Kura Sushi USA, Inc. (NASDAQ:KRUS) Q4 2022 Earnings Call Transcript

Kura Sushi USA, Inc. (NASDAQ:KRUS) Q4 2022 Earnings Call Transcript November 10, 2022

Kura Sushi USA, Inc. beats earnings expectations. Reported EPS is $0.19, expectations were $0.06.

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Fourth Quarter 2022 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. Please note that this call is being recorded. On the call today, we have Jimmy Uba, President and Chief Executive Officer; Jeff Uttz, Chief Financial Officer; and Benjamin Porten, Vice President of Investor Relations and Business Development. And now, I would like to turn the call over to Mr. Porten. Please go ahead.

Benjamin Porten: Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal fourth quarter 2022 earnings release. It can be found at www.kurasushi.com in the Investor Relations section. A copy of the earnings release has also been included in the 8-K we submitted to the SEC. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

We refer all of you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. 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 release. With that out of the way, I would like to turn the call over to Jimmy.

Jimmy Uba: Thank you, Ben and thank you everyone for joining us today. It’s great to be able to report a strong growth to our financial year. We broke sales records and unit growth records and achieved on four time high on our restaurant-level operating profit margins. We further approved our portability by entering and succeeding in three new states and many more DMAs. We implemented many new innovations at our restaurants allowing us to scale successfully as we continue to pass through aggressive growth. It’s been a greater year. Now, I would like to discuss our fiscal fourth quarter results and touch on some expectations for the coming fiscal year. We continue to see strong sales performance in our fourth quarter with sales of $42 million, a 50% growth over the prior year of $27.9 million, and comparable sales growth of 27.6% as compared to the prior year period.

What’s remarkable about this figure is that our comparable sales of growth have far out to pace to the pricing that has taken over this period. As we saw traffic growth of 14.6% over the prior year. Profit growth in California was especially robust and over 20%. As a reminder, California, we opened for full indoor dining on June 15, 2021. The traffic gain we saw in California materially outperformed our expectations directly to the benefit of two weeks of additional operating capacity in fiscal year 2022. On that note, I would like to discuss regional performance. In the fiscal fourth quarter California saw comparable sales growth of 32.7% compared to the prior year period. In Texas, we saw comparable sales growth of 19% has compared to the prior year period.

This geographic previous comparative benefit California had in last year’s operating restrictions. Off-premises sales were $1.3 million with a mix of 2.9% consistent with our near term expectations for low single-digit off-premises mix. This strong performance started in the fiscal year 2022 AUV of $3.8 million, which is an increase of $1.7 million over the prior year AUV of $2.1 million, as well as a healthy improvement on our pre-pandemic AUV of $3.5 million. To provide some context for our comparable sales, I would like to go over our recent pricing history. We took pricing of approximately 80% in September of 2021, pricing of approximately 2% in March, 2022 and close out the fiscal year with pricing of approximately 6% in July, 2022. Following our lapping of September, 2021, our current year-over-year effective pricing is a little bit less than 8%.

Again, our comps for the first quarter on a single year stuck were approximately 28% with effectively pricing of approximately 14% over the same period. We are exceptionally proud to say that our comparable sales gains are not being driven fully by pricing, and we have seen no discernable traffic growth and demonstrated by the previous mentioned 14.6% of year-over-year profit growth in our fiscal fourth quarter. Now, I would like to discuss, what I’m sure is top of mind for everyone in the restaurant industry. Inflation, labor availability and the consumer strength. Our COGS as a percentage of sales was 30.7%. While this 30.7% figure is still very strong from historical perspective, it was nothing that we saw a 100 basis points increase in COGS relative to our fiscal third quarter due to commodity inflation, which we were not able to fully offset by pricing.

On the other hand, labor as a percentage of sales improved to 28.9%, driven primarily by price and seasonal sales leverage and supported by the full rollout of robot servers tableside payment and touch panel during order systems. Staffing headwinds have progressively eased and our current staffing, excluding the newly open units, is over 95% of optimal levels. In spite of unprecedented inflation, we were able to deliver an all-time best industrial operating profit margin of 23.9% in our fourth quarter. On a full year basis our restaurant operating profit margin in fiscal 2022 was 21.2%, which is an improvement of more than 100 basis points over our pre-pandemic historical results. I believe that consumer demand of Kura Sushi remains very strong in spite of inflationary concerns and potentially pressure on discretionary spending.

First, we are fortunate in that our historical and current type restaurant strategy, prioritize these markets that over index is high income residents and so Kura guest is that much more resilient as a customer. Second, our value proposition remains excellent. In spite of the pricing that we take during the pandemic and internal survey of Sushi restaurants indicated that our menu pricing is approximately top of those set by local competitors. There has been a lot of discussion about consumers trading down and we think there’s an amazing opportunity in capturing first-time guests that were trading down from their local mom-and-pop Sushi restaurants. This will be a key strategy for growing sales in fiscal 2023, and we expected to make additional marketing investments in order to best take advantage of this opportunity.

The health of the Kura consumer is demonstrated by our quarter-to-date sales. We saw September sales of $13.5 million and October sales of $13.3 million with year-over-year comparable sales growth of 11.5% and 6.3% in September and October effectively. I believe these counts are particularly strong when considering the tough competition as we have the 80% pricing we took in September, 2021. As far the demonstration of strengths of the Kura consumer, our papa franchise consumption during the quarter-to-date has actually shown modest growth relative to our fiscal fourth quarter. Average tech sizes have also grown modestly compared to our fiscal fourth quarter. Moving to development. In the fourth quarter, we opened three new locations, Novi, Michigan; Vineland, Florida; and Tysons Corner, Virginia making whole total of eight new units openings for fiscal year 2022.

As you may have heard on other earning calls from our peers in the industry, we are continuing to see headwind in construction cause gradually by seeking delays and delays in permitting from local governments. I’m very proud of our developmental team for achieving 25% unit growth this year while working under these conditions. I believe that much like fiscal year 2021, our craft of new units from this year have the potential to be one of the best classes we’ve ever opened. Development for fiscal year 2023 is off to a strong start and we expect three new unit to open in the next several weeks. Two of these units will be in the new market of Philadelphia, Pennsylvania, and at the Mall of America in Minneapolis, and the other unit is set to open in Jersey City, New Jersey.

It is a market that has delivered remarkable results with our port relocation. On another note, I would like to formally welcome our new Chief Financial Officer, Jeff Uttz. Jeff has a truly remarkable career in the restaurant industry, including growing the other house from only three units and ultimately leading it sale to leading Shake Shack talk about the idea in 2015. Jeff has only been with us for a month and have already proven himself to be an incredible addition to the team, and I couldn’t be more excited to have him as one of Kura’s leader. Finally, I would like to thank all of the team members that have made this great year possible, both after our restaurants and our corporate support center. Kura has grown so much over the last several year and it’s great to see our employees grow alongside us and for our management pipeline to be filled with internal promotions.

And with that, I’ll hand it over to Jeff to briefly discuss our financial results and liquidity. Jeff?

Jeff Uttz: Thank you, Jimmy. I am humbled and honored to be part of this amazing company and to have joined the best-in-class management team. I believe we are poised to become the industry leader in Sushi, and I couldn’t be more excited about the future. For the fourth quarter, total sales were $42 million as compared to $27.9 million in the prior year period. Comparable sales growth as compared to the prior year period was 27.6% with regional comps of 32.7% in California and 19% in Texas. Turning to costs. Food and beverage costs as a percentage of sales were 30.7% as compared to 30.8% in the prior year quarter due to pricing taken over the course of fiscal year 2022, largely offset by food cost inflation. Labor and related costs as a percentage of sales decreased to 28.9% from 29.9% in the prior year quarter.

Excluding the impact of the employee retention credits recognized in the prior year, labor as a percentage of sales in the prior year would’ve been 34.3%. This decrease is due to sales leveraging from pricing and operating conditions that allowed for full indoor dining capacities. This leveraging was partially offset by wage increases. Occupancy and related expenses as a percentage of sales improved to 6.5% from 6.8% in the prior year quarter, primarily due to higher sales leverage, partially offset by higher pre-opening lease expense. Other costs as a percentage of sales decreased to 12.4% compared to 12.9% in the prior year quarter, also due to higher sales leverage. General and administrative expenses as a percentage of sales decreased to 13.3% as compared to 18% in the prior year quarter, largely due to higher sales leveraging from an expanded system base and normalized operating conditions.

On a dollar basis, general and administrative expenses were $5.6 million as compared to $5 million in the prior year quarter. Operating income was $1.9 million as compared to an operating loss of $762,000 in the prior year quarter. As a percentage of sales operating income was 4.6% as compared to negative 2.7% in the prior year quarter. Income tax expense was $61,000 compared to $18,000 in the prior year quarter. Net income was $1.9 million or $0.19 per diluted share compared to a net loss of $834,000 or negative $0.09 per diluted share in the prior year quarter. On an adjusted basis, net income in the fiscal fourth quarter was $2.1 million or $0.21 per diluted share compared to the prior year quarter’s net loss of $1.4 million or negative $0.15 per diluted share.

Restaurant level operating profit as a percentage of sales was 23.9% compared to 16.4% in the prior year quarter. Adjusted EBITDA was $4.8 million compared to $619,000 in the prior year quarter. Turning to our cash and liquidity. At the end of the fiscal fourth quarter, we have $35.8 million in cash and cash equivalents and no debt. Lastly, I would like to provide the following guidance for fiscal year 2023. We expect total sales to be between $183 million and $188 million. We expect general and administrative expenses as a percentage of sales to be approximately 16%, and we expect to open between nine units and 11 units with average net capital expenditures per unit of approximately $2.5 million. And with that, I’ll turn the call back over to Jimmy.

Jimmy Uba: Thanks, Jeff. This concludes our prepared remarks. We are now happy to answer any questions you have. Operator, please open the line for questions. As a reminder, during the Q&A session, I may answer in Japanese, before my response is translated into English. Please bear with us.

Q&A Session

Operator: And our first question will come from Joshua Long of Stephens Inc. Please go ahead.

Joshua Long: Great. Thank you for taking the question. And Jeff, nice to hear from you again, glad to have you aboard. When we think about the results in the quarter, I was hoping you might be able to talk about some of the strength that you’ve seen obviously the regional strength is helpful context, but as you think about that momentum continuing into the first part of your fiscal 2023. Can you talk about just the underlying pushes and pulls there? Are you doing €“ do you see that as momentum for the brand on top of just the consumer looking for those unique experiential concepts which you offer? Do you see any sort of context you’d help there to frame up kind of how your consumers doing and that underlying momentum would be helpful.

Jimmy Uba: Thank you, Joshua for your question. Please, I don’t need to answer in Japanese.

Benjamin Porten: To start with the regional comps, the disparity that we saw between California and Texas is really just an artifact of the easier comparison that California had due to the first two weeks of June only having 50% seating capacity. And then just sort of the ongoing traffic recovery that we saw last year. And so that’s really the only reason that California is better comps than Texas this time.

Jimmy Uba:

Benjamin Porten: Q4 with truly exceptional comps with year-over-year comparable sales of almost 20 €“ comparable sales growth of almost 28%. As Jimmy mentioned in the opening remarks in September and October, we had comps of about 12% and 6% respectively. So those are going to be probably more representative of the overall comps we expect for Q1 relative to Q4.

Jimmy Uba:

Benjamin Porten: So, we also touched on this a little bit in the prepared remarks, but in September and October, one of the truly reassuring things that we saw in terms of guest sentiment was that the fee per person Sushi plate consumption had had not gone down at all. And in fact, it we’d seen modest growth. That’s the primary way that we monitor consumer elasticity, just given that you build your check plate by plate. And so if there is, a threshold, you can see them manage that check. But the average checks have also grown as well modestly. But to fee per person consumption and average checks remain very stable in spite of the pricing that we saw in July indicates that we really don’t think that the guests are sensitive to the pricing at all.

In terms of the acceleration for comps relative to Q4, I think this is more an externality or just like a reflection of the overall everything that everybody’s seeing in the industry. I think people are just going out less frequently, but when they do come, they’re not managing their check. And so it’s clear that our guests have not, are not yet sensitive to any €“ to the pricing that we’ve taken. And again, as Jimmy mentioned earlier, our €“ in spite of the pricing that we’ve taken, we’re still approximately half of the price of our local competitors. And so we still remain a truly excellent value.

Jimmy Uba:

Benjamin Porten: And so one of the main themes for fiscal 2023 is going to be our focus in capturing guests that have yet to be €“ yet to go to Kura, but go to other Sushi restaurants as everybody knows, we have a truly unique dining experience that you really can’t get anywhere else. Coupling that with the fact that we’re price at approximately half the price of our competitors makes us truly appealing, and so we’re really going to be leading into capturing new guests.

Joshua Long: Got it. Thank you. That’s very helpful. When we €“ on that last point, when we think about that pricing maybe opportunity or just the current state of it bounced against the inflationary environment, what are your thoughts on pricing going forward? It seems like there’s perhaps room where you could take incremental pricing and still be a value, but also just noting that your last point there in terms of getting more people into your concept and into that funnel. How do you think about pricing on a go forward basis?

Jimmy Uba:

Benjamin Porten: So in terms of pricing, I don’t think we can really meaningfully discuss it without giving the context of cogs. And so we saw commodity inflation of approximately high single €“ in the high single digit zone over Q4, over the course of Q4, we’re expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal 2023.

Jimmy Uba:

Benjamin Porten: We pledge take pricing in Q2 given the inflationary trends that we’re seeing now. We’re getting monitoring it very closely and that’ll determine the magnitude and timing. Being said, we, we don’t expect the pricing that we’re going to take to fully offset the inflation that we’re seeing. Last year we had our company best in terms of COGS at 30%. We don’t think that the pricing will €“ it’s unlikely that the pricing will get us back to 30%, but when we take price, we don’t think just about managing COGS or driving COGS down to a certain number. We think about the overall restaurant profitability holistically. And so that’s really going to be the North Star for us in terms of price.

Jimmy Uba:

Benjamin Porten: And looking at our labor numbers, you can see that there was a material improvement in labor costs from Q3 to Q4. And so when we take price, we look at our occupancy costs or D&A, other fixed costs, and the pricing that we take allows us to better leverage those costs. So it’s not just a matter of lower end COGS, it’s really a matter of the overall profitability

Jimmy Uba:

Benjamin Porten: Today with the pricing that we’ve taken, we’ve really seen minimal traffic loss and that that’s been really great, but we’re absolutely cognizant that you can’t just, there’s always the possibility for traffic loss. And value propositions always relative and so if you’re used to going to Kura and you’re coming here every month or so, the price that we take is a lot more visible. But for people that have never been to Kura, there are a lot of Sushi lovers that are paying twice the average Kura ticket. And so for those people that have never been here, it’s an overwhelmingly great value. And so we know those guests exist and it’s just a matter of getting them to come to our restaurants.

Joshua Long: Very helpful. One more, if I may. When we think about the high single digit inflation that you’ve seen across your food basket, can you break that out a little bit and provide some more context around it? I know we’ve talked about you having a broad basket with also some opportunity from the sourcing that you have on the seafood side internationally, but just curious where you’re seeing some of that inflation and just trying to add some context to the COGS margin that you reported for the quarter. It was still down year-over-year, but up sequentially versus 3Q. So just trying to understand how some of those pushes and pulls played out during the quarter?

Jimmy Uba: So certainly we do have a broad basket, and that’s one of the reasons that we’ve been able to mitigate the inflation. But we €“ there has been ongoing headwinds ever since we entered the pandemic. Typically we’re able to lock in six month pricing for our big main purchases, which gives us a level of stability with COGS, but with the huge spikes and drops in demand as a result of the pandemic and post-pandemic we’re not able to get €“ we’re not able to get all of our say, like tune up from the same vendor in the way that we would’ve in the past. We need to go to a variety of smaller vendors to get everything that we need to make sure we have all the ingredients in place. And so a, you don’t get as much of a scale benefit because you’re dealing with a lot of different vendors and because they’re smaller, they can’t lock-in prices for six months at a time.

That being said, we’re hoping that this will €“ this doesn’t go on forever, and as the vendors are able to predict demand more accurately, we’ll begin to see moderation and hopefully be able to lock in prices again in the way that we have historically. One thing that we’re looking forward to in terms of mitigating inflation outside of price is taking advantage of the four exchange rates between the U.S. dollar and Japanese yen. The U.S. dollar is basically at an unprecedented high relative to Japanese yen, and we know that if we source directly from Japan, we’ll be able to benefit from that. The reason that we haven’t seen that upside just yet is that we’re still in the process of existing our €“ exhausting our existing supply, but once that’s gone, then we can take that much more advantage of the exchange rates.

And so we’re hoping that we can see some impact in that beginning and the back half of the year.

Joshua Long: Thank you.

Operator: The next question comes from Andrew Strelzik of BMO Capital Markets. Please go ahead.

Daniel Gold: Hi, this is Daniel Gold on for Andrew. Thanks for taking the question. Can you speak to the performance of your units in new markets and what new or existing markets you are excited about expanding in next year and the fall to that? Can you speak to your pipeline, or signed leases and what you already have under construction?

Jimmy Uba:

Benjamin Porten: In terms of fiscal 2022, we entered three new markets. We were successful in all three of those new markets, which always is a huge source of encouragement for us. Just given that it continues we, it’s further proof that we’re able to prove our portability nationally. The fiscal 2022 units even outside of the new markets have been very, very strong. And the strength of those units has reflected in the more €“ in the aggressive unit growth that we’ve guided towards for fiscal 2023.

Jimmy Uba:

Benjamin Porten: And then looking at the pipeline for fiscal 2023 the new markets that will likely be entering will be Minnesota with that Mall of America location Philadelphia and Pennsylvania, and then New York State. Each of the locations in these three new markets are excellent, and so we’re very excited. In terms of markets that will be in filling we’re currently in the process of we’re, wrapping up construction in New Jersey City, which will be our second location in New Jersey. We chose that has been an exceptional market for us, just given the strength of Fort Lee right out of the gate. And so we’re going to be opening our second New Jersey location and possibly a third New Jersey location as well.

Daniel Gold: And just a last one for me in regards to staffing levels. I know you had made great progress in 3Q, where are you at today? Have you reached optimized staffing levels?

Jimmy Uba:

Benjamin Porten: As Jimmy mentioned in the prepared remarks, our current staffing levels are over 95% relative to their optimal levels. So really the best that we’ve been at, the best position we’ve been in since entering the pandemic. All of our restaurants are operating, they’re full operating hours. We don’t have any restaurants that aren’t able to service to go orders because of group of constraints. And so we’re very pleased with the staffing levels as they are now. The recruiting team, the training department, the marketing team, the new store opening team. They’ve really been doing a tremendous job in terms of hiring and retention. We also rolled out three new initiatives over the course of the year €“ over the course of fiscal 2022 being, the robot servers, the touch panel drink orders, and the tableside payment.

And those have introduced efficiencies, but they’ve also improved the take home pay of our employees, cause they’re able to serve that many more tables and it simplified their operations. And so these combined efforts have gotten us to a place that we feel really good about.

Daniel Gold: That’s great to hear. Thank you.

Jimmy Uba: Thank you, Daniel.

Operator: The next question comes from Sharon Zackfia of William Blair. Please go ahead.

Sharon Zackfia: Hi, good afternoon. It’s good to talk to you guys and to hear Jeff’s voice again. I guess I’m curious on the G&A guide for the year, I think it was probably a bit more than a lot of us had expected. Is part of that increase due to what you were alluding to Jimmy with marketing? Is that kind of where that would go on the P&L? I don’t know if it goes there on other ops for you. And can you talk more about how, what kind of marketing, you’re thinking of to bring in more customers? And as you think about revenue guidance with more marketing, this might be a Jeff question. What do you assume kind of the return is on that marketing?

Jimmy Uba:

Benjamin Porten: So the, our marketing costs actually aren’t in the G&A line. And so we’ll just discuss marketing separately and Jeff can take the G&A discussion. But as you know, the marketing costs as a percentage of sales in fiscal 2023 relative to fiscal 2022, we’re going to be a little bit higher. This largely reflects a shift in our thinking in terms of how to capture guests. Historically, our bread and butter has really been using our rewards system to get our existing guests to increase frequency. And now, with what we’re seeing in the overall Sushi market, we’ve pivoted to, thinking about capturing the massive potential of all these new guests that are trading down. And so we’re making commensurate investments to be able to take best take advantage of that opportunity. Jeff, do you want to grab a G&A?

Jeff Uttz: Yes. Hey Sharon, it’s really good to hear your voice and everybody’s voice again, and be back on the earnings call game. It’s fun. So, I’m excited to be part of this. On G&A, as you guys know, my last two roles were in growth concepts and, where we are G&A both dollars and percentage of sales is not unusual or unreasonable given where we are in our growth cycle. That being said, coming in the door, one of my main goals is to take a very, very hard look at G&A and figure out where we can potentially save some money. We’ve seen challenges everywhere from not only salaries, but as I’m sure you all know because you travel all the time, is the price of travel and airline tickets and hotels, but airlines in particular is through the roof.

And so we’re going to look at all that and I’ve gone to every department head and asked them, do you get together with me? We’re going to go through all of our existing contracts for things that do hit the G&A line and see if there’s any opportunity to renegotiate some of those. And with me coming in the door, it’s a good time to go back to some of these people and see if we have an opportunity to save some money. That being said, one of the biggest mistakes you can make as a growth company to not have the support and the people and the support center to be ready for growth. And we do want to be ready for that growth. And while I’m going to take a very hard look at that G&A, we’re not going to be shy about making sure that we have the right number of people and the right support in the office to support the growth out in the field and support our development team.

So, we are going to look at it. I am going to do what we can to get that down, but certainly not going to project or give any guidance that we’re going to shy away from making sure that we have the people that, that we need to make our growth successful, because we got to prepare for it and I don’t want to make the mistake of not being ready.

Sharon Zackfia: Thanks for that. And then Jimmy, with all of the innovation you did over the summer, I know you talked about table turns and the employees are happy and getting more tips or take home pay. I mean, did you have anything quantifiable you could share about customer satisfaction with the new technology and I don’t think you mentioned whether you’ve seen beverage attached measurably go with the full order systems, but if I missed that, I apologize.

Jimmy Uba: Sure. Sharon, I’m happy to answer this question

Benjamin Porten: So to sort of go back to our thinking, when we initially rolled out these projects. The immediate goal was to improve customer satisfaction. The industry had really hit a wall in terms of hiring. Wait, times had gotten longer, checkout times had gotten longer. And, pretty much across the industry the experience was not the same. And we wanted more than anything for our guests to come to the crew that they knew and loved. And so the initiatives were really €“ they were designed to allow our front of house servers to really focus on hospitality, which is where their value add truly is. And so we saw immediate upticks in customer service ratings as a result of implementing these. And the 28% comp that we saw in Q4, I think are a clear reflection of just, just how well received they’ve been didn’t by the guest, given that the rollout was completed by the end of Q3.

Jimmy Uba:

Benjamin Porten: And that, in terms of its impact on employees, we certainly see retention rates improve as a result of the implementation of these initiatives. Now, the servers are really able to focus on hospitality, which is why, they’re interested in being servers in the first place. And as a result of putting all these features in, we’ve actually been able to operate these restaurants with fewer individuals while also serving more people. And so certainly that’s led to tip growth that’s led to and which is driving that retention improvement between the three initiatives, we’ve seen about 50 basis points in labor savings. And so it’s certainly been a meaningful impact and we think of it as a big success.

Jimmy Uba:

Benjamin Porten: Hi. In terms of beverage attach rate, we have seen meaningful or a modest increase in attach rate, not enough to really move the needle in terms of overall sales, but enough to know that it has had an impact. In terms of table turn times; it’s still something that we’re evaluating. Once we have our upgraded weight system implemented, we’ll be able to get a much better view or much more accurate view of table turn times, which will be, which will allow us to give you a more meaningful number in coming quarters.

Sharon Zackfia: Okay, great. Thank you very much.

Jimmy Uba: Thank you, Sharon.

Operator: The next question comes from Jeremy Hamblin of Craig-Hallum Capital Group. Please go ahead.

Jeremy Hamblin: Thanks for taking the questions and congrats on the strong results. I want to come to, come back to the unit development and kind of the timing of that. I think if I’m not mistaken, in Q4, the two of the three openings occurred, I think in the last week of the quarter. And in terms of, the openings in Philly, Mall of America, Jersey City, I think those are probably two or three months behind, which might have been thinking, four or five months ago. But I wanted to get a sense for, a in Q4, that shift in timing of openings, what type of revenue impact, you think that might have had versus what, where you were thinking things were going to open back in, let’s say June. And then in terms of the, the FY 2023, the type of impact that you might be seeing.

And if you could maybe help us to pin down a little bit of the nine to 11 units expected for the year, is, I’m not sure if you were suggesting that three units were going to open before the end of the November quarter, or if it’s two open and then maybe one opens in December. But any more color you can share on the timing of when you expect the nine units to 11 units to open during the year. The cadence.

Jimmy Uba: Sure, Jeremy.

Benjamin Porten: So you are correct in the two of the three units that we opened in Q4 get opened during the last week and Philadelphia, Mall of America, Jersey City are running a couple months behind our initial expectations.

Jimmy Uba:

Benjamin Porten: And in terms of, what’s driven the delays for, the unit that we just mentioned, it’s, we sort of touched on this during the prepared remarks, but really there’s been an unprecedented level of delays and slowness when it comes to, getting permits, inspections, getting document reviews. It’s the municipal governments are just overstretched and there’s really not much that we can do in terms of pushing them forward. That being said, the nine units to 11 units that we’re guiding towards for fiscal 2023 takes this into account. It’s a number that we’re very comfortable with. In terms of the cadence for the store openings. We have five units under construction. We expect, three Philadelphia, Mall of America and Jersey City to open in several weeks. But we, it’s pretty opaque the remaining after that €“ so the remaining stores will likely open in the back half of the year.

Jeremy Hamblin: I’m sorry, Jimmy.

Jimmy Uba: Sorry do you like to question.

Jeremy Hamblin: Well, I think I was looking to see, just the timing of, what you would estimate the revenue impact was from just these push outs in completion and actual openings, with, if you did $42 million in the August quarter, do you think that could have $43 based on, kind of prior timing and then, obviously it’s certainly impacting the November quarter as well.

Jimmy Uba:

Benjamin Porten: So, we haven’t really given sort of revenue, whatever numbers it’s kind of a weird way to put it, but our AUVs are $3.5 million to $3.85 million. If you just sort of you could take sort of a mid-quarter convention and worked out the operating weeks and, that’ll get to pretty close to the lost revenue expectations. In terms of Q4, we certainly did have opening delays, but the sales losses there were partially offset by the tremendous success of the Demon Slayer program. It probably had a low single-digit just to overall sales. September and October might look a little bit weaker relative to Q4, but again, they’re not benefiting from the incredible popularity of the IP that we collaborated with during July and August.

Jeremy Hamblin: Got it. Okay. Just a quick follow up here. Then very impressive restaurant margin contribution in the quarter. In terms of, I think you noted that your food and beverage cost, you expected to be, maybe a little over 30% here during the year in terms of the labor, in labor down at 29%, the sustainability of that given that you’re carrying the high single-digit pricing, is that something that’s reasonable? I mean, it seems like you guys got incredible efficiency during the quarter, but whether or not, even if it’s not 29%, are you thinking that, in that 30% range is an achievable figure.

Jimmy Uba:

Benjamin Porten: So long story shortly, we do think that the improvements that we saw in Q4 are sustainable for at least part of it. There are a number of puts and takes, that we saw that that really that got us to that 28.9%. But in terms of modeling going forward, there, the things that we’d like you to pay the closest attention to would be just the historical seasonality of labors, the percentage of sales. Q4 always has the best labor percentage of sales because of its strongest sales leverage. Q1 always has its weakest. So please keep that in mind with your modeling. We expect minimum wage increases in January, and we expect to take pricing in Q2. But yes, we do think that the labor situation has improved. We’re very happy about the robots and all that.

Jeremy Hamblin: Great. Thanks for the caller guys. Congratulations and best wishes.

Jimmy Uba: Thanks, Jeremy.

Operator: The next question comes from George Kelly of ROTH Capital Partners. Please go ahead.

George Kelly: Hey guys, thanks for taking my questions. So just to start, you just mentioned the Demon Slayer, the success of that Demon Slayer promotion over the summer. Curious, I see Tetris right now curious if that could be something that’s similarly impactful, or is there anything else that you can flag that’s planned for the coming couple quarters?

Jimmy Uba: Sorry, go ahead.

Jeff Uttz: Okay. So the Tetris campaign has been really fun. We have these two go boxes that are actually in the shape of Tetris blocks, and those have been, we’ve never had two go sales as strong. It’s clear that it’s like a huge hit with guests. That being said, it does not have the same cache as Demons Slayer. People that had never heard of Kura were coming because of Demons Slayer, people that had never people outside of our markets were learning about as a result of our Demons Slayer collaboration, which is great in terms of planting seeds for future markets, but Demons Slayer really was one of the, the all time best campaigns we’ve had. That being said, we do have a lot of campaigns in our pipeline with, executed agreements that I’m extremely excited about.

Historically, we basically only partnered with, Japanese brands, animes, video games, et cetera. But we do have a number of American properties with, truly nationally universal appeal. And so those are things that I’m very excited about.

George Kelly: Okay. Excellent. And then you mentioned earlier potentially sourcing from Japan later this year. What kind of savings could that drive in? Is that something that’s already baked into your guidance?

Jimmy Uba: In terms of COGS, we’ve seen quarter-over-quarter inflation from Q3 to Q4 and then Q4 to Q1. We expect this inflation to continue to grow up until Q2. And so our COGS for Q1 and Q2 are going to be, worse than what you saw for fiscal 2022. That being said with the pricing that we’re taking in Q2 that’s begin to mitigate that, and our hopes for the Japanese Yen benefit is really not so much as, like getting back to fiscal 2022 COGS levels, but really just offsetting any future inflation. And so we’re hoping for a stabilization in our COGS beginning in Q3 and Q4.

George Kelly: Okay. Thank you.

Jimmy Uba: Thanks, George.

Operator: This concludes our question-and-answer session. The conference has now also concluded, thank you for attending today’s presentation and you may now disconnect.