Kura Sushi USA, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kurosushi USA Inc. Fiscal First Quarter 2025 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 Hajime Jimmy Uba, President and Chief Executive Officer, Jeff Utes, Chief Financial Officer, and Benjamin Porton, Senior Vice President, Investor Relations and System Development. And now, I would like to turn the call over to Mr. Borton. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and thank you all for joining.

By now, everyone should have access to our fiscal first quarter 2025 earnings release. It can be found at www.crosissue.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 Security and Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and therefore each 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 conditions. Also during today's call, we will discuss certain non-GAAP financial measures we should believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation, nor should substitute for results prepared in accordance with GAAP, and the reconciliations to comparable GAAP measures are available in our interweaves. 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. We are very pleased to link in the new year by reporting our strong Q1 results including the positive comps of 1.8% and the six exceptional new unit openings. I'm especially proud to be able to announce an adjusted EBITDA margin of 5.5%, representing a 210 basis point improvement year over year. I can't think of a better demonstration of controlling what we can control than the significant year over year growth in corporate profitability. I'm extremely proud of our entire team and the work that they've put in to make this possible, which has effectively given us a head start on the leverage we expect as we continue to scale our base. Total sales for the fiscal first quarter were $64.5 million, representing comparable sales growth of 1.8%, with price and mix of 4.1%. offset by 2.3% of negative traffic. Our cost of goods sold as a percentage of sales improved by 80 basis points year-over-year to 29% due to pricing and the ongoing efforts of our supply chain department. Labor as a percentage of sales increased to 32.9% as compared to the prior year quarter's 31.9%, driven by rich inflation, including the fact that the majority of fiscal 24 restaurant openings were in high labor cost markets and partially offset by operational springlining efforts. Restaurant-level operating profit margin was 18.2% as compared to 19.5% in the prior year quarter due mainly to rich inflation. Turning to development, We opened six new units in the fiscal first quarter. Beaverton, Oregon, Tacoma, Washington, Rockville, Maryland, Cherry Hill, New Jersey, Batesfield, California, and Fishers, Indiana. We currently have six units under construction, but continue to expect the majority of this year's remaining openings to be back-half-weighted. In our last call, we have discussed how excited we were by our recent openings, and we are pleased to share that their subsequent performance has been excellent and supports our beliefs on new market opportunities. We have discussed two markets in particular, the Pacific Northwest and our Bakersfield, California opening, which highlights the opportunity in TMH that was smaller than our typical markets. Beaverton and Tacoma continued to outperform our expectations, with Beaverton on track to become a top five store. I'm very pleased to say that Bakersfield's performance is as strong as ever, too. As a reminder, Bakersfield is a critical test market for us, as it represents an entry into a significantly smaller market than any of our previous openings. Historically, Our site section has focused on the top 40 or 50 largest DMAs in the U.S., and Bakersfield is around the top 120 largest. While we have always been confident about doing well in Bakersfield, its demonstrated success after opening has given us so much more confidence in pursuing smaller, high-potential markets. Beyond the potential long-term impact on growing our overall white space potential, opening in smaller DMAs will allow us to better manage comp sales headwinds rather than infilling existing markets while maintaining historical cash-on-cash returns. Our goal is to return to a 50-50 pipeline split between new and existing markets over the coming years to manage the waterfalls and the opening up of smaller DMAs will make it meaningfully easier to fill the new market portion of the 50-50 equation. Moving to new initiatives, I'm pleased to share that The new reservation and self-seating system is progressing as scheduled, with our first in-restaurant test expected in February. This will be a very significant improvement to the guest experience, as we currently do not offer reservations. Today, guests can remotely check into a restaurant waitlist, but cannot choose a specific time to dine. The reservation system is coupled with a self-sitting system, and we believe the implementation of these systems will eliminate the need for a dedicated host position, as well as bolster shorter period cells. Additionally, in conjunction with the new reservation and self-sitting system, I'm very happy to share for the first time that We are nearing the rollout of updated table-side ordering panels, along with a redesigned push-button Mr. Fresh 2.0, which is much easier to use. Servers can spend up to three minutes explaining how to use the existing Mr. Fresh domes to first-time guests, and so this is an opportunity for labor tailwind, as well as an improvement to the guest experience. The Mr. Fresh 2.0 is complete, and we expect to begin U.S. rollout in February as well. In terms of promotions and marketing, our political comps in Q1 were supported by the successful One Piece and Pikmin IP collaboration campaigns. This is the timing of the licensor's promotional schedule. We do not have any IP collaborations planned for the fiscal second quarter. but were extremely excited for the collaborations we have in place for the back half of the fiscal year. In place of IP collaboration for the fiscal second quarter, we are doubling down on the food forecast marketing efforts we have discussed in the last earnings call. Our fiscal year is off to an excellent start, and we are very encouraged to see that. Our comps have returned to productive territory, Our new openings are exceeding expectations and have us even more excited about coolant's ultimate opportunity in the U.S. ICT beta margins have hit an all-time high for our fiscal first quarter thanks to company-wide efforts to control costs. Technological initiatives are progressing smoothly, and we expect to share the results of our first stateside in-restaurant test during our next earnings call. I would like to reiterate my thanks to the entire Cura team, both at the restaurants and our support center, for the amazing work they've done in positioning us to fire on all cylinders. The speed and the comprehensiveness of everyone's efforts has been nothing short of remarkable. Thank you. Yes, now I'll turn it over to you to discuss our financial results and liquidity.

Thanks, Jimmy. For the first quarter, total sales were $64.5 million as compared to $51.5 million in the prior year period. Comparable restaurant sales performance compared to the prior year period was positive 1.8%, with regional comps of positive 7.8% in our West Coast market and negative 2.3% in our Southwest market. Turning now to costs. Food and beverage costs as a percentage of sales were 29%. compared to 29.8% in the prior year quarter, largely due to pricing and supply chain initiatives. Labor and related costs as a percentage of sales were 32.9%, compared to 31.9% in the prior year quarter. This increase was largely due to wage increases and restaurant openings in higher labor cost markets. Occupancy and related expenses as a percentage of sales were 7.4%, compared to the prior year quarters, 7.6%. Depreciation and amortization expenses as a percentage of sales remain flat year-over-year at 4.8%. Other costs as a percentage of sales were flat year-over-year at 14.5%. General and administrative expenses as a percentage of sales decreased to 13.5% as compared to 16.7% in the prior year quarter due to significant leveraging of corporate costs against a growing unit base. Operating loss was $1.5 million compared to an operating loss of $2.8 million in the prior year quarter due to the previously mentioned G&A leverage. Income tax expense was $39,000 compared to $38,000 on the prior year quarter. Net loss was $1 million for a loss of $0.08 per share compared to a net loss of $2 million for a loss of $0.18 per share in the prior year quarter. Restaurant-level operating profit as a percentage of sales was 18.2% compared to 19.5% in the prior year quarter, largely due to higher labor-related costs. Adjusted EBITDA was $3.6 million compared to $1.8 million in the prior year quarter, largely due to greater G&A leverage. Turning now to our cash and liquidity, at the end of the fiscal first quarter, we had $107.7 million in cash and cash equivalents, and no debt. This increase in our cash balance is due to the follow-on offering that we closed in November. And lastly, I'd like to reiterate our 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 lastly, we expect general and administrative expenses as a percentage of sales to be approximately 13.5%. And with that, I'll 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. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and 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 keys. And our first question comes from the line of Jeremy Hamblin with Craig Howell.

Please proceed.

Thanks and congratulations on the strong results. I wanted to just dive into what you've seen in terms of trends here. It looks like you got, you know, mid single digit improvement on your comps in both of your key markets and wanted to just get a sense for, you know, what was driving that. It appears as though Um, your mix was a little bit better in the quarter. Um, I think menu pricing was, was not significantly different from, uh, from your, your last quarter. Um, so wanted to just see if you could provide a little bit of color of that, and then maybe a little bit of color on the cadence, um, throughout Q1.

Sure. Uh, thank you for your first question, Jeremy, but please allow me to answer your question in Japanese. It's going to translate. First of all, Q1 has been improved from Q4. In a big way, as I mentioned in the Prepaired Remarks, One Piece and Pikmin from IP Collaboration have been greatly improved. As for the improvement of price and mix, we focused on udon for the first time in Q1. It was a combo of perfect pair of udon. In terms of the improvements that we saw in Q1 over Q4, certainly one of the major tailwinds that we had were the successes of the IP collaborations we had with One Piece and Pikmin. Those were very successful campaigns.

In terms of price mix, As you've mentioned, price was largely, you know, effective pricing is largely flat quarter over quarter. And so we did see meaningful improvement in mix. We've been talking about having more food focused marketing efforts, and this would be an example of what are the fruits of those labors. We've been really talking up the quality of our udon, the way that we make it from scratch every morning. And we had a follow up campaign called the perfect pair, which was a combo of an udon bowl and a sushi bowl. And that led to significant improvements in side menu attachment without any reductions to per person plate consumption. And so this is some of the best mix we've seen in recent memory. Really pleased to see it.

Also, the cadence in the quarter, this is the same as the entire industry data, but we also liked November. September and October were

And then in terms of the monthly cadence that we saw, we saw largely the same as the rest of the industry.

November was the strongest month for us. Got it.

And then just you noted a little bit of change here in your collaboration kind of packages you're thinking about fiscal 25. You're lapping, you know, kind of Snoopy peanuts from last year in December and January timeframe. And you really don't have that same kind of collaboration going on right now. As you noted, you've focused on kind of food marketing. And I think you've got some, you know, some premium items coming here in the next couple of weeks. But just wanted to get a sense for how Consumers were responding to that, and then just kind of a tangent-related question, whether or not kind of the shift in calendar this year is having kind of any impact on results.

Sure. I'll speak to the first question.

In terms of the IP collaborations, it's certainly true that Q2 is a more difficult comparison than Q1. To your point, we are lapping peanuts, which is one of the most successful campaigns we've had, and we are not running an IP collaboration in Q2. And so it is going to be a more difficult comp from that perspective in Q1, knowing that our focus is going to be on cost control and delivering profitability regardless of that headwind. And so that's really what we're focused on in terms of Q2 specifically. But looking to the full year and to future years, this is, I would characterize Q2 as really just a sort of hiccup growing pain as we pivot to our new strategy. A big part of why we don't have a collaboration in Q2 is simply the timing of different licensors. There wasn't one that we felt really checked all of our boxes. Sort of the same thinking as how we pruned our LOIs going into fiscal 25. And so while we won't have a collaboration for Q2, seeing the results in future quarters and just how strong the IPs are, I think everybody will really be quite pleased with what we have in store.

Got it. And then just the question on the you know, the impact, there's a shift in the kind of the timing of the holidays this year in December into January and wanted to get a sense for whether or not that's, you know, having any impact, good or bad, you know, on what you would expect in those moments.

Yeah, I think January... Ben, can I answer that question? Yes, yes. First of all, regarding December, I think this is all about the industry, but Thanksgiving is the last day of the year, right?

I assume this is the case for pretty much everybody else in the industry, but just looking at the calendar shift, the fact that Thanksgiving came so late into November, we're looking at December and January really as a combined month, sort of along the lines of how you treat March and April as a combined month, just given the calendar shifts that are so typical of those months.

Got it. Thanks for taking the questions and best wishes in 2025. Thanks, Jeremy.

Thank you, David. And the next question comes from the line of Jeffrey Bernstein with Barclays.

Please proceed.

Great. Thank you very much. A couple of questions. The first one, just following up from a comp perspective, you know, I think one quarter ago you had guided to you know, loosely positive comps for fiscal 25, but you noted that you were still kind of in recovery mode, so it was difficult to forecast. It seems like you have some better visibility now. I'm just trying to clarify. It sounds like you're saying for fiscal 2Q, it's possible that the comp reverts to perhaps a modest negative with the collaboration mismatch, but your focus is on protecting profitability, and then you'd expect with the stronger collabs in the back half, you'd return to positive comps in the second half of fiscal 25. Is that Is that a fair assessment of your outlook for the next few quarters in terms of how the comp plays out?

Is that a fair assessment of your outlook for the next few quarters in terms of how the comp plays out?

Jeffrey, or Jeff, thanks for the question. In terms of IP collaborations, our Q1 performance was certainly buoyed by the success of One Piece and Pikmin, which we were very pleased with. To your point, Q2, we were lapping peanuts without an IP collaboration, and so thinking about the comp relative to Q1 is certainly more difficult.

Yes.

The guidance that we gave at the beginning of the year contemplated this. This is not a surprise to us, and so it was always our plan to focus on operations and driving profitability in Q2. And it's the reason that when we talked about comps, we always talked about it in the full-year context. The back half is really where the major opportunity lies, both in terms of the easier comparisons, the implementation of our new technologies, and the IT collaborations that we have in store.

Got it. Very helpful. Jeff, it's Jeff. In the past was that we have our Q1 comp that we get sequentially better throughout the year. I don't think we anticipated a 1.8% comp for Q1. So, you know, that may not necessarily be the case. But like Jimmy and Ben just talked about, for the year, we do anticipate that our comp will be a positive number for the full year.

Understood. And then just... Following up from the cost side of things, again, you focused on profitability in the short term, but inflation, can you update us on the food and labor inflation that you saw in the first quarter and what your outlook is for the second quarter and the full year? Just wondering whether you're able to leverage those line items as we think about the full year.

Sure. I'll answer a labor-related question first. First, regarding labor, this time, Q1 has become higher, but regarding this, The reason for this is wage inflation. We predicted mid-single-regit, but in fact, it became high-single-regit, which is the cause. However, to conclude, Q2 labor costs are the same as the same quarter last year, and for Q2, the previous four were also good numbers, and we are confident that we will be able to do better in the future. That's all for labor. I'll stop here.

So to sort of start with the conclusion, our expectations for labor for Q2 are to be largely in line with the prior year's percentage of sales. And for Q3 and Q4, for fiscal 25 to be superior to fiscal 24's percentage of labor of sales, I'm sorry, labor as a percentage of sales. And so for the full year, we expect labor leverage as well. If you look at our historical earnings calls, you can see that Our general experience has been that we've seen labor inflation of mid-single digits, low single digits. The most recent quarter, we actually experienced high single digits. And so that was a little bit unexpected. But the operational implementations, the streamlining that we've put in place, we've already seen very meaningful improvements in sales per man hours. And these sorts of labor initiatives, the upside is really It tracks along with our seasonality, tracks along with general sales and labor leverage. And so the opportunity presented by the operational streamlining, as well as the additional initiatives that we have coming up later in the year, they really come live in the latter half, the busier half of the fiscal year.

So for labor, we continue to be bullish.

And then on COGS, Jeff, inflation for this quarter on COGS, Jeff, was basically flat. In fact, it was just flat deflationary year over year. So we're very happy where that is. And I don't expect significant increases or any significant inflation for the remainder of the year for COGS and would expect that line as percentage sales to remain where it is or even trend down somewhat for the remainder of the year. If you look year over year last year, we were 29.8 and this year we're at 29. So that's a big improvement over last year. And I expect it to potentially, you know, it'll stay the same or potentially get a little better if we have some stars aligned and things go our way.

And my last question was on the labor initiatives. I think you guys previously talked about how you'd already achieved maybe 100 basis points from back of house initiatives. And I think you were talking about how maybe the reservation system and the self-seating system had potential for another 50 basis points of opportunity. I'm just wondering how that's tracking and maybe what key performance indicators you'll be able to share with us over the next few quarters to kind of see. It sounds like your first one is in February where you're going to be rolling that out. So just what kind of expectations you have over the next few quarters in terms of the initial impact. Thank you.

Yeah, so we're really excited. We're really pleased with the operational improvements. We mentioned that we started them in fiscal 24. Rollout was complete by September, and so they're live in pretty much every restaurant. In terms of the productivity, beyond a doubt, we've seen very meaningful improvements. We're very, very happy with the results. That being said, we didn't see, you know, if labor as a percentage of sales improved year over year, just given that the high single-digit wage inflation was higher more than we'd expected. That being said, the nature of the improvements is it's station consolidation. And so you can go from five people to four people or four people to three people, but you can't really go smaller than that. And so the opportunities where you can go from four to five, or I'm sorry, five to four, four to three, those become much more frequent as we approach the summer and we enter the summer. And so the upside from those, that 100 basis points, is you're really going to see that in the back half of the year. In terms of the 50 basis points that we expect from the self-seeding and reservation system, that remains unchanged.

Thank you very much. Thank you, Jeff.

The next question comes from the line of John Tower with Citi. Please proceed.

Great. Thanks for taking the questions, guys, and Happy New Year to you. So, maybe just, I guess, A couple nuances on the quarter itself, the fiscal second quarter. On the modeling side, I believe in January you traditionally take a round of pricing, and it didn't sound like you spoke to that yet. So did you take any pricing, number one and number two? Last year there was Leap Day. I can't recall whether or not that was included in your same-store sales number or if it wasn't, but could you speak to both?

In terms of the Leap Day, we adjusted for it, and so it was not included in our same-store sales. Okay. Okay.

And then, Jeff, on pricing, we took about 2% price the first week of November. And so the effective pricing for Q1 that just ended is about 4.5%. Okay.

And similar, okay, so we'll have a little bit closer to 5%, say, in the fiscal second quarter, because I don't think anything's rolling off unless there is.

There is a little bit rolling off on January 1st. just rolled off, but your number around 5% for effective pricing for Q2 is about right, a little bit over 5%. And then in terms of additional menu price increases, we typically take them, as you know, beginning of the year and in the middle of the year. We took the beginning of the year one early, as I mentioned, the first week of November. And right now, we don't have any additional plans to take anything in the summertime. but we typically do, but, uh, that is to be determined as we continue throughout the year. And I think we all hope that we have to continue to provide the great value for our guests.

Got it. Cool. Thank you for that. Um, maybe just zoom it out a little bit. I I'm, I'm a little surprised at how conservative your guidance appears on revenue for the year. Again, I mean, just based on where you guys came in, in the fiscal first quarter on the, um, you know, obviously same store sales and aggregate revenue front up 25% year over year. The guidance itself would imply a fairly aggressive slowdown in the back half. So I'm just curious. I know you have some tough comparisons and some IP collabs that you're not doing this year, but is there anything else we should think about with respect to new store productivity, perhaps opening in markets that are maybe more challenging or you're expecting a higher level cannibalization that might be weighing on the revenue growth on a year-over-year basis?

Yeah, so, John, the reason behind the guidance, and we admitted in the last call that it was conservative, the 275 to 279 is conservative. I think we're all very bullish that that can be beat at some point. But if you take the clock back to last April and our call, which when we face our guidance, And then in July, we had to lower the guidance. We want to be very careful about being in a position of that happening. We want to make sure that when we do a guidance raise, that we do see a trend and we don't jump the gun too quickly on a raise. And it really has nothing to do with worrying about productivity in restaurants or any additional cannibalization that we're not already experiencing that we've already talked about in the past. So there's no factors out there that are causing that number to be where it is. It's because we would all like to make sure that we're seeing a trend before we put it out there and to raise our guidance and want to be sure we do raise our guidance. We can keep our promise to the street and not have to reduce three months later.

Got it. Makes sense. And I appreciate that. Can you maybe then just pivoting a little bit to marketing, it sounds like obviously fewer IP collaborations in the future, perhaps more potent than ones you've done in the past. Maybe, could you speak to the differential and spend expected on those versus, you know, at least year over year in the back half, number one, and the number two, you know, your approach to marketing in general, it does sound like you're focusing a little bit more on the food side. I know you, um, Ben, you mentioned earlier the perfect pairing promotion that you did that helped drive mix during the period. So, you know, as consumers and frankly, as investors, is that how we should think about some of the marketing going forward is more of these perfect pair promo or something like that. Um, running through and being promoted through social media rather than these IPs going forward?

You can assume that when we don't have an IP, we're always going to have some sort of alternative going on, whether it's something like a perfect pair or 15th anniversary campaign or holiday scratchers. You know, our pivoting from a constantly packed calendar of IP collaborations doesn't mean that we're not going to continue to have a packed marketing calendar. Got it.

And then in terms of the cost difference between, say, something like the perfect pair or another food-focused campaign versus an IP collaboration, the difference would be about $150,000, $200,000. To the better.

It's $200,000 more expensive when we collaborate with an IP.

Okay. Makes sense. Cool. All right. That's it for me for now, so I appreciate you taking the questions.

Thanks, John. Happy New Year to you, too.

Thanks, John. Thank you.

The next question comes from the line of Brian Mullin with Piper Sandler. Please proceed. Hey, thank you.

Just a question on development. In the prepared remarks, I think you spoke to continuing to move into smaller DMAs over time. You know, I'm just wondering if you could speak to the targeted volumes of those stores. You know, does the DMA dictate what the volume of a store can be, or is it really just a function of the size of the box, and it really doesn't have to do with the location?

Sorry, go ahead, Jimmy. Okay.

First of all, we've always said the same thing, but when we open a new restaurant, Cash-on-cash return is one of the basic standards, so we look at the store size, rent, and sales, and we look at that alone. So, by doing small DMA, we don't have to worry about AUV or sales. Cash-on-cash return is the only thing we can do.

Brian, when we do site selection, our focus really is on cash-on-cash returns. We don't have a target AUV, and so that remains unchanged in terms of how we approach smaller DMAs. We're focused on cash-on-cash returns, and our standards for the smaller DMAs are the same as all of our other DMAs.

Okay. Thank you. And then just to follow up, just a clarification item. You gave the menu price for the quarter. Can you just let us know what traffic was? And I apologize if I missed it.

Traffic was down 2.3% and price and mix was 4.1%. Okay.

Thank you very much. Thank you. You're welcome. Thanks, Brian.

And the next question comes from the line of Sharon Zakpia with William Blair. Please proceed.

Hey, thanks for taking the question and happy new year. You know, it was really nice to see the improvement in MIX, and I know you touched on earlier some of the drivers there. I guess I'm curious on your thoughts on the sustainability of MIX becoming a more neutralized part of comps going forward.

First of all, regarding the side menu, basically this time we did a special promotion, but that promotion is about two months from the first month, but if you look at it, Given that this is relatively recent, without giving too much forward expectations, we think the days of negative high single digit mix

are behind us. We're really pleased with the efforts that the marketing team has made. Typically, when we have a two-month campaign, you see deceleration, the effectiveness in the second half. But we're continuing to see success in December with the most recent Food Own campaign. And so without commenting about the long-term sustainability of the flattish mix that we have, we think that we're in a much, much better position than before. And we've got all these levers that we never even considered to pull in the past. And so this is great, great progress.

Okay. Can you talk a little bit about, sorry, go ahead.

In addition to the great efforts by the marketing team, one of the other reasons why Mix is improving is for the past year to year and a half when we've taken menu price increases, we haven't touched the side menu items at all. So we are lapping the increase, the menu price increases on side menus, which when you take some menu price increase on things, it does impact mix to some extent. And because we're lapping the price increases on side menu, I think that's also why mix is coming in line a little bit, as well as the previously mentioned marketing factors that we've done.

And then, I'm sorry if you talked about this, my cell cut out and I had to redial back in. But on delivery, I know that's a more nascent part of your business. And I understand there's obviously some operational tensions, given how busy the restaurants are. I mean, Where are you on delivery at this point? Is it fully kind of turned on all of the time, all locations? How are you handling that? Is it proving to be incremental or bring in kind of new people to the brand?

Yeah, so I think it's definitely incremental. I think, you know, as soon as somebody opens up their DoorDash app, they're basically committed to eating inside. So that guest wouldn't have been coming into our restaurants anyway. And so any sale we do believe is incremental. I'd say in terms of where we are on that journey, DoorDash has been live at all of our restaurants for almost a year now. Yeah, almost a year. And it is throughput is the issue. We're constantly hitting ceilings just because our restaurants are so busy, which is a great problem to have. But we're always going to be prioritizing the guests that have gotten into trouble coming to our restaurants. And so as we infill markets and we're able to use the incremental restaurants as sort of pressure release valve, for the kitchens, that's when we really see the off-premise opportunity becoming more meaningful. But at this point, we're happy where it is, especially given that it's incremental. And we don't want to distract ourselves from the major opportunity, which is the tremendous white space of the United States.

Great. Thank you. Thanks, Gerard. Thank you, Sal. The next question comes from the line of Mark Smith with Lake Street Capital.

Please proceed.

Hi, guys. First question for me is really on the cost side on corporate kind of G&A, you know, really solid leverage during the quarter. You know, curious, you know, if the guidance is maybe conservative as well as it kind of doesn't bake in any additional leverage throughout the remainder of the year, but Any insight you can give us on the guidance and if there's any costs coming in here later this year that maybe we should be watching for?

No, there's no more costs coming in. And where the guidance is implies a 60 basis point improvement year over year. And I'm still comfortable with that number. I do believe that after having 80 BIPs two years ago and 90 last year in leverage, that it's hard to keep that trend of 80 to 90 points a year. So I'm comfortable with the 60. However, if sales trends do pick up and come in higher than where we expect them to be, then there's the additional leverage there. So when we get into April, I'd be happy to give an update on that if we're at the point where we can. But I do want to get through a couple more months, Mark, before I increase any guidance on G&A, because I still think that a 60 basis point improvement for the year is pretty good.

Absolutely. Another question for me is just around kind of pre-opening expenses, you know, came in a little lower than we'd expected during the quarter. You know, was that a function of just kind of the timing of some of the openings earlier in the quarter, or are you getting more efficiencies and lower costs kind of as we think about pre-opening expenses, maybe even in some of the smaller markets?

First of all, last year's Q1, we had nine stores open. So we are working on six stores for this year. We already have a different number of employees for management in training. The other one is related to G&A reduction. We are thinking about a new structure for the opening team. We are working on opening 2.5 teams to 1.5 teams. We are working on opening some of the opening team members So there are two major things that worked in our favor in terms of pre-opening.

The first is last year we had nine units under construction versus the six units we had under construction during the same period this year. This, you know, we have four managers for any new restaurant. And so you can, that's 12 managers per year. across the three restaurant difference that we had in training. So that's an incremental labor cost incurred in fiscal 24 that we didn't have this year. The other major change is the shift in our opening team structure. Now that we've established beachheads largely across the country, we don't need the, right now we have two and a half, or historically we've had two and a half opening teams. Now that we've established a geographic presence in enough markets, we've been able to pare back to 1.5 teams by reassigning the other members to become store managers at local restaurants. And that has meaningfully reduced our training costs as well. And so that's helped with labor. It's also helped with our G&A.

Excellent. Thank you. Thanks, Mark. Thank you. The next question comes from the line of Jim Sanderson with North Coast Research.

Please proceed.

Thanks for the question. I wanted to follow on to some of the conversations about mix and the shift from mid-single-digit negative to flattish. Have you built similar promotions to drive items per check, similar to, I think, what happened in the first quarter, if I understood the benefit of the pair combo? Is that the right way to think of it?

I've never done anything like this before, but what I did this time and what Jeff said earlier We were really pleased with the Perfect Pair campaign.

It's the first time we've done something like that, and so I'd be very, very surprised if it was the last time we'll do something like that. I think it's going to be a useful tool in our food-focused marketing box Jimmy, I'm sorry, what was the second part? And the other part of Mix is that we haven't taken pricing on side menu for the last year. And the reason that's important in terms of Mix headwinds is that there's less attachment on side menu items. And so you get less flow through on pricing that you take on side menu versus pricing that you take on plates. And so that was a mixed pressure.

Now that we've lapped that, that's less of a mixed pressure.

Another thing that we're doing at SupportMix is leading into our LTOs with some more premium items. We've seen that if we have the right LTOs, we can just increase attachment. It's not really a trade so much as just you know, a tech growth opportunity. And so that's another lever that we have for our mix.

All right. Thank you for that. Just a follow-up question on that. I think you had a promotion in the current quarter that is related to a contest for average check higher than $70. Is that the type of promotion that could help improve mix going forward? Is that the way to think of it?

Absolutely. So this is the first time we've done like a holiday scratcher or any sort of scratch card. But this is not the first time that we've tied a marketing campaign to a spending threshold. In the past, when we've had IP collaborations, we've had giveaways where you can get, say, like a T-shirt or something if you spend more than $70. And these sorts of efforts, yeah, you can really see the impact in check size and mix attachment.

All right. Thank you for that. A quick question on traffic trend. I think on a two-year stack basis, you saw it. a deceleration in traffic trend. Is that where we are today? Is that a good run rate? The low single digit positive traffic on a tier stack?

Yeah, I mean, the thing, the number I want you guys to focus on is the improvement from Q4, the minus 6.1 to minus 2.3 in this quarter. I think that's what's important because, you know, we had some bumps in the road last year when we, in July and, in the summertime, and we talked about that in some of our previous calls. And where the number came out for this quarter at 1.8%, we're very happy with that number. And quite honestly, even though we don't give quarterly guidance, I don't have a problem telling you it's higher than I thought it would be for Q1. And I think it's higher than any of us thought it would be. So I'm happy with that number. And I think it's most important to look at it that way, just because of the – Summertime, like I said, some of the bumps in the road during the summertime, and then also some of the weird things happening in November with the election. I think there's a lot of noise to look at on a two-year stack, so I'd rather focus on the quarter-over-quarter from Q4 to Q1 improvement.

All right, last question for me. Could you just briefly review the shares outstanding to be used for the second quarter in fiscal 25 based on the follow-on?

Yeah, I have that number. Why don't we go to the now? I'll get you that, Jim. I don't have it right in front of me, but I'll get that.

I believe it's 12,000. 12 million.

I'm sorry, 12 million shares. Yeah, understood. Now that it's probably 06 or something like that.

Okay, very good.

Thank you. I get it. And the next question comes from the line of George Kelly with Roth Capital Partners. Please proceed.

Hey, everybody. Thanks for taking the questions. First one, I think you mentioned in your prepared remarks that there's a new Mr. Fresh dome launching in February. And I was just kind of surprised to hear that. What's the opportunity there? Is it maybe more kind of labor-intensive than I would have thought? Or just what's the reasoning behind that launch?

Do you remember the first time you went to Akura Sushi and you tried to open one of those Mr. Fresh's? They're not intuitive. You sort of need somebody to explain them because you need to go under and lift it. And pretty much, if you go to one of our restaurants, pretty much every time I go, I see somebody trying to pry it open like they're like an otter with a clamp. And it's just, you know, it's confusing because most things aren't open like that. And because it's not intuitive, our servers will spend two, three minutes explaining this. They'll even bring a Mr. Fresh to the table so the guests can actually practice it to get accustomed to that. It's not very guest friendly. It eats up our server's time. And the new Mr. Fresh is just, it's a push button. It works exactly as you'd expect it to work. And we're really excited. It's just, it's a lot friendlier. It can be intimidating to come into a restaurant and not know how to order or not know how to take things off the belt. And this, you know, I think this just makes it a friendlier experience for everybody.

OK.

There are a lot of things that are unique to our restaurant that need to be explained if you're coming for the first time, such as how our plate slots work, the fact that we have secret ponds where you can win prizes. And so for first-time guests, you need to go through a spiel and explain all of these different things. But in tandem with the Mr. Fresh 2.0, we're actually releasing an update to the order panel software that on its landing page will have a button asking if you're a first-time guest. And if you click that, it'll play a video that will basically teach you how to enjoy Cura. And so that meaningfully reduces server work as well. Having to do dozens of those during like a weekend peak hour is just, it's a meaningful drain on productivity. And so being able to streamline this is something that we're really excited about.

Okay, excellent. That's helpful. Thank you. And then second question for me. or maybe a couple questions on the reservation system. Most of the conversation in this call with respect to the reservation system has been about the opportunity for cost savings. But I'm curious if you could also discuss the opportunity to drive comp growth. And what I'm unclear on, I guess, is sort of how much you talked about it, I think, improving comp performance for a bunch of different reasons in the back half. Does the reservation system, is that a big factor in that sort of accelerating comp as well? And just how is it going to work? Are you going to open up a lot of inventory to the system, or is it really just kind of shoulder periods? Or if you could just give more detail there, too, that would be helpful. Thank you.

Yeah, so in terms of inventory, that's actually one of the most difficult parts of this project is figuring out the right number of tables to allocate for reservations. And that's actually, we need to do that on a score by score basis. And so that's the operations team is hard at work on that in terms of the traffic opportunity. So what Japan saw with its implementation is that the peak hours would fill up pretty much immediately. And people would realize that. And rather than show up and wait for an hour and leave, they would make reservations for the shoulder periods, five o'clock, nine o'clock, 10 o'clock. And if they didn't want to do that, then they made reservations for the next day or the weekend. And so with our historical wait list, we've had about a 20% drop off where people will sign in and then not eat because the wines are too long. And so that 20%, this is an opportunity to address that directly. I'm by no means expecting a 20% traffic bump, but that is a massive opportunity for us. I'm really excited.

Okay, understood. Thank you. Thanks, George. Thank you, George. And the next question comes from the line of Todd Brooks with the Benchmark Company.

Please proceed.

Hey, thanks, and great start to the year. I have just a few tag-in type of questions. Just following up on George's questioning there, how quickly does this turn on once you start the rollout process? of the reservation and self-seating platform. Ben, you said it's a store-by-store algorithm, but is this a start to turn on in Q2 and it takes a couple months to turn the system on, or is it a longer duration than that?

So the goal that I'm holding myself to, which is ambitious, is a full system-wide rollout by the end of the fiscal year. And so everything so far has moved on track. It's been remarkably smooth. We have our first in-restaurant test next month, I'm extremely pleased with all of our partners. Everybody's really coming together to make sure that this goes on schedule. After we have – well, we'll probably test in the first restaurant for about a month or so and then begin the rollout in earnest. My expectation would be April.

Okay, great. And you spoke to Japan's experience in rolling it out and picking up shoulder reservations and four-day reservations. You talked about the abandonment off the wait list here in the States. Can you talk to the experience in Japan from a traffic lift standpoint from having the system fully rolled out?

Given that Courier Japan is a separate publicly traded company, we can't speak to them in too much detail.

Our understanding and what we've heard from them is that it did have a meaningful impact on traffic, but we're not able to quantify that right now. In terms of the sales list, one thing that we're really excited about with the reservation system is that there is a guaranteed benefit in headcount reduction as it is coupled with the self-seating system. And it is a massive improvement to get satisfaction because we're introducing reservations for the first time and our primary complaint is our wait times. And so this is a direct way to address that. And so we've got two things that we know for a fact are coming with this project. And so even if there isn't a sales lift, There's still plenty of upside. We do expect a sales lift, but in any case, we're still happy with this project.

That's great. And a follow-up, different angle. With the labor efficiency, and you look at the initiatives around consolidating the stations down to three in the back of house, and you look at upcoming self-seeding initiatives, If you look at what it took to staff the restaurant two years ago versus what it should take to staff the restaurant post the rollout of self-seating, how much has that number dropped from a number-of-bodies standpoint?

Well, first of all, back-off the host, or rather, in terms of self-seating, at least one host can be reduced. Other than that, if you look at Mr. Fresh and touch panel updates, Just to confirm, are you talking about historically or expectations going forward? I'm just trying to get an idea. The efficiency, if you pick, I'm pulling the numbers out from memory, but if it was 22 people per shift and

With what we saved with the consolidation, are we going to 18 people per shift once we get to the end of these improvements?

So if we're comparing, say, pre-pandemic staffing, I'd say that at peak, back of house and front of house has gone down by about two people each. And so it's been a pretty meaningful streamlining of the operations.

And then in terms of the operational streamlining that we discussed in the past call,

about the station consolidation. That opportunity really does come from the restaurants being busy. And so the upside is just going to grow and grow as the seasonality kicks in as we progress through the year.

Okay, and then the last one for me. You obviously have visibility into the IP partnerships for the back half, and I think we had two in Q1. We won't have one in Q2. How does the back half from a number of partnerships match up versus, I think, three last years? Is it three to three, or are we stepping down a number of partnerships, but maybe making it up in the magnitude of who we're partnering with? Thank you.

Thank you.

We have two lined up for the back half. They're very strong. We're really excited about them. Okay, perfect. Thank you. Thank you. There are no further questions at this time, and this will conclude today's conference. You may disconnect your lines at this time, and enjoy the rest of your day.