Kura Sushi USA, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kurasushi USA Inc. Fiscal Second Quarter 2023 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 Uva, President and Chief Executive Officer, Jeff Utes, Chief Financial Officer, and Benjamin Porton, Senior Vice President, Investor Relations and Business Development. 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 2023 earnings release. It can be found at www.cursus.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 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 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. Presentation of this additional information should not be considered in isolation, nor is a substitute for results prepared in accordance with GAAP, and the reconciliations to comparable GAAP measures are available in our earnings release. With that out of the way, I'd like to turn the call over to Jimmy.

Thanks, Ben, and thank you to everyone for joining us today. It's been an exceptional quarter for Kurasushi. In the previous earnings call, I had mentioned our three goals for this fiscal year. Maintaining great operations and delivering unbeatable value to our guests. Continuing our rapid unit expansion and leveraging our G&A investment. It's my pleasure to be able to say that we are seeing excellent results on each of these goals. We continue to lead the industry with traffic growth of 7.4% in our second quarter and as demonstrated by our topic performance, consumer sentiment remains extremely strong. Our unit pipeline is the strongest it has ever been, with nine units under construction and another nine executed leases across existing and new markets. Our success in leveraging GMA, combined with improvement in restaurant level cost, has resulted in a 400 basis point adjusted EBITDA margin expansion over the previous year. Our second quarter sales of $43.9 million represent 40% revenue growth over the prior year. Our restaurants delivered comparable sales growth of 17.4%, which breaks down to 7.4% in traffic growth and 10% in price and mix. Despite our pricing, our value remains unparalleled and consumer sentiment and strength have never been stronger. Our strong sales performance continued into March with revenue of $16.4 million and comparable sales of 11.2%. Turning to operating results, we've seen material improvement in both labor and cost of goods sold. Our labor costs as a percentage of sales have improved by 160 basic points over the prior year, and our COGS as a percentage of sales are approaching the all-time best we saw in fiscal 22. Between the flattening of food cost inflation and our December pricing, we saw COGS as a percentage of sales improve by 150 basic points over the prior quarter. Restaurant efficiencies continue to be realized resulting in restaurant-level operating profit margin of 20.3%, a 250 basis point improvement over the prior year. In terms of corporate cost, we were able to improve G&A as a percentage of sales by 120 basis points over the prior year. Cumulatively, we were able to grow adjusted EBITDA margin by 400 basis points and net income margin by 370 basic points as compared to the prior year. It's been a pleasure to see our strategies for growing corporate profitability succeed, and we believe this is only an early indication of what we can expect as we continue to grow and achieve our true scale. During our second quarter, we opened three new restaurants, Philadelphia, Edison, New Jersey, and Oak Brook, Illinois. We are very pleased with the performance of these restaurants, with the Philadelphia and Edison locations in particular, underscoring the tremendous opportunity that East Coast Market represents. In our previous calls, we have mentioned unprecedented permitting delays that impacted the opening of Jersey City and Philadelphia. We haven't seen any such permitting concerns since and we believe those are one-off anomalies. Looking ahead, our unit pipeline is stronger than it has ever been, with nine restaurants under construction and nine more executed leases. We not only feel extremely comfortable about achieving our fiscal 2023 unit growth guidance, but also have an excellent head start on our fiscal 2024 development. As a note on the cadence of unit openings, we expect one opening during the third quarter, with the remainder in Q4. Finally, we have made meaningful progress on the implementation of our new waitlist app, which we believe has the potential to be the biggest comp driver of our fiscal 2023. As we mentioned in past calls, our current waitlist app algorithm provides highly conservative estimate of wait times, particularly close to the end of the evening. We expect the revised algorithm to have three major impacts, an improvement in customer satisfaction, reduced attrition, and the potential to drive additional traffic in off-peak hours. I'm extremely pleased with the progress that we've seen on our marketing initiatives as well. The targeted advertising and search engine optimization we began in December has been highly effective in drawing first-time guests. Our reward membership-based growth continues to be extremely rapid, with the current count of 700,000 members as compared to the 500,000 members we noted during our November earnings call. While the implementation of the new waitlist app is a more immediate priority. We are also working on rolling out our updated device program with Punch. Additionally, we just began our second demo 3D campaign in April, which I'm sure you remember from the prior summer as being our most successful brand collaboration yet. As the preview of things will come, I'm very happy to announce that we will be partnering with DC Comics this summer which is just another indication of the momentum the Kula brand has seen over recent years. It's an honor and a privilege to be able to report such strong results and progress on our initiatives, and I'm incredibly grateful for the consistently spectacular work by our restaurant team members and corporate support staff that make this possible. And with that, I'll turn it over to Jeff to discuss our financial results and liquidity. Jeff?

Thanks, Jimmy. For the second quarter, total sales were $43.9 million as compared to $31.3 million in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 17.4% growth with regional comps of 20% in California and 14% in Texas. The variance in regional comparable sales reflects the relatively easier comparison for California due to Texas's faster recovery from the pandemic. This regional difference becomes minimal with a pre-pandemic three-year comparison against fiscal 2020 Q2 with California comps of 27.3% and Texas comps of 29.4%. Turning to costs, food and beverage costs as percentage of sales were 30.1%, as compared to 30% in the prior year quarter. We are very pleased that with the flattening of the inflation curve combined with our price increases, we were able to minimize the impact to our food and beverage costs and continue to be encouraged in the trends that we are seeing. Labor and related costs as a percentage of sales decreased to 31.5% from 33.1% in the prior year quarter. This decrease is due to incremental efficiencies created by the implementation of technological initiatives a favorable comparison in the lapping of the impact of Omicron in fiscal 22, and sales leveraging from increased traffic and pricing. This leveraging was partially offset by wage increases. Occupancy and related expenses as a percentage of sales were 7% compared to the prior year quarters, 7.4% due to sales leverage. Other costs as a percentage of sales decreased to 13.3% compared to 13.9% in the prior year quarter, also due to sales leverage. General and administrative expenses as a percentage of sales decreased to 16.2% as compared to 17.4% in the prior year quarter. On a dollar basis, G&A expenses were $7.1 million as compared to $5.5 million in the prior year quarter, with the increase largely driven by compensation as we invested in both recruiting and internally developing the management talent. As Jimmy previously mentioned, we are very pleased with the leverage we have seen in our G&A expenses and continue to hold G&A leverage as a main focus going forward. Operating loss was $1 million as compared to an operating loss of $1.9 million on the prior year quarter. As a percentage of sales, operating loss was 2.4% as compared to a loss of 6% in the prior year quarter. Income tax expense was $15,000 compared to $3,000 on the prior year quarter. Net loss was $1 million, or 10 cents per diluted share, compared to a net loss of $1.9 million, or 19 cents per diluted share, in the prior year quarter. Restaurant-level operating profit as a percentage of sales was 20.3%, compared to 17.8% in the prior year quarter. Adjusted EBITDA was $2.3 million, compared to $0.4 million in the prior year quarter. Turning to cash and liquidity, at the end of the fiscal second quarter, we had $22.3 million in cash and cash equivalents and no debt. Lastly, I would like to reiterate and update the following guidance for fiscal 2023. We expect total sales to be between $185 and $188 million. We expect to open between nine and 11 units with average net capital expenditures per unit of approximately $2.5 million. And we expect general and administrative expenses as a percentage of sales to be between approximately 15.5% and 16%. Please note that our guidance assumes no material changes in consumer behavior or broader macroeconomic trends. In addition, As we move on from the pandemic era, at the conclusion of the current fiscal year, beginning with our first quarter earnings call, we will no longer quantify quarter-to-date performance in keeping with pre-pandemic reporting policies. With that, I'd like to turn it back over to Jim.

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. Thank you for your attention.

Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may 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 would 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 key. Our first question comes from the line of Jeremy Hamlin with Craig Callum. Please proceed with your question.

Thanks and congratulations on the really strong momentum in the business. I wanted to come back to the wait time app and just get an understanding in terms of, you know, potential for efficiencies in the process? When do you expect the new version to be going live fully? And what do you think is the opportunity based on what you're seeing with initial results to potentially have a positive impact on comps? You mentioned that you think some of the kind of lower volume day parts could really see a benefit. Wanted to get a sense for what you think the potential magnitude can be.

Sure. Thank you, Jeremy, for your first question. I will be happy to answer this question, but please allow me to speak in Japanese. Ben is going to translate. First of all, I would like to say that we are currently testing at five stores, and we would like to roll out all of them within the current period, even if it is late. First of all, I would like to say this.

We're currently testing the updated waitlist in five stores, and we expect a full rollout by the end of the fiscal year at the latest.

We're currently testing the updated waitlist in five stores, and we expect a full rollout by the end of the fiscal year at the latest. We're currently testing the updated waitlist in five stores, and we expect a full rollout by the end of the fiscal year at the latest. We're currently testing the updated waitlist in five stores, and we expect a full rollout by the end of the fiscal year at the latest. We're currently testing the updated waitlist in five stores, and we expect a full rollout by the end of the fiscal year at the latest. We're very encouraged by the initial test results. What we've seen is we've seen very concrete improvements in waiting time accuracy. If we were to say prior to implementation, about 70% of the wait times were accurate within five minutes.

We're now seeing upwards of 85%. In terms of the shoulder periods that we mentioned, we think there's pretty meaningful opportunity, especially at the end of days. Those are when you get the worst nutrition rates because, say, you and I go to dinner at 9 o'clock and you know the restaurant closes at 10 and the wait time says two hours, we're not going to wait because we're not going to get a seat. Because everybody has the same reaction. Had we waited, we would have gotten a seat. And so just by having that more accurate wait time, that unlocks greater operational efficiencies for that last hour. In terms of the other shoulder periods, one big opportunity we see is in weekday lunches. If a dinner wait time is off by 15 or 20 minutes, it's annoying, it's frustrating, but your day is over, and so you can just wait a little bit longer. If your lunch wait time is off by 15 or 20 minutes, you've lost your lunch, your meal opportunity. And so we think that once we can really dial in the accuracy and communicate that to our guests, that's a very meaningful opportunity for us.

So while we're tremendously excited for the opportunity represented by WiseLeague,

Just given, you know, the rollout expectations, we haven't built this upside into our existing financial models, into our guidance. And so, you know, if there is a lift, that's gravy for us.

Great. That's helpful cover. And then just last one for me. In terms of, I think in April now you're running the Demon Slayer promo, and Could you just talk about that? I think you ran that the end of last summer, bringing it back. I think it's a pretty significant licensing partner. But any call that you might be able to share on that particular licensed partner in terms of the potential to impact results versus some of the other promos that you've run?

Yeah, so I'm sure you remember we did Demon Slayer in July and August of last year. Comps in that quarter were 28%, 14% from traffic. Certainly not entirely driven by Demon Slayer, but it was a major component of one of our most successful quarters ever. In terms of this April's Demon Slayer, it's going to be the same format largely where we have the 15 plates and you get a prize. We'll have giveaways like shirts and tote bags, etc., One thing that is counterintuitive and is tremendously exciting, I was speaking with the marketing director the other day, and they mentioned that the second campaign can actually be more successful than the first campaign. And you wouldn't expect that, but what happens is that you're able to, you know, because Demon Slayer is such a big property, you expand your fan base through Demon Slayer with the first campaign. And then when you have that second campaign, you start with that bigger starting base. And so... we're very excited for what Demon Slayer can do for us. And as Jimmy mentioned during the opening remarks, I've been sort of alluding to this in past calls, but we are working with DC Comics, and that's going to be our first really major mainstream American property, and I'm tremendously excited for that.

Fantastic. Thanks for the call, and best wishes. Thanks, Jeremy.

Our next question comes from the line of Todd Brooks with The Benchmark Company. Please proceed with your question.

Hey, thanks, and congrats to all of you on the operating momentum that you're showing this quarter. Very exciting to see. I know, Jimmy, you talked about seeing some signs of early success with the new marketing approach and bringing new customers to the Cura brand. I think we could probably point to maybe that 200,000 jump in The loyalty program has some evidence of that. But do you want to track success? And are we far enough into this that we can start to gauge intent to revisit and how we're converting those customers to additional frequency once they discover the brand? And I have one more after. Thanks.

Sure. I'm happy to answer this question.

So we began the targeted marketing with Google in December. We're extremely pleased with the early results. It's only been three or four months, but just seeing the traffic strength. Last quarter, we were 700 basis points above NAPTRAC. This quarter, we're actually 740 basis points above NAPTRAC. And so we've gotten even further ahead of the pack. We're really happy about that. And in terms of cost effectiveness, it's really been unbeatable. There's been no incremental spend. We've just reallocated some of our other digital advertising, and so it's been a home run.

Also, regarding the reward program members, this is not specifically related to Q2, but the effects that have come out so far are clear. Reward members and non-members have a frequency that is about 6 times different, and the average check and spending are different. So basically, we're seeing the same thing here.

And then, well, it's hard to break out what specific, you know, whether Google is delivering those new rewards members or it's just, you know, the ongoing strength. We've been seeing this sort of tremendous growth for the last year or two, but we're really happy to have, you know, this ongoing growth for the rewards members. They tend to visit about six times as frequently as a non-member. Their average check is about 20% higher because they want to get to the coupon breakpoints or the giveaway breakpoints. And about a quarter of our sales are done through rewards. And so it's a very meaningful part of our business. We're extremely excited to really be able to unlock the potential that the rewards program, especially the data component, represents when we move to Punch.

That's great. Thanks. And then my second question, and I'll jump back into the queue after this. Five units opened in the first half of the fiscal year. Sounds like the pipeline between under construction and executed lease is very strong. What I'm wondering is with one unit opening in Q3, are there any operational pinch points in Q4 to how many units you can open? I'm just trying to think with, I think you guys highlighted that we're mostly new centers, which is an easier construction process in the back half of the year. What drives us for where we land between the nine units and the 11 units for four-year guidance? Thanks.

Sure. First of all, regarding Q4, of course, it's three months in a row, so if we can open it properly, we can have four stores in the opening team of two teams, four stores, five stores, and multiple stores, so we want to control it as much as possible, but there is a California store in the Q4 opening store, so there is a possibility that you can open from the existing store without using the opening in the California store. So certainly the goal is to open those remaining units in Q4 as evenly as possible to distribute the stress on the opening teams and the operational teams. But one thing that we're happy about is that

Some of these openings are in existing units like California where we can really draw on the support of our existing units there and so hopefully not have to leverage one of our opening teams. And so what we're doing, we're trying to get in front of the ball as much as we can. And so it's not a manpower issue that's a bottleneck for us in terms of achieving the higher end of that unit guidance.

As Jeff reiterated, 9 to 11 is very confident.

Just to sort of repeat what Jeff said in the prepared remarks, we're very confident about those 9 to 11 units, and we're extremely happy that we've got such a meaningful head start on fiscal 24. That's great.

Thank you all. Thanks, Todd. Thank you.

Our next question comes from the line of Joshua Long with Stevens. Please proceed with your question.

Great. Thank you for taking my question. I was curious if we could run through a couple housekeeping items. The 17.4% comp during the quarter, can we talk about how that progressed through the quarter? I know, I think back to January, you had talked about and strong 14% area comps of December. And then also there was a bit of incremental price taken from 1Q into 2Q. So just curious if you could kind of outline how that flowed through the quarter and then talk about any sort of acceleration and momentum that you saw in January and February.

Ben, can you hear me? Yes.

In terms of the difference between Q1 to Q2, the biggest single factor would be the impact of the easier comparison in Omicron. It's probably going to be responsible for low to mid single digits of that comp. Besides that, we're very pleased with the performance of the targeted marketing we began in December, as well as the brand collaboration that we did through our partnership with My Hero Academia. As a reminder, we lapped 2% pricing in March. And so don't think of the March results as a deceleration by any means. It's really, when you back out the Omicron impact and that pricing lapse, it's completely in line with the Q2 results. And so we're very pleased with the results for the quarter to date as well.

Great. That's helpful. And then maybe just kind of level setting that pricing conversation. I feel like you'd taken, I think it turned out to be an incremental 700 basis points. From 1Q into 2Q, I think you'd taken that in late December, so maybe you didn't get a full 700 basis points for December. But is that where you shook up for the quarter? And then as you think about rolling into March to your points, Ben, you roll off about 200 basis points. So that kind of has about 13% menu price embedded in what we should be expecting for the 3Q period?

Yeah. Yes. The effect is still there. 3% in March, and 2% in March. So, between Q2, it was 14.4%, and after March, it was 12.4%. As a result, the number of customers has increased, and in March, the number of positive customers has also increased, so I think that customers will receive it very actively.

So to clarify, we took pricing during the first week of December, not the first day. And so the benefit was so partial, but more meaningful than if we'd taken it in the last quarter. The effective price that we were carrying throughout Q2 is 14.4%. With us hitting March, we're enrolling up 2%. We'll be carrying around 12.4% for Q3. As we mentioned in the prepared remarks, the traffic being up 700 basis points in Q2, traffic being positive in March as well. We're extremely happy about consumer sentiment. We think we're in a very strong position.

Understood. That's very helpful commentary. I appreciate that. I was curious if you might be able to talk about the inflation outlook for the year. Obviously, you had gotten some good visibility earlier in the year. It seems like things were cooling down. That sounds to be more or less the case. Is that what is driving kind of much of what we should expect to see over the course of the year? Previously, you talked about maybe some sourcing initiatives. maybe longer-term opportunities to optimize the supply chain. Anything you can share there in terms of just how to think about some of these cost line items as we go through the rest of the year would be helpful.

Yeah, Jeff. In terms of inflation, I think I mentioned at ICR that what we had started to see, we were very happy with, and that came to fruition, as you can see in our results with the cost of goods sold number. The year-over-year inflation is about 7.5%, which is a deceleration from what we had seen in Q1, where we believe the year-over-year 10%. So the numbers are improving. They're continuing to show, um, we're continuing to be happy with what they're, where they're, where they're coming out. Um, and what we're getting really a double benefit because we were seeing not only a leveling off of the inflation, but because we took the pricing increase for kind of getting that benefit and that flow through on both sides of that equation. So going forward for the rest of the year, I'm really happy with where our COGS forecast is.

Great. That's super helpful. Some of the tech initiatives or efficiencies from tech initiatives have been talked about in prior calls and maybe alluded to a little bit here. Can you talk about the impact of those initiatives in terms of driving the better year-over-year labor margins? I imagine some of that was price, some of that was operational execution, just momentum, but you have had some pretty interesting tools, whether it's robot servers, order-the-table drinks, I think there had been some discussion of maybe some robot dishwashing at some point, but could you remind us kind of what is embedded here in the 3Q results and how we might think about the rollout of some of those initiatives over the course of the year?

First of all, three table side payments, touch panel order, and robot server. Regarding this, as I have said so far, 50 base points to 60 base points. I see that the effect of this part is both Q1 and Q2. In terms of the labor impact of the tech initiatives that we rolled out last year, the touch panel drink orders, the table side payment, and the server robots, as we've mentioned in the last call, we're seeing about 50 to 60 basis points in labor improvement, and we're continuing to see that today.

One thing to keep in mind is that when we rolled out the robot servers, that was also a traffic lift as well because of the experientiality. It's one of the reasons our Q4, which was the first quarter we had a full rollout of robot servers, our traffic was up 14% in part because of that experiential addition. And so as we lap that rollout in Q3, we'll still have the labor benefits, but we're not going to have the traffic tailwinds that we had from the novelty of robot servers.

One more thing I'd like you to keep in mind with Q2 labor is that, of course, we've already confirmed the labor efficiency at the 50-based point level and 60-based point level from the work schedule, but at the same time, we're facing 10% labor inflation at Q2. So, I'm sure you can figure it out if you calculate it, but the leverage of 7% in December is not fully available in Q1. That's a big reason. In terms of the 50 to 60 basis point improvement we just mentioned,

We're very, it's a very hard number. It's a very concrete number for us. We can see it reflected in the schedules that we've built in the working hours that are required to operate our restaurants. But people might notice that, you know, we didn't get the full leverage flow through from the pricing that we took in December in terms of labor. And that's because we're seeing about 10% labor in place in year over year. We're hoping for that to ease, but it's not baked into our expectations. And so that's going to be an ongoing factor for us in Q3 and Q4. We're going to do absolutely our best to manage that, but that is the labor market that we're in right now. In terms of the wait list, the labor advantage of that is really going to be coming more from sales leverage. It's just being able to serve more guests per day, which allows you to spend your labor dollars more effectively. And in terms of the dishwasher system, The technology is alive. It's ready to go. It's just a matter of getting certification, but that's a pretty opaque process. Historically, it's been one to two years. Given just how much upside we see in it, we're going to be pushing as much as we can. But ultimately, we're at the certification agency's mercy. But the expectation would be that it would have at least the impact of those three initiatives, if not more.

Great. That's helpful. And last one for me, when we think about these GNA efficiencies, how much of that is being driven by some of the things that you talked about, Jeff, when you onboarded in terms of opportunities to optimize spend and really just think about the timing and cadence of investments versus just some of the near-term sales leverage as we think about the guidance range being given in terms of G&A margins. Is there more to come there? How early on are we in terms of really being able to optimize the overall spend in G&A investment pipelines?

We're very happy with 120 bps that we leverage that we achieved in this quarter. And that's just the start. We're continuing to work hard. One of the reasons we're being able to see benefits right now is the last 12 to 18 months, we spent a lot of money investing in the office in terms of C-suite and vice president level positions, expensive people. We've built that team out now. We're not going to have those additional hires of that magnitude going forward. And that's going to continue to help the GNA leverage. The other thing that's going to help the leverage on the regional side is if we continue to infill markets with additional restaurants, we'll be able to be much more efficient with our area managers. Instead of an area manager having, say, five or six restaurants maybe in four or five states, we'll be able to compartmentalize them more into restaurants that are closer, and we'll be able to save on travel, and it'll just make their time much more efficient as well. So those are the two things going forward that I believe are really going to deliver more G&A leverage. There is more to come. We haven't given a timeline on when we're going to get down to a single-digit number. However, what we've seen so far has been really, really encouraging, and there is more to come. Great. Thank you. Just to add on that, the G&A spend in terms of operations, like the regional managers, that spend is going to sort of follow a bell curve. So as Jeff mentioned, as we infill, we'll be able to we'll be able to assign more units to each regional manager. But the opening teams are a pretty meaningful part of our G&A as well. We've got two right now. Each costs about a million dollars per year to operate. When we were talking about the pipeline before, we mentioned how markets like California, you don't need an opening team. And so as we continue to infill, those very meaningful G&A investments become unnecessary and can actually – The hope is eventually those teams will become store managers or regional managers, and we won't need opening teams once we reach a certain point. And also, while the expensive G&A hires have ceased, we've filled most of those positions, we're not going to cut back on making sure that we have a development and real estate team in place that we need in order to keep the pipeline as robust as it is. As Jimmy mentioned in the prepared remarks, we have nine restaurants under construction and nine more executed leases. And we need to continue to add to that pipeline, and we want to make sure that we have the right teams in place in order to keep it as robust as we need it to be in order to continue the growth pattern that we've seen in the number of units. And then the other area that we just talked about is resource management. As we add restaurants, we are going to have to continue to add area managers to make sure that we continue to support the restaurants and provide the best customer guest service that we possibly can and that we're known for.

Thank you.

Our next question comes from the line of Sharon with William Blair. Please proceed with your question.

Hi, good afternoon. My cell actually went out for a part of Jeff's commentary, so I apologize if you talked about this. But in terms of the development pipeline, how far out now are you working? Are you working on kind of fiscal 25 at this point? And can you talk about kind of the quality of the kinds of sites that you're able to get now and maybe contrast it to, I don't know, 2019 or before the pandemic?

Generally speaking, the units in our pipeline, they're for fiscal 24. There's a couple of fiscal 25 sprinkled in there, but what we're looking at is mostly 24. The quality of the sites that are being brought to us, they're improving every day.

he tries to personally visit as many of the sites as possible. And it's, you know, obviously the quality of the sites are amazing. One thing that's been really, really fun is, you know, some of the sites that Jimmy and I have been looking at for the last five years, been waiting to get into, we've been able to get into them and they've been just as successful as we hope. And so that's been really fun to see. I know for people that are familiar with the story, we mentioned how during the pandemic, we made very aggressive investments in terms of real estate. We built that $45 million revolver with a parent. We hired our first chief development officer who's opened thousands of units, and we aggressively signed leases in places that would have otherwise been inaccessible to us at that point, like Westfield. But because we have one- to two-hour dinner lines, we're great tenants, and now Westfield wants us everywhere. And so at the time of the pandemic, when we first signed these leases, we were extremely excited, but there was an internal concern that this boost would be limited to the fiscal 21 and 22 stores. But what we're seeing is that this success is really just It's snowballed. It's just getting better and better. And so our expectation is that our AUVs are going to stay just as strong, if not even stronger. The development is as strong as it's ever been. We're very pleased.

Sharon, I apologize. Sorry. Did we answer all of your questions?

I had a follow-up question, but Jimmy, I didn't know if you had more to add. No.

Okay.

Just one follow-up. I mean, the traffic growth remains very impressive. I guess I'm curious, are you seeing consumers try to manage the check at all, though, when they come in? Are you seeing fewer plates or lower beverage attach or anything that might suggest any kind of, you know, check management starting to creep into the business?

First of all, we think the consumer sentiment is very strong. We're extremely pleased with consumer sentiment. As we mentioned earlier, of the Q2 comps, 14.4%, we saw about 10% price and mix, and so that's

You know, that's great. Last quarter of our 6.9% comps, only 2.9% was from price and mix. And so we're seeing even better flow through than before. The guests are eating more plates per person than they were over the prior quarter. And our average check has grown to about $28. And so in spite of the pricing that we're seeing, guests are actually eating more. It's been very encouraging to see.

And another thing is that Kura is a fundamental market. We believe that Kura has fundamental advantages as a concept, even when consumer sentiment is weak. Certainly, we're not saying that it is, but just given what we've seen, it has been extremely strong. But

If there is a downturn, we do have some structural advantages. I mean, if you're reducing the frequency of times that you're dining out, you want your entertainment dollars to go as far as possible. And so you can make a sandwich at home. You can even grill a steak at home. Nobody makes sushi at home, certainly not with a conveyor belt. And so that's one of the reasons that, you know, our traffic has been so strong. Initially, the way that we build our the way that guests experience the meal where they build it plate by plate means that nobody's ever priced out. And so we're in an excellent position. We're very pleased to be where we are.

Okay, great. Thank you. Thanks, Aaron. Thank you so much.

Our next question comes from the line of George Kelly with Roth Capital. Please proceed with your question.

Hey, everyone. Thanks for taking my question. So just a couple for you. The first one, I was curious if you could update us on a couple sourcing initiatives that you've talked about in prior calls, specifically the – the potential for Japanese sourcing and then the utilization of broad liners.

Yeah, we've started that process.

We're starting to work with Cisco of it. We're testing some of the deliveries in some markets. That's something that we're just not going to flip the switch on because getting the products in at the right time, you know, efficiently and effectively is so important that we have to take this slowly and make sure that we're completely dialed in before we flip the switch to the whole company. We do have some initiatives that are coming up. We've got shrimp and salmon that we have been able to purchase at a much more favorable price. It'll be coming in in May and June. So that's upcoming. I think we've talked about that in the past, but that's an exciting development. And one thing that I'm really excited about, too, is it'll be much easier for us to forecast where we're going to be in terms of COGS. In the past, we've kind of been riding the market. The markups were kind of around, you know, across the board. And once we get everything into more of a broad line system, we'll be able to know exactly what the market is, exactly what we're paying, and we'll be in a much better place in terms of forecasting, not to mention our actual results going forward should be better as well. So it's in process, but we're taking it slowly to make sure that we're really dialed in before we roll it out system-wide.

So if I were to just attempt to repeat what you just said, is this something that you're still kind of assessing and uncertain as to whether you'll kind of roll it out across the base? Or would you expect this to be something that you fully implement by maybe the start of next fiscal year?

I believe by the start of next fiscal year, it will be implemented. And this is something we are doing. We're just taking it slowly to make sure it's being done properly.

Okay, understood. Thanks. And then second question for me. I'm just curious if you are contemplating taking additional pricing this year. And then another question is just the timing of the DC Comics partner. When is that stuff? Is that in July and August, or if you could specify that? And that's all I had. Thank you.

As for pricing, in July, we will increase the minimum wage of our stores in multiple regions. As I explained earlier, we are facing 10% of labor inflation in the short term. In addition to that, as I mentioned earlier, we have fallen into high inflation, but there are various other expenses as well. Based on all of these, if necessary, we will conduct a careful investigation, and if necessary, we will carry out pricing at some point.

We have no specific plans at this point, but there are a couple things that are useful to consider. One would be that we're going to be lapping 6% price in July. We'll no longer have that benefit. We are still seeing that 10% labor inflation that Jimmy had mentioned, and there are typically minimum wage increases in July, especially in our Los Angeles markets. And while COGS inflation is easing, we are seeing ongoing inflation in, you know, non-COGS expenses. And so while we have no current plans, you know, we're going to be flexible in terms of making sure that we're able to make the best decision possible for that point in time. What we'd like to reiterate is that this, whatever pricing we take would not be a margin driver. That's not why we take price. It would be purely to offset increased costs.

That's a DC Comics question, but this is from this summer. We're really excited about DC Comics. We think it's going to get us in front of a new and different audience from what the past collaborations have done.

We haven't baked in a bonanza, and we'd be really pleased to see it beat Demon Slayer. But one thing is that DC will be starting in August, whereas Demon Slayer had July and August.

Understood. Thanks. Thanks, George.

We have a follow-up question from the line of Todd Brooks with the Benchmark Company. Please proceed with your question.

Hey, thanks for squeezing me in. Just going back to the commodity side, I believe across the course of last year when demand was robust, your supply chain had issues keeping up. So your vendor base got a little deconsolidated. As we're looking towards that predictability, Jeff, that you talked about with COGS forecasting going forward, maybe review how the process of reconsolidating with fewer vendors, more volume, and then maybe the scale advantages that you're finding as you do that. And then my follow-up to that one is, given the improvement that we're seeing with the commodity inflation side and the strong sales results, is there a way to think about an exit rate with the initiatives that are in place for this year for where restaurant-level margin should be targeted at as we're thinking about going into 2024? Thank you.

Yeah, so, and I'm going to let Jimmy and Ben also elaborate on kind of last year as well because I wasn't with the company last year. But my understanding, during the pandemic, what happened is we were coming out of the pandemic because a lot of our suppliers had stopped having on hand as much product as they did because they ended up throwing so much away during the pandemic. They were a little bit shy in terms of how much they had on board. So we had to go to some other suppliers, and that really – drove their cogs up last year because we had to go to a new supplier. We weren't able to really negotiate with them. We kind of had our backs against the wall a little bit and had to go to them and say, we need this product. They were able to provide it at the quality we needed, but we did pay for that. So there were no vendors that I know of that we really, any of our large protein vendors especially, that were really lost. It was just more of a shortage of the supply they were supplying. And we're back to buying our products from the pre-pandemic suppliers for the most part. Is there anything additional?

No, I think you explained everything.

Okay. And then, Todd, I'm sorry, can you ask your second question again one more time, please?

Yeah, just I'm listening to the commentary on the call and the normalization that we're seeing in inflation and the sequential improvement and scale benefits, the Cisco rollout proceeding over this year. I'm just trying to get my mind around kind of what you guys are thinking maybe for an exit rate for restaurant-level margins kind of going into fiscal 24 so we can start to think about earnings power in that year. Thanks.

So our eye is always on the 20% restaurant-level margin price. That's pretty much the gold standard in the restaurant industry. And, in fact, hitting the 20.2% that we did in Q2 I believe is – It's one of, if not our highest Q2s of all time. And we're very happy with that because Q2, our seasonality is Q1 is our slowest quarter of the four, and then it gets sequentially better from there. Q2 is better than one, three better than two, and Q4, which is our summer, is our best quarter. So to be able to hit a 20% restaurant-level margin at Q2, we're very happy with. We'll continue to chip away at it, but that number is a pretty good number, and we're not going to sacrifice anything guest service or food quality in order to drive that margin, you know, much higher than that. But there is a little opportunity, I believe, as we continue to leverage, but we're happy with the number where it is. Yeah. I'm sorry. Go ahead, Jimmy. I'm sorry.

As a reminder, that labor inflation that we mentioned, we do expect that to continue through Q3 and Q4 and potentially past that. And so please be mindful of that as well. A couple of other notes just from my end.

Thinking about exit rates might not be super helpful for your modeling purposes just because of the seasonality that Jeff mentioned. Q4's restaurant-level operating profit margin and Q1's restaurant-level operating profit margin are materially different. If you go through any of our past things, I'm sure you'll see that. And just to echo Jeff's note, we're very happy with that 20% plus. It's one of the industry bests. It's great to see ongoing improvement, but in terms of the major opportunity for top and bottom lines, That's going to be the ongoing unit expansion and leveraging of our T&A.

Great. Thank you all. Thanks, Todd. Thank you.

Our next question is a follow-up question from Joshua Long with Stevens. Please proceed with your question.

Great. Thanks for squeezing me in for the follow-up. I was just curious. It looked like there were maybe a couple remodels during the quarter of maybe some of your older units. Just curious if that was maybe a one-off opportunity or – you know, remodel or something a bit more comprehensive is in the works. Just, you know, just curious on either, you know, set up for that and or what you learned by touching, going back and looking at some of those. I think it was in your California market.

So at the time of the IPO, we, our parent company actually worked with a very famous designer. He's the guy who did the Uniqlo logo. It's probably what he's best known for the West, but he's the guy who did our new updated logo and he developed an interior design design update as well. And so we've been doing those updates since 2019, 2020. We only have six left. They cost on average maybe $200,000 to $300,000. But after those six, we're caught up.

Great. Thank you. Thanks.

That concludes our question and answer session. That also concludes our conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.