FWRG - NASDAQ

Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc. Fourth Quarter and Fiscal Year 2023 Earnings Conference Call occurring today, March 5, 2024, at 8:00 AM Eastern Time. Please note that all participants are in a listen-only mode. Following the presentation, the conference will be open 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 & Events section. I would now like to turn the conference over to Steven Marotta, Vice President of Investor Relations. 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 fourth quarter and fiscal 2023 on Globe Newswire and filed its annual report on Form 10-K with the SEC. These documents can be found at investors.firstwatch.com. Let me first cover a few housekeeping matters before introducing Chris. 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 limitations, 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. 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. And with that, I will turn the call over to Chris.

Good morning. I'm pleased to report that we had a very strong finish to 2023, with both fourth quarter same-restaurant sales and traffic growth accelerating versus the third quarter, along with improved restaurant-level profitability. 2023 marked the start of our fifth decade as a company and was also a year in which First Watch surpassed several significant milestones. To start, we eclipsed $1 billion in systemwide sales, posted nearly $100 million in adjusted EBITDA, and in August celebrated the opening of our 500th restaurant. We grew same-restaurant sales by 7.6% with positive traffic for the year. During the year, we opened 51 systemwide restaurants across 19 states and converted 23 restaurants from franchise to company owned through strategic acquisitions. Our total systemwide restaurant count at year-end was 524, up nearly 11% from prior year. In 2023, total revenues grew by 22% versus 2022 and more than 100% versus 2019. Nothing better illustrates our position as a high-growth brand than doubling our total revenue in a four-year window. Sticking to that four-year look-back, our systemwide restaurant count grew 42% and same-restaurant sales and traffic grew 38.9% and 7.5%, respectively. In addition to the top line results, we saw strengthening in our restaurant operations efficiency, which yielded a restaurant-level operating profit margin of 20% and adjusted EBITDA growth of 44% versus 2022. For the year, we also grew market share and logged our best customer experience scores ever. In short, First Watch has diligently and consistently delivered on our goals. We take tremendous pride in that. We realize that as a public company, meeting short-term expectations is important and we intend to continue to do so. But our primary focus is on creating long-term value for our stakeholders and we will continue to make decisions that we believe will deliver predictable long-term growth. Having grown to 524 restaurants, we recognize and embrace our leadership position in daytime dining. We were an early pioneer and first mover in this now well-established segment. We'll continue to maximize our first-mover advantage, leverage our significant scale and lean on our 40-year operating history of focusing on superior execution and quality strategic growth to widen our competitive moat. These are the foundational pillars that have been critical to our sustained performance and establishing that leadership position, and we see no reason to change course. In short, scale matters, and we believe that we can and will continue to grow while upholding what has made First Watch such a beloved brand and an employer of choice. In fact, we believe our growth is a force multiplier and creates additional opportunities. From where I stand today, I've never felt better about our culture, our culinary strategy, the quality of our people, and the high level of service they provide. I feel just as good about the pipeline of talent that we've developed and cultivated. For years, we've highlighted employee turnover that sits below the industry average as a key competitive advantage, and even during another high-growth year, this metric improved sequentially throughout each quarter in 2023 for both managers and hourly team members. It is for all these strengths and others that we're confident in our long-term guidance of low double-digit unit growth as we continue on our march towards 2,200 domestic restaurants. As it pertains to that restaurant growth, I'm pleased to announce our two new expansion markets, Las Vegas and New England. We've completed our diligence and identified the long-term unit potential in each of these markets, and it is significant. We are already deep into negotiations for multiple locations in both markets and expect a material percentage of our growth to come from these two areas in the coming years. Considering our proven portability, as evidenced by our top decile restaurants spanning 10 states and 20 DMAs, we are confident that First Watch's differentiated breakfast, brunch and lunch offering will be just as well received in these two vibrant markets as it has been in so many others around the country. Las Vegas and New England and their abundant trade areas are in addition to the 17 DMAs that accompany the recently completed and announced franchise acquisitions. And we're excited about the new white space in front of us. And finally, I'd also like to share that effective last month, we completed the rollout of pay-at-the-table technology at all company-owned restaurants. Pay-at-the-table streamlines and improves the overall experience for both customers and our team members. Through a simple QR code on our receipts, customers can now seamlessly pay with a few clicks using Apple Pay, Google Pay or credit card, thereby reducing bottlenecks frequently encountered at our busy host stands, particularly during peak weekend hours. From our testing, we determined that congestion at the front, especially when we are on a wait, was significantly reduced, with no negative impact on table turns. Last week alone, more than 125,000 customers elected to use this new feature. Assuming 30 seconds saved per transaction at the register, we saved over 1,000 customer and employee hours. Pay-at-the-table is yet another initiative, along with back-of-house technology like KDS and front-of-house technology like our waitlist functionality that positions us to serve more demand. As I look back on 2023, I'm proud of but not surprised by our operational excellence, which delivered more than $1 billion in system-wide sales, nearly $100 million in adjusted EBITDA, organic unit growth approaching 11%, several successful franchise acquisitions, same-restaurant sales growth of 7.6% and positive same-restaurant traffic. Given our segment leadership and untapped market potential, the growth we see in front of us is even more exciting than what we've already achieved. And with that, I'll turn it over to Mel.

Thanks, Chris, and good morning. As Chris shared, we finished the year with a strong fourth quarter, stronger in fact than we had projected. Total fourth quarter revenues were $244.6 million, which was $58.9 million higher than the prior year, a 32% increase. Our total revenue growth in the fourth quarter was driven by 5% same-restaurant sales growth, 37 new company-owned restaurants and 14 new franchise restaurants opened during the year, our acquisitions of 23 franchise restaurants and the extra week, as fiscal 2023 was a 53-week year for First Watch. Same-restaurant traffic declined 1.3% in the fourth quarter due to an expected decline in off-premises traffic, with dining room traffic again positive and improving sequentially from the third quarter. Our food and beverage costs were 22.5% of sales in the fourth quarter compared to 23.7% in the same period last year. Costs as a percent of sales improved, primarily due to carried pricing of 5.7%, positive mix and lower-than-expected commodity inflation of 2.1%. Labor and other related expenses were 33.9% of sales in the fourth quarter, which was better compared to the 34.5% we realized in the fourth quarter of 2022, with improved labor scheduling driving favorable variances in both regular and overtime hours. Total health insurance costs were also a benefit and were slightly offset by additional management headcount carried in preparation for planned new restaurant openings. Restaurant-level operating profit was $46.8 million for the fourth quarter, reflecting a margin of 19.4%. This marked a significant increase versus the 16.7% restaurant-level operating profit margin for the same period last year. The year-over-year restaurant margins reflect a winning combination of increased leverage associated with same-restaurant sales growth, the 120 basis point improvement in food and beverage costs, the 60 basis point improvement in labor cost, and a 40 basis point improvement in other restaurant operating expenses, primarily a result of lower to-go supply costs. General and administrative expenses were $30 million, approximately $8.2 million higher than in the prior year, primarily due to additional headcount, the impact of the 53rd week, as well as other costs. For additional color, our fourth quarter general and administrative expenses were essentially in line with the third quarter after giving consideration to the 53rd week, the cost of our annual Fourth Quarter Leadership Conference and year-end performance-based compensation. Adjusted EBITDA was $24.6 million, reflecting a margin of 10.1%, an increase versus the 8.1% margin we realized in the fourth quarter of 2022. Favorable expansion of the adjusted EBITDA margin was attributed to the restaurants delivering significant improvement in restaurant-level operating profit. Our 23 acquired restaurants added roughly $1.5 million during the quarter. The 53rd week, which benefited from higher sales and lower costs, contributed approximately $5 million to the quarter's adjusted EBITDA. We opened 19 system-wide restaurants during the quarter, of which 17 are company-owned and two are franchise-owned, and our total system grew by 50 restaurants during 2023, net of one planned closure. To help you model our performance, excluding the 53rd week, acquisitions in 2023 contributed $18.4 million to total revenue and $3 million to adjusted EBITDA. Now I'd like to provide our initial outlook for 2024. We expect total revenue growth in the range of 18% to 20%, excluding the impact of the 53rd week last year. Of the 18% to 20% range, approximately 7% of the growth is expected to be contributed from the 23 restaurants we acquired in 2023 and the 21 restaurants we announced we would acquire in 2024. We are expecting same-restaurant sales growth in the range of 1% to 3%, with flat to negative same-restaurant traffic. Our same-restaurant sales growth guidance includes a 2% price action implemented in the last week of January, which implies carried pricing of around 4% in the first quarter and just under 3% for the year. We expect a total of 51 to 57 net new system-wide restaurants, including 43 to 47 company-owned restaurants and nine to 11 franchise restaurants, with one planned company-owned restaurant closure. Our development pipeline is heavily weighted in the second half of 2024, Q4 in particular, similar to our cadence in 2023. We expect full year commodity inflation of 2% to 4% and restaurant-level labor cost inflation in the range of 5% to 7%. Our adjusted EBITDA guidance range is $106 million to $112 million, with an impact from acquisitions expected to contribute about $12 million to our adjusted EBITDA this year. This implies growth of 12% to 18% over 2023 after adjusting for the 53rd week. We expect a blended tax rate in the range of 27% to 29%. We expect capital expenditures of $125 million to $135 million, not including the capital allocated to the franchise acquisitions. While we do not guide to quarterly results, a number of factors are in play in the first quarter of 2024 which warrant particular attention. Like other restaurant companies have noted, unexpectedly harsh weather across many of our markets contributed to a slow start to the year. We are also up against a formidable comp as the first two months of 2023 were especially strong. As a reminder, through the first two months of last year, our same-restaurant traffic was positive 8.5% and same-restaurant sales were positive 15.7%. While this year's traffic improved in February versus January and is trending several hundred basis points higher than the segment according to Black Box, our same-restaurant traffic is down mid-single digits year to date. These trends have been taken into account in our full year guidance. We appreciate that the 53rd-week effects can be challenging to understand. In First Watch's case, the 53rd week in fiscal 2023 was a week between Christmas and New Year's, which is historically one of our most productive weeks of the entire year. So due to the combined effects of the calendar shift, which moved that week out of 2024, and the slow start in the first few weeks of the year, we expect adjusted EBITDA for the first quarter of 2024 to be at least a few million dollars below last year. At the same time, given these circumstances are isolated to the first quarter, we expect Q1 will be the only quarter this year with an adjusted EBITDA comparison below the prior year. We remain highly confident in our growth prospects. As such, we're reiterating our long-term annual financial targets, including percentage unit growth in the low double-digits, same-restaurant sales growth of around 3.5%, restaurant sales and adjusted EBITDA percentage growth in the mid-teens. For further details on our fourth quarter, please review our supplemental materials deck on our Investor Relations website beneath the webcast link. And operator, let's open the line for questions.

[Operator Instructions] The first question today comes from Brian Vaccaro with Raymond James. Please go ahead.

Hi. Thanks and good morning. Chris, in your prepared remarks, you highlighted the operational excellence you're achieving and we obviously, saw the strong margins that you put up here in the fourth quarter. Could you just, I guess, provide a little bit more context on some of the key metrics and the improvement you're seeing? And on labor, specifically, could you speak to some of the efficiencies that you're seeing within that line, maybe some metrics on turnover? And then I just had a follow-up for Mel.

Sure. So good morning. Thanks for your question, Brian. I appreciate it. I think the biggest contributor to our success in that area has been around effective scheduling - labor scheduling. We've talked about it recently about new tools that we've put in place, new dashboards, business intelligence tools for our operators to use to just do a better job of projecting and predicting and then scheduling labor. So we've benefited from that greatly, and we're kind of in the early innings of that, too. So visibility, not only restaurant by restaurant, but across the regions, and we're stack ranking in all of those different ways in which we look at it. Now, Dan Jones, our Chief Operating Officer, and his team have just done a great job. And then, obviously, we benefited from eased inflation. So that helped with the restaurant-level operating profit margin as well.

And Brian, you might remember in the third quarter we had talked about the fact that during the year our labor turnover had declined almost every period of the year, month over month over month. And that great track record there was - continued through the fourth quarter as we saw that continue through the year. So our turnover has always been a little bit of an advantage to the rest of the system or rest of our peers. And I think we've kind of returned to normalcy now in terms of our not only doing better than the category, but we're continuing to work it down. That's been a real success factor for Dan Jones and his operating team.

And I was trying to find it in my notes. It's been a little while, maybe, but could you update us on where your turnover metrics are, however you measure that, either on the management or hourly side?

Yes, our typical - I think the thing we've quoted most often has been management turnover, which for us has historically run in the 40% category. It dropped under 40% during the fourth quarter of the year. I can't remember if we've talked much publicly about the back-of-house and front-of-house turnover, but the crew labor generally runs a little bit higher.

Okay, great. And then just to follow up on the dine-in versus off-premises dynamics, and I guess on the off-premise side, are you seeing any sequential stability week to week over the last quarter or two? Or is there any way to frame when you think that year-on-year headwind could dissipate? And as part of that, can you remind us of any changes that you made and how you execute off-premise in '23 that may be impacting sales within that channel, just thinking about kind of the lapse there? Thank you.

So in terms of the percentage, you might remember again what we've talked about, is that from about the third quarter of 2022, we started to see that begin to tick down and that's continued through the full year. I don't know that we've had any startling changes in the way we execute off-prem. But what we have referred to is the fact that it's our expectation that in the back half of this year we should begin to see that playing off a little bit. It's difficult to know exactly what the right level of that is. It seems to be seeking a new home, but we believe we're going to get there in the back half of the year.

Alright, thanks. I'll jump back in the queue.

The next question comes from Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you very much. Two questions as well.

Morning, Jeff.

Good morning. The first one just on the '24 guidance, broadly, the comp and the adjusted EBITDA. Again, hard to read just because of the nuances of 53rd week and franchise acquisitions, but just the growth rates are below the long-term guidance. I'm just wondering whether - as you look at it, whether you would attribute that purely to the tough compares from the outperformance in '23, or perhaps you are getting to a point, maybe where the long-term algorithm is becoming increasingly challenging just because of the larger base. Just trying to get a broader sense for your view of '24, again, relative to '23 and the long-term algorithm. And then I have one follow-up.

Yes, I think - yes, just real quickly, I don't think there's any question about what our delivery over the last - course of the last few years has well exceeded the long-term guidance. I don't think that there's any hesitation on our part about the enthusiasm and the accuracy of our long-term guidance. Those are the targets that we set and that we aspire to, and I think there's plenty of opportunity for us to grow into that. I think this year's guidance, I would attribute a lot of the caution that we have just to the things that we identified as part of our slow start, the shift in the 53rd week. We know that the first quarter - or first period broke out of the gates a little bit slower than we had hoped, and so that gives us some pause. But I don't have any reason to believe that our long-term guidance won't be realized long term.

Understood. And then just as a follow-up, the technology that you talked about, the pay-at-the-table, I think you said it saves 30 seconds, which is obviously a lot of hours. But how do you think about that in terms of comp or table turns? And similarly, what would you say is the next big unlock? I know you have a lot of technology opportunities, but what would you say is next on the docket that could be a meaningful benefit to the system? Thank you.

Yes. We're constantly looking at technology that reduces friction, either for our employees, our customers, or in the case of pay-at-the-table, both. As far as tying it into comps and things like that, I'm going to give you the same answer we gave on KDS after rolling that out, which is this whole toolkit that we're deploying an element at a time is really meant to allow us to serve more demand in our peak sales hours, and that's what we're focused on. And so our ability to do that and really our ability to get to 2,200 restaurants is the main impetus for doing these programs, and we're thinking about it more as a long-term solution play for us. Not that there's not immediate benefits, there is. But to be honest with you, on pay-at-the-table, for example, it's really a customer experience and employee experience improvement tool, which we think then leads to repeat visits if we're removing frustrations that we hear from our customers as it relates to their journey with us. So that's how we're looking at it, that's how we looked at KDS, it's how we look at our waitlist management. Anything that we can do to address what the consumer has told us is a pain point.

Got it. And lastly, just to clarify, just because there is so much noise, Mel, as you mentioned, in the first quarter, as you guys look at all the data for the fourth quarter, which it sounds like improved from the third, and the first quarter, sounds like February is better than January. But do you sense that there's any change in consumer behavior in recent months, for better or for worse, or is the caution more recently, more just due to kind of unusuals that should settle out as we move through the first half of the year?

Yes, this is Chris. I think the things we look at are very encouraging. It's our in-restaurant dining traffic, and it's also our per-person average. So our check is higher than the price that we've taken. So we're seeing the consumer opt for the full experience when they're in our restaurants. We're seeing them come to our restaurants more. Those are key signs for us. As we've talked about, the off-prem will settle in where it settles in, and once we get to that point, we'll know it. We expect that in the second half of the year, like Mel talked about, but we're not seeing any signs - behavioral signs from the consumer that that has us concerned. Everything that - the caution that's in our guidance really has to do specifically with what we experienced in January and a little bit into February. So other than that, we're very confident in our full year guidance and also what we're seeing with the consumer.

Great to hear. Thank you very much.

You're welcome.

The next question comes from Andy Barish with Jefferies. Please go ahead.

Hi, guys. Good morning.

Hi, Andy.

Wondering if you could give us an update on the timing of the North Carolina acquisition and kind of the performance of those restaurants. I mean, is there anything in there that we should be aware of, or would they be similar to kind of the contributions you've seen historically from franchise acquisitions?

Currently, we're targeting early second quarter for closing the transaction. The restaurants have a range. For the most part, they perform like the rest of the system. But there are a number of restaurants that are operated by the franchisee that are probably among, I don't know, the top 5%, 10% of restaurants in the system in terms of both sales and profitability. There are a number in that group that are real leaders in our system.

Got you. And just carrying on the franchise acquisition theme, I just wanted to clarify, you've gotten 17 additional DMAs from the franchise acquisitions for growth. And then how many left, kind of, under your historical agreements that you've repurchased a lot of these recent deals under?

We have a couple of franchise groups that would still have pre-negotiated options. I think each of them have fewer than 10.

Yes, we have - after the North Carolina acquisition, we'll have 78 franchise restaurants, and we have purchase options on 25 of them.

Got you. And then the 17 DMAs, I just wanted a clarification, is that kind of additional growth territories that you've now acquired in the last couple of years?

Yes. So those are the DMAs that come with these acquisitions that are in addition to the corporate restaurant growth markets that we have throughout the country. So before, where the franchisee had the rights to grow in those markets, we take that back as part of our franchise acquisition. And then we size and scope the potential for those, and that obviously, increases our ability to open more company-owned restaurants.

Okay. Appreciate it, guys.

You're welcome.

The next question comes from Brian Mullan with Piper Sandler. Please go ahead.

Hi, thank you. Just a question around the alcohol initiative. Maybe where are you seeing that mix right now, and just talk about maybe any strategies or initiatives to continue to drive that higher over time. And just broadly, with some more and more time on your belly, are you just happy with what it's doing for the business?

Yes. It's a mix in-between 5% and 6% in the system. I think that there is - we're still in the early innings of actually exploiting that new platform for us. And I think over time, you'll see just as much creativity come out of that, as you've seen our teams execute on our shareables line, on our LTOs, on our entrees, on our fresh juice. So it gives us another - it gives us that additional platform to begin to offer our customers those things that they want.

The other thing I'll say is that we're a food-forward concept, not an alcohol-forward concept. So finding that right balance for us, I don't think we're there at, because, as Mel said, we haven't really leaned into fully the innovation that platform, but we will. And I think what I'll tell you is that we'll optimize it for us. And whether from a comparison standpoint, it matches what's out there in the marketplace or not, we'll do what's right for us, because we have the added element of the juice program. So when you combine those two things and you see that our beverage attachment is up as we roll out new beverages, like the alcohol, like the cold caffeinated drinks that we launched last year, I think that's our goal, is to just get overall beverage incidents up.

Okay. Thanks a lot.

The next question comes from Sara Senatore with Bank of America. Please go ahead.

Thank you. Yes, I just had a question and then a quick clarification. The question is about the new markets. You mentioned Las Vegas and also New England. I know other restaurant companies have tended to shy away from New England and the Northeast just because costs are higher and volumes don't always make up for that. So, I guess, I was curious on your thoughts in terms of the new - how you're thinking about new unit volumes going forward. I think this year they've actually maybe been even a little bit higher than we had anticipated. So if you could just perhaps talk about whether the newest stores have the highest volumes, if that just keeps happening. And then as you think about entering possibly more competitive markets, what that looks like for you? And then I have a clarification.

Yes. So I think, for us, an extreme amount of diligence goes into entering new markets. And, in fact, we haven't announced a new market since 2019 with Chicago. And it's because of that diligence process. So I think from the standpoint of specific characteristics around these markets, I'll just tell you that we will stick to our disciplined approach and we won't sacrifice on our return criteria and things like that. And so, we've looked at that in those markets. We believe that both of these markets are ready for our offering. We do believe that because of our extreme differentiation that we'll have an opportunity there that maybe others wouldn't. And so we're excited about going there. Obviously, Las Vegas is known for really high volumes, and we know the challenges that come with New England. And keep in mind also that we go into the suburbs predominantly first, before we enter the urban areas or city centers. And so we build up that brand recognition, we build up that trial, and then we go into the markets where maybe some of the characteristics you're speaking of, Sara, are more prevalent. So we're excited about it. We've gone into other markets before. I'll use Philadelphia as an example, where a very traditional diner-type breakfast occasion is what's predominant there. And then we come in the market, and I think we bring something, an elevated execution of breakfast, brunch and lunch that consumers in those markets don't even know exist until we open. And so, I always talk about us as being a sunflower in a field with the sun shining on us when we get in there. And I think that's what we've experienced. And there's also very little competition in these markets from our standpoint. So, again, we're pretty excited about it.

Makes sense and speaks to the portability of the brand, to your point. And then the clarification was just on new unit build costs. I was kind of trying to feverishly estimate it from the CapEx you talked about. But are you seeing any continued inflation in there, or is that largely settled down, such that you might see returns actually creep higher if volumes keep going up?

The inflation component, I haven't looked at it in the last six months or so, but I think it seems to have settled. We're spending more in the restaurants. We're getting sites that have bigger footprints, and we're outfitting them to do higher volumes, as most of our restaurants are. And so, those costs are more than we used to pay for the restaurants. But as Chris mentioned a minute ago, we don't compromise our underwriting criteria. We still have the same expectations on that third-year return. And so, if we pay more for them, if there's more square footage, then we expect more in terms of the top line and the performance all the way through, so that we get an adequate return. Haven't seen any shift or degradation in that, just because we're approving sites where we're investing more.

Right. Understood. I was just thinking if the inflation has sort of slowed or stabilized on the denominator, then as your volumes continue to go, you might actually even see that - those returns creep up after a period of meaningful inflation in the last few years.

Yes, if we saw a great - it would have to be a substantial amount of, as you say, inflation as opposed to our elective investment in additional equipment or more floor space. But it would have to be significant inflation, I think, in order to drive a lot of different return.

You're not seeing that. Okay. Thank you very much.

The next question comes from Andrew Charles with TD Cowen. Please go ahead.

Great. Thank you. Mel, just a couple of model questions. Mel, just a couple of model questions. First within our same-store sales guidance, is it fair to think that 1Q - you called out the noticeable headwinds. Is it fair to think that 1Q is offsetting what's going to be 3.5% same-store sales? If you think about 2Q through 4Q, is that kind of the right cadence for the year?

Could you ask that question again? I'm trying to decode what you're trying to get at.

Yes, sure. So I'm thinking, if 2Q through 4Q expected to be closer to the 3.5% ongoing algorithm, it's just 1Q is the offset to that?

I wouldn't dispute it. That's probably roughly right for modeling, Yes.

Okay, great. And then also wanted to ask just about eggs and egg prices. Within 2% to 4% commodity inflation, what's anticipated for eggs? I know you lump it in with potatoes. And really how hedged are your egg prices for 2024?

Yes. So eggs and potatoes, I think we've talked about before. We fix those prices prior to the beginning of the year. So we have a fixed price contract. And I don't know which portion - what portion of - how much inflation there is in that particular or those two commodities alone. I don't have that data in front of me. I don't know that we've talked about eggs and potato prices separately from the rest of the market basket.

Okay. And then within guidance for price, you talked about the January 2% price increase. Typically, you guys revisit price around mid-year. Is that the expectation for this year just given - seems like with commodity inflation pretty set around 2 to 4 and 5 to 7 on the labor side, is the assumption you guys won't be taking any price around mid-year?

We do - as you know, our typical cadence is to visit in the middle of the year. We don't talk about pricing in advance of actually taking price. We look at how things are running for the year and whether or not our inflation estimates have been accurate. So yes, we revisit, but we don't include it as part of our guidance on this call.

Okay, very helpful. Thank you.

Yes.

The next question comes from Jon Tower with Citigroup. Please go ahead.

Great, thanks. Mostly follow-up here, but I'm just curious, going back to the comment in the prepared remarks regarding the flat to negative traffic for the year, is that purely just a reflection of what's transpired in the first quarter and the expectation, obviously, as the year goes on that that's going to improve?

You bet. I think we start in the hole and I think we're going to be clawing out for the balance of the year.

Okay, cool. Perfect. And then going back to Sara's question regarding new markets and specifically New England, I'm excited to have you guys come up this neck of the woods. So that's great. But I'm curious to hear your thoughts on, is there a need to adjust the prototype relative to what you've got in other markets in order to address some of the higher costs up here. And is there anything that would kind of restrict you from perhaps building the bigger units that you've been adding in a bunch of other markets, or should we expect that kind of theme of bigger footprint stores continuing in New England and Vegas?

It's really a site-by-site decision, honestly. I mean, we believe we can find the mix that we have everywhere else. In other words, X-amount of standalones and X-amount of end caps and things like that. So it's really site-specific that we look at, but we don't see any reason why we wouldn't have a fairly consistent balance of prototype executions in these markets.

Got it. I appreciate that. And then just going back, you've unlocked quite a bit of technology at the stores, KDS and now the pay-at-the-table. I'm just curious to get your thoughts on whether or not you believe that a loyalty platform would make sense for you at some point in time, especially now that you've got that pay-at-the-table, you're probably collecting, or have the option to collect more information on the consumer and learn a little bit more about them over time. Does that thinking line up with what you're considering longer term for this brand?

Yes, I think when we look at our tech stack, we're pleased with the additions we've made to it. And under the kind of the brand filters that I talked about earlier about why we do these things, I don't see loyalty as something that we'd be launching anytime soon, certainly not in the way that the industry talks about loyalty. But we want to have relationships with our customers. We do have relationships with our customers and it will manifest itself in a different way for us, I think.

Great. Thanks for taking the questions.

Yes.

The next question comes from Chris O'Cull with Stifel. Please go ahead.

Yes, thanks. Good morning, guys.

Good morning.

Mel, I was hoping just maybe we could level set everyone Just on the first quarter comp. You mentioned traffic was down mid-single digits through the first two periods, and I think pricing is around 4% and maybe 60 basis points of mix, which would seem to imply you're expecting roughly flattish first quarter comps. Is that about right?

No. Our expectation is to have something better than flat.

Okay, that's helpful. And then the next question is, it looks like overall off-premise average weekly sales was less negative year-over-year than it was last quarter. Can you help us understand how much of the sequential improvement is traffic versus check in off-premise?

I don't think I have that figure in - I don't have it in front of me. We can try and dig it out and if it's helpful, we can add something in the website, I suppose.

Has there been any notice stabilization in either delivery traffic or takeout traffic when it comes to off-premise?

There is some stabilization, I would say. It's still ticking downward, but it's kind of closed the gap.

Okay, great. Thanks, guys.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Tomasso for any closing remarks.

Great. Thanks for your thoughtful questions. We appreciate it. Before we close, I just want to take a minute to express appreciation for the entire First Watch team for delivering a fantastic year. The growth we experienced in 2023 is a direct result of you making days brighter for every First Watch customer. We're really looking forward to the same in 2024 and beyond. Thank you.