First Watch's 2025 Results Show Growth but Reinforce Margin and Leverage Concerns

What happened

First Watch released its full-year 2025 financial results and 2026 outlook, reporting revenue growth driven by unit expansion but continuing to struggle with thin consolidated profitability. Restaurant-level margins remain healthy at around 20%, yet corporate operating margins stayed near 3-4% due to high depreciation, pre-opening costs, and G&A from aggressive company-owned growth. Leverage is elevated with net debt to EBITDA at 7.9x, compounding risk as the company plans significant capex and franchise acquisitions. Same-restaurant traffic turned negative in Q4 2025, highlighting fragility in the core growth narrative despite overall positive comps for the year. The 2026 guidance will be critical to assess whether margin recovery and traffic stability can justify the current stretched valuation.

Implication

The persistent gap between strong unit economics and weak consolidated margins limits earnings power, making it hard to justify a 20x EV/EBITDA multiple. High leverage at 7.9x net debt to EBITDA increases financial vulnerability, especially if traffic softens or commodity costs rebound. Valuation already prices in robust margin expansion and sustained growth, leaving no room for operational missteps or macroeconomic shocks. Near-term catalysts like the 2026 guidance could drive volatility, with any shortfall likely compressing multiples given the lack of downside protection. Long-term, a more attractive entry point around $13 would better compensate for these risks while preserving exposure to the growth story.

Thesis delta

The DeepValue 'POTENTIAL SELL' thesis remains intact, as the 2025 results confirm ongoing margin pressure and high leverage despite revenue growth. No material shift is indicated; the 2026 outlook must demonstrate EBITDA margins reaching 12%+ and leverage falling below 4x to change the call, but current data suggests these thresholds are challenging. Investors should await the detailed 2026 guidance and subsequent quarters for confirmation before reconsidering the bearish stance.