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tl;dr:
\-First Watch sells avocado toast and mimosas
\-Denny's doesn't
\-First Watch does more revenue in 8 hours than IHOP and Denny's do in 24, at triple the profit margin
\-First Watch is doing a series of investor pitches in the next few months. They're going to release the numbers on Nov 12 that prove they're profitable and growing. Good chance for the stock to go from $12.50 to $20-$25
I’ve tricked myself into buying a restaurant stock, First Watch ($FWRG), and shorting IHOP and Cracker Barrel. It’s a popular breakfast chain, think IHOP/Denny’s except the food is Instagrammable:
https://preview.redd.it/fmwkaccepqmh1.png?width=1766&format=png&auto=webp&s=ac8a0795eb86cd51be0a8e8ac8a50c2a2f627e3b
It’s a high-quality business, profitable, customers love it. They’re at 650 restaurants now and plan to grow to 2,200 stores. It’s on sale: market cap is $760M, and they make about $75M a year which they reinvest into new stores, growing 10%+ a year. That’s a 10x multiple, very cheap for a healthy growing company.
https://preview.redd.it/0xi4osgupqmh1.png?width=2042&format=png&auto=webp&s=d9b6e07d3ed40387247ebe378425561b541ee833
**People Love First Watch**
First Watch is coming in at the [\#1 most loved full service](https://trends.yelp.com/most-loved-brands-2025) restaurant brand on Yelp, and is coming in on some lists as #1 [most loved employer](https://mostlovedworkplace.com/americas-top-most-loved-workplaces-2025/#top-list). Anecdotally, everyone I know that has been there unanimously agrees it blows traditional breakfast places out of the water. Check out the interior:
https://preview.redd.it/qhu8s3bxpqmh1.png?width=1390&format=png&auto=webp&s=8055dfa1d59d8a5d11ad93cc788586fe5a54cb34
Compare that to the dated feel of IHOP/Denny’s/Waffle House/Cracker Barrel:
https://preview.redd.it/g65sddyypqmh1.png?width=1566&format=png&auto=webp&s=9857a07773a878ea3e40b7ec078e290aeac7e61d
First Watch is leading a trend of stylish brunch restaurants that are going to outcompete IHOP, Denny’s, Cracker Barrel and Waffle House. The [brunch sector is up 11.5%](https://www.restaurantbusinessonline.com/financing/family-dining-segment-divided-dinner) last year while traditional breakfast restaurants declined:
https://preview.redd.it/p2cipsh0qqmh1.png?width=1508&format=png&auto=webp&s=0924c183d2f6e2b508ef4e5834ee3a3f4eb2969f
Note this is what Cracker Barrel was trying to do. Traffic was down 7% in 2023 as customers flocked to modern concepts like First Watch. The new CEO countered by rebranding to industrial-farmhouse, copying First Watch’s exact aesthetic:
https://preview.redd.it/3i2pdfc1qqmh1.png?width=932&format=png&auto=webp&s=96dcfac653b8b3a73b8ff7b130cdf1401af73dfb
It was actually working, sales were up 5% in 2025. Then came the minimalist logo change where they got rid of both the cracker and the barrel, customers revolted, and they had to revert all the changes back. Cracker Barrel traffic is down 7% versus last year while the stock is up 80%.
**First Watch makes a ton of Money**
Growing up my parents owned 20 IHOPs at their peak before selling them a decade ago, anticipating the decline of sit-down restaurants in favor of fast casual. I can tell you from experience, the 24/7 diner chains were always a tough and complicated business with low profit margins, and operators today are struggling to survive after losing customers for a decade.
First Watch restaurants make **10% more money in a third of the operating hours**, with **triple the profit margins**:
https://preview.redd.it/0eyjdxk3qqmh1.png?width=1022&format=png&auto=webp&s=46106fe29d682df7ef84639b8f62c1eb16074ade
IHOP/Denny’s are essentially commodity restaurants, competing on price to make $3-4 profit per plate of eggs/bacon/toast. First Watch distinguishes itself through quality and style, and sells mimosas at $0.50 of ingredient cost for $9 each, and some people drink 2 or 3. This isn’t a fair competition.
First Watch stores cost $1.8M to build, and the restaurants are exceeding $2.8M in revenue with an elite 35% annual return on investment and 18-20% profit margin. There’s still a long runway, it’s at 650 stores now vs 1600 Denny’s, 1800 IHOP and 2100 Waffle Houses. The NorthEast and West are still largely untouched.
https://preview.redd.it/f5u51nj6qqmh1.png?width=1384&format=png&auto=webp&s=b52530c023adc7130d4584d359602126f55d898e
Note that as the company scales it should also get more efficient. Look at corporate overhead as a % of revenue:
First Watch is in growth mode, they are paying for store development teams, marketing teams, appropriate for a company with 1,000+ restaurants. Notice how all the growth concepts have higher overhead than the larger, mature companies. As First Watch grows this overhead should slowly decrease in size, which means profit will grow faster than revenue.
https://preview.redd.it/cj3vqf09qqmh1.png?width=1998&format=png&auto=webp&s=9ffc983a24f21c87a4b78d86e4cda7314b99105e
First Watch can reinvest its own profits at a high rate of return (35% annual by year 3), has a multi-decade growth runway, and has operating leverage, i.e. large and relatively fixed corporate costs. First Watch should also benefit from other economies of scale, including supply chain efficiencies and growing national brand awareness. Taken together this looks like a classic compounder setup, the kind of company that can grow 15% a year for 20 years.
**Brand Awareness is Growing**
Unaided brand awareness is up 50% on the year, and it shows on Google trends:
https://preview.redd.it/6nnaux1aqqmh1.png?width=2048&format=png&auto=webp&s=774ad191e4a0e12db0d75231dca32f4e69d5aae3
**What the Market Thinks**
[Wall Street analysts agree](https://www.bloomberg.com/news/articles/2026-05-04/first-watch-breakfast-menu-helps-it-stand-out-but-stock-is-down-this-year?accessToken=eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJzb3VyY2UiOiJTdWJzY3JpYmVyR2lmdGVkQXJ0aWNsZSIsImlhdCI6MTc4NzU5ODE2MSwiZXhwIjoxNzg4MjAyOTYxLCJhcnRpY2xlSWQiOiJURUQ4OVZLSVAzTTcwMCIsImJjb25uZWN0SWQiOiJCNjQ3QUEyRTg3Qjg0NkUyOUMyRUFBMjkzODgxRDY2NiJ9.rITNxIllxoeYANab3ujD-YAWnvqbeo3LJ2NUzEmfFY8) this is undervalued, they put an average $21 price target on First Watch. A common way to measure the price of a company is EV/EBITDA, i.e. (Debt + Market Cap) / Profit.
First Watch clearly sticks out as the cheapest growth stock:
https://preview.redd.it/hqzpwu2bqqmh1.png?width=1568&format=png&auto=webp&s=e01418149e11cafc2f5b68f49bd1a92259e67bf1
So why is it trading cheap?
Retail investors aren’t buying this because they don’t understand the accounting. Most bloggers are seeing this:
https://preview.redd.it/1wdzsvjgqqmh1.png?width=1270&format=png&auto=webp&s=f9919c9b5115c33c5ba381f9d09e0cf7424513ca
And this:
https://preview.redd.it/j1z8gfmeqqmh1.png?width=1250&format=png&auto=webp&s=c9be6dc49955309eb978ecf0c2201bd45f0e6a91
And they say, man, great company too bad it’s trading at 47x pe with 1.1B debt, too risky for me. Both of these are wrong.
Net income is distorted by building depreciation. It’s a real expense, buildings will eventually need refurbishing, but right now it greatly overstates the cash cost. Look at cash flow:
https://preview.redd.it/hv0rohzhqqmh1.png?width=1268&format=png&auto=webp&s=ce9a12b3d97883ffd1784a8026031e2caa953b27
Which, yeah, free cash flow is also negative, but this is only because they have been building 50+ stores every year. If you look at Capital Expenditure it was $150M in the last 12 months. It’s not fair to add all of that back in, some of that is maintenance. We know they built 57 stores at 1.8M each last year, or $102M total, and once you add that back in you can see **First Watch made roughly $80M last year**.
The debt also isn’t a problem. On all the stock screeners it shows $1.1B, but most of that is leases which have already been subtracted as an expense. Corporate debt is only $293M which is manageable and financed through 2029.
Still, $80M < $102M, which means they borrowed $22M last year to grow faster, and $32M the year before. The interest they pay is [tied to debt level](https://www.sec.gov/Archives/edgar/data/1789940/000178994026000090/fwrg-20260628.htm) and will increase as they grow faster. So it’s a good time to pump the brakes, in Q2 they announced they will slow their pace of expansion to 50 stores/year + 5 franchised in order to retain more profit.
So we’re at an awkward spot where the growth slowdown has been pre-announced, it should be 10-12% annual going forward. Some growth funds that are mandated to have higher growth are being forced to sell. Value funds still need proof of multiple quarters of free cash flow before they buy in. I think it’s a great moment to buy a good company on sale while it’s being transferred between these investor bases.
Also note First Watch is a former private equity company, Advent International acquired them from the original founder, doubled them in size, then ipo’d. They then dumped shares on a schedule for four straight years:
https://preview.redd.it/0blx9tcjqqmh1.png?width=2048&format=png&auto=webp&s=7a688bee0c8b6336c84169fed1e719fcff116228
So between confusing accounting and five straight years of shares being dumped this stock has been a dog:
**The Bear Case**
Traffic and price data for First Watch vs casual dining sector:
https://preview.redd.it/h1vq9qtkqqmh1.png?width=1596&format=png&auto=webp&s=913f716e910590897cb5a26025270f2887982139
The bears say First Watch has been increasing prices too fast. Note price has been increasing 1-2% faster than competitors for the past couple years. This is true, but remember these competitors are fighting on price for commodity bacon/eggs/toast, while First Watch has been upgrading to premium items (chimichurri steak and eggs was the special this Summer, during a beef shortage). Raising prices while taking traffic from competitors is the sign of a strong brand, not a weak one.
On traffic, bears argue that new stores might be cannibalizing traffic from old stores. Management admits there’s a bit of this. When I visited a First Watch myself I noted they were building a new restaurant only a 4 minute drive from an existing one. So sure, there is some cannibalization, but this is just masking growing customer demand. Traffic has been flat for the last two years (still better than competitors), while new stores are taking traffic from existing ones. If they hadn’t built new stores, the mature stores would have shown growing traffic.
There’s also competition from other brunch concepts, including Denny’s-backed Keke’s. While this may be a future problem, all of these companies are still small. First Watch has a strong opportunity to solidify itself as the go-to brand for the brunch concept before its competitors reach national size.
https://preview.redd.it/5mpvrxtnqqmh1.png?width=1050&format=png&auto=webp&s=1d3119fd04b45f16fc5fbe2860e978c81cbae416
Anyways, while these are all real concerns, I’m not convinced there are real problems here. The market however is still debating these points, and wants to see clearer data. Management is telling us they’re confident in the numbers and they’re putting on an investor roadshow to convince the market. They are presenting twice in September and then an investor day on Nov. 12 where they will show the raw data on their growth plan including cannibalization, traffic, brand awareness, maintenance costs, etc. That should clear up some of the market’s concerns, and will let Wall Street build financial models and value the company.
**Model**
I went ahead and built a [model](https://gregw135.github.io/fwrg-model/) ahead of time based on the data we already know. It’s got a lot going on but I think it’s fair, and all the assumptions are listed on the site. If we plug in the current operating numbers and assume a multiple of 16x we get a share price of $75 by 2031:
https://preview.redd.it/vaymahtoqqmh1.png?width=1718&format=png&auto=webp&s=90b36709e9d7c265f0f3f0cfa06ebc6e2382c8be
Try playing around with the model and testing different assumptions. I’m finding that even if traffic declines by 2% for five straight years while margins drop, and the multiple stays at 10x, build costs overrun and overhead barely drops, the stock should still grow 10% a year. That just goes to show how much bearishness is baked into the current stock price.
I will update the model after investor day, Nov 12, and Wall Street will probably do the same and update their price targets the week after. If the numbers still look good the stock could easily go past $20 this year.
Really though we don’t need the numbers to know this is a great business at a great price. First Watch is the modern concept, Cracker Barrel/IHOP/Denny’s/Waffle House are outdated. Cracker Barrel knows it, that’s why they tried to copy First Watch’s industrial-farmhouse style. Profit margins are a very healthy 18-20% while 24/7 diner restaurants are struggling to survive. The market is still pricing First Watch like it’s a member of a dying class but it’s the predator killing off the competition.