First Watch Restaurant Group, Inc. (FWRG) Earnings Call Transcript & Summary

Good morning. Thank you very much for joining us here in the room and online. My name is Jeff Bernstein. I'm the restaurant and food service distribution analyst here at Barclays. I want to welcome all to day 2 of Barclays Eighth Annual Eat Sleep Play Conference. The event is in person for the first time since 2019. And we're excited to have 11 restaurant and food service distribution companies attending our conference. I'm also joined by our gaming, leisure, and lodging analyst, Brandt Montour as well as our Latin American consumer analyst, Antonio Hernandez. We hope you find day 2, a good use of time. Hope we get a chance to chat in the halls if you're here in person. But at this time, I'd like to introduce our first presenting company for my coverage today, which is First Watch. With us this morning from Bradenton, Florida, we have Chris Tomasso, President, and CEO; and Mel Hope, the CFO. And before I get into the fireside chat, I was asked to read the following disclosure, which is as follows. This fireside chat may include forward-looking statements. These statements 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, growth strategies, and future expenses. Any such statements should be considered in conjunction with the cautionary statements in the company's earnings release and the risk factor disclosure in the filings with the SEC, including the most recent 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 remarks today may 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 filings with the SEC. With that out of the way, just for background, for those not familiar, and I promise you will be in time. First Watch has 450 or so units across the United States with a franchise mix of roughly 20%, primarily focused on company-operated unit growth. We believe the fundamentals are impressive with the trifecta of comp and unit growth, coupled with outsized restaurant margins and related profitability. It does make a comparable peer group difficult to define, especially because they focus on breakfast, brunch, and lunch. With that said, it seems our high-growth restaurants depends on the day. Sundays are in the penalty box and are slow on macro. Other days, investors are intrigued by the higher growth into a slowing macro.

But with that said, we will kick off the Q&A, and then I will pause with 10 minutes or so remaining to see if there's any questions from the audience. But with that said, excited to have First Watch with us this morning. So yesterday, we had a number of restaurants sitting up here. And it seems like a handful of questions throughout the day yesterday. No surprise. The first few are just very high-level industry perspectives as you think about the consumer going into 2023. I mean if you were to look at macro data or read the paper on any particular morning, we're heading into a recession. Just wondering how you think your brand is positioned in an environment like that. And if you were to see some weakness, what levers could you pull to desire to help to reaccelerate sales in an environment like that?

Yes. I think we're very well positioned should that happen if all the headlines turn out to be true. We're a full-service restaurant. We're open 1 shift a day, and we make everything fresh to order. I'm sure there's a lot of folks in here that have not been to our restaurants, but the quality of the product that we put out, we don't have heat lamps, deep fires or microwave. So from a consumer perspective, we're very well aligned with how the consumer is looking to eat. On the value side of it, we do all of that at a $15.50 check average. So we're an affordable luxury. I wish I could put some food shots up here, so you can see the kind of food that we put out for that kind of per-person average. But it's pretty amazing. And you're right, it's difficult to put us into a category, and we like that. It makes the job for Mel and I on the explanation side a little bit harder, but we're kind of one of those once you go, you get it places. And so I've been with the company for 16 years. I went through the economic issues that we had in '08, '09, and '10, and we performed very well during that time relative to the industry. I think our approach over the past call it, 2 or 3 years before COVID and leading up to COVID to position ourselves for where we are and where we might be in the next year or so. I'm confident in our positioning. We're one of the few -- I still think we're the only one. I can't say it because I haven't found anybody but that didn't take any price in '21 as we were coming out of COVID. And we've been relatively conservative on our pricing. But we're one of the only concepts that has had positive traffic as well. And so we think there's a correlation there. So we're very much focused on being an affordable luxury, not becoming a special occasion restaurant, but also executing consistently. And I said on our last earnings call that I believe should the consumer pull back on the number of occasions that they have in dining that they're going to go to the places that deliver value and are consistent, and we do that very well. We're also the #2 most trusted restaurant in America according to a Technomic survey. So that trust that we've built over almost 4 decades, I think, is another thing that will help carry us through these times. So all of those things for me check the box to say we're really well positioned to get through this.

The more discriminating customers are the more we know that they're going to want to spend that excess dollar that they have in our restaurant.

And then also our consumer is higher income, higher educated. So we think that provides some additional insulation as well.

Do you have a metric for the average household income of something you quantify...

We do. Our most -- our heaviest users are 70,000 household income or above.

Interesting. And coming out of earnings over the past month, it seems like there's a potential -- maybe I'm being too optimistic, but a goldilocks scenario, which would, in our view, I mean, at least in the third quarter and what we've heard over the past months, sales seem to be holding up surprisingly well for the whole industry. Menu pricing, which has been outsized has been accepted. And commodities, if you believe it, are maybe starting to roll over a little bit. And in that scenario with strong sales, outsized pricing and commodity rolling over you could have this window where there is like margin recapture opportunity in the short term, and investors are all of a sudden looking after companies that of the potential to see some outsized margin expansion, which typically wouldn't be a franchise business. It would be more of a company-operated business like yourself. Just wondering whether that's overly optimistic or I should say, overly simplistic in terms of viewing it that way? Or how you think about that in the short term, that scenario playing out where there could be some margin...

Well, in terms of price, we have a history of looking closely at price very, very modestly early in the year and then midyear depending on how inflation is running. We -- and we are seeing some, I guess, moderation in the pace of inflation. So you're right. I think that, that -- those 2 -- those 2 phenomena that are going on, I suppose, is going to help with our margin equation. But more importantly, we're going to continue to be very discriminating ourselves about taking price and being sure that we're continuing to drive traffic because we're in this game for 30 years, right? We want to win not just the quarter or the next year, but we want to be sure that our customers see a value in coming to First Watch for the next decades. And so as we capture more occasions, that's going to be the better long-term equation for us.

And I would say, I'm not on board yet with the consumers accepted those price increases. As you know, the foot traffic indicator is a lagging one. So I think you're starting to see more of that than I think some concepts expected with their price increases. So we're watching that very closely. But when you compare it to grocery inflation and other things, certainly, there's opportunity there. And like Mel said, we're starting to see some relief at least in the pace of inflation.

That's great. Not deflation, just...

No. Yes. Yes. We joke about how happy we are with percentage increases that we never thought we would be.

Yes. Right now I'm excited to ask you guys this question. Just hopefully, the COVID concerns are easing. We are sitting closer than we otherwise should. But because you guys are in such high growth mode and still in early stages of your expansion. Just wondering what do you think through COVID with the greatest structural change either to your brand or to the industry and whether or not you think that's going to stick. I mean I know you guys are changing the way you design certain restaurants as you open them up to kind of based on learnings of COVID. So just wondering what you think has been the greatest change to your brand or the industry.

Without question is the emergence of off-premise for us. Breakfast as an off-premise occasion in general wasn't the thing prior to COVID. And we had already begun our efforts to set up that structure, but COVID just accelerated that. And we went from pre COVID less than 5% off-premise percent to now upwards of 20, and it's -- people always ask if it's sticky, and it's actually been extremely sticky even as our dining room traffic has recovered, and it still sits around 20%, and it's a different customer for us. So that's been a huge structural change because we had -- again, prior to COVID, you had to phone call our restaurant to do it to go order and now we have all the technical and digital infrastructure to be on all the platforms.

Our IT group and our marketing group in a couple of months during the middle of 2020 operationalized online ordering, online pay in terms of our apps and just an amazing pivot to be able to service a large amount of off-premises business that we did -- we had never organized around before.

Now when you're opening up new stores, I presume you have a different design or different waiting area or things like that for delivery drivers or pickup or whatnot, you really incorporate your business going forward?

Yes. Our front lobby area on a Saturday and Sunday can be very congested with people waiting and people paying. And so in our new designs from that standpoint, we've moved off-premise pickup to a window on the side. That's right off of the kitchen. We've added new equipment to the kitchen, either a second make line or a longer make line to accommodate that additional channel that we have now. So yes, we're definitely starting to think about it in all the restaurants that we build going forward.

And in terms of, well, I mean, your longer-term view, which I can appreciate you guys tend to take a longer-term view than most. But what assumptions are built into your long-term comp outlook, I think from your IPO, you were talking about maybe 3.5% or so would be a reasonable comp outlook for the next number of years. What's the ideal components within that comp? Like you said, most of your peers are running negative traffic. And therefore, right now, the comp is being driven more than 100% by menu pricing. But how does First Watch think about that and maybe why you think you're booking that trend to be able generate the positive traffic?

Sure. Our long-term trend on growth is really built on that continued traffic growth. But for the year that COVID so much affected our traffic the company had 3 and a half decades of growing transactions annually. So it's been a reliable process that we go through in terms of the modest pricing, attracting new customers, getting the word out, growing awareness, getting people in the restaurants. And so that long-term algorithm on our growth in terms of our same-restaurant sales has parts of it continuing to offer items that customers select so that our mix goes up, but it's really built on that continuing assumption of positive traffic and growth. And we're building restaurants that really can accommodate that kind of growth, both in the dining room as well as the off-premises business.

The other thing is... It sometimes slides under the radar, but we have 5 seasonal menus a year, 10 weeks at a time. Really, that's an opportunity for us to drive mix, like Mel was saying, actually increase check. That's typically a place where we introduce premium proteins like a crab omelet or a shrimp and grits or some -- or barbacoa breakfast burrito like we have right now. And as Mel said, the consumer gravitates towards those. So in essence, they're building their check that way. And we were able to do that without having to raise prices so much on the core menu. So -- and those are like real-time pricing opportunities because they're in and out. So we can determine the price on those 6 weeks before they launch and be thinking about the ones that are coming later on in the year. So we -- it gives us a lot of flexibility.

And speaking of pricing, I think you're currently approaching 8%, which I think a couple of years ago, you would have probably left if you ran that...

Historically high for us...

Historically high. Do you believe the brand has more pricing power if needed? I mean, I know you said you let the consumer decide if they want to trade up to something. So effectively, you don't necessarily have to raise your prices. But I know from a more conservative standpoint that you'd probably err on the side of not taking it if you didn't have to. So how do you think about further pricing going into '23 if inflation remains elevated?

Well, our philosophy has been the same, which is to price to cover inflation. We had typically historically done it twice a year. And actually, if you think about it, yes, we were carrying $7.8 billion, but we didn't take any in '21. So our annual average is pretty close to the same, but we just played a little bit of catch-up. But honestly, I think the decision we made in last year did not take price was prudent. We were already seeing outsized PPA just because people were splurging when they were coming in, they were ordering either an alcohol drink or $1 million bacon shareable or something like that. So we didn't feel like we needed to take the price at that point. And again, we were very much focused on -- we didn't know what the consumer was going to be doing as far as going out to eat. And if there were going to be less visits, we wanted to make sure we got our share and didn't put anything out there that would deter somebody from coming in. So that and not taking anything off our menu when we returned from COVID, which I know a lot of concepts did were just 2 decisions that we made that put us out on an island. I know we weren't -- we were kind of out there on our own, but I think we did the right thing. I absolutely believe that we have pricing power. When we look at our analysis compared to either competitors, which is a herd of cats. It's typically a local breakfast brunch and lunch restaurant. We have lots of opportunity there. But we kind of like to keep it in our quiver in case we experience rough times. And again, just trying to build that relative value moat between us and others in our space, but then also just overall inflation in general and make sure that the consumer still wants to come to us on a frequent basis. Breakfast is a very frequent and habitual and visceral visit. It's not like -- I mean, we can have people that come in every day and order the same thing. So we cherish that and we huge that, and we want to make sure that we don't do anything that would stop that from happening...

Right. And for those in the room that maybe haven't been, when I say breakfast, brunch, and lunch, I think most people think of mimosa or Bloody Mary along with that, which up until recently, that wasn't even an option. So just wondering if you could talk a little bit about your new rollout of alcohol program, which seems like a real driver of increasing your mix shift -- and I think you mentioned you're now in 90% of stores. So how is that going so far?

Yes. I mean it's something that we started to work on prior to COVID, and we had started to test it and started to get liquor licenses. When COVID came about, we just went to work behind the scenes, getting liquor licenses for all of our restaurants. So I'm not sure of any company who has ever gone back and gotten 400 liquor licenses in one swoop, usually do it as you open. But the reason we were doing that is because our research and consumer research was telling us that as brunch was becoming and has become an occasion and a social occasion and the gathering occasion, keep in mind that breakfast has been the only segment in the restaurant industry that had seen growth, and I think that's still true today. There was this segment of groups that wanted to go out for the social occasion of brunch. And for many of them, alcohol was a part of that decision process. So it wasn't something we offered, but we knew we could do it and do it well. We did it our way with crafted cocktails. We don't actually have bartenders. We make these really great crafted cocktails and it's a relatively curated list. And it's been great. It's -- people ask about the mix and how many restaurants it's in. To me, the biggest upside of that is just eliminating the veto vote and getting that consumer and really the other 6 or 7 people that come with them to come to our restaurant because if there's one in the group that wants alcohol, typically, everybody else will defer to that person and they'll choose a restaurant that has alcohol. So to me, that's the biggest opportunity to grow our consumer base, but also it's an attractive consumer base that's doing that, too. It's the millennials and younger generation, which we've seen a great balancing out of our consumer base since doing that.

I seem to remember at least to say it was a bougie brunch, I guess, is a good frame of reference for people who perhaps haven't been before. Is there any metrics you can share in terms of what you use as a measuring stick as to where alcohol should be or what the range of performance it has been thus far, just so we can kind of get a sense whether presumably not turning into a bar on a single-digit mix, but just trying to get a sense for maybe the range of outcomes or the desired outcome.

The way we talk about it is we have a very successful fresh use program with kale tonics and morning meditations with beet juice. We use everything in-house that day. Any juice that you order today was juiced that day. When we launched that 6 or 7 years ago, it was mixing around 2%, and now it's around 15% because we've innovated and explored. I think the same can be said about alcohol. We're in the very, very early innings of it. We kind of put out what I would call the gateway drinks, the bloody marys and mimosa, but there's so much innovation that can happen around that platform that we've been working on behind the scenes but waiting to roll out until the alcohol is in all of our restaurants. So I think there's tremendous opportunity to continue to grow that.

And then on the restaurant industry tends to focus on comp growth, which demonstrates, in our view, the health of the business, at least the traffic component of that. But the unit growth is what's really incredible and it helps you guys stand out versus the competition in terms of I think your long-term target is for low double-digit annual percentage unit growth, which I think would be one of the fastest build-outs of a casual diner in any kind of recent memory. When I say casual diner, loosely you are a casual diner I presume, but servicing different dayparts. So it's kind of a different scenario. But how would you characterize the current pipeline and real estate environment. It seems like all we hear about our delays and challenges and very difficult to open up stores. Does that lead you to maybe want to temper your growth in the near term? Or how do you kind of think about the availability and desire to maintain that level of growth?

I think our development team has to work a lot harder, right? They're solving for a more difficult environment right now. But the projects that Chris and I look at now, and we're on the real estate committee approving projects we're going forward with. Those projects already have 2024 dates on them. There most of what's baked into our plans for next year. We had sort of the prospective opening date. So we feel pretty secure about our growth trend for next year. And the -- and you kiss a lot of frogs in the real estate business for restaurant sites. So they -- I think because we're now a national credit, we have developers working in every market. We have -- they're dealing with commercial real estate development. I think we see most everything that's coming available. I think we're an attractive tenant for -- particularly for first-generation space. Frankly, because when the developers are merchandising their centers, they're not only looking for a national credit but somebody who can open up the center early in the morning, we're vibrant. We can kind of create that early morning foot traffic. And then they can merchandise the center with a late-night business at the other end because we don't consume parking in the evenings. And so whenever there's a developer and a new promising trade area, I think we're seeing most of those in the markets that we're in. And so the pipeline remains robust. We are looking at every project that's out there and our developers, I would say, in terms of outages or shortages or that sort of thing that I've heard other people mention it as well. One of the things I give our development team a lot of kudos for is that because they're very metric-driven, they get dates early, they -- we put a lot of emphasis on training before we open a restaurant. So those dates are really important to our operators as well. They are very disciplined about making sure that we're not short on equipment. We're having to buy ahead of time in some cases or we're having to -- sometimes we're storing it in order to put it in place ahead of time, but they've been very thoughtful about making sure that we have no physical limitations on the properties, and the things that come up generally are in the smaller category and you just have to manage through them. And that's what's been -- they spend a lot of time doing.

As you know, this year, we've stuck to our growth numbers throughout the year.

And the idea, I mean, that you're going to be approaching 500 units in the not too distant future. So we're talking about some 50 units a year at some point. And I'm sure you get asked this a lot, like what's the gating factor? Not that you want to grow faster, but what would stop you from opening 75 units a year? Is it the people? It doesn't sound like it's the real estate. I'm just wondering what -- why that's the right number and whether you can maintain that number as the base gets larger.

One of the disciplines that we use is that we don't open a restaurant unless we can have a veteran manager from the market who opens that restaurant. So we're literally making where we carry 2.5, 3 managers in our restaurants. We're taking a veteran out of an existing well-performing restaurant and moving them into the new restaurant. So one reason that we're careful about the pace is so that we don't so heavy into any market that we're poaching all the veteran managers in well-run restaurants. And so we're -- and putting them in a new restaurant. So we're trying to make sure that we do it at the right pace so that we don't abandon the good customer experience in the other restaurants as well. So the more markets we open and the more mass we develop in those markets gives us more ability to open in more markets. So as our growth accelerates, we'll be doing it in markets that today don't -- we're not operating in, but we'll be -- we'll have a mass, we'll have teams that are there that are ready to open more rapidly. And so it kind of builds on itself.

And if I think about somebody who joins the system because they want to grow within the system and become a manager, if you've got 2.5 to 3 per store and you're pushing -- when you got over 1,000 managers that hopefully, many of them aspire to be -- have their own restaurants. So you're talking about only needing 50 at a time -- and I guess you just run it at the pace where if you had a lot more managers that were ready, that would be the biggest gating factor. You could say, you know what, we want to keep our best people. We've got to open up 60 or 70 and your pipeline of managers becomes larger and larger.

And we carry extra managers, too. I mean, as you and I have mentioned before, some of our labor cost is the fact that we actually carry extra managers in marketplaces in order to prepare the marketplace for the new restaurant openings.

Yes. The other benefit for us is we are high growth. And so there's really good quality individuals out there who are with great companies that just aren't growing. And they're just looking for a growth opportunity. They're not leaving the company because they're not happy. They're just leaving the opportunity because they don't see growth opportunity. We're able to bring them in, put them through our management training program, get them in our restaurants and then give them their own restaurant relatively soon. Every 4 restaurants we open, we need 13 what I call ops leaders, 2 ops managers, a general manager, a director of operations for each restaurant. So yes, there's -- we just had our annual leadership conference in Orlando 2 weeks ago, and that was the entire discussion with all the folks that came in was about the opportunity that the growth presents for them.

I see we have about 10 minutes to go. I want to pause and see if there's any questions from the audience before we dig into commodity labor and restaurant margins. So anybody have a question in the room? -- Pretty good way long. And we haven't even touched on inflation yet. So I think for 2022, your commodity basket was up mid-to high teens, which most people would say, like you sort of breakfast, brunch, and lunch, most people just think the big center of the plate items are the ones that run high, but we're perhaps learning different. But can you talk about maybe your outlook with the formal or informal in terms of where you'd think that basket would be as we move through '23 relative to '22. Again, I mentioned earlier, still inflation, but maybe it's disinflation relative to deflation...

So we have periods this year. I think first, second quarter, sometime in there, we were running 17.5%, so almost 18% inflation in some of our areas where we -- I think we project it to be at 12% to 14% for the full year. So you have seen some easing in the back half of the year. I think that trend is going to continue for no other reason, and we're rolling over bigger numbers last year. But the -- kind of the way we think about things differently right now, our suppliers are also dealing with inflation as well. So historically, we haven't had enough mass as a company to do a lot of longer-term contracting. Most of our contracts on commodities go out 35, 40 days, sometimes 60 days in terms of the short term. But on some of our bigger commodities now, the last 2 years, we've tried to price for the full year, particularly around eggs. I think between eggs and potatoes, we're probably -- I think that's about 15% of our market basket and we're entering into year-long contracts for those for next year as well, which not only is helpful just in terms of getting a good price or a favorable price relative to what the play in the market might risk. But it also ensures supply. So when -- by entering into the longer-term contracts for a vulnerable commodity like that, it puts us first in line when we're particularly around eggs when we're having to procure it. So it kind of de-risks the supply chain for us to enter in into longer-term supply contracts.

If you're running, I guess, if it was 12% to 14% for the full year and you were running high teens in the first half. We're already in the single digits now, presumably. And you'd expect it to be still inflationary, but could be less than this year. So you could be more in the mid-single digits versus high or above. I mean that would seem to be a good outcome after what we've been through for the...

Yes, I think that's pretty consistent with what I'm hearing from others. And for those of you on the webcast, I'm crossing my fingers.

One of our big impacts was avian flu, which really was kind of a unique inflation impact with eggs on pretty much everything that we sell. So our team worked really hard to manage that and maneuver around that.

And on the labor front, just because labor seems to dictate your pace of growth and whatnot. It seems like last year, there were literal shortages where you couldn't be open as much as you'd like, which seems like the greatest problem you could possibly have. We're hearing that's easing. I'm just wondering your perspective where you are in terms of actually staffing the restaurants and then what the level of inflation you -- where it's ending this year and what your anticipation would be for 2023?

So first of all, we've never closed a restaurant because of staffing shortage -- it certainly not large groups of restaurants. So we didn't experience the same sort of stress that I know some of my peers have talked to me about around the industry. I think some of the buffer that we enjoy from the worst of that has to do with our operating hours. I mean our promise to our employees is that we work on shift from 7:00 to 2:30 in the afternoon and those hourly employees get out earlier so that they can be with their families. They can help with homework, some of them have another gig, some of them coach baseball. So I think that appeals to a certain cohort of the hourly employees. And so while we were operating our restaurants without the saying bench strength that we hope to have, we were able to operate fully staffed on the floor all the time. Applications have gone up. Since early this year we've seen the applicant flow increase. We've certainly seen that at that general manager level, which Chris mentioned is absolutely the -- I mean, that's the point guard for our restaurants. And so we've been able to increase the cohort of our general managers around the system. So it has improved. And frankly, when your applicant flow is better, you have a deeper pool from which to select and hire and replace and train and that sort of thing. And so as a consequence, I think we didn't experience the worst of it, and we're enjoying now pretty much returned to sort of more normal times for us in terms of applicant flow and labor staffing.

Yes. We're actually back to pre-COVID staffing levels on both the hourly and the management level.

And has turnover proven to, I mean I'm assuming it was higher than you would have historically seen. Is it now back to where it was before? Or we...

I think we still have some work to do there, frankly. We have typically run about 20% lower than the industry at both the hourly level and as well as the general manager level. We really measure that general manager, but we do have -- and we have elevated our turnover during the last couple of years. We'd like to see it work its way down. And I think that will be the hallmark of more normal times. But I would say this, our tenure is really one of the things that is a kind of a secret weapon for us while we have a lot of turnover and everybody has turnover at the hourly positions. But -- and while we're not immune to the turnover, our general managers, their tenure, and throughout the system runs north of 5 years. And our over the restaurant tenures even goes to 10 and 15 years depending at the next couple of levels. So having those veterans who can solve in the moment for staff outages or a very useful staff or is way key to how we service the customer and how we have a consistent performance across the system, and that tenure is something we lean on a great deal, and we enjoy a lot of it in that first line.

And I guess it all kind of culminates once we talk about the sales and the commodity and the labor and the pricing, it comes down to restaurant margins. What are your short or long-term goal posts? Some companies will say, we will hit this margin no matter what -- and others say, we're not as interested in the short-term margin if it's not relevant for the long term. So how do you position yourselves? And what level do you say I will guarantee to investors we're going to hold this level or what range do you target? How do you think about that?

Well, probably the best way to think about it is how we approve projects. So when we approve our new restaurant projects, we generally target that in that third year that they're going to be north of 18% in restaurant margins. We pretty consistently do that. If you look at -- our margins last quarter were not where we wanted them. But if you sort of break things up a little bit, our comp restaurants, so the most mature restaurants in the system, actually, we're doing about a 19% restaurant-level operating profit margin. And because we have so many new restaurants entering the system and they're very high volume, so they over-index as far as impact on the margin, it tends to moderate that margin a little bit lower. So probably the most meaningful thing we can do is to get our more juvenile restaurants operating at more mature margins more quickly because we expect on that third year that they're fully delivering in that above 18% restaurant-level operating profit. And for people who are not familiar that that's our public company work for 4-wall EBITDA.

So the new stores, which... If you're opening up 50 on 500, and that's 10%. And what kind of a headwind does that lead to an average quarter or a year? I mean are those stores doing 10% margins, and therefore, it's…

I mean some of -- they're across the spectrum. The newest restaurants are lower than that. And as they're pacing their way to maturity, they're doing higher than that. So it really -- some of it depends on timing and where you're bulking up. As we get to be a larger system, they're not going to have as much influence on that. But they're all on pace. And what I think is more meaningful is that, frankly, their sales are exceeding the system average of the legacy restaurants. So they're doing -- they're pacing to do $2.2 million but certainly above $2 million in sales where the restaurant -- rest of the system is probably averaging something like $1.8 million, something like that. So they're contributing that one restaurant might be contributing -- it's like 1.2 restaurants in terms of its impact on the cohort of other legacy restaurants like comp restaurants.

Understood. Well, I think we've completed our allotted time, but I want to thank First Watch for joining us this morning. Chris and Mel, thank you very much. Have a good day of meetings.