Kura Sushi USA Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 4, 2024

There are 6 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA Inc. Fiscal First Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the lines will be open for your questions following the presentation. Please note that this call is being recorded.

Operator

On the call today, we have Hajime Jimi Uva, President and Chief Executive Officer Jeff Yuth, Chief Financial Officer and Benjamin Porton, Senior Vice President of Investor Relations and System Development. And now I'd like to turn the call over to Mr. Porton.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you all for joining. I now, everyone should have access to our fiscal Q1 2024 earnings release.

Speaker 2

It can be found at www.kurosushi.com

Speaker 1

in the Investor Relations section. A Copy of the earnings release has also been included in the 8 ks we submitted to the SEC. Before we begin our formal remarks, we need to remind everyone that part of our discussion today will include forward looking statements 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. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

Speaker 1

We refer all of you to our and evaluating our performance. Presentation of this additional information cannot be considered in isolation nor does this constitute results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release. With that out of the way, I would like to turn the call over to

Speaker 2

Jenny. Thanks, Ben, and Happy New Year to everyone joining us today. Fiscal 2024 is off to an exceptionally strong start With meaningful improvements in restaurant level operating profit margin and adjusted EBITDA as well as 6 new units opened to date with another 7 under construction. Our goal for this fiscal year remains the same as last year, Maintain excellent operations, continue to rapidly grow the number of our vessels and leverage our G and A against an increasingly larger restaurant base. I'm pleased to say that we are continuing to make excellent progress on all three for 3 fronts.

Speaker 2

Quarter sales for the fiscal Q1 were $51,500,000 representing comparable sales growth of 3.8 percent with profit growth being responsible for 3.3% of our overall comp. Sales momentum has accelerated since our last earnings call as implied by the 110 basis points improvement over the blended September over comps of 3.7% with the improvement being driven entirely by traffic growth. Executive price was 9% during the fiscal Q1. As of the 1st week of December, we dropped 7% in price, which we partially offset in January with pricing of approximately 1%. Our current 3% FX to be pricing is a return to our historical pricing cadence, which reflects our confidence in the ongoing normalization of our prime costs as well as a strong strategic decision to best take Quality costs have seen a marked improvement over the prior year quarter with our cost of goods sold as a percentage of sales Coming up 29.8 percent for Q1 as compared to last year's 31.6%.

Speaker 2

Labor costs have largely remained the same at 31.6% as compared to prior year quarter's 31.9%. Restaurant level operating profit margins Improved from 18.2% in the prior year quarter to 19.5% and adjusted EBITDA grew from $600,000 to $1,800,000 representing year over year growth of approximately 200%. It's worth mentioning that much of the adjusted EBITDA growth was driven by improvements in commodity costs, It is truly encouraging to see such dramatic growth even while we face 300 headwinds associated with good for office of compliance and restaurant level headwinds associated with a record number of new restaurant openings and the units under construction. I believe this adjusted EBITDA growth is only a test of what we can expect in future years In the fiscal Q1, we opened 4 new restaurants Pittsburgh, Pennsylvania, Sashin New York, Tampa Florida and Maple Village Illinois. Subsequent to the quarter end, We opened 2 more new restaurants in Kansas City in Hui and Koki, Illinois.

Speaker 2

Additionally, we have 7 units currently under construction. Accordingly, We are excited to increase our unit opening guidance for fiscal 2024, which Jeffrey will expand on shortly. The incredible reflection that we've seen as we establish ourselves in new markets demonstrates The purely national cost of fuel cost portability of Kura Sushi and the performance of new units in existing markets is confirming our expectations that It's been a couple

Speaker 3

of months

Speaker 2

since we launched a new version of our U. S. Program, and I'm very pleased to be able to share that. Early momentum that we discussed in our previous earnings call has remained just as strong. The installation rate of new members are approximately tripled what they have with the previous program.

Speaker 2

And given that These are all new users. We expect better engagement on a per user basis and the overall comfort of the previous year program. While it is still very much early days in terms of the newlyweds program and our earnings on how to best leverage it, We expect to give more concrete update in future earnings calls in terms of newly unlocked opportunities and its potential to drive incremental revenue. Our current ID collaboration, Finan, Has been very well received by our guests. Our next brand collaboration is Sai Family and we believe pipeline for the remainder of the fiscal year is the strongest one we've ever had.

Speaker 2

As we enter the New Year, I would like to thank all of our team members, both at our restaurant and at our corporate support center for all of their hard work, And with that, I will turn it over to Jeff to discuss our financial results and liquidity. Jeff?

Speaker 1

Thank you, Jimmy. For the Q1, total sales were $51,500,000 as compared to $39,300,000 in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 3.8 percent with regional comps of 9% in our West Coast market and 1.3% in our Southwest market. Turning now to costs. Food and beverage costs as a percentage of sales were 29.8% as compared to 31.6% in the prior year quarter, largely due to pricing and the easing of commodity inflation.

Speaker 1

Labor and related costs as a percentage of sales decreased to 31.6% from 31.9% prior year quarter. This decrease is due to sales leveraging from increased traffic and pricing, which was largely offset by increased training costs associated with new store openings and general wage increases. Occupancy and related expenses as a percentage of sales were 7.6% compared to the prior year quarter 7.3 percent due to incremental preopening rents associated with a greater number of units near construction. Depreciation and amortization expenses as a percentage of sales increased to 4.8% as compared to the prior year quarter's 4%, largely due to the additional newly opened units as well as the accelerated depreciation of assets that are being replaced due to planned remodels. Other costs as a percentage of sales increased to 14.7% Compared to 13.5% in the prior year quarter due mainly to pre opening costs associated with a greater number of store openings as well as an increase in marketing costs and general cost inflation.

Speaker 1

General and administrative expenses as a percentage of sales decreased to 15.7% as compared to 16.9% in the prior year quarter due to greater sales leverage, Which was largely offset by incremental public company costs and recruiting and travel costs associated with new unit open. Operating loss was $2,800,000 as compared to an operating loss of $2,200,000 in the prior year quarter, largely driven by incremental other costs, depreciation and amortization and occupancy associated with the greater number of unit openings and units under construction. Income tax expense was $38,000 compared to $10,000 in the prior year quarter. Net loss was $2,000,000 or $0.18 per share compared to a net loss of $2,100,000 or $0.21 per share in the prior year quarter. Restaurant level operating profit as a percentage of sales was 19.5% compared to 18.2% in the prior year quarter.

Speaker 1

Adjusted EBITDA was $1,800,000 compared to $600,000 in the prior year quarter. Turning to our cash and liquidity. At the end of the fiscal Q1, We have $64,200,000 in cash and cash equivalents and no debt. And lastly, I would like to update and reaffirm the following guidance for fiscal year 2024. We now expect Total sales to be between $239,000,000 $244,000,000 We now expect to open between 12 14 units With average net capital expenditures per unit of approximately $2,500,000 and we continue to expect general and administrative expenses as a percentage of sales to be approximately 14.5%.

Speaker 1

Now, I'll turn it back over to Jim.

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. We will now be conducting a question and answer session. Confirmation Thank you. Our first question comes from the line of Joshua Long with Stephens. Please proceed with your question.

Speaker 4

Great. Thank you for taking my question. I was curious if you could share a little bit more about the unit development pipeline and what seems to be a nice Strengthening in that. I know in the prior call you talked about the potential for upside to the unit the new unit development pipeline for the year that seems to be coming into fruition. Just curious if this is a function of site selection, maybe if permitting has gotten any better, anything you could share there in terms of just how the new stores are coming together?

Speaker 2

Sure. Thank you, Jeff, for your first question. Please allow me to speak in Japanese. Ben will have to answer it for me.

Speaker 1

So as Jimmy mentioned in the prepared remarks, we have 7 units under construction. We're extremely pleased to say that 3 of those are pretty far into construction. And so we're very happy with where we are. It's one of the reasons that we were confident in terms of raising our guidance. In terms of the permitting delays that we've mentioned in the past fiscal year, those have meaningfully eased.

Speaker 1

And so we're Very happy with the rollout and how smooth it's been this year.

Speaker 4

Great. That's very helpful. Thank you. And Thinking maybe more about the performance of newer stores, it sounds like that's pretty strong. Could you give a little bit of extra context or color in terms of just how the results for the quarter I know there's always going to be a little bit of difference in between what you all see and how we model it.

Speaker 4

But I'm thinking particularly in terms of just How average weekly sales growth was growing through the quarter and maybe if at some point we kind of get away from looking at this on a multiyear stack I know we're getting further away from kind of COVID and some of those disruptions, but just curious if you're starting to see any sort of Normalization there and any sort of commentary you could share on how new store performance is unfolding?

Speaker 1

In terms of new restaurants, fiscal 2023 has been a record year. This year, we've already opened 6 to date. And so we've had a lot of new openings. In terms of The major new markets that we've hit, we've entered Minneapolis. We've opened a couple of restaurants in New York.

Speaker 1

We hit Pittsburgh. We're in Tampa. It's been A pleasure really to see how warm the reception has been in each of these markets. And every time we open every time we enter in a new market, it's just A confirmation of the portability of our concept and so it's really encouraging for us. In terms of the existing markets, we've opened a couple of New Jersey, Chicago, the Atlanta area And those are all doing very well as well.

Speaker 1

As Kimi mentioned in the earlier prepared remarks, there's abundant appetite for Across the United States. And so we feel very confident, but not only in terms of our existing our new markets, which are gangbusters, but in filling our existing markets as well. So, in terms of the multiyear stack, we're not If I'm being if we're being totally frank, we're not internally doing a multiyear stack anymore. We've returned to normalcy. And so we're very pleased

Speaker 4

Great. Thank you. That's helpful. And one last one for me. In terms of the food deflation or just the overall COGS basket that You talked about in your prepared remarks.

Speaker 4

I think also in the past, there was conversation around the potential to reinvest in food quality or other areas if The food cost margin went materially below 30%, which is as kind of a starting point. So realize it's probably early on in The whole process and there's still a little bit fluidity there, but could you just remind us how you're thinking about the food cost line and when and where some of those Pivot points or thought process might lie in terms of the potential for seeing leverage or maybe reinvesting in that line item.

Speaker 1

Hey, Josh, it's Jeff. Yes, the 30% number that on the COGS line is something that we're very happy with. It's something that we would like to see a little bit lower and it has gotten lower. In terms of deflation, just to give you the numbers of what we've seen this year, Year over year our deflation was about 4% and sequentially quarter over quarter our deflation was about 2%. So that deflation Combined with the price increases that we've taken over last year and as Shumi mentioned, we did take about 1% on January 1.

Speaker 1

We believe that with the price increases and the deflation that we're going to be successful in having that COGS number show up even below 30. But as we've mentioned in the past, there's a floor to that. That COGS number were to get somewhere 27, 28 that may be a little bit too low and then you do risk hurting your food quality, which is not something we're going to do. So as long as we can keep that number in the very, very high 20s or right around 30%, we're going to be happy. Got it.

Speaker 1

Very helpful. In terms of reinvesting that, some things that we've done have materially significantly improved the quality of our core proteins, Especially tuna and salmon. Very pleased to be able to say that we've done that while also lowering our COGS basket or COGS Austin, so that's really been pretty remarkable for us. One other thing that we like to do is our LTOs. For example, in December, we did a crab fair, Very high quality crab.

Speaker 1

Winter is crab season in Japan. And this was one of the most popular LTOs ever. And I think our guests Really enjoyed it and sort of appreciated that we were giving back to our guests through craft.

Speaker 4

Great. Thank you so much.

Speaker 2

Thanks, Josh. Thank you, Josh.

Operator

Thank you. Our next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.

Speaker 3

Thanks and congrats on the strong results. I wanted to just come back because there's a little bit of a breakup in the audio and some of the commentary around menu pricing as well as same store sales color. Apologies for going back over some of this, but Want to make sure that I understood kind of the cadence of comps color that you shared throughout FQ1. And then 2, I think what I heard on the menu pricing was that you're carrying 3% overall in FQ2. And then kind of the comp on the West Coast versus the other regions or in the Southwest region.

Speaker 3

If we could start with that, that would be great.

Speaker 1

Yes. So the pricing that we ran Jeremy in Q1 was 9%. We did take the 1 we've lapped the 7% pricing in December and then we took the 1% at the beginning of January. So we're currently at 3% pricing. We're very, very happy with where the comp number came out and what we really want to point everybody back to is that traffic number.

Speaker 1

The Traffic of 3.3% that we saw in Q1, and as you know listening to conference calls still throughout the year, very few concepts have been able to Have positive traffic. And we look at that number and as long as we can keep people coming back in the door and keep our existing guests coming back, We're going to be very happy. That's one of the things that we can control through great service and great food quality. We continue to do that. We believe that our guests Keep coming through that door and keep that traffic positive.

Speaker 1

And if we can do that, we're very positive that we can. It's going to be a good year for us. And just to add on the cadence given that the audio broke up a little bit. We gave September October comps last earnings call. It was 2.7%.

Speaker 1

And so you can assume that the comps for November were much stronger given that we came in at 3.8% for the full quarter and given that we didn't take any price during that quarter The acceleration was driven solely due to traffic. So back to Jeff's earlier point, we're very, very pleased to We're operating, executing so well that more guests than ever coming in through our doors.

Speaker 3

Got it. I think there was some commentary on the West Coast versus the Southwest market comps also, just want to clarify?

Speaker 1

Yes. Give me one second. I have the numbers here. Sorry, I was over now, top of my head, sorry. 9% in the West Coast and 1.3% in the Southwest markets.

Speaker 3

Got it. And so then just coming back to the comp overall in terms of where the menu pricing was Traffic up really strong 3.3%. Are you still seeing a little bit of reduction then in average plate consumption?

Speaker 1

On a sequential basis from Q4 to Q1, plate consumption for Persis actually got up. And on a year over year comparison, it's about And so we're really happy with where plate consumption is.

Speaker 3

Got it. And then I wanted to shift gears to your labor costs. And you had some nice 30 basis points of leverage year over year. I think minimum wage in California on January 1 is up about 3.2%. But wanted to get an outlook of what you're thinking about Jeff on kind of the labor market here in calendar 2024 as we're moving forward.

Speaker 3

Are you seeing a little bit less pressure? I think there's also In April, the impact of the potential large scale fast food wage laws that are going into effect, the $20 wage. But just wanted to get a sense for what you were expecting? And again, pretty nice leverage that you got on a 3.8% comp.

Speaker 2

I'm happy to answer this question just, Jamie.

Speaker 1

So In past earnings calls, we've mentioned that about I think until about Q3 of last year, the year over year labor inflation was about 10%. It's since moderated to mid single digits and that is including the annual minimum wage increases in California. With the 1% Ish pricing that we took as of January. We believe that that's enough to offset the labor increases and really keep our margins flat year over year. You'd asked about AB1228, previously known as the FAST Act.

Speaker 1

We're very pleased to be I think we're pretty much the only concept That is saying that we see this as an opportunity. In terms of our California markets, our employees are already making wages that are competitive with The $20 that people are going to be making in QSR. And so obviously QSRs need to take a progressive price to be able to Offset that. And so we see this as a meaningful opportunity to grow market share as up until now the conversation has really been we go to Kura Sushi or do we go to other casual dining places? Now it's do we get a combo meal at the burger place or do we get Kura Sushi?

Speaker 1

And that's one of the reasons that we're running 3% prices, we really want to demonstrate to the world at large and not just our existing guests how great a value Kura Sushi is.

Speaker 3

Got it. That's a great point. Last one for me and I'll hop out of the queue. Just wanted to ask about some of the recent collaborations, right? You've partnered with Peanuts and Snoopy in December here to January.

Speaker 3

I wanted to get a sense for how that promotion was performing, seems to You'll be generating a decent amount of buzz.

Speaker 1

Yes. We're really pleased with the December results. And Peanuts collaboration is certainly a big part of it. Our PR team gets better and better with every collaboration that we cycle through. This time they did a really job with what we call the space collaboration, not just the toys or the enemies, but we had photo ops Where the restaurants were decked out like a Charlie Brown Christmas.

Speaker 1

We had little big Snoopy figures on our Mr. Fresh domes and those would go mysteriously missing. And so, I guess, we're a part of that. You can really take a higher praise than that. Certainly not encouraging guests to do that, but it was nice to see people were so that excited about it.

Speaker 1

And as Timmy mentioned earlier, we've got Spy Family is our next collaboration and then we've got 2 more after that for the remainder of the fiscal year. This is the best pipeline we've ever had. I could not be more excited. I wish I could tell you what they were right now, but you're going to have to wait until the next call.

Speaker 3

Great. Thanks for taking all the questions and best wishes.

Speaker 1

Of course. Thank you. Thank you, Damian.

Operator

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

Speaker 5

Thanks for taking the question. Jeff, I have to confess I was a little surprised that you raised revenue guidance this early in the fiscal year. So But I'm curious on the $1,000,000 raise. Was it And anticipated in initial guidance, was it the opening schedule a little bit better? Is it just

Speaker 1

Hey, Sharon. You're cutting out a little bit on my end, but I think I got the gist of your question. So as Jimmy mentioned earlier on one of the questions that was asked, the cadence of the opening is going quicker than we had which is why we decided to raise the guidance. We feel that we're going to have some more operating weights and have an additional unit come in at the end of the year, Which is why we raised at $1,000,000 and not more than that. To talk about some of the things that have been happening with the openings in the markets that we're opening in, we have seen some of the Inc.

Speaker 1

And some of the site selection has been really good. And landlords are excited about getting us in. And I was talking to our Chief Development Officer recently, in fact last night and he was telling me that these landlords are getting their work done quicker because they want to get us in And they're excited about having Kurosushi as part of their portfolio. And the quicker that they can get their work done, the quicker that we can get our work done and we can get open. And we're seeing that happen, which is why we raised the guidance a little bit.

Speaker 1

And wanted to get through the Q1 and kind of see how that played out. We thought that that's how it would be, but we wanted to get through the Q1 and kind of watch what happened before we raise the guidance. So that's why we are where we are now.

Speaker 5

Very helpful. And then on the traffic improvement you saw in November, It's pretty meaningful. We can all kind of do the math. I mean is there anything in particular you attribute November 2 or In hindsight, I do attribute prior 2 months to being a little bit the November.

Speaker 1

We would attribute the acceleration in traffic in November largely for our new rewards program, we're very pleased with Its capabilities. Part of it was in November, we were just making a push to migrate more of our existing users sort of a final push. And so we had A promotion around that. In December, we started a promotion where this is the first time we've ever done this and something that we can only do because we have A rewards program that can track this kind of thing where but we made an offer where if you come twice in December, you get a 20% off for January. And so that was very good for driving traffic in December.

Speaker 1

And obviously, it's going to be a traffic driver in January as well

Speaker 5

The robotic dishwasher, which I know we're all very excited about. I think In the spring, I'm just wondering if that's still on plan and went really well. What could the timeframe look like for a rollout into new units going forward?

Speaker 1

Yes. So we are still in We are still on pace for a test in spring. I'm very much looking forward to it. I'd say that the technology is largely ready. It's Just a matter of getting it battle tested.

Speaker 1

There's a it's a little bit tricky to go from the prototype to the mass market model just or the mass produced model just given that there are some material changes. And so I think it's safe to assume that it's going to be at least 12 months From when the mass produced model is finalized, at that point, I can get the actual parts list and bring it to the regulatory organizations, but That's a pretty okay process. And so it would probably be 12 months minimum from testing. And then it would just be the timing for which stores we can plan ahead In terms of the layout to accommodate the robot dishwasher.

Speaker 5

Thank you and Happy New Year.

Speaker 1

Thank you. Happy New Year. Thanks, Sharon.

Operator

Thank you. Our next question

Speaker 1

Couple of questions on the comp trend. The first one I think for the fiscal quarter you did a 3.8% and I think you said the pricing was 9% and the traffic if I heard right was a 3.3%. So that would imply I guess a negative 8% or so mix. And I think you said the plates were flat. So I guess it sounds like an ongoing maybe non sushi Check management.

Speaker 1

I'm just wondering how you think about that negative offset whether you see that as a concern or whether that The concern is abating kind of that missing component of presumably the meaningfully negative mix shift kind of how you think about that? So in terms of the negative mix, it's certainly there, but we don't really think of it as a concern. Our focus remains traffic. Our marketing is geared around that. Our overall strategy is geared around that.

Speaker 1

We think that's the hardest part and really where we shine brightest, Especially in comparison to our peers. In terms of average tech management, we think of that actually as a unique feature for our guests That comes from our service model. Guests can come in no matter what their budget is. And that's one of we never price people out and that's one of the reasons that our traffic is doing so strongly. But in spite of that mix pressure, our restaurant level operating profit margin is 19.5%, a meaningful improvement over the 18.2% last year.

Speaker 1

And so Our thought again is traffic is our focus. We can leverage our fixed costs against traffic and that gets us the margins that we like. That being said, of course, we love it when our guests do have greater attachment side menu items, etcetera. And so We do have some promotional campaigns in the pipeline that are geared towards improving guest spend. Understood.

Speaker 1

And then as we look forward, I think I pieced together from an outlook perspective on comps. Based on the September, October, it seems like the November was roughly a 6%. And I guess if the pricing was similar for sure that's a nice uptick. So I'm just wondering one I want to confirm that was right. And then I think on December, I thought you said that you were really pleased.

Speaker 1

I wasn't sure if that was a reference to the overall comp Or how we should just think about the outlook whether or not it's fair to assume a mid single digit type comp sustains with still positive traffic and the pricing in that 3% range? Just trying to Figure out the outlook first on the December and then kind of what we should be thinking about for the rest of the year based on those components. So, yes, in terms of the November coming in at about 6%, your math is right there. Looking at December, we did lap that 7% pricing in the 1st week. But as we said, we were very pleased With our traffic performance, our overall comp performance, we're confident that with our ongoing traffic strength, our marketing efforts, the IT pipeline that we have, many development We'll be able to maintain this very strong momentum through the remainder of the fiscal year.

Speaker 1

We're very happy. Understood. Now that's encouraging despite I guess concerns of a slowing consumer, so good to hear. My last question was just on the cost side of things. Just a clarification, I think you said Commodities were 4% deflation in the Q1.

Speaker 1

I'm just wondering what the labor was for the Q1 and maybe the expectation for each of those Hi. In terms of labor, we've seen about mid single digits inflation year over year, but we were overcoming 30 basis points below the prior year, 31.6 against last year's 31.9%. And so we're feeling that the operational efforts that we've made the yes, as well as the pricing that we've taken all Come into play there. We're very pleased that we were able to not just stay flat, but actually improve our labor margins. And then in terms of food deflation, you arrived, it's from quarter 1 fiscal 2023 to this year quarter 1, it was about 4% deflation.

Speaker 1

And then sequentially from Q4 of this past fiscal year to Q1, it was about 2%. Got it. And just to clarify, Ben, did you say I mean, I know depending on how we look at restaurant margins, it varies, but based on your calculation, it was 100 30 basis points of expansion. But did you say you expect the restaurant margins flat in fiscal 2024 with the 3% price for the rest of the year? Or were you referring to the labor line?

Speaker 1

I think that prior question, Son was asking about labor.

Speaker 2

But I know you I

Speaker 1

thought you had mentioned that you were comfortable with restaurant margins flat. So just wanted to clarify if you have any kind of forward looking thoughts on the remaining three quarters from an overall margin perspective. Thank you. Yes. If you look at our historical margin, They tend to lever pretty meaningfully every quarter.

Speaker 1

And so you can just assume that the same as historically they're going to continue to improve as we have greater traffic and greater sales that we can leverage against our fixed costs. The comment about the 3% pricing that we took, we thought was enough To offset not just our labor costs, but our while we've got a COGS tailwind, we do have some other costs general inflation, but the 3% that We thought it was enough to pretty much offset all those inflationary pressures. And on the I'll also add too, Jeff, on the restaurant level operating profit a percentage of sales, as I mentioned in my prepared remarks, we had 130 basis points of leverage there from 18.2% to 19.5%. So with a lot of tailwinds, Our pricing, the commodity deflation, the easing of labor inflation. So the tailwinds have been great this past quarter and we fully expect That continue for the remainder of the year.

Speaker 1

Sounds great. Thank you very much.

Speaker 2

Thank you, Jason. Thank you.

Operator

Thank you. Our next question comes from the line of Jon Tower with Citigroup. Please proceed with your question.

Speaker 1

Great. Thanks for taking the questions. Just a few if I may. And I apologize if you might have hit this earlier. I had a hard time hearing some of the stuff.

Speaker 1

But On the loyalty program, I'm curious how has registrations hit versus your own expectations? And How is it it seems as if per Ben's comments earlier at least around the promotion of in December where you can come in twice and get 20% off in January. 1, I don't know if that was only reserved For loyalty members or not, but how is this working overall the loyalty program to drive frequency ticket and or frankly any sort of customer insights that you might not have had previously. Yeah. So generally speaking whenever we talk about a promotion you can assume limited to our rewards members.

Speaker 1

I don't know if you recall in the last earnings call, it was November. Our rewards program has just been out for a couple of weeks and we mentioned that the registration rate had doubled as compared to the prior program. And you sort of assumed that would level off that that was due to the initial excitement. But I'm not sure if you heard in today's call because the audio is a little bit garbled, but the registration has actually tripled In comparison to the last program, so it hasn't leveled off. It's actually accelerated.

Speaker 1

So I think it's very fair to say that it's far exceeded our We're very pleased with it. I think it's still a little bit premature to be discussing guest insights, but This engagement is great. The things that we can do, the kind of campaigns that we can deploy are at a completely different level. Certainly, the next earnings call will have a lot of good news that we'll be able to share with you. Yes.

Speaker 1

And that this being twice in December to get that 20% off in January that's with Only for our rewards members. In fact, the improved rewards platform is what enabled us to use to actually do that for the first time. Got it. Thank you. And just I know last quarter you'd also discussed the idea about communicating kind of some of the upgrades on the waitlist system And or kind of the rolled out cell phone ordering at the table to consumers as a potential lever.

Speaker 1

Did you guys push that during the quarter At all? And if so, what was the uptake of either? Yes. In terms of the waitlist app, So guest attrition has dropped from 25% to below 20%, a very meaningful improvement. We're very, very happy with it.

Speaker 1

And we think it's one of the reasons that our traffic is continuing to improve. In terms of the mobile phone ordering that It's still limited to 2 restaurants. We're going to start testing later this we're going to the testing is complete. It's feature complete. Really, I think the biggest factor We've had some trouble figuring out exactly what to name it.

Speaker 1

When we have a button called mobile ordering, I think our guests are saying It's like a takeout button. And so we're changing it to smartphone ordering, which I think is a clear explanation of exactly what it can do. And for people that are New to this on the call. It's it allows this program allows you to use your cell phone to place orders as well, which doesn't sound very exciting until you've been at a restaurant With a party of 4 or more and you're sitting on the outside and you can't order from the panel and you don't want to reach over people and grab stuff. And so We're very excited about this, especially in terms of mix.

Speaker 1

We think it's a meaningful opportunity for side menu attachment rates to go up. And so, yeah, That's rollout is starting in January and it's going to be on a rolling basis. Should be my expectation is that it will be done in the next two quarters, hopefully next order. Got it. Thank you.

Speaker 1

And then just I guess following up on the U. S. TAM, I know you've previously talked about the idea of getting to about 300 stores and it seems like new store productivity volumes and certainly traffic All seem to indicate that your brand is resonating particularly well with consumers despite whatever the macro had been doing over the past 24 months and obviously prior to that as well. So I'm curious if and when you guys think about that number. It appears dated at the moment.

Speaker 1

Do you guys have any more thoughts on where that should go over time? Hi. So it still remains a topic of discussion in terms of when we're going to commission the new whitespace study. Obviously, we know that people are excited for that. And So we're excited to share that with the Street whenever we do decide to commission the white space study.

Speaker 1

We communicated many times in the past that the 300 units That we initially gave at the time of the IPO, we think is conservative, not just because it was a conservative number to begin with, but because of the market fragmentation and The sheer number of restaurant closures in the Japanese segment as a result of COVID, we think that's fundamentally changed our opportunity in the United States. But Again, as you mentioned, we're roving along. We've got 56 units against that initial 300 and so we're not rush necessarily. We don't see a need to see however many hundreds of units into the future, but I don't think anybody, certainly not anybody in this call expects 300 to be our ceiling. Got it.

Speaker 1

Thank you for taking the questions.

Speaker 3

Of course.

Speaker 1

Thank you,

Operator

Tom. Thank you. Our next question comes from the line of Todd Brooks with Benchmark Company. Please proceed with your question.

Speaker 3

Thanks for taking the question. Just a couple left here. Jeff, on the other cost line, given the success in accelerating the opening pipeline, is it safe to take the Kind of Q1 level of spend and then obviously apply a low leverage as the volumes increase in the back half. But How should we be thinking about that level of spend as we go forward through the year?

Speaker 1

That's exactly how you should think of it, Todd. We're going to continue our opening base. As you know, we raised the guidance to 12 to 14 units. So we're going to continue to Open units as quickly as we can. So we're going to continue to see those large pre opening expenses.

Speaker 1

And that's really what impacted other costs The most throughout the quarter was the pre opening expenses associated with opening the trust restaurants. As you know, a lot of restaurant companies in the past have broke Now preopening expenses as a separate line item on the financials, which is looked down upon now, so we don't do that. But you can see what our preopening expenses were and our adjusted EBITDA reconciliation in the queue. So as we continue to open restaurants and we have more top line revenue to get the leverage, You're thinking about it exactly right. It's going to leverage a little bit, but they're still going to remain elevated.

Speaker 1

I wouldn't think about a lot of leverage going forward necessarily this year on the preopening But as we get through the year, you will get some. And again, next year more and next year more, similar to G and A really is how I'm kind of thinking about it. Because Unless we start opening 50 stores sometime, we're going to continue to have enough stores where that additional revenue from the stores we have opened will significantly offset that. But right now, It is giving us some higher costs in the other cost line and in the labor line as well. Our preopening Costs are sprinkled throughout our P and L.

Speaker 1

They're not stuck in just one line. They're in it's in labor. It's in occupancy. That's another reason the occupancy was high too. Nobody asked about occupancy yet, but we have to start booking rent expense on restaurants when we take possession of the building.

Speaker 1

So when it takes 4 or 5 months to build the restaurant, we're having non cash rent expense hit our books. And because of the accelerated openings, that's why you see our occupancy line a little bit higher than I think some people expected it to be this quarter as well. But it's a good thing. We're opening restaurants and they're going to start pushing through revenue and make profits and we're excited to see this happening.

Speaker 3

That's very helpful. Thanks, Jeff and agree that if it's tied to accelerated year end openings, it's a great thing. Just one follow-up there And I'll hop back in the queue. Within the other expense, you talked about marketing costs being up. Is this just preopening marketing for new units?

Speaker 3

Or is there Something that you're doing additionally on the marketing side that would bump that cost line up.

Speaker 1

So as some context, last year in December, we started investing in targeted marketing search engine optimization with Google across its channels. It's been exceptionally it's been very cost effective. We're very happy with it, which is why we've kept it as part of our marketing suite. So this is really just a year over year comparison given that we started in December. This was the first In last Q1 where we didn't have that cost last year, as of Q2, we're going to be doing an apples to apples flat comparison.

Speaker 1

So it sounds like we started something new in Q1. This is really just the tail of a year over year comparison.

Speaker 3

Perfect. Thank you both.

Speaker 2

Thank you. Thank you, Todd.

Speaker 1

Thanks Todd.

Operator

Thank you. Our next question comes from the line of George Kelly with ROTH Capital Partners. Please proceed with your question.

Speaker 4

Hey, everyone. Thanks for taking My question

Speaker 3

here. So most of my stuff

Speaker 4

has been asked, but just one last one for you related to CapEx. And I was curious, what's a good sort of percent of sales to use just generally for maintenance CapEx? I know it's 2.5 per restaurant, but wondering about maintenance CapEx. And if we look back over the last year or 2, has there been kind of a post COVID catch up on some maintenance CapEx or just curious if there's been anything sort of not normal in the more recent periods?

Speaker 1

So a couple of things, George. Hi. So for maintenance CapEx, we've said in the past, it runs about $100,000 per restaurant Once a restaurant is opened, your ongoing maintenance stuff that we're capitalizing. And In terms of catch up, there's not necessarily so much of a catch up. But when you look at our depreciation line on the P and L, What you're seeing is a lot of accelerated depreciation in there, because we've done several remodels.

Speaker 1

We changed our logo sometime before I joined the company, but we Change the signage yet. So we're changing a lot of our signage to the new logo. And when we make that decision and we have a date for when that time is coming down, we have to accelerate depreciation. We also have a lot of protective equipment that we have in the restaurants for COVID that we kept on the books just so we made sure the COVID emergency was over and now that's over We have to write those off as well. So there are some several unusual things hitting our depreciation line.

Speaker 1

But That's kind of how I think you should look at it. Like I said $100 or so for us for me is CapEx.

Speaker 4

Okay. Sounds good. That's all I had. Thank you.

Speaker 1

Thank you, George. You're welcome.

Operator

Thank you. Our next question comes from the line of Mark Smith with Lake Street Capital.

Speaker 1

Hi, guys. Similarly, I think most questions have been asked here. But just one for me. As we look at G and A, There was a little bit of litigation accrual. Did that fall in there?

Speaker 1

And was there anything else that was kind of one time ish? It looks like you're expecting some pretty good leverage there. I Just wanted to see if there was anything else that was maybe one time ish in nature. Yes. The litigation of the CORAL 205,000 was the biggest one time piece.

Speaker 1

And as you back that out, the number came to almost exactly where we expected it to come out for the quarter. So things you're going to see going forward for the rest And if you look at our guidance, we're projecting about 50 basis points of leverage when we had 80 basis points last year. And the reason we're not expecting as much leverage this year is this is our 1st year, because this is our 6th year as a public company, which means that we now have to be 404 compliant, which has created quite A bit of additional auditor costs and some consulting costs to make sure that we are completely 404B compliant when we need to be. So The additional public company costs create a little bit of a headwind there. But you know what, 80 last year plus 50 this year, 130 bps over 2 years is pretty good.

Speaker 1

Excellent. Thank you. Thank you. Thank you, Mark.

Speaker 4

Thank you.

Operator

Thank you. We have reached the end of our question and answer session. And with that, this will conclude 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 Q1 2024
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