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Why First Watch's focus on breakfast has led to a 'compelling business model'

First Watch Restaurant Group CEO & President Chris Tomasso joins Yahoo Finance to discuss its unique restaurant business model, its plans for growth, and its successful recovery despite recent Delta variant surges.

Video Transcript

BRIAN SOZZI: An impressive market debut on Friday for restaurant chain First Watch with shares surging nearly 23%. The breakfast-focused company has seen a strong rebound in its business in recent months. Same-restaurant sales rose 45.2% in August as people became more mobile during the pandemic.

Joining us now for more on the company is First Watch President and CEO Chris Tomasso. Chris, good to see you. Congratulations on the debut. For those not familiar with your brand, I found the S-1 or your prospectus very fascinating. One, you focus on one shift, one menu, and you serve food from 7:00 AM to 2:30 PM. Different model. Why no dinner? Why no late nights?

CHRIS TOMASSO: You know, what it really starts with our employee proposition of no night shifts ever. So if you think about it, most restaurants have two day parts, usually lunch and dinner. We just happened to pick breakfast and lunch so that, you know, our family-- our employees can be home with their families at night. And traditionally, breakfast has been one of the most profitable day parts as we've seen a lot of other concepts enter into the space.

And, really, it's the only day part that's had consistent year-over-year growth in the restaurant industry, and that comes despite 78% of morning meal occasions still being consumed at home. So we just see a lot of potential in that day part. We've been doing it for almost four decades now, and it's created a really compelling business model for us.

BRIAN SOZZI: Well, now you're a public company, Chris, and investors, they're going to want to see growth. Are there any plans on the table to start dabbling in dinner?

CHRIS TOMASSO: No. Actually, our growth will come from unit growth. In 2019 and 2020, we were the fastest-growing full-service restaurant company in America. And, you know, as you've seen, we've had tremendous results leading up to 2020 with seven straight years of positive same-restaurant traffic and 24 consecutive quarters of positive same-restaurant sales.

So from a core base, we continue to see that growth. And then, again, a majority of our growth will come from continued unit growth throughout the US.

JULIE HYMAN: Hey, Chris, it's Julie here. And how much your growth is going to come from alcohol? I know you guys rolled out at least some pilot cocktails, brunch-type cocktails at some of your restaurants. How has that gone? Is it now at all of your restaurants? And, you know, those obviously are higher-margin products, traditionally.

CHRIS TOMASSO: A big part of our same-restaurant sales growth over the past number of years has come through culinary innovation. Our fresh juice program, like you see on the screen there, our shareables platform, and alcohol is just the latest iteration of that.

And so we have it in about 2/3 of our restaurants now. We're still in the very early stages of it, but we've been very pleased with the performance of it. And more so than the incremental sales, we really like it because for us it-- you know, we believe that it continues to ensure our long-term relevancy and drive, you know, a customer base that, you know, fills that pipeline for us for years.

JULIE HYMAN: Chris, I also wanted to ask about sort of current state of affairs because the numbers-- the growth numbers for you guys are very impressive prepandemic. What happened for you during the pandemic? We all know that breakfast in particular, out breakfast, was hit pretty hard. So what does the current growth look like, and how much has come back?

CHRIS TOMASSO: Yeah, our recovery from COVID has been spectacular, and we believe that it's because of what we did during COVID. A couple of things-- one is we really focused on our people and on our culture. We did a lot for their physical, their mental, their financial being, and they responded. We had 90% of our general managers returned postpandemic and 75% of our tenured hourly employees come back.

So we believe that was a big component of why we were able to recover from COVID so well because we had such an established base, and we maybe didn't start in a hole like a lot of other concepts had to from a hiring standpoint, which is critical in this particular hiring environment.

So we've been comping positive over 2019, which was already a very stout performance year for us. And so once we started to recover, in Q2 we turned positive traffic, and we haven't looked back since. So it's been a very rapid recovery for us and one that we're very thankful for.

BRIAN SOZZI: Chris, there have been some companies warning about trends in their business in areas where the Delta variant is spreading-- Texas, Florida, you name it. Now, 30% of your restaurants are in Florida. Have you seen sales impacted there?

CHRIS TOMASSO: It's interesting, Brian. We made a last-minute decision in the S-1. If you'll notice, we put in July and August in the S-1, you know, the first two periods of Q3, just to show how the Delta variant didn't change our trajectory at all.

So, you know, yes, we have a high concentration in those areas, but honestly, you know, we're in 28 states. We have over 400 restaurants, so we're spread out pretty well. But we didn't see any significant impact from the Delta variant.

JULIE HYMAN: And, Chris, the majority of your restaurants are company owned, which is a different model than a lot of other restaurant companies we talk to. In your next phase of growth, do you expect those to also be company owned, and what to you is the advantage in doing that sort of blended model?

CHRIS TOMASSO: Yes, our focus going forward is going to be on company-owned growth. And, frankly, again, I point back to our compelling business model and really us just wanting to own that. Obviously there's the other element of brand control.

We have a tremendous franchise community. They run excellent restaurants for us. We have a great relationship with them. You know, they love that we're in the same business they are because we make decisions that benefit both of us. So it's been a great relationship going forward, but from our standpoint, most of our growth will come from company-owned growth.

BRIAN SOZZI: Chris, why does avocado toast cost so much?

CHRIS TOMASSO: Avocados are expensive. Actually, it doesn't cost that much at First Watch, so I think that's why it quickly became one of the top-five sellers on our menu. You know, we launched it a long time ago, I think before it was even as mainstream as it is now, and it's immediately been, you know, a customer favorite. And I think, you know, our price point makes it very approachable as well.

BRIAN SOZZI: All right, fair enough. Just had to ask the tough questions here. First Watch President and CEO Chris Tomasso, congratulations on the debut. Look forward to staying in touch.

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