Earnings Call Transcript - KRUS Q1 2023

Operator, Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal First 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.

Benjamin Porten, SVP, Investor Relations and Business Development

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal first 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.

Jimmy Uba, CEO

Thank you, Ben. And thank you everyone for joining us today. I'm excited to report another strong quarter where we outperformed industry averages with regards to traffic growth, saw two strong restaurant openings, and delivered restaurant-level operating profit margin that exceeded the same period prior to the pandemic. Our performance has been driven by the steadfast support from our loyal guests and warm receptions by new fans alike. In an environment where consumers are forced to be more careful with their discretionary spending, we’re delighted to see that when our guests go out to eat, they choose to dine with us. Our three goals for this year are to continue our rapid unit expansion, grow into our G&A, and to maintain the operational excellence and incredible values that have made us our guest's top choice for dining out. Our first quarter sales were $39.3 million, representing revenue growth of over 30% over the previous year's first quarter revenue. We saw comparable sales growth of 6.9%, while facing headwinds created by adopting 8% of pricing at the beginning of September. This 6.9% comp figure breaks down to 4% from traffic and 2.9% from price and mix. We are especially pleased by our traffic growth, which outpaced the casual dining segment by a monthly average of more than 700 basis points and which we believe is an indication of our concept's resilience in a potential economic downturn. As mentioned in our previous earnings call, we believe that there is significant opportunity in capturing new guests as they trade down from local sushi restaurants that have taken price much more aggressively than we have. On traffic growth during the period, casual dining as a whole is suffering from declining traffic, which only underscores the opportunity created by our unparalleled value proposition. Looking at our operating results, we are pleased to note that our labor costs as a percentage of sales are 60 basis points below the prior year, confirming the expectation that a 50 basis point labor improvement in the prior quarter, driven by the implementation of our three technology initiatives, was not just a one-time benefit, but potentially a long-term tailwind for our operational efficiencies. Due to ongoing inflation, our cost of goods sold as a percentage of sales was 160 basis points higher compared against the previous year, and it's largely responsible for the year-over-year decline in restaurant-level profit. But it is difficult to predict when we can expect moderation in commodity cost. We do not expect this inflation to be permanent and remain optimistic that we can achieve the margin profile we saw in the previous fiscal year as we enter a more normalized environment. As Jeff mentioned in the last earnings call, a key area of focus as our new CFO was to manage G&A expenses. For a growing company, there are certain investments in people and infrastructure that are necessary to support the growth, and we will not compromise that. However, this does not mean that there are not opportunities for savings, and pursuing these savings is a top priority. Since the IPO, we have said that the best possible profitability for us is to leverage our G&A costs against an increasingly larger store base. While this leveraging will be a multi-year process, we are proud to announce that we are making substantial progress throughout this call, as demonstrated by the improvement in G&A expense as a percentage of sales of over 100 basis points as compared to the prior year. I'm particularly impressed by the team's efforts to control costs and for us to have achieved the leverage during a period when we are continuing to see inflation in the underlying items. Our G&A strategy is to renegotiate existing contracts and to implement further efficiencies, which will allow us to minimize new hires. Our support center employees have risen to the occasion, and I'm proud of the company-wide cooperation that has made this possible. Turning to development, we opened two new locations in the first quarter, one in the Mall of America in Bloomington, Minnesota, and one in Jersey City, New Jersey. Subsequent to the end of the quarter, we opened our Philadelphia location in late December. As I'm sure you heard on our previous earnings call, construction and permitting delays have been a headache for the rest of the industry. And two of these units similarly suffered from unusually long opening delays. That being said, we believe that the worst is behind us as the remainder of our fiscal ‘23 pipeline is robust, which typically makes for further expansion. Additionally, we are very pleased by the early performance of these three units. It's great to see our restaurant drive in the Mall of America, further indicating cross-national adaptability and across demographics, and Jersey City continues to show the east coast market tremendous potential. We currently have four units under active construction and still more breaking ground later this month. With still more restaurant openings expected in Q2, we are on track to achieve the annual growth guidance we provided in the last earnings call. Lastly, I'm very excited to announce that we have made significant progress in the implementation of our new Waitlist app and reward program platform and expect the testing to begin during this quarter. The Waitlist app will have an immediate positive impact on customer satisfaction by improving waiting time accuracy, which we hope will translate into improved retention rate for guests waiting. With the new reward program platform, not only will we have greater flexibility in the way that we can reward our guests, but we will be able to begin leveraging environmental data for targeted marketing for the first time. Our loyalty program has been hugely effective in driving frequency and average check growth, but still relies on the data's power, and the utilization of this data represents a new chapter in our marketing efforts. On that note, we began our targeted marketing efforts specifically geared towards first-time guests in December. But it's too early for us to discuss the impact yet; we believe that the opportunity in capturing new guests who have been discouraged by the aggressive pricing we have seen among local competitors is truly significant, and capturing these guests remains a key pillar of our marketing strategy for the fiscal year. Before I hand things over to Jeff, I would like to note that we took a pricing increase of approximately 7% in the first week of December. Finally, I would like to thank all of our team members, both at our restaurant and the support center, for the great work they do every day to create the magic that is a great experience. And with that, I'll turn it over to Jeff to briefly discuss our financial results and liquidity.

Jeff Uttz, CFO

Thank you, Jimmy. For the first quarter, total sales were $39.3 million as compared to $29.8 million in the prior year period. Comparable sales growth as compared to the prior-year period was 6.9%, with regional comps of 10.3% in California and 2.1% in Texas. Turning to costs, food and beverage costs as a percentage of sales were 31.6% as compared to 30% in the prior year quarter due to food cost inflation, partially offset by pricing taken over the course of fiscal 2022. Labor and related costs as a percentage of sales decreased to 31.9% from 32.5% in the prior year quarter. This decrease is due to incremental efficiencies created by the implementation of technological initiatives, as well as sales leveraging from pricing taken over the course of fiscal 2022. This leveraging was partially offset by wage increases and incremental pre-opening labor. Occupancy and related expenses as a percentage of sales were 7.3% and were largely flat year-over-year compared to the prior year quarter at 7.4%. Other costs as a percentage of sales increased to 13.5% compared to 12.1% in the prior year quarter due to increases in pre-opening costs, advertising and promotional costs, and repair and maintenance costs. General and administrative expenses as a percentage of sales decreased to 16.9% as compared to 18% in the prior year quarter. On a dollar basis, general and administrative expenses were $6.6 million as compared to $5.4 million in the prior year quarter, with the increase largely driven by compensation and partially offset by reductions in professional fees and insurance costs. Operating loss was $2.2 million as compared to an operating loss of $1.3 million in the prior year quarter. As a percentage of sales, the operating loss was 5.5% as compared to a loss of 4.2% in the prior year quarter. Income tax expense was $10,000 compared to $12,000 in the prior year quarter. Net loss was $2.1 million, or $0.21 diluted share, compared to a net loss of $1.3 million, or $0.13 per diluted share in the prior year quarter. Restaurant-level operating profit as a percentage of sales was 18.2% compared to 19.5% in the prior year quarter. Adjusted EBITDA was $0.6 million compared to $0.8 million in the prior year quarter. Turning to cash and liquidity, at the end of the fiscal first quarter, we had $26.9 million in cash and cash equivalents and no debt. Lastly, I would like to reaffirm the following guidance for fiscal year 2023: we expect our total sales to be between $183 million and $188 million, we expect general and administrative expenses as a percentage of sales to be approximately 16%, and we expect to open between nine and 11 new units with average net capital expenditures per unit of approximately $2.5 million. And with that, I'd like to turn it back over to Jimmy.

Jimmy Uba, CEO

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.

Operator, Operator

Thank you, everyone. We will now begin the question-and-answer session. Our first question comes from Andrew Strelzik with BMO Capital Markets. Please go ahead with your question.

Daniel Gold, Analyst

Hi, this is Daniel Gold on for Andrew. Thanks for taking the question. When we think about the results in the quarter, our math suggests your comp slowed throughout the quarter to 2.5% in November. What do you attribute that to? And what are you tracking quarter to date or in December?

Jimmy Uba, CEO

Thank you, Daniel for your question. Please allow me to answer your question in Japanese and Ben is going to translate it. In terms of our comps, we were exceptionally pleased to see that in this environment we were able to achieve comps of 6.9%, particularly because our traffic was up 4% over the course of the quarter, which, as everybody knows, in this environment is pretty rare. So looking at industry averages, particularly those provided by NATRAX over the period that was our Q1, it's pretty clear that our peers in the casual dining space are down in traffic. And again, the fact that traffic is up for us is a great sign for our concept; it's a great sign for the strength of the consumer. But that being said, as Jimmy mentioned in the prepared remarks, our focus for fiscal '23 is going to be in terms of capturing first-time guests. In this sort of environment, it's only natural that people are going to reduce the frequency of their out-of-home dining occasions, and we've been able to remain one of the dining options for our guests. But for us to maintain the traffic growth that we've seen in the last quarter, we think it's imperative for us to capture first-time guests. Jeff, is there anything you wanted to add?

Jeff Uttz, CFO

No, I think the traffic that we were able to get is something we're very happy with. Getting people in the door is the first step, and we've been able to do that. We've been able to increase the number of people coming in by 4% over last year in a very tough environment. So we're not really going to give monthly comps, and I know we did give September and October on the last call, so you can obviously do the math yourself. But we're very, very happy with where the comp came out for the first quarter of our fiscal year, especially compared to our peers. People are still coming in. And as Ben said, if people were going out three times, now they're only going out two times. It appears based on the numbers that we've been lucky enough to remain one of those two dining occasions that people do choose to eat away from home.

Daniel Gold, Analyst

Got it. That's really helpful. Thank you. I have another question. One of the goals for the year is G&A. I'm interested in your plans for the long term. You’ve indicated a target of 16% for G&A as a percentage of sales this year. What do you think is a reasonable long-term goal? Are you anticipating a steady decrease or are there plans for G&A investment?

Jeff Uttz, CFO

I'm expecting near linear progression down. We're not going to give any guidance past this current fiscal year. We are a growth company. I do think that our G&A is elevated. And as we've said many times on these calls and in meetings with investors and conferences and whatnot, one of my top goals is to get it down. We did see a little bit of leverage when you compare the first quarter of this year to the first quarter last year, which we're very pleased with. But it's not a trend yet, and we're going to continue to guide towards the 16%. The number came in where we expected it to for Q1, so there were no surprises, but stick with the 16% for now. I do expect that to get better in future years, but I'm just not able to quantify that at this time. But Jimmy also said in the prepared remarks that we're also not going to compromise investments that we need to invest in our company for future growth, but there is room for improvement. That's a promise that we have made to everybody, and that's a promise we're going to keep. I just can't quantify for future years right out past fiscal '23.

Daniel Gold, Analyst

Got it. Thank you very much.

Operator, Operator

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

Jeremy Hamblin, Analyst

Thanks. I wanted to revisit the discussion around traffic, menu pricing, and mix for the November quarter. I estimate that there was close to 8% menu pricing during the quarter prior to the December price increase. If traffic increased by 4%, does that suggest that there was a notable mix shift during the quarter?

Jeff Uttz, CFO

What did you suggest? Please continue, Jimmy.

Jimmy Uba, CEO

Okay. Thank you. So, in terms of Q1, we did see a little bit less of flow-through from pricing than we had in past quarters. That being said, we did see average check growth on a quarterly sequential basis from Q4 to Q1, and so it's not like there's aggressive check management; checks are still growing. The purpose and plate consumption over the same period was flat as well. Certainly, it's a point of focus for us. But given that this is just a result from one quarter, we don't think this is necessarily indicative of a trend yet.

Jeremy Hamblin, Analyst

Okay. Got you. And you're not providing any color on kind of quarter-to-date trends, whether or not because I did want to ask you a 7% price increase that you took in December, whether or not that's having any impact on traffic trends? And then the second part that's kind of tied into that is, you did see a pretty healthy jump now the last two quarters in food and beverage costs. We know that there's inflation out there, certainly on commodities. But I wanted to get a sense for, are we getting close to where you feel like that peak in food cost inflation has happened? And with that incremental 7% that you took in December, is that hopefully going to balance out kind of your COGS as a percent of sales?

Jeff Uttz, CFO

In response to your first question regarding December and the price increase, initial feedback from guests has been positive. We've observed a similar pattern with past price hikes, showing little to no adverse reaction. Our pricing remains competitive, and we believe we have the ability to increase prices, as we implemented a 7% rise at the start of December. So far, we are pleased with the lack of negative response. However, it's too early to provide further insights as December just closed five days ago, making it difficult to assess the beginning of the second quarter. Regarding COGS, I am hopeful that we are reaching a peak, although I am cautious about that assumption. We have experienced month-to-month inflation since the beginning of the year, continuing into the fourth quarter of last year. I anticipate this upward trend to persist, which is why we opted for the price increase. While the price adjustment does not completely counter the effects of inflation, it has been helpful. It's encouraging to see that guest traffic increased by 4% during the quarter, indicating that the pricing changes have not deterred customers from visiting us. I remain optimistic but not enough to assert that we have definitely hit the peak. There are some promising signs, but as I mentioned in response to earlier questions, we are not seeing a definitive trend yet.

Benjamin Porten, SVP, Investor Relations and Business Development

Just to add to the point about commodity inflation, we are one of the few concepts showing positive traffic in the casual dining sector. A significant reason for this is our exceptional value proposition, which attracts many guests who are choosing us over more expensive sushi restaurants. We view this as a long-term investment in expanding our overall restaurant base, which I believe is an opportunity that others might not recognize. While we may face short-term commodity pressures, I believe that our excellent value will better position us for success once inflation normalizes.

Jeremy Hamblin, Analyst

I just wanted to clarify another point from the script regarding the unit openings and the expected timeline. You mentioned that there are four units currently under construction, with a few more anticipated to break ground by the end of the month. I know that these projects have faced some delays related to construction, permitting, and HVAC systems. Can you share your expectations on how many units you plan to open this quarter? You've opened one so far; are you aiming for two more? Additionally, for the latter half of the year, will the openings be evenly distributed or more weighted towards that period? Any insights you can provide would be greatly appreciated.

Jimmy Uba, CEO

We have four units currently under construction and two that are about to start. We've opened one so far this quarter, and we expect to open one or two more in Q2, with the rest coming in the latter half of the year. It's worth noting that construction times have not significantly increased. The delays in openings we are experiencing are mostly due to inspections and permitting. For instance, inspections that used to allow for a follow-up the next day now often require a two-week wait, which is more common in urban areas compared to some rural markets. This gives us confidence for the latter half of the year, as we do not expect the same issues we faced in places like Philadelphia. Additionally, most of our upcoming projects are new builds, which typically experience fewer complications, such as those involving gas lines or leveling floors, providing further support for our pipeline moving forward.

Jeremy Hamblin, Analyst

Got it. Thanks for the color guys. Best wishes.

Jimmy Uba, CEO

Thanks, Jeremy.

Jeff Uttz, CFO

Thanks, Jeremy.

Operator, Operator

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

Sharon Zackfia, Analyst

Hi, good afternoon. I guess circling back on inflation, Jeff, could you quantify the commodity and labor inflation you saw in the quarter and what you're expecting for the year?

Jeff Uttz, CFO

We haven't quantified it yet. You can observe the calculations quarter-over-quarter based on what we've experienced. We were fortunate this year regarding wage inflation, as we mentioned in our prepared remarks. The price increases, along with the three technological initiatives we implemented, contributed approximately 50 to 60 basis points of labor leverage. As a result of our pricing strategies, we achieved a stronger quarter this year from a labor standpoint. Regarding food prices, I've already addressed the situation with inflation. I apologize for not being able to quantify what I've observed, but I'm optimistic, albeit without guarantees, that we may see improvements or at least a stabilization of food costs.

Sharon Zackfia, Analyst

I wanted to follow up on your previous statement. You mentioned that the 7% increase wasn't sufficient to fully address the inflation you're experiencing. Should we interpret this as a sign that restaurant-level margins may face some pressure throughout the year? I know you have other initiatives in place that could potentially improve margins, but I'm looking for some clarity on the message you want to convey regarding this situation.

Jeff Uttz, CFO

The first thing to remember is that our first quarter is typically our lowest-performing quarter in terms of margins. As the year progresses, we do expect to see an improvement in margins. I don't anticipate significant further downward pressure on margins; I really believe we have either reached or are close to reaching the peak concerning wages and the cost of goods sold. Looking at the numbers, it was primarily the cost of goods sold this quarter that affected our bottom line and margins. We have some control over certain factors, although many aspects are influenced by the broader economic environment. Once inflation decreases or stabilizes, I genuinely think our margins will improve. While I cannot predict when that will occur, I feel that perhaps the most challenging times are behind us in that regard.

Sharon Zackfia, Analyst

Okay. And then I'm sorry if I missed this, but I don't think I heard any update on loyalty and the membership trends there. And I'm just curious, as you're continuing to generate the positive traffic, are you having continued success converting folks to loyalty? And is there any update on frequency of loyalty versus non-loyalty?

Benjamin Porten, SVP, Investor Relations and Business Development

Yes. The growth rate of our rewards membership has been consistent with the exceptional rates we've experienced over the past couple of years, and we are very pleased with this. The significant development in our rewards program is that we are starting to test with Punch this quarter. Previously, we relied on an in-house platform, which has been helpful in increasing visit frequency and spending. However, we have not been able to leverage data for targeted marketing with it. Transitioning to Punch represents a major shift in our rewards program and marketing strategy, and it will be a key highlight for our rewards this year.

Sharon Zackfia, Analyst

Okay. Thank you.

Operator, Operator

Our next question comes from Joshua Long with Stephens. Please go ahead with your questions.

Joshua Long, Analyst

Hi. Thank you for taking the question. I was hoping we could dig into some of the initiatives platforms, tools and just your overall approach in terms of going after that first-time guest and getting them into the funnel. It seems like that's a big opportunity. You talked about it a couple of times. I imagine that there are either some tools, marketing, or some sort of approach that you're bringing. And without giving it away too much, I'm just curious if you could talk about it high level and how you're thinking about that unfolding as we go forward.

Jimmy Uba, CEO

In terms of our targeted marketing, just at a very high level, it's going to be heavily focused on search engine optimization. So whether it's Google or Yelp, we'll be able to drive that many more guests who are interested in Japanese or sushi. We'll be top of mind because we'll be at the top of the list, and so that's something that we're excited for. The incremental spend that we put on targeted marketing is not going to result in a change in the overall marketing budget. It's going to be more about optimizing our marketing efforts, and we'll be able to reallocate some of those savings towards that targeted marketing, which is very effective on a dollar basis, so that would be a high level. With the rewards program platform, Punch, we're really going to be able to segment our consumers in ways that we just have never been able to do before. For instance, if we identify guests that are interested in noodles, we can send them a noodle coupon for half off at 4 p.m., which is historically a shoulder period for us. People ask us, 'You've got incredible wait times. How are you going to be able to drive comps in these tremendous over-performing stores?' This is one of those opportunities. It's going to be harder to get additional parties in the door during 8:00, but that's certainly not the case at 4:00. That's one of the big things that we're excited about.

Joshua Long, Analyst

Thank you for that insight. I would like to return to the topic of inflation from a different perspective. I recognize the current circumstances and, while being relatively new in this role, I appreciate the efforts of the entire team. One point we discussed was possible supply chain optimization and potential opportunities in that area. Could you provide a high-level overview of any initiatives you are pursuing to leverage your core brand strength and broad product range? Additionally, are there any near-term wins or opportunities for optimization and efficiency that could help scale the brand?

Jeff Uttz, CFO

One of the things that I really want to look at is getting more of our basket into a broad liner. I think that will really help us. I think there are some opportunities there. One of the things that we've had trouble with over the last year was having to buy some of our fish from suppliers that were not our regular suppliers. During the pandemic, some of our regular suppliers had to throw out a lot, and they weren't able to fulfill some of the orders that we needed. So we had to go to these smaller houses and didn't get better prices. I'm hoping that this starts to come back. In fiscal 2023, we started to come back in our favor. Between that and shifting to broader distribution and looking at all of our contracts, this is something that I'm doing with G&A and also asking the purchasing department to do it for our food purchases. I think there are opportunities to go back to our suppliers and leverage the growth that we're going to be seeing over the next few years, and this promises to be good for them.

Benjamin Porten, SVP, Investor Relations and Business Development

Just to add on that, we do have a number of things that we're looking forward to in the back half of the year, such as improved supply lines for select items, which means that there’s no compromising in quality, but we'll see a certain amount of savings. These savings here and there won't be enough to really move the needle. What's tricky about our basket is that we have over 100 inputs, and it's one of the reasons we've been so resilient in the past year in terms of our COGS; we achieved our all-time best. However, this also makes it trickier since there's never just one big thing that you can address. Like Jeff mentioned, being able to move to a broad liner is going to be a tremendous opportunity for us.

Joshua Long, Analyst

That's very helpful. I appreciate that. And one more kind of housekeeping item for me. In terms of just we think about the price that you're running now, you mentioned taking an incremental pricing window here in December. Can you provide us when, how, and at what pace you would think about more pricing in the future or just kind of what the philosophy of the approach is there? Yes. Thank you.

Benjamin Porten, SVP, Investor Relations and Business Development

Given that we just took price in December, I think it's a little bit early to discuss future pricing decisions, but I think the philosophy is going to remain largely the same. Historically, we've taken price about twice a year, typically to offset minimum wage increases, which we've already done, and then we'll adjust based off of inflation. But given that it's impossible to predict when inflation is going to end or what degree it's going to look like, it’s hard for us to give any numbers at this point. That being said, it's really clear that the traffic here is being driven by the value proposition, and so that's certainly something that we don't want to compromise.

Operator, Operator

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

George Kelly, Analyst

Hi everybody. Thanks for taking my question. So just a couple, most of my questions have been asked and answered, but a couple for you. The first one, you mentioned on last quarter's conference call about potentially sourcing from Japan. I was wondering if that's something you're still contemplating. And how meaningful could that be to your gross margin?

Benjamin Porten, SVP, Investor Relations and Business Development

Yes, that's something that we're still looking forward to. We're in the process of exhausting the inventory we have with our existing vendors and the agreements that we have in place. But that's something that we continue to look forward to. I think even in the last call, you mentioned that we don't expect to benefit from that until the back half of the year. The benefit is going to be dependent on foreign exchange rates, but right now, the American dollar is so strong that the benefit seems meaningful.

Jeff Uttz, CFO

Some of the challenge will involve ensuring that if we find a supplier in Japan that meets our standards, we can expand distribution once we streamline the process. Many suppliers in Japan, as I understand it, may face difficulties distributing through a broad liner. We might encounter some obstacles, but the team is currently working to identify the best approach.

George Kelly, Analyst

Okay, okay. And then the second question for me is on just your staffing levels right now. I'm curious if you're seeing much change if it's becoming easier to find people, what kind of wage pressure there is, etc. Just if you could expand on any of those. Thank you.

Jimmy Uba, CEO

In the past earnings call, we noted that our hourly positions were about 95% filled. Currently, we're at 95% to 100% across all our restaurants, which puts us in an excellent position. We are not experiencing any operational impacts from quarantine. Unlike last year at this time, when we faced seating limitations or reduced hours, that is not the case now. We are very pleased with our staffing situation and proud of the efforts made by our recruiting, operations, training, and HR teams. Regarding staffing, I understand that the FAST Act is a significant topic for many on this call, particularly because California is our largest market. I want to assure everyone that as the legislation stands, it does not affect us and does not apply to our situation. Some have suggested that if wages increase for everyone, ours will follow suit, regardless of legal classification. However, if that were true, there would be no servers in Texas or New Jersey earning $2.13 an hour since they could earn a guaranteed $8 elsewhere; people choose server roles because they are financially rewarding due to tips. With our tips, we are among the highest-paying employers in our industry. The FAST Act is not a concern for us; it may even enhance our competitiveness. The strength of our management pipeline is crucial for our unit growth rate. We are pleased to report that this pipeline is exceptionally robust. Any delays we have experienced in openings have stemmed from permitting issues or inspections, not from a lack of management. In fact, these delays have allowed our management trainees to receive additional training, resulting in a strong class for this year and next. We are not worried about this and do not see it as a barrier to our ambitious growth plans.

George Kelly, Analyst

Okay. Understood. Thank you.

Operator, Operator

There are no further questions in our queue. This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.