First Watch Restaurant Group, a popular breakfast and brunch chain, recently released their Q1 2024 earnings. While initial figures appear positive, a closer look reveals a potential weakness: the Florida market.

The company acknowledged a slowdown in Florida's restaurant industry, aligning with data from Placer.ai, a location analytics platform, indicating a decline in restaurant business in the state over recent quarters. Placer.ai provides foot traffic data for businesses. Although Florida accounts for 30% of First Watch's system, the company downplayed its impact, stating their expansion and market share gains offset any negative effects.

However, concerns linger about the sustainability of this optimistic outlook. First Watch operates 123 restaurants in Florida, a 48% increase over the past five years, coinciding with substantial population growth. Logically, a larger population should result in more breakfast and brunch customers.

The company attributed some performance impact to 'harsh weather in January.' While weather is a factor, it doesn't fully account for the performance gap between Florida and other areas.

One theory suggests that the post-COVID surge in restaurant visits, termed the 'Florida traffic benefit,' is diminishing faster than First Watch acknowledges, indicating potential market saturation in Florida. If this holds true, the company's ongoing expansion in the state might be a risk.

While new restaurants generate revenue, they could cannibalize existing locations. If Florida restaurants already face declining traffic due to saturation, opening nearby locations could further dilute customer visits, affecting profitability for both new and existing stores.

Additionally, First Watch's tendency to concentrate new restaurant openings in Q4, as seen in 2023 and projected for 2024, raises concerns. This strategy, combined with potential Florida saturation, could lead to underperformance during the critical holiday season.

First Watch's management remains confident about Florida, emphasizing their market share gains and competitive advantages. They point to the company's operational efficiency, enhanced by technology like kitchen display systems (KDS) and pay-at-the-table options, as a buffer against potential challenges.

Although these measures improve customer experience and operational efficiency, they may not entirely neutralize market saturation. A more cautious strategy might involve slowing expansion in Florida and diversifying growth into new markets like Las Vegas and New England, where cannibalization risks are lower.

First Watch Adjusted EBITDA and Traffic Growth

The following chart illustrates the relationship between First Watch's adjusted EBITDA and same-restaurant traffic growth. As the company grows, analyzing the connection between profitability and customer traffic trends is crucial.

Moving forward, it's essential to watch First Watch's Florida performance. If the saturation theory is accurate, the company might need to re-evaluate its growth approach and investor expectations. While Florida still holds potential for First Watch, caution is necessary to avoid overexposure to a potentially cooling market.

"Fun Fact: First Watch gets its name from the nautical term 'first watch,' which refers to the first shift of duty on a ship, typically from 4:00 AM to 8:00 AM. This aligns with their focus on serving breakfast and brunch."