions we consider to be incremental.

The truth is I don't know that we've ever publicly talked about the RLOP on the different types of different sales channels.

But it is a big contributor to our adjusted EBITDA.

This now concludes our question-and-answer session. I would like to turn the floor back over to Chris Tomasso for closing comments.

Great. Thank you. Thanks, everybody, for joining us on the call this morning. We really appreciate it. We're looking forward to connecting with most of you in the coming days and weeks.

And as always, we are grateful for the dedication shown by our entire team, many of whom I know are listening today. So a sincere thank you from all of us here. We look forward to building on our strong foundation throughout the balance of this year and are excited about our prospects for 2026. Have a great day, everyone. Thank you.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.