Kura Sushi USA, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kurosushi USA, Inc. Fiscal Second Quarter 2026 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. 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. Porton.

Please go ahead. Thank you, Operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal second quarter 2026 earnings release. It can be found at www.kurosushi.com in the Investor Relations section. A copy of the earnings release has also been included in the AK 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 you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial conditions. 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 to substitute for results prepared in accordance with GAAP, and the reconciliations to comparable GAAP measures are available in our initial 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 on our call today. Entering DC's career, We knew that the second fiscal quarter would be critical regarding our ability to accomplish our stated goals, expectations, and full year guidance. As some of you may have seen in this afternoon's release, our fiscal second quarter was quite strong. We have a lot of good news to share today, including better than expected comparable sales and record-breaking labor leverage. So let's jump right in. Total sales for the fiscal second quarter were $80 million, representing comparable sales growth of 8.6%, with 4.3% of positive traffic and 4.3% of price on the mix. To provide an update on our goal of flat to slightly positive three-year comparable sales, our year-to-date comparable sales growth as of the end of the first half of fiscal 2026 is now 3%. While Q2 is the most favorable quarter in the fiscal year from a comparative perspective, considering our performance to date, we now expect modestly positive full-year comps. Cost of goods as a percentage of sales was 30.4% as compared to the prior year quarters, 28.7%. The tariff situation remains largely unchanged for us. and some minor relief due to the changes in tariff types have been offset by commodity inflation. We continue to expect full-year COGS to be approximately 30%. Labor as a percentage of sales improved by a remarkable 410 basis points from last year's 34.8% to 30.7%. driven by operational initiatives and better sales leverage. Opportunity from labor initiatives scale alongside seasonal leverage, and it's unusual to see this level of impact in the first half of the fiscal year. Given our progress to date, our initial goal of improving labor as a percentage of sales by 100 basis points has proven to be conservative. Moving on to the unit of development, in the second quarter, we opened one new restaurant in Pflugerville, Texas. Subsequent to quarter end, we opened four more restaurants, Orange and Union City, California, Goodyear, Arizona, and Wellington, Florida. The openings from fiscal 26 are shaping up to be just as strong as fiscal 2025, which was the strongest vintage in recent memory. We currently have eight units under construction. As some of these have very recently broken ground, our expectation for new openings in fiscal 26 remains at 16 units. On marketing, it's clear that our strategy of re-emphasizing our IP collaborations is working. Our Kirby collaboration was just as successful as we had hoped. and Nintendo is an excellent partner. Sanrio's evergreen popularity was one of the reasons for our strong performance in February. Our current IP collaboration is with Jujutsu Kaisen, coinciding with the release of their third season. Our next collaboration is with Tamagotchi, as part of its 30th anniversary celebration, followed by Honkai Salaise. We are making meaningful strides on the introduction of status clearing in our reverse program. This will be the most meaningful evolution in the reverse program since its introduction, and we are hard at work to create something that will delight both new guests and long-time proffers. Turning to the reservation system, I'm pleased to report that reverse members using the reservation system a much higher visitation rate than reward members who haven't yet. Our two running top complaints have been our wait times and the accuracy of our wait time estimates. And we feel the reservation system has succeeded in addressing these biggest pain points for our guests. We believe that there's a further opportunity by raising awareness of the ability to place reservations and side steps these rates completely. To this end, after opening up reservations to non-rewards members, we were able to grow the number of reservations placed by over 30%. On these robots, we continue to expect to retrofit the majority of the 50 restaurants that have the space to accommodate them by the end of the fiscal year. It bears mentioning that Our expectation to improve labor by 100 basis points for fiscal 26 does not contemplate the impact of the tissue robots. We expect the robots to deliver an incremental 50 basis point benefit in fiscal 27 over wherever we land at the end of this fiscal year. It's my pleasure to be able to report such a strong quarter and I would like to thank our team members at our restaurants and support center for making this possible. Before I turn the call over to Jeff, I want to take a moment to address our announcement today and recognize and thank him personally. Jeff has been an invaluable partner to me and to Kurosushi over the past four years. His strategic insight and financial leadership has been instrumental in our growth journey as a public company. While we will miss his expertise and partnership, we are grateful for everything he has contributed to our success. This, on behalf of everyone at Cura, we would like to wish you the best of luck and success in your future endeavors.

Thank you, Jimmy, for those kind words. It's been an honor and a privilege to serve as CFO of Kurosushi over the past four years. I'm incredibly proud of what we've accomplished together as a team, and I'd like to thank Jimmy, the board, and every member of the Cura family for their partnership and their trust. Now let me walk you through our fiscal second quarter financial results. For the second quarter, total sales were $80 million, as compared to $64.9 million in the prior year period. Comparable restaurant sales growth compared to the prior year period was 8.6%. with 4.3 percent from traffic and 4.3 percent from price and mix. Comparable sales growth in our West Coast market was 7.2 percent and 9.7 percent in our Southwest market. Effective pricing for the quarter was 4.5 percent. As a reminder, beginning in the first quarter of fiscal 2027, we will no longer provide regional breakdowns for comparable sales, as regional comps are largely determined by the timing of infills and we do not believe they are indicative of overall company trends. Turning now to costs. Food and beverage costs as a percentage of sales were 30.4% compared to 28.7% in the prior year quarter due to tariffs on imported ingredients. Labor and related costs as a percentage of sales were 30.7% as compared to 34.8% in the prior year quarter due to operational efficiencies, pricing, and better sales leverage, partially offset by low single-digit wage inflation. Occupancy and related expenses as a percentage of sales were 8.1%, compared to the prior year quarter's 7.9%. Depreciation and amortization expense as a percentage of sales were 5.2%, as compared to the prior year quarter's 5.1%. Other costs as a percentage of sales were 14.5%, as compared to the prior year quarter's 13.5%, due to higher promotional and utility costs. General and administrative expenses as a percentage of sales were 13.7% as compared to 16.9% in the prior year quarter. Fiscal second quarter 2026 includes $1.2 million of litigation expenses as compared to $2.1 million of litigation expenses in the prior year. Operating loss was $2.2 million compared to an operating loss of $4.6 million in the prior year quarter. Income tax expense was $51,000 as compared to $38,000 in the prior year quarter. And net loss was $1.7 million or negative 14 cents per share compared to a net loss of $3.8 million or negative 31 cents per share in the prior year quarter. Adjusted net loss which excludes the litigation expense was $502,000 or negative 4 cents a share as compared to adjusted net loss of $1.7 million or negative 14 cents per share in the prior year quarter. Restaurant-level operating profit as a percentage of sales was 18.2 percent compared to 17.3 percent in the prior year quarter. Adjusted EBITDA was $5.5 million as compared to $2.7 million in the prior year quarter. And at the end of the fiscal second quarter, we had $69.7 million in cash, cash equivalents and investments, and no debt. And lastly, I'd like to update and reiterate the following guidance for fiscal year 2026. We now expect total sales to be between $333 and $335 million. We expect to open 16 new units, maintaining an annual unit growth rate above 20%, with average net capital expenditures per unit continuing to approximately $2.5 million. And we now expect G&A expenses as a percentage of sales to be approximately 12%, excluding litigation expense. And we now expect full-year restaurant-level operating profit margins to be between 18 and 18.5%. 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.

Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation token 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 the first question comes from the line of Andrew Charles with TD Cowen. Please proceed.

Great. Thank you very much. I was a bit surprised, you know, following the big 2Q, same sort of sales beat, that revenue guidance was inched up. You're looking at consensus forecast. It looks like you're blessing, you know, the back half of the midpoint. So, you know, does that reflect conservatives in the back half of the year? Perhaps you can comment on what you're seeing with the new store productivity as well.

Thank you, Andrew, for your first question. But please allow me to speak in Japanese. Ben is going to translate your question. Thank you very much.

Hey, Charles, or Andrew Charles. My grandfather's name is Charles. Hey, Andrew, this is Ben. In terms of the guidance that we've provided, it really, it incorporates the better than expected performance of Q2, but just given there's a war going on and we don't know how it's going to play out, we felt it was prudent in terms of our guidance just to add the upside from Q2, but not to extrapolate further from that. It doesn't reflect conservatism or pessimism. It's just prudence.

Okay, fair enough. And then, Kyrs, what drove the improvement of Mix to roughly flat? You know, what are you seeing there in terms of attachments or beverages, et cetera, that helped improve that performance?

Yeah. The biggest factor would be our guests are eating more plates per person.

Our interpretation is that this is a reflection of the success of the IPs. When we have compelling IPs, people are that much more incentivized to go for that 15th plate or to hit the spending threshold for our giveaways.

Awesome. Very good. And Jeff, all the best in your new role. Thanks, Andrew. Appreciate it. The next question comes from the line of Todd Brooks with Benchmark StoneX.

Please proceed.

Hey, congrats on a really great quarter. And Jeff, best of luck in your next stop here. So two questions, if I may. One, you talked about the margin leverage in this business and kind of the ability to claw your way back towards a 20% restaurant level operating margin without any sort of tariff relief. I think at a recent conference, Jimmy, you talked about some successful negotiations with some suppliers. We saw outsized labor leverage here. I guess, where are we in that journey and when would you kind of think Cura has the ability to get back to that 20% level?

Well, First of all, regarding the negotiation of the competition, it went well, but unfortunately, in fact, in places that have nothing to do with Talix, the ingratiation of Seadoo came quite unexpectedly, and unfortunately, the effect of my negotiation is expected to be offset. As I said in the Prepaid Remarks this time, regarding the competition, it is likely to hit 30% or more, so I don't think it will contribute to margin expansion. Other than that, this time, the labor cost of more than 400 base points, That's why we continued to connect with 27. Plus, we were able to do 50 basis comp with the DC robot. Also, Q2 comp was good, but it's a modest comp compared to the old one. After next year, we'll be able to open it to the new market, and we'll be able to reduce the impact of the carnival. Sales leverages and labor, those are the main drivers that we can do 18% or 20% of.

Hey, Todd, this is Ben. So we're very pleased with how the negotiations between Jimmy and our suppliers went. And fortunately, we've seen higher than expected inflation in some of our seafood inputs separately from tariffs. And so the upside to Jimmy's negotiations have largely been upset. We're thinking of it in terms of, you know, thanks to the negotiations, we're able to continue to maintain our expectation of give or take 30% COGS for the full year. And so we don't expect that to be a creative margin opportunity. The biggest would be, as we look to next year, as Jimmy mentioned in his prepared remarks, the dish robots, we expect an incremental 50 basis points in terms of leverage. I'm sorry, in terms of labor improvement. And next year, we have a... Previously, we've been saying a 50-50 split between new and existing markets. That's actually shifted even more in our favor to 55-45. These, you know, the new markets have no impact on capitalization, and so that will be a tailwind for fiscal 27. And all things equal, new markets outperform. And so between those things, we feel very confident in our ability to get back to that 20% without carefully.

In the near future.

In the near future.

Okay, great.

Perfect. And then my follow-up question, I'll jump back in queue. And I think, Jimmy, when you were kind of rolling through it, you talked about some future IP partnerships. Can we just review those again so that we pick up the detail behind the upcoming partnerships? And as we're starting to think about, I think at the end of April, this window of IP versus no IP in the prior year. And so as we're looking forward into Q3 here. Can you remind us what we're comparing against? And just give us a qualitative sense of the strength of the partnerships that you see coming up in the future versus what Cura ran last year. Thanks.

Got it. Hey, Todd. This is Ben. The ones that we have lined up after Jujutsu Kaisen or Tamagotchi, which is coinciding with its 30th anniversary, and then we have a partnership with a video game called Honkai Star Rail. In terms of your question, yes. At the end of April, we'll be ending the lapping of the lack of IPs. Starting from the last week of April through May, we had peanuts. And then actually through June, we had peanuts as well. Those months were pretty strong. And then we had HoloLive, which was a strong performer as well. So that sort of goes back to Jimmy's earlier comment about Q2 being the easiest point of comparison. Please do not model 8% comps on a go-forward basis.

Okay, I'll change the bottle now.

Thanks, Ben. Thanks, Todd. Thanks, Seth. The next question comes from the line of Jeremy Hamblin with Craig Howland.

Please proceed.

Thanks and congrats on the strong results. I want to revisit just the tariff ruling and in terms of thinking about obviously some volatility on sourcing potential for freight costs to be passed through as well, given the war. But just in terms of understanding the tariff aspect of your food costs that's embedded here, what's the timing where you would expect, given your forward contracts, to potentially have some benefit, all else being equal? Are we looking at you know, kind of the June timeframe, just given the change in the global tariff rate.

I'm happy to answer this question. I'm happy to answer this question. Hey Jeremy, this is Ben. So to your point earlier, we do make forward contracts for some of our proteins.

Because our basket is so wide, we have, you know, the contracts don't expire on the same date, so to speak. They're all sort of overlapping. And so there wouldn't be a, you know, a moment where we would expect a really meaningful shift. The other thing that bears mentioning is with the tariffs, while the IPA tariffs were taken down, they were replaced by other tariffs. And so the relief was really quite minor for us. And this has been offset by, you know,

fuel costs, and just protein inflationary basket. Got it.

So with that, I wanted to talk about kind of technology investments that you guys have been making, which have had nice success, the reservation system, you know, robotic dishwashing. In terms of other labor initiatives, because it looks like you guys have made some really nice progress, tremendous, progress on the labor front. Can you talk about, you know, with so many tools now available, and you guys have really been an industry leader in making technology investments to help make your business operations more efficient, can you just talk about some of these tools that are available, whether they're, you know, kind of AI generative tools to help with labor scheduling or otherwise? that provides some opportunity on a go-forward basis, whether it's, you know, in FY26, but more likely in the future, just to potentially really refine the business model.

First of all, the first thing I'm going to talk about is the Suzy Slider, which I've talked about many times. This is a USMAT certification. This is not a 50 basis model or a big impact, but a new high-volume restaurant weekend. There is little system-wide impact, but I would like to share that such a new product has been produced. In addition to that, I would like to introduce various products such as a soup dispenser to make the quality of the food consistent. Hey, Jeremy. So to give you an update on the robotic dishwashers, we expect to finish the installation of our first 10

or tranche of the first 10 by the end of this month. And so we're very happy with the progress. Jimmy's happy to announce that we've actually gotten approval for American use for technology that we've mentioned in past calls, the sushi slider. And so this will be limited to new store openings. And we don't expect, you know, a straight headcount reduction in the way that we'd expect with the robotic dishwashers. But this will be a market opportunity, especially for higher volume restaurants on weekends. In terms of the tech things that we're looking at, we're focused a lot on using technology to improve food quality and food consistency. And we're also starting to explore more guest-facing technologies as well that aren't as focused on efficiency as much as they are focused on fun, which we see as a meaningful opportunity in terms of driving traffic as well going forward. In terms of AI, we're using a couple, we're using the social media listening tool right now, but I've been assigned AI broadly. I'm the chair of our new AI committee, and this is large, this is eating most of my time, and so I hope to have exciting updates for you guys in the future.

In terms of AI opportunities, menus and IPs,

Really, it's kind of shocking how meaningful the strides have been and in terms of the ease of making specialized tools for your business. We see a lot of really, really exciting things we can do. One obvious application would be to try to hone in on the batting average of our IT collaborations, that would be something that we'd be really excited about.

Great. Thanks for the color, and best wishes to the team and Jeff on his next endeavor. Thank you. Thanks, Jeremy. The next question comes from the line of Jeff Bernstein with Barclays.

Please proceed.

Hi. This is Anisha on for Jeff Bernstein. Before my question, I wanted to thank Jeff for four years of collaboration and wish him all the best going forward. As you think about bringing a new CFO, what capabilities or prior experience are most important given Kira's next phase of growth, particularly around unit development, capital allocation, or systems as the business continues to scale?

Yeah, hey Nisha, this is Ben. You know, Jeff has been such a great partner to us.

We really, uh, we set high expectations for the role and we're looking for somebody who can satisfy that. And so that's something that our nominating committee is working on right now. All those, uh, you know, qualifications that you've mentioned. Um, personally, I would, uh, love somebody as charming and charismatic as Mr. Utes. It's been a lot of fun working with him. And so, uh, we're, we're not in a rush to fill the spot for the sake of filling the spot. We know it's a very, very important role and we're going to give it the appropriate attention.

Great. And as a follow-up, you've got it to around 20% unit growth for fiscal 26. So looking beyond that, what gives you confidence that a similar growth rate is sustainable into fiscal 27? And what key guardrails are most important to preserve as the system scales?

First of all, we're already working on the pipeline for the 27th. So we're already working on the pipeline for the 27th. So we're already working on the pipeline for the 27th. So we're already working on the pipeline for the 27th. After all, the more you open it, the more the unit economics will go down, and the more operations will be lost. I try not to do that, but in terms of 27, there is no problem with the number and quality, so I think I want to maintain 20% as long as possible. However, at the same time, I think we should be flexible, so I think we should monitor the performance of the new restaurant and the situation of the operation, and when we should do it, we should change it.

So as it relates to fiscal 27, we already have our pipeline built, and so we feel very confident about our ability to hit that 20% unit growth for fiscal 27. In terms of the gating factors, the way that we've always thought about it would be if our new units are not meeting our expectations, if they're coming in below the system average for unit economics, that would cause us to seriously reconsider how quickly we're growing. As Jimmy mentioned earlier, fiscal 25 is one of the strongest years we've opened in recent memory, and fiscal 26 is shaping up very strong as well, and so we're really pleased with that, and we'd like to sustain that 20% unit growth for as long as possible. At the same time, we don't want that 20% to become the tail that wags the dog, and so if it ever... We're always looking at it critically. It's not a blind chase of a number, and should... circumstances change, we like to maintain our flexibility. But for where we have visibility as it stands today, we feel good about that 20 percent.

Great. Thank you.

Thank you. The next question comes from the line of Sharon Zacchia with William Blair.

Please proceed.

Hi. Thanks for taking the question. I guess I have two. The first is kind of going back to one of the initial questions on I guess, Jimmy, you said, you know, slightly positive comps for the year, and you can kind of get there with no comps for the rest of the year. And I get that there's geopolitical uncertainty and all of that, but are you seeing anything in the business that would suggest that you can't maintain positive comps for the rest of the year?

I haven't said that I want to maintain positive comps in the future. There are a lot of answers, so... So Sharon, I'm sure you recall the traumatic and unfortunate experience a couple years ago where we raised guidance

And then in a number of weeks, we had to lower guidance below the initial guidance. And that's sort of informed a level of conservatism in the way that we provide guidance ever since. But having had that lesson and knowing today that, you know, the president has like a deadline and we don't know what's going to happen, it just seems irresponsible to get ahead of our skis. And so the guidance reflects that.

you know, what we're seeing today and what we're confident that we can hit.

And we're pleased to have supporters going so far. Just looking at how the environment is, we're pleased with how things are proceeding.

Okay. Second question is, you know, it may have been causal, it may have been coincidental, but it certainly felt like the company got a lot more discipline around GNA when Jeff joined the company. And I guess I'm curious, like, do you think now that's part of the muscle memory of the company and ingrained that, you know, you will seek GNA leverage on an ongoing basis, even as Jeff departs? And again, sorry to see you go, Jeff.

Thanks, Sharon. I mean, I'll let Jimmy and Ben address, you know, going forward, but You know, we made a lot of strides. I'm proud of the team. I was fortunate to be in the driver's seat for the G&A reduction and kind of lead the charge. But, you know, the team really stepped up. And, you know, over 400 basis points in just over three years is quite a bit when you kind of multiply that by, you know, the trading multiples and all that. It's quite a bit to our valuation that I'm quite proud of. You know, going forward, as Jimmy said earlier, you know, as I search for a new CFO, They're not going to rush it, and it humbles me and makes me feel proud that the company thinks of me the way that they do. And I wish them the best, and I'll be on the sideline continuing to watch what they do. And I hope that the new CFO continues to lead this to a single-digit G&A at some point, as I have promised in the past.

Jeff has carved such a clear and sustainable path forward for us that

We absolutely expect to continue to leverage CNA, and that's going to be one of the primary mandates for whoever becomes the next CFO. As much as I would love to, you know, double my salary, we know that there are more prudent ways to spend our money. You know, it's just, it's one of the things that our investors have come to expect. It's part of our guidance. And so it's just, it's part of, you know, our report card at this point. And so Jeff leaving doesn't change that.

That's great. Thank you.

The next question comes from the line of Mark Smith with Lake Street Capital Markets.

Please proceed.

Hi, guys. I wanted to dig into the comp just a little bit, and sorry if I missed any update on this. But can you guys speak at all to March and maybe as we saw gas prices rise, any changes in consumer behavior there? And, you know, potentially in the past, if gas prices have had a significant impact on your consumer, whether it be, you know, the plates that they eat or traffic trends.

First of all, as I said earlier, we are happy with the progress we have made so far. And the other thing is not that we are happy, but we are currently over $6 in California, so we are not affected by the current environment at all. So as Jimmy mentioned earlier, we're happy with how the quarter to date is going.

As it relates to gas prices, Jimmy and I, we're in California. Gas prices are $6. Whether we're talking about Quora or any other company, it would be Bullish to think that this would not have an impact on the consumer. That being said, we are pleased with performance. And yeah, that's where we are. Okay.

Last question is just around cadence of openings as we look at the back half of the year, the remaining restaurants to open. Will these be More heavily, I know you've got four open, but should we look for the rest of those in Q4, or can you squeeze more in here in Q3 or even early in Q4?

There are a number of stores that we're hoping to open up in Q3, but for modeling purposes, it's We think it's safe to assume back half weighting relative to Q4.

Perfect. Thank you, guys. Thanks, Mark.

The next question comes from the line of Jim Sanderson with North Coast Research. Please proceed.

Hey, thanks for the question, and Jeff, best of luck in your research. New opportunity. I wanted to go back to seafood inflation and more broadly food costs. Is there any concern that we're going to start seeing or hearing about fuel surcharges or incremental invoice impacts from aviation fuel increases or diesel fuel in the next couple of quarters?

Hey, Jim and Chef. I've been really deep into this as I finish up here. We're really watching this. That is a possibility. Fuel surcharges are something that the – the delivery companies like to impose. I did ask our supply chain team. We haven't seen a lot of it lately, just a handful, but that is a possibility. It does happen, obviously, when fuel goes up. We push back on those. In my seat, I've had these before at other companies, and I don't just accept them. I push back and say, look, that's the cost of doing business. If you want to adjust your prices, go ahead, but they typically don't. And they will usually allow you to cross out those line items on the invoice. And I've been pretty successful with that in the past. That being said, as Jimmy mentioned earlier, there's just a lot of puts and takes and food costs right now with what's going on in the world. And that's why we've kept our guidance at the 30%-ish number for the year. And we think with all the negotiations, minus anything that's going on with fuel and delivery costs and all that, We remain pretty confident in that 30% number as of where we sit right now for the year.

We remain pretty confident in that 30% number as of where we sit right now for the year. If you look at the average check, it's just over $1. Since it's an American restaurant, I don't think there's an average check increase of just $1. Right now, other proteins are also rising. And when we think about the current state of the freight cost, we're not planning on pricing next. We're sure that the value proposition is getting stronger. No matter how economic it is, I think we're making a very good progress. Hey, Jim.

So just to add on to Jeff's comment, we're very, very proud that we've been able to keep our cost of goods sold at 30%, all things considering. When you look at our Q2 comps, half of that being driven by traffic, we see this as vindication of our strategies. The 4.5% effective pricing that we're running as of November translates to roughly $1 per person. We know that our direct competitors, the individually owned sushi restaurants, there's just no way that they're able to keep the doors open by charging just one extra dollar per person. And that value delta has become clearer and clearer to our guests. And so this dynamic isn't fun, but it works in our favor. And as incremental pressures arise, again, it won't be fun, but it will work in our favor. And we're really happy that we, as we see the year now, we feel that we have no need to take further price this year.

Okay. And that assumes about 4%, 4.5% for the fiscal year for price?

It'll be a little bit below 4% on a four-year basis.

Last question for me. I think last year reported about a 500 basis point negative impact because of wildfires and other issues. If we peel that off the 8.5, the comp you reported, is that a good run rate for where you think you are trending March, April to date?

Jim, unfortunately, we had weather as well this year.

And so the comps are so good that it doesn't seem obvious, but we did have pretty significant winter weather that impacted our sales. And so the 400 to 500 basis point, well, that's not a 400 to 500 basis point tailwind this year.

It's more like a 200 basis point tailwind.

Okay, okay. So, again, maybe I can ask it one last time. How should we think about the performance in the back half relative to the guidance? Low single digits, just kind of bridging that gap.

Well, as I've been talking about, there's no guidance in the quarter. Also, when we upgraded, we lowered it a little bit. We don't like to make it a practice of giving quarterly guidance.

And just given all the moving parts, we feel it's especially not a good time to try to give quarterly guidance. But we did provide a guidance update at the beginning of this call. That incorporates everything that we've seen to date. And to reiterate, we're happy with how Q3 has performed so far.

Understood. All right. Thank you very much. Thanks, Jim. The next question comes from the line of George Kelly with Roth Capital Partners. Please proceed. Hey, everyone. Thanks. First,

Ben, in response to one of the earlier questions, you mentioned there being opportunity for tech enhancements around food quality and consistency. I don't know how much you're going to want to say on today's call, but can you provide a little more detail just on where you think there could be opportunity there?

I'm happy to answer this question, George. First of all, there are two things. First of all, there are two things. So the two that are on the,

the docket right now. One is managing our broth. And so we make all of our broth, all of our stock from scratch every morning. During my training period, I was responsible for doing this. So this is near and dear to my heart. But you make the broth in the morning and if you're keeping it warm, it evaporates. And so it gets progressively more concentrated and bitter. And so we have this technology that we use in Japan that allows know it to stay fresh all day long and so we're really excited to bring that over make sure that we have you know very consistent quality on what we see is one of the most important things about our uh our restaurants being our broth the other that we're working on is uh so we have a sear station for so like the uh the seared mayo salmon for instance uh we do that by hand right now but we're working on uh automating that And so that'll give us much greater consistency, probably a little bit in labor savings, but that's mostly a food quality effort.

Okay. Okay. Helpful. Thank you. And then two other quick ones. Litigation expense, what are your expectations for that in the coming quarter? Should it stay kind of consistent with what you just did? I think it was 1.2 in the quarter. And then second question on labor. I may have missed it, but did you provide more specific, like an updated guide for the year on labor?

And that's all I had. Thank you. Sorry, thank you.

I'll address the litigation one, George, and then Jimmy can jump into the labor side. On the litigation, I mean, unfortunately, this is just a negative byproduct of doing business in California. And, you know, any of the restaurant companies that you follow or anybody else follows, you get sued in California for just wage and hour stuff, regardless of how buttoned up your system is. So what are my expectations? My expectations are to never be sued because I think we're very buttoned up. But it just happens in California, and it's an unfortunate thing. So I would like to tell you that they're done, but we just don't know. But I will assure you that our employment, you know, the practices that we employ in terms of employment and wage and hour law are some of the best that I've ever seen. But you just can't get away from it in California. So that's where I'd leave it. I'm hopeful that we won't see any more, but you just never know.

Hey, George, as it relates to labor, we're not expecting 400 basis points

been leveraged in the coming quarters. There were a lot of idiosyncrasies to Q2 that led to that 400 basis point. But we do think that for Q3 and Q4, we can improve labor year over year by about 150 basis points.

And so we're looking forward to giving you guys updates on that. Okay. Thanks. And Jeff, it's been a pleasure. All the best to you. Thank you, George. Appreciate it. The next question comes from the line of Matt Curtis with DA Davidson. Please proceed.

Hi, thanks. I just had another one on the reservation system. Jimmy, in your comments, I think you mentioned that it was driving a much higher visitation rate. So just wondering if you've seen any sales lift from increased usage of the reservation system. I mean, I think you guys previously said you've not been explicitly baking in any sales upside from this and just wanted to see if this is still the case or not.

Yeah, our internal estimate is that the reservation system has contributed about 1%, and so we're very pleased, especially given the headcount reduction that's already delivered.

Okay, great. And one last one for me. I think you had a gap in your IP collaborations for the first two weeks of March due to some inspection issues, I believe it was. Could you maybe just provide a little more detail around this and whether you think it's more of a one-off or something that could potentially reoccur.

This has actually never happened before in our history of being in the United States, and so we really had no reason to expect it. We don't expect it to happen again. We're not sure why it happened this time, but we think it's one-off.

Also, in this case, I think impact is very limited. In any IP collaboration, the first two weeks that started, So while we weren't happy that this happened,

we don't really see it as a meaningful headwind just given that the overwhelming upside and response opportunity for the IT collaborations tends to be the first two weeks. And so it's not like we lost those first two weeks. We just pushed them back by two weeks. And so if we lost anything, it would have been the last two weeks of the campaign, which, you know, tailwind comparison to the first two weeks. And so it's unfortunate, but it's, Not as much of a headwind as it might sound like. And to reiterate, we're happy with Q3.

Okay.

Sounds good. Thanks very much. And best of luck, Jeff. Thank you. Thanks, Matt. The next question comes from the line of John Tower with Citi. Please proceed.

Great. Thanks for taking the question. Just curious, I noticed that you guys during the quarter did a sushi lunch combo. I think it was $13.99, and it wasn't something that's seen before, but I think it's something you've done in the past, just not in recent memory. So I'm curious, one, how consumers responded to it. Two, did it end up impacting your mix at all or traffic during that lunch period? And is this also a sign of something that you feel comfortable with using again in the future?

This is something that we've done every winter.

We usually do some sort of combo with our soups and our noodle dishes. We think they're really good and we want to give people opportunities to or, you know, reasons to try them. And so that's something that we've done every year. It has an impact, but not, you know, it's not really a big needle mover. We'll probably do something similar in the summer as well, not for soups, but we don't expect it to be a big needle mover.

And one more thing, this is also something that we've been talking about recently, but we think that if we succeed in the IT collaboration and recognize the importance of it, we'll be able to promote food in the restaurant industry as well. And John,

It's really great to see how successful the IPs have been working, but we don't want to be entirely reliant on IPs. And so to that end, we've been working on a lot of LTOs, even going above and beyond the career reserve. For instance, in March, we had a campaign called Wagyu of the Seas. It was very high-quality Toro. And, yeah, we've got a pretty good calendar in terms of reasons to come in.

Got it. Thank you. I appreciate that. And I got to go to the stores more frequently to make sure I can understand what's new and what's not. But I guess, you know, you'd mentioned earlier, obviously, that, you know, this year you've been pretty disciplined on pricing and that the competitive set is likely going to have to pass along a lot more pricing than what you guys are going to, what you guys are planning to do for the year. One, have you seen that happen, you know, anecdotally based on your own work that you've done? And then two, You know, have you seen any signals that because of the price increases or potential price increases from the competitive set that consumers are pushing back and or like there's risk that these other chains, these other stores might have to, you know, close their doors because traffic is just not showing up the way that it should?

It's possible. I mean, this is a dynamic that's played out twice before. At least with my time at the company, once during the pandemic and once during the post-pandemic supply chain issues, it's always been a traffic boon to us. The reason that we are interpreting, the reason for this interpretation would really be we took 3.5% price on November, but our traffic accelerated. And so we don't think there'd be a reason for that if it weren't clear that the value was amazing. Anecdotally, yes, we are seeing it. You'll be able to confirm the same thing just by looking at Yelp menus and going back historically and seeing their current menus, and I think you might be surprised.

Got it. And are you guys highlighting that in any of these social or digital marketing that, like, how can you communicate that to guests?

That's a tricky message. Everybody's raising price but us. It's not a good slogan.

Yeah. I think I've mentioned this a few times before, but in order for us to be able to compare our prices with other restaurants, we haven't been able to do that, but we've been able to target other restaurants. We've been doing this since the end of last year, so it's a bit difficult to quantify, but I think it's going to have an effect. There's a lot of competition in certain places,

One thing that we do do is target marketing, especially if we're able to see that the competitive set in that local market is taking price pretty aggressively. We can spend incremental advertising dollars there just to get eyeballs, and that's worked pretty well. Another tool, you know, we just talked about the Wagyu of the seas, but that makes it easier for guests to make a direct comparison with higher-end sushi as well. And, you know, if they're not impressed by the salmon, getting the bluefin toro for $4 is impressive.

And so it serves dual purposes, these LTOs. Got it. Thanks for taking the questions. Thanks, y'all. Thank you.

This concludes today's question and answer session, and this will also conclude the conference as well. You may all now disconnect your lines at this time, and we thank you for your participation. Have a great day, everyone.