Marketing And Technology Investments In 2025 Will Increase Brand Awareness And Return To Positive Guest Counts

Key Takeaways

• Expansion plans with new restaurant openings and strategic marketing initiatives aim to drive revenue growth by increasing brand awareness and customer count.
  
• Focus on technology enhancements and strategic partnerships aims to improve customer experience, drive higher sales, and optimize profit margins.
  
• Rising commodity and labor costs, coupled with traffic declines, could pressure First Watch Restaurant Group's margins and earnings despite substantial marketing investments.

Catalysts

Through its subsidiaries, operates and franchises restaurants under the First Watch trade name in the United States.

• First Watch's plan to meaningfully scale its marketing spend in 2025, coupled with investments in technology for more efficient targeting, is expected to increase brand awareness and drive a return to positive guest counts, potentially leading to increased revenue.
  
• The company's identification of vast white space throughout the U.S. and its goal of reaching 2,200 locations demonstrate a significant growth potential, which could positively impact revenue and earnings in the long term.
  
• First Watch's focus on opening new restaurants with higher average unit volumes (AUVs) above the system average, and a projected cash-on-cash return above 35%, could enhance overall revenue and improve net margins through economies of scale.
  
• The introduction of enhanced customer-facing technologies, including a custom-built waitlist, new menu tools, and personalized offers, aims to improve customer experience and retention, potentially boosting revenue and margins.
  
• Strategic modifications in third-party delivery partnerships to improve visibility within delivery apps have already turned the traffic trend positive in this channel, suggesting potential for increased earnings from higher off-premises sales.

First Watch Restaurant Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming First Watch Restaurant Group's revenue will grow by 16.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 2.4% in 3 years time.
• Analysts expect earnings to reach $38.8 million (and earnings per share of $0.62) by about March 2028, up from $18.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.7x on those 2028 earnings, down from 53.4x today. This future PE is greater than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.84%, as per the Simply Wall St company report.

First Watch Restaurant Group Future Earnings Per Share Growth

Risks

• Negative same-restaurant sales of 0.3% and a same-restaurant traffic decline of 3% indicate potential issues with customer retention or acquisition, which could impact future revenue growth.
  
• The increase in commodity prices, particularly eggs, avocados, bacon, and coffee beans, along with additional tariffs, could pressure margins and increase costs, negatively impacting net margins.
  
• High single-digit commodity inflation and labor inflation are likely to put pressure on operating expenses and could reduce earnings if not offset by increased pricing or cost efficiencies.
  
• The significant investment in marketing could represent an increased cost that might not yield the intended traffic growth or return on investment, potentially impacting net margins.
  
• The company's reliance on third-party delivery channels, which previously experienced negative traffic, could be a risk if consumer preferences shift or if partnerships do not yield expected results, impacting revenues.

Valuation

• The analysts have a consensus price target of $23.364 for First Watch Restaurant Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $28.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.6 billion, earnings will come to $38.8 million, and it would be trading on a PE ratio of 48.7x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $16.66, the analyst price target of $23.36 is 28.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.