Kura Sushi USA Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 6, 2023

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kurosushi USA Inc. Fiscal Third 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 Call. Please note that this call is being recorded.

Operator

On this call today, we have Hajime Jimmy Uba, President and Chief Executive Officer Jeff Utz, Chief Financial Officer and Benjamin Porton, SVP, Investor Relations and Systems Development. And now, I would like to turn the call over to Mr. Porton.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal Q3 2023 earnings release. It can be found at www.kurusushi.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 discussion today will include forward looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward looking statements are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our SEC filings for a more detailed discussion of the risks 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 as a substitute for results prepared in accordance with GAAP and the reconciliations to comparable GAAP measures are available in our earnings With that out of the way, I would like to turn the call over to Jim.

Speaker 2

Thanks, Ben, and thank you to everyone for joining us today. I'm pleased to announce another excellent quarter for Kurosushi, both in terms of restaurant level performance and corporate initiatives. Year over year revenue has grown by approximately 30%, driven by our aggressive unit growth and industry leading comparable sales talent. Our GMV elevating efforts continue to bear fruit with an improvement of 130 basis points over the prior year as well. I'm exceptionally proud to see Kurosushi continue to mature as a company as it expands its footprint and takes a slice towards greater profitability.

Speaker 2

3rd quarter revenue was $49,300,000 with comparable sales of 10.3%, which breaks down to 3% traffic growth and 7.3% in price and mix. Our traffic Continued to lead the casual dining industry with our 3rd quarter traffic outperforming industry averages by 830 basis points. June performance has been even better with total sales of $17,600,000 and the comps of 14.7%. As these results demonstrate, the expansion of our Kula remains extremely strong. The inflationary pressures that we saw earlier in our fiscal year continue to ease with cost of goods sold as a percentage of sales coming in at 30%, which is in line with the all time best we saw in fiscal 2022.

Speaker 2

Labor costs as a percentage of sales were 29.3%, representing an improvement of 180 basis points over the prior year. Our 3rd quarter revenue operating profit margin of 23.5% represents an improvement of 100 basis points over the prior year. I'm also very happy to note that between our growth in the front level operating profit margin and the improvement in G and A, We were able to grow our adjusted EBITDA margin by 200 basis points over the prior year and our net income margin by 2 10 basis points. During Q3, we opened 1 new restaurant, Beaufort, Georgia and 1 more new restaurant subsequent to quarter end in Framingham, Massachusetts for a total of 7 new restaurants opened to date during the fiscal year. We have 7 units under construction as well as 11 more executed releases.

Speaker 2

We are in an excellent position to achieve our unit growth goals for fiscal 2023 And couldn't be happier with the pipeline we have showed up for fiscal 2024. Our new vehicleift app Has been successfully rolled out across our entire reference system. While it's too early for us to provide quantitative data on its impact, We are very encouraged by early results. Wait times are meaningfully more accurate and we believe This is part of why we continue to outperform our peers in terms of traffic, which is further underlined by the exceptional performance we've seen in June. Our rewards membership continued to grow with approximately 120,000 new members over the course of the quarter.

Speaker 2

Our demonstration campaign held during April May, again proved to be another great success and Comp Driver and our current collaboration with We Bare Bears, a television program on Cartoon Network Has far exceeded our initial expectations and has delivered some of the strongest guest responses we've seen of any collaboration, which set our restaurants up for our amazing June. As a final note, I would like to provide some updates on pricing. We left approximately 2% of pricing on March 1, bringing our effective repricing for our fiscal 3rd quarter to 13%. Subsequent to the quarter, we lost 6% of pricing on July 1, which was partially offset by 2% pricing that we took concurrently. The relatively modest scale of this most recent pricing event reflects our confidence in the normalization of inflationary pressures seen earlier in the fiscal year.

Speaker 2

Lastly, I would like to share my deep appreciation for the amazing work by our employees, both at our restaurants and corporate support center. Thank you, everyone. And with that, I will turn it over to Jeff to discuss our financial results and liquidity. Jeff?

Speaker 1

Thanks, Jimmy. For the Q3, total sales were $49,200,000 as compared to $38,000,000 in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 10.3% with regional comps of 15.5 in California and 4% in Texas. Turning to costs. Food and beverage costs as a percentage of sales were 30% as compared to 29.7% in the prior year quarter.

Speaker 1

We're very pleased to see that the flattening of the inflation curve that began during our Q2 has continued to hold And we continue to be encouraged in the trends that we are seeing. Labor and related costs as a percentage of sales decreased to 29.2% from 31% 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 and pricing. This leveraging was partially offset by wage increases. Occupancy and related expenses as a percentage of sales were 7.2% compared to the prior year quarter 7.1%.

Speaker 1

Other costs as a percentage of sales increased to 12.5% compared to 11.5% in the prior year quarter due to an increase in marketing costs as well as general cost inflation. General and administrative expenses as a percentage of sales decreased to 14.2% as compared to 15.5% in the prior year quarter. On a dollar basis, G and several calls, leveraging our G and A line has been a main focus of ours this year. The quarter over quarter increase of $1,100,000 represents an increase of We continue to keep this as a main focus going forward, while making sure that we continue to make the key hires necessary to fuel our aggressive growth, such as in our construction and in our operations departments. Operating income was $1,300,000 as compared to operating income of $500,000 in the prior year quarter.

Speaker 1

As a percentage of sales, operating income was 2.7% as compared to 1.2% in the prior year quarter. Income tax expense was $41,000 compared to a benefit of $2,000 in prior year quarter. Net income was $1,700,000 or $0.16 per share Compared to net income of $500,000 or $0.05 per share in the prior year quarter. Crossout level operating profit as a percentage of sales was 23.5% compared to 22.5% in the prior year quarter. Adjusted EBITDA was $5,100,000 compared to $3,200,000 in the prior year quarter.

Speaker 1

Turning now to our cash and our liquidity. At the end of the fiscal Q3, we had $70,500,000 in cash and cash equivalents And no debt. This large increase in our cash balance is due to the follow on offering, which we closed in April of this year. Lastly, I want to reiterate and update the following guidance for fiscal year 2023. We expect total sales to be between $187,000,000 $189,000,000 We expect to open between 9 11 new units with average net capital expenditures per unit of approximately $2,500,000 And lastly, we expect general and administrative expenses as a percentage of sales to be between 15% 15.5%.

Speaker 1

Please note also that our guidance assumes no material changes as consumer behavior or broader macroeconomic trends. In addition, as mentioned during our previous earnings calls, at the conclusion of the current fiscal year beginning with our Q1 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 might have. Operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you.

Operator

Our first question comes from Jon Tower with Citigroup. Please proceed with your question.

Speaker 3

Great. Thanks for taking the questions. Just curious if you can dig in a little bit on the quarter to date. I believe you said 14.7% comps quarter to date. Do you attribute that primarily to the promotional activity that and I apologize for not following Exactly the promo that's on air at the moment.

Speaker 3

But would you attribute most of that to The promotion and how long do you anticipate that promotion to stay intact?

Speaker 2

Thank you, John, for your first question. Please allow me to answer your question in Japanese

Speaker 1

Yes. We're extremely pleased with the results with 3 Bear Bears. Our marketing team did an amazing job with setting us up with that collaboration and it's definitely It's played a very meaningful part in those 14.7 percent comps that you've mentioned. All of our campaigns are over a 2 month period. So We began in June for We Bare Bears and we're going to go through the end of July with We Bare Bears.

Speaker 1

The historical pattern that we've seen is typically the excitement for a given campaign It's greater in the 1st month than the 2nd month. And so our expectations are relatively tempered for July's rebar bear impact But for the 1st week of July, the enthusiasm has certainly helped. We're very pleased.

Speaker 3

Great. And just to kind of continue that line of thinking, I believe you had a planned promotion with DC Comics Still on track for hitting in August, if I'm is that correct?

Speaker 1

Yes, absolutely. We Dare Heroes is 1 of our first sort of nationally known American brands and DC being another one of those brands, we're very excited about August. If we had put anybody up against Stephen Slager, I'm glad that it's D. C.

Speaker 3

Okay. And then just on the labor cost per operating week, I was just looking at that in the model And was surprised to see it actually go down on a year over year basis, considering I'm assuming some of the inflation you're seeing. So Can you perhaps speak to what the drivers were behind that? Anything funky in last year's Q3? Or are we just talking about a combination of sales leverage and technology Rolling through the system and therefore the sustainability of this trend moving forward, how should we think about that?

Speaker 1

Yes. So looking at labor cost performance year over year, you're right. The 2 driving factors The 3 driving factors, one would be sales leverage. The other would be the effectiveness of our 3 initiatives. We completed rollout at the end of Q3 of last year.

Speaker 1

And so this year, We had benefit for the full quarter from the server robots whereas we only had a partial benefit in the preceding year. The other is our operations team and our COOs Taken store operations, store management or labor management, they've made that one of their top priorities and they've really been executing on that. And so We're very pleased with where we've come in for Q3. In terms of sustainability on a go forward basis, we would like to provide some more And we do expect a degree of leverage, but certainly not in the range of 200 Basis points or anything like that. The first factor being that the 3 initiatives have they've been live for full 12 months and so they're baked in from a comp perspective.

Speaker 1

We had a bonus adjustment in Q4, which we don't expect in Q4 this fiscal year. And so while we do expect leveraging in sales, Basically, I think the way to look at it is just look at Q4's labor as a percentage of sales and that's probably going to get you pretty close Q4 this year as opposed to trying to triangulate from the quarter over quarter basis point step down that we saw in Q3 'twenty two to Q4 'twenty two.

Speaker 3

All right. Thanks a lot. I'll pass it along.

Speaker 2

Thanks, John. Thank you, John.

Operator

Thank you. Our next question comes from Joshua Long with Stephens. Please proceed with your question.

Speaker 4

Great. Thank you for taking my question.

Speaker 2

I was curious if

Speaker 4

you could talk about some of the trends through the quarter. I know as we left off last quarter, Started off in that low double digit 11% range, very strong. Curious if there's any additional color you on just how things transformed through the quarter overall and then maybe by region with the California and Texas comp numbers that you called out as well.

Speaker 1

Yes. So looking at a regional basis, as Jeff mentioned in the opening remarks, California outperformed Texas costs for this quarter, but that's on a single year basis. If we do a multiyear comparison, the comparison comes much closer simply because The operating environment for California and Texas have been so radically different, especially over the last 2, 3 years that the easier over year comparisons, Just the frame of comparison can really determine your answer. In terms of the cadence of performance, yes, March was April was a little bit weaker, which I think is what everybody saw in the restaurant industry, and then May was stronger. And June is actually We couldn't more pleased with June with the 14.7% that we saw, very strong traffic.

Speaker 1

It's been a nice June for us. And I think Josh too what's important to note is we've mentioned this in conferences as well that our 3 best units are in Washington State and Texas and in New Jersey. So while certain regions Texas may be better than California some quarters and vice versa, we're very pleased and very happy to see that our 3 best restaurants Our very geographically dispersed and we continue to do well pretty much in every region throughout the country.

Speaker 4

That's super helpful. I appreciate those two points. When you think about trends, I think in the past couple of quarters, we've talked about pretty consistent per plate consumption. Also, I've been trying to think about this from a marketing perspective in terms of you mentioned the We Bare Bears being the 1st American Most widely known here in America and then going into thinking about the DC Comics. Are you pulling in a new guest?

Speaker 4

Are you pulling in your kind of More frequent guests or your current guests more frequently, how do you think about that and how does how has per plate consumption trended through 3Q?

Speaker 1

Looking at consumer sentiment, we've percolate Consumption and check has been flat. Check management has been pretty much minimal, negligible. In terms of the impact for rebar bears, So the way that one of the ways that we're thinking about it is that over the last quarter, we gained about 120,000 rewards members. And for all of Q4, we'll be working with American Properties. So we bear bear for the 1st 2 months and then DC Comics for the latter month for the last month of August.

Speaker 1

And so our ability to attract the Board's members materially is a much larger number than what we've seen in past quarters. And certainly, this would be something that we put into our strategic toolbox. Yes. So one we see a pretty strong correlation between the effectiveness of a brand collaboration with sign ups because To get the better prices, the giveaways, the T shirts, the Canva Stacks, etcetera, you need to register as a member. And so a strong collaboration certainly can Jewel membership growth and that will be one of the ways that we're determining the effectiveness of these brand collaborations.

Speaker 4

Great. That's very helpful. One last quick one for me and then I'll hop back in the queue. When we think about kind of the marketing efforts, I think Ben in prior calls you've talked about the opportunity to Optimize your awareness to drive accessibility and it's been more about managing the current spend and again optimizing versus adding dollars To the marketing pipeline, can you square that up with some of the commentary you had in terms of the 3Q numbers that just you just reported in In terms of marketing kind of stepping up, it sounds like is that kind of a one time, intra 3Q dynamic? Or how should we think about marketing and spend and then the overall kind of progress against your initiatives of driving awareness and optimizing the brand visibility.

Speaker 1

So Josh, I think what you're referring to is the comment in the other costs line where we mentioned marketing costs being what are the drivers. But really, the marketing costs maybe incremental by 10, 20 basis points. It really wasn't meaningful. As we mentioned in the past earnings calls, the new marketing strategy, Particularly the targeted advertising for Google's many channels, that's really just been a reallocation of marketing dollars. And as we've seen with The traffic performance, particularly in the last two quarters, we've been exceptionally pleased.

Speaker 1

We think our marketing and talent are moving very effectively. And so yes, we don't expect a big step up or anything like that in terms of marketing spend in future Anytime in the near future, we're very pleased with the performance.

Speaker 4

Understood. Thanks so much for the time.

Speaker 5

Hey, Josh.

Operator

Thank you. Our next question comes from Sharon Zackfia with William Blair. Please proceed with your question.

Speaker 6

Hi, good afternoon. I wanted to touch on development because it's still a pretty wide range implied For the Q4, anywhere between 3 to 5 new openings, and I know you've opened 1 so far. I guess, are you more comfortable at the lower end or higher end? I mean, where is the status of that construction? I know everyone's been battling kind of permitting delays and so on.

Speaker 6

So I'm just curious kind of where your comfort level is on hitting maybe the higher end of that?

Speaker 1

So that 9 to 11 number that we shared, we're extremely comfortable with. Of the 7 units under construction that we mentioned, Most of them are pretty far along construction. They're in the back half. And so hitting that higher end is certainly not outside of the realm of possibility. And so yes, I'd say we're very confident about the quality of our pipeline for the remainder of the quarter.

Speaker 1

And so that 9% to 11%, we're very confident in the number of units that we're already in the 1st week of So the impact that the subsequent units can have in terms of the impact of fiscal 2023 revenue is going to be on the order of a month lesson. So that's not going to be super substantial. But that being said, our revenue guidance has been set in. And so both in terms of revenue guidance and The unit pipeline, we're extremely comfortable with the numbers that we've shared with the Street.

Speaker 6

Thanks for that. And then I know for June, you talked about kind of the changes to the waitlist algorithm Being a positive. I'm curious if there's any way to quantify that. And as you've had this and tested some locations longer, is that A benefit that kind of builds over time or is it something where you kind of manifest that improvement and kind of the lunch and or late night dayparts pretty quickly.

Speaker 1

Yes. So in terms of quantifying it, we just finished the rollout in Q3 and There's a 6 week learning period for the algorithm where it sort of takes in it uses that to build its Topic expectations. And so we're a little bit low to build because it provide quite a numbers or numerical expectations. In terms of what your second question, I think, is really interesting about does the impact build over time. And one thing that we've been discussing with the marketing department is that We rolled out these updates, these improvements to the waitlist app without really communicating that necessarily to our guests.

Speaker 1

And so The accuracy has improved and I imagine the guest experience has improved, but there I don't think that guest behavior will change until there's a concerted marketing effort To let guests know that there actually has been a material improvement in our waitlist app and that they can build their schedule around it. And so now that we finished the rollout of the waitlist app, we're working on the update to our new rewards program, which is going to have a new skin. It's going to look completely different from the existing one. And so the idea is that we're really going to bundle That communication with the rollout of the new apps, maybe just say the app wasn't as great, the app is really great now, come to lunch. And also Sharon, while we don't have the data yet to be able to quantify what it means in terms of sales or comps, the new waitlist app, what we do know And the information we do have is that wait times are more accurate.

Speaker 1

And we do know that the over quoting or the under quoting of people by half an hour or more has Decreased substantially to where some restaurants could have been in the 20% to 25% range of people being misquoted by half an hour or more on their wait times. And we know now that in most of our restaurants that's down into the single digits.

Operator

Okay, great. Thank you. Thank you. Our next question comes from Todd Brooks with Benchmark Company. Please proceed with your question.

Speaker 5

Hey, thanks for taking my question. Jeff, I wanted to ask about the G and A performance in the quarter. Obviously, very strong improvement, provided guidance for the full year range. But where are you And I know this is one of your priorities coming in as far as attacking this opportunity. And as we're starting to look at forward years, Have you completed most of the efficiency efforts that you went after or is there more opportunity for efficiency

Speaker 1

There are more opportunities for efficiencies. One of the things I talked about in the past was being able to leverage some more technology In the support center on some of our daily things that we do, we actually recently one of the first things we did is in our financial planning and analysis We're launching a new software for FP and A that will improve substantially not only our forecasting and our budgeting, but also the research tools that we have in the support center for the restaurants to determine what's going on with their P and Ls and it's we want to give our operators a tool to be able to dig deep into their financials On their own as well as having us in the support center help them. That's just one technological step that we've taken. I've asked other departments to really think about How can IT help you? What can we do?

Speaker 1

We saw really good leverage in the last two quarters, 120 bps in Q2 and 130 bps this quarter. Very, very happy with that and quite honestly exceeded my expectations a little bit. And I'm very pleased and very happy with how the team stepped up in the company in order to make that happen because this is not a single person effort, it's an effort of the entire company. And so what we did this year For the past 9 months, it has slowed down our hires a little bit in the support center, continuing to hire in the areas where we need to in order Our growth such as construction, development, recruiting, training, and we're going to continue to do that. But we've asked people to really kind of Do what they can to keep the hires at a minimum.

Speaker 1

So that's why we saw such good leverage. We are going to continue to see leverage going forward. I haven't provided any guidance on will be in single digit percentages. We will get there someday, but that's not necessarily in the next 12 or 24 months, But we are very happy with the leverage that we've seen over the last two quarters.

Speaker 5

That's great. And a follow-up question, if I may. Actually a quick question on the pricing side. So I think the way that I heard you guys talking about the waterfall was 13% during the quarter. We lapped 6% at the start of July, but at the same time we took another 3%.

Speaker 5

So kind of the back 2 months of the quarter, is it right to think about running maybe 10% effective price, is my math right there?

Speaker 2

Well, I was going

Speaker 1

to say, what you'll see is, there's a 6% and a 7% that were in there for June. So in Q3, you'll see the 6% to 7%. And as that were in there for June. So in Q3, you'll see the 6% to 7%. And as we mentioned, we took we rolled off 6% on July 1, but we took 2%.

Speaker 1

So the pricing for July August then will be 8% for each of those months. So 13% June, 8% July August.

Speaker 5

Perfect, thanks. And my final one is

Speaker 4

Sorry, I'm sorry, I'm

Speaker 1

sorry, 9% July August, 13% June, 9% July August.

Speaker 2

Okay, perfect. Thanks.

Speaker 1

It's a 7% in December and a 2% that we just took.

Speaker 5

Fair enough. And then the final one, dollars 70,000,000 in cash on the balance sheet after the offering. I know The team has talked about, listen, we're building to grow. We'll make the hires that we need to grow. I guess between the brand's performance, Landlord's appetite to get Kura into projects and now the magnitude of cash on the balance sheet.

Speaker 5

Do you see any uptick in the opportunities to open or accelerate the unit openings? I think you talked about 11 leases signed already for the coming year. But just would like to know if the incremental capital and the readiness for the organization As you're thinking of growing any faster into the opportunity that the brand has in the U. S? Thanks.

Speaker 1

So this is very similar to what we've said in past earnings calls. But the way that we think about our unit growth pace Really in terms of 3 gaming factors. 1st would be our liquidity. The second would be the availability of high quality sites and the third would be our management pipeline. As you mentioned, With the April rates, we're in the best cash position we've ever been in and the sites are great.

Speaker 1

And so last several years, the focus has really been on making sure the quality and breadth of the management pipeline can really keep up with our Growth goals. And so what we've said historically is that 20% is what we think is what we probably discrete When we went public, we tended to outperform that. Last year, we did 25% the year, we're 28%. Midpoint of our guidance is for this year, it's 25%. And so that's the neighborhood that we're comfortable in and that's the neighborhood that We think we can continue to deliver.

Speaker 1

One other thing that we've mentioned in past earnings calls is that just the sheer number of new markets that we're in, we're going through additional growing pains In terms of building up regional management teams, not in terms of a regional manager, but managers by region. And so once The single unit markets become infill, become 2, 3, 4 unit markets, then you get that sort of ability to self sustain. So that's another opportunity. But regardless, just with the number if you look at the number of units we've been putting out over the last 5 years, even if our Growth as a percentage doesn't change. That number grows materially every year.

Speaker 1

And so we will very quickly grow. And to keep that growth trajectory going, Todd, it kind of ties back full circle to the G and A question you just asked. That's why we're going to be Continuing to invest money into recruiting because it's all about eliminating potential bottlenecks. And as you mentioned, with the $70,000,000 of cash on the balance sheet, We eliminated a potential bottleneck for cash. We're a set of cash for a while.

Speaker 1

But then as we continue to invest in the recruiting side, we want to make sure that we eliminate any potential Bottleneck as it relates to hiring managers. So, we're very well shored up in terms of development going forward to keep that pace.

Speaker 5

Perfect. Thank you all.

Speaker 2

Thanks, Todd. Thanks, Todd.

Operator

Thank you. Our next question comes from Mark Smith with Lake Street Capital. Please proceed with your question.

Speaker 7

Hi, guys. Want to follow-up on that development question just a little bit. Any additional insights on what you're seeing on deals these days? Any change in TI dollars and kind of availability of real estate deals that you're looking at?

Speaker 1

So The biggest shift would really just be going from smaller developers to really national developers. And national developers, especially if they're whatever mall they have $30 I can be a lot bigger than a mom and pop strip mall developer. So we've seen that change, but That's more of a structural change. I don't think that's necessarily reflective of economic trends or anything like that. It's just a different position that we're in, in our growth cycle.

Speaker 7

Okay. And then just wanted to look kind of further out, you guys did a good job driving margin here. You've got some initiatives that you've talked about a little bit like some back of the house dishwashing technology, things like that That could maybe be margin drivers down the road. Any updates on that or any other initiatives that you have that maybe can help improve some restaurant margin as we look forward?

Speaker 1

Yes, there's absolutely that's always the case. And so In terms of the dishwasher, that is the single most exciting thing that we have in our pipeline. I'm very pleased to say that I'm actually now in charge of these initiatives. And so you've got only one neck to strangle. But yes, no, I've been extremely hands on.

Speaker 1

Right now, we're beginning the testing in a physical restaurant in Japan. Pending that, we're actually trying to get approval in the United States in parallel. And so I it's unfortunately, it's impossible for me to give a timeline on moments of all this out. But The impact from the dishwasher alone would be greater than the 3 initiatives that we rolled out last year. And so the upside is tremendous.

Speaker 1

Keeping in mind that With such a material change, this is the impact would probably be limited more to new restaurants, but it is something that I'm extremely focused on. The other part about margin is, we're a growth concept. And so as Jeff mentioned in his opening remarks, our G and A grew by 18% against revenue growing by 30%. And so I'm going to do my best to deliver incremental restaurant margin improvements, but really the meat of the story is in leveraging G and A.

Speaker 7

Okay. Maybe I'll squeeze one more in. You've talked quite a bit about labor. Are you guys seeing any difference

Speaker 1

So it's always been a point of pride for us that we outperformed in discrete turnover averages. For Pretty much the entire time we've been in the United States, we've been in it's because we provide a really great place to work and our Take home compensation is probably the highest among casual dining restaurants. I think it'd be really hard to compare with the tips you can get with our efficiencies. But Just being a relatively new concept to the United States, most people aren't familiar with revolving sushi, being in a lot of new markets. So for instance, if we're training a management candidate outside of their home state, there's greater attrition associated with that.

Speaker 1

But that's really just a growing pain for us given our current We know that as we infill, this is only going to get easier for us. And as I mentioned earlier, we're already beating the industry average. So we're very happy with where we're at. Excellent. Thank you, guys.

Speaker 1

Thank

Operator

you. Our next question comes from George Kelly with ROTH MKM. Please proceed with your question.

Speaker 8

Hey, everybody. Thanks for taking my questions. So first one for you on the back to the dishwasher. Ben, you were just going through your excitement around that. Curious, you said that that alone should have a bigger impact than the 3 initiatives from last year.

Speaker 8

Can you just quantify and remind us those three initiatives and how much savings they drove?

Speaker 1

Yes. So those 3 initiatives, and as a reminder for the other people on the call, those were referring to the robot servers, the tablesite payment and the touch panel bring quarters. Our expectation is about 50 to 60 basis points in labor improvement from those three initiatives and the dishwasher we are confident would be more meaningful than that.

Speaker 8

Okay, that's great. And then sorry, I interrupted.

Speaker 1

Keeping in mind that the impact will cascade from when we put it in just because it's not going to be The robot service we put into all of our existing restaurants, the robotic dishwashers will probably be on a go forward basis. And so you're not going to see like a light switch. It will be A steady improvement, but the dishwashers, as we mentioned before, they're actually in the highest paid position in the back of the house or among the highest paid position because they're not eligible for tips. It's The one position that the DOL has not given us approval for, our other kitchen employees are technically serving guests And it's a physically grueling job. And so it's an expensive position with high turnover and being able to automate this and make it Easier for the better part for the remaining person.

Speaker 1

Their workload will the remaining workload even for them will be materially less than what they're dealing with now. And so The benefit, it won't just be the restaurant level, it will be at the G and A level where we don't have to focus on recruiting and constantly replacing people and stuff like that. I'm really excited for it.

Speaker 8

Okay. That's great. And then second question for me. If I look historically at your restaurant level margin, just the seasonality of that one. There's been a really nice

Speaker 1

step up

Speaker 8

between 3Q and 4Q historically. And you just reported such a strong number. I'm just curious if there's anything I should be aware of that would make it hard for To achieve that kind of step up again this year.

Speaker 1

I think the biggest thing, George, when you look at last year from Q3 to Q4, as Jimmy already on this was, we got such a big jump in labor from last year because of the initiatives that we put in place. It was Q1 where everything was fully in place last year between Q3 and Q4. So we got a lot of benefit between those two quarters. In addition, we took an incentive compensation adjustment last year in Q4, both of which we're not going to have those benefits in this year. So if you look specifically at last year, be very careful To assume that kind of a jump from Q3 to Q4 in terms of the labor line.

Speaker 1

What you've seen historically in the other lines, I think it's Probably pretty consistent with where I would keep your eye on.

Speaker 2

Okay. That would be helpful.

Speaker 8

Great. And then last question for me. I don't believe you've talked about this recently, but I remember as part of the IPO process, there was a TAM study You guys did just about the number of units that you thought was a realistic goal. And then there was discussion about maybe updating that. Is that something you're still working on?

Speaker 8

Discussion about maybe updating that. Is that something you're still working on?

Speaker 1

It's certainly not we don't have a new It's the short of it. We're still very we've got about 50 units against that initial white space estimate of $300,000,000 and so we're not necessarily in a rush to update it. One of the trickier things that we've seen when exploring this is that I think for us, in our estimation, the biggest opportunity Since we've gone public is really and it's unfortunate, but it's the mass closures of Japanese restaurants. And whitespace studies tend to focus more on demographics as opposed to competitive factors. And so we're that's The tricky part is figuring out how to bake in just how meaningfully the landscape has changed because the demographics haven't changed that much, but the competitive landscape has changed completely.

Speaker 1

And so that's where we are. And we do know too that when we did the TAM study at the IPO that the parameters that were used are very conservative. And we do know that we make very good money at sales levels that are below what we used in the last whitespace study. So when we redo that, if we just lower some of the parameters, I think everybody on this call and we all know, we've even said at conferences that we believe that number is going to be much higher than 300. And we will at some point update that study as most companies do about 5 years or so from their IPO, which for us would be next summer.

Speaker 1

Fortunately for us, it seems like analysts provide their own white space numbers for us and so we haven't had to give a new one.

Speaker 2

Thank you. I'll keep guessing.

Speaker 1

Thanks George.

Operator

Our next question comes from Jeremy Hablin with Craig Hallum Capital Group. Please proceed with your

Speaker 6

question. Thanks, guys. This is Jack Cole on for Jeremy. Congrats on the great quarter. So you mentioned that wages are Still up year over year.

Speaker 6

Could you just clarify the magnitude of wage pressure in Q3? Is that still up high single digits? And then just how do we think about wage pressure heading into FY 2024?

Speaker 1

So I think in the last quarter, we mentioned that Labor inflation was about 10%, and that's what we've seen largely be the case for For our Q3, we've seen a little bit of easing. And so I think that's reflected in the pricing that we took being a lot lower than what we historically take or And what we've taken over the last year and a half, I'd say it's a lot closer to what we've historically taken, which really speaks to our confidence in terms of where we expect Our labor and our COGS to land for whatever period of pricing this is going to cover. But Yes, low single digits, mid single digits of labor. And yes, we're very happy with where things are going.

Speaker 6

Got it. That's helpful. And then related to the unit development again, what does the pipeline look like in executed leases versus active units under construction, I think you mentioned 7 under construction. So could you just clarify that and then Provide us the number of executed leases.

Speaker 1

Yes. So it's we've got 7 units under construction, most of them being in the back half of their construction phases. We've got 11 leases under 11 leases that have been executed and a number that are We expect to be executed any day now and double, triple, quadruple the number of LOIs. And so, yes, the pipeline is great. We're very happy with the pipeline.

Speaker 1

Got it. Thank you. That's all for me.

Speaker 2

Thanks, Jack. Thank you, Dan.

Operator

Our next question comes from Joshua Long with Stephens. Please proceed with your question.

Speaker 4

Great. Thanks for taking the follow-up. Wanted to see if we could dig into the inflationary environment, specifically on the food basket. You Talked about how that is coming back in line like we had hoped and sort of expected here in the back half of the year. But I think in prior quarters, we had talked about an You all had talked about an opportunity in terms of sourcing, maybe with some contracting around shrimp and salmon or some of the other Key Protein, curious if you could give us an update there.

Speaker 4

And then Jeff, I know one of the other initiatives that was on the plate For at some point, maybe a longer term one was the ability to shift to a broad line distribution partner. And so just curious if you have any sort of update there, if any, In terms of just how you're thinking about that or maybe the timing and potential?

Speaker 1

Yes, I do have an update. So the broad line distribution projects Really goes hand in hand with talked about tiny contracts for 6 months or a year or whatever. We'll be able to be in a much better position to do that once we Get our consolidation underway. The update on that consolidation piece is that in the past we had talked about moving to a U. S.

Speaker 1

Broadliner such as Sysco or U. S. Foods. And what we've done, what we've decided to do is consolidate some of our Japanese broadline distributors, which we've already used because What we found is that it was very difficult for the U. S.

Speaker 1

Broadliner to get a hold of some of the very specialized Japanese ingredients that we use in our products, And since the Japanese product lines that we use already have those, it's easier for them than to go get the mainstream type stuff. So what we're doing is we're consolidating down into 2 suppliers that we already use and they are Japanese companies that have U. S. Operations. And by doing that, we're going to have the entire country covered.

Speaker 1

But more importantly, we'll make sure that the very hard to get specialty items that are used in Asian cooking we'll be able to get. And so that's a process that we're doing. It's in progress. We've already done many of our SKUs are already consolidated. And I expect that in the next several months that will be done.

Speaker 1

In terms of the inflationary environment that we've seen, we have seen that continue to ease. We saw about a 2% quarter over quarter decline from Q2 to Q3 in our cost of goods So that line continues to move in a positive direction. And with all the work that we're putting into the supply chain and the consolidation with the distributors, As well as the general economy seems to be smoothing out a little bit. All of those factors are working in our favor and we're very happy going forward is what we're seeing on the COGS line.

Speaker 4

That's super helpful commentary. In terms of just thinking about the 3Q inflation, understand that that 2% was quarter over quarter. What is that how would we kind of frame that up on a

Speaker 1

year over year basis? Jimena, what we talked about last quarter, it's In about the same range as we talked about last quarter, but what was most important to us is it's easing.

Speaker 4

Understood. That's super helpful. And then one of the key pieces in one of your questions earlier that came through is that it's not really about You're not capital constrained. You've got a great concept, lots of growth opportunities. You mentioned the importance, the human capital side.

Speaker 4

And so just curious if you could Quantify or talk about that manager pipeline and where the biggest opportunities are to either develop talent, funnel talent into that or just How you're approaching that? Because that seems like that is the bigger piece of the overall growth story going over time.

Speaker 1

So, yes, This story goes back to what we mentioned earlier. But we have a unique concept and we're in a unique partner growth where the majority of our units are single unit markets. And so naturally, we're going to have Growing pains associated with recruiting and training and HR. So that's also why that's really been the theme of our earnings calls for the last 2 years. If we know that that's It's going to be the single most important gating factor and we don't want to compromise on our growth and so that's what we really focused our efforts on.

Speaker 1

When we're saying when we're discussing this, this is really an effort to be transparent about our priorities. What we don't want you to think is this is going to be This is a serious enough concern that it's going to compromise our ability to grow. That's not the case at all. What we're saying is that this is simply the top priority for where we are. The other thing is that with America with our American operations Working so well and everybody is seeing tremendous opportunities for growth.

Speaker 1

There are a lot of Japanese expats I want to join the American group. And so we've got a dual pipeline of internal really a simple pipeline of internal promotions from American store employees, Japanese employees that are banging down our doors because they want to be the next There's just countless examples of people that have grown tremendously over the last several years and then the external hires as well. Yes. And so to summarize, this is I wouldn't call it an easy position that we're in, but I certainly wouldn't call it a concerning position that we're in. Totally understand.

Speaker 1

And to

Speaker 4

be clear, There's no concern on my part from that side, just knowing it's restaurants are an easy business, easy is hard to do, especially when you're trying to scale your culture. So I appreciate That perspective and the information there on the dual and triple pipelines, that's certainly encouraging. Appreciate the color.

Speaker 1

Of course.

Operator

Thank you. There are no further questions at this time. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Kura Sushi USA Q3 2023
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