Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Second Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the lines will be open for your questions following the presentation. 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, Senior Vice President, Investor Relations and Business Development. And now, I'd 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 2023 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.

Thank you, Ben, and thank you to everyone for joining us today. It's been an exceptional quarter for Kura Sushi. In the previous earnings call, I had mentioned our three goals for this fiscal year; maintaining great operations and delivering unbeatable value to our guests, continuing our rapid unit expansion, and leveraging our G&A investment. It's my pleasure to be able to say that we are seeing excellent results on each of these goals. We continue to the lead the industry with traffic growth of 7.4% in our second quarter. And as demonstrated by our traffic performance, consumer sentiment remains extremely strong. Our unit pipeline is the strongest it has ever been, with nine units under construction and another nine executed leases across existing and the new markets. Our success in leveraging G&A, combined with improvements in restaurant-level costs, has resulted in a 400 basis point adjusted EBITDA margin expansion over the previous year. Our second quarter sales of $43.9 million represent 40% revenue growth over the prior year. Our restaurant delivered comparable sales growth of 17.4%, which breaks down to 7.4% in traffic growth and 10% in price and mix. Despite our pricing, our value remains unparalleled and the consumer sentiment and the strengths have never been stronger. Our strong sales performance continued into March with revenue of $16.4 million and comparable sales of 11.2%. Turning to operating results. We have seen material improvement in both labor and cost of goods sold. Our labor cost as a percentage of sales have improved by 160 basis points over the prior year, and our COGS as a percentage of sales are approaching the all-time best we saw in fiscal 2022. Between the flattening of food cost inflation and our December pricing, we saw COGS as a percentage of sales improved by…

Thanks, Jimmy. For the second quarter, total sales were $43.9 million as compared to $31.3 million in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 17.4% growth with regional comps of 20% in California and 14% in Texas. The variance in regional comparable sales reflects the relatively easier comparison for California due to Texas' faster recovery from the pandemic. This regional difference becomes minimal with a pre-pandemic three-year comparison against fiscal 2020 Q2 with California comps of 27.3% and Texas comps of 29.4%. Turning to costs. Food and beverage costs as a percentage of sales were 30.1% as compared to 30% in the prior year quarter. We are very pleased that with the flattening of the inflation curve combined with our price increases, we were able to minimize the impact to our food and beverage costs and continue to be encouraged in the trends that we are seeing. Labor and related costs as a percentage of sales decreased to 31.5% from 33.1% in the prior year quarter. This decrease is due to incremental efficiencies created by the implementation of technological initiatives, a favorable comparison in the lapping of the impact of Omicron in fiscal 2022 and sales leveraging from increased traffic and pricing. This leveraging was partially offset by wage increases. Occupancy and related expenses as a percentage of sales were 7% compared to the prior year quarters 7.4% due to sales leverage. Other costs as a percentage of sales decreased to 13.3% compared to 13.9% in the prior year quarter also due to sales leverage. General and administrative expenses as a percentage of sales decreased to 16.2% as compared to 17.4% in the prior year quarter. On a dollar basis, G&A expenses were $7.1 million as compared to $5.5 million…

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. Thank you for your attention.

Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Thanks, and congratulations on the really strong momentum in the business. I wanted to come back to the wait time app and just get an understanding of in terms of the potential for efficiencies in the process, when do you expect the new version to be going live fully and what do you think is the opportunity based on what you're seeing with initial results to potentially have a positive impact on comps? You mentioned that you think some of the kind of lower volume day parts could really see a benefit. I wanted to get a sense for what you think the potential magnitude can be.

Sure. Thank you, Jeremy for your first question. I'm happy to answer this question, but please allow me to speak in Japanese. Ben is going to translate. [Foreign Language]

We are currently testing the updated wait list in five stores and we expect a full rollout by the end of the fiscal year wait list.

[Foreign Language]

We're very encouraged by the initial test results. What we've seen is, we've seen very concrete improvements in waiting time accuracy. If we were to say, prior to implementation, about 70% of the wait times, we're accurate within five minutes. We're now seeing upwards of 85%. In terms of the shoulder periods that we've mentioned, we think there's pretty meaningful opportunity especially at the end of days. Those are when you get the worst attrition rates because, say, you and I go to dinner at 9 o'clock and we know the restaurant closes at 10 and the wait time says two hours, we're not going to wait because we're not going to get a seat, but because everybody has the same reaction, had we waited, we would've gotten a seat. And so just by having that more accurate wait time that unlocks greater operational efficiencies for that last hour. In terms of the other shoulder periods, one big opportunity we see is in weekday – weekday lunches. If a dinner wait time is off by 15 or 20 minutes, it's annoying, it's frustrating, but your day is over and so you can just wait a little bit longer. If your lunch wait time is off by 15 or 20 minutes, you've lost your lunch, your meal opportunity. And so – we think that once we can really dial in the accuracy and communicate that to our guests, that's a very meaningful opportunity for us.

[Foreign Language]

So while we're tremendously excited for the opportunity represented by [wisely] just given the rollout expectations, we haven't built this upside into our existing financial models into our guidance. And so if there's a lift that's gravy for us.

Great. That's helpful color. And then just last one for me. In terms of – I think in April now you're running the Demon Slayer promo, and could you just talk about that? I think you ran that at the end of last summer, bringing it back, I think it's a pretty significant licensing partner. But any color that you might be able to share on that particular license partner in terms of the potential to impact results versus some of the other promos that you've run?

Yes. So I'm sure you remember we did Demon Slayer in July and August of last year. Comps in that quarter were 28%, 14% from traffic. Certainly not entirely driven by Demon Slayer, but it was a major component of one of our most successful quarters ever. In terms of this April's Demon Slayer, it's going to be the same format largely where we have the 15 plates and you get a prize, we'll have giveaways like shirts and tote bags, et cetera. One thing that is counterintuitive and is tremendously exciting, so I was speaking with the Marketing Director the other day, they mentioned that the second campaign can actually be more successful than the first campaign, and you wouldn't expect that. But what happens is that you're able to – because Demon Slayer is such a big property, you expand your fan base through Demon Slayer with the first campaign, and then when you have that second campaign, you start with that bigger starting base. And so we're very excited for what Demon Slayer can do for us. And as Jimmy mentioned during the opening remarks, I've been sort of alluding to this in past calls, but we are working with DC Comics and that's going to be our first really major mainstream American property and I'm tremendously excited for that.

Fantastic. Thanks for the color and best wishes.

Thanks, Jeremy.

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

Hey. Thanks and congrats to all of you on the operating momentum that you're showing this quarter. Very exciting to see. I know, Jimmy, you talked about seeing some signs of early success with the new marketing approach and bringing new customers to the Kura brand. I think we could probably point to maybe that 200,000 jump in the loyalty program has some evidence of that. But do you want to track success and are we far enough into this that we can start to gauge, intend to revisit and how we're converting those customers to additional frequency once they discover the brand? And I have one more after. Thanks.

Sure. I'm happy to answer this question. [Foreign Language]

So we began the targeted marketing with Google in December. We're extremely pleased with the early results. It's only been three or four months. But just seeing the traffic strength, last quarter we were 700 basis points above [NAV track]. This quarter we’re actually 740 basis points above NAV track. And so we've even – we've gotten even further ahead of the pack. We're really happy about that. And in terms of cost effectiveness, it's really been unbeatable. There's been no incremental spend. We've just reallocated some of our other digital advertising and so it's been a home run.

[Foreign Language]

It's hard to break out what specific – whether Google is delivering those new rewards members or it's just the ongoing strength. We've been seeing this sort of – this tremendous growth for the last year or two, but we're really happy to have this ongoing growth for the rewards members. They tend to visit about 6x as frequently as a non-member. Their average check is about 20% higher because they want to get to the coupon rate points or the giveaway break points. And about a quarter of our sales are done through rewards. And so it's a very meaningful part of our business. We're extremely excited to really be able to unlock the potential of that rewards program, especially the data component represents when we move to Punch.

That's great. Thanks. And then my second question, I'll jump back into queue after this. Five units opened in the first half of the fiscal year. Sounds like the pipeline between under construction and executed lease is very strong. What I'm wondering is with one unit opening in Q3, are there any operational pinch points in Q4 to how many units you can open? I'm just trying to think with – I think you guys highlighted that were mostly new centers, which is an easier construction process in the back half of the year. What drives us for where we land between the nine units and the 11 units for full-year guidance? Thanks.

[Foreign Language]

So certainly the goal is to open those remaining units in Q4 evenly as possible to distribute the [indiscernible] on the opening teams and the operational teams. But one thing that we're happy about is that some of these openings are in existing units like California where we can really draw on the support of our existing units there, and so hopefully not have to leverage one of our opening teams. And so we're doing – we're trying to get as much – in front of the ball as much as we can. And so it's not a manpower issue, that's a bottleneck for us in terms of achieving the higher end of that unit guidance.

[Foreign Language]

Just to sort of repeat what Jeff had said in the prepared remarks, we're very confident about those nine to 11 units and we're extremely happy that we've got such a meaningful head start on fiscal 2024.

That's great. Thank you all.

Thanks, Todd.

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

Great. Thank you for taking the question. I was curious if we could run through a couple housekeeping items. The 17.4% comp during the quarter. Could we talk about how that progressed through the quarter? I know, thinking back to January, you had talked about some strong 14% area comps of December, and then also there was a bit of incremental price taken from 1Q into 2Q. So just curious if you could kind of outlined how that flowed through the quarter and then talk about any sort of acceleration anb momentum that you saw in January and February?

[Foreign Language]

In terms of the difference between Q1 and Q2, the biggest single factor would be the impact of the easier comparison in Omicron. That's probably going to be responsible for low-to-mid single digits of that comp. Besides that, we're very pleased with the performance of the targeted marketing we began in December and we – as well as the brand collaboration that we did through our partnership with My Hero Academia. As a reminder, we lapsed 2% pricing in March. And so don't think of the March results as a deceleration by any means, it's really – when you back out the Omicron impact and that pricing lapse, it's completely in line with the Q2 results. And so we're very pleased with the results for the quarter-to-date as well.

Great. That's helpful. And then maybe just kind of level setting that pricing conversation, I feel like you had taken – I think it turned out to be an incremental 700 basis points from 1Q into 2Q. I think you had taken that in late December, so maybe you didn't get a full 700 basis points for December, but is that where you shook up for the quarter? And then as you think about rolling into March to your point, Ben, you roll off about 200 basis points, so that kind of has about 13% menu price embedded in what we should be expecting for the 3Q period?

Yes.

[Foreign Language]

So to clarify, we took pricing during the first week of December, not the first day, and so the benefit was still partial, but more meaningful that if we had taken in the last quarter. The effective price that we were carrying throughout Q2 is 14.4% with us hitting March, we're enrolling up 2%. We'll be carrying around 12.4% for Q3. As we mentioned in the prepared remarks, the traffic being up 700 basis points in Q2, traffic being positive in March as well. We're extremely happy about consumer sentiment. We think we're in a very strong position.

Understood. That's very helpful commentary. I appreciate that. I was curious if you might be able to talk about the inflation outlook for the year. Obviously, you had gotten some good visibility earlier in the year, it seems like things were cooling down. That sounds to be more or less the case. Is that what is driving kind of much of what we should expect to see over the course of the year? Previously you talked about maybe some sourcing initiatives, maybe longer term opportunities to optimize the supply chain. Anything you could share there in terms of just how to think about some of these cost line items as we go through the rest of the year would be helpful.

Yes. Josh, it’s Jeff. In terms of inflation, I think I mentioned at ICR that what we had started to see, we’re very happy with and that came to fruition as you can see in our results with the cost of goods sold number. The year-over-year inflation is about 7.5%, which is deceleration from what we had seen from in Q1 where we believe the year-over-year at 10%. So the numbers are improving, they're continuing to show – we're continuing to be happy with what – where they're coming out, and we're getting really a double benefit because we're seeing not only a leveling off of the inflation, but because we took the pricing increase, we're kind of getting that benefit and that flow through on both sides of the equation. So going forward for the rest of the year, I'm really happy with where our COGS forecast is.

Great. That's super helpful. But some of the tech initiatives or efficiencies from tech initiatives have been talked about in prior calls and maybe alluded to a little bit here. Can you talk about the impact of those initiatives in terms of driving the better year-over-year labor margins? I imagine some of that was priced, some of that was operational execution just momentum, but you have had some pretty interesting tools, whether it's robot servers, order the table drinks. I think there had been some discussion of maybe some robot dishwashing at some point, but could you remind us kind of what is – what is embedded here in the 3Q results and how we might think about the rollout of some of those initiatives over the course of the year?

[Foreign Language]

In terms of the labor impact of the tech initiatives that we rolled out last year, the touch panel drink orders, the tableside payment, and the server robots. As we've mentioned in the last call, we're seeing about 50 to 60 basis points in labor improvement and we're continuing to see that today. One thing to keep in mind is that when we rolled out the robot servers, that was also a traffic lift as well because the experientiality, it's one of the reasons our Q4, which was the first quarter, we had a full rollout of robot servers. Our track was up 14% in part because of that experiential addition. And so as we lap that rollout in Q3, we'll still have the labor benefits, but we're not going to have the traffic tailwinds that we had from that – from the novelty of the robot servers.

[Foreign Language]

In terms of the 50 to 60 basis point improvement we just mentioned, we're very – it's a very hard number. It's a very concrete number for us. We can see it reflected in the schedules that we've built in the working hours that are required to operate our restaurants. But people might notice that we didn't get the full leverage flow through from the pricing that we took in December in terms of labor. And that's because we're seeing about 10% labor inflation year-over-year. We're hoping for that to ease, but it's not baked into our expectations. And so that's going to be an ongoing factor for us in Q3 and Q4. We're going to do absolutely our best to manage that. But that is the labor market that we're in right now. In terms of the Waitlist, that's going to come – the labor advantage of that is really going to be coming more from sales leverage. It's just being able to serve more guests per day, which allows you to spend your labor dollars more effectively. And in terms of the dishwasher, the technology is a lot – it is wide, it's ready to go. It's just a matter of getting certification, but that's a pretty opaque process. Historically, it's been one to two years given just how much upside we see in it. We're going to be pushing as much as we can, but ultimately, we're at the certification agencies mercy. But the expectation would be that it would have at least the impact of those three initiatives, if not more.

Great. That's helpful. And last one for me, when we think about these G&A efficiencies, how much of that is being driven by some of the things that you talked about, Jeff, when you onboarded in terms of opportunities to optimize spend and really just think about the timing and cadence of investments versus just some of the near-term sales leverage as we think about sort of the guidance range being given in terms of G&A margins? Is there more to come there? How early on are we in terms of really being able to optimize the overall spend in kind of G&A investment pipeline?

We're very happy with 120 bps that we – and leverage that we achieved in this quarter and that's just the start. We're continuing to work hard. One of the reasons we're being able to see benefits right now is the last 12 to 18 months, we spent a lot of money investing in the office in terms of C-suite and Vice President level positions, expensive people. We've built that team out now. We're not going to have those additional hires of that magnitude going forward, and that's going to continue to help the G&A leverage. The other thing that's going to help the leverage on the regional side is continue to infill markets with additional restaurants. We'll be able to be much more efficient with our area managers instead of an area manager having say five or six restaurants, maybe in four or five states, we'll be able to compartmentalize them more into restaurants that are closer and will be able to save on travel and it'll just make their time much more efficient as well. So those are the two things going forward that I believe are really going to deliver more G&A leverage. There is more to come, haven't given a timeline on when we're going to get down to a single-digit number. However, what we've seen so far has been really, really encouraging and there is more to come.

Great. Thank you.

To add on that, the G&A spend in terms of operations, like the regional managers that that spend is going to sort of follow a bell curve. So as Jeff mentioned, as we infill, we will be able to assign more units to each regional manager, but the opening teams are a pretty meaningful part of our G&A as well. We've got two right now, each cost about a $1 million per year to operate. When we were talking about the pipeline before we mentioned how markets like California, you don't need an opening team. And so as we continue to infill, those very meaningful G&A investments become unnecessary and can actually – the hope is eventually those teams will just – they'll become store managers or regional managers and we won't need opening teams once you reach a certain point.

And also while the expensive G&A hires have [indiscernible], we've filled most of those positions, we're going to – not going to cut back on making sure that we have a development and real estate team in place that we need in order to keep the pipeline as robust as it is. As Jimmy mentioned in the prepared remarks, we have nine restaurants under construction and nine more executed leases, and we need to continue to add that pipeline and we want to make sure that we have the right teams in place in order to keep it as robust as we need it to be in order to continue the growth pattern that we've seen in the number of units and then the other area that we just talked about is regional management. As we add restaurants, we are going to have to continue to add area managers to make sure that we continue to support the restaurants and provide the best customer guest service that we possibly can and that we're known for.

Thank you.

Thanks, Josh.

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

Hi. Good afternoon. My cell actually went out for a part of Jeff's commentary, so I apologize if you talked about this. But in terms of the development pipeline, how far out now are you working? Are you working on kind of fiscal 2025 at this point? And can you talk about kind of the quality of the kinds of sites that you're able to get now and maybe contrast it to, I don't know, 2019 or before the pandemic?

[Foreign Language]

Generally speaking, the units in our pipeline, they're for fiscal 2024, there's a couple of fiscal 2025 sprinkled in there, but what we're looking at is mostly 2024.

[Foreign Language]

The quality of the sites that are being brought to us just they're improving every day. Jimmy, he tries to personally visit as many of the sites as possible and it's obvious the quality of the sites are amazing. One thing that's been really, really fun is, some of the sites that Jimmy and I have been looking at for the last five years, been waiting to get into, we've been able to get into them and they've been just as successful as we hope. And so that's been really fun to see. I know for people that are familiar with the story we mentioned how during the pandemic, we made very aggressive investments in terms of real estate. We built that $45 million revolver with a parent. We hired our first Chief Development Officer, who's opened thousands of units, and we aggressively signed leases in places that we would've otherwise been inaccessible to us at that point, like, Westfield, but because we have one to two hour dinner lines, we're great tenants now. Westfield wants us everywhere. And so at the time of the – when we first signed these leases, we were extremely excited, but there was an internal concern that this boost will be limited to the fiscal 2021 and 2022 stores. But what we're seeing is that this success is really just – it's snowball. It's just getting better and better. And so our expectation is that our AUVs are going to stay just as strong, if not even stronger. The development is the strongest it's ever been. We're very pleased.

Did we answer all of your question?

I had a follow-up question, but Jimmy, I didn't know if you had more to add.

No.

Okay. Just one follow-up, I mean, the traffic growth remains very impressive. I guess, I'm curious, are you seeing consumers try to manage the check at all though when they come in? Are you seeing fewer plates or lower beverage attach or anything that might suggest any kind of check management starting to creep into the business?

[Foreign Language]

We're extremely pleased with consumer sentiment. As we mentioned earlier, the – of the Q2 comps, 14.4%, 10 of that – we saw about 10% price and mix. And so that's great. Last quarter of our 6.9% comps, only 2.9% was from price and mix. And so we're seeing even better flow through them before. The guests are eating more per plate – more plates per person than they were over the prior quarter. And our average check has grown to about $28. And so in spite of the pricing that we're seeing, guests are actually eating more. It's been very encouraging to see.

[Foreign Language]

We believe that Kura has fundamental advantages as a concept even when consumer sentiment is weak. Certainly, we're not saying that it is. But just given what we've seen, it has been extremely strong. But if there is a downturn, we do have some structural advantages. I mean, if you're reducing the frequency of times that you're dining out, you want your entertainment dollars to go as far as possible. And so you can make a sandwich at home, you can even grill a steak at home. Nobody makes sushi at home, certainly not with the conveyor belt. And so that's one of the reasons that our traffic has been so strong. Additionally, the way that we build our – the way the guests experience the meal, where they build it plate by plate means that nobody is ever priced out. And so we're in an excellent position. We're very pleased to be where we are.

Okay. Great. Thank you.

Thanks, Sharon.

Thank you, Sharon.

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

Hey, everyone. Thanks for taking my question. So just a couple for you. The first one, I was curious if you could update us on a couple sourcing initiatives that you've talked about in prior calls, specifically the potential for Japanese sourcing and then the utilization of broadliners?

Yes. We've started that process. We've started to work with Cisco a little bit. We're testing some of the deliveries in some markets. That's something that we're just not going to flip the switch on because it's getting the products in at the right time efficiently and effectively is so important that we have to take this slowly and make sure that we're completely dialed in before we flip the switch to the whole company. We do have some initiatives that are coming up. We've got shrimp and salmon that we have been able to purchase at a much more favorable price that'll be coming in, in May and June. So that's upcoming. I think we've talked about that in the past. But that's an exciting development. And one thing that I'm really excited about too is it'll be much easier for us to forecast where we're going to be in terms of COGS. Because in the past, we've kind of been riding the market and the markups were kind of around – across the board. And once we get everything into more of a broadline system, we'll be able to know exactly what the market is, exactly what we're paying, and we'll be much – in a much better place in terms of forecasting. Not to mention our actual results going forward should be better as well. So it's in the process, but we're taking slowly to make sure that we're really dialed in before we roll it out system wide.

So if I were to just attempt to repeat what you just said, is this something that you're still kind of assessing and uncertain as to whether you'll kind of roll it out across the base? Or would you expect this to be something that you fully implement by maybe the start of next fiscal year?

I believe by the start of next fiscal year, it will be implemented. And this is something we are doing. We're just taking it slowly to make sure it's being done properly.

Okay. Understood. Thanks. And then second question for me, just curious, if you are contemplating taking additional pricing this year. And then another question, is just the timing of the DC Comics partner, when is [indiscernible] in July and August or if you could specify that? And that's all I had. Thank you.

[Foreign Language]

We have no specific plans at this point, but there are a couple of things that are useful to consider. One would be that we're going to be lapping 6% price in July. We'll no longer have that benefit. We are still seeing that, that 10% labor inflation that Jimmy had mentioned, and there are typically minimum wage increases in July in our – especially in our Los Angeles markets. And while COGS inflation is easing, we are seeing ongoing inflation in non-COGS expenses. And so while we have no current plans, we're going to be flexible in terms of making sure that we're able to make the best decision possible for that point in time. What we'd like to reiterate is that this – whatever pricing we take would not be a margin driver. That's not why we take price. It would be purely to offset increased costs.

[Foreign Language]

We're really excited about DC Comics. We think it's going to get us in front of a new and different audience from what the past collaborations have done. We haven't baked it, like baked in a bonanza, and we'd be really pleased to see it beat Demon Slayer. But one thing is that DC will be starting in August, whereas Demon Slayer had July and August.

Understood. Thanks.

Thanks, George.

We have a follow-up question from the line of Todd Brooks with The Benchmark Company. Please proceed with your question.

Hey, thanks for squeezing me in. Just going back to the commodity side, I believe across the course of last year when demand was robust, your supply chain had issues keeping up. So your vendor base got a little deconsolidated. As we're looking towards that predictability, Jeff, that you talked about with COGS forecasting going forward and maybe review how the process of reconsolidating with fewer vendors, more volume and then maybe the scale advantages that you're finding as you do that. And then my follow-up to that one is given the improvement that we're seeing with the commodity inflation side and the strong sales results, is there a way to think about an exit rate with the initiatives that are in place for this year for where restaurant-level margin should be targeted at as we're thinking about going into 2024? Thank you.

Yes. So – and I'm going to let Jimmy and Ben also to elaborate on kind of last year as well because I wasn't with the company last year. But my understanding, during the pandemic what happened is we were coming out of the pandemic, there’s a lot of our suppliers had stopped supply having on hand as much product as they did because they ended up throwing so much away during the pandemic. They were a little bit shy in terms of how much they had on board. So we had to go to some other suppliers and that really drove their COGS up last year because we had to go to a new supplier, we weren't able to really negotiate with them, we were just kind of had our backs against the wall a little bit and they had to go to them and say, we need this product. They were able to provide it at the quality we needed, but we did pay for that. So there were no vendors that I know of that we really – any of our large [indiscernible] vendors especially that were really lost, it was just more of a shortage of the supply they were supplying and we're back to buying our products from the pre-pandemic suppliers for the most part. And is there anything additional?

No. I think, you explained everything.

Okay. And then Todd, I'm sorry, can you ask your second question again one more time please?

Yes. Just I'm listening to the commentary on the call and the normalization that we're seeing in inflation and the sequential improvement and scale benefits the Cisco rollout proceeding over this year. I'm just trying to get my mind around kind of what you guys are thinking maybe for an exit rate for restaurant-level margins kind of going into fiscal 2024 so you would start to think about earnings power in that year? Thanks.

So our eye is always on the 20% restaurant-level margin price. That's pretty much the gold standard in the restaurant industry. And in fact hitting the 20.2% that we did in Q2, I believe is one of, if not our highest Q2s of all time. And we're very happy with that because Q2, our seasonality is Q1 is our slowest quarter of the four, and then they get sequentially better from there. Q2 is better than one, three better than two and Q4, which is our summer is our best quarter. So to be able to hit a 20% restaurant-level margin in Q2, we're very happy with. We'll continue to chip away at it, but that number is a pretty good number and we're not going to sacrifice guest service or food quality in order to drive that margin much higher than that. But there is a little opportunity, I believe as we continue to leverage, but we're happy with the number where it is.

A few things to add on that – I'm sorry, go ahead, Jimmy.

I can give you additional explanation. [Foreign Language]

As a reminder that labor inflation that we mentioned, we do expect that to continue through Q3 and Q4, and potentially pass that. And so please be mindful of that as well. A couple other notes just from my end, thinking about exit rates might not be super helpful for your modeling purposes just because of the seasonality that Jeff mentioned. Q4s restaurant-level operating profit margin and Q1s restaurant-level operating profit margin are materially different. If you go through any of our past things, I'm sure you'll see that. And just to echo Jeff's note, we're very happy with that 20% plus, it's one of the industry bests. It's great to see ongoing improvement. But in terms of the major opportunity for top and bottom line, that's going to be the ongoing unit expansion and leveraging of our G&A.

Great. Thank you all.

Thanks, Todd.

Thank you.

Our next question is a follow-up question from Joshua Long with Stephens. Please proceed with your question.

Great. Thanks for squeezing me in for the follow-up. I was just curious, it looks like there were maybe a couple remodels during the quarter of maybe some of your older units. Just curious if that was maybe one-off – a one-off opportunity or a remodel or something a bit more comprehensive is in the works. Just curious on either set up for that and/or what you learned by touching – going back and looking at some of those, I think it was in your California market?

So at the time of the IPO, our parent company actually worked with a very famous designer. He's the guy who did the unique logo. It's probably what he is best known for the west, but he's the guy who did our new updated logo and he developed an interior design update as well. And so we've been doing those updates since 2019, 2020. We only have six left. They cost on average maybe $200,000 to $300,000. But after those six, we're caught up.

Great. Thank you.

Thanks.

That concludes our question-and-answer session. That also concludes our conference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.