Kura Sushi USA, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kira Sushi USA Inc. Fiscal Second Quarter 2021 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation. Please note that this call is being recorded. On the call today, we have Jimmy Uba, President and Chief Executive Officer, Steve Benrubi, Chief Financial Officer, and Benjamin Porton, Investor Relations Director. And now, I'd like to turn the call over to Mr. Porton.

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal second quarter 2021 earnings release. It can be found at www.kurosushi.com in the investor relations section. A copy of the earnings release has also been included in an NK we submitted to the SEC. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions. Also during today's call, we will discuss certain non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation, nor as a substitute for results prepared in accordance with GAAP, and the reconciliation of the comparable GAAP measures are available in our earnings release. With that out of the way, I would like to turn the call over to Jim.

Thank you, Ben, and thank you, everyone, for joining us today. Let me start with a high-level review of our quarterly results and the business update before Steve goes through our financials. As I mentioned briefly on the previous call, our fiscal second quarter results ending in February were materially impacted by the increased severity of COVID restrictions. This was particularly the case in California, where 50% of our residents reside. If you recall, California imposed a total ban on both indoor and outdoor dining in early December. While the ban on outdoor dining was partially lifted at the end of January, the ban on indoor dining remained effective through our entire fiscal second quarter. While we are pleased with the strong performance of our off-premises sales, it was not enough to offset the loss of sales due to the inability to offer our guests the full-class experience created by our dining rooms. Health in California began to recover in February with the resumption of outdoor dining, although this was partially offset by severe winter weather in Texas, resulting in the temporary closure of all of our Texas restaurants, which lasted up to a week, depending on the location. While this was unfortunate, we are happy that our team members in Texas were all safe and are proud of the resilience they displayed throughout these overlapping difficulties. Thanks to their ongoing efforts, our Texas stores continued to perform well in spite of the winter storm and reduced seating capacities relative to the previous quarter. Our system-wide daily sales volumes in February, exclusive of the impact from weather, were among the best we've seen since entering the pandemic. Looking to the current quarter and beyond, we believe that we are poised for continued recovery as the pandemic winds down. Our March revenue exceeded $5 million, a material improvement over February's revenue of $3.1 million. This has largely been driven by the relaxation of certain dining restrictions in mid to late March, including the resumption of outdoor dining and restricted indoor dining in our California stores, the resumption of conveyor belt operations in California, increase of indoor dining capacity of our Texas restaurants to 100%, and the increase of indoor dining capacity in several other states. The month-over-month sales growth we've seen in March is very encouraging, especially considering that we only benefited from these regulatory relaxations for part of the month. Our Texas market, which now has no seating capacity restrictions, has already begun comping positively against pre-COVID-19 comps, and we think this is a great indication of the recovery we can expect once restrictions are lifted across our system. Again, I couldn't be more proud of our restaurant operations team's resilience despite the constant challenges they've faced during the last year and how nimble they have been at ramping up operations swiftly and efficiently as restrictions have allowed. Let me reiterate that while we are all eager to bring back the Fulcrum experience to our guests, our top priorities still includes the health and safety of our guests and team members. To that end, we are continuing to promote safe indoor and outdoor environments through the use of personal protective equipment for each of our team members, enhanced cleaning processes, social distancing, partitions between booths, and team member health checks prior to the start of each shift. As sales in our existing stores continue to show progress, we have also maintained our development momentum. During the fiscal second quarter, we opened two new restaurants with our Aventura, Florida location opening in early January and our Troy, Michigan location opening at the end of the quarter. We have been very pleased with the early performance of these new restaurants. Additionally, in early April, we opened a new restaurant in Sherman Oaks, California, and we expect our Bellevue, Washington restaurant to open later this quarter. With these latest openings, we will have completed our planned seven new restaurant openings for fiscal 2021. Looking ahead, we believe the units in our fiscal 2022 pipeline are among the best we've ever had. Our new data platform, Forum Analytics, has completed its correlation analysis of our unit system-wide and has been incorporated into our site selection process. We remain on track to achieve our 20% unit growth CAGR goal over the five-year period starting in fiscal 2019. Turning to other initiatives, we continue to strengthen our long-term business model by expanding the opportunities for our guests to enjoy the Cura experience. In January, we successfully launched our new CuraTouch app. With the goal of better integration, our new app combines our waitlist, online ordering, and rewards program all in one place. Today, we have over 100,000 combined rewards members and app users. We believe this app will further streamline our off-premises sales efforts, even as we continue to fill our restaurants with indoor dining. During the fiscal second quarter, our total off-premises revenue was $2.4 million, representing sustained and material growth over the previous quarter's off-premises revenue of approximately $1.3 million. While this period coincides with the restrictions on indoor and outdoor dining in California, we believe the biggest driver of this growth was our successful integration with Square, which was completed in December. By month, off-premises sales were $870,000 in December, $860,000 in January, and $650,000 in February. followed by $680,000 in March as we began our fiscal third quarter. Our fiscal second quarter off-premises mix was 26%, a far cry from the 1% or so sales mix that off-premises represented pre-pandemic. While we don't expect this mix to fold in full once we enter post-pandemic life and that the core of our business will always remain the correct experience. Our March off-premises revenue increased relative to February in spite of dining room reopenings in California. This is tremendously encouraging for long-term prospects for our off-premises sales. In closing, while we are still operating in uncertain environment, we believe we are starting to see the light at the end of the tunnel. With COVID cases continuing to decline and vaccines becoming more widely available, our team is ready for post-pandemic recovery and eager to capitalize on pent-up demand for a full-class experience. With that, let me turn the call over to Steve to briefly discuss our financial results and liquidity. Steve?

Thank you, Jimmy. For the fiscal second quarter, total sales were $9.1 million. as compared to 19.4 million in the past year period, resulting in comps of negative 60%. Turning to cost, food and beverage costs as a percentage of sales were 35.0% or 32.9% excluding spoilage, compared to 31.5% in the prior year quarter. The increase is in part the result of the geographical mix of sales towards Texas restaurants that have lower sushi plate prices. Labor and related costs as a percentage of sales decreased to 22.7% from 31.7% in the prior year quarter, primarily due to a $2.2 million employee retention credit recognized under the CARES Act extension. Excluding the credit, labor and related costs would have increased to 46.9%, primarily due to the effect of lower sales and the minimum staffing needed to operate our restaurants at reduced capacities. James Moore- Occupancy and related expenses were consistent as compared to the prior year quarter at $1.6 million with costs from new restaurants offset by reductions in percentage rent. James Moore- Other costs as a percentage of sales increased to 22.6% compared to 11.4% in the prior year quarter due to fixed cost the leverage as a result of the decrease in sales. General and administrative expenses were $2.9 million compared to $2.8 million in the second quarter last year. Excluding the impact of the $400,000 employee retention credit recognized under the CARES Act extension, general and administrative expenses would have been $3.3 million. This increase was primarily due to compensation-related expenses. As a percentage of sales, general and administrative expenses increased to 31.6% compared to 14.4% in the prior year quarter. Operating loss was $3.8 million compared to an operating loss of $200,000 in the second quarter of 2020. Restaurant level operating loss was $1.3 million compared to restaurant level operating profit of $3.9 million in the second quarter of 2020. Adjusted EBITDA was a negative $4.7 million compared to $1 million in the second quarter of 2020. And income tax expense was $29,000 compared to income tax expense of $30,000 in the second quarter of 2020. Taking all of these together, net loss was $3.9 million or negative 46 cents per diluted share compared to net loss of $100,000 or negative two cents per diluted share in the second quarter of 2020. Adjusted net loss was $6.5 million or negative 78 cents per diluted share compared to adjusted net loss of $100,000 or negative two cents per diluted share in the second quarter of 2020. Turning to our cash and liquidity, at the end of fiscal second quarter, we had $2.3 million in cash and $12 million in debt as we borrowed an additional $9 million on our revolver to meet our planned capital expenditures for fiscal year 21. Subsequent to quarter end, we borrowed an additional $2 million and expanded our revolving line of credit from Kurosushi Japan from $35 million to $45 million. I'd also like to provide an update on our expenditure expectations for the remainder of our fiscal year. With our strong performance in March and indications that the pandemic may end sooner than we had expected, we feel ready to move from a relatively defensive position to a more aggressive strategy. To this end, we expect our weekly CapEx spend during Q3 and Q4 to be $250,000, allowing us to accelerate the opening timeline for our fiscal 22 pipeline. We expect our weekly G&A spend to be $300,000 to $310,000 exclusive of expected employee retention credits as we scale our organization in preparation for our new units and growing system size. Lastly, as a reminder, due to the ongoing uncertainty driven by COVID-19, we will not issue additional financial guidance for fiscal year 21 at this time. Now, I'll turn the call back to Jimmy.

This concludes our prepared remarks. We are now happy to answer any questions you have. Operator, please open the line for questions. During the Q&A session, I may answer in Japanese before my response is translated into English. Please bear with us.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question is from Peter Celeste with BTIG.

Great. Thanks. Thanks for taking the question. Jimmy, I think you mentioned that Texas was already comping positive. I think that was versus 2019 results. Can you just give us a little bit more color? Is that a number from the month of March or April? Or how do we think about that performance so far in Texas?

Sure. Peter, thank you for your question, but please allow me to answer in Japanese. Ben is going to translate.

So the period that we're referring to in terms of Texas comping positively would be the period in March subsequent to the reopening of our seating capacity to 100%. I believe that was on March 10th, but that compared to the same period in 2019 is what we're comping positively against.

So post-March 10th, correct? Okay. All right. Very helpful. Okay, and then on the off-premise sales, and thanks for giving all the detail on the monthly figures, any color you can provide, I mean, it does look like, you know, the off-premise business gave back, you know, a couple hundred thousand in terms of revenue there from January going into February and it kind of stayed consistent in March. I'm assuming that's all just because the dining room is reopened. Can you provide a little bit more color? And if you expect to kind of sustain that level, that 650, 680, or you expect that that number will come down even further? Thanks.

Yeah. Hey, Peter, this is Steve and Ruby. I'll speak a little bit to that. So we did see in February when outdoor dining was opened up again in California, it clearly had some impact in the amount of off-premises where we went. from 860 in January to the 650 in February. What was really encouraging to us, in spite of the mid-March or even early March in Texas, further expansion of capacities, we still saw that off-premises, it actually grew in the month of March in dollars to $680,000, which was about 13% of sales. And from our standpoint, it's a little speculative at this stage, but we do feel like there's some level or some core of Kura Sushi customers that continue to want and will want AB off-premises as an option. And it gives us confidence that we feel like an opportunity for mid to high single digits mix when things normalize could be something we could end up at on off-prem for the mix.

Excellent. And then just lastly on your commentary to be a little bit more aggressive, for getting ahead of 2022 development. Just talk about the real estate environment and what you're seeing. Are you seeing good opportunities, at least it sounds like you are, to build more stores or are you just getting better real estate? And just give us a sense on construction costs and if you're seeing any relief there or is it just more of the same, more inflation? Thanks.

Sure. I don't have this question. So when Steve referred to a sort of more aggressive strategy regarding fiscal 22, this would be more in terms of pushing the overall timeline down

further towards the beginning of the fiscal year, 22, as opposed to increasing the number of units. Our goal remains that 20% unit growth cater that we keep mentioning.

And then the opportunity part, I've been saying this for a long time, but the real estate opportunity is in a very good state right now, so we have five lease signs, but there are also a lot of other contracts and LOI negotiations, so it's a very

In terms of real estate opportunities, we're seeing a truly great pool to draw from. And as a result, we already have a substantial number of leases signed for fiscal 22 pipeline. We have a number of leases and LOIs under negotiation. The real estate opportunities are great. Peter, if I could just add, you'd asked about the number. I would just mention that we haven't commissioned a white space study yet. We still feel that the best time to do this is following the pandemic, just given that there are so many moving targets. But we do believe the white space pre-pandemic and the white space post-pandemic will not be the same. The world is a different world now.

Great. Thanks for the color.

I think you'd asked about construction costs as well. We're not seeing any sort of...

So the biggest variable in terms of our build-out costs would be whether or not we're using union labor. In fiscal 21, we opened two stores in areas that required union labor for the first time, and they were materially more expensive than our typical build-out costs. But otherwise, we're expecting...

our fiscal 22 stores to be in line with what we've seen in the past.

Thank you.

Thank you, Peter. And our next question is from James Rutherford with Stevens Inc. Please proceed.

Hey, thanks, guys, for taking the questions. I wanted to follow up first on the question Peter asked at the beginning about comps in Texas. positive sign to see that to turn positive since they reopened. Could you perhaps quantify the magnitude of that positive comp and then also just give us where California is running on a comp basis compared to 2019, just to help us as we calibrate our models?

Yeah, I'll share. On the Texas, it was a low single-digit positive comp. And just to confirm what Ben had said earlier, it was March 10th. when Texas went from 75% to 100% capacity in the restaurants. It was really for a three-week period. Obviously, it's still a short window, and we would caution reading too much into a short time like that, but it was encouraging. For the month of March overall, we came in at a negative 31% comp. That's coming off of February. And again, that's negative 30 against 2019. And that's coming off of a down 57 in February. So there's a clear positive move really throughout the business. California, for instance, during that post beginning of indoor capacity period, California was running mid-30s down comp in March, and that was for the last half of the month. And that was, you know, much better than what we were seeing through the course of Q2, where the comps for California came in down 77%. So a lot to be excited about, but at the same time, a lot to be careful about, knowing that there's still a road ahead until everything is really back to normal. Yeah.

That's super helpful. Thanks, Steve. I know there's still capacity restrictions in play in California as well. But on the Florida opening, I hate to get so granular, but I have to ask, is there any insight you can provide into the acceptance of that location? Is there anything you can share about sort of a sales level of that store compared to what you've seen with new store openings in other markets? And I ask, I know you did that with the Fort Lee location. So curious if you could do the same with that Florida store.

Sure, I'll answer this question.

So in terms of Fort Lee, Fort Lee continues to perform very well. It's materially outperforming what you would expect based off of its capacity restrictions against a run rate 3.5 million AUV. Like Fort Lee, Aventura and Troy are both doing very well. We're very pleased with their performance. What's truly notable about these three units is that they're all in new markets and they're all in completely different markets, but they're all doing Well, we're very pleased. And so I think this is a great bellwether in terms of the portability of our concept across the country.

Also, Sherm Oaks opened last weekend. Of course, it's still short, but we'll let you know that it's a great start. Another big thing that was encouraged was that there were still a lot of new customers. I felt that there was still a lot of room for improvement in the existing market.

So Sherman Oaks opened very recently, so it's a little bit early to discuss it in too much depth, but we've seen a very strong opening. And one of the things that was of most interest to us was that a lot of the customers that were coming into Sherman Oaks were new customers. So that leads us to believe that there's still plenty of room to infill our existing markets, especially given that Southern California, which is where Sherman Oaks is located, is our densest market. And so between the portability and the infilling, we still feel there's tons of room for growth.

LA Korea Town and Washington DC, as you may have noticed, are located in a highly metropolitan area. The restriction has been lifted, but recovery is much slower compared to others. This is not because it is a new store, but because it is an existing store. So our remaining two stores that we've opened this fiscal year, LA Koreatown and DC, they're both in very metropolitan areas. And whether we're looking at new units or existing units, legacy units that have done very well historically, we're seeing pretty much across the board

that metropolitan sales are suffering the most. And so while restrictions are beginning to be lessened in those markets, we're still seeing a slower recovery for existing restaurants in those metropolitan areas. And we're expecting maybe a little bit longer than typical for Koreatown in D.C. to reach typical maturity. But just like how Texas has begun comping positively once all the restrictions have been lifted, We're very confident that Koreatown and DC are going to be strong performers over the remainder of their leases.

All right. It's encouraging to see the results. Thank you, guys. Thanks, James.

Thanks. And our next question is from Andrew Strazic with BMO Capital Markets. Please proceed.

Hey, good afternoon. I hope everyone's doing well. I actually had a couple more on Texas. I also find the positive comps to be very encouraging. So you mentioned that you think mid to high single digit off-premise mix is kind of an achievable normalized environment type of level. Is that actually what you're seeing in Texas right now from an off-premise perspective as you're comping positively? And are you actually in Texas operating at 100% capacity or are there some, you know, inherent kind of capacity limitations just in the operations there?

Yeah, we are operating at 100% capacities. We are continuing to ask guests to wear masks when they come into the restaurant and when they're moving around away from tables. But it is, you know, at effective 100% capacity, and we're able to do that within all of the laws within the state of Texas, you know, distancing and so forth. And I will speak just in general, that mid to high single-digit off-premises level. We've seen that consistently in restaurants that have had significant amounts of indoor dining capacity really across the chain, you know, in Texas and elsewhere for a period of time now. And that's another element that's kind of a barometer for us on what can be a sustained kind of off-premises level.

Since we have opened up Texas to 100%, our off-premises sales in that market have not fallen below mid-single digits. Not a single Texas store is selling low single digits in terms of off-premises. And so this is hugely encouraging, given that it's our only market that's at 100%, but the off-premises remain sticky.

Okay, that's great to hear. And my second question, you know, I'm just curious, as you've kind of fully restored where you could the conveyor belt, service model. Have you seen any change in the way that people are using the brand? Are you seeing more touchpad ordering? Is the mix all the same? Day parts, week parts, any other just broad changes? It's obviously such a high-touch and vibrant environment. I'm just wondering if you're seeing any kind of nuanced changes to how customers are using the brand.

Sure, I'll answer this question. First of all, we're a little surprised, but So it's actually been quite surprising for us. Right now, all of our restaurants are open with a full-curve experience.

And we really haven't seen too much change in consumer behavior, whether we're talking about menu preferences or the mix between things that are taken off the belt versus things that are ordered through the touch panel, how long guests have been, how long guests typically take to finish their meals. It's been surprisingly stable.

That's right. post-pandemicでもいくつかのセーフティーメジャー、今取っているものは残していくことも検討していきますし、やはり大きなところではお客様、コンタクトレスのオペレーションを望むというふうに思っていますので、引き続き我々システムをしっかりインプルーメントすることによって、よりコンタクトレスなオペレーションを目指していきたいというふうに考えています。 This being said, we do believe that safety and restaurant safety, food safety is going to be

more present in diners' minds than prior to the pandemic. And so all the safety measures that we've rolled out through the pandemic, whether that's the plexiglass or cleaning procedures, all those are going to remain in place. And we're also working to develop our systems further to provide for a more contactless experience so that if there are guests that are concerned about high-touch places, that won't be an issue for them.

Okay, great. And then just quickly, my last one. We're hearing from a lot of people about the challenges in the labor market, hiring, and how competitive that is. I'm just curious, as you're looking to ramp up the store growth, be more aggressive there into 2022, I guess, just can you comment on how you're finding the labor environment to be for the brand, please?

Sure. Of course, the whole industry is in trouble, so we are also experiencing challenges, but we have been strengthening the recruitment team in advance, and we have managed to manage the minimum number of customers at most stores so far. There are some difficult stores, but we have been able to cut through with support from other stores and manage the operation without any problems. Of course, we will continue to increase the number of customers The hiring has been an issue industry-wide, and certainly we've experienced this as well to some degree.

We're doing our best to try to get in front of the issue by building out our recruitment team. Our recruitment team today versus the size it was prior to the pandemic is completely different. Through their strong efforts, All of our restaurants are able to operate without operational issues with their current staffing in place. But we realize that with the fiscal 22 pipeline, management is critical. And so we're actually hiring earlier than we typically do for management candidates. We're ramping up hiring efforts, preparing for that June 15th date that Governor Newsom has mentioned as a potential date that we might be able to reopen. We certainly want to make sure that we're adequately staffed to capture all that demand.

Okay, great. Thank you very much for all the color. Thank you.

Thanks, Andrew.

And our next question is from Jeremy Amblin with Craig Allen.

Thanks, and well done on navigating this challenging environment. Just a follow-up on the off-premises sales here. Could you tell me what the average ticket for your off-premises sales versus your in-store ticket has been in that Texas market?

Sure. Steve, do you mind if I take this?

Yeah. Yeah. Go ahead.

Go ahead. So the off-premises ticket has been about low 30s, whereas the indoor dining has been low 20s. But I would caveat that it's unclear what the party size, so to speak, is for off-premises dining. orders, it's possible that they're splitting these or it's entirely possible as well that off premises just leads to a larger ticket. People sort of order a bigger basket.

Right. Understood. But helpful info. In terms of, you know, I think that's kind of a remarkable thing where, you know, off premises was de minimis. a couple of years ago, and now it looks like it could be mid-single digits, maybe even high single digits on an ongoing basis, totally changes what was already an impressive store economic model. Does it make you think about potentially changing the type of real estate that you have or building the box a little bit differently to make your off-premises sales may be a little bit more customer-friendly, because I don't know that the restaurants right now are designed optimally for off-premises sales.

First of all, in terms of the design of the cycle collection and the store that supports off-premises, we expect that demand will continue to remain, and new stores will In terms of prototype, we do expect our off-premises demand to be steady post-pandemic, and so our future restaurants are going to feature

dedicated pickup areas just for off-premises. We may see if there are additional efficiencies we can find in the back of the house, just in terms of building a kitchen layout that's more conducive to parallel operations for off-premises and in-store dining. In terms of the type of real estate, certainly this is now a part of our site selection criteria. For instance, before, curbside dining was not a consideration. Now, if we have access to a curb, it's a bonus. And so that's These off-premises opportunities are just part of the overall site selection suite now. I wouldn't say that, you know, we're doing anything as aggressive as rolling out drive-thrus or, you know, anything like Starbucks is doing and having like standalone kiosks with drive-thrus. But we do understand that off-premises is an important part of our business, and we're trying to make sure that we make most of it.

As for the store size, of course, we will consider the Off-Premises part as well. Other than that, we are also analyzing the performance of past stores, the relationship between store size and ROI. So, as an Off-Premises, we will consider which store size will be suitable in the future. For example, if it is a metropolitan area, small size may be a good fit, and if it is a suburb area, a large store may be good.

In terms of our store size, we'll be treating off-premises opportunity as just one factor. Similarly, how we'll be treating it for our site selection criteria. Whatever we determine the size for a given store, we're trying to maximize our return on investment. And so the store size for a given place is going to be influenced by the off-premises opportunity. Generally speaking, I think the patterns where metropolitan areas tend to trend smaller and suburban areas trend larger are going to stay in place, but we do have a new additional consideration which we think will help us hone in on that much more opportunity.

Finally, I would like to emphasize that Of course, Off-Premises affects the size and design of the store, but it's a 20-year lease. So, when it comes to the size selection, such as the size of the shoe, the area, and the city, it's more important to analyze the success of the store in the past than the Off-Premises. Other than Off-Premises, it's the most important.

The message that we want to leave you with is that while off-premises is important, it's really just one factor in terms of our decision making. We're not going to be deciding which states we're going to enter or not enter based off of the off-premises opportunity. We're not going to be building our market strategies around this. But it will just be a standard part of every decision-making process in our site selection going forward.

Great. And that was my next leading into my next question about your future store openings. And, you know, you've had success now in certainly Fort Lee, New Jersey, really impressive given, you know, kind of the restrictions around there, Florida, Michigan. you know, D.C., I think you're going to the state of Washington as well. In terms of thinking about the next, you know, 10 locations or 20 locations, you know, what percent are likely to be in existing markets versus, you know, looking into new markets like Michigan or New Jersey, Florida, etc.? Sure.

So this is a point of ongoing, uh, reevaluation for us. We're always trying to decide what the ideal mix is, but for the last several years, we've pursued a two prong strategy of about an even mix between infilling existing markets and entering new markets. That's worked very well for us. We think it's been very useful in terms of establishing our brand presence. Uh, just given how few units we have, we think that the best way for the country to get to know us is by going around the country. And so, uh, The new market strategy has been very successful for us. Just as Jimmy mentioned earlier, with Sherman Oaks drawing so many new guests, there's still abundant opportunity in filling existing markets. And so for the foreseeable future, we're going to be continuing this strategy. Of course, if conditions change, we want to maintain our flexibility and respond appropriately.

Okay, great. And then last couple here. In terms of thinking about food costs in the near term, given of where your business mix is, should we assume that your food and beverage costs are going to be a little closer to that 35% level seen in Q2, in Q3, as Texas continues to be outsized in terms of percentage of mix?

Yeah, Jeremy, I think it is wise to keep in mind the mix of our business because it does have an impact. And that was at least some of what you were seeing in the 35% COGS level for the quarter. And then I would just say, generally speaking, if you're thinking about food costs, really, and labor to some degree, if you're thinking about a normalized environment and kind of our normal store economics, one is we believe we'll be able to get back to the kind of store economics we saw pre-pandemic, but really both of those costs in their own ways are affected by operating at something below historical sales levels. In the area of COGS, in addition to that market balance of sales, there are elements that are COVID related that can put some pressure on cost of goods around having to move Phil Kleisler- inventory around or substitute some items when when demand is just a little bit harder to project and then even some level of spoilage you know we always endeavor to have none but. Phil Kleisler- But in an environment like this there, it can get more complicated in the supply chain and create occasions of some spoilage and so. Phil Kleisler- You know, looking at where cogs is you can maybe think about it, you know, not necessarily as a linear. move, but, but you look at where we are now and then, you know, where we spend historically. Oh, we get to a normalized world. You know, you can probably anticipate something in between. Um, and then labor, of course, with the minimum staffing requirements and restaurants, you know, we ran a 47% labor for the quarter where historically, you know, low 30% is where you seek to be. And it really does take back to pre pandemic. kind of volumes and leveraging of hourly staff in order to optimize or get, you know, all the way there again on labor. And I would say just like COGS, you know, it's not necessarily a linear progression, but, you know, there should be some element of understanding that if sales productivity isn't back to pre-pandemic, the leveraging of labor, you know, it's just a challenge until that happens.

understood um fair to assume though that you know your labor costs here in in uh certainly in the may quarter are likely to track to your kind of the highest levels overall uh versus during the time during the pandemic meaning that you know above that 4.4 million that you you had in in the november quarter yeah i would you know you know thinking about labor as as a percent of sales

is probably a good paradigm or place to start from in terms of restaurant economics. And with the move in March to a better monthly volume, over 5 million versus about a 3 million average in the prior quarter, yes, that does create some degree of labor leverage improvement and percent of sales improvement on labor But as we all know, that move in March sales, we still have a journey to get back to pre-pandemic levels of sales. And just the same, getting back to pre-pandemic levels of labor leverage. We're on the path, but work to do still.

Sure. Understood. Great job, guys. Thanks for taking all the questions. Good luck.

Thanks.

Thanks, Jim.

Thank you.

And our next and final question is from George Kelly with Wealth Capital Partners.

Hey, everyone. Thanks for taking my questions. So maybe I'll start with, I have a two-part question for you on menu pricing. So the first part of that is, I go through and I just check your various restaurants' menu prices, especially just for the conveyor belt pricing, and I've seen some modest increases in California recently. So I was curious, what have you seen in the past when you take pricing? And then part two, just earlier in response to one of the questions, you commented just, you know, the world's going to look so much different post-COVID with the competitive landscape. And so I was curious if you think longer-term pricing could be more of a a lever than it has in the past?

Sure, I'll answer this question, George. First of all, in California, when it comes to pricing, the minimum wage that we do every year goes up, but at the offset level, we made a modest price increase. This is the case up to now, but In terms of the California pay price increase, this is the same thing that we've done in past years where we peg a minor price increase to offset minimum wage increases. We haven't used it to increase margin. It's really just to

offset that minimum wage increase. One real advantage that we have is that we have a small plates menu. So the pricing that we take is on an order of 5, 10, 25 cents. It's not like a traditional entree-based meal where you've got this big protein, this head of the plate that's gone from $40 to $60 or $40 to $50. We've really had minimal pushback in the past as demonstrated by, we've never seen a drop in traffic as a result of pricing. And as far as we can tell from our March results, the same is held true for the most recent pricing.

As far as we can tell from our March results, the same is held true for the most recent pricing. In terms of pricing, we're ready to re-evaluate market by market what the appropriate pricing is. In the past, our pricing has purely been a response to minimum wage increases, but we're thinking going forward, there might be other

occasions for us to take pricing as well. There are a lot of different possibilities that we're open to but nothing concrete right now. The last thing we'd like to mention on pricing is that we really do pride ourselves on being a concept that can provide sushi for everybody. We don't want to price anybody out. We want sushi to be an everyday accessible thing for many more people than it's been in the past. And that's always going to be something that we keep our eye focused on whenever we take pricing.

Okay. Okay. That's very helpful. Then second question for me, going back to Texas. So this might be a quick answer, but curious if you could break down the comps that you've seen within your portfolio there. And what I'm trying to get at is, are there any urban locations that are maybe dragging down, even since the reopen in March 10th or whenever you said it was, are there any locations that are dragging that down? And what I'm trying to learn is, is Is there a base of stores performing well above that sort of, I think you gave a low single-digit positive comp. Is there a group of stores performing well above that?

George, just to speak a little bit to that, we have seen a little bit of difference, and some of that we would attribute to just the market-by-market sentiment towards COVID and how much they were affected during the worst parts of it. An example is is Houston from a comp standpoint, um, hasn't been relatively speaking as strong coming back out of it as, as Dallas has. And, and, you know, if you, if you know that market at all, you know, and understand just how much, you know, Harris County and the Houston area was affected and kind of what sentiments are around COVID restrictions and, and how, how that contrast with a market like Dallas, you could probably guess that there might be a, a quicker rebound in a, in a Dallas market. So we, we really attribute more of that to, to, you know, a, a, a COVID COVID point of view than anything else. Uh, the fluctuation there, but really as a whole, I mean, we're very pleased with, with what we've seen early on granted, but, but with what we've seen in Texas all around.

Okay. Okay. I guess just to dig a little deeper on that. So is it, are there some, uh, metros in Texas where you'd have 120, you'd have 20% comps or is that, is that way too high?

Yeah, I, I, I don't think I want to get into calibrating too much on a, you know, a store level or a sub market within the state. I think it would suffice to say that across the board, I mean, we're, we're, we're happy with the, with the, the customer reaction in Texas as we've, come back online, you know, to full capacities in the restaurants. And we think it bodes well for, you know, ultimately for every part of the state.

Okay, understood. And then last question for me, G&A, I think the guidance was 300K, 300 to 310 per week. That's a pretty big step up from where it's been trending. What are those investments that you're making?

It's really in the team side of things in a couple of aspects. One, there had been freezes on compensation increases through the pandemic period. There was a period of time where at that level, we had salary reductions in place that now with more visibility on where COVID headed, that's reverting back to standard levels. And then also, really, we had held off or deferred the hiring intended for the current fiscal year until we saw and felt better. And so there are some areas in the organization that if we're going to grow the business in the smartest way possible, we think it's going to be a few supplements to the team, really, in a number of different parts of the business. Ben talked about Rick Warren, Recruiting, for instance, as an area where we brought on some additional resource, given the labor environment and just knowing you know our plans to be more front front ended. Rick Warren, With our growth plan and 22 and and just other ways to analyze the best places for us to be and that you know operate delivers on the brand promises we as we move forward. These are hot always intended for this year, but we had held off on until we had more visibility.

Okay, thank you. Thanks, George.

And ladies and gentlemen, we've reached the end of the question and answer session. I'd like to turn the call back over to management for any closing remarks.

Again, thank you for joining us. We look forward to seeing you at our next earnings call. Thank you.

Thank you guys. This concludes today's webinar. Thank you for your participation and have a great day.