First Watch's Slowing Growth Confirms Overvaluation Risks

What happened

First Watch's FY 2026 guidance disappoints with same-store sales growth decelerating to 1-3%, signaling a clear slowdown from prior expectations. This aligns with the DeepValue report's earlier warnings about fragile traffic and high valuation multiples that already price in robust growth. Adjusted EBITDA margin guidance implies no operational leverage gains, echoing concerns over thin consolidated margins and high leverage highlighted in the report. The article's fair value estimate in the low teens matches the bear case scenario of $13, indicating limited upside from current stretched levels. Thus, the market is now acknowledging the risks that were previously flagged, shifting focus from growth optimism to execution challenges.

Implication

The guidance cut underscores that First Watch's growth trajectory is weakening, making it hard to justify the current high P/E of 55.9x for FY 2026. With no operational leverage expected, margin recovery is delayed, pressuring earnings and increasing reliance on cost management. High leverage and fixed costs amplify downside risk if traffic deteriorates, as highlighted in the bear case with an implied value of $13. Entry points near the DeepValue report's attractive level of $13 provide better compensation for inflation and execution risks. Investors must closely monitor same-store sales and commodity costs, as further softness could trigger significant multiple compression and downside.

Thesis delta

The new guidance validates the DeepValue thesis that First Watch's valuation is unsustainable given operational headwinds, reinforcing the 'POTENTIAL SELL' rating. It shows growth is slowing faster than anticipated, with risks now more evident in the price, though no fundamental shift in the long-term story. Investors should reassess entry points downward, as the asymmetry has tilted towards downside protection.