Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA Fiscal Second 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 Hajime “Jimmy” Uba, President and Chief Executive Officer; and Benjamin Porten, Vice President of Investor Relations and Business Development. I would now like to turn the call over to Mr. Porten.

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal second 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’d like to turn the call over to Jimmy. Hajime “Jimmy” Uba: Thank you, Ben, and thank you, everyone, for joining us today. Before beginning my prepared remarks, I would like to note that Steve Benrubi, our Chief Financial Officer, is attending to a personal matter and won’t be joining our call today. I’m very pleased to announce that the strong sales momentum of our fiscal first quarter has continued through the first half of our fiscal year. Our team has done…

Thank you, Jimmy. For the fiscal second quarter, total sales were $31.3 million as compared to $9.1 million in the prior year period. We believe measurement of comp sales growth is most relevant versus the pre-COVID period of fiscal second quarter 2020. On that basis, comp sales grew by 11.3% with regional comps of 8.9% for California and 12.6% for Texas. Turning to costs. Food and beverage costs as a percentage of sales were 30% compared to 35% in the prior year quarter due to pricing taken at the start of the fiscal first quarter, partially offset by food cost inflation and largely normalized performance as sales volume improved. Labor and related costs as a percentage of sales increased to 33.1% from 22.7% in the prior year quarter due to the lapping of the employee retention credits recognized in the prior year. Excluding the impact of the ERC, labor and related costs as a percentage of sales in the prior year quarter would have been 46.9%. The year-over-year improvement in labor and related costs as a percentage of sales, excluding the ERC was due to higher sales leverage, partially offset by increases in minimum wage. Occupancy and related expenses as a percentage of sales improved to 7.4% from 17.9% in the prior year quarter, primarily due to higher sales leverage. Other costs as a percentage of sales decreased to 13.9% compared to 22.6% in the prior year quarter due to higher sales leverage as well. General and administrative expenses were $5.5 million compared to $2.9 million in the prior year quarter. Excluding the impact of the ERC recognized in the prior year quarter, general and administrative expenses would have been $3.3 million. The increase was primarily due to compensation-related expenses as we made investments in our team to support our…

Thank you. [Operator Instructions] Our first question comes from Andrew Strelzik with BMO Capital Markets.

This is Amanda Morley [ph] on for Andrew. My question is, given the current environment, have you recently seen any notable changes in consumer behavior as it relates to number of plates per customer, traffic, wait times, et cetera? Are you seeing any regional differences that you would call out? Hajime “Jimmy” Uba: Sorry. Go ahead.

Yes. Go ahead, Jimmy. Hajime “Jimmy” Uba: Okay. So, I mean please allow me to answer your questions in Japanese. [Foreign Language]

Hi, Amanda, to answer your second question first, in terms of regional differences in consumer response, in Q2, we saw minor pressures in Texas relative to typical just given that we have greater incidences of quarantine, staff, and we had some weather events. But having entered Q3 in March, the operating environment is very similar to Q1. We’re not really seeing any major differences between regions. California naturally has a greater degree of conservatism when it comes to the pandemic. But, I mean Los Angeles County has just removed their vaccine mandates for indoor dining. Indoor mass mandates have been dropped across the state. And so, it’s about as good the situation as it’s been since we’ve entered the pandemic. Hajime “Jimmy” Uba: [Foreign Language]

In terms of the overall sort of pandemic situation, we were really encouraged to see in Q2 just how quickly we were able to rebound from Omicron. It’s been the fastest recovery we’ve seen since entering the pandemic. And I think it says a lot about consumer psychology where they’re at. In Q1, we mentioned that we’ve taken pricing in September. And to give context to that, we discuss plate consumption rates. And they -- the Q2 plate consumption rates haven’t changed whatsoever since Q1, and both of those are meaningfully higher than plate consumption rates per person pre-pandemic. And this is really encouraging because whatever you take pricing, there’s a concern that there to be a delayed response, delayed pushback. But now that we’re 6 months in from taking that September price, we know that the pushback or the lack of pushback is -- it’s holding.

Okay, great. And then, if I could just fit in another question. Can you provide an update on your tech initiatives as it relates to improving table turn times? I know, for example, I believe the handhelds have now been fully rolled out for the entire quarter and the robot test is being expanded. So, have you been able to quantify exactly how impactful that has been? Hajime “Jimmy” Uba: [Foreign Language]

It’s a little bit difficult for us to quantify just given all of the noise in Q2 between Omicron, weather events in certain markets, but also because we’ve rolled out these initiatives so rapidly in succession. It’s hard to tease out right now the specific impact of any given initiative. Hajime “Jimmy” Uba: [Foreign Language]

That being said, in terms of the three initiatives that we’re focusing on for this fiscal year, the robot server rollout, the table-side payment and touch panel drink ordering, we have two major goals. The first is to drive sales, as you mentioned, through increased -- through improved table turn times; and the other is to reduce labor as a percentage of sales. And looking at initial results, we’re confident that these initiatives are going to contribute to both of those goals.

Our next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

Thanks. Congrats on the strong results. I wanted to start with unit openings and make sure that I confirm what I heard. I know that you opened a location in Watertown, Massachusetts. I think what you indicated was that the remaining openings for the year would all open up in fiscal Q4. And so, I think you had indicated that previously, it’s roughly 4 to 5 months between the time when you break ground and when you complete a store and it’s ready to open. So, first, I wanted to confirm the timing of those openings. Second, I wanted to understand -- we’ve heard a lot about permitting delays, construction build delays, and whether or not you’re experiencing any of that? Hajime “Jimmy” Uba: Sure. I’m happy to answer this question. [Foreign Language]

Jeremy, to answer your first question, yes, you heard correctly that we expect all of our remaining store openings for the fiscal year to be in Q4. Given that it’s only a three-month period, we’re going to be trying to spread out the openings as evenly as possible throughout the quarter to reduce stress on our opening teams, but we do have multiple opening teams now, and so we are able to open stores in parallel. As you mentioned, the permitting delays are really the overwhelming -- not overwhelming, but they’re really the main factor in terms of uncertainty for construction times. And so, that’s going to impact the cadence of the openings in Q4, but everything else we’re doing everything in our power to control. You mentioned stuff about like material delays or whatever. One important change that we’ve introduced is that as of our location in San Antonio, we’ve used our first domestically manufactured conveyor belt and furniture. Typically, we ship this in from Japan or China. It’s substantially more expensive than freight, and it could be a 4- to 5-month period whereas this U.S. factory based in Virginia, so it’s a 4- to 5-day delivery to San Antonio, which as you can imagine, gives us a lot more control over construction time. And so, we’re really excited about this partnership.

I also wanted to confirm, as you’re providing some color on sales trends, I think that you indicated that March was up 22% versus February. Some of that might be just the number of days in the month. But I think that calculates to about like $10.2 million, $10.3 million versus I think you said March was $12.5 million in sales. I wanted to understand, it sounds like plate consumption rates have remained stable. The additional price increase 1.8%, even though that you did take some price in some of your markets in December, what was the sense given what we think is significant pricing power that you have -- you have a lot of peers who are taking more like mid-single-digit, in some cases, high-single-digit price increases. How did you think about whether or not to be a little bit more aggressive? And is there some thought to potentially taking additional price increases in calendar ‘22?

Sure. Just as a note before I dig into this, Jeremy, I just wanted to mention that we didn’t have a price event. We didn’t take any pricing in December. You might be confusing that with the September pricing. But in terms of pricing power and our aggressiveness with price, I think we’re being very diligent about it. We never like to grow margin. We don’t like to drive margins through pricing. The pricing that we’ve taken in March is really -- it’s to offset increases in minimum wage and what we anticipate in terms of commodity pressures. What we know is that -- delivering a great value has always been core with our brand. And in spite of the pricing that we’re taking, the purchasing power of the -- the rest of the sushi industry being so fragmented is just not nearly on the same scale as we are. And so, the mom-and-pops are having to take far more price than we are. And so, in spite of the pricing that we’re taking, value delta continues to grow. So, we’re very much in a -- I think we’re pretty happy with our position right now.

Okay, great. And then, your other operating cost line item, that was up about $700,000 sequentially versus your revenue increased about $500,000. I wanted to just get a better understanding. I think that line item includes utilities, repairs and maintenance, insurance, credit card fees, stock comp expense. Could you give us a little bit more detail on exactly where the pressure was on that? Which of those line items was causing that sequential increase? And whether or not that may be a good baseline to think about on a go-forward basis for that other operating cost line item? Thank you.

Sure. Going forward, we expect other costs to be closer to Q1 than Q2 as a percentage of sales. Q2 saw a number of onetime costs such as we do restaurant deep cleans whenever we did ship quarantining, we -- we swapped out all of our uniforms. There were just a number of minor onetime costs that have -- coincide in Q2, but Q3, we’re expecting something much closer to Q1.

Our next question comes from Matt Curtis with William Blair.

I have a question on off-premises mix. It ticked up, I think, to 5.1% last quarter, if I heard you right. I’m just wondering how this trended in March. And then, relatedly, you’ve talked about of the units you have in the pipeline, having features designed to make off-premises more frictionless. I was just wondering if you could tell us when some of these might be expected to open.

Sure. In terms of the off-premises mix, the bump in Q2 is largely driven just by a colder weather. It’s a trend we’ve seen every year, I’m sure a trend that the rest of the industry sees as well. Q3, the off-premises mix is closer to -- it’s more in the Q1 range. In terms of the units in our pipeline for the more frictionless off-premises, those won’t enter until at least fiscal ‘23. Examples would be stores with pickup windows for order-ahead orders. But nothing like drive-thru. The off-premise is nice to have, it’s gravy for us. But overwhelmingly, the major driver of growth both in terms of top line and bottom line for us is going to be unit growth. And so just given that -- we’re barely 10% into our white space potential, there’s just so much more to be gained by focusing our energies on that as opposed to off-premises. And so, our focus remains on unit growth as opposed to improving off-premises sales or mix.

Okay. If I can actually just follow up on development for a moment. I mean, given all the success you’ve been having in new markets, are you still [Technical Difficulty] split in the future years, or are you considering a meaningful expansion into new markets potentially starting next year?

Were you asking if our mix of units is going to be skewed a little bit more towards infills in the future?

No, I’m asking if it would be skewed more towards new markets in the future.

Got it. Hajime “Jimmy” Uba: [Foreign Language]

Going forward, we do expect a mix of about 50-50 between new markets and existing markets in the near term. That being said, we are now in 11 states and D.C. And so naturally, as the number of new markets we enter, the number of remaining new markets just going to shrink, so that ratio is just going to skew naturally. But we do want to expand our presence to most of the major metropolitan areas. So, that’s going to continue to be a focus for us.

[Operator Instructions] Our next question comes from George Kelly with ROTH Capital Partners.

Thanks for taking my questions, and congrats on a strong quarter. So first, I just wanted to better understand March, the $12.5 million number that you gave. Just wondering if there was any kind of unique promotion to highlight there that drove business or anything else? And were you still negatively impacted in any markets by COVID restrictions during March? Hajime “Jimmy” Uba: [Foreign Language]

In March, our brand IT collaborator was Sanrio, which is an extremely well-known brand. We partnered with them in the past, and it’s been very successful. And it’s proven to be just as successful for us this time as well. Hajime “Jimmy” Uba: [Foreign Language]

In terms of the COVID impact for March, it’s been extremely limited, pretty much the same as other good times of the pandemic troughs in the pandemic spread. And so, the impact to us has been basically minimal or nil. In the prepared remarks, we mentioned that we’re about 95% of where we’d like to be in terms of staffing. And in terms of that 95%, that means that we’re able to keep all of our restaurants open for full operating hours and full seating or pretty much all of our restaurants. Closing that gap of 5%, that would allow us to improve table turns a little bit more. And so, that’s our immediate focus for the near term is to close that gap. And the sales momentum that we’ve seen in March is extremely strong. It’s very much in line with Q1. And if we can close this gap, we think we can -- it’s possible that we could even outperform what we’ve seen in Q1. Hajime “Jimmy” Uba: [Foreign Language]

In terms of staffing issues generally, people are debating whether or not this is primarily COVID-driven or if this is going to be an issue even following the pandemic. Our approach is to cover our basis as much as possible. And so, we’re just assuming that staffing difficulties are going to continue. And so, we’ve really made hiring, training and retention, really the top priority. I think it’s been like the key theme for the last couple of earnings calls. And so, we’re going to really continue to drill into staffing. And I think the efforts that we’ve been making over the last half year, that’s what’s delivered that 95% level.

Okay, great. And then, another question for me, just there were several positive comments in your prepared remarks just regarding these new units that you’ve been opening. And so, I guess, I have two questions. The first one is I think that you mentioned that your target unit level economic profile, you might just be needing to sort of revise that higher as far as AUVs and store-level profitability. So, did I hear that right? And can you be any more specific about how that’s changing? And then, the second question is what is it that you think you’re getting better at? Are you picking better locations, doing better marketing? Like can you give us any idea of just where you think that improvement is coming from? Hajime “Jimmy” Uba: [Foreign Language]

To answer your question about the new unit performance, a lot of this is driven by our -- the strategy we’ve taken in 2020 and 2021 in terms of unit growth. While pretty much every other restaurant company was totaling up and limiting their CapEx costs, we felt that this was a huge opportunity in terms of capturing prime real estate that might have been otherwise inaccessible or more difficult for us to access. And we’re extremely pleased to see that that strategy has paid off, and the units are as productive as we’d hope they’d be. In terms of AUVs and new unit expectations, it’s still very early into the store openings, but we see plenty of room of opportunity for exceeding the 3.5 million AUVs that we’ve seen historically. Beyond that, we’re not giving too much -- we’re not giving new unit guidance or expectations today, but we hope to do that once we’re in a more -- once we’ve had a normalized operating environment for a longer period.

Our next question comes from James Rutherford with Stephens Inc.

I want to touch on commodity inflation. I’m just curious what visibility you have into commodity prices and kind of year-over-year inflation in the back half of the year? And what your expectation for those rates would be?

Sure. In terms of commodity inflation, we saw about -- over Q2, we saw about 80 basis points as a percentage of sales in terms of commodity inflation, which the September pricing was able to offset. The pricing that we’ve taken as of March 1st, it expects to offset commodity inflation as well as minimum wage inflation. To give you some context for minimum wage, on January 1st, we saw about 1.25% as a percentage of sales, minimum wage inflation. And so, you can kind of work backwards from that to get our expectations for commodity inflation. But one thing that we’d like to touch on again is it’s -- the fact that our basket has over 100 items and the fact that our top 5 purchases make up about 25% of our overall purchase makes us extremely resilient in terms of commodity spikes. It’s one of the main reasons we’ve been able to keep or COGS flat. In fact, not just flat but historical bests when that’s just not been the case for everybody else. And so, we’re really glad to have this advantage.

Understood, yes, and it makes a lot of sense. Second question is on technology. I’m curious when you’ve implemented the robot servers and other pieces of technology, how much improvement in table turns that you’ve seen. And if that’s going to be a material sales tailwind as you finish rolling these out through the system. Hajime “Jimmy” Uba: [Foreign Language]

So the robot server rollout over Q2, that’s largely coincided with the ship quarantining. And so it’s extremely difficult for us to be able to work out the robot server impact on table turns, just given that they were under staffing in many of our restaurants, just generally. But again, we’re very excited about the robot servers. The response from our customers as well as our servers has been phenomenal. And we expect to fully roll out by the end of the fiscal year. And hopefully, there will be enough normalized operational time for us to give you a more concrete update.

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