What happened
Shares of First Watch Restaurant Group (FWRG 1.10%) turned sour on Monday morning. The restaurant chain reported solid third-quarter results before the opening bell, but a shelf registration giving it the ability to sell 5 million shares overshadowed the strong top-line sales. First Watch shares fell as far as 21.2% on the mixed bag of news, recovering to a loss of 11.3% by 1:30 p.m. ET.
So what
Your average Wall Street analyst was expecting third-quarter earnings of roughly $0.03 per share on revenues near $181 million. First Watch fell short of the bottom-line target with a break-even performance. At the same time, sales rose 19% year over year to $187 million, floating past the consensus analyst estimate.
Furthermore, regulatory filings showed that First Watch filed a "shelf" registration statement allowing it to sell up to 5 million shares of its common stock. If it sold all those shares, that would increase the number of issued shares by 8.5% and at today's price would bring in approximately $72 million.
The same filing also showed that the majority shareholder, Advent International Corp., may sell 41.6 million shares over time. In other words, 70% of First Watch's shares are potentially on sale now.
Now what
First Watch's business is doing fine. Networkwide sales rose 19% year over year in Q3. The up-and-coming chain opened 11 new locations during the third quarter alongside a double-digit increase in same-store sales. Bottom-line profits shrank due to higher ingredient costs and restaurant staff wages, as expected in an inflationary economy with historically low unemployment.
US Core Inflation Rate data by YCharts
First Watch and its controlling shareholder are selling a lot of stock, essentially asking independent investors to send over a quick cash infusion. The company has consumed almost all of its operating cash flows in 2022, and the proposed stock sale should nearly triple First Watch's cash balance. That sounds useful in order to support continued growth during a challenging economy, but the dilutive effect of the 5 million new shares cannot be denied. Also, Advent International's planned stock sale doesn't exactly look like a vote of confidence in future price gains.
So the mixed report makes sense, but the bearish market reaction is equally reasonable. All things considered, I'm neither more nor less interested in First Watch's stock after this tumultuous report.
Editor's note: This article has been updated. First Watch Restaurant Group falls into the full-service restaurant category. The recent filing was a shelf registration allowing the company to sell up to 5 million shares.
