Earnings Call Transcript - KRUS Q2 2026

Operator, Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Second Quarter 2026 Earnings Conference Call. Please note that this call is being recorded. On the call today, we have Hajime Jimmy Uba, President and Chief Executive Officer; Jeff Uttz, Chief Financial Officer; and Benjamin Porten, Senior Vice President, Investor Relations and System Development. And now I would like to turn the call over to Mr. Porten. Please go ahead.

Benjamin Porten, SVP, Investor Relations and System Development

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal second quarter 2026 earnings release. It can be found at www.kurasushi.com in the Investor Relations section. A copy of the earnings release has also been included in the 8-K we submitted to the SEC. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Also during today's call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance with GAAP, and the reconciliations to comparable GAAP measures are available in our earnings release. With that out of the way, I'd like to turn the call over to Jimmy.

Hajime Uba, CEO

Thanks, Ben, and thank you all for being here today. As we entered this fiscal year, we recognized that the second fiscal quarter would be crucial for meeting our goals, expectations, and full-year guidance. As some of you may have noticed in this afternoon's release, our fiscal second quarter performed very well. We have plenty of good news to discuss today, including better-than-expected comparable sales and record-breaking labor leverage. Let's get started. Total sales for the fiscal second quarter reached $80 million, representing comparable sales growth of 8.6%, with 4.3% from positive traffic and 4.3% from price on the mix. To update you on our aim for flat to slightly positive full-year comparable sales, our year-to-date comparable sales growth as of the end of the first half of fiscal 2026 is now at 3%. While Q2 is typically our strongest quarter from a comparative standpoint, given our performance thus far, we now anticipate modestly positive full-year comps. The cost of goods sold as a percentage of sales was 30.4% compared to 28.7% in the same quarter last year. The tariff situation remains mostly stable for us, and costs have been mitigated by commodity inflation. We still expect the full-year cost of goods sold to be around 30%, while the percentage of sales improved significantly by 410 basis points from last year's 34.8% to 30.7%, driven by operational initiatives and better sales leverage. We opened one new restaurant recently and, after the quarter ended, we opened four more in Orange and Union City, California; Goodyear, Arizona; and Wellington, Florida. The openings from fiscal 2026 are shaping up to be as strong as those in fiscal 2025, which was our best year in recent history. Currently, we have 8 locations under construction and we maintain our expectation of opening 16 new units in fiscal 2026. Regarding marketing, it’s evident that our strategy to reemphasize our IP collaborations is effective. Our recent collaboration was as successful as we anticipated, and it coincided with the release of the third season. Our next collaboration will be with Tamagotchi for its 30th anniversary. This partnership has been invaluable for me and for Kura Sushi over the last four years. His strategic insight and financial leadership have been essential to our growth as a public company. While we will miss his expertise, we are thankful for all he has contributed to our success.

Jeff Uttz, CFO

Thank you, Jimmy, for those kind words. It's been an honor and a privilege to serve as CFO of Kura Sushi over the past 4 years. I'm incredibly proud of what we've accomplished together as a team, and I'd like to thank Jimmy, the Board, and every member of the Kura family for their partnership and trust. Now let me walk you through our fiscal second quarter financial results. For the second quarter, total sales were $80 million as compared to $64.9 million in the prior year period. Comparable restaurant sales growth compared to the prior year period was 8.6%, with 4.3% from traffic and 4.3% from price and mix. Comparable sales growth in our West Coast market was 7.2% and 9.7% in our Southwest market. Effective pricing for the quarter was 4.5%. Food and beverage costs as a percentage of sales were 30.4% compared to 28.7% in the prior year quarter due to tariffs on imported ingredients. Labor and related costs as a percentage of sales were 30.7% as compared to 34.8% in the prior year quarter due to operational efficiencies, pricing, and better sales leverage, partially offset by low single-digit wage inflation. Occupancy and related expenses as a percentage of sales were 8.1% compared to the prior year quarter's 7.9%. Depreciation and amortization expense as a percentage of sales were 5.2% as compared to the prior year quarter's 5.1%. Other costs as a percentage of sales were 14.5% as compared to the prior year quarter's 13.5% due to higher promotional and utility costs. General and administrative expenses as a percentage of sales were 13.7% as compared to 16.9% in the prior year quarter. Fiscal second quarter 2026 includes $1.2 million of litigation expenses as compared to $2.1 million of litigation expenses in the prior year. Operating loss was $2.2 million compared to an operating loss of $4.6 million in the prior year quarter. Income tax expense was $51,000 as compared to $38,000 in the prior year quarter and net loss was $1.7 million or negative $0.14 per share compared to a net loss of $3.8 million or negative $0.31 per share in the prior year quarter. Adjusted net loss, which excludes the litigation expense, was $502,000 or negative $0.04 a share as compared to adjusted net loss of $1.7 million or negative $0.14 per share in the prior year quarter. Restaurant level operating profit as a percentage of sales was 18.2% compared to 17.3% in the prior year quarter. Adjusted EBITDA was $5.5 million as compared to $2.7 million in the prior year quarter. At the end of the fiscal second quarter, we had $69.7 million in cash, cash equivalents, and investments with no debt. Lastly, I'd like to update and reiterate the following guidance for the fiscal year 2026. We now expect total sales to be between $333 million and $335 million. We expect to open 16 new units, maintaining an annual unit growth rate above 20%, with average net capital expenditures per unit continuing to approximately $2.5 million. We now expect G&A expenses as a percentage of sales to be approximately 12%, excluding litigation expense. We expect full-year restaurant-level operating profit margins to be between 18% and 18.5%. And with that, I'd like to turn it back over to Jim.

Hajime Uba, CEO

Thank you, 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.

Operator, Operator

And the first question comes from Andrew Charles with TD Cowen.

Andrew Charles, Analyst

I was a bit surprised following the big 2Q same-store sales beat that revenue guidance was inched up. You're looking at consensus forecast; it looks like you're blessing the back half at the midpoint. So does that reflect conservatism in the back half of the year? Or perhaps you can comment on what you're seeing with the new store productivity as well?

Hajime Uba, CEO

Thank you, Andy, for your first question. But please allow me to speak in Japanese.

Benjamin Porten, SVP, Investor Relations and System Development

Andrew, this is Ben. The guidance we provided takes into account the better-than-expected performance of Q2. However, considering the ongoing war and its uncertain outcome, we believe it is wise to include the positive results from Q2 but refrain from making further extrapolations. This approach is not about being conservative or pessimistic; it's simply about exercising prudence.

Andrew Charles, Analyst

Okay. Fair enough. And then curious, what drove the improvement in mix to roughly flat? What are you seeing there in terms of attachments or beverages, etc., that helped improve that performance?

Hajime Uba, CEO

Given the current circumstances of the ongoing war and the uncertainty regarding its outcome, we believed it was wise to include the positive results from Q2 in our guidance but not to make assumptions beyond that. This is not indicative of a conservative or pessimistic outlook; it's simply a cautious approach. Andrew Charles, Analyst, asked about the factors contributing to the improvement in mix to roughly flat. He was inquiring about what aspects, such as attachments or beverages, contributed to that performance improvement.

Benjamin Porten, SVP, Investor Relations and System Development

The biggest factor is that our guests are enjoying more dishes per person. We believe this indicates the success of our intellectual properties. When we present compelling offerings, people are more inclined to go for that 15th dish or reach the spending limit for our promotions.

Andrew Charles, Analyst

And Jeff, all the best in your new role.

Operator, Operator

The next question comes from the line of Todd Brooks with Benchmark StoneX.

Todd Brooks, Analyst

Congrats on a really great quarter. And Jeff, best of luck in your next stop here. So 2 questions, if I may. One, you talked about the margin leverage in this business and kind of the ability to claw your way back towards a 20% restaurant-level operating margin without any sort of tariff relief. I think at a recent conference, Jimmy, you talked about some successful negotiations with some suppliers. We saw outsized labor leverage here. I guess, where are we in that journey? And when would you kind of think Kura has the ability to get back to that 20% level?

Hajime Uba, CEO

You mentioned the margin leverage in this business and the potential to reach a 20% restaurant-level operating margin even without tariff relief. At a recent conference, Jimmy discussed some successful negotiations with suppliers, and we noticed significant labor leverage. Where are we in that process, and when do you expect Kura to return to that 20% level?

Benjamin Porten, SVP, Investor Relations and System Development

Todd, this is Ben. We are very pleased with the outcome of the negotiations between our suppliers. However, we have encountered higher-than-expected inflation in some of our seafood inputs, which is separate from tariffs. As a result, the benefits of Jimmy's negotiations have largely been nullified. We believe that thanks to these negotiations, we can maintain our expectation of approximately 30% for cost of goods sold for the full year, but we do not anticipate any margin improvement. Looking to next year, as Jimmy noted, we expect an additional 50 basis points of leverage from the robots. Additionally, the split between new and existing markets, which we previously stated as 50-50, has now shifted more in our favor to 55-45. These new markets do not impact our existing sales and will provide a tailwind for fiscal 27. Overall, new markets tend to perform better, and considering all factors, we are confident in our ability to return to the 20% margin without tariff relief.

Todd Brooks, Analyst

In the near future. Perfect. For my follow-up question, I'd like to return to the topic of future IP partnerships you mentioned earlier. Could we revisit those details regarding the upcoming partnerships? As we approach the end of April and consider the previous year's IP scenario, can you remind us what we are comparing this to? I would appreciate a qualitative overview of the strength of the future partnerships in contrast to what Kura achieved last year.

Benjamin Porten, SVP, Investor Relations and System Development

Got it. Todd, this is Ben. The projects we have lined up after Jujutsu Kaisen include Tamagotchi, which is celebrating its 30th anniversary. Additionally, we have a partnership with the video game Honkai Star Rail. To answer your question, yes, at the end of April, we will no longer be comparing against a period with a lack of IPs. Starting from the last week of April through May, we had other strong partnerships.

Operator, Operator

The next question comes from the line of Jeremy Hamblin with Craig-Hallum.

Jeremy Hamblin, Analyst

Congrats on the strong results. I want to revisit just the tariff ruling and in terms of thinking about, obviously, some volatility on sourcing potential for freight costs to be passed through as well given the war. But just in terms of understanding the tariff aspect of your food cost that's embedded here, what's the timing where you would expect, given your kind of forward contracts to potentially have some benefit, all else being equal, are we looking at kind of the June timeframe, just given the change in the global tariff rate?

Hajime Uba, CEO

So I'm happy to answer this question.

Benjamin Porten, SVP, Investor Relations and System Development

Jeremy, this is Ben. In response to your point, we do have forward contracts for some of our proteins. Since our range is quite broad, the contracts don’t all expire at the same time; they overlap. Therefore, we don't anticipate a significant shift at any one moment. It's also important to note that although some tariffs were reduced, they were replaced by others, resulting in only minor relief for us. This has been further offset by rising fuel costs and inflation in our protein basket.

Jeremy Hamblin, Analyst

Got it. So with that, I wanted to talk about kind of technology investments that you guys have been making, which have had nice success, the reservation system, robotic dishwashing. In terms of other labor initiatives because it looks like you guys have made some really nice progress, tremendous progress on the labor front. Can you talk about with so many tools now available and you guys have really been an industry leader in making technology investments to help make your business operations more efficient? Can you just talk about some of these tools that are available, whether they're kind of AI generative tools to help with labor scheduling or otherwise that provide some opportunity on a go-forward basis, whether it's in FY '26, but more likely in the future, just to potentially really refine the business model?

Hajime Uba, CEO

Can you discuss the various tools currently available and how your leadership in technology investments has improved your business operations? Specifically, could you elaborate on AI generative tools that assist with labor scheduling or other opportunities that could enhance your business model moving forward, potentially in FY '26 or beyond?

Benjamin Porten, SVP, Investor Relations and System Development

Jeremy, to update you on the robotic dishwashers, we plan to complete the installation of the first ten by the end of this month. We are pleased with the progress and happy to share that we have received approval for American use of the Sushi slider technology mentioned in previous calls. This will be limited to new store openings, and we don’t anticipate a direct reduction in headcount as we do with the robotic dishwashers. Instead, this presents a margin opportunity, particularly for high-volume restaurants on weekends. Regarding technology, we are concentrating on improving food quality and consistency, while also exploring guest-facing technologies that enhance efficiency and fun, which we believe will significantly drive traffic moving forward.

Hajime Uba, CEO

We anticipate that the robotic dishwashers will provide a chance for improving margins, particularly in high-volume restaurants during weekends. Regarding technology, we are concentrating on ways to enhance food quality and consistency. Additionally, we are beginning to investigate more guest-facing technologies that aim to boost efficiency and add an element of enjoyment, which we view as a significant opportunity for increasing traffic in the future.

Benjamin Porten, SVP, Investor Relations and System Development

Yes. It's quite surprising how significant the progress has been regarding the ease of creating specialized tools for our business. We have many exciting possibilities ahead. One clear application would be to focus on improving the batting average of our intellectual property collaborations, which we would be very enthusiastic about.

Jeremy Hamblin, Analyst

Great. And best wishes to the team and Jeff on his next endeavor.

Operator, Operator

The next question comes from the line of Jeff Bernstein with Barclays.

Anisha Datt, Analyst

This is Anisha on behalf of Jeff Bernstein. Before my question, I wanted to thank Jeff for 4 years of collaboration and wish him all the best going forward. As you think about bringing a new CFO, what key capabilities or prior experience are most important given Kura's next phase of growth, particularly around unit development, capital allocation or systems as the business continues to scale?

Hajime Uba, CEO

This is Anisha on behalf of Jeff Bernstein. Before my question, I wanted to thank Jeff for four years of collaboration and wish him all the best going forward. As you consider selecting a new CFO, what key skills or prior experiences do you think are most critical for Kura's next phase of growth, especially concerning unit development, capital allocation, and systems as the business continues to expand?

Benjamin Porten, SVP, Investor Relations and System Development

Yes. Anisha, this is Ben. Guest has been a great partner for us. We have high expectations for the role and are looking for someone who can meet those expectations. Our Nominating Committee is currently working on this. I personally would appreciate someone as charming and charismatic as Mr. Uttz. Working with him has been enjoyable. We are not rushing to fill the position just for the sake of filling it. We understand it's a very important role and will give it the proper attention it deserves.

Unknown Analyst, Analyst

Great. And as a follow-up, you've guided to around 20% unit growth for fiscal '26. So looking beyond that, what gives you confidence that a similar growth rate is sustainable into fiscal '27? And what key guardrails are most important to preserve as the system scales?

Hajime Uba, CEO

We have really enjoyed working with him. We're not in a hurry to fill the position just to fill it. We understand that it is a very important role, and we will ensure it receives the necessary attention. As a follow-up, you've projected about 20% unit growth for fiscal '26. What gives you confidence that a similar growth rate can be maintained into fiscal '27? What key factors are essential to keep in mind as the system expands?

Benjamin Porten, SVP, Investor Relations and System Development

As it pertains to fiscal '27, we already have our pipeline established. We are very confident in our ability to achieve 20% unit growth for that year. Regarding factors that could limit our growth, we will assess our new units. If they do not meet our expectations or are below the average system performance in terms of unit economics, we would rethink our growth speed. However, as Jimmy mentioned earlier, fiscal '25 has been one of our strongest years recently, and fiscal '26 is also looking very positive. We are pleased with this progress and aim to sustain the 20% unit growth as long as possible. Nevertheless, we want to ensure that this target does not dictate our decisions. We continuously evaluate our approach and are not blindly chasing a number. Should conditions change, we want to remain adaptable. Given our current visibility, we feel optimistic about achieving that 20%.

Operator, Operator

The next question comes from the line of Sharon Zackfia with William Blair.

Sharon Zackfia, Analyst

I have two questions. First, Jimmy mentioned slightly positive comps for the year, which you could achieve with no comparisons for the rest of the year. I understand there is geopolitical uncertainty, but is there anything in the business that indicates you won't be able to maintain positive comps for the remainder of the year?

Hajime Uba, CEO

I have two questions. The first is regarding your earlier comment about slightly positive comparisons for the year. You mentioned that you could achieve that even without any comparisons for the rest of the year. I understand there is geopolitical uncertainty involved. However, is there anything in the business that indicates you might not be able to sustain positive comparisons for the remainder of the year?

Benjamin Porten, SVP, Investor Relations and System Development

So Sharon, I'm sure you remember the difficult situation a couple of years ago when we raised our guidance, only to have to lower it soon after. This experience has led us to adopt a more cautious approach in providing guidance. Given the current uncertainty with the President's deadline, it seems unwise to make predictions too far ahead. The guidance we provided is based on what we are observing so far and what we are confident we can achieve.

Hajime Uba, CEO

We had a traumatic and unfortunate experience a couple of years ago when we raised our guidance, only to have to lower it shortly after that. This has led us to adopt a more conservative approach in how we provide guidance. Given the current situation with the President's deadline and the uncertainty surrounding it, we believe it's unwise to make predictions beyond our current visibility. Our guidance is based on what we have observed so far and our confidence in meeting those expectations.

Benjamin Porten, SVP, Investor Relations and System Development

And we're pleased with how the quarter is going so far.

Hajime Uba, CEO

Knowing today that the President has a deadline and we don't know what's going to happen, it just seems irresponsible to get ahead of ourselves. The guidance reflects what we're seeing to date and what we're confident that we can achieve. And we're pleased with how the quarter is going so far.

Benjamin Porten, SVP, Investor Relations and System Development

We are pleased with how things are proceeding.

Sharon Zackfia, Analyst

Okay. Second question is it may have been causal or may have been coincidental, but it certainly felt like the company got a lot more disciplined around G&A when Jeff joined the company. And I guess I'm curious, like do you think now that's part of the muscle memory of the company and ingrained that you will seek G&A leverage on an ongoing basis even as Jeff departs. And again, sorry, I see you go, Jeff.

Jeff Uttz, CFO

Thanks, Sharon. I mean I'll let Jimmy and Ben address going forward. But we made a lot of strides. I'm proud of the team. I was fortunate to be in the driver's seat for the G&A reduction and kind of lead the charge, but the team really stepped up and over 400 basis points in just over 3 years is quite a bit when you kind of multiply that by the trading multiples and all that is quite a bit to our valuation that I'm quite proud of. Going forward, as Jimmy said earlier, as they search for a new CFO, they're not going to rush it. I hope that the new CFO continues to lead this to a single-digit G&A at some point, as I have promised in the past.

Hajime Uba, CEO

The team has done an impressive job reducing general and administrative expenses by over 400 basis points in just over three years, which positively impacts our valuation. As mentioned earlier by Jimmy, while searching for a new CFO, we will take our time in the decision-making process. I hope the new CFO can help us bring G&A down to single digits, as I have previously committed.

Benjamin Porten, SVP, Investor Relations and System Development

Jeff has established a clear and sustainable strategy for us, and we expect to continue optimizing our general and administrative expenses. This will be a key priority for whoever takes on the CFO role. While I would like to see my salary increase, we recognize there are more responsible ways to allocate our resources. This is something our investors expect from us and is part of our guidance, so Jeff's departure won't affect that.

Operator, Operator

The next question comes from the line of Mark Smith with Lake Street Capital Markets.

Mark Smith, Analyst

I wanted to dig into the comp just a little bit. I'm sorry if I missed any update on this. But can you guys speak at all to March? And maybe as we saw gas prices rise, any changes in consumer behavior and potentially in the past, if gas prices have had a significant impact on your consumer, whether it be the plates that they eat or traffic trends?

Hajime Uba, CEO

I wanted to ask about the comparable store sales a bit more. I'm sorry if I've missed any updates on this. Can you provide any insights about March? Also, with rising gas prices, have you noticed any changes in consumer behavior? In the past, gas prices have significantly affected your customers, whether in what they purchase or their shopping habits.

Benjamin Porten, SVP, Investor Relations and System Development

So as Jimmy mentioned earlier, we're pleased with how the quarter-to-date is progressing. Regarding gas prices, I was in California where they were $6. Whether we're discussing Kura or any other company, it's optimistic to believe that this wouldn't affect consumers. That said, we are satisfied with our performance, and that sums up our current situation.

Mark Smith, Analyst

Okay. Last question for me is just around the cadence of openings as we look at the back half of the year, the remaining restaurants to open. Will these be more heavily? I know you've got 4 open, but should we look for the rest of those kind of in Q4? Or can you squeeze more in here in Q3 or even early in Q4?

Hajime Uba, CEO

It would be optimistic to believe that this situation won't affect the consumer. However, we are satisfied with our performance. As for the pace of new openings in the latter half of the year, we currently have four opened. Should we expect to see the remaining restaurants primarily in the fourth quarter, or is there a possibility of opening more in the third quarter or even early in the fourth quarter?

Benjamin Porten, SVP, Investor Relations and System Development

There are several stores we plan to open in Q3, but for planning purposes, we believe it's reasonable to expect more activity in the second half of the year, specifically in Q4 compared to Q3.

Operator, Operator

The next question comes from the line of Jim Sanderson with Northcoast Research.

James Sanderson, Analyst

Jeff, best of luck in your new opportunity. I wanted to go back to seafood inflation and more broadly food costs. Is there any concern that we're going to start seeing or hearing about fuel surcharges or incremental invoice impacts from aviation fuel increases or diesel fuel in the next couple of quarters?

Jeff Uttz, CFO

Jim, it's Jeff. I've been really deep into this as I finish up here really watching this. That is a possibility. Fuel surcharges are something that the delivery companies like to impose. I did ask our supply chain team. We haven't seen a lot of it lately, just a handful, but that is a possibility. It does happen, obviously, when fuel goes up. We push back on those. And I see I've had these before at other companies, and I don't just accept them. I push back and say, look, that's the cost of doing business. If you want to adjust your prices, go ahead, but they typically don't. And they will usually allow you to cross out those line items on the invoice. And I've been pretty successful with that in the past. That being said, as Jimmy mentioned earlier, there's just a lot of puts and takes in food cost right now with what's going on in the world. And that's why we've kept our guidance at the 30% number for the year. We think with all the negotiations, minus anything that's going on with fuel and delivery costs and all that, we remain pretty confident in that 30% number as to where we sit right now for the year.

Hajime Uba, CEO

I've been successful in managing those line items on the invoice in the past. However, as Jimmy mentioned earlier, there are many factors affecting food costs right now due to global circumstances. This is why we've maintained our guidance at the 30% figure for the year. Despite the ongoing negotiations and the issues related to fuel and delivery costs, we remain quite confident that we can achieve that 30% target for the year.

Benjamin Porten, SVP, Investor Relations and System Development

To build on Jeff's comment, we take pride in maintaining our cost of goods sold at 30%, considering the circumstances. In our Q2 comparisons, half of that is due to increased traffic. We view this as confirmation of our strategies. The 4.5% effective pricing we have implemented as of November results in about $1 additional per person. We recognize that our direct competitors, the independently owned sushi restaurants, cannot sustain their operations by simply raising prices by one dollar per person. Although this situation is challenging, it ultimately benefits us. As additional pressures emerge, it may not be easy, but it will again be advantageous for us.

Hajime Uba, CEO

The traffic increase validates our strategies. The effective pricing of 4.5% that we have implemented as of November translates to approximately $1 per person. Our direct competitors, the independently owned sushi restaurants, simply can't sustain their operations by charging just one extra dollar per person. While this situation isn't enjoyable, it benefits us. As additional pressures emerge, it may not be pleasant, but it will ultimately benefit us.

Benjamin Porten, SVP, Investor Relations and System Development

And we're really happy that we feel there is no need to take further prices as we look at the year now.

James Sanderson, Analyst

Okay. And that assumes about 4%, 4.5% for the fiscal year for price?

Hajime Uba, CEO

We feel confident as we look at the year ahead and believe there is no need to implement additional price increases.

Benjamin Porten, SVP, Investor Relations and System Development

It will be slightly below 4% for the full year.

James Sanderson, Analyst

Last question for me. I think last year, you reported about a 500 basis point negative impact because of wildfires and other issues. If we peel that off the 8.5% the comp you reported, is that a good run rate for where you think you are trending March, April to date?

Hajime Uba, CEO

It will be a little bit below 4% on a full-year basis. Last question for me. I think last year, you reported about a 500 basis point negative impact because of wildfires and other issues. If we peel that off the 8.5% the comp you reported, is that a good run rate for where you think you are trending March, April to date?

Benjamin Porten, SVP, Investor Relations and System Development

Ben, unfortunately, we faced weather challenges this year. The comparisons are favorable, but we did experience significant winter weather that affected our sales. Therefore, the impact we originally considered to be a 400 to 500 basis point boost is actually more like a 200 basis point boost.

James Sanderson, Analyst

Okay. Okay. So again, maybe I can ask it one last. How should we think about the performance in the back half relative to the guidance, low single digits, just kind of bridging that gap?

Hajime Uba, CEO

The comparisons are strong, which might not be immediately clear, but we experienced considerable winter weather that affected our sales. So the 400 to 500 basis points isn't a true tailwind this year; it's more like a 200 basis point tailwind. James Sanderson, Analyst, asked how we should view the performance in the second half compared to the guidance of low single digits, looking to connect the dots on that.

Benjamin Porten, SVP, Investor Relations and System Development

We prefer not to provide quarterly guidance due to the various factors at play, and we believe this is not the right time to do so. However, we did give an update on our guidance at the start of this call, which reflects everything we have observed so far.

Hajime Uba, CEO

We don't like to make it a practice of giving quarterly guidance. Given all the moving parts, we feel it's especially not a good time to try to give quarterly guidance. But we did provide a guidance update at the beginning of this call and all that incorporates everything that we've seen to date.

Benjamin Porten, SVP, Investor Relations and System Development

And to reiterate, we're happy with how Q3 has performed so far.

Operator, Operator

The next question comes from the line of George Kelly with ROTH Capital Partners.

George Kelly, Analyst

First, Ben, in response to one of the earlier questions, you mentioned there being opportunity for tech enhancements around food quality and consistency. I don't know how much you're going to want to say on today's call, but can you provide a little more detail just on where you think there could be opportunity there?

Hajime Uba, CEO

In response to one of the earlier questions, you mentioned opportunities for technology improvements in food quality and consistency. Could you share more details on where you see those opportunities?

Benjamin Porten, SVP, Investor Relations and System Development

So the two items we are currently focused on include managing our broth. We prepare all our broth from scratch every morning. If kept warm, it evaporates, leading to a more concentrated and bitter flavor. We have technology from Japan that helps keep it fresh throughout the day. The other item we are developing is related to our sear station for the seared mayo salmon, which we currently do by hand. We are working on automating this process, which will improve consistency and potentially provide some labor savings, but the primary focus is on enhancing food quality.

George Kelly, Analyst

Okay. Helpful. And then 2 other quick ones. litigation expense, what are your expectations for that in the coming quarters? Should it stay kind of consistent with what you just did? I think it was $1.2 million in the quarter? And then second question on labor. I may have missed it, but did you provide more specific like an updated guide for the year on labor? And that's all I had.

Hajime Uba, CEO

Sure. Here’s the rewritten earnings call remark: What are your expectations for litigation expenses in the upcoming quarters? Should it remain consistent with what you reported, which I believe was $1.2 million for the quarter? Additionally, did you provide a more specific updated guidance for labor for the year? That's all I had.

Jeff Uttz, CFO

I will address the litigation issue first, and then Jimmy can discuss the labor aspect. Regarding the litigation, this is unfortunately a common downside of operating in California. Any restaurant companies in this region tend to face lawsuits related to wage and hour matters, no matter how well-prepared their systems may be. My hope is to avoid lawsuits entirely because I believe our systems are very strong. However, it's a reality in California, and it's unfortunate. I wish I could say that these issues are resolved, but we can't be certain. I can, however, assure you that our employment practices concerning wage and hour laws are among the best I've encountered, but it's a challenge we can't escape in California.

Hajime Uba, CEO

My expectations are to never be sued because I believe we are very well-prepared. Unfortunately, these situations occur in California, and it's a regrettable reality. I wish I could say they are resolved, but we simply don’t know. However, I can guarantee that our employment practices, particularly regarding wage and hour laws, are among the best I have encountered, yet it's something we cannot completely avoid in California.

Benjamin Porten, SVP, Investor Relations and System Development

Regarding labor, we do not anticipate achieving 400 basis points in leverage in the upcoming quarters. There were several unique factors in Q2 that resulted in that 400 basis points. However, we believe that for Q3 and Q4, we can improve labor year-over-year by approximately 150 basis points. We look forward to providing updates on that.

Operator, Operator

The next question comes from the line of Matt Curtis with D.A. Davidson.

Matthew Curtis, Analyst

I just had another one on the reservation system. Jimmy, in your comments, I think you mentioned that it was driving a much higher visitation rate. So just wondering if you've seen any sales lift from increased usage of the reservation system. I mean I think you guys previously said you've not been explicitly baking in any sales upside from this. I just wanted to see if this is still the case or not.

Jeff Uttz, CFO

Yes. Our internal estimate is that the reservation system has contributed about 1%. And so we're very pleased, especially given the headcount reduction's already delivered.

Matthew Curtis, Analyst

Okay, great. I have one last question. I understand there was a gap in your IP collaborations for the first two weeks of March due to some inspection issues. Could you provide more details about this and whether you believe it is likely to be a one-time occurrence or something that might happen again?

Jeff Uttz, CFO

This has actually never happened before in our history of being in the United States. And so we really had no reason to expect it. We don't expect it to happen again. We're not sure why it happened this time, but we think it's one-off.

Hajime Uba, CEO

Benjamin Porten, SVP, Investor Relations and System Development

Although we weren't pleased with what occurred, we don't consider it a significant setback since the primary opportunities from the IP collaborations typically arise in the first two weeks. If we faced any delays, they were just postponed by two weeks. We find it regrettable, but it’s not as large of a hurdle as it may seem. To emphasize, we are satisfied with Q3.

Operator, Operator

The next question comes from the line of Jon Tower with Citi.

Jon Tower, Analyst

Just curious, I noticed that you guys during the quarter did a sushi lunch combo. I think it was $13.99. And it wasn't something that's seen before, but I think it's something you've done in the past, just not in recent memory. So I'm curious, one, how consumers responded to it? Two, did it end up impacting your mix at all or traffic during that lunch period? And is this also a sign of something that you feel comfortable using again in the future?

Hajime Uba, CEO

Just curious, I noticed that during the quarter you introduced a sushi lunch combo for $13.99. I don't recall seeing this before, though I believe it's been done in the past. I'm interested in how consumers responded to it, whether it influenced your sales mix or traffic during lunch, and if you feel comfortable using this option again in the future.

Benjamin Porten, SVP, Investor Relations and System Development

This is something that we've done every winter. We usually have some sort of combination with our soups and noodle dishes. We believe they're really good, and we want to provide people opportunities to try them. It has an effect, but it's not a significant driver. We will likely do something similar in the summer as well, not for soups, but we don't expect it to be a significant driver.

Hajime Uba, CEO

This is something that we've done every winter. We usually offer a combination of our soups and noodle dishes. We believe they're really good, and we want to give people opportunities to try them. It has an impact, but it's not a significant change. We will likely do something similar in the summer, although not for soups, and we don't expect it to be a significant change.

Benjamin Porten, SVP, Investor Relations and System Development

And Jon, it's great to see how successful the IPs have been working. However, we don't want to rely entirely on IPs. We've been focusing on a lot of LTOs, even going beyond our core reserve. For example, in March, we launched a campaign called Wagyu of the Seas, featuring very high-quality Toro. We have a solid calendar planned with various reasons for customers to visit us.