First Watch Restaurant Group Inc (FWRG) 2022 Q2 法說會逐字稿

Thank you for standing by, and welcome to the First Watch Restaurant Group, Inc., Second Quarter 2022 Earnings Conference Call. (Operator Instructions) This call is being recorded today, August 9, 2022 at 8:00 a.m. Eastern Time and 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 Raphael Gross, Partner at ICR to begin.

Good morning, everyone, and welcome. I am joined here today 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 second quarter 2022 on Globe Newswire and filed its quarterly report on Form 10-Q with the SEC. These documents can be found at investor.firstwatch.com.

Let me now 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 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 cautionary statements in the company's earnings release and the risk factor disclosure in its filings with the SEC, including its 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'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 would now like to turn the call over to Chris.

Good morning. Thank you for joining us today for our Q2 2022 earnings call. I'm pleased to report that First Watch build momentum we reported in the first quarter and achieved continued success and sustained growth during the second quarter. We believe the results we've shared this morning speak to the strength of our brand, the distinctiveness of our offering and an increasing awareness among consumers. These attributes reinforce our confidence in our ability to meet or exceed our stated short- and long-term objectives.

Our second quarter same-restaurant sales growth was 13.4% year-over-year and 30.2% when compared to 2019. The Increased customer counts continue to be the primary driver of that sales growth. I'm especially proud of our 8.1% same-restaurant traffic growth when compared to a strong second quarter of 2021 and 7.4% growth when compared to 2019. This is significant when you consider that in Q2 of 2021, we had already returned to positive traffic versus 2019. Moreover, our traffic has improved sequentially quarter-over-quarter versus 2019 as well.

Our average weekly traffic remained consistent throughout the quarter, and we experienced traffic growth in all 3 periods. In June, we achieved 4.2% traffic growth year-over-year. To add a bit of context regarding the strength of that last statement, Placer.ai, reported that visits to full-service restaurants in June fell 4% year-over-year. Our performance clearly distinguishes us from most others in casual dining in the restaurant industry as a whole.

On the back of our sales results, our restaurant-level operating profit margin was a healthy 8.2%, which brings us to 18.9% year-to-date, in line with our expectations despite a challenging inflationary environment. We continue to stay true to our philosophy of utilizing menu pricing as a means to offset inflation while continuing to elevate the First Watch experience with high-quality evolving offerings.

As you may recall, we decided early on to take a conservative approach to pricing these past few years, having made strategic decisions to one, not take any price in 2021 as we work to welcome back our customers; and two, to take only a modest 3.9% increase at the start of this year. While we did see the expected slight impact on margins for the quarter due to increased commodity inflation, we believe our pricing approach was an important factor in driving our increased traffic growth.

Additionally, we believe that much of the food inflation we've experienced has peaked, and we expect costs to normalize moving forward. We've improved our absolute and relative value proposition, especially when you consider that our increase is lower than both food away from home and grocery inflation. Customers know they can find fresh, high-quality food at First Watch for a per person average just over $15. We believe this approach resulted in increased market share over the past year and in prior volatile periods.

We did not see any negative traffic impact from our last price increase nor have we seen what I believe to be an early indicator of pricing resistance, check management by the consumer. In fact, customers are electing to spend more in our restaurants for all beverage incidence is up, and our PPA is above our expected level when you consider the pricing. This reaffirms our pricing power, particularly given the value we provide.

I want to pause here because as you consider the totality of the continued outsized performance that I just walked through, it becomes even more clear that First Watch is truly special. You've heard me speak about differentiation and our results continue to enforce that fact. For those of you that have had the pleasure of dining at one of our restaurants, you understand. For those who haven't, I highly encourage you to visit us or at least do the next best thing, check out our website or Instagram and feel the freshness of our experience and our brand. Nobody is doing what we're doing at scale. The talented folks in every First Watch are executing a high-quality experience in 450 restaurants that you typically see only in single unit chef-driven restaurants. We roast vegetables, bake them up and use fresh produce every single day, and our continued traffic growth shows how our commitment to quality is resonating with consumers. It's built deeply into our DNA.

Consider this in the context of our most recent seasonal menu, where our quesabirria-style Barbacoa Benedict performed far better than our already high expectations and aligned perfectly with current culinary trends as you are seeing [video] plastered across Instagram and on small independent restaurants' menus.

What's most special here is that this menu item was identified and tested close to 1.5 years ago, highlighting our ability to identify early trends and operational seamlessly throughout a fast-growing system. This is a unique competitive advantage that has been refined over decades. It ensures that we remain relevant and in a leadership position as we take advantage of the long runway ahead of us. And not only are we dedicated to delivering on that elevated experience for the customer, but we're also dedicated to fostering an environment for our employees that drive satisfaction, retention, and continues to help us attract some of the best and brightest talent in our industry.

To that end, we're quite pleased that our staffing levels have stayed relatively consistent with hourly staffing at 93%, while manager levels have improved slightly and currently sit at 2.8 managers per restaurant. At these levels, we are well-positioned to continue to serve our increasing demand at a very high level, particularly with the additional uptick in applications that we've seen recently. At First Watch, there's no limit to the growth opportunities for our people, particularly as we continue to execute on our strategic development strategy and create more jobs.

Consistent with our plan, we opened 9 new system-wide restaurants in 7 states during the quarter, including our first restaurant in Asheville, North Carolina and our third in the Chicagoland area since our debut there last year. We ended the quarter with 449 total restaurants. Our development calendar is weighted slightly towards the back half of this year, as we've noted previously. We're on track and confident in our ability to meet that plan. In fact, thus far in the third quarter, we've opened 4 new restaurants with 3 more slated to open by the end of this month and at least 3 more in September. The bottom line is where varying restaurants and have been for many years.

As a reminder, in 2019, we opened 80 new First Watch restaurants between organic growth and the conversion of certain acquired restaurants. We followed with 42 new restaurants in 2020 and 31 and '21. These new restaurants, which have enhanced footprints designed for higher volumes have AUVs that reliably outperform our legacy locations, which raises my confidence in our ability to deliver on our long-term guidance in this area. Rest Assured strategic growth remains a priority for First Watch and further reinforces the competitive moat we've created and continue to widen.

I'd now like to provide an update on a couple of our key initiatives that we've been talking about. Our alcohol program rollout is on track. The offering is now available in more than 75% of the system with a clear path to reaching our desired penetration by the end of this year. Additionally, our kitchen display system or KDS rollout is ahead of schedule and beginning to help us serve more demand, particularly during peak hours. We're on track to surpass our goal of leveraging the technology in at least half of our restaurants by the end of this year. In fact, at the end of the second quarter, KDS was in use in 114 restaurants and today, it's active in more than 200.

I'm also excited to share that Stephanie Lilak, Chief People Officer of Bumble Inc., has joined the First Watch Board as an Independent Director. Stephanie is a respected leader in human resources strategy, including DE&I, compensation and benefits, and employee experience, having led these efforts for renowned General Mills and Dunkin' Brands. We're absolutely thrilled to have Stephanie's invaluable perspective on our board.

During the quarter, we announced a national partnership with the V Foundation, whose mission it is to achieve victory over cancer. We contribute $0.25 from the sale of every kid's meal in every First Watch restaurant to the organization's Dick Vital Pediatric Cancer Research Fund. Dick is a dear friend of First Watch spending most days dining at our restaurants here at home in Lakewood Ranch, Florida. We're very proud to partner with him and the V Foundation and to share that through the first half of 2022, we've donated $300,000 to fund pediatric cancer research.

First Watch is a company focused on quality profitable growth, and we have a long runway ahead of us. We're executing well against our strategic plan and are benefiting from growing consumer demand, particularly in the daytime dining segment, of which First Watch is the clear leader. We still have relatively low brand awareness, yet impressive guest satisfaction scores, creating an ideal opportunity as we move forward. Consumers are still discovering us and we're in a great position in our brand life cycle as we grow toward our long-term potential of 2,200 restaurants in the U.S.

We continue to open restaurants that are delivering tremendous results and returns while we reinvest in our brand to ensure long-term relevancy. At the same time, our teams are definitely handling the staffing and supply chain challenges facing our industry as a whole and have managed the volatility in the middle of the P&L extremely well. We've been able to defend our margins, enhance the customer experience, improve our value and attract new customers. Given those factors, coupled with our significant outperformance in the first 2 quarters of the year, we are raising our guidance, which Mel will speak to shortly. This is a tough environment and despite a backdrop of macroeconomic uncertainty, First Watch is well-positioned as we move forward. Now I'll pass the mic to Mel to review our second quarter financial results in further detail.

Thanks, Chris. So during the second quarter, our system-wide sales of $231.2 million were up $17.1 million over the first quarter of this year. The company's total revenues were $184.5 million, which is $11.3 million higher than the first quarter and $30.5 million more than the second quarter of 2021. Compared to the same quarter last year, our sales grew on the strength of continuing same-restaurant sales growth of 13.4%, plus the sales and growth of the 46 restaurants, which have not yet entered our comp group. These non-comp restaurants include the 5 company restaurants that we opened during the quarter. Chris mentioned that in the second quarter, our same restaurant traffic growth was 8.1% over the same quarter last year and 7.4% over the same quarter in 2019, which predated the pandemic. Increasing our customer traffic continues to be a key indicator of the quality of our same-restaurant sales growth.

Dining room recovery versus 2019 grew to 93% for the quarter and weekly off-prem sales volumes remained consistent even as our dining room traffic has continued its recovery. Likewise, our franchise revenues grew to $2.8 million for the second quarter of 2022 due to the increase in sales from franchise-owned restaurants and the addition of 11 franchise restaurants opened since the second quarter of last year. During the second quarter of this year, franchisees opened 4 new restaurants.

Food and beverage costs as a percentage of restaurant sales rose to 24.9% in the quarter. That's up from 23.1% in the first quarter -- we experienced inflation of 17.7% in the cost of our commodities, which was higher than we projected for the quarter, but we believe this quarter's inflation is the high watermark for our year. Labor and other related expenses as a percentage of restaurant sales were 32.3% during the quarter, which is consistent with our first quarter. Labor inflation is holding in the range of 8% to 10%, which is consistent with what we expected. At $21.9 million, G&A increased $0.3 million over the first quarter, which was in line with our plan. As we discussed in our last earnings call, G&A was lower in the first quarter due to the timing of some of our planned projects. We intend to continue to -- our investment in staff and in projects that provide for our future growth in the restaurant efficiencies.

Net income was $2.7 million for the quarter. Adjusted EBITDA was $17.8 million and restaurant-level operating profit was $33.1 million with a margin of 18.2%. Year-to-date, this brings our adjusted EBITDA to $37.2 million and restaurant-level operating profit to $66.5 million with a margin of 18.9%.

We fielded a lot of inquiries this year about our egg costs. Before the year began, we put in place a full-year supply contract with a favorable pricing formula for our eggs, including our pasteurized cage-free supply. In the second quarter, when the effect of the avian influenza put a significant strain on egg availability, we modified that contract to ensure that we would secure the necessary supply at costs that continue to be favorable to the market rate. As Chris shared in his comments earlier, just committed to delivering the elevated experience that our customers have come to expect and at a great value. In that spirit, we modestly increased our in-restaurant menu prices by 3.9%, starting in the first week of our eighth period on July 25. We do not anticipate this measure is going to have a negative impact on our traffic.

I'd now like to shift the conversation to our full year outlook. Given our outperformance in the first 2 quarters of 2022 and our continued positive momentum, we've raised our guidance on some metrics. We previously shared that we expected same-restaurant sales growth in the high single digits. Now we've increased that range to 13% to 15% for the year, driven primarily by our continued positive traffic. We'd also previously shared that we expected total revenue growth in excess of 15% relative to 2021. We now expect that revenue growth to be approximately 20% in total revenues. And lastly, we previously shared that we expected adjusted EBITDA in the range of $67 million to $71 million for the year, and we've updated that range to $70 million to $72 million.

We'd also like to reiterate our previous guidance as it relates to our blended tax rate of 33% to 34% for the year. We still expect capital matures between $60 million and $70 million, and we still expect to open between 30 and 35 new company-owned restaurants and 8 to 13 new franchise-owned restaurants during the year.

For some additional detail, please visit our Q2 supplemental materials deck that we added this morning on our Investor Relations website. We appreciate the opportunity to share these strong results with you. And, Operator, if you will open the line, we'll start taking questions.

(Operator Instructions) Our first question comes from Chris O'Cull from Stifel.

Comps and traffic accelerated sequentially relative to '19 compared to the first quarter. Can you talk a little bit more about -- or provide some more details around what drove that acceleration, whether there are any meaningful callouts in terms of just geographies or customer segments that would help us understand the strength of that performance? And then how do you gauge the durability of what you're seeing right now in terms of that top line number?

So things come to mind. One, our increase in both traffic and sales has not been limited in any particular geography. It's been fairly consistent across all the markets we operate in and the company's history has been that we -- I mean, we've grown traffic for decades, but for the pandemic environment.

So I guess in terms of the stamina of our growth, we've got a pretty long history of doing this. So we're confident we can continue to build it. Yes. And I'd also -- I think it's the sum of all parts, frankly. I think it's the continued work we do around our menu and having constant menu news through the seasonal menu program. It really is our hours, our focus on service, our teams. I mean, there's -- it's everything. You know all the work we've done to reposition the brand over the last 5 or 6 years, and all of that is really resonating with the consumer. And that and obviously, the recovery for us has been more rapid than others. And we see that sequential improvement.

Obviously, we're still -- we're not in what I would call a peer environment yet where we're comping over normalcy every single period. So you do have those ups and downs. But I think if you strip all that out, the trend line is where we want it to be, and we're really pleased.

Great. And then just one other one. I wanted to touch on just the performance of new units, particularly the '21 development class. And any update you can provide around the unit economic performance there relative to your targets? And then maybe some of your learnings have been about the optimal trade area placement going forward based on those stores?

So our 2021 class of restaurants have all outperformed the average unit volumes of the rest of the system. What we've seen, Chris, actually, over the course of the last several years is that we are reaching more mature performance more quickly. We generally plan on doing that within a year or so, and we're doing it in 7 or 8 months. And that's really a testimony to our trainers getting out early. Our use of veteran managers when we open new restaurants. And frankly, the system has got a history of improving the restaurant performance quickly in our new restaurants. And so we've had a great deal of success and our development team is observing a pretty data-driven process when we do site selection. And so by observing that, we have a -- they're batting 1,000 in terms of selecting restaurant sites that proved to be good performers for us.

Yes. And I would - this is Chris. I would add that just like you see in our mature restaurants in our markets, the same holds true for new restaurants where we're seeing broad success across different geographies. It's really not any kind of regional differences. And you specifically asked about the site selection and things like that. And I would just reiterate what Mel said about the discipline that we apply to that and the learnings that we take from every opening. And so it's great to see that consistency across geographies with the new restaurants because that levels out our ability to do our openings like we talked about, where it's equally balanced between core emerging and new markets. We don't have to balance more in core markets to offset slower starts in new markets and things like that. So it gives us a lot of flexibility and gives our real estate team a lot of runway to bring sites to real estate.

The next question comes from Jared Garber from Goldman Sachs.

Wanted to just get just one point of clarity on the pricing. So I think you said you took 3.5% -- or 3.9% pricing in July. So you'll be running, if my math is correct, close to 8% in the back half of this year if you combine the 2 pricing actions. So I just want to get a sense, and obviously, the traffic trends have certainly been strong, but I want to get a sense of what gives you the confidence that you can kind of take that now with the incremental macro pressures and just how you got comfortable with taking that and also maintaining that high level of traffic performance?

Yes. I think as I stated, we've been conservative in our approach on pricing. And I still think, again, relative to what our industry has taken and what we're seeing in grocery and food away from home, we still feel really good sitting at 8% for the rest of the year or just under 8%. And so, again, the comment about we don't expect any negative impact on our traffic. This is one where we feel like we can take this price, do what we've done in the years past, which is take it to offset the inflation that we're seeing. And then hopefully, that subsides a little bit, and we're in a good place. But we're very cautious about taking price, not because we don't believe we have pricing power to do so, but we do like reserving that, and we also like to really highlight our value as we go forward here.

Great. That's helpful. And then just one other one for me. The labor environment, Mel, I think you said you're about 93% staffing versus the 2019 level, but obviously, the top line performance is really impressive. So I'm wondering if there's a sort of a scenario here in which the efficiencies, maybe it's gaining through the KDS system rollout or maybe it's just some benefits of that one shift model where you had less turnover over the last couple of years, which is driving some greater level of efficiency. Is that allowing you to maybe operate at a lower staffing level but still drive the top line? Or should we expect to sort of recapture that remaining 7%?

Well, obviously, we have been operating at a lower staffing level with -- and driving the top line. So that's true. I still think we're learning the -- we're still learning about what the KDS system is going to do. We have a very small sample size, I would say, right now with regard to that. But I think the combination of things and kind of working together to squeeze out more efficiencies may be an outcome we'd look for, but we do that all the time regardless of what is going on. I mean, that's just part of the restaurant business is that you're constantly looking for basis points of savings in labor and input costs. And so I think what you're getting at is, are we seeing more of a permanent shift in our labor environment. And I don't think we'd be ready to conclude that just yet. We're still operating in a labor market that is improving, but it's still affected by what I would call pandemic or post-pandemic kind of the different workplace.

The next question comes from Jeffrey Bernstein from Barclays.

Two questions. The first one, just on the momentum that you saw from a same-store sales perspective. It seems like you're confident, I guess, that momentum has continued thus far in the third quarter leading you to raise that guidance. I'm just wondering, you mentioned no sign of slowing traffic, no pushback on the price. Can you just talk about why you believe brand resilience is going to hold up during what seems to be a likely economic slowdown over the next 6 to 12 months, whether it's historical data to prove that point or trends you've seen more recently just because it does seem like most in the industry are acknowledging that there will be a slowdown in the back half. Just wondering how First Watch will be able to navigate better than others? And then I have one follow-up.

Sure. Good morning. It's Chris. I'll say 2 things. One, we really believe in the differentiation of the brand and our offering and the fact that we're in affordable luxury, again, to -- for consumers to get the kind of food and experience that we're offering for, call it, $15 really sets us apart. And going back to my time here in '08, '09 and 2010, I think in times like this, it's when the consumers (technical difficulty) quality consistency. If they are going to reduce the number of times they go out to eat, they want to make sure they get it right. And all the steps that we took coming out of COVID to communicate that quality and that consistency, whether it was the fact that we didn't take anything off of our menu when we returned or the conservative approach to pricing or some of the improvements that we made and some of the -- frankly, the culinary additions that we've had, really, we think will carry us through that.

So we also know, Jeffrey, that we've got unmet demand. So that gives us confidence as well. And that's the reason for our focus on improving throughput because we've got unmet demand sitting at our front door that if we can unlock that, that's an even greater opportunity.

Understood. And then just on the cost side, it was interesting you mentioned on a couple of occasions that you think the -- maybe the commodity outlook or inflation has peaked. Just wondering maybe you can share whether you think that's broad-based across all commodities? Or is it something specific to what you're sourcing? Any color you can provide in terms of maybe what percent is locked? Or what gives you the greatest confidence that we're now in for less inflation going forward? Thank you.

So based on just talking with my peers and what I see in the industry, our commodities, which -- our 5 or 6 commodities remain -- the top items remain pretty much avocados, bacon, our bread, our eggs, our coffee beans. Those stay fairly consistent in terms of our usage across time and at least within that commodity group. I think we expect to see the -- as we particularly begin to roll over more inflationary periods from last year that the ascent of inflation for us would not continue at the same rate. I don't think that that's true in all proteins that I know others are dealing with, but at least for our group. I have some confidence that we would see that soften a little bit for us.

And then in terms of pricing, I think I'm right when I say roughly 50% of our market basket has at least fixed price formulas or fixed prices through much of the rest of the year now. So we have some pretty good line of sight to what we believe is going to happen, at least for that 50%.

Understood. So you'd expect going through the back half of the year that the basket inflation number, I think you said it was like 18% in the second...

17.7% in the second quarter. Frankly, Jeff, I've proven to be a bad predictor of the amount of inflation. It has -- it was more than I expected at the first part of the year. So I feel absolutely certain that we're not going to duplicate that.

Got it. So we should expect easing in the third and fourth, maybe getting down to single digits? Or do you think that's too aggressive in terms of the...

I think that would be too aggressive. I think we're going to remain in the double-digit territory for the remaining 2 quarters, which will kind of balance out our year maybe just higher than I predicted, but more along the lines of maybe 15% for the year or something like that.

The next question comes from Nicole Miller from Piper Sandler.

You talked about mix shift kind of qualitatively. And if we put together the pieces of comp and what you gave us on price and traffic, basically, mix is again up low-single digit. So I just wanted to confirm that. And then also, previously, I think consumers were like adding on bacon and adding on beverage. I guess the question is what the heck are they adding on now?

Well, we have certainly had some well-performing limited time offers. So that us into our mix. And you may follow our menu. We've offered some premium items that, frankly, have been very well received by our guests in the restaurants. So that's adding to the mix as well. So I think that continues to be one of the big drivers. Yes. The other point I mentioned in my comments was that beverage incidence is up, and that's not a small contributor. So between the juices and then like Mel said, the LTOs and the attachment on those, that's really has -- what's driven our mix.

Okay. Great. And then you also made a comment I found very interesting around your value proposition and even affordability, I suppose, to some degree versus food at home. And I was just curious if there's any way -- if that's just like your intuition and I can see how that makes sense. Or if you think that's even more important for the cuisine and even the time of day that you're offering food away from home? Do you compete a little bit more with someone saying, gosh, I can replicate this and taking that into account? Or is it just more of an observation.

Well, despite the incredible sales of our cookbook, I would say that most people would prefer to eat out for brunch, really because of the occasion aspect to it. I mean it's -- there is a composer it's not the easiest meal to prepare at home if you want to get creative per se. And so again, as an affordable luxury and as an experiential type brand, that's what we think is the differentiator there.

And then as it relates to the inflation and my comment about '08, '09 and even into '10 is we just saw that families were trading -- going out for a steak dinner on Friday night for getting together for brunch over the weekend and spend a lot less and have the same kind of social engagement, but do it during the day. And now with all that we've done on the menu from the alcohol and the juices and things like that, it's just very appealing across all demographics to take part in that. So that's what gives us comfort there.

And just really quick, with the increased applications, are those happening anywhere in particular or for any position in particular?

I'd have to look at that and see. I think it's across the board, but let us get back to you on that.

The next question comes from Andy Barish from Jefferies.

Just trying to kind of contextualize a little bit of revenue guidance increase. Is a lot of it from the outperformance in the 2Q and then the additional pricing. Is that kind of what you're layered in, just given how consistently you've sort of seen demand trends out there?

It's -- well, it's our expectation about our continued growth in traffic as well as the -- what you saw in - what we've seen in the first half of the year, not just the second quarter.

And... Have you continued to see kind of weekday lunch outperform just given that was -- it's an important daypart, but obviously one where there's more probably flexibility and capacity. And I think there's been some menu focus as well. Just give us an update there, please?

Yes. Our weekday traffic in general trends have improved, and they're above weekends. Obviously, we have more capacity during the week. But it's actually spread out pretty nicely between breakfast and lunch at -- on weekday. So that's been a nice one for us. You're right. We had talked pre-IPO about the focus on lunch and it's actually spilling over into weekday breakfast as well, which is great.

Fantastic. And then just a couple of just quick expense questions, on the higher inflation and the egg contract you had did that, I assume just kind of looking at making sure you had some supply during that tough period cost you a little bit more in the quarter outside of the contract? And then secondly, can you just refresh my memory on kind of other operating expense, what the pressure there has been recently.

Okay. So eggs, yes, we did see the new egg pricing or the pricing that we had to go through in the second quarter was elevated as a result of the avian flu. And we move -- kind of the worst thing that can happen is for us to run out of the eggs altogether, right? So my focus and our team's focus is on securing supply. We do it a little bit cost favorable to the market, and we had a -- and we're still a little bit favorable to the market price, but not nearly as favorable as we were in the first quarter. So we did pick up a good bit of cost there. And it will probably be that way for much of the rest of the year as the flocks are repopulating and growing so that they deliver the kind of eggs that we serve in our restaurants, which are -- we're pretty in the high quality of the eggs that we use in our restaurants.

In terms of what's in the other operating expenses, really, the thing that tends to shift around in there was kind of the variable cost, the larger variable cost is the delivery fees associated with our third-party off-premises business. We also had packaging materials that are captured in that number. And then the rest of it are the things that we do to maintain the restaurants or cleaning materials and supplies for the wash machine, that sort of thing, staff uniforms, it's kind of a broad range of stuff that doesn't wind up on the play of the restaurant or in the pocket books of the staff in terms of payroll.

The next question comes from Gregory Francfort from Guggenheim.

My first one is just on the pipeline maybe for units into 2023. I think you're probably starting to put that together now. Given how strong the comps have been, is there an opportunity to accelerate that at all? Or site selection still governor on acquiring new sites? I'm just curious your -- what you're seeing on that front as we start to build that up?

So for almost all year, the sites that we're looking at, that Eric Hartman's team is delivering to us are really related to next year and the year following since we're kind of inside the window of the restaurants that will open this year. In terms of accelerating, as I've mentioned before, we kiss a lot of frogs, right? We look at a lot of sites, and we have some -- we're very strict about the selection criteria on the restaurants. So in terms of accelerating right now, we're going to continue to build out at the pace that we promised long-term, which is about a 10% growth in the system every year. And I feel like there's -- we'll be looking back on that 8 years from now and not really apologizing for that kind of unit growth story.

That makes sense. And just on the pricing, any quantification of how value scores have been? And I would imagine that that's been building pretty well, you've underpriced peers? And just a quantification of that would be helpful.

Yes, our value scores have remained very consistent through the price increase. And actually, that's been our historical perspective as well. So again, we feel like our pricing relative is conservative. But our -- as we look at the qualitative metrics, too, our NPS scores are solid, our value scores are solid. And obviously, the biggest indicator of that is traffic. So with those 3 things, plus others that we look at, we just -- that's why we feel like we've actually improved our value proposition.

And the other thing I kind of mentioned it, but it's worth calling out is we're also doing things to enhance the customer experience when we do this. So it's not -- we're not just taking price on a like-for-like product or even experience when we're doing ingredient improvements and things like that. There are some behind-the-scenes things that we're doing to ensure consistency and execution, but then to also, again, make continuous improvements, which we've done for a very long time.

Just conversationally, Greg, I don't know if you ever tried our crepe cakes Benedict that we had on the menu in the first LTO in the quarter. But that was simultaneously one of the most popular LTOs, and I think it was as pricey as anything we've ever put on our menu and customers consumed it to the point where we were in every bit of crab, we could find. So frankly, our -- it's -- we have a customer who seems to see value in a lot of our items even when we take the price up.

I'm usually a chocolate chip pancake guy, but (inaudible) more. And maybe just the last question for me. Where do you think on the menu -- I mean you've done a lot of work on alcohol and particularly the appetizers on the last couple of years and where are the biggest opportunities on the menu from here? Well, as you're looking kind of for what you want to redesign or what you want to expand to try to mix going forward? Where are the big sort of buckets of what you're looking for, for opportunity?

We've got a lot of runway to maximize the items that we have there now, but culinary innovation is part of the DNA of the company. I don't know if we'd announce what it's going to be on the call.

What I will say is, and we've talked about this before, we haven't innovated around alcohol yet. We're rolling out what I would call to be the entry-level platform. And when you think about what we did with the juice platform and how that went from 3% mix to 15% mix, we're really excited about the opportunities around alcohol and around beverages in general. I think there's opportunity for us in the beverage category, too, to Mel's point, nothing that we're ready to announce yet, but things that were -- that are in our process that have us really excited.

Like the chocolate chip pancake line.

(Operator Instructions) Our next question comes from Brian Vaccaro from Raymond James.

To circle back on the alcohol program, can you just level set how the program performs here in Q2, either kind of percent of sales mix or guests that are ordering from the platform? And then where is overall awareness on the program? And any plans in the second half to add marketing support that could move the needle further? Or is that more of a '23 dynamic?

So in terms of mixing, when we launched the program in the restaurants where we serve it in the dining rooms, it was just under 4% of the mix. Currently, in the dining rooms where we serve it, it's about 6.5% of mix. So it's been improving over the course of the last, what, 16 months that we've been purchasing licenses and installing it in the restaurant.

Okay. And just in terms of plans to in-store marketing to build awareness further. To what degree have you already done that? Or are there plans in second half? Or is that more of 2023?

Yes. We're still purchasing licenses. So until we have it in as many restaurants as we believe we can get it in, I don't think we're actually trying to move the number up so much. It's -- but will -- it probably is just in terms of timetable, you say, 2023, that's probably a pretty good timing table.

Okay. Okay. Thank you for that. And on the KDS rollout, I understand it's a small sample size, but in the units that have had it for a little longer and optimizing the system, I'm just curious what benefit -- can you give us any more color of the benefit you're seeing on throughput or table turns during peak periods?

Yes. We're seeing benefits on ticket times. Also, KDS is one part of an overall improving throughput strategy that we have. KDS gets all the talk because it's sexy and its technology, but there's a lot of other things we're doing. And so to measure the benefit specifically of that is part of a broader initiative for us. But everything that we expected it to do, it's doing from helping us (technical difficulty) folks sooner, reduced training time because of it, again, some of those behind-the-scenes benefits. And our accuracy is improving. But obviously, the most important factor for us is improved throughput during peak hours, and we're seeing that. And that's why we're so -- being so aggressive in the rollout so that we can get that rolled out and start talking about it in terms of its impact on the organization.

All right. Great. And last one for me. I just want to ask about labor inflation. I think you said around 8% to 10% in the second quarter. And now I'm just curious how you expect that to trend moving through the second half? Could you start to see wage pressure abate with staffing levels coming back, et cetera? And are there any outsized training costs or other costs that have been associated with this tight labor market that could start to ease from what we've seen in the P&L in the last few quarters? Thanks you.

So the 8% to 10% is kind of what we projected for the full year in terms of our inflation, and I do think that it's -- I do think that, that wage inflation is probably here to stay through the balance of the year. Our applications are up in terms of just the number of people applying for positions, and that's always a good sign for us. It's helpful. Haven't seen a lot of increase in training costs, there's probably an increase in the frequency of training. Most of the staff-level positions are trained in the restaurants by veteran managers. And so it probably puts a -- it probably adds complexity or a physical strain to do it as often, and we get some -- we do a lot of listening to what goes on in the restaurants. And so that frequency of training shows up when it becomes more complex or more frequent, but it hasn't added a lot to our overall cost.

The next question comes from Andrew Charles from Cowen.

Mel, just one final point, just on commodity inflation. The 10-Q calls out 10% to -- 15% to 17% COGS inflation. Is that the anticipated level for the full year or just the back half of 2022?

That was for the full year.

Great. Thanks. And then on - can - you guys obviously caught out strong reception of the brand in new markets, a strong class of 2021 openings. And as you can continue this expansion path in the Northeast as well as the Midwest, is Canada something that's on your radar? Is that an opportunity for growth here as well as just broader international expansion. If you were to pursue it, would that be through a company-operated angle or perhaps something that we can see franchised?

I would say it's not on our radar right now. We've still got so much green space in front of us in our core emerging new and then markets we haven't even entered into yet. So not something that we're thinking about. We actually get quite a few inbounds on international expansion, and we're just -- we're really focused on bringing our unique breakfast brunch and launch to the contiguous 48 for now. But I think, obviously, down the road, that's an opportunity for expansion, but not in the near-term.

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

Great. Thank you for joining us today. Thanks for your thoughtful questions. We're certainly aware of the obstacles and the macroeconomic uncertainty around the world and here at home. But First Watch has overcome its fair share of challenges during our nearly 40 years in operation. So if you can't tell by the call in our tone, we're confident in our unique positioning and our value proposition. And most importantly, I'm really confident in the leaders throughout our organization who continue to adapt and thrive. As we look ahead, we continue to invest in our people and to invest in our growth. And I want to thank everybody for joining us here today. With that, we'll close it out.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.