Kura Sushi USA Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 11 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kurosushi USA Inc. Fiscal Fourth Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the lines will be open for your questions following the presentation. Call.

Operator

Call. Please note that this call is being recorded. On the call today, we have Hajimejimi Uva, the President and Chief Executive Officer Jeff Yertz, the Chief Financial Officer and Benjamin Porton, SVP, Investor Relations and System Development. And now I'd like to turn the call over to Mr. Porton.

Operator

Thank you, and you may proceed, sir.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal Q4 2023 earnings release. It It can be found at www.kurtissushi.com in the Investor Relations section. A copy of the earnings release has also been included in the 8 ks we submitted to the SEC.

Speaker 1

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. Call. 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 and financial condition. Also during today's call, we will discuss certain non GAAP financial measures, which we believe can be useful in evaluating our performance.

Speaker 1

Call. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance with GAAP. The reconciliation and comparable GAAP measures are available in our earnings release. With that out of the way, I would like to turn the call over to Jimmy.

Speaker 2

Thanks, Ben, and thank you to everyone for joining us today. I'm very pleased to announce that we've closed another record breaking year is a great fiscal Q4. Before we dive into discussing our most recent quarter, I would like to have a quick recap of What we have achieved over the full fiscal year. At the beginning of the year, we mentioned 3 major goals for fiscal 2023: Maintaining excellent operations, continuing to rapidly grow our restaurant base and leveraging our G and A against increase of our increasingly large restaurant base. I'm proud to report our success on all of these fronts, as demonstrated by our full year less than double operating profit margins, improving 70 basis points year over year to 21.9%.

Speaker 2

Record 10 new unit openings and full year G and de leveraging of 80 basis points over the prior year. Our AFVs have grown from $3,800,000 in fiscal 2022 to $4,300,000 in fiscal 2023, reflecting the incredible run of new unit openings we've had in recent years. These successes Directly translated to improvement in profitability. Our adjusted EBITDA grew from $9,200,000 in fiscal 2022 to $14,300,000 in fiscal 2023, representing a growth rate of over 56% in a single year. Total sales for the fiscal 4th quarter were $54,900,000 representing comparable sales growth of 6.5%, with traffic growth being responsible for 5.6% of our total comp.

Speaker 2

In spite of ongoing concerns over deteriorating macro environment, more guests are coming to Kura Sushi than ever before. Our profit is actually outperforming pre pandemic levels. We continue to be pleased with our sales performance As we enter the new fiscal year, with blended comps for September October of 2.7%, Total revenue of approximately $34,300,000 and the positive traffic in both months. Community costs have continued to improve. Our cost of goods sold as a percentage of sales of 29.5 percent is a 120 basis point improvement over the prior year quarter and a 50 basis point sequential improvement over the prior quarter.

Speaker 2

Labor costs as a percentage of sales have held steady at 28.8%, confirming the expectations we had shared during the previous earnings call. Restaurant level operating profit margins reached an all time high of 24.4 percent, representing a 50 basis point improvement over the prior year quarter. During our fiscal Q4, we opened 4 new restaurants Long Island, New York in San Jose, California and Framingham and Dorchester in Massachusetts for a total of 10 unit openings in fiscal 2023. Our momentum on the development front is better than ever. Since entering the new fiscal year, We've already opened 4 units, Pittsburgh, Pennsylvania, Flushing, New York Tampa, Florida and Naperville, Illinois, with another 7 units currently under construction.

Speaker 2

It's been wonderful to see Kula continue to resonate in new markets as we expand across the country. Turning to new initiatives. I'm very happy to announce that We launched our new rewards program app in mid October, and the guest responsibility to our to the new app has been uniformly positive. While our previous rewards app has been very effective in growing traffic by encouraging repeat visits, The visual presentations app and its usability was lacking. In comparison, Our new app is very highly rated on the App Store and the Google Play Store, with many users commenting on the significant improvements the new app has delivered.

Speaker 2

The response from existing users has been nothing short of great. But what's really exciting is that Since launching our new apps, the number of weekly new user registrations has more than doubled. To be clear, these are not existing users that were migrating their accounts, but completely new guests that were joining our rewards program due to the improvement that we had made. I would encourage everyone on this call to download our new app as you'll be able to immediately receive a leave in priority. On top of the improvements to the guest experience, our new reward platform has unlocked completely new opportunity for our marketing team such as customer segmentation, targeted marketing and new ways of rewarding and engaging with our guests.

Speaker 2

I'm extremely excited for its potential and expect is to be a meaningful sales driver for us as we plan to unlock its potential. Development of the robotic dishwashers will continue to progress with the 1st industrial implementation in Japan expected in spring of 2024. Following this pilot, we'll be able to begin the certification process for implementing the robotic dishwasher in the U. S. While we do expect the dishwasher robots to have a meaningful impact on our labor model in future years.

Speaker 2

As we have stated in past earnings call, We do not expect implementation during this fiscal year, and we expect its impact to slowly ramp as These tissue shell robots will be limited to newly opened vessels. Our current rigid Kaizen IP collaboration have had a great guest response and our upcoming pipeline of brand collaborations is our strongest one yet. I'm so excited to see what we can achieve in fiscal 2024, and I'm deeply grateful for the continuous hard work by our team members at our restaurants and at our corporate support center for setting us up for another amazing year. And with that, I'll turn it over to Jeff to discuss our financial results and liquidity. Jeff?

Speaker 3

Thank you, Jimmy. For the 4th quarter, total sales were $54,900,000 as compared to $42,000,000 in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 6.5 percent with regional comps of 12.1% in California and 3.3% in Texas. Turning now to costs. Food and beverage costs as a percentage of sales were 29.5% as compared to 30.7% in the prior year quarter, largely due to pricing and the stabilization of commodity inflation.

Speaker 3

Labor and related costs as a percentage of sales decreased to 28.8% from 28.9% in the prior year quarter. This decrease is due to incremental efficiencies created by the implementation of technological initiatives and sales leveraging from increased traffic margin pricing, which was largely offset by wage increases. Occupancy and related expenses as a percentage of sales were 6.6% compared to the prior year quarter's 6.5%. Other costs as a percentage of sales increased to 13.8% compared to 12.4% in the prior year quarter due to costs associated with a greater number of store openings as well as an increase in marketing costs and general cost inflation. General and administrative expenses as a percentage of sales decreased to 13.2% as compared to 13.3% in the prior year quarter.

Speaker 3

On a full year comparison, G and A expenses as a percentage of sales decreased to 15% as compared to the prior year's 15.8%. This represents an increase of G and A dollars of 25.8 percent for fiscal year 2023 as compared to sales growth of 32.8% over the same period. With the leveraging of G and A being one of our key goals for fiscal 2023, we are very pleased with these results and expect to achieve further leverage in the coming fiscal years. Operating income was $2,200,000 as compared to operating income of $1,900,000 in the prior year quarter. Income tax expense was $167,000 compared to $61,000 on the prior year quarter.

Speaker 3

Net income was $2,900,000 or $0.25 per diluted share compared to net income of $1,900,000 or $0.19 per diluted share in the prior year quarter. Restaurant level operating profit as a percentage of sales was 24.4% compared to 23.9% in the prior year quarter. Adjusted EBITDA was $6,300,000 compared to $4,800,000 in the prior year quarter. Turning now to our cash and liquidity. At the end of the fiscal Q4, we had $69,700,000 in cash and cash equivalents and no debt.

Speaker 3

And lastly, I'd like to provide the following guidance for fiscal year 2024. We expect total sales to be between $238,000,000 $243,000,000 We expect to open between 11 13 units with average net capital expenditures per unit of approximately $2,500,000 and we expect general and administrative expenses as a percentage of sales to be approximately earnings call, we will no longer quantify quarter to date performance. And with that, I'd like to turn the call back over to Jimmy.

Speaker 2

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 and A session, I may answer in Japanese before my response is translated into English.

Speaker 2

Thank you for your attention.

Operator

Thank you. At this time, we will be conducting a question and answer change to 2 questions. And if you have any further questions, you are welcome to rejoin the queue to ask further questions. It may be necessary for you to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Operator

The first question comes from Joshua Long from Stephens. Please proceed with your question, Joshua. Joshua, you may proceed with your question. If your line is muted, please unmute your line so that you can pose your questions.

Speaker 4

Great. Thank you for taking my question. Curious if we could talk through the trends that you saw through the 4th your fiscal 4th quarter that we had previously Talked about June and kind of the almost 15% range, but curious how that trended in July August? And then as you think about Kind of the early trends here in 1Q 2024, can you remind us kind of what we're lapping over and or How you think about the brand awareness initiatives that you've been working on in terms of a traffic driving tool? Thanks so much.

Speaker 4

Sure. Thank you just for your

Speaker 1

Hi, Josh. This is Ben. Regarding the June comps, we were very pleased that as we mentioned in the prior earnings call, July August were among the most difficult comparisons, if not the most difficult comparison that we've been up against since going public. We were We had the Demon Slayer campaign. We had the benefit of the full rollout of the 3 initiatives for the first time in Q4.

Speaker 1

And We also had different operating conditions in 2022, which made a compare or I'm sorry, 2021 making comparison 2022 a little easier. And so the comps for Q4 of 2022 were 28%. For us to have hit 6.5% and in fact to have comped 5.6% in positive traffic over that 14% or so positive traffic from last year, we think is quite an achievement. And so we're very pleased with results. Josh, did you have did we answer your whole question or was there Anything that I didn't address.

Speaker 4

I appreciate that. And then just thinking forward, I mean, you've done A great job in terms of broadening the awareness of the brand with some of your brand partner collaborations. Curious how those are performing and kind of Any sort of early read or additional context you could offer for 2024?

Speaker 1

So as we mentioned before, for us to have lapped that 28% comps with positive traffic. We're very pleased and certainly the IP collaborations that we've been working with has been a big part of it. In the last earnings call, we mentioned just how strong We Bare Bears was and that was certainly a lift for a traffic perspective. Right now, our current collaboration is with Fujitsu Kaisen, which is a very popular anime that's going very well. And while I can't disclose the full pipeline for the remainder of the year, we do have, I would say, the most exciting trends ever to have collaborated with Kura coming up.

Speaker 1

And so I'm extremely excited to give you updates on that as we get further into the quarter or I'm sorry, into the fiscal year. Thank you.

Speaker 2

Thanks, Yaj. Thank you, Tush.

Operator

Call. Thank you. The next question comes from Jeffrey Bernstein from Barclays. Please proceed with your question, Jeffrey.

Speaker 5

Great. Thank you very much. Two questions. First, just wanted to follow-up on the comp trend. Totally appreciate lapping a 28% comp is extremely difficult.

Speaker 5

But in order to flush out the comparisons that I think you said got more difficult as the quarter went along, Perhaps you can share on a 2 or 3 year basis, however you look at it, because it does seem like, right, the comp if you're running close to 15 in the 1st 5 weeks You did a 6 and change for the full quarter that it was pretty flattish in the back 9 weeks. I'm just trying to gauge whether you think it was a sequential slowdown at all or whether on a multiyear basis It was actually fairly stable. Just trying to get a sense for the trend throughout the quarter flushing out the comparisons.

Speaker 1

Yes. On a multiyear basis, I would say that it's stable. Last quarter was really exceptional. July August in particular had the Demon Slayer collaboration, which Really unprecedented traffic for us.

Speaker 5

Do you share them just So we had to figure out kind of how that was in terms of 2 3 year. Can you share the monthly numbers last year so

Speaker 1

we can kind of gauge? I don't have them in front of me, but I believe if you go to our past earnings calls, you'll be able to see them in the archives.

Speaker 5

Okay. And then my second question was looking forward from a restaurant margin perspective, I appreciate that you gave top line guidance In terms of revenues and units and whatnot, but as we think about the margins and the flow through the earnings, any thoughts you can give in terms of fiscal 2024? I mean, The commodity and labor basket inflation, I presume, just wondering what you're thinking for each of those and whether you have an ability or desire to hold the margins is flat. Maybe how much pricing you're anticipating in fiscal 2024? Any color on the key line items on the pricing to offset ultimately leading to restaurant margin would be great.

Speaker 1

So we'll let Jeff handle commodity. But just to In past earnings call, we've been mentioning that we've been seeing about double digit year over year labor inflation. We're very pleased to be able to say that that's moderated down to mid single digits, Which really is sort of reflected in our pricing decisions that we made in July. As you know, we lapped 7 percent, the earnings of 2% to offset that. And the relatively modest price increase really reflects The bullishness that we have on the overall labor environment, as we've mentioned in past earnings calls, anything above 20% is An exceptional restaurant level operating profit margin.

Speaker 1

We're very pleased to actually grow that substantially this year with 80 basis points year over year. But anything over 20% is something that we're very pleased with. Yes. And Jeff, this

Speaker 3

is Jeff. I'll just add to what Jimmy and Ben said as well. When we think about restaurant Level operating profit. The 20% number is great. We've never historically taken price to chase margin.

Speaker 3

What we've done is we've taken price in response to minimum wage increases and other outside forces that are increasing the cost of us doing business. And that's what we're going to continue to do going forward. In terms of what we've seen on the COGS line, it has been really very encouraging. In the last 2 or 3 calls, I've said, we've seen the really high increases slow down and even out. And I'm really happy to report that in this past quarter, We saw not only sequential quarter to quarter, but also year over year very slight deflation in our basket.

Speaker 3

Not a huge number, but it's not it's a red number now, not a number going up. So we're happy. And I I'm confident that that trend is going to continue. We've got some we've made some promotions in our supply chain department, some really good people and the negotiating has That's done really well and we're continuing pushing forward on that. So I'm very bullish on what we're going to see on our COGS line as we move forward through this fiscal year.

Speaker 5

Got it. And just lastly, if I could just clarify from a unit opening perspective, I know you're talking about 11 to 13 units. I'm just wondering if you can share maybe the openings. Well, you did 4 already in the Q1, but your openings by quarter and how you think about those in new versus

Speaker 1

So in terms of the open cadence, this isn't something that we typically discussed in Q4 earnings calls, but just Given that we've already opened 4 stores, we sort of need to comment on it. We don't expect further openings for in Q1. The 7 units we have under construction, the majority are in the early stages of construction. So I think you can sort of back out the cadence from that relative to our guidance. In terms of the new versus existing, about 20%, 25% of our units from fiscal 24th pipeline are Slotted for new markets and the remainder will be in existing markets.

Speaker 1

This represents a shift from the historical fifty-fifty split. Just given that we're in the first 15 states now, there are fewer new markets for us to enter.

Speaker 3

And one further thing about opening more stores up in existing markets is It's really going to help us even further on the G and A line and our regional G and A, make it much more efficient for our area managers not having to travel so far and have restaurants that are in Geographical areas where they've gone on the road as much and not spending

Speaker 6

as much money doing that.

Speaker 3

So we're excited to be able to see some potential Leverage on the regional G and A side of things versus the corporate G and A side as well.

Speaker 1

Just to close out the unit growth discussion. Relative to you might have been surprised By our guidance being 11 to 13 units when we've already opened 4 and we've got 7 under construction, you might people on the call might be wondering why are we being more aggressive with our growth. And really this is just a reflection of the operating environment that we've been in the last 12 years. The construction itself Construction period is very stable, but we've seen unexpected hurdles pop up in the last the final stages, which Delayed openings from anywhere from weeks to months. And so the 11% to 13% reflects just uncertainty in terms of especially permitting.

Speaker 1

But we do believe that should things be smoother, there's ample opportunity for upside and we're very excited to hopefully provide updates and upgrades And subsequent earnings calls.

Speaker 5

Thank you.

Speaker 1

Thank you, Jeff.

Speaker 2

You, Jeff.

Operator

Thank you. The next question comes from Jon Tower from Citigroup. Please proceed with your questions, Jon.

Speaker 6

Great, thanks. First a clarification and then a question. Just curious, I think Jimmy you had mentioned September, October running comps In the plus 2.7 percent range. Maybe I misheard that, but wanted to clarify. And if I'm curious to gain your perspectives on the slowdown on a 1 year basis that you're experiencing.

Speaker 6

And I think on a multiyear basis that would also be a bit of a slowdown as well.

Speaker 3

Yes, John, Good to talk to you. This is Jeff. In terms of the comps that we've seen, what we're really most excited about, what we want to focus on is the traffic. And what we believe is that getting people on the door and getting traffic to increase is a huge part of the battle when it comes to comps. And we feel we're winning that battle.

Speaker 3

And You and all of us have all listened to the conference calls from other companies that have been going on over the last several weeks. And we're Proud of the fact that we're one of the few concepts that is showing a positive traffic number. We can't control certain things like somebody maybe not ordering A soda or ordering a tea or having a side item, which you might expect in an economy like we're having. But what we Do expect is that the people will continue to keep coming back and they do. And people when they go out are choosing Kura and we believe that's going to continue.

Speaker 3

And We're going to continue to push other people come in that door. And if they do make some changes to their dining habits, hopefully, and we believe that will be offset Having more people come through the door. So that's

Speaker 1

what we're going to continue to

Speaker 3

push is that traffic number.

Speaker 6

Got it. So it is you are seeing a little bit of check management from Consumers that are coming back, albeit more frequently than before, but the check management is occurring in the business right now?

Speaker 3

A little bit. And it's like small add on things. So our sushi plates for guests is not changing dramatically. So like I said, somebody may have a water instead of a Coke Or not have a tea or maybe they won't have a small dessert at the end of their meal or something like that, which like I said, is to be expected in an economy like we're in, but people are still coming through the door. We're happy with that.

Speaker 6

Got it. Cool. And then just talking about the development side again, I know that There's been some discussion, not with you yet, but others in the industry about having some problems on the development side. I know you hit on kind of Slower permitting timelines than what you had historically seen. But are you actually seeing any problems with Developers not actually opening units, especially in 1st generation locations?

Speaker 6

And if so, how Can you give us maybe an idea of how much of your portfolio is kind of exposed or potentially exposed to those developers that are at risk of potentially cutting new locations short and therefore potentially putting some of your new stores at risk or potential

Speaker 2

quarter.

Speaker 1

Yes. So just to be clear, the uncertainty that we're referring to is really more on permitting as opposed to anything on the developer side. We're fortunate to be able to say that this really is a problem that's entirely foreign to us. We've seen maybe 1 or 2 LOIs go sideways Because of interest rates and developers pulling out and certainly nothing in our fiscal 2024 pipeline, certainly nothing under construction. And so, yes, it really is this hasn't been an issue for us.

Speaker 1

Yes. One odd kind of wrinkle that we've been seeing This is a new issue for us is that very late in construction, we've had the permitting officials come by After they've approved the blueprint months in advance saying, after we've built the restaurant, actually I've got a problem with this blueprint, We need to make these major changes, which obviously adds many weeks to the openings. And so that's been frustrating. You think Maybe it's part of unfortunate just sort of turnover in the personnel that are managing this as a result of the pandemic. They're probably layoffs and new employees and Maybe they're still getting their sea legs, but it's yes.

Speaker 1

So that's the uncertainty that we've been seeing, not anything from the developers' end.

Speaker 3

And oftentimes our approved plans, which are always to code when they come in and want us to do additional things, things that are way above and beyond what code is And things that we've never really seen before. So those are the we're not sure why they're doing this, but we're running into that from time to

Speaker 1

The Cuban element is sort of gone where before these things could be talked through, whereas now we really have no recourse, just Online portals are really the only way to get in contact with people and online portal is not Open to discussion. So yes, that's been a change. But like we said earlier, we do expect A very strong development year. Even the midpoint of the 11% to 13% is 24% unit growth. And we do Very much hope to be able to give you updates and upgrades.

Speaker 3

Our pipeline is really strong, John. And Jimmy talked about the 7 under construction. And beyond that, we're not talking any further about that other than the guidance that we've given, the 11% to 13%, but the pipeline is very strong. And we have no concerns about being able to meet our guidance and like Ben said, potentially hopefully raise it in a future call if we can.

Speaker 6

Got it. Thank you for all that. I appreciate it. And then just mechanist sorry, I guess, mechanically, thinking through the rewards revamp, Are you anticipating and I'm uncertain as to how this is going to impact, but in terms of redemption, are you Any bit of a comp headwind from the rewards revamp that you've added in mid October?

Speaker 1

No, it should not be a comp headwind. If anything, it will be a comp tailwind. I mean, that's why we're very focused on it.

Speaker 6

Cool. And then just the last piece, I know the robotic dishwasher, that's encouraging. Glad to hear that it's going to be Making its way here at some point in 2024 into future windows. Can you maybe give us an idea of like what sort of Incremental costs that might be at least from a CapEx standpoint. And then perhaps if you could frame any sort of labor savings you're expecting from this over time?

Speaker 1

So we're still it's still the pilot model. And so they're probably going to be material changes and changes in the materials for the robots between The pilot model versus the mass production model, but the ROI, I mean, it's an Extremely low bar for us to clear. It's really going to be a slam dunk and we're really excited about it.

Speaker 3

2 important things to remember though on the robotic dishwashing is that we don't expect any Labor impact this year because it won't be it will be fiscal 'twenty five or beyond. And then the second thing to take note is, It's going to be started in the new units only because our existing units for the most part are very efficient in terms of space in the kitchen. So these dishwashers Most likely not be able to be retrofitted into our existing kitchen. So we'll start doing new construction to start.

Speaker 1

And to provide additional color on the labor impact, right now, at most of our restaurants, we 2 full time employees working as dishwashers. This would reduce our labor needs to 1 full time employee and the burden for that employee would be lessened as well, which is And so all around, it's very exciting. We mentioned in past earnings calls that we think the overall impact is going to be greater than those Three initiatives that we rolled out in fiscal 'twenty two combined and we still believe that.

Speaker 6

Great. Thanks. I'll pass it along.

Speaker 2

Thanks, John. Thank you, John.

Operator

Thank you. The next question comes from Jeremy Hamblin from Craig Hallum. Please proceed with your questions, Jeremy.

Speaker 7

Thank you and congrats on a strong year. I want to come back to the sales guidance for the year and just make sure I understood In terms of that range that you provided, what's the implied same store sales embedded within that? Is it kind of like in the 3% to 5 percent

Speaker 2

range.

Speaker 1

So we don't provide comp guidance and so we can't really get into it right now. But the revenue guidance that we provide contemplates The 11 to 13 units as well as what our internal comp expectations are. And as we mentioned before, there's ample opportunity for The number of stores that we're opening could go beyond that 11% to 13% that we're saying, which would have a concurrent impact on our revenue guidance as well. And so we've got a lot of things to look forward to for

Speaker 2

call. That would allow

Speaker 1

me. Just as a closing note though, the 9.5% full year comps that we had for fiscal 'twenty three, we aren't expecting the same thing for fiscal 'twenty four.

Speaker 7

Got it. And then wanted to ask a question here on margin. So you had Pre opening costs were over $700,000 in the August quarter. And in terms of 1, I want to understand what kind of the average preopening cost per new location was? And then number 2, Do all of those pre opening costs fall in the other operating costs line item or are they sprinkled in between, let's say, your labor occupancy and other operating costs?

Speaker 1

Yes. They are sprinkled between them. So for instance, we opened one store on August 31, The very last day of our fiscal year. And so we've had employees training for that restaurant for a month or so, maybe longer. And that's a lot of That's that falls directly on the labor line.

Speaker 1

Otherwise, the majority of the cost would be non cash rent that we start booking upon receipt of the premises. And so that's typically 150 days before Sure. Yes, before opening. And so, yes, the elevated preopening costs, that makes total sense. We opened 4 restaurants In Q4, we opened 4 restaurants in Q1 and so the preopening costs for Q1 are falling on Q4, etcetera.

Speaker 1

We do expect

Speaker 3

to leverage those preopening costs As we continue to open restaurants in areas where there's already other restaurants, then our new employees can drive over The restaurant that's right there to be trained rather than having to travel further to be trained.

Speaker 1

And

Speaker 3

same with our the managers as well for their training won't have to fly all over the country to have their training. We can do

Speaker 2

it locally. Okay.

Speaker 7

Got it. And then just want to come back here To restaurant level margins, in terms of what your expectations, it sounds like you feel pretty good about where Your full costs are for the year. It sounds like you feel like labor is hourly wage rates are more under control, although Your menu pricing is down pretty significantly from where it was in June. Is it something where you're expecting your restaurant level margins? Or let me ask a question in a different way.

Speaker 7

What would your What do you think that your comp needs to be for restaurant level margins to be flat or up slightly in FY 2024.

Speaker 1

So in terms of the comps, as we mentioned earlier, we can't really provide numerical guidance as to what our expectations are. But we've maintained this 20% We've got a level operating profit margins for years and we're very, very happy to be able to grow that. In terms of maintaining or growing that further, pricing could be an element. Certainly, there's it's a sensitive decision for us given the ongoing macro environment. And For us to potentially sacrifice the traffic advantage that we have is maybe something that we have to very seriously think about.

Speaker 1

For us to have such a significant traffic lead, I think really sets us up for the next several years and not just on a quarter to quarter basis. In terms of serious impacts to restaurant level operating profit margins, we do the dishwasher really does have the opportunity to move the needle. Right. As we mentioned before, that's going to be not in fiscal 'twenty four and it's going to be on a limited to the new stores basis. And so it's going to be a slow ramp, but that's something that is very concrete that we're excited for.

Speaker 3

And also, As you know, the prime costs are the biggest piece of restaurant level margin and the initiatives that we're putting in place like the dishwashers that will have impacts. But At the same time also, we can't compromise food quality and we can't compromise service quality and there becomes a point where We really think the leverage that we're going to get on the margin will come from increasing sales and we'll get the leverage on some of the fixed costs that we have in the operating cost line. But we really need to be careful, like I said, to when you get to a point under 30% on food costs, you really don't want You play too much with the quality

Speaker 2

there.

Speaker 1

Yes. So Jeff makes a really good point. I mean, we could be very aggressive and try to achieve 25% restaurant level off in profit margins, but certainly that would have an impact on traffic. Our strategic preference is to grow traffic and use that to leverage our fixed costs and grow our asset level operating profit margin more organically.

Speaker 7

Got it. Thanks for taking the questions guys. Best wishes this year. Thank you, Jeremy. Thank you, David.

Operator

Thank you. The next question comes from Sharon Zackfia from William Blair. Please proceed

Speaker 8

Hey, good afternoon. I'm just going to beat the dead horse of the quarter to date comp. I do have in my notes that last year comps were, I think, up like 11.5% in September and 6.3% in October. And we've heard a lot of companies talk about kind of more normal seasonality and I'm not sure you saw that in 2022. So I guess My question is, have you seen what others have seen, which was kind of slower traffic trends in September followed by more of a rebound in October as we're comparing a little bit of an apple and an orange maybe year over year?

Speaker 1

So as Jeff mentioned earlier, Ed, as everybody has seen in the restaurant industry, September October has been Deeply influenced by macro factors and considering that we're extremely pleased to have been able to grow traffic the way that we did. So there are a couple of factors for October. One would just be that we had more weekend days the year prior October versus 2023, but considering those, October is a little favorable relative to September. I'm sorry. October was yes, so we didn't really see the same thing that the others did.

Speaker 1

Our performance was Not that different between September and October. Yes. And then the timing of Halloween certainly didn't work in our favor, didn't work in anybody's favor. But if you control for everything, yes, it's Pretty much flat or October is a little bit favorable, but not a big difference between the 2 months.

Speaker 8

Okay. Thank you for that. And then it was It's good to hear about labor inflation moderating, but I'm highly aware of your concentration to some extent in California that remains. And I know you're not directly impacted by the FAST Act, but we've had some other full service operators say that they still expect that to be an impact for wage rates in California just more broadly outside of limited service. So curious what your perspective is on what you may or may not need to do next spring in California and how if you need to raise wages, how you would approach pricing in that environment?

Speaker 1

So thank you for asking this. We were hoping to have an opportunity to address this. But we really we believe the impact from the fast act It's going to be minimal or in fact a tailwind for us. And so we'd love to go through the reasons why we're we think this is actually going to be a benefit. So the first two factors would be that as you know the FAST Act doesn't directly apply to us.

Speaker 1

And considering the comments that Our peers have made about their knock on effects. Even at a $20 minimum wage, our California employees are making competitive wages relative to that. And so it's not like we're going to have to raise wages to be $20 And so that's it's really not a consideration for us. Another thing is that we are very unique in that We're so tech driven that we have these initiatives to reduce headcount, which is specific to current, not really something that anybody else can emulate. And so I think this makes us this is a competitive advantage for us.

Speaker 1

And lastly, as QSRs need to catch up from the $16 or so they're currently paying down the $20 minimum wage, they'll have to aggressively raise prices. And so as the price between its USR meal and a Cura meal shrinks, The appeal value of Kura only grows. And so we think this could ultimately be a traffic killer for us as well.

Speaker 8

Okay. Thank you.

Speaker 2

Thanks,

Operator

The next question comes from Mark Smith from Lake Street. Please proceed with your questions, Mark.

Speaker 9

Hi, guys. This is Alex Sternings on the line for Mark today. Just firstly, And you might have touched on it already, but could you walk us through the menu price increases that are built into the comp And any new increases or increases that you anniversary this quarter?

Speaker 1

Yes. So effective price was in it was about 10.7% for Q4. As of July, 7% fell off and we offset that by 2%. And so June was 14% and then September, October I'm sorry, July, August were about 9%, And there's been no change since.

Speaker 3

So Q1 will be all 9%? Yes. And will lap 7% on the 1st week of December. Exactly. Yes.

Speaker 3

So starting at the beginning of December, we'll only have 2% pricing in our

Speaker 1

Right. And we touched on this earlier, but the fact that we only took 2% to offset that 7% coming off is really just a reflection of our bullishness on the labor environment As well as the actual inflation that we're seeing on the commodity front.

Speaker 9

Yes, perfect. That's good there. And then just My last question, you guys have the collabs, the updated app, the tech initiatives with the automated dishwashers, but Are you guys looking at any other areas of the customer experience you guys could improve, anything to leverage there?

Speaker 1

Yes. There are a billion things, but a couple of low hanging fruit that come to mind would be the first is that we haven't really communicated The upgrade to the wait list to our guests yet. And so they're benefiting from it, but they're not changing their behavior based off of that. And so that's Hello, Hiding for the others that we have this technology. I don't know if you've been to one of our restaurants, but if there are 4 people at your table, it can be hard to reach The conveyor belt, if you're on the outside of the table and we have this technology that allows you to directly place orders from your cell phone, so you don't have to reach over your friend to hit the order panel.

Speaker 1

And that's ready to go. It's just a matter of rollout. And so those would be 2 things that I can talk about right now and I'm sure that I will Many more things. I'll be up to show with you as we progress throughout the year.

Speaker 9

Thanks for answering my questions. Appreciate it.

Speaker 2

Thanks, Alex. Thanks, Devin.

Operator

Thank you. The next question comes from JP Wallum from Roth Capital Partners. Please proceed with your questions, JP.

Speaker 10

Great. Thanks everyone for taking my questions. First, if we could just start maybe, A lot of new openings, call it, the last 6 months or so. Can you maybe just talk about, In terms of openings, are there any differences you've seen with kind of the latest cohort of openings? Or I know we've really Talked a lot about the development, but maybe just kind of on customer reception and anything new you're seeing or any new trends you're seeing when these units open.

Speaker 1

So over the last 6 months, we've been fortunate, Very fortunate to be able to say that pretty much all the openings have been really great. I'd say rather than noticing anything new, What it's really been is just a confirmation that our strategy was correct. In past earnings calls, we've discussed how we've taken a non contiguous growth approach across the United States. Fort Lee was our 1st New Jersey location, our 1st East Coast location. And on the strength of that, we've really filled out that market, whether we're talking about Philadelphia, New York, Boston, BC.

Speaker 1

The entire Northeast has been great to us. And so that's been it's just really great to be indicated and see that That strategy pan out. And obviously with our other markets such as Bellevue having Not been filled in yet. That makes us that much more excited about the Pacific Northwest once we start to build out those markets. And in past calls, we've mentioned Yes, Aventura being slow to recover from the pandemic and not really performing to the expectations we have prior to its opening.

Speaker 1

But Subsequently, we've opened 2 more units, 1 in Vineland, which is in Orlando and one in Tampa, and both of them are doing spectacular. So it's really It's great to see that the issue is not with Florida as a market, but really just that one specific site. We think Florida is a huge growth opportunity for us.

Speaker 10

Great. Yes, that's very helpful. And then maybe one follow-up if I could turn to Jeff. I just kind of want to ask with the guidance of the 14.5% G and A as a percent of revenue, could you maybe just Help give us a sense of kind of from where you started when you first joined Kura And kind of where that guidance is, how are you feeling about your ability to either kind of optimize some of the costs or take some costs out of the business. And how do you feel as we go forward whether there's even more opportunity or whether you've really kind of pushed as far as you could on that regard?

Speaker 10

Thank you.

Speaker 3

There is more opportunity. Absolutely. So we it was 80 bps from fiscal 2022 to fiscal 2023 for our full year G and A leverage. And I'm very proud of that. That exceeded my expectations and my goals for the company when I came in.

Speaker 3

And leveraging G and A was in the top three things that Jimmy asked me to work on. And I'm very happy with what we've done. This year, we're projecting more as you can see based on our guidance. There was a lot in the this year. I'm really proud of our team.

Speaker 3

I'm proud of all the department heads really stepped up and did what they could to either push back Hires and reduced expenses or do what they could to become more efficient. And that's what I've asked everybody to do and they've answered the bell. And we're going to continue to see that this year. One slight headwind on G and A that we have this year is this will be our 1st year of 404 compliance. So you're making sure we're fully ready for that is increasing our public company cost a little bit.

Speaker 3

But even with that, we're going to have future leverage this year as you can see by our guidance. And then In future fiscal 'twenty five and beyond, we're going to continue to see leverage and at some point, I don't know, so with the company, we get it down into the single digits at some point. And I know we will. I have no timeline on that, but we're working on it.

Speaker 10

Got it. That makes sense. Thank you and best of luck moving forward.

Speaker 1

Welcome. Thank you. Thanks JP.

Operator

Thank you. And ladies and gentlemen, we have reached the end of the question and session. This does conclude today's conference. Thank you very much for joining us and you may now disconnect your lines.

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Earnings Conference Call
Kura Sushi USA Q4 2023
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