Earnings Call Transcript - KRUS Q3 2024

Operator, Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA Fiscal Third Quarter 2024 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 Hajime Jimmy Uba, President and Chief Executive Officer; Jeff Uttz, Chief Financial Officer; and Benjamin Porten, SVP, Investor Relations and System Development. And now, I would like to turn the call over to Mr. Porten.

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 third quarter 2024 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 the 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.

Hajime Jimmy Uba, CEO

Thanks, Ben, and thank you to everyone for joining us today. As we mentioned in our pre-release announcement, sales in the fiscal third quarter did not meet our expectations. This sales decline, which began mid-April, was sudden and unexpected, and I'm proud of the efforts that our team members have made, allowing us to maintain a restaurant-level profit margin of just 20% despite sales deleverage. We believe the current headwinds are macro-driven and transitory, but with the difficulty in predicting the duration of macroeconomic shifts, we believe the most prudent course of action is to position ourselves to be able to continue to deliver strong financial results and uninterrupted progress on our core strategic goals of at least 20% annual unit growth, G&A leverage, and operational excellence regardless of the broader economic environment. While the third quarter results were unexpected, nothing has changed about Kura Sushi's tremendous potential. Total sales for the fiscal third quarter were $63.1 million, representing comparable sales growth of 0.6% and traffic growth of 0.3%. We believe the comp deterioration over the prior quarter was driven by the overall macro environment and consumer sentiment, particularly in California, as well as a degree of cannibalization as we execute our planned strategy of infilling existing markets. The impact of cannibalization we have seen was not unexpected and is a necessary result of infilling, and we expect financial benefit from infilling synergies. At the same time, we continue to take a thoughtful approach within infills for the purpose of managing their impact on comparable sales. As we exit the current macro environment, we expect to return to delivering positive comparable sales through the ongoing incorporation of new learnings into our site selection process in combination with the balancing of infill ratios for our pipeline. As context for the softness in California, in past earnings calls, we had mentioned our expectations that the FAST Act will be a tailwind for us as wage pressures would prompt more aggressive pricing among competitors and highlight the value that Kura Sushi offers. What we have seen instead is a general perception that restaurants as a category have become expensive introducing industry-wide pressures regardless of a given restaurant's relative value. Despite this shift in consumer behavior, I'm pleased that we were able to maintain both positive comparable sales and traffic for the quarter. Turning to restaurant-level expenses, our cost of goods sold improved by 80 basis points to 29.2% as a result of ongoing supply chain efforts. Labor as a percentage of sales increased from the prior-year quarter's 29.2% to 32.3%, largely due to sales deleverage, increased pre-opening labor costs, and wage increases. Other costs rose by 190 basis points to 14.4% due to sales deleverage, general inflation, and an increase in pre-opening expenses. To offset increased costs, we took 1% pricing in May and 1.7% in July for current effective pricing of approximately 4%. Additionally, we believe we have opportunities for better cost management in the near future through incremental operational efficiencies in hourly labor. We also expect to achieve meaningful reductions in pre-opening expenses, primarily labor and the travel costs associated with management trainees by taking advantage of the opportunities created by infilling existing markets. I'm very proud that we were able to continue to leverage our G&A year-over-year in spite of lower-than-expected sales. Third quarter G&A as a percentage of sales was 14%, which is a 20 basis point improvement year-over-year. As I mentioned earlier, continued G&A leverage regardless of macro pressures is a major priority. We believe G&A leverage opportunities in infill markets will play a very meaningful role in our cost management and G&A reduction strategies. In fiscal '25, we plan to continue our unit growth rate of at least 20%, but also expect that we will be able to manage these new restaurants with our existing area management team. Additionally, as we plan to open several new restaurants in existing markets in fiscal '25, this will allow us to grow on the talent pool developed by local restaurants and meaningfully reduce our third-party recruiting agency fees. Moving on to development, we opened four units in the fiscal third quarter: Waterford Lakes, Florida; Atlanta, Georgia; Scarsdale, New York; and Roseville, California. Subsequent to the quarter-end, we opened a restaurant in Lake Grove, New York, marking the 14th unit of our fiscal year and the high-end of our new unit guidance range for FY '24. We currently have six units under construction, positioning us for a strong start to fiscal '25. Turning to tech initiatives, I'm pleased to announce that we have completed the rollout of our smartphone mobile ordering system and the in-store testing for the additional feature that allows guests to earn coupons with side-menu items is on track to begin shortly. The Sushi Slider is undergoing US certification, and we are making improvements to the robotic dishwasher in preparation for the final mass production model. I'm exceptionally pleased to be able to announce some new technologies today. We're currently working with Japan to implement a reservation feature for the first time. This is a massive upgrade from our current remote check-in system, giving guests far more control over their dining experience. Our long wait times are harder for our guests when they decide to dine with us, and we believe this removes that hurdle. With this system, guests can identify the busiest times and avoid them by making reservations outside of peak demand, which we believe is a traffic opportunity particularly on weekends. This technology is accompanied by an automated seating system, reducing the workload of our front of house employees. These new features are our top priority, and we are pushing to roll them out as quickly as possible. It is unfortunate that the macro environment has weakened, but consumer confidence always bounces back. We continue to regularly set new guest survey records, and so we know that our guests like Kura as much as they always have. As restaurant visitation habits normalize, we know that guests will put us at the top of their list because of the exceptional value we have always offered. In the meantime, we are focused on driving incremental operational efficiencies at our restaurants and reducing other costs so that we can continue to post strong unit-level economics and leverage G&A regardless of the overall macro environment. These improvements will carry over as consumer strength returns, and we are tremendously excited to see the new heights we'll be able to achieve as a result. I would like to close by expressing my gratitude to each of our team members for their tireless efforts at our restaurants and our support center. Thank you. Jeff, I'll turn it over to you to discuss our financial results and liquidity.

Jeff Uttz, CFO

Thanks, Jimmy. For the third quarter, total sales were $63.1 million as compared to $49.2 million in the prior-year period. Comparable restaurant sales performance compared to the prior-year period was positive 0.6% with regional comps of positive 7.3% in our West Coast market as compared to 8.7% in the prior quarter and negative 3.9% in our Southwest market as compared to flat in the prior quarter. Comp pressures in the Southwest were expected due to the openings of Webster and Euless, while California's deceleration was completely unexpected. Turning to costs. Food and beverage costs as a percentage of sales were 29.2% compared to 30% in the prior-year quarter, largely due to pricing and supply chain initiatives. Labor and related costs as a percentage of sales were 32.3% as compared to 29.2% in the prior-year quarter. This increase was largely due to sales deleverage, increased training costs associated with new store openings, and wage increases. Occupancy and related expenses as a percentage of sales were 6.8% as compared to the prior-year quarter's 7.2%. Depreciation and amortization expenses as a percentage of sales increased to 5% compared to the prior-year quarter's 4%, largely due to additional newly opened units as well as the accelerated depreciation of assets being replaced due to planned remodels. Other costs as a percentage of sales increased to 14.4% compared to 12.5% in the prior-year quarter, due mainly to pre-opening costs associated with a greater number of store openings as well as general cost inflation. General and administrative expenses as a percentage of sales decreased to 14% compared to 14.2% in the prior-year quarter due to sales leverage, which is partially offset by incremental public company costs associated with our first year of SOX 404(b) compliance and recruiting and travel costs associated with new unit openings. Note also that the current quarter G&A expense includes a litigation accrual of $0.6 million. Operating loss was $1.2 million compared to operating income of $1.3 million in the prior-year quarter. Income tax expense was $60,000 compared to $41,000 in the prior-year quarter. Net loss was $0.6 million or $0.05 per share compared to net income of $1.7 million or $0.16 per share in the prior-year quarter. Adjusted net income was $4,000 or $0.00 per share compared to adjusted net income of $1.7 million or $0.16 per share in the prior-year quarter. Restaurant-level operating profit as a percentage of sales was 20% compared to 23.5% from the prior-year quarter. Adjusted EBITDA was $4.5 million compared to $5.1 million in the prior-year quarter. Turning now to our cash and liquidity, at the end of the fiscal third quarter, we had $59.4 million in cash and cash equivalents and no debt. And lastly, I'd like to update and reaffirm the following guidance for fiscal year 2024: We now expect total sales to be between $235 million and $237 million; our new unit opening guidance is 14 units, with average net capital expenditures per unit of approximately $2.4 million; and we continue to expect general and administrative expenses as a percentage of sales to be between 14% and 14.5%, excluding litigation accruals. With that, I will turn it back over to Jimmy.

Hajime 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. Thank you for your attention.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Jeffrey Bernstein with Barclays. Please go ahead with your question.

Jeffrey Bernstein, Analyst

Thank you very much. A couple of questions. The first one is just on the comp trends. I believe last quarter you guys had talked about strong momentum and you were happy with March. And I think you mentioned you were very happy with the early days of April, yet clearly, Jimmy, you mentioned that the full fiscal 3Q was disappointing. And I think you guys have talked about at least in the pre-announcement that it was really California, which I think you said earlier was totally unexpected. So, I'm just wondering if you can maybe walk through the cadence of trends through the quarter when you saw a, I guess, severe change in trend and your outlook on how you can perhaps turn that around if there's anything you can proactively pursue to maybe reverse the California trend versus kind of just riding out as you talked about the consumer sentiment challenges. And then I had a follow-up.

Hajime Jimmy Uba, CEO

Thank you for the question. Please allow me to speak in Japanese, and Ben can translate. In terms of the outlook, we had been optimistic about our projections during the April earnings call, as our sales results leading up to that time were very strong. You may have noticed a significant difference between the guidance we provided before the earnings call and the remarks made today compared to the previous quarter. We would like to explain some context around that. Generally, we don't provide monthly comparisons, but this time we want to illustrate the situation. At the April earnings call, early in the month, our March system-wide comparable sales were 7.3%, and California's comparable sales were 14.1%. Looking at where we ended for the full quarter, you can see how different our outlook was in early April compared to the pre-release. Regarding how we arrived at our guidance for the prior quarter, we were considering March trends, historical seasonality, and the excitement around our new units, especially Dragon Ball and the upcoming One Piece promotion in August. All these factors made us very optimistic about our annual revenue expectations. However, once we noticed the sales slowdown in late April, it felt like a setback for us. Before discussing our strategies for boosting sales, I want to summarize this situation. Based on our revenue guidance for the year, our expectations for Q4 comparable sales are negative mid-single digits to negative high-single digits. While this is unusual for us to provide, it's due to the exceptional circumstances for this earnings call. That said, as Jimmy mentioned in the opening, we are focused on achieving our core goals, which include maximizing general and administrative efficiencies, maintaining restaurant-level operating profit margins above 20%, and sustaining a unit growth rate of at least 20%. After noticing the sales slowdown in April, we implemented various cost management measures, which helped us maintain a 20% restaurant-level operating profit margin in Q3 despite the sales decline. Now that these measures are fully in place, we anticipate opportunities in Q4 and Q1. To drive sales, we hired our first VP of Marketing in April, coinciding with this period. Our current strategy focuses on making consistent, cost-effective improvements rather than aggressive discounting or large media investments. One of our primary messages is to highlight the value we provide. We have always used real crab in our California rolls, and starting in August, we will offer 100% Canadian snow crab, which is an exciting enhancement in quality. Additionally, we plan to serve larger portions of toro starting in fiscal 2025. Reinforcing the core value and high-quality ingredients we offer is a key focus of our messaging. In terms of other sales initiatives, we are also focused on technology improvements. We have completed the rollout of smartphone ordering across all our restaurants. We are about to begin testing a system that allows guests to earn prizes via the side menu, which was previously limited to sushi plates. We're also introducing a reservation system for the first time, moving beyond just a remote check-in program. This will significantly improve the dining experience. Addressing wait times is an important issue for us, as it differentiates us from many other restaurants. In summary, we are proactively managing costs and taking a careful approach to drive sales. We are not pursuing aggressive discounting for short-term gains but instead focusing on enhancing our offerings and integrating technologies that will benefit us in the long term. We acknowledge that we cannot predict how long macroeconomic challenges will persist, so we are preparing for the future. By implementing the steps we are taking, we believe we can continue to optimize our operations and maintain strong restaurant-level profit margins. While we can't control the external environment, we can control our offerings. People enjoy sushi, and it's not something they typically make at home, so we are committed to being the first restaurant that comes to mind when they want to enjoy sushi.

Jeffrey Bernstein, Analyst

Understood. I appreciate the details provided. It appears that in March, you achieved a 7.3% comparable sales increase. For the entire quarter, the results were slightly positive. However, it seems that April and May experienced declines. Now that we are in July, it looks like you're projecting a mid- to high-single digit decline for the full fiscal fourth quarter, despite what seems to be a favorable comparison. Could you please provide any details on the comparable sales for April, May, and June, or any additional insights to help us understand the trends following the positive 7.3% in March?

Hajime Jimmy Uba, CEO

We prefer not to regularly disclose monthly comparisons, but as Jimmy pointed out earlier, we have shared the figures for the first month and the entire quarter. This provides insight into how the remaining quarters differ significantly. Additionally, we have outlined our expectations for the fourth quarter comparisons.

Jeffrey Bernstein, Analyst

Understood. Okay. And then my follow-up is just on the unit growth side of things. Could you clarify if there are any learnings regarding markets where you believe you might have reached penetration? Is it possible that some of the softness in certain California markets is due to having achieved a certain level of penetration? Also, could you elaborate on what you mentioned about fiscal '25 regarding the mix of new versus existing markets? I didn't fully catch that, so I was hoping you could provide clarity on the unit outlook and thoughts around penetration. Thank you.

Hajime Jimmy Uba, CEO

To provide some insight, the discussion about the balance of new and existing markets is important. Opening a second unit in a single-unit market can create competition that affects the sales of the first restaurant more significantly than adding a ninth unit in a market with eight existing ones. We need to consider the distribution of new and existing markets and the characteristics of those existing ones, such as whether they are single-unit or more established markets. For fiscal year 2025, we anticipate a ratio of about 40-60 in favor of new markets, which is an increase compared to this year. However, these processes take time, and fiscal year 2026 will allow us to better utilize what we've learned. As for market penetration, I don't believe we have fully penetrated any of these markets yet, but we have gained insights. For example, we initially thought that a 30-minute distance would minimize cannibalization, but we've discovered that some restaurants see a consistent distance of 45 minutes. These findings are specific to each unit and market, and we continue to learn and adapt.

Jeffrey Bernstein, Analyst

Appreciate all the color. Thank you very much.

Hajime Jimmy Uba, CEO

Thank you.

Jeff Uttz, CFO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Jon Tower with Citi. Please proceed with your question.

Jon Tower, Analyst

Great. Thanks for taking the questions. Maybe I'll get back to the comp commentary. I appreciate the color you provided in the West and California. But can you speak to the rest of the country as well? Obviously, you've got a good amount of stores outside of California in the Southwest. I'm just curious how those stores performed during the period.

Hajime Jimmy Uba, CEO

So, considering our comp base and how quickly we've expanded into numerous markets, many units located outside California and Texas that have been open for 18 months are now introducing their second or third units in their respective markets. Consequently, they are experiencing challenges related to infilling. However, this is not as significant in California or Texas. Additionally, the macroeconomic environment is affecting all regions, not just California. Nevertheless, when excluding these factors, the performance has been aligned with our expectations. We are quite satisfied with the comp base and the overall results.

Jon Tower, Analyst

Okay. Maybe then go into the cannibalization point that you talked about. I can't recall it being brought up in previous calls. So, I'm just curious if you can give us some color on what's the magnitude of cannibalization that you're seeing and how long does that traditionally last for your stores? Are we talking about something where it's a drag for six months, 12 months, beyond that? I'm just curious, provide some color around that.

Hajime Jimmy Uba, CEO

The reason we are addressing this for the first time is that while cannibalization has always played a role, its magnitude has been roughly equivalent to the challenges we face with comparable store sales. We have always managed to counterbalance that with our strong performance in California. However, with California not contributing as expected for overall comparable sales in April and May, we are now experiencing the impact of transitioning from single-unit markets to second and third unit markets, which aligns with our expectations. This topic hasn't come up previously because of our strong system-wide comparable sales. Additionally, out of the 14 units we've opened this year, 10 are in existing markets, which is a greater number than in previous years. Despite this, we still achieved positive comparable sales in the first half of the year, so it hasn't been a major focus. However, due to California's performance not meeting our expectations in the third quarter, we felt it was important to provide a comprehensive understanding of the reasons behind the comp underperformance relative to our expectations.

Jon Tower, Analyst

Okay. So, no color on the magnitude of the drag?

Jeff Uttz, CFO

The magnitude of the drag is difficult to specify because it's unique to each unit. The effect of a single market transitioning to two unit markets will differ from that of another restaurant in California that represents the 28th unit. Therefore, stating a specific impact per restaurant does not accurately reflect the situation.

Jon Tower, Analyst

Okay. Then maybe just jump on to just what happened during the quarter itself. What are you using to determine that this is more of a macro issue rather than a category- or company-specific issue? I mean, we can look at the same data you're probably looking at when it comes to put down across more of the lower-income cohorts, but that seem like other brands that cater a little bit more to the wealthier consumer have been doing relatively well, at least in the high-frequency data we can look at. So, I'm just curious, how are you able to disaggregate the difference between macro versus micro or category.

Hajime Jimmy Uba, CEO

In terms of whether this is a broader restaurant industry issue or specific to our subsector, we're awaiting further clarity as earnings reports continue to emerge throughout the summer. We are among the first to report, which limits our context. However, we believe this situation reflects macroeconomic factors rather than issues unique to Kura or Sushi. Our analysis of extensive customer data shows that guest survey scores remain as strong as ever, and in some locations, they are even stronger. Social media mentions are consistently high, and guest value perception is solid. The price increases we have implemented are modest, in the low-single digits. Our food quality has not decreased, and portion sizes as well as the overall guest experience remain unchanged. Therefore, we don't have any reason to believe that people's appetite for Kura would suddenly shift over a few weeks; that just doesn't seem plausible.

Jon Tower, Analyst

Thank you. Regarding the remainder of the year, I know you are very focused on balancing costs with sales as you approach 2025. Can you discuss the planned promotions you have? Will they hinder any opportunities to launch the promotions you had scheduled? I understand one was set to release in this fiscal fourth quarter. Will that proceed as planned, or do you intend to change that?

Jeff Uttz, CFO

You mean the One Piece collaboration?

Jon Tower, Analyst

Yes.

Jeff Uttz, CFO

Yes. No, that's still on track. That'll be rolling out August 1st.

Hajime Jimmy Uba, CEO

In our earlier comments, we emphasized that we will not be attempting anything new or massive as a last-ditch effort. We are not going to invest millions of dollars in advertising because that is not our strategy. Our focus is on cost-effective methods, whether that involves our traditional approaches or new opportunities presented by the VP of Marketing. We believe we can achieve excellent results while maintaining a similar level of spending.

Jon Tower, Analyst

Got it. Thank you very much for taking the questions.

Operator, Operator

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

Jeremy Hamblin, Analyst

Thanks for taking the questions. I wanted to ask just another one on the same store sales, just to get an appreciation for some of the regional performance. So, I think you said in March, California was up 14.1%. I don't think you gave us a Southwest market performance for that month, but I think that would be helpful. And then, just wanted to understand in terms of the guidance here for your fourth quarter of down mid-single to down high-single, what's the magnitude of change in those regional markets? Because your call out really has been in California, and I don't know if that means that the primary change is California and the Southwest markets kind of bumping along at a similar level, or if you've seen degradation kind of across regions.

Hajime Jimmy Uba, CEO

To answer your first question, the comps for the Southwest region in March were 1.8%. Regarding our expectations for Q4 comps, we are not anticipating a slowdown in sales compared to Q3. Instead, we are facing a tougher comparison from last year, which was a significant success for us. Additionally, the three most recently opened restaurants are in existing markets, which may affect cannibalization. The guidance of negative mid- to high-single digits does not suggest a decline in performance; it reflects a run rate expectation based on what we've observed so far, considering the comparisons and other factors affecting comps.

Jeremy Hamblin, Analyst

Got it. Some of your restaurant peers have been more aggressive with their pricing, especially in the California market following the change in wage laws on April 1. I’m curious how you perceive this. Do you believe there’s increased price sensitivity among companies targeting a higher education customer base that can afford to price more aggressively to counteract wage pressure? You’ve also mentioned your value proposition, stating that your prices are typically 30% to 50% lower than your sushi competitors. Is this a factor in considering whether to be a bit more aggressive, especially in that market?

Hajime Jimmy Uba, CEO

So, Jeremy, thanks for your question. This is a significant topic of discussion that is ongoing within the company. Ultimately, we believe that preserving the value proposition of Kura Sushi is very important, not just in the current climate where people are looking for discounts, but for the long-term viability of the company. Regarding the competitive pricing you mentioned, being 30% to 50% cheaper than other sushi options didn't arise overnight; it took 10 to 15 years of continuous effort to maintain lower prices while implementing measures to sustain our margin. Currently, we are implementing a pricing adjustment of approximately 4%, which we believe is necessary to maintain profitability at the levels we achieved in previous years. This pricing strategy, in conjunction with the operational improvements across our system and our technological advancements, presents a unique opportunity for Kura. We are capitalizing on this as much as we can to limit price increases and ensure we continue to provide strong value while preserving our brand identity. In response to your other question, it seems that all of us are experiencing increased price sensitivity. I know that Jimmy, Jeff, and I have adjusted our own habits as well, so I think this trend affects everyone.

Jeremy Hamblin, Analyst

Understood. I have one quick question. Your unit development pipeline and execution have been exceptional. Having six units under construction puts you on a strong path as you approach fiscal year '25. Has the performance of same-store sales affected your unit development plans at all? It seems that in addition to the six units you mentioned, you have lease agreements and/or site selection on a significantly larger number which may indicate that your unit growth could be higher in fiscal year '25. Any insights you could share on that would be greatly appreciated.

Hajime Jimmy Uba, CEO

So, at a high level, our current sales and same-store sales have not affected our growth ambitions. We believe the potential for expansion remains strong, and our growth outlook is very promising. Our enthusiasm for growth hasn't wavered. What has changed is our appreciation for our strong development team, which has a solid pipeline. We've been able to utilize the insights we've gained over the past year, particularly regarding which units to pursue and which to exclude from our pipeline. This year, we are placing a greater emphasis on cannibalization compared to previous years. As we noted earlier, predicting how long the macro environment will be challenging is difficult. However, we'll do everything in our power to deliver strong results. If conditions were to worsen significantly, it could disrupt our growth plans, but currently, there are no indications of that. We remain very enthusiastic about the fiscal '25 pipeline, and we will provide an update during our Q4 call when we offer our formal guidance, as we do each year.

Jeff Uttz, CFO

And Jeremy, it's Jeff. I just wanted to add to that. What's really important to us is maintaining the promises that we've made to our shareholder base. And one of those, as you know, is to maintain a 20% unit level growth per year. And that's what we continue to plan to do, not only just 20% unit level growth, but the other promises that we've made to maintain the 20% restaurant-level operating profit and have significant G&A leverage. And that's very important to us as a management team to make certain that we keep those promises that we've made, certainly since I've been with the company. So that's what we're going to continue to do.

Jeremy Hamblin, Analyst

Great. Thanks for all the color. Appreciate it, and best wishes.

Jeff Uttz, CFO

Thanks.

Hajime Jimmy Uba, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from Todd Brooks with The Benchmark Company. Please go ahead with your question.

Todd Brooks, Analyst

Hey, thanks for taking my questions here. Just wondering, you talked about the price increase that you took in July, 1.7%. Was that across all regions or because the consumer largely didn't kind of differentiate between concepts that took price and didn't take price, but they started voting with their feet in California and stopped going out altogether? Is the pricing more loaded in the California market since you did not take any earlier in the year?

Hajime Jimmy Uba, CEO

Generally speaking, it was system-wide. Any adjustments we made for California were related to the minimum wage increases that took effect on July 1st, something we do annually. There may be slightly higher costs in California, but they are not connected to the issue you raised; it's just the usual adjustments for minimum wage. To summarize our historical pricing approach, it has always been very consistent. We typically implement price adjustments in January and July to account for statutory wage increases. This year, for the May pricing event, we faced unexpected labor inflation and increased costs, which led us to take a 1% increase to address those additional inflationary pressures.

Jeff Uttz, CFO

Both price increases we implemented in May and July were based on a blended number for the entire system, taking into account our current menu mix. Therefore, it does not imply a uniform 1.7% increase across all items.

Todd Brooks, Analyst

Okay. Fair enough. Thanks, Jeff. Secondly, I wonder if we can talk about average check trends or what mix trends were in the quarter. I know mix has been a challenge. We thought maybe with some strength in Dragon Ball, it might help mix pull up. Can we talk about what price/mix ran in the quarter?

Jeff Uttz, CFO

Yes, the price/mix has shown improvement from the previous quarter. Overall, it was negative 0.3%, with a pricing increase of about 3.4% and a mix decrease of 3.7%. This is a notable improvement compared to the last quarter when the price/mix was negative 3%, with pricing at 3% and a mix decrease of 6%. Currently, we are not experiencing mix pressures; instead, we are benefiting from mix tailwinds.

Benjamin Porten, SVP, Investor Relations and System Development

And even if you look at a year ago, our mix was down almost 10%.

Jeff Uttz, CFO

Right. So, it's a very meaningful improvement.

Todd Brooks, Analyst

Okay. If we look across the quarter and the trends, did the mix remain relatively steady? Were consumers who were coming out still spending in a similar way in terms of the number of plates, as well as the side menu and attachments?

Jeff Uttz, CFO

Yeah. There were many major changes worth calling out in April and May.

Hajime Jimmy Uba, CEO

What we've observed is less about managing spending and more about managing the frequency of purchases, unfortunately.

Todd Brooks, Analyst

Okay. And then, the final one for me. I know we're a little ways out, but we're starting to get over half a year of experience with the new loyalty program under our belts here. In past discussions, it's iterative. You've got to build the data set before you can really start to lever it. As you're looking towards what you can do with the tool to stimulate frequency, what you can better do maybe in specific markets with segmentation if you need to attack weakness in a market like California, and then maybe using the tool to better tie in or incent people against some of the IP partnerships, where are we in that journey that we start to look at loyalty as being a frequency driver going forward? Thanks.

Benjamin Porten, SVP, Investor Relations and System Development

We see this as a tremendous opportunity. In the last call, I mentioned that Rewards members visit about 1.3 times a month, which is quite frequent. For instance, we can target our Rewards members who haven’t visited in the last 90 days and work on bringing them back to achieve that 1.3 visits per month. While the idea is straightforward, the execution can be more challenging. Our VP of Marketing has a lot on his plate, but we collaborate closely, and leveraging the Rewards program is a key focus for us. I don't want to disclose too much too soon, but we do have significant news related to the Rewards program coming up.

Todd Brooks, Analyst

Okay. Fair enough. Thanks, Ben.

Operator, Operator

Thank you. Our next question comes from the line of Matt Curtis with William Blair. Please proceed with your question.

Matt Curtis, Analyst

Hi, good evening. So, with regard to the mid-single digit to high-single digit negative comp run rate so far in the fourth quarter, just to be clear, have you seen trends actually already stabilized in this range or not? And then, when you look back at the comp slowdown in April, is there anything in terms of dayparts, demographics or days of the week that stick out to you as having been important drivers?

Hajime Jimmy Uba, CEO

We haven't observed significant changes in dayparts. Regarding sales trends to date, there haven't been any major fluctuations. Additionally, looking at the comp challenges for Q4, we've opened four locations since April, all in existing markets, which have contributed to the comp impacts.

Jeff Uttz, CFO

And also, Matt, thinking about on the first part of your question about days, Friday Lunch seems to be a little bit challenging if you had to pick out any day of the week, but that's consistent with many articles that I've been reading that the industry is seeing a lot of people not going out to lunch on Friday and Thursday has become more of a bigger day to go out. But that's really the only thing that I can think of that we've seen in terms of a particular day.

Matt Curtis, Analyst

Okay. Got it. Thanks for that. And then despite the comp slowdown, it seems like new units are still performing well. Maybe you can just give us an update on how the class of 2022 and 2023 has been doing recently in terms of new unit productivity?

Hajime Jimmy Uba, CEO

Looking at the momentum for each vintage, we are very pleased with the overall performance for fiscal '24, which aligns well with fiscal '22 and '23. The key factor is that the first unit in a market is typically much more successful than subsequent restaurants due to initial hype and customer interest. This year, we opened 10 infill locations compared to four new markets, whereas previous years focused more on new markets. Therefore, while we don't have the same initial excitement this year, the restaurants are performing according to our expectations. Fiscal '22 and '23 continue to show strong results. Performance variance primarily hinges on infill locations. Looking ahead, Kansas City and Columbus, Ohio, stand out as two key stores in our overall strategy. Although they are new markets and not typical sushi areas, they are performing exceptionally well, with lower rent and business costs. Their popularity and profitability not only showcase our adaptability but also enhance our confidence in managing the restaurant mix in our pipeline for fiscal '25, ensuring we can maintain positive comparable sales.

Matt Curtis, Analyst

Okay, great. Thanks very much.

Hajime Jimmy Uba, CEO

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of George Kelly with Roth Capital Partners. Please proceed with your question.

George Kelly, Analyst

Hey, everyone. Thanks for your questions. I want to start by discussing costs. Can you provide more details on where you identified savings? You mentioned a few examples in your prepared remarks, but could you elaborate on that regarding both general and administrative expenses and on a four-wall basis?

Hajime Jimmy Uba, CEO

Before discussing the specifics of our cost management efforts, we want to ensure everyone has a shared understanding of labor. We view labor and cost of goods sold as a combined line item, so fluctuations in labor shouldn't be seen as a direct indicator of our performance since these can vary significantly based on the regions we are expanding into. Over the past few years, we've increased our presence on the East Coast from just a couple of units to many more, and operating in that market tends to be more expensive compared to places like Texas. Therefore, it’s not unexpected that labor costs have risen. Additionally, for fiscal 2024, it’s not surprising that year-to-date labor costs are higher compared to fiscal 2023 due to the number of pre-openings and store openings, which involve associated pre-opening labor costs.

Jeff Uttz, CFO

And then, George, on the G&A side, we're continuing to execute really well there as we have in the last couple of years, continuing to have people think strategically about hires, thinking about contracts that we have. It's really the basics of what we've been doing. And we haven't changed anything on the G&A side. And I think that you can see that significant leverage that we had. I did mention there was a $600,000 litigation accrual in there as well and the number is still leveraged. So, we're hitting on a lot of cylinders when it comes to the G&A side. We're just going to continue to do that.

Hajime Jimmy Uba, CEO

In terms of the opportunities at the restaurant level, we are particularly excited about a few developments. Since noticing a slowdown in April, our executive team has made a concentrated effort to improve operations. One significant change has been the streamlining of our back-of-house operations. Previously, we operated with four main stations, but we have reduced that to three, leading to a reduction in headcount. This enhancement is notable because, unlike our technology upgrades, it doesn't rely on hardware, software, or certification, meaning there’s nothing holding us back. We have already figured out the process and are implementing it across the system. We anticipate this will become a standard part of our operations by sometime in the fourth quarter, and we are very enthusiastic about it. Looking ahead to fiscal 2025, as Jimmy mentioned earlier, while we have experienced some cannibalization due to infill, there are also compensatory benefits. For example, in infill markets, staffing new restaurants can be achieved using internal promotions, which reduces pre-opening costs significantly compared to entering new markets. This will provide a substantial advantage in terms of preopening labor costs, positively affecting our overall labor expenses. Additionally, we have several technology initiatives underway, both recently implemented and planned for the future. Regarding G&A and restaurant-level profit margins, we are very confident in our ability to sustain and leverage a 20% restaurant-level operating margin.

George Kelly, Analyst

Okay, understood. And then just one last quick one. Ben, I think you mentioned putting in place a reservation system. Can you test that? Like what does it look like if you've tested it? And how much inventory do you plan to make available to reservations?

Benjamin Porten, SVP, Investor Relations and System Development

So, yeah, this is going to be really tricky and going to occupy most of my thinking hours for the next couple of months. But this is a system that's already in place in Japan, and so it's rigorously tested from a tech perspective. That being said, working out the inventory of available seats, just the overall operations, that's going to be the harder part. We have members of the Kura Japan IT team actually coming next week specifically to work on this. It's a really, really high priority. And it is my personal responsibility to be able to give you a meaningful update on the next call. So please, look forward to that.

Hajime Jimmy Uba, CEO

One of the reasons we are excited about the reservation system, aside from it being a feature I would enjoy as a guest, is the operational efficiency it brings. This system does not require significant hardware changes, which could limit certain restaurants, nor does it need a certification process that would delay timelines beyond our control. It is something we can directly manage, and we are actively working on it as an important initiative. This is a major focus of mine, and I will be providing updates on our progress.

George Kelly, Analyst

Understood. Thank you.

Operator, Operator

Thank you. There are no further questions at this time. I would like to conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.