First Watch’s Expansion Strategy: Growth at the Expense of Profitability?

The breakfast and lunch restaurant chain First Watch is demonstrating a challenging financial dynamic: achieving substantial revenue growth while simultaneously experiencing a significant contraction in profits. This raises a critical question for shareholders about whether an aggressive growth model that prioritizes expansion can deliver sustainable returns.

Soaring Revenue Masks Profitability Concerns

A closer examination of the company’s second-quarter performance reveals a complex financial picture. Total revenue surged by an impressive 19.1% to reach $307.9 million. This top-line strength was further supported by a 15.8% increase in system-wide sales. However, this revenue success came with a notable downside. Net income experienced a dramatic decline, plummeting to just $2.1 million from $8.9 million in the same quarter the previous year. Concurrently, the restaurant-level operating margin compressed, falling from 21.9% to 18.6%.

Aggressive Growth: A Double-Edged Sword

This financial dichotomy is primarily driven by the company’s ambitious expansion agenda. During Q2, First Watch launched 17 new restaurants across eight different states, bringing its total footprint to 600 locations. The growth trajectory is set to continue, with plans to open between 59 and 64 new establishments throughout the 2025 fiscal year. Reflecting this optimistic outlook, management has increased its full-year EBITDA guidance to a range of $119 million to $123 million.

The core challenge for the company is balancing this rapid growth with profitability. While the underlying business health appears robust—evidenced by three consecutive quarters of rising same-store sales and increased guest traffic—the near-term financials show that each new opening requires substantial investment, which pressures margins.

Should investors sell immediately? Or is it worth buying First Watch Restaurant?

Market Analysts Maintain a Largely Bullish Outlook

Despite these mixed financial signals, analyst sentiment remains predominantly positive. The consensus rating for the stock continues to be a “Buy,” accompanied by an average price target of $21.09. Benchmark analysts have expressed particular optimism, recently raising their price objective from $22 to $24. A more cautious perspective comes from Stifel Nicolaus, which maintains a target of $17.

The stock itself has shown resilience, trading significantly above its key moving averages following a 5.85% gain last Friday. However, with a Relative Strength Index (RSI) reading above 73, some technical indicators suggest the shares could be overbought in the short term.

First Watch now faces the classic growth company dilemma: how to scale rapidly without eroding profitability. Its ability to successfully manage this balance will be determined by its performance in the coming quarters.