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

[Audio Gap] And then I do want to thank everybody here for joining us today in particular, Chris Tomasso and Mel Hope, the CEO and CFO of First Watch. I think everybody here knows First Watch, although you may not have had the pleasure of eating there, and it is delicious food because they're still expanding. But First Watch is an award winning daytime dining restaurant concept, serving made-to-order breakfast, brunch and lunch using fresh ingredients. And I can attest to the ingredient quality and how, like I said, delicious the food is. So thank you for joining us.

Thank you.

I thought given that we're at a consumer conference, we can talk a little bit about your demand trends, and in particular how strong they were. I know you reported very robust both sales and traffic year-to-date or quarter-to-date. Maybe talk to us about what the source of that is? How much is idiosyncratic? I know there's a lot that's -- you have been leaders in the industry, so, clearly, that's a big piece of it. And then how much maybe the demand environment looks different or not over the last few months?

Yes, I would say that our most recent quarter is really indicative of our history, if you look at when we filed to go public. We went back pretty far and showed that kind of traffic growth. And that's really what our growth is based on is traffic growth. And even when we look forward into our guidance for next year, it's based on positive traffic growth. So the makeup of that and why we think that is, is a number of different reasons. I think we're the leader in the growing segment of the restaurant industry. And as you recently reported, it's the only segment in the restaurant industry that's been growing year-over-year. And so, we're fortunate to be in that space, we're fortunate to be a leader in that space. Likewise, I think a lot of the work that we've done over the years to position ourselves to continue to benefit from positive traffic growth is around our focus on relevancy and expanding our consumer base. And I think a great illustration of that is our recent expansion with the alcohol program, for example. But we have examples of that, that go back to our juice program and just our overall menu innovation and evolution. But then also just an evolution of our offering in general, including the prototype, a lot of the work we've done around the restaurant design, the footprint and those type of things. So I think it's a lot of different things that play into it, but things that we have identified and are focused on. So one of the big themes we talked about in our earnings announcement was the demand and serving more of that demand. So we're fortunate that, that demand is sitting at our front door, and it's really up to us to do what we need to do to increase those peak sales hours. Pretty much any breakfast restaurant that's out there is busy on the weekends. And so, the key differentiator for us, I think, in driving these higher volumes is our business during the week and weekday breakfast, weekday lunch. But then really focusing on capturing and serving more of that demand on the weekend so that we can have higher peak sales hours, and frankly, larger sales days.

Right. And so, it's interesting that you say it's sort of a continuation of trend. And I'm going to sort of go through in order of how you touched on different points.

Sure.

Because to an outside observer, it looks like there might have -- like there was a sharp acceleration. But I guess what I'm hearing you say is if I look at the underlying business, adjusting for weather or a lapse, that kind of thing, this strength is very consistent.

It is. I mean we've had 38 of 39 years of positive same-restaurant sales growth. So when you think about all the things that we've been through over those almost 40 years, '08, '09, 2010, we know what we need to do in challenging economic times. But we also know that we have very low brand awareness and consumers are still discovering us. We're seeing higher volumes in our new restaurants than we've ever seen before. And for all intents and purposes, when we're going into some of these new markets, we should have low to no brand awareness. But I think as we've grown and people have discovered us, whether either on vacation in Florida or in Arizona or wherever, I think people now anticipate us opening more. And I think that's why we gave one example on the call about one of our restaurant is doing volumes we've never seen before. And I think we've been really pleased with that kind of reception. And you know this. We're seeing that across geographies. We're not having to wait our openings based on geography to make up for what might be a slow starter or something like that. We're getting that same type of reception across geographies. So it's helping us with our development schedule.

Right, right. That's predictably high now, which is good. So I think it would be easy to talk on your breakfast. There was a big cost of living increase for older consumers on fixed income, like that was the big driver. So I'm asking -- I wanted to sort of ask you to kind of dig in a little bit into what your customer looks like? Because I think it's probably not what we traditionally associate with the breakfast. And so that COLA increase probably not the driver of your January, February comps.

Yes, we -- that's a great point. We have a very broad consumer base and it's also, I think, younger than people think based on what you said. If you think about it, the companies that report publicly that are in our day part specifically are legacy family dinners and whatnot. So I understand that the benchmarking universe is quite small. And it makes it challenging for folks in your seat and investors and even consumers to put us in a bucket. And we're kind of in a class unto ourselves as far as a at scale breakfast, brunch and lunch concept. We have a lot of competitors, but it's a herd of cats. They're different in almost every market. So, yes. So our consumer skews a little bit female, higher educated, higher income, and by that, we mean college and household incomes of $70,000 or more. And so that represents a big piece of our consumer base. But through some of the actions that I already mentioned, the alcohol and other things, we started to see a leveling out of our consumer base and really attracting more of what I call the next-generation pipeline of First Watch customers. So our customer has grown with us -- grown up with us over the 40 years that we've been around. But we're really thinking about now in the next 40 years and we talked about it in terms of having 2,200 restaurants at some point. We're less than 500 right now. So our big opportunity lies ahead of us for sure. And so the steps that we've taken to balance out that consumer base will help us as we continue to mature and our customer base matures with us.

Right. Yes. And that broad appeal, yes, as to your point, critically important over time and even -- and right now in terms of thinking about what -- the sort of volatility or the vicissitudes of individual groups. One of the things -- so right, you mentioned the day part. Just so we're clear, like breakfast has been growing, but you have been growing even faster than the breakfast segment. I don't know if you have sort of -- if you have some numbers behind that, like what the segment grows? And also, it sounds like the share gains are primarily coming from independents? Or do you know where those customers are coming from? So those are kind of 2 questions in 1?

Sure. I think the -- well, first of all, there's been a lot of focus on breakfast in our industry, and so -- whether it's QSR putting a ton of marketing dollars behind it. But I've -- we talked about this as we were going public and now that still 70% of breakfast occasions are eaten at home. So that's where the growth is coming from. And we believe the more people that are marketed to and told about breakfast away from home, we'll get our fair share and if not more because of our scale. And again -- so then the second part of your question. I think we're definitely from independents, that herd of cats that I talked about. I think we -- our leverage and our scale and our operations acumen allows us to come into markets and compete with independents, because we almost position ourselves as an independent. Most consumers don't realize we're as large as we are. And so we come into a market. There's no 2 First Watches that look like. Our menu and our atmosphere -- it's very easy to think about us as an independent. And it's funny because we actually win like best local restaurants sometimes. And that's a neat accolade to get, because that's exactly what we're trying to convey, is that we're really just your neighborhood breakfast, brunch and lunch restaurant. And we might be a network of restaurants, but we don't talk about ourselves in terms of a chain either. And I think that goes to our philosophy of 'if we can do it in 1, we can do it in 100,' 'if we can do it in 100, let's do it in a 1,000'. So by that I mean when concepts become successful or are successful and grow, at some point, they start to think about, "Okay, how can we shave cost? How can we do things? How can we outsource?" And probably forget about what got them there and why they were so successful in the first place. And then I would say that I think we're taking share from large bakery cafe concepts that probably started on a very similar premise to us, but have moved more towards convenience and things like that. And that consumer that went to them for very specific reasons turns to us because we have those same attributes. So I think it's across the board. I think the overall push for relevancy for us has really helped us with the trial. And I think the trial is a big part of our traffic gains. And then I just -- I give our operations team and our culinary team a lot of credit, because once they come in the door, I think we do a really good job of converting trial to usage and then that's where the traffic growth comes in.

I think we decided our customer shops everywhere, and that we get our fair share when the trial is out.

Right. And how do you -- yes, that is one of the questions. How do you encourage trial? I know you have a sort of a seasonal menu, which is unique among chains I would say. To what extent is it menu usage of bringing people in? And -- or is that perhaps just translating into increased frequency versus other channels that might bring -- social media, that kind of thing. So how do you get that first trial, because to your point, when people try the food, they'll come back with the awareness as well?

Yes, we've always been a word-of-mouth concept. And I think the advent or the growth in social media has allowed us to amplify that. What I say is we used to whisper and now we're a little bit above a whisper. And we're able to be much more targeted. We don't do traditional marketing or advertising like on television and whatnot. So we still are a word-of-mouth concept. Social has helped us -- social and digital specifically has helped us amplify that word of mouth. But we do it from a kind of an inside-out approach, where we really focus on the brand voice and we allow the food to be front and center. The freshness of the food, the seasonal menu specifically, I think, are a key driver for us because our teams get excited about it, our customers get excited about it. But they're also -- I mean, they're beautiful dishes that also if we target the imagery the right way and to the right consumer at the right time, as we're learning, it can really be that driver of trial. I think it's a big component of frequency with our current customers, but I also think it plays a role in the trial and then that gets them in.

There is a rhythm to the 5 seasonal offerings. And then we meet them with -- the rest of the menu is with an everyday value. So I think our customer, part of their loyalty is just entrusting us to be there with an everyday value, something that they can return to. And I think that's part of the secret sauce, is that regular menus plus we're a reliable and trustworthy operator for them to frequent.

Right. And to your point of value, I think the average check is still $15.5, which is relatively low, especially as we talk about for some seasonal and fresh offerings.

Right.

One of the things that you mentioned that was interesting and has sort of been, I think, a true line for this conference is that your teams get excited about the innovation. And sort of happy employees, happy guests, that dynamic has really, I think, been -- there's been a bright spotlight shown on this, especially as labor challenges have presented themselves. So maybe talk a little bit about that, to the model as it appeals to somebody who's going to work at First Watch?

We never -- it's interesting. The strength of our labor model really paid off a great deal during the very worst of the initial wave of COVID, where we never experienced the kind of challenges that I think some of my peers have told me that they had experienced. We operate from 7 in the morning till 2:30 in the afternoon. That one shift is a benefit. There's a certain cohort of hourly employees who just prefer to have their evenings to themselves and some ability to either do another gig or be home to do homework or coach baseball or something like that. And so, we never experienced the kinds of dramatic shortages that I think other concepts ran into, particularly late night and the dinner day part. We were -- we ran thin from time to time. We didn't have the bench strength that we were accustomed to having. But once our applications picked up, I guess, it was really -- this time a year ago, I think the applications for hourly positions resumed with the same kind of pace that we saw prior to COVID. We've never -- I mean we've never experienced a downturn since then. And so, whenever your applicant pool is big and deep, then just the ability to continue to operate your crews at maximum levels, that's just a huge help. But I think it's that advantage of -- the promise we make to our employees is, "Hey, one shift work."

"No nights."

Yes. "No nights. You're going to enjoy working with one crew. You're developing" -- "you're working on one menu. We're not changing menus during the day." So they're getting reps on the same thing. It simplifies their life and it also meets their needs.

A lot of processes and procedures that we're putting in place right now have a goal of out the door by 4. So have everybody in our restaurants out the door by 4. And if you think about that, that's plenty of time to get home, pick kids up from school, those type of things. And so, whether it's new technology that we're putting in to help the managers do their job, scheduling tools -- things that happen after were closed can be done in that 1.5 hours from 2:30 to 4 and get everybody out the door by 4.

Yes. And that's a good segue, because I did want to talk to your point serving the demand you have, right? So you have the high-quality problem of having too much demand.

Right.

So what is -- can you talk about some of the process improvements or technology that you've deployed and whether it's to address on-premise or off-premise? And also, it is interesting to hear you say that it actually improves the experience for people working at First Watch, not just for the customers. So maybe just give us some thoughts on that?

Yes. So we think about it in terms of an ecosystem, as everybody would. There's some of those pieces within the ecosystem that have been either highlighted or we've talked about more than others. But I can tell you it's not a small list and some of them are big like KDS and include an investment. But some of them are time and motion studies and process improvements and sometimes something as simple as moving where something is in the kitchen to reduce the steps. We've also done the dedicated make line for it to go. Just to remind everybody, we had 3% or 4% off-prem prior to COVID and now we sit around anywhere from 18% to 20%. And by the way, our dining room traffic is at the same level as it was pre-COVID now. So when you think about how our kitchens were designed -- and frankly, a lot of them were designed to do $1.2 million in AUVs, and now we're talking about over $2 million. And that's a component of being around for 40 years. We have restaurants that have been open for 35, 36 years, and they just weren't designed that way. So what we've tried to do is develop this kit of parts that we can apply all, some or none. In many cases, there's not an opportunity to do any of them. But we've scoped out each one. We kind of know what they're worth if they're implemented properly. And when we're either updating restaurants, we see which ones we can put in there. But more importantly, again, when I talk about the less than 500 restaurants now and the 1,700 we're yet to build, those we're able to control which ones we put in there. And that's why we're seeing these volumes that we are. So there'll be some volume limits on some of the older cohorts. But really, this is about unlocking the value in the ones we're going to be building over the next 2, 3, 5, 10 years.

Right. And so you mentioned sort of a toolkit, and as you said, all, some, none. So you talk about kitchen display. You talked about a second make line. I guess what are the other kind of big tools, if you will, that we should see in every kind of new First Watch?

So when possible, a dedicated to go pickup area on the side of the building. We've optimized dining rooms. We talk a lot about our waitlist management system and how many of our customers go through that system when we're on a wait on the weekends. That helps us determine average party size. The dining room optimization one, that's one that's really interesting because we actually did that work before COVID. And we saw that when we were full, we were about 70% full -- or, excuse me, when we were on wait, we're about 70% full because the tables weren't optimized. So what we learned was that our average party size on the weekends was 1.9 people, and we were planning for 4. And so by optimizing that dining room, we get that 70% to 85%. It's never going to be 100%. I mean, it might be by accident. But getting that to 85%. So we had that plan. And then COVID came and it was just the opposite. You had to have tables 6 feet apart from each other, all those different things. So it wasn't until post-COVID that we started to revisit that, and say, "Okay, let's optimize the dining rooms." But if you're going to do that, that obviously puts additional pressure on the kitchen because now there's more people in there eating at once. So that's when we started to focus holistically on the -- within all 4 walls, and say, "Okay, what do we need to do to accommodate that?" So the indoor, outdoor bar is a big piece of that. Believe it or not, adjusting and optimizing our bussing procedures is a big contributor to faster table turns. We had a philosophy of bussing tables in 4.5 minutes. That started from the very first restaurant that opened. That's what the founders did. And it was just one of those things that we just hadn't revisited for so many years. And we looked at it, and said, "We can do better than that." And so, we now have a goal of 90 seconds or less. And so that -- if you time that well with the seating procedures and having people on deck ready to go to the table, all of that is just helping with the throughput. And again, everything you do in the front of the house, you have to make sure that the kitchen and the back of the house is optimized to be able to handle that increased volume.

Right. So 2 things. One is what is the average table turn?

So it's 29 minutes or less. Our food comes out typically in 10 minutes or less. And then -- although I'll tell you it's -- I don't want to call it anecdotal, but it's not as scientific or quantitative as we like it to be, because we weren't on -- we didn't have a kitchen display system that told us. It was more manual tracking of it. But now with a lot of this technology, it gives us that kind of input: the party size, the ticket time. Now when they pay, we can tie it back to when we seated them and things like that. So we're getting -- I would say we're setting up a really nice benchmark now of what those data points are.

Right. Yes, I mean you can tell by restaurants -- I didn't realize it was that tight. So I was thinking about breakfast, people are pressed for time. But it's actually not as nearly as big a time commitment as like a -- what I would think about with casual diner.

Well, just to clarify. So that's across all 7 days, right? So there's going to be times where there's no wait and there's times where there are. So that averages out to 29. I think when you talk about -- if you're talking about seat to eat, that's 29 minutes even on the weekend. But obviously, there's a wait time component that happens before that. But we've put some tools in place to reduce that friction. And really, it's not even so much friction. It was psychological anxiety around waiting. And so if you think about it -- before the digital waitlist management system and putting it on the app, where you can put your name on our list, you'd come in, you'd give us your name, your party size. We would write it down. Probably every 6 minutes, you'd come up and say, "Where am I on the list?" You don't have to do that anymore. It's on the phone. It tells you how many parties are ahead of you. And when it's time for you to come seat, we're able to send you an SMS that says, "You're up next. Come be ready so that we're not waiting for you to come when it's time to seat you," all of those things. I mean, we're talking about shaving seconds. But when you do it a thousand times, it makes a difference.

Yes. Yes, it makes a difference to the operations and also to the customer experience for sure. Because waiting is -- waiting on something is probably one of the most painful experiences that people have at like a regular basis. So it certainly seems like it's an important point to address. And I guess the other sort of -- so besides that, one of the things you mentioned like bigger -- get more efficient -- or optimized seating means more demand. And that's -- I would say that is like a theme throughout COVID right? It was like you just had a lot more demand, and it could be first year or it could be -- because you didn't have -- to your point, seating wasn't necessarily the gatekeeper or the cash wasn't necessarily the gatekeeper that we're used to seeing. So how have you -- and you touched on it, but how have you adjusted to address the fact that off-premise is so much bigger? Does it change your day part mix? Does it change sort of the flow throughout the day? Or is it really just about making bigger kitchens so that the demand that comes in the dining room and through the digital ordering can all be met?

First, I'd say that we're thankful for the business. It wasn't there before, right? But we did have to kind of fuel the jet and midair to figure out how best to do that. And so, we've addressed it with the second make line. Our focus all along was, do not let it degradate the in-restaurant dining experience. Like that's our bread and butter, that's where we shine. But we also want to meet our customers where they are. So by focusing on it separately and embracing it as opposed to treating it as a burden I would say, I don't think anybody internally thought that we would still have 20% off-prem once the dining room is recovered. I really thought it was a COVID phenomenon for us. And when I think about our percentage of off-prem now, compared to the restaurant companies who I've always looked up to that do it really, really well and have been doing it for years, and our percentage is pretty close to theirs. I'm pretty amazed actually, because it just wasn't something that we had before. So doing more than accommodating it, but embracing is really what changed for us. And a lot of that comes from the internal leadership and getting the teams to understand that it is a core part of our business now and making sure that we do it the right way.

It didn't take time to get enough reps and that we were good at it. I mean we had to learn ourselves how to get it done. But -- and so during part of the time, we actually had to throttle it on our big times in order to be sure that we had a great experience in the restaurant that we were proud of, because we didn't want to affect the dining rooms. But then once we got enough reps and the teams were ready for it, we were able to take the throttles off and accommodate both. And we must be doing a great job with off-prem because it is holding up. And regardless of what you thought the promise of it was originally, it continues to be a really big part of our business.

So you don't have to turn it off on weekends or peak periods right, which was something that yes?

Yes, we were turning it off on weekends so that we could accommodate the in-restaurant. I mean, just to give you an insight into it, when you order a traditional breakfast at First Watch, it comes on one plate, when you order it to go, it's 3 different vessels. And so, we have only so much room in our pass-through window, and we were realizing that if the off-prem was coming from the mainline, it was clogging up the whole window. So I mean it was just learnings like that along the way of, okay, well, this is -- they're not going to work trying to just squeeze it into our existing system. We had to think about accommodating it differently.

Right, right all right. So I mean I think we've talked about this for a long time, but it wouldn't be a conference if I didn't grill now on margins?

You backup.

Yes, you don't want to get between us. So I guess but can we talk broadly about the cost outlook. So last year, 2022, you took everybody by surprise, I think particularly felt like just a big step change in March of last year. I think now you're guiding to sort of commodity inflation that will moderate, but I know it's very dependent on some specific categories so if you could talk a bit about that?

Sure, so commodities look, we're still playing more for everything now than we were a year ago. But it has -- the growth and the increase in inflation has slowed down a great deal. We have taken the steps the last couple of years where we have a couple of commodities beacon -- excuse me, eggs and potatoes, where we have locked the prices for the full year. Now eggs have been an interesting environment for the last couple of years. But by locking the price for the year, it's allowed us to at least have clear line of sight. And I think as we go into this year, we feel like we're one -- we're at least controlling for some of the pricing exposure associated with eggs. For most of our other commodities, we generally are priced out maybe 45 or 60 days into the future. So we have kind of near near-term clarity of sight. But I think as we expect for the year to kind of see that growth of inflation tapering down, that will be -- I mean that will be a win for us right now. We're living in a world where my 6% inflation would have made my years bleed 2 years ago. Now I'm thinking, boy, that sounds like early.

We're lucky.

Yes, right. And on the labor side, that's another place where we've seen relatively high inflation. I think this year, you have said kind of in that, I think its high single-digits, primarily because of the impact of, I think, minimum wage. So a lot of it has to with your geographical?

Yes, that's the hourly -- employees inflation, and we operate in states where there are step function changes in the regulatory minimum wage we pay more than minimum wage in our restaurants. But as the minimum wage increases, we'll want to continue to keep that kind of delta between the statutory rate and what we pay in order to be sure that we have the right advantage when it goes to actually higher in our crews and keeping them happy.

Right, right. You want to avoid that compression, that wage compression that can happen. And I guess, the sort of the other side of -- to your point, like probably 6% a few years ago, we would have been -- would never see it, but also pricing the same thing. Like somebody said, there are going to be companies that will have 15 points of pricing on the menu in 2022? I would have yes I would very much struggle to believe that. So in that context you've been in price, you haven't been a price leader, but in that way, you've sort of been very circumspect about pricing. Maybe talk a little bit about the philosophy and the prioritization of traffic first and foremost, but is there room to recover some margin after having been a price lager to few or less last year?

So philosophically, I think it's a great way to ask the question what's the philosophy because the company has got a 40-year history of building traffic. And part of the secret sauce there has been to be sure that we are there with an everyday value for the customer. We don't discount. We don't do dealing deals in the restaurant. We want to be sure that we're there every day. So when we start talking about pricing, we go there very carefully. We think we have pricing power, obviously, with the pent-up demand out there that continues. We don't -- when we've taken pricing actions, we haven't seen that affect our traffic or that pent-up demand. So, we believe we have pricing power, but we're very careful about exercising it because we want to be sure that we're not out in front of the customer and that they do have something that they can afford to visit more frequently every day. Our typical cadence we talked about is that we'll take price or look at taking price early in the year and then revisit, based on where the margins are going in the middle of the year and make a call then. But until we get out there, we don't start thinking about it until we start seeing how the year is trending.

And again, to sort of think about it back to the philosophy a bit, the -- broadly speaking, like I said, margins kind of came down last year. I guess what I'm hearing is that the preference -- strong preference would be to get back via traffic and sales leverage as opposed to pulling the pricing down?

Right. Yes, I think we'll recover margin over time as sort of -- the pace of inflation slows. But moreover, we're focused on driving traffic. So -- and traffic will deliver more dollars even if the margins are still having to grow back to where they were.

Right, right. The margin rate, but what we really care about is right the dollars?

We're trying to win this game for the next 3 decades. And so, we think that's the winning formula.

Yes, yes I would suspect your investors would agree. One more thing on labor. You talked about specialized roles. Maybe just a little bit more on that. It doesn't sound like you're adding more labor you're just deploying it more efficiently or effectively?

So for clarity, I think it does add labor, but it comes with additional sales. So I think you'll see our labor percentage stay relatively the same, but we're able to apply roles within the operation that improve the customer experience, actually improve the employee experience. The one I talked about was a dedicated beverage position, for example. So if you think about it right now, our servers take your beverage order, go in the back. They have to make a kale tonic, a hot chocolate, an ice coffee, something like that. Whereas now with the KDS as part of it, it can direct the ticket right to the bar and somebody who's there doing the beverages. It allows the server to spend less time in the back of the house and more time with their customers and just walk by, grab their drinks and bring them. So it actually allows the server to turn the tables faster. So it drives sales. So these are positions that we've looked at that more than pay for themselves. So when people ask about is it incremental hours technically, yes, but they're very efficient because they come with the additional sales.

Sara, I tell people who have never worked in restaurants that working in a restaurant with our kind of complexity as an athletic event, right? I mean you -- people are moving in different directions. You've got things located in the restaurant, either inconveniently or conveniently and the hard work of a restaurant team is sorting out some of those complexities so that you are more efficient. And just like Chris said a few minutes ago, its cut in seconds a million times, right? It doesn't come in huge clumps at once. It's shaving basis points -- it's shaving seconds in the delivery time over and over and over again on the kind of transactions that we have in all of our 480 restaurants.

Right. And it's making your employees happier, right?

Yes.

Which is again, as we talked about at the beginning, so critical to the guest experience. So, we don't have too much time left. I did want to talk a little bit about the unit growth. And that's another so and from the cost side that is another area where we've seen a lot of inflation. And I guess -- you could talk a little bit about what you think this is -- I know what you've guided to into returns? So remind us on like what that is. Obviously, some excess returns. I put that in "2021 and 2020", but maybe now more normalized. So if you could just sort of level set us, so we can think about what is a normalized run rate. And this is something that I talked about with all my companies. We just -- some of them we have a little more history than others. So we can benchmark against 2018 or '19 or the decade prior. And so we might, need a little more help from you?

Well, in 2020, we had to kind of put our development pipeline into a little bit of a self-induced coma. And we've been resurrecting it since then. But what our long-term goals are to grow the system by 10% or more each year in terms of the number of units. You mentioned the increasing cost of the restaurants. Frankly, most of its elective I mean we -- our costs probably 3 or 4 years ago for building a new restaurant, we're just under $1 million net of tenant improvement dollars. That number looks more like $1.4 million now -- tenant improvement dollars. But we're building restaurants with bigger footprints. We're building restaurants with now with the bar element that accuse the customer that we have an alcohol program. Chris mentioned that we're building restaurants with a larger or a second make line, larger patios, larger footprints. And those are the restaurants that are delivering on these higher, higher volumes. So when we underwrite a project, we don't use any different criteria than we used 3 or 4 years ago in terms of their returns. But we expect more -- if we pay more for a restaurant, we expect them to deliver more at the top line. And as they get to that 18% to 20% restaurant-level operating product, we know that that's going to deliver that north of 35% cash on cash return. And so we're just underwriting bigger projects now, but we're not -- we haven't sacrificed anything on the expectation in terms of what they deliver at the bottom line.

So 40 years from now, you're not going to have the issue, maybe 4 years maybe a little bit too far in the future to commit, but you talked about how you have these early restaurants that were built for $1.4 million?

Right.

What are the new restaurants? I mean are there any foreseeable capacity constraints where you have now or you could -- these will serve you well into the future?

I think we talked about the one on the call that might be our first $4 million restaurant. And so that's really been encouraging for us because we did apply all of these things there, and we can see that we can do $90,000 to $110,000 in a week. So to me, that's raised the theoretical ceiling so that we may not have that problem 10 years from now that we're dealing with right now. That there's really no reason that, the restaurants that we're building now can't build to that kind of volume. So that's -- you're talking about almost double what our AUVs are right now. So I feel good about our opportunity to take advantage of that going forward. And that has to come with the trade area growth and maturation. Some of these markets we're going into are a little bit green. We know we're going in a little bit green. But again, as Mel said, we're signing a lease with 10 years and 2 5-year options. So it's okay to be a little early if we're getting to maturity in 2.5, 3 years.

System average AUV now over $2 million, and some of these restaurants doing $3 million and $4 million. That's in one [indiscernible] shift. I mean it's astounding.

Right. Certainly suggests that there is room for the 2,200 that you've targeted and maybe more for that the demand. So I think that's a good place to end it. Thank you so much for joining the conference.

So thank you.

Yes, thanks for having us.