Kura Sushi USA, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Cura Sushi USA Inc. Fiscal Fourth Quarter 2022 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 Yuba, President and Chief Executive Officer, Jeff Yutz, Chief Financial Officer, and Benjamin Porton, Senior Vice President of Investor Relations and Business Development. And now I would like to turn the call over to Mr. Porton. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal fourth quarter 2022 earnings release. It can be found at www.careersissue.com in the investor relations section. A copy of the earnings release has also been included in the 8K 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 on your 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 SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Also during today's call, we will discuss certain non-GAAP financial 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 reconciliations to comparable gap measures are available in our earnings release. With that out of the way, I'd like to turn the call over to Jimmy.

Thank you, Ben, and thank you, everyone, for joining us today. It's great to be able to report a strong close to a banner year. We broke sales records and unit growth records and achieved an all-time high on our restaurant-level operating profit margins. We further improved our portability by entering and succeeding in three new states and many more DMAs. We implemented many new innovations at our restaurants, allowing us to scale successfully as we continue to pursue aggressive growth. It's been a great year. Now I would like to discuss our fiscal fourth quarter results and touch on some expectations for the coming fiscal year. We continue to see strong sales performance in our fourth quarter with sales of $42 million, a 50% growth over the prior year of $27.9 million, and comparable sales growth of 27.6% as compared to the prior year period. What's remarkable about this figure is that our comparable sales growth has far outpaced the pricing that we've taken over this period. as we saw traffic growth of 14.6% over the prior year. Traffic growth in California was especially robust at over 20%. As a reminder, California reopened for full indoor dining on June 15, 2021. The traffic gains we saw in California materially outperformed our expectations. relative to the benefit of two weeks of additional operating capacity in fiscal year 2022. On that note, I would like to discuss regional performance. In the fiscal fourth quarter, California saw comparable sales growth of 32.7% compared to the prior year period. In Texas, we saw comparable sales growth of 19% as compared to the prior year period. These geographic torrents reflect the previous comparative benefit California had in last year's operating restrictions. Off-premises sales were $1.2 million, with a mix of 2.9%, consistent with our near-term expectations for a low single-digit off-premises mix. This torrent performance resulted in a fiscal year 2022 AUV of $3.8 million. which is an increase of $1.7 million over the prior year AUV of $2.1 million, as well as a healthy improvement on our pre-pandemic AUV of $3.5 million. To provide some context for our comparable sales, I would like to go over our recent pricing history. We took pricing of approximately 8% in September of 2021 pricing of approximately 2% in March 2022, and closed out the fiscal year with pricing of approximately 6% in July 2022. Following our wrapping of September 2021, our current year-over-year effective pricing is a little bit less than 8%. Again, our comps for the fourth quarter on a single-year stack were approximately 28%, with effective pricing of approximately 14% over the same period. We are exceptionally proud to say that our comparable sales gains are not being driven solely by pricing, and we have seen no discernible traffic growth, and demonstrated by the previous mentioned 14.6% of year-over-year traffic growth in our fiscal fourth quarter. Now I'd like to discuss what I'm sure is top of mind for everyone in the restaurant industry. Inflation, labor availability, and consumer strength. Our COGS as a percentage of sales was 30.7%. While this 30.7% figure is still very strong from a historical perspective, it was noting that we saw a 100 basis point increase in COGS relative to our fiscal third quarter. due to commodity inflation, which we were not able to fully offset by pricing. On the other hand, labor as a percentage of sales improved to 28.9%, driven primarily by price and seasonal sales leverage, and supported by the full rollout of robot servers, table-side payment, and touch-pandering order systems. have progressively eased, and our current staffing, excluding newly opened units, is over 95% of optimal levels. In spite of unprecedented inflation, we were able to deliver an all-time best in restaurant-level operating profit margin of 23.9% in our fourth quarter. On a full-year basis, our restaurant-level operating profit margin in fiscal 2022 but 21.2%, which is an improvement of more than 100 basis points over our pre-pandemic historical results. I believe that consumer demand for Kura Sushi remains very strong in spite of inflationary concerns and potentially pressures on discretionary spending. First, we are fortunate in that our historical and current site selection strategy prioritizes markets that over-indexed with high-income residents, and so the fuller guest is that much more resilient as a customer. Second, our value proposition remains excellent. In spite of the pricing that we've taken during the pandemic, an internal survey of sushi restaurants indicated that our menu pricing is approximately half of those set by local competitors. There has been a lot of discussion about consumers trading down, and we think there's an amazing opportunity in capturing first-time guests that were trading down from their local mom-and-pop sushi restaurant. This will be a key strategy for growing sales in fiscal 2023, and we expect to make additional marketing investments in order to best take advantage of this opportunity. The health of the cooler consumer is demonstrated by our Q2 data sales. We saw September sales of $13.5 million and October sales of $13.3 million, with year-over-year comparable sales growth of 11.5% and 6.3% in September and October respectively. I believe these comps are particularly strong. when considering the tough comparison as we lap the 8% pricing we took in September 2021. As further demonstration of strength of the cooler consumer, our per-person sushi plate consumption during the quarter to date has actually shown modest growth relative to our fiscal fourth quarter. Average check sizes have also grown modestly compared to our fiscal fourth quarter. Moving to development, in the fourth quarter, we opened three new locations, Novi, Michigan, Vineland, Florida, and Tysons Corner, Virginia, making for a total of eight new unit openings for fiscal year 2022. As you may have heard on other earnings calls from our peers in the industry, we are continuing to see headwinds in construction caused largely by shipping delays and delays in permitting from local governments. I'm very proud of our development team for achieving 25% unit growth this year while working under these conditions. I believe that much like fiscal year 2021, our class of new units from this year have the potential to be one of the best classes we've ever opened. Development for fiscal year 2023 is off to a strong start, and we expect three new units to open in the next several weeks. Two of these units will be in the new market of Philadelphia, Pennsylvania, and at the Mall of America in Minneapolis. And the other unit is set to open in Jersey City, New Jersey, which is a market that has delivered remarkable results with our photo relocation. On another note, I would like to formally welcome our new Chief Financial Officer, Jeff Yutz. Jeff has a truly remarkable career in the restaurant industry, including growing Yardhouse from only three units and ultimately leading its sale to Darden, to leading Shake Shack's blockbuster IPO in 2015. Jeff has only been with us for a month and has already proven himself to be an incredible addition to the team, and I couldn't be more excited to have him as one of Cura's leaders. Finally, I would like to thank all of the team members that have made this great year possible, both at our restaurants and our corporate support center. Cura has grown so much over the last several years, and it's great to see our employees grow alongside us, and for our management pipeline to be filled with internal promotions. And with that, I'll turn it over to Jeff to briefly discuss our financial results and liquidity. Jeff?

Thank you, Jimmy. I am humbled and honored to be part of this amazing company and to have joined a best-in-class management team. I believe we are poised to become the industry leader in sushi, and I couldn't be more excited about the future. For the fourth quarter, total sales were $42 million as compared to $27.9 million in the prior year period. Comparable sales growth as compared to the prior year period was 27.6% with regional comps of 32.7% in California and 19% in Texas. Turning to costs, food and beverage costs as a percentage of sales were 30.7% as compared to 30.8% in the prior year quarter due to pricing taken over the course of fiscal year 2022, largely offset by food cost inflation. Labor and related costs as a percentage of sales decreased to 28.9% from 29.9% in the prior year quarter. Excluding the impact of the employee retention credits recognized in the prior year, labor as a percentage of sales in the prior year would have been 34.3%. This decrease is due to sales leveraging from pricing and operating conditions that allowed for full indoor dining capacities. This leveraging was partially offset by wage increases. Occupancy and related expenses as a percentage of sales improved to 6.5% from 6.8% in the prior year quarter, primarily due to higher sales leverage, partially offset by higher pre-opening lease expense. Other costs as a percentage of sales decreased to 12.4% compared to 12.9% in the prior year quarter, also due to higher sales leverage. General and administrative expenses as a percentage of sales decreased to 13.3% as compared to 18% in the prior year quarter, largely due to higher sales leveraging from an expanded system base and normalized operating conditions. On a dollar basis, general and administrative expenses were $5.6 million as compared to $5 million in the prior year quarter. Operating income was $1.9 million as compared to an operating loss of $762,000 in the prior year quarter. As a percentage of sales, operating income was 4.6% as compared to negative 2.7% in the prior year quarter. Income tax expense was $61,000 compared to $18,000 in the prior year quarter. Net income was $1.9 million or 19 cents per diluted share compared to a net loss of $834,000 or negative 9 cents per diluted share in the prior year quarter. On an adjusted basis, net income in the fiscal fourth quarter was $2.1 million or 21 cents per diluted share compared to the prior year quarter's net loss of $1.4 million or negative 15 cents per diluted share. Restaurant level operating profit as a percentage of sales was 23.9% compared to 16.4% in the prior year quarter. Adjusted EBITDA was $4.8 million compared to $619,000 in the prior year quarter. Turning to our cash and liquidity, At the end of the fiscal fourth quarter, we have $35.8 million in cash and cash equivalents and no debt. Lastly, I would like to provide the following guidance for fiscal year 2023. We expect total sales to be between $183 and $188 million. We expect general and administrative expenses as a percentage of sales to be approximately 16%. And we expect to open between 9 and 11 units with average net capital expenditures per unit of approximately $2.5 million. And with that, I'll turn the call back over to Jimmy.

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

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And our first question will come from Joshua Long of Stevens, Inc. Please go ahead.

Great. Thank you for taking the question. And Jeff, nice to hear from you again. Glad to have you aboard. When we think about the results in the quarter, I was hoping you might be able to talk about some of the strength that you've seen. Obviously, the regional strength is helpful context, but as you think about that momentum continuing into the first part of your fiscal 2023, can you talk about just the underlying pushes and pulls there? Do you see that as momentum for the brand on top of just the consumer looking for those unique experiential concepts which you offer? Just any sort of context you could help there to frame up kind of how your consumer is doing, and, you know, that underlying momentum would be helpful.

Thank you, Joshua, for your question. Please allow me to answer in Japanese. Ben is going to translate. First of all, Ben, in terms of regional, looking back at Q4 results, the biggest difference is comparable. Last year, in terms of Alphornia, the first half of the 6 months, India wasn't able to do that. That's why there's a difference in Q4.

To start with the regional comps, the disparity that we saw between California and Texas is really just an artifact of the easier comparison that California had due to the first two weeks of June only having 50% seating capacity and then just sort of the ongoing traffic recovery that we saw last year. And so that's really the only reason that California is better comps than Texas this time.

Also, as I mentioned in the Prepaid Rematch, the Comp Sales of Q4 is about 28% in September and October. I think this is a great result, but compared to that, September is 12%, and October is 6% in Comp Sales. So it's true that growth is slowing down a little. And the conclusion is that the future Comp Sales estimate is not 28% of Q4, Q4, we truly exceptional comps with year-over-year comparable sales growth of almost 28%. As Jimmy mentioned in the opening remarks, in September and October, we had comps of about 12% and 6% respectively.

So Q4, we truly exceptional comps with year-over-year comparable sales growth of almost 28%. Those are going to be probably more representative of the overall comps we can expect for Q1 relative to Q4.

And for the sentiment part of the customer, as I mentioned in the Pre-Pair Remarks, we are looking at the consumption of one plate in September and October. We are looking at this as the most important indicator. Such as Average Check, compared to Q4, it is a bit mild, but it is increasing. Because of that, our customers are still So we also touched on this a little bit in the prepared remarks

But in September and October, one of the truly reassuring things that we saw in terms of guest sentiment was that the per person sushi plate consumption had not gone down at all. In fact, we'd seen modest growth. That's the primary way that we monitor consumer elasticity, just given that you build your check plate by plate. And so if there is a threshold, you can see them manage that check. But the average checks have also grown as well, modestly, but see per person consumption and average checks remain very stable in spite of the pricing that we saw in July indicates that we really don't think that the guests are sensitive to the pricing at all. In terms of the deceleration for comps relative to Q4, I think this is more an externality or just a reflection of the overall everything that everybody's seeing in the industry. I think people are just going out less frequently. But when they do come, they're not managing their check. And so it's clear that our guests are not yet sensitive to the pricing that we've taken. And again, as Jimmy mentioned earlier, in spite of the pricing that we've taken, we're still approximately half of the price of our local competitors. And so we still remain a truly excellent value.

That's why we should do what we should do. Currently, we're going to other shops. And so one of the main themes for Fiscal 23 is going to be our focus in capturing guests that have yet to go to Kura but go to other sushi restaurants. As everybody knows, we have a truly unique dining experience that you really can't get anywhere else.

Coupling that with the fact that we're priced at approximately half the price of our competitors makes us truly appealing. And so we're really going to be leading in to capture new guests.

Got it. Thank you. That's very helpful.

On that last point, when we think about that pricing, maybe opportunity or just the current state of it, balanced against the inflationary environment, what are your thoughts on pricing going forward? It seems like there's perhaps room where you could take incremental pricing and still be a value, but also just noting that your last point there in terms of getting more people into your concept and into that funnel, how do you think about pricing on a go-forward basis?

まずプライシングを話す前にコックスのコモディティインフレーションの見通しも説明しないと多分わからないと思うのでそちらも同時に説明したいと思うんですけども結果から見るとご存じの通りQ3と比較してQ4は So in terms of pricing, I don't think we can really meaningfully discuss it without giving the context of COGS. And so we saw commodity inflation of approximately in the high single digits

zone over Q4, over the course of Q4, we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23.

So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 23. So we're expecting We plan to take pricing in Q2, given the inflationary trends that we're seeing now. We're going to be monitoring it very closely, and that will determine the magnitude and timing.

That being said, we don't expect the pricing that we're going to take to fully offset the inflation that we're seeing. Last year, we had our company best in terms of COGS at 30%. We don't think that the pricing will – it's unlikely that the pricing will get us back to 30%. But when we take price, we don't think just about managing COGS or driving COGS down to a certain number. We think about the overall restaurant profitability holistically. And so that's really going to be the North Star for us in terms of pricing.

Especially for labor, as you can see from the Q4 figures, there were good numbers. Also, the rent, the cost of gas, and other costs are fixed, so the prices will go down. So, assuming all of these things, I'm going to repeat it again, but I'm looking at it from the perspective of maintaining the overall profit rate of the store, so I'd like to tell you that.

And looking at our labor numbers, you can see that there was a material improvement in labor costs from Q3 to Q4. And so when we take price, we look at our occupancy costs, our DNA, other fixed costs, and the pricing that we take allows us to better leverage those costs. So it's not just a matter of lowering COGS. It's really a matter of the overall profitability.

Of course, of course. At this point, the reason I explained earlier is that the number of existing customers is very limited. Of course, if we increase the number of customers, it will increase the number of customers who will go to other places. This is not zero. I think this is honest. I will repeat it earlier. There are people who pay twice as much as other restaurants. Today, with the pricing that we've taken, we've really seen minimal traffic loss, and that's been really great.

But we're absolutely cognizant that there's always a possibility for traffic loss. And value proposition is always relative. So if you're used to going to Kura, and you're coming here every month or so, the price that we take is a lot more visible. But for people that have never been to Kura, there are a lot of sushi lovers that are paying twice the average Kura ticket. And so for those people that have never been here, it's an overwhelmingly great value. And so we know those guests exist, and it's just a matter of getting them to come to our restaurants.

Very helpful.

One more, if I may, when we think about the high single-digit inflation that you've seen across your food basket, can you break that out a little bit and provide some more context around it? I know we've talked about you having a broad basket with, you know, also some opportunity from the sourcing that you have on the seafood side internationally, but just curious where you're seeing some of that inflation and just trying to add some context to the COGS margin that you reported for the quarter. It was, you know, Still down year over year, but up sequentially versus 3Q. So just trying to understand how some of those, you know, pushes and pulls played out during the quarter.

First of all, regarding the breakdown, I'd like to provide a proper breakdown of the 1-on-1. In a big way, despite the variety of baskets, the reason why there's been an inflation in the third quarter in a row is because of the pandemic. The vendor is a stockholder. After that, we had to recover our demand rapidly and sent a lot of stuff. So, not just the top 10 items, but a wide range of items, we had to collect them, not just one company. Before the pandemic, we could lock the price properly for 6 to 1 month for the main items, but we couldn't do that during the pandemic. Even now, we can't do that. That's the background of the situation. Instead of a breakdown, I'd like to explain the background. I expect it to calm down around Q3 next year. I'd also like to talk about other measures other than raising the price. It's a little calmer today, but the dollar is relatively strong against the Japanese yen, so I'd like to take advantage of that environment and import more fish from Japan. I'd like to offset it from Q3. Sorry, it's a little too much.

So certainly we do have a broad basket, and that's one of the reasons that we've been able to mitigate the inflation. But there has been ongoing headwinds ever since we entered the pandemic. Typically, we're able to lock in six-month pricing for our big main purchases, which gives us a level of stability with COGS. But with huge spikes and drops in demand as a result of the pandemic and post-pandemic, we're not able to get we're not able to get all of our, say, like, tuna from the same vendor in the way that we would have in the past. We need to go to a variety of smaller vendors to get everything that we need to make sure that we have all the ingredients in place. And so, A, you don't get as much of a, you know, scale benefit because you're dealing with a lot of different vendors. And because they're smaller, they can't lock in prices for six months at a time. That being said, we're hoping that this will, you know, this doesn't go on forever and as the vendors are able to predict demand more accurately, we'll begin to see moderation and hopefully be able to lock in prices again in the way that we have historically. One thing that we're looking forward to in terms of mitigating inflation outside of price is taking advantage of the four exchange rates between the U.S. dollar and Japanese yen. The U.S. dollar's basically at an unprecedented high relative to Japanese yen. And we know that if we source directly from Japan, we'll be able to benefit from that. The reason that we haven't seen that upside just yet is that we're still in the process of exhausting our existing supply. But once that's gone, then we can take that much more advantage of the exchange rates. And so we're hoping that we can see some impact in that beginning in the back half of the year.

Thank you.

The next question comes from Andrew Strzelczyk of BMO Capital Markets. Please go ahead.

Hi, this is Daniel Gold on for Andrew Strzelczyk. Thanks for taking the question. Can you speak to the performance of your units in new markets and what new or existing markets you are excited about expanding in next year? And as a follow-up to that, can you speak to your pipeline of LOIs, signed leases, and what you already have under construction?

First of all, there were three new states in FY22, and both of them are very successful. Especially in the new market, we support our portability, so we are very encouraged. Based on the success of FY22, including these new restaurants, we are going to reflect on the aggressive unit growth rate of FY23, which was announced by the guidance this time.

In terms of fiscal 22, we entered three new markets. We were successful in all three of those new markets, which always is a huge source of encouragement for us, just given that it continues. It's further proof that we're able to prove our portability nationally. The fiscal 22 units, even outside of the new markets, have been very, very strong. And the strength of those units is reflected in the aggressive unit growth that we've guided towards for fiscal 23.

And the strength of those units is reflected in the aggressive unit growth that we've guided towards for fiscal 23. And the strength of those units is reflected in the aggressive unit growth that we've guided towards for fiscal 23.

And then looking at the pipeline for fiscal 23, the new markets that we'll likely be entering will be Minnesota with that Mall of America location, Philadelphia and Pennsylvania, and then New York State. Each of the locations in these three new markets are excellent, and so we're very excited. In terms of markets that we'll be infilling, we're currently in the process of We're wrapping up construction in Jersey City, which will be our second location in New Jersey. That has been an exceptional market for us, just given the strength of Fort Lee right out of the gate. And so we're going to be opening our second New Jersey location and possibly a third New Jersey location as well.

And just a last one for me.

In regards to staffing levels, I know you had made great progress in 3Q. Where are you at today? Have you reached optimized staffing level?

Where are you at today? Have you reached optimized staffing level? As Jimmy mentioned in the prepared remarks, our current staffing levels are over 95% relative to their optimal levels. So really, the best position we've been in since entering the pandemic, all of our restaurants are operating

They're full operating hours. We don't have any restaurants that aren't able to service to-go orders because of throughput constraints. And so we're very pleased with the staffing levels as they are now. The recruiting team, the training department, the marketing team, the new store opening team, they've really been doing a tremendous job in terms of hiring and retention. We also rolled out three new initiatives over the course of fiscal 22, being the robot servers, the touch panel drink orders, and the table-side payment, and those have introduced efficiencies, but they've also improved the take-home pay of our employees because they're able to serve that many more tables, and it's simplified their operations. And so these combined efforts have gotten us to a place that we feel really good about.

That's great to hear. Thank you. Thank you, Daniel.

The next question comes from Sharon Zaxia of William Blair. Please go ahead.

Hi, good afternoon. It's good to talk to you guys and hear Jeff's voice again. You know, I guess I'm curious on the GNA guide for the year. I think it was probably a bit more than a lot of us had expected. Is part of that increase due to what you were alluding to, Jimmy, with marketing, is that kind of where that would go on the P&L. I don't know if it goes there and other ops for you. And can you talk more about how, you know, what kind of marketing you're thinking of to bring in more customers? And as you think about revenue guidance with more marketing, and this might be a Jeff question, what do you assume kind of the return is on that marketing?

Yeah, As for marketing, the percentage of sales compared to FY22 is a little higher than FY23. However, revenue increases, so the dollar amount increases. In such a place, the amount of budget that can be used increases. As for another direction, as you know, we have been focusing on increasing the return frequency of existing customers such as reward members. As I explained earlier, So our marketing costs actually aren't in the G&A line, and so we'll just discuss marketing separately, and Jeff can take the G&A discussion, but

As, you know, the marketing cost is a percentage of sales. In fiscal 23 relative to fiscal 22, we're going to be a little bit higher. This largely reflects a shift in our thinking in terms of how to capture guests. Historically, our bread and butter has really been using our rewards system to get our existing guests to increase frequency. And now, you know, with what we're seeing in the overall sushi market, We've pivoted to thinking about capturing the massive potential of all these new guests that are trading down. And so we're making commensurate investments to be able to take advantage of that opportunity. Jeff, do you want to grab a T&A?

Yeah. Hey, Sharon. It's really good to hear your voice and everybody's voice again and be back on the earnings call game. It's fun. So I'm excited to be part of this. On G&A, as you guys know, my last two roles were in growth concepts. Where we are, G&A, both dollars and percentage of sales, is not unusual or unreasonable given where we are in our growth cycle. That being said, coming in the door, one of my main goals is to take a very, very hard look at G&A and figure out where we can potentially save some money. We've seen challenges everywhere from not only salaries, but as I'm sure you all know because you travel all the time, is the price of travel and airline tickets and hotels, but airlines in particular is through the roof. And so we're going to look at all that. And I've gone to every department head and asked them to get together with me. We're going to go through all of our existing contracts for things that do hit the G&A line and see if there's any opportunity to renegotiate some of those and With me coming in the door, it's a good time to go back to some of these people and see if we have an opportunity to save some money. That being said, one of the biggest mistakes you can make as a growth company to not have the support and the people in the support center to be ready for growth. And we do want to be ready for that growth. And while I'm going to take a very hard look at that GNA, we're not going to be shy about making sure that we have the right number of people and the right support in the office to support the growth out in the field and support our development team. So we are going to look at it. I am going to do what we can to get that down, but certainly not going to project or give any guidance that we're going to shy away from making sure that we have the people that we need to make our growth successful because we got to prepare for it. And I don't want to make the mistake of not being ready.

Thanks for that. And then, Jimmy, with all of the innovation you did over the summer, I know you talked about table turns and the employees are happy and getting more tips or take-home pay. I mean, did you have anything quantifiable you could share about customer satisfaction with the new technology? And I don't think you mentioned whether you've seen beverage attach measurably go with a full order systems, but by this time, I apologize.

Sure. Sharon, I'm happy to answer this question. First of all, when we introduced these three initiatives, the most important point is that in the industry where there is a shortage of people, by doing this, for example, we can reduce waiting times, and we can compensate for the lack of servers, so that the servers can To sort of go back to our thinking when we initially rolled out these projects, the immediate goal was to improve customer satisfaction

The industry had really hit a wall in terms of hiring. Wait times had gotten longer. Checkout times had gotten longer. And, you know, pretty much across the industry, the experience was not the same. And we wanted more than anything for our guests to come to the crew that they knew and loved. And so the initiatives were really, they were designed to allow our front of house servers to really focus on hospitality, which is where their value at truly is. And so we saw immediate change. upticks in customer service ratings as a result of implementing these. And, you know, the 28% comps that we saw in Q4, I think, are a clear reflection of just how well received they've been by the guests, given that the rollout was completed by the end of Q3.

As a result of that, the retention rate has increased, as Ben said. As a result of that, the retention rate has increased. Of course, there are times when the work is focused on hospitality work. And as a result, after putting these three in, we were able to run the work schedule with a small number of people. As a result, I think we had a half percent reduction in human resources. That's not just the reduction in human resources, but we were able to run with a small number of people, and the sales haven't changed, so the number of people has increased, and the retention has also increased. So, the reduction in human resources and the reduction in retention have had an effect, and I think that's reflected in the staffing level of the previous 95%.

In terms of its impact on employees, we've certainly seen retention rates improve as a result of the implementation of these initiatives. Now, the servers are really able to focus on hospitality, which is why they are interested in being servers in the first place. And as a result of putting all these features in, we've actually been able to operate these restaurants online. with fewer individuals, while also serving more people. And so certainly that's led to TIP growth, which is driving that retention improvement. Between the three initiatives, we've seen about 50 basis points in labor savings. And so it's certainly been a meaningful impact, and we think of it as a big success.

Also, one more thing about the drink order. This is something that we haven't really emphasized, but In terms of beverage attach rate, we have seen a modest increase in attach rate, not enough to really move the needle.

in terms of overall sales, but enough to know that it has had an impact. In terms of table turn times, it's still something that we're evaluating. Once we have our upgraded weight system implemented, we'll be able to get a much better view or a much more accurate view of table turn times, which will allow us to give you a more meaningful number in coming quarters.

Okay, great. Thank you very much.

Thank you, Karen.

The next question comes from Jeremy Hamblin of Craig Hallam Capital Group. Please go ahead.

Thanks for taking the questions and congrats on the strong results. I want to come back to the unit development and kind of the timing of that. I think, if I'm not mistaken, in Q4 two of the three openings occurred I think in the last week of the quarter. And in terms of the openings in Philly, Mall of America, Jersey City, I think those are probably two or three months behind what you might have been thinking four or five months ago. But I wanted to get a sense for A and Q for that shift in timing of openings, what type of revenue impact you think that might have had versus where you were thinking things were going to open back in, let's say, June. And then in terms of the FY23, the type of impact that you might be seeing, and if you could maybe help us to pin down a little bit of the 9 to 11 units expected for the year. I'm not sure if you were suggesting that three units were going to open before the end of the November quarter, or if it's two open and then maybe one opens in December, but Any more color you can share on the timing of when you expect the 9 to 11 units to open during the year, the cadence?

Sure.

So you are correct in that two of the three units that we opened in Q4 did open during the last week. And Philadelphia, Mall of America, Jersey City are running a couple months behind our initial expectations.

The reason is, as I said in the pre-paid remarks, the timing for the inspectors to come is a little longer than before. Also, after we have to re-publish the documents, the review period is very long. It's so long that it's ridiculous. There are such assumptions, and we are working hard to deal with them. However, this time, the guidance for 9 stores and 11 stores is based on the numbers we decided based on the ongoing delays that are happening now. Also, there is a cadence. In terms of what's driven the delays for the unit that we just mentioned, we sort of touched on this during the prepared remarks that

Really, there's been an unprecedented level of delays and slowness when it comes to getting permits, inspections, getting document reviews. The municipal governments are just overstretched, and there's really not much that we can do in terms of pushing them forward. That being said, the 9 to 11 units that we're guiding towards for fiscal 23 takes this into account. It's a number that we're very comfortable with. In terms of the cadence for the SOAR openings, We have five units under construction. We expect three Philadelphia, Mall of America, and Jersey City to open in several weeks. But it's pretty opaque. The remaining after that, so the remaining stores will likely open in the back half of the year.

Jeremy, did I answer all of your questions?

I'm sorry, Jeremy. Sorry, did I answer all of your questions?

Well, I think I was looking to see just the timing of what you would estimate the revenue impact was from just these pushouts in completion and actual openings. If you did $42 million in the August quarter, do you think that could have been $43 based on kind of prior timing? And then obviously it's certainly impacting the November quarter as well.

First of all, we would like to avoid a specific impact on the market, but we announced the AUV of 3.85 million yen, so I thought it would be possible to predict it with that in mind. However, Q4 had an opening delay, I'd like you to take a look at the Demon Slayer campaign. There was a sales up of about a few percent. I'd like you to consider this when you make a financial model. I'd like you to consider this when you make a financial model. I'd like you to consider this when you make a financial model. I'd like you to consider this when you make a financial model. I'd like you to consider this when you make a financial model.

So, we haven't really given sort of, you know, revenue, whatever numbers, kind of a weird way to put it. But, you know, our AUVs are 3.85 million. If you just sort of, you could take sort of a mid-quarter convention and work out the operating weeks, and that'll get you pretty close to the lost revenue expectations. In terms of Q4, we certainly did have opening delays, but the sales losses there were partially offset by the tremendous success of the Demon Slayer program. It probably had a low single-digit boost to overall sales. September and October might look a little bit weaker relative to Q4, but, again, they're not benefiting from the incredible popularity of the IP that we collaborated with during July and August.

Got it.

Okay, just a quick follow-up here then. Very impressive restaurant margin contribution in the quarter. In terms of, I think you noted that your food and beverage cost, you expect it to be maybe a little over 30% here during the year. In terms of the labor, and labor down at 29%, the sustainability of that, given that you're carrying the high single-digit pricing. Is that something that's reasonable? I mean, it seems like you guys got incredible efficiency during the quarter, but whether or not, even if it's not 29%, are you thinking that in that 30% range, isn't it an achievable figure?

First of all, Q3 and Q4, there are various factors. As a result, we got 28.9% which is a good result. To answer Jeremy's question directly, basically Q4 numbers are sustainable and we assume that we can think of it as a new base in the future. However, from here, there are three factors. The past seasonality, Q4 has the highest sales and Q1 has the lowest sales. How much has the percentage of human resources changed in the past seasonality? So, long story short, we do think that the improvements that we saw in Q4 are sustainable, or at least part of it. There are a number of puts and takes that we saw that really got us to that 28.9%.

But in terms of modeling going forward, the things that we'd like you to pay the closest attention to would be just the historical seasonality of labor as a percentage of sales. Q4 always has the best labor as a percentage of sales because of its strongest sales leverage. Q1 always has its weakest. So please keep that in mind with your modeling. We expect minimum wage increases in January, and we expect to take pricing in Q2. But, yeah, we do think that the labor situation has improved. We're very happy about the robots and all that.

Great. Thanks for the call, guys. Congratulations and best wishes.

Thanks, Jeremy. The next question comes from George Kelly of Roth Capital Partners. Please go ahead.

Hey, guys. Thanks for taking my question. Just to start, you just mentioned the Demon Slayer, the success of that Demon Slayer promotion over the summer. Curious, I see Tetris right now. Curious if that could be something that's similarly impactful. Or is there anything else that you can flag that's planned for the coming couple quarters?

Sure. Go ahead. Go ahead. Go ahead. Go ahead.

Okay, so the Tetris campaign has been really fun. We have these to-go boxes that are actually in the shape of Tetris blocks, and those have been... We've never had to-go sales as strong. It's clear that it's like a huge hit with guests. That being said, it does not have the same cachet as Demon Slayer. People that had never heard of Kura were coming because of Demon Slayer. People that had never... People outside of our markets were learning about Kura as a result of our Demon Slayer collaboration, which... is great in terms of planting seeds for future markets, but Demon Slayer really was one of the all-time best campaigns we've had. That being said, we do have a lot of campaigns in our pipeline with executed agreements that I'm extremely excited about. Historically, we basically only partnered with Japanese brands, animes, video games, et cetera, but we do have a number of American properties with, you know, truly nationally universal appeal. And so those are things that I'm very excited about.

Okay, excellent. And then you mentioned earlier potentially sourcing from Japan later this year. What kind of savings could that drive in? Is that something that's already baked into your guidance?

Well, this is what I said earlier about COPS expectations. Until Q2, In comparison to Q4, inflation is increasing by Q each. From there, the price will swing for the first time, so it's bad so far. After that, the number may go up, but as I just mentioned, it will be offset by the price that is cheaper in Japan and the US compared to the US. In terms of COGS, we've seen quarter-over-quarter inflation from Q3 to Q4 and then Q4 to Q1.

We expect this inflation to continue to grow up until Q2. And so our costs for Q1 and Q2 are going to be worse than what you saw for fiscal 22. That being said, with the pricing that we're taking in Q2, that should begin to mitigate that. And our hopes for the Japanese yen benefit is really not so much as, you know, like, getting back to fiscal 22 COGS levels, but really just offsetting any future inflation. And so we're hoping for a stabilization in our COGS beginning in Q3 and Q4.

Okay. Thank you. Thanks, George.

This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation, and you may now disconnect.