Kura Sushi USA, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kurosuchi USA Inc. 4th Quarter 2024 Earnings Call. At this time, you have been placed in a lesson-only mode, and the lines will be open for your question following the presentation. Please note that this call is being recorded. On the call today, we have Hajime Jami-Uba, President and Chief Executive Officer, Jeff Hutes, Chief Financial Officer, and Benjamin Porton, SVP Investor Relations and System Development. And I would now 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 fourth quarter 2024 earnings release. It can be found at www.cursushi.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 discussions 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 we 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. The 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 would like to turn the call over to Jimmy.

Thanks, Ben, and thank you to everyone for joining us today. I am pleased to report on end to the fiscal year. that has meaningfully outperformed the expectations we shared during the last earnings call, and to share that, our new fiscal year is off to a strong start. The sales pressures beginning in April improved significantly over the course of the quarter, resulting in fourth quarter comps of negative 3.1%. As compared to the expectations we shared during the prior earnings call of negative high single-digit comps, I'm very pleased that, in spite of the unexpected sales decline in the back half of the fiscal year, we were able to maintain positive full-year comps of 0.7% and full-year restaurant-level operating profit margins above 20%. This was made possible by the rapid response by our team members throughout the company to find new efficiencies and cost-saving opportunities. Total sales for the fiscal fourth quarter was $66 million, representing comparable sales performance of negative 3.1%. Our cost of goods sold as a percentage of sales was 28.5%, representing a 100 basis point improvement over the prior year. This improvement was made possible by improving the quality of ingredients while also lowering cost. Labor as a percentage of sales was 31.1%, representing an increase of 230 basis points as compared to the prior year due to wage inflation and sales deliverance. Restaurant-level operating profit margin for the fourth quarter was 20.9% as compared to the prior year of 24.4% due to sales deliverance. On the development front, we opened one new unit in Lake Grove, New York during the fourth quarter, for a total of 14 new unit openings during the fiscal year. Subsequent to quarter end, we have opened five new units, Beaverton, Oregon, Tacoma, Washington, Rockville, Maryland, Cahill, New Jersey, and Bakersfield, California. We currently have six units under construction, but it bears mentioning that Some of these units have just broken ground. While we are satisfied with the progress of opening new restaurants so far in fiscal year 2025, we expect that the opening of the remaining nine restaurants, especially those that have not yet started construction, will be back-loaded for Q3 and Q4. As many of you know, Bellevue has been our strongest performer since its opening. is our most successful unit being in Washington State. We have always been excited about the massive potential of the Pacific Northwest market. This year, we finally opened our second unit in the Pacific Northwest with Beaverton, Oregon. I'm extremely pleased to share that we were not disappointed. Following Beaverton, we opened our new unit in Tacoma, Washington. Tacoma has been a very strong performer since its opening. While it's still early days, I'm very happy to see that the new units in the Pacific Northwest have exceeded our already high expectations, and I'm very bullish about the long-term potential of this market. Turning to new initiatives, we completed the full rollout of our back-of-house streamlining efforts in early September, and results to date have delivered the expected improvements to labor cost. Supporting of KuroJapan's reservation and self-setting system is proceeding as scheduled, representing further opportunities for labor efficiencies later in the year. We have also diversified our marketing efforts so that we have more levers to pull beyond the HIT-ID correlations. We are going to be more discerning with our IT collaborations going forward, prioritizing the quality and growth-based appeal of partnering brands over the number of campaigns. Our strategy to showcase our unbeatable quality and authenticity will be key to building our long-term brand equity as we grow into our national footprint, while also being more cost-efficient than rolling IT collaborations. During the fourth quarter, we took an impairment charge of $1.6 million. This charge is due to a challenging sales environment at our eventual Florida location. While we are required to take this impairment charge this quarter per the accounting rules, we will continue to operate this restaurant and will implement several operational changes that we believe could improve results. The new fiscal year has started strong, and it's clear that we are in a very different place than the last year's goal. The cost-saving efforts we began in preparation for the potential of longer-term macro-headwinds have been fully implemented, and these initiatives will serve us well as we enter a fully normalized environment. Our new unit openings to date have exceeded expectations and confirmed that the Pacific Northwest is a huge, untapped market for us. In addition to the success we are continuing to see in the Pacific Northwest, we are highly anticipating our upcoming openings in smaller markets that will serve as proof of concept for our ability to thrive in the United States beyond the largest DMAs, indicating even greater white space opportunity. While Baker's field has only been open for a few days, the strength of its opening has us optimistic about our ability to thrive in smaller DMAs. Fiscal Year 2025 is an opportunity to demonstrate the next level of coolest sheets potential, and I am incredibly grateful for the excellent work by our team members who have positioned us so well for the new fiscal year. Yes, now I'll turn it over to you to discuss our financial results and liquidity.

Thank you, Jimmy. For the fourth quarter, total sales were $66 million as compared to $54.9 million on the prior year period. Comparable restaurant sales performance compared to the prior year period was negative 3.1%, with regional comps of positive 3.9% in our West Coast market, a negative 8.9% in our Southwest market. Turning now to costs. Food and beverage costs as a percentage of sales were 28.5% compared to 29.5% in the prior year quarter, largely due to pricing and supply chain initiatives. Labor and related costs as a percentage of sales were 31.1% as compared to 28.8% in the prior year quarter. This increase was largely due to sales deleverage and wage increases. Occupancy and related expenses as a percentage of sales were 7% compared to the prior year quarters, 6.6%. Depreciation and amortization expense as a percentage of sales increased to 4.6% compared to the prior year quarters, 3.8% due to sales deleverage and the accelerated depreciation of assets being replaced due to planned remodels. Other costs as a percentage of sales increased to 14.7% compared to 13.8% in the prior year quarter, due mainly to utilities, delivery fees, software licenses, and operating supplies. General and administrative expenses as a percentage of sales increased to 20.3% compared to 13.2% in the prior year quarter due to a litigation expense. General administrative expenses as a percentage of sales excluding litigation expense for the fourth quarter and the full fiscal year were 13.2% and 14.1% respectively, representing full year leverage over fiscal 2023 of 90 basis points. Operating loss was $5.8 million compared to operating income of $2.2 million in the prior year quarter, largely driven by litigation expense, as well as sales due leverage, higher labor costs, and incremental other costs associated with the greater number of unit openings and units under construction. Income tax expense was $19,000 compared to $167,000 in the prior year quarter. Net loss was $5.2 million, or a negative 46 cents per share, compared to net income of $2.9 million, or 25 cents per share, in the prior year quarter. Adjusted net income was $1 million or $0.09 per share compared to adjusted net income of $2.9 million or $0.25 per share in the prior year quarter. Restaurant level operating profit as a percentage of sales was 20.9% compared to 24.4% in the prior year quarter. Adjusted EBITDA was $5.5 million compared to $6.3 million in the prior year quarter. Turning now to cash and liquidity, at the end of the fiscal fourth quarter, we had $51 million in cash and cash equivalents and no debt. And then lastly, I'd like to provide the following guidance for fiscal year 2025. We expect total sales to be between $275 and $279 million. We expect to open 14 units, maintaining an annual unit growth rate above 20%. 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 approximately 13.5%. And with that, I'd like to turn it 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.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then 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 keys. One moment, please, while we poll for questions. The first question we have is from John Tower of Citi. Please go ahead.

Great. Thanks for taking the questions. Good evening, guys. Maybe just to start, I'm curious about the guidance for revenue and based on the new store openings greater than 20%. I think the sales growth would imply something lower than that. You're talking about the current quarter. You're pleased with the start to the fiscal year. So I'm just curious if you could help square that for us, why the revenue growth that looks relatively conservative versus the new store growth and how bullish you sound on the current state of same-store sales.

Thank you, John, for your first question. Please allow me to speak in Japanese. Thank you for my translation. First of all, as John just said, I think it's true that we are a bit conservative this time. Currently, in September and October, in these two months, we are a little happy with the recovery of sales. It's better than Q4, but we're still in the middle of recovery, so we can't really go strong here in such a situation. In particular, last time, I had to pay for sales in the middle of recovery, so I want to repeat the same thing.

John, as you said, it's true that we are being a little bit conservative. We're very pleased with the performance that we've seen to date as we've gone through the fiscal year, September and October. The Q1 is definitely outperforming Q4, and we're very happy to see that. But it's also true that we're still in mid-process in terms of recovery. And so we feel it's prudent not to be overly aggressive with our revenue guidance at the beginning of the year. The last thing we want to do is to have to do a repeat of downward revenue guidance that we did last year. And so we felt that this was the most prudent approach.

On the other hand, we were very surprised by the sudden decline in sales since April last year. On the other hand, I think it's very important for us to be able to control ourselves. For example, control of costs, new operation initiatives, With that, we were able to achieve 20% of the restaurant-level open-end profit, and we were able to minimize the impact of cannibalization to improve the management of comps. We were able to control 20% of the digital growth, but we couldn't control the macro relationship when it came to sales, so there were some things like that. As for this, as I said before,

In terms of looking at the impact of the post-April sales deceleration, we're very proud of how we were able to manage the things that were under our control, namely our cost control efforts, the streamlining changes that we made to our back-up house in particular. Those changes were what allowed us to maintain that restaurant-level operating profit margin of about 20%. We're also very pleased that we were able to maintain a unit growth rate above 20% for fiscal 25, in spite of the fact that we trimmed some of the LOIs from our pipeline in an effort to minimize cannibalization and reduce comp headwinds. And so we're very pleased in terms of how we've been able to execute the things that are under our control. But unfortunately, the macro environment is something that is not under our control, nor is it something that we can predict. And so that's really the thinking behind our guidance at this point. Of course, should the environment continue to prove favorable, then we look forward to a revision.

Okay. So when thinking about the components of growth this year, I can back into slightly positive comp growth. And I'm also trying to figure out the new store productivity implications. Is there anything to note? I mean, you just hit on the idea of perhaps being in markets where you're not going to have as much canalization with the existing stores. But are you doing anything with the size of the stores? Are these kind of all on trend relative to what you've been opening the past couple of years?

Go ahead, Jimmy. Go ahead, John.

As you say, John, in terms of how we look at new stores, one of the things that you know that we really focus on and we put a lot of credence in is cash-on-cash returns. And that allows us to look at a bunch of different sites. We're not dialed into a particular cookie cutter size. So we'll build a smaller store if that's a great site that's available. And we don't necessarily always dial into a particular AUV. Because if I can get a cash on cash return of 40% or 50% on a smaller restaurant that may do a little bit lower AUV, we'll do that all day. And then in terms of your comment about Our comp assumption for fiscal 25 is, you know, we don't give comp guidance. But to kind of reiterate what Jimmy said, as we came out of Q4, I think we kind of saw what everybody else did. You know, June wasn't great. And then towards the latter half of July and into August, things started to get better. But in our mind, it isn't quite yet a trend. So we didn't want to get too far ahead of our skis and put an overly aggressive comp assumption in our model. But I can tell you that the comp assumption for next year is not a negative number. without quantifying it for you.

Okay, great. Thank you. I appreciate that. And then maybe just in terms of thinking about the digital initiatives I know you hit on earlier. Actually, I'll stop, pause on that. Going back to the labor initiatives that you did at the store level, those things should remain in place as volumes kind of return in the future. There's nothing that would suggest as volumes come back to stores you should anticipate having a need to add more labor in the back of the house to meet that demand.

It's a bit unclear, but the 24 is lower than the 24, and the BOHC and the front of the house match, so even if it's unclear, it's a bit lower than the 24 last year. I'd like to emphasize that.

John, the changes that we've made in terms of operational streamlining are structural. It's the combination of multiple make stations into a single one. And so an increase in sales would not require an increase in labor. While it's still very much early in the fiscal year, our belief is that our full year labor numbers, percentage of sales should be better than fiscal 2014. And of course, if the macro environment recovers as we hope, then there's further upside to the labor line. But even without that, we expect our labor to be an improvement year over year, you know, between the operational streamlining and whatever pricing that we take.

Great. And maybe my last one, pricing fourth quarter in the mix in the quarter as well, if you wouldn't mind, and what the... pricing is to start the year in 25?

Yeah, so we're running about for Q4, we're running about 4% price in the numbers we just released. And then as we think about the upcoming year, John, in terms of pricing, typically we've always taken pricing in January, but we're thinking about taking pricing sooner than that this year, simply because we've determined that if you take it a little bit earlier than January, you can really capture a lot during that December holiday period. and capture a lot of those sales. So you'll probably see a price increase, which we haven't quantified yet, coming up shortly before the end of the fiscal year. I mean, I'm sorry, before the end of the calendar year.

Got it. Thanks. I'll pass it along. I appreciate you taking the questions.

Thank you, John.

The next question we have is from Jeff Bernstein of Barclays. Please go ahead.

Hi. Good evening. Thanks for taking the question. This is product guys. Just a quick question on development. You've already opened five, and you've alluded to a pretty decent pipeline with six under construction. Just wondering on why there isn't more upside to the 14. I know anecdotally we've heard that maybe the approval and permitting process is a little bit better these days, but maybe not yet exactly where it needs to be. But just anything you can provide on just the availability of quality sites, the ability to get permits, approvals, just are there any kinds of headwinds you're seeing there that lead you to be a little bit more conservative on the unit level?

Thank you. So this, hey Pratik, this is Ben.

In terms of development, there aren't any issues with permitting or construction that we're seeing. This is really more a reflection of us taking seriously the site selection, strategic changes we mentioned in the last earnings call. We did prune a number of LOIs. There's nothing wrong with the sites per se. It was just not the right timing in terms of cannibalization headwinds. And so we decided to either cancel them or hold them for future years. And so part of the middle of the year pipeline got pruned. And so that's really what it is. And the reason that we've got a 14 instead of a range is just looking at our lease timing. That's really what we're led to believe. And so we felt it. just make the most sense to give you guys what we're actually expecting.

Got it. I appreciate that color. And then just turning to commodities, I know you have a very different basket than most in the industry, but what is a good inflation level that you're assuming in fiscal 25? I know it's early, and things can change pretty easily, but just what you're assuming in fiscal 25 and just how easily you can kind of pivot in and out of different items on the menu if the need arises.

Yes, our commodity basket, as you know, is pretty varied, right, things that we do buy. In terms of what we look at for next year, you know, there were so many moving parts. Some of that was solidified last night as to what's going on. You know, we do have the Fed tomorrow, so we've got a lot of things going on. There is an assumption of low single-digit commodity inflation in the budget, just, you know, comparable to what a CPI increase would be. Nothing super aggressive in terms of inflation assumption. But yeah, because our bass is so diversified, we can pivot quickly. If for some reason we have a problem getting a particular fish or a particular product in, we can pivot to an LTO or something with a different product. And the other thing that I've talked about too, which is great, is with our two broadliners, they overlap each other. So if one of our broadliners happens to run out of a product, we can go to the other one and most likely they will have it. So we do have redundancy in our supply chain process. And because of that, very rarely do we run out of things. And the process has been very streamlined over the last year to two years.

That's great. And if I can just sneak one last one in, just on the labor line, Jeff, you know, you've spoken to all these efficiencies that are going to yield some dividends. And it looks like you're going to laugh AB1228 as well later on in the year, although it doesn't look like your concept really saw much of an impact, but just what is a more normalized rate of inflation on the labor line going forward once kind of like all these prior year nuances are lapsed? Like, is there something like around mid-single digits that we should expect?

First of all, I'll answer to FY24. Regarding FY24, it's mid-single digits, but so far, it's been around low-single digits. Historically, labor inflation on an annual basis has been about low single digits.

For fiscal 24, it was closer to mid-single digits. With the operational improvements that we've put into place, we're confident that we'll be able to exit fiscal 25 with a four-year labor line that is superior to fiscal 24s. And obviously, if the macro environment improves and we get further sales leverage, then that's additional opportunity there.

Thank you so much. I'll pass it on, guys. Appreciate it. Thank you.

The next question we have is from Brian Mullen of Piper Sandler. Please go ahead.

Hi, this is Alison Armstrong for Brian Mullen. Thank you for taking the question. In regards to the 20.9 restaurant level margin this year, I'm curious how you're thinking about the range for next year and what some of the headwinds and tailwinds might be that we should consider.

First of all, regarding the restaurant-level operating profit margin, we don't have any guidance, but we always tell you that it's not the price, but that it's more than 20%. We were able to maintain this last year, but this year as well, we want to maintain it even if there are headwinds. That's what we've been saying so far, and we're aiming for this year.

In terms of restaurant-level operating profit margin, we've never provided guidance, but one thing that we've said very consistently is that one of our primary goals is to maintain our restaurant-level operating profit margins above 20% on a four-year basis. We were very pleased to see that in spite of the headwinds that we saw in terms of sales deleverage beginning in April, we were able to maintain restaurant-level operating profit margins above 20%, and we absolutely expect to do that again in fiscal 25, hopefully without the headwinds that we saw beginning in April.

Thank you.

The next question we have is from Jeremy Hamblin of Craig Hallam Capital Group. Please go ahead.

Thanks for taking the questions and congrats on the improved results. Wanted to dig in a little bit on the other operating costs line item, which has been You know a bit more challenging to control here in recent years and just get a sense, you know, we know some of that is due to utilities inflation has been higher insurance inflation has been higher. But wanted to get a sense for what you are are seeing here at the start of this fiscal year related to that line item and. You know, I know embedded within that is some of the, you know, the low delivery cost fees and just understand how, you know, how that, you know, the DoorDash deal is kind of progressing.

Yeah, let me hit the operating supplies and then let Jimmy and Ben will talk about the DoorDash deal. On the operating supplies, you're right, Jeremy. I mean, utilities are up significantly. software licenses, everything has gone up when you call a plumber into the restaurant to fix something, just more than it was in prior years. One thing to remember as we think about the year upcoming in terms of the cadence of that line is that while a lot of it is variable, there are some fixed costs in there. So if you, you know, Q1 is, in terms of sales, is our, you know, seasonality-wise, our lowest quarter. So when you look at some of those fixed costs that are in other costs, you'll see a trend in that direction. What we're seeing as the year started is pretty similar to what we've seen in past years. We're continuing to push and work as much as we can to renegotiate contracts and widen our vendor list of people that come in. We do use Ecotrack, which is a great software that the facilities department uses in order to work with multiple vendors when something goes down in the restaurant in order to find the vendor that not only has the best response time, so we're not down, but also has the best pricing. And we're looking at all of those things to try and do what we can You know, unfortunately, things like utilities are a little bit out of our control, but we're looking line by line by line in other costs for the things that are under our control to do what we can to continue to chip away at that cost line.

Yeah, so I think that Jeff really covered 99% of what there is to discuss in terms of other costs. For the delivery costs, that's a reflection of – promotional campaign where we subsidized part of delivery fees for first time orders on DoorDash. And so it's not a typical fee.

I wouldn't expect it to be a recurring fee. And can you quantify what the impact of that promotion was on that line item? I don't have that number on me, but not huge.

Okay, got it. And then could you just you could you provide a bit more color on some of the upcoming technology initiatives, just in terms of the timing of when you would expect, you know, some impact on those, right? It sounds like you're expecting your labor line, which I think was 31.9% of sales to be a little bit better this year. I'm sure that's not kind of a straight line shot, but can you help us just understand the context of timing on those initiatives and how you expect that to play out to get to that target?

Yeah, yeah, I'm more than happy to discuss. The biggest opportunity in terms of fiscal 25 is the new reservation and self-seating system. I've been working in lockstep with Japan to bring, to port that system translated into not just English, but how they make it appropriate for American use. It's going very much on track, and we expect our first store implementation in early spring. That, for fiscal 25, is definitely the biggest opportunity. There's maybe a maximum of 50 basis points to be saved with its implementation.

However, compared to what I said earlier,

That being said, Jimmy's earlier comments in terms of our expectations about being able to produce labor's percentage of sales in fiscal 25 that is lower than last year, that doesn't contemplate the upside represented by the reservation system. So that'll be gravy for us on the labor line and national level operating profit margin line as well.

Great, helpful color.

Last thing, just a little bit more color on the $4.7 million litigation expense. Any more details you can share on that?

It's just, Jeremy, the typical wage and hour claims that restaurant companies unfortunately have to deal with from time to time around Relate Liberty to get into the details of it, but it's your run of the mill, you know, pretty, I don't know a restaurant company that hasn't had to deal with these types of claims over the last seven to ten years. So it is wage and hour, though.

Thanks for the call. Best wishes.

Thanks, Jeremy. Thank you, Jeremy.

Ladies and gentlemen, just a reminder, if you would like to queue for a question, you may press star and then one. The next question we have is from Sharon Zagfia of William Blair. Please go ahead. Hi, good afternoon.

Thanks for taking the question. I guess, and I apologize, my phone is a little bit muffled, but it sounds like trends have improved more in November, in the November quarter, and certainly improved as the August quarter progressed. I guess as you do like the postmortem on kind of what happened in April through August, do you really think it was the promotional tie-in? Do you think it was fast act? I mean, what is your best insight now on kind of what caused that swoon?

Well, Well, as I said earlier, I think the strength of the IP was a little influenced by that. August One Piece, August 9th One Piece, and the Pygmy in October were also very good, so I think that was reflected. So, in November, there are a lot of elections and a lot of noise, so I'm expecting that it will go back to the way it was in March, so I'm thinking about how much it will go back, and it's quite opaque, so I think it's going to be a little funny like I said earlier.

In terms of our thinking on the cell deceleration starting in April through August, I think we're pretty much aligned with the rest of the industry. Initially, we thought a lot of it was coming from sicker shock with the implementation of AB1228. Our thinking changed once it became clear it was a wider national macro factor, which has been corroborated by the earnest calls of our peers. And then to your comment on IT collaborations, that certainly could have played a role as well. Our August benefited from One Piece, which was a very successful campaign, ran from August to September. As we entered October, we've been working with Pikmin, which is a Nintendo property. Also, we're very pleased with the results there. November, you know, we just entered, so it It doesn't really make too much sense to comment on the first five days, but we're hopeful that these trends continue. But just given the opacity, we felt it was appropriate to be prudent with our revenue guidance, going back to Jimmy's earlier comments.

That's really helpful. I guess one other question, Ben, you just talked about the reservation self-seeding system coming in next year and maybe being able to get 50 bps from that. Are these savings, and I know you continue to get more and more efficiencies, more and more savings, ultimately, how do we think about that, kind of in harvesting to the bottom line versus reinvesting in the business to continue to deepen the competitive mode?

Well, in regards to this, investments are not just costs.

Costs and assets.

No, that's not really it. In a big way, KUDO Japan is developing, and we're In terms of the opportunities presented by the implementation of the

the reservation system and really any future technologies. Our expectation is that this will certainly help us get back to the waiver levels that we saw in fiscal 23. We think that's an appropriate level for us to be at, and so that'll probably be the first thing that you see.

Great. Last question. Hey, Jeff, can we get the traffic in the quarter?

Yeah, I have that number. It was minus – it was negative 2.4. The next question we have is from Todd Brooks of Benchmark Company.

Please go ahead.

Hey, thanks for squeezing me in. Wanted to explore the regional spread in the same store sales performance that you highlighted. I know a lot of investors kind of focus on this number as a proof of portability of the concept, but is that weakness in the kind of southwestern market, is that more of the two-year stack that you were lapping tougher same-store sales, or is there an element that Texas got hit by barrels during the quarter and that was an artificial drag on that region versus the West Coast region?

First of all, I would like to explain a little about the market other than California. We have about 45 comp-based stores, and half of them are in California, and the other half is divided into four regions. Texas has 17 stores and closes a large portion of them. Most of the states, including California and Texas, only have single units. Over the past few years, this has been increasing. Especially in Japan, 23 states. Most of the restaurants have already filled in the existing states, other than California. The impact of the cannibalization has been very intense. Basically, in the Southeast, Texas, Dallas, Houston, and so on. We have received a lot of impact from both of these units. This is not only for Southwest, but also for California and other regions. Therefore, we are not only reflecting our performance, but we are also increasing the impact.

So the biggest thing that we really want to emphasize in terms of comps is that looking at the regional comps, it's not necessarily an indication of our performance or our popularity or the demand that we see in those markets, but really just an artifact of the way that we've grown over the last 10 years. And so our comp base has about 45 units. About half of those are in California. We've got over 10 in Texas. Outside of those markets, they're pretty much all single-unit markets, which have recently gone into multi-unit markets. And so, obviously, that has a very meaningful impact on comps, and it has nothing to do with demand. It just has to do with the fact that it's the first infill. Looking to the southeast in particular, there was one infill in Dallas and one infill in Houston, which impacted a store each in those markets, which had largely been not impacted by prior infills. And so, that was a headwind there.

As for N25, there are still a lot of companies that are still existing in the pipeline, and there is still a little bit of a cannibalization impact. After N26, as I talked about in the previous Unlocked Call, we will focus a little more on the new market, and I think that the pressure of compo in all regions will be very loosened. Especially this time, we are going well with Smaller DMS at the Seikaku Guild,

And just to give you some additional thinking on the way that we've approached cannibalization since the last earnings call, we've been very proactive in terms of our pipeline. And starting in fiscal 26, that's when you'll really start to see a greater number of new market units being included, which obviously don't play into cannibalization whatsoever. In terms of fiscal 25, with lead times, it's pretty... options are pretty limited in terms of adding new places. And so our approach for fiscal 25 is really removing places, which were existing markets would have been first infills, but looking at the early success of Bakersfield, that's, you know, a meaningfully smaller DMA than we typically enter and we're doing great there. So that really opens up a lot of options in terms of what we would consider in terms of new markets. And so our ability to manage our info strategy against comps, that's really going to come into full gear in fiscal 26, which we're very excited about.

That's great. And just one follow-up, if I may, not follow-up, an additional question. Ben, you talked about a lower frequency, perhaps, of the IP collaborations. Can you walk us through maybe some detail behind it? Is it fewer events? Is it shorter duration of event? Just How do you see this evolving, and are you tying yourself to a specific number of collabs per year anymore, or it's when the right partner comes along, you guys would work that into kind of your calendar of what you're looking to do? Thanks.

Yeah, so that's an interesting way of putting it, but that's pretty similar to our thinking as well, where before the thinking was you always wanted to have an IP collaboration. That's what Jimmy was referring to with the rolling – collapse in his prepared remarks, but every, every branded property collaboration is expensive and not every single one is worth the associated cost. And so the thinking now is really, let's go for the ones that we think are really going to be big hits. And so before we had, you know, six guaranteed, that's no longer the case.

We're really just going after targets that we think will really move the needle from a comp perspective. And of course, you know, we're not just reducing the number of collaborations with nothing to replace it.

We have a huge advertising pipeline. Our VP, our new VP of marketing, which I think we've mentioned on every call since we've hired him, is doing a really great job. Newton, if you're listening, we're very pleased. And so September and October, we've been seeing pretty strong results. The IP campaigns are part of it, but another big part would be the new advertising efforts that we put into place, especially the food-focused ones. We're excited to see the performance in upcoming months where we don't have IP collaboration so that we can see just how successful these campaigns are with without that additional variable. And just as some additional context, when we aren't doing a brand collaboration, that doesn't mean we're not going to be giving out the big coupon prizes. They just won't be branded prizes.

Understood. And then finally, just in the revenue guidance, which you talked about a lot of the reasons for maybe the conservancy to start the year, is this a part of it as well as we're kind of weaning ourselves to programs that make sense versus six programs a year and that that's Do you want to leave yourself a little bit of room there as kind of the new advertising mix kicks up?

So in terms of revenue guidance, we've always, in past years when we've given guidance, it

doesn't contemplate the impact of IT collaborations. Basically, whenever we have a hit collaboration, that's opportunity for upside. And so that's the same thinking here. It does not contemplate IT collaborations. Okay, Todd.

Thank you all. Can I just add one? Go ahead. I just wanted to say that on those additional marketing campaigns that Jimmy was talking about that will be in between the IT collaborations, what's really great about those, and Ben alluded to this too, is that they come with a fraction of the cost. as the IP collaborations, and they can be just as good as the top line. So a lot of that will flow down to the bottom line, and it also kind of ties into a question we were asked by another analyst earlier about other costs. The costs with these IP collaborations flow into other costs. So as we continue to put marketing campaigns in that are just as good for the top line that don't hit that other cost line, that flows straight to net income. So we're really looking forward to having some of those mixed in with the IP collaborations as well.

That's very helpful. Thanks, Jeff.

The next question we have is from Jim Sanderson of North Coast Research. Please go ahead.

Hey, thanks for the question. I just wanted to follow up a little bit more detail on G&A spending. I think you reported a slight improvement over prior year. So going forward, maybe you can walk us through what type of line item leverage you would expect and how that can flow through to the bottom line?

The biggest leverage will be on our support center salaries. Really, that's the biggest line item in GNA. And the entire team in our support center has done a great job in determining how do we do things more efficiently and how do we do things better without adding people. And that's where we're going to continue to see the leverage and our guidance of about 13 and a half percent for next year would represent 60 basis points. And we came down from 15.8% two years ago to 15% last year to 14.1% this year. And we get into 13 next year. That is much better than I anticipated when joining the company. It's because of the efforts of everyone in the support center. to just look at how we do things and use technology and software rather than having to add people every time we open 10 restaurants. And we're going to continue that cadence throughout next year.

Can I add something to James' comment? Of course. This is Jimmy. First of all, in addition to what Jeff said, in particular, in the past and in the future, we will focus on existing markets. . . . . .

And to add on to Jeff's comment, over the last year, the two years, the two preceding years, we've had a lot of infills. And unfortunately, the point of discussion in terms of infills has been cannibalization in the last call. But really, the other side is synergy. And so now that we have these infilled markets, we can have area managers handle more restaurants. And so for fiscal 25, Even though we're adding 14 units, you don't expect to add any area managers. So salary savings, travel savings with greater density. Our facilities teams don't have to travel as far. We have proprietary equipment teams that deal with all of our patented technology that will get leveraged there. So there are a lot of regional G&A costs that are an opportunity for fiscal 25 and beyond as well.

All right. Thank you for that. I also just wanted to follow up and make sure I understood the feedback about the same store sales and traffic for the quarter. I think you said 4% price, negative 2.4 on traffic. So that would imply a little bit of a worse negative mix in the quarter. Any feedback on what's driving that?

Actually, we're really happy with where the mix came out. If you go back a year or you go back two years, our negative mix had been in the high single digits. So really where we're looking at it now is we're really happy because we're looking at it compared to last year. So I think that the change is really negligible. It's not anything that can necessarily be identified. Last year, we think people weren't having maybe a drink or maybe they weren't adding an additional attachment, but that's come back this year. And we're happy with where the mix landed for Q4.

okay okay last question for me just wanted a brief update on doordash if you can provide maybe what the mix for delivery sales um was in the quarter and if your pricing is set on marketplace equal to in-store pricing yes uh so our our mix is 3.2 percent of overall sales our pricing is the same as it is in restaurant um with the so we added doordash in march just to give you a

some context on how we've grown. Our mix in Q1, which would have been September through November of calendar 23, the off-premises mix at that point was 2%. And so it's grown meaningfully with the addition of DoorDash.

All right. Thank you very much. Thank you. Thanks, Jim.

At this stage, there are no further questions. And with that, this concludes today's conference. Thank you for joining us you may now disconnect your lines.