Kura Sushi USA Inc (KRUS) 2022 Q4 法說會逐字稿

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 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 of Investor Relations and Business Development. And now I would like to turn the call over to Mr. Porten. Please go ahead.

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 used to evaluate our performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance to GAAP. And the reconciliation 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.

Thank you, Ben, and thank you, everyone, for joining us today. It's great to be able to report a strong growth to a banner year. We broke sales records and unit growth records and achieved an all-time high on our restaurant operating profit margins. We further (inaudible) our profitability by entering and succeeding in 3 new states and many more DMAs. We implemented many new innovations at our restaurants, allowing us to scale successfully as we continue to (inaudible) aggressive growth. It's been a great year. Now I'd like to discuss our fiscal fourth quarter results and touch on some expectations for the coming fiscal year.

We continued 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 growth has far outpaced the pricing that is taken over this period, as we saw traffic growth of 14.6% over the prior year. Profit growth in California was especially robust, at over 20%. As a reminder, California reopened for full indoor dining on June 16, 2021. The traffic gains we saw in California materially outperformed our expectations [relative] to the benefit of 2 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% as compared to the prior-year period. These geographic points reflect the previous comparative benefit California had in (inaudible) the year's operating [reflections].

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 current performance resulted in fiscal year 2022 NAV 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 8% in September of 2021, pricing of approximately 2% in March 2022, and closed 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 fourth quarter on a single-year stack were approximately 28%, with effective pricing of approximately 14% over the same period. We are exceptionally proud to say that our comparable sales gains are not being driven solely by pricing, and we have seen no [discernable] profit growth, as demonstrated by the previously 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 consumer strength. Our COGS as a percentage of sales was 30.7%. While this 30.7% figure is still very strong from a historical perspective, it's worth noting that we saw a 100-basis-point increase in COGS relative to our fiscal third quarter, due to (inaudible) inflation, which we were not able to fully offset by [traffic]. 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 drink order systems. Staffing tailwinds have progressively eased, and our current staffing, excluding newly opened units, is over 95% of optimal levels.

In spite of unprecedented inflation, we were able to deliver an all-time best in restaurant 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 for Kura Sushi remains very strong, in spite of inflationary concerns and potential pressure on discretionary spending.

First, we are fortunate in that our historical and current [site] restaurant strategy prioritize these markets that over index with high-income residents, and so Kura guest is such much more resilient as a customer. Second, our value proposition remains excellent. In spite of the pricing that we've taken during the pandemic, an internal survey of sushi restaurants indicated that our menu pricing is approximately half of those set by local competitors. There have been a lot of discussions about consumers trading down, and we think there is an amazing opportunity in capturing first-time guests that were trading down from their local mom-and-pop sushi restaurants. This will be a chief strategy for growing sales in fiscal 2023, and we expect 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, respectively. I believe these comps are particularly strong when considering the tough competition as we had the 8% pricing we took in September 2021. As further demonstration of strength of the Kura consumer, our [papasan] sushi (inaudible) consumption during the quarter to date has actually shown modest growth relative to our fiscal fourth quarter. Average check sizes have also grown modestly compared to our fiscal fourth quarter.

Moving to development, in the fourth quarter, we opened 3 new locations, Novi Michigan, [Banan], Florida, and Tyson's Corner, Virginia, making for a total of 8 new unit openings for fiscal year 2022. As you may have heard on other earnings calls from our peers in the industry, we are continuing to see headwinds in construction, caused largely by shipping delays and the delays in permitting from local governments. I'm very proud of our development team for achieving 25% EBITA growth this year while working under these conditions. I believe that much like fiscal year 2021, our [class] of new units from this year has 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 3 new units to open in the next several weeks. Two of these units will be in the new markets of Philadelphia, Pennsylvania and at the Mall of America, in Minneapolis. And the other unit is set to open in Jersey City, New Jersey, which is a market that has delivered remarkable results with our (inaudible) location.

On another note, I would like to formally welcome our new Chief Financial Officer, Jeffrey Uttz. Jeff has a truly remarkable career in the restaurant industry, including growing Yard House from only 3 units, and ultimately leading itself to Darden, to leading Shake Shack's (inaudible) IPO in 2015. Jeff has only been with us for a month and has 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 leaders.

Finally, I would like to thank all of the team members that have made this great year possible, both our (inaudible) and our corporate support center. Kura has grown so much over the last several years, 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 will turn it over to Jeff to briefly discuss our financial results and liquidity. Jeff?

Thank you, Jimmy. I am humbled and honored to be part of this amazing company and to have joined a 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 have 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 preopening 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 had $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 9 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.

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.

We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Joshua Long of Stephens Inc.

Great. And Jeff, nice to hear from you again. Glad to have you on board. 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? Just any sort of context you could help there to frame up kind of how your consumer is doing and that underlying momentum would be helpful.

Thank you, Joshua, for your questions. Please allow me to answer in Japanese, then (inaudible) translate. (foreign language)

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 2 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 has better comps in Texas this time.

(foreign language)

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

(foreign language)

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 per-person sushi plate consumption had not gone down at all. In fact, we've 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 see 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 deceleration for comps relative to Q4, I think this is more an externality or just like a reflection of the overall -- everything that everybody is 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 the pricing that we've taken. And again, as Jimmy mentioned earlier, 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.

(foreign language)

And so, one of the main themes for fiscal '23 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 priced at approximately half the price of our competitors makes us truly appealing, and so we're really going to be leaning into capturing new guests.

Got it. That's very helpful. On that last point, when we think about that pricing maybe opportunity or just the current state of it, balanced 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?

(foreign language)

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 -- or over the course of Q4, we're expecting to see that same cadence of ongoing accelerating inflation as we enter fiscal '23.

(foreign language)

We plan to take pricing in Q2, given the inflationary trends that we're seeing now. We're going to be monitoring it very closely, and that will determine the magnitude and timing. That being said, 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.

(foreign language)

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 lowering COGS, it's really a matter of the overall profitability.

(foreign language)

To date, with the pricing that we've taken, we've really see minimal traffic loss, and that's been really great. But we're absolutely cognizant that you can't just -- there's always a possibility for traffic loss. And value proposition is always relative, and so if you're used to going to Kura and you're coming through 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.

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.

(foreign language)

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 there have been ongoing headwinds ever since we entered the pandemic. Typically, we're able to lock in 6-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 get -- we're not able to get all of our, say, like tuna from the same vendor in the way that we would have 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 6 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 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 foreign 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 -- of 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 in the back half of the year.

The next question comes from Andrew Strelzik of BMO Capital Markets.

This is Daniel Gold on for Andrew Strelzik. 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 as a follow-up to that, can you speak to your pipeline of LOIs, (inaudible) leases and what you already have under construction?

Sure. (foreign language)

terms of fiscal '22, we entered 3 new markets. We were successful in all 3 of those new markets, which always is a huge source of encouragement -- of encouraging for us, just given that it continues -- it's further proof that we're able to prove our portability nationally. The fiscal '22 units, even outside of the new markets, have been very, very strong, and the strength of those units is reflected in the aggressive unit growth that we've guided towards for fiscal '23.

(foreign language)

And then, looking at the pipeline for fiscal '23, the new markets that we'll likely be entering will be Minnesota, with that Mall of America location, Philadelphia in Pennsylvania, and then New York State. Each of the locations in these 3 new markets are excellent, and so we're very excited.

In terms of markets that we'll be infilling, we're currently in the process of -- we're wrapping up construction in 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.

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?

(foreign language)

As Jimmy mentioned in the prepared remarks, our current staffing levels are over 95% relative to their optimal level, 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 their full operating hours. We don't have any restaurants that aren't able to service to-go orders because of throughput 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 3 new initiatives over the course of course of fiscal '22 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 because they're able to serve that many more tables, and it simplifies their operations. And so, these combined efforts have gotten us to a point that we feel really good about.

That's great to hear.

The next question comes from Sharon Zackfia of William Blair.

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're 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 or 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?

(foreign language)

So, 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 the marketing cost as a percentage of sales in fiscal '23 relative to fiscal '22 are going to be a little bit higher. This largely reflects a shift in our thinking in terms of how to capture guests. Historically, or 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 advantage of that opportunity.

Jeff, do you want to grab G&A?

Yes. 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 2 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 ask them you get together with me, and 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 is to not have the support and the people in 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, yeah, 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 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.

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 attach measurably go with a full-order systems, but if I missed that, I apologize.

Sure, Sharon, I'm happy to answer this question. (foreign language)

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, takeout 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 Kura 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% comps that we saw in Q4 I think are a clear reflection of just how well received they've been by the guests, given that the rollout was completed by the end of Q3.

(foreign language)

And 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 are 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 like a tip growth, that's led to -- which is driving that retention improvement. Between the 3 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.

(foreign language)

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 a much more accurate view of table turn times, which will allow us to give you a more meaningful number in coming quarters?

The next question comes from Jeremy Hamblin of Craig-Hallum Capital Group.

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, 2 of the 3 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 2 or 3 months behind what you might have been thinking 4 or 5 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 FY '23, the type of impact that you might be seeing, and if you could maybe help us to pin down a little bit of the 9 to 11 units expected for the year. I'm not sure if you were suggesting that 3 units were going to open before the end of the November quarter, or if it's 2 open and then maybe 1 opens in December. But any more color that you can share on the timing of when you expect the 9 to 11 units to open during the year, the cadence?

Sure, Jeremy. (foreign language)

So, you are correct in that 2 of the 3 units that we opened in Q4 did open during the last week, and Philadelphia, Mall of America, Jersey City are running a couple months behind our initial expectations.

(foreign language)

In terms of what's driven the delays for the units 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. 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 9 to 11 units that we're guiding towards for fiscal '23 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 5 units under construction. We expect the 3 -- Philadelphia, Mall of America, Jersey City -- to open in several weeks. But we -- it's pretty okay. The remaining -- after that, so the remaining stores will likely open in the back half of the year.

Jeremy --

I'm sorry, Jimmy.

I'm sorry. Did I answer all your questions?

Well, I think I was looking to see just the timing of what you would estimate the revenue impact was from just these pushouts in completion and actual openings. If you did $42 million in the August quarter, do you think that could have been $43 million, based on kind of prior timing? And then obviously, it's certainly impacting the November quarter as well.

Sure. (foreign language)

So, we haven't really given sort of revenue whatever numbers. It's kind of a weird way to put it, but our AUVs or 3.5 -- $3.85 million. If you just sort of -- you could take sort of a mid-quarter convention and work out the operating weeks, and that will get you 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 boost 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.

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 costs you expect it to be maybe a little over 30% here during the year. In terms of the labor, and 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 in an achievable figure?

Sure. (foreign language)

So, long story short, we do think that the improvements that we saw in Q4 are sustainable, or at least part of it. There are a number of puts and takes that we saw 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 labor as a percentage of sales. Q4 always has the best labor as a 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.

Great. Congratulations and best wishes.

The next question comes from George Kelly of Roth Capital Partners.

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 of quarters?

Sure, so the testers campaign has been really fun. We have these to-go boxes that are actually in the shape of TETRIS blocks, and those have been -- we've never had to-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 cachet as Demon Slayer. People that had never heard of Kura were coming because of Demon Slayer. People that had never -- people outside of our markets were learning about Kura as a result of our Demon Slayer collaboration, which is great in terms of planting seeds for future markets. But Demon Slayer really was one of 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.

Okay. Excellent. And then, you mentioned earlier potentially sourcing from Japan later this year. What kind of savings could that drive, and is that something that's already baked into your guidance?

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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 '22. That being said, with the pricing that we're taking in Q2, that should begin to mitigate that. And our hopes for the Japanese yen benefit is really not so much as getting back to fiscal '22 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.

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