Hi, thanks for joining us. I'm Sharon Zackfia with William Blair, and I'm really happy to have with us today from Kura Sushi, President and CEO, Jimmy Uba, CFO, Jeff Utz, and SVP of Investor Relations and Systems Development, Ben Porton. Kura's unique experiential dining and outstanding value per plate have yielded gravity-defying metrics, with 12 straight quarters of positive traffic. From roughly 60 locations today, unit development is Kura's most meaningful driver of growth, and we expect annual expansion of at least 20%+ for the foreseeable future, which we believe translates to good visibility on revenue growth of 25%+, which makes Kura one of the fastest-growing publicly traded restaurants. We're going to have a short video that Ben will introduce, but before you get to watch the video, I, of course, have to generate website traffic.
Please go to williamblair.com and check out our complete list of research disclosures and potential conflicts of interest.
... Bases, we're a pretty unique experience, and so, I think this video will give everybody a quick idea of what our experience is like. Oh, can we turn the audio on?
... A stream of Sushi builds an exciting sense of discovery. Guests can use our tableside panels to order any of our over 140 menu items, including dishes that aren't on the belt, like ramen and tempura. Guests clear their own plates throughout their meal with our tableside slots and earn a prize for meeting dining milestones. Proprietary systems manage certain aspects of kitchen operations, from production amount to automatic disposal. Our robot-assisted operations have automated certain kitchen tasks, allowing us to simplify operations and optimize our labor costs by eliminating the need for highly trained executive chefs. Rice preparation is handled almost entirely by robots in order to ensure the greatest consistency. These systems have been honed over the last 40 years by our parent company, Kura Sushi, Inc., which operates over 500 restaurants in Japan.
We are able to offer high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives at a reasonable price due to our operational efficiency, which result in lower food and labor costs. We believe that guests love the Kura experience because of the authentic, memorable meals they cannot have anywhere else.
Great, and thanks. We're gonna do a fireside chat here, so, and then we'll do a breakout where all of you guys can ask questions. I guess first, you know, we, we always get the question as to why there is no, a national sushi, sushi chain already in the U.S., why it has been so difficult for this particular segment to scale. Oftentimes, investors seem to think it's supply chain, and that's been the issue. But I'd love to hear your perspective on why you think you have such, you know, a wide-open, competitive playing field, at this point, and really are kind of emerging as the category killer here.
Sure. I'm happy to answer this question, but please allow me to speak in Japanese. Ben is going to translate for me. Hi, so sushi has been very popular in the United States for 20-30 years. In spite of that, as you know, until Kura Sushi, there really hasn't been a national chain. There are a number of reasons for that, but the biggest would be the operational difficulty, the skill floor required to operate a sushi restaurant, and the unique training methods that develop the skill set. So for those of you in the audience who've trained under a traditional sushi chef, you will recall that learning how to wash rice is a 2-3-year training process. Learning how to make the rice balls is a 5-year training process. Obviously, extremely arduous, not conducive to chain growth.
Even for a mom-and-pop to expand to multiple units, once you've spent all this time training your employee to become, you know, a competent sushi chef, it's, for that employee, it's a much better option to break off and start your own restaurant and make much more money than to draw hourly pay. And so there are these structural reasons for, you know, the lack of chains in the United States. Our approach and the reason that we've been able to grow 20%-25% units for the last five years is we've really sidestepped that entire issue. We don't have executive chefs in any of our kitchens. Our approach to automation is to start with the most difficult tasks, so everything involving rice preparation.
And so that, it, you know, we've been able to grow very rapidly. 20-25% units, not 20-25 units. I'm, I'm sorry, if I, I misspoke. 20-25% units, not 20-25 units.
...
なので、まあ、それがあるんで、我々、あの、あともう一つ、他の回転寿司と比べても、我々40年間の経験があるんで、あの、まあハードウェアはコピーできても、このソフトウェアはコピーできないと。まあ、それ、それによってエフィシェンシーの違いが出て、我々がより、より、あの、リーズナブルなプライスでハイクオリティなものができると。なんで、他のリボルビング寿司バーも真似してるんですけど、我々と同じクオリティのものを同じ値段でできることできないと。まあ、これも、あの、別の理由だと思います。
And then, you know, even looking past traditional sushi restaurants, there are a number of one-off sushi revolving sushi chain or sushi restaurants. We've seen a couple chains come and go. It's, you know, you can make something that looks superficially like one of our restaurants. It's exceptionally difficult to actually imitate us, given that we have 40 years of operational knowledge. Kura Japan has developed over 50 patents, all of which we have access to, some of which are so important that we filed them with the U.S. Patent Office ourselves. But, you know, for anybody that doesn't have our technology, you'd be serving, you know, food that is of inferior quality if you want to match our prices, or food that is much more expensive if you want to match our quality.
That's the reason that there are no other successful revolving sushi chains in the United States.
Also, I'll add, too, to your point on supply chain, Sharon, if you are a mom-and-pop-type sushi restaurant, which the vast majority are, you don't have the ability to go and purchase in bulk and make better deals. So when you have 63 restaurants like we do, we have the ability to deal with our suppliers. So one thing that we've done, for instance, is we purchased almost $3 million worth of bluefin tuna from a supplier in Croatia, swimming around in a pen in the ocean off the coast of Croatia, that they ship to us, process it, and ship to us as we need. So actually, when you're a chain of any size, you can ... supply chain is not an issue, but it could be a gating factor if you have one or two restaurants, certainly.
So, you know, having three years now of positive traffic, you know, you're probably in a universe of one casual dining company that's done that in the publicly traded realm. Can you talk about how you approach value to the consumer? Because I think one of the important flywheels is how you approach those price points with those labor savings that you get and how that also kind of creates the moat around the business. I'd also be interested to hear what your experience has been in California, right? Where limited service peers had that big wage hike. You know, that gap between your price point and others has narrowed. Are you seeing kind of incremental trade up, if you will, into Kura because it's, you know, a narrower gap than it used to be?
First, the way to maintain the value proposition is, as Sharon simply stated just now, we use technology to operate labor more efficiently, and the savings from that are being applied to costs; that is the big point. In our survey, roughly, roughly compared to other individual restaurants, it is viewed as half the price point. So, by firmly maintaining these, we want to maintain the value proposition. First, this first question. And others, I will answer separately.
To answer your first question, you know, as you mentioned, we do reinvest all of our labor savings back into our food quality, and so we just don't think it's possible for anybody else to match us on a dollar-to-dollar perspective. And to Jeff's earlier point, with the tuna that we are, you know, raising in the ocean, we were able to serve 2 pieces of bluefin tuna for $3. It's just... you're not gonna see that anywhere else. With our own menu analyses, we've seen that the average mom-and-pop is charging twice at least what we're charging. So if they're charging $7 or $8 for what we charge $3 and change for. So it's just exceptionally difficult for anybody to match what we do.
あと、まあ、あの、トラフィックの事ですが、我々、あの、こういうバリューの、しっかり高いバリューのものを、こう、供給することによって、まあ、今ご説明いただいたように、まあ、3年間、3年間かな。3年間ポジティブなトラフィックとポジティブなcompを維持してきましたけど。まあ、この優位性っていうのは、あの、今後も、まあ、続いていくし、今後も維持していきたいなと思ってるんで、我々、今までやってきたことをしっかり同じこと継続していきたいなというふうに思ってます。あと、あの、4月以降の、そのFAST Actによる、このプライスのギャップですが、まあ、このベネフィットの部分ですが、まあ、我々、かなりベネフィットを受けると思ったんですけど、まあ、実際はちょっと、やっぱり全体的な、こう、あの、消費の落ち込みっていうのがやっぱりあるみたいで。まだ今のところ、その期待したほどのベネフィットっていうのは受けてないですけど、まあ、これから、まだ、まだ始めたばかりなんでね、まだ2ヶ月しか経ってませんから、しっかりね、我々がベネフィットを受けるような形で、こう、自分たちの戦略を、プライス、あの、プライスポイントをアピールするとか、そういったことをしっかりやっていきたいなと思ってます。
So as a last comment on value, that really does remain core to our operation, core to our model. It's one of the key reasons we've maintained three years of positive traffic. Our SVP of supply chain is in Vietnam today, looking for better shrimp at better prices. And so we're just always improving the quality of our key proteins. If you go into our restaurant, our, you know, pretty much it will always be the best sushi food that we've ever served, and that comes with our scale. Turning to California, we were really hopeful in terms of the impact, just as some context. With the FAST Act, all the other QSRs had to go from $16-$20 minimum wage. We're casual dining, and so didn't impact us.
What we've seen generally is sort of a wider reluctance to go out to eat, period. I think there's just like an across-the-board perception that restaurants are more expensive, and it's a tricky message to say, "You know, everybody's expensive except for us. We haven't changed our prices." So, you know, it's only been a couple of months. I think, you know, as people start coming out again, they'll realize that we're a better value, you know, comparatively than we've ever been before, and so we still look forward to that.
... Great. I think, you know, during the IPO, I think a lot of investors were like: "Okay, yeah, of course, this works in California. You know, maybe it will work in Manhattan, and the rest of the country will be a wasteland." So can you talk about how Kura has resonated across geographies and kind of who your target demographic is?
Sure. It's been a really fun five years since the IPO. For those that are newer to the story, when we went public in 2019, we were only in three states: California, Texas, and-
Georgia.
Georgia. And so, you know, it was a fair question, you know, with that geographic concentration about whether or not we truly had legs. Today, we're in 17 states and Washington, D.C., and what's remarkable is that, you know, we've multiplied our presence across the United States, but our unit-level economics have also improved over that same period, whether we're looking at our AUVs or our restaurant-level operating profit margins, which is, you know, basically unheard of for such a regionally concentrated brand. So that, that's really addressed any questions that there have been about our portability. We've already demonstrated it. We've yet to enter a market where we haven't been very warmly received.
When people would ask about the California thing, during the IPO, they would say: "Sure, let's see what you do in Missouri." We opened in Missouri, and we had a 5-hour wait, and so we're very pleased. In terms of demographics, the single best predictor of our sales is actually the proportion of bachelor's degree holders and above in the surrounding area. Beyond that, we look for things like population density. We have, you know, very strong traffic, and you need a lot of people for that. About half of our guests earn more than $100,000. Those would be the key demographic criteria we look at. And in terms of our overall development strategy, since the IPO, we've been targeting, you know, establishing a presence in our top 20-25 DMAs.
We're largely done with that, and so now we're starting to look at the next top 25. And what's really exciting about this is we've got a number of units that are in our pipeline that would be, you know, in that next 25, and depending on the success of those units, which we're extremely bullish on, that changes the opportunity that we could expect in America.
To give a little more color on the, excuse me, the geographic diversity, our four top performing units are Bellevue, Washington, Austin, Texas, Fort Lee, New Jersey, and San Diego, California. So that shows you can't get much more geographically diverse than those four places in the country. And then, when we open in some places that are not huge metropolitan areas, we're very, very happy with the results. Some recent ones, besides Kansas City that Ben mentioned, Columbus, Ohio, we recently opened in, doing very, very well. Pittsburgh, doing really well. Areas that you don't typically think of sushi when you think of Pittsburgh. If anybody's from Pittsburgh and Columbus, I'm sorry, but you don't typically think it's a sushi place, when you think of those two cities, but those restaurants, both of those are in our top core top.
Hey, Jeff, since you're talking, can you talk about the unit economics for Kura and what you look for and how replicable that's been across recent classes?
Yeah. So for us, 20% restaurant-level margin is pretty much the gold standard in the restaurant industry. I've been in restaurant finance for almost 30 years, and it's always been 20%. That's really what you shoot for. Our most recently completed fiscal year, our restaurant-level operating profit was 21.9%. And so while we continue to want to look at the restaurant-level margins and how can we improve them, and as we continue to open restaurants with higher sales, we are gonna get some leverage because while the majority of the restaurant operating costs are variable, there is a small element of fixed costs in there that we do get leverage on. But to kind of dovetail into another piece of that is what we're really excited about is our adjusted EBITDA margin leverage through G&A.
So in fiscal year 2022, we were at 15.8% G&A. We leveraged 80 basis points in 2023 to 15%, and our guidance this year is 14%-14.5%. So if you assume we hit the midpoint of 14.2, that'd be another 80 basis points this year of leverage on G&A. So 160 basis points over two years. We're gonna continue that year after year. I'm not promising 80 basis points every year, but I think if, you know, 50 basis points a year, we'll continue to head towards that single-digit G&A over time. I haven't given any timeline on when we're gonna hit that, but I'm certain that over time, we'll be able to get down to that single-digit G&A. As we continue to infill markets this year, our ratio is gonna be...
For next year, I'm sorry, our ratio is gonna be about 85% infill markets, 15% new, and as we continue to infill markets, we get regional G&A leverage because we don't have to send managers to different cities to train. Our area managers don't have to go from state to state to manage their restaurants. They can be more concentrated. So there's a lot of leverage coming up that we're gonna be able to get some G&A leverage, too.
The unit-level economics?
Twenty percent.
20% cash on cash?
Oh, yeah, on cash on-
Sorry.
Oh, yeah. So when we build a restaurant, it costs about $2.5 million to build one of our stores on average. And really, the main thing that we look for, that I look for on the finance side is our hurdle rate has been 33% cash-on-cash Return. I like to see the restaurants pay themselves back in three years. We've been very successful, and our restaurants opening at much higher than that. We've hit 40%, 50%, even 60%. That certainly is a surprise to us when we do that. But what, what I really like is that-
... if we don't hit the 33%, because everything isn't going to be a home run. We've been very fortunate to have a lot of home runs lately, but we realize that not everything can be. It's just a lot of averages. So if we don't, and we hit 25%-26%, that's still a 4-year return, which is the hurdle rate that most restaurants look at. So our 33% is much higher than the industry average, at least in my experience, that people look for. So it gives us some play if we don't hit our targets, and we're still gonna have a really good return on capital.
So Kura has some real fans. I mean, obviously, you revamped the loyalty program last year and got tremendous pickup on that revamp. Can you talk about what you did, why you did it, what capabilities you have now? And of those different levers that you have to pull with loyalty, what is still on the come that we haven't seen yet?
Do you want to start?
Sure, yeah. So we relaunched a new rewards program in October, replacing the rewards program that had been in place since 2019. We were very pleased with the old program, but the issue was that we built it in-house, and so it didn't have the sophistication necessary to really leverage the guest data we were collecting, which is ultimately the purpose of any rewards program. And so we moved to Punchh, which is the industry standard, and already we're seeing very meaningful improvements. The first would be that registration rates have more than doubled, which held very consistently since October. I thought it would be a pretty short phenomenon, but it's remained very strong.
Given that the new program has only been live for 6 months, relative to the older programs, you know, many years, the membership count is still approximately half of where we were before, but the percentage of sales that the new group is responsible for is actually larger. They, our rewards program now does about a third of our sales, whereas before it was 25%. And so given that every member of our rewards program has voluntarily opted in over the last 6 months, it's an extremely engaged base, which, you know, we're very happy about. The other really exciting things about Punchh would be just the new functionalities that we can do, like frequency-based programs, which we've experimented with.
What's most exciting for me is that the massive improvement in engagement, it has largely been driven from aesthetics and the UX, the user experience. We really haven't gotten into the meat of the data leveraging yet. We're, we're starting to do guest segmentation and starting to do campaigns based off of that, but those are tailwinds that are coming. And so the rewards program is already off to a great start, and we, we just hired our first VP of marketing, and we are extremely excited for exactly what it, it can do for us.
So DoorDash, you announced an exclusive relationship with in February. You know, those who look at the restaurant space would say, "Okay, well, that, you know, delivery will be a double-digit % of your sales at some point," right? That's kinda the industry average. I, I guess I'd be interested to hear you, your thoughts on that. And I also get bombarded with questions about how this can be accretive economics - at the same prices as in the restaurants. So Ben, I expect you to, to do that math for all of us so that we can understand that.
It would be my pleasure.
But it would be helpful to understand kinda the rollout of DoorDash, how accretive it is, how quickly, and the thoughts about ultimately where that can go.
Yeah. We're really pleased with the DoorDash so far. I think this probably came as a surprise to anybody who's been following us for years, where we've just said that, you know, off-premises is not a real consideration for us. And the reason for that is our kitchens are really designed down to the last square inch, and they were only meant to accommodate the in-store traffic. And so an off-premises sale is... Our thinking was it wasn't necessarily an incremental sale, it was just a sale that we weren't able to do in our kitchen. And pre-pandemic, our off-premises was less than 1%. At peak, it was 24% of mix, which we don't expect to be the case again. It's not a target for us.
But what it did for us is it really demonstrated that there was strong demand for Kura outside of the restaurant experience, and so we knew that it was a future opportunity. Our belief has been that we need to, you know, relieve the kitchen a little bit by infilling before we can truly see the opportunity for off-premises. But over the last year, DoorDash approached us with a rate that was so good that there was just no reason to wait. And the reason that it's accretive is we don't need to hire additional labor to fulfill these orders. And so, you know, even with a low sales volume, they're immediately margin accretive.
There always seems to be myriad things in development at Kura, so it's always fun to listen to the conference calls. But, you know, clearly, robotic dishwashers have captured the imagination of the investment community. Maybe overstating that a little bit, but it's very exciting, right? To have the idea of robotic dishwashers. So can you talk about, you know, why that's exciting and where you are in that process?
Yeah, the robot dishwasher is something I love talking about. Again, it comes down to our relationship with Kura Japan. In exchange for our royalty of 50 basis points, we get access not just to everything that's historical, but we get to leverage their R&D. Their annual sales are over $1 billion, and so it's a very different story from the typical restaurant chain, where you need 200-300 units to really justify tech investments, where at 63, you get to benefit from maturity. And so, for example, Kura Japan has already invested over $1 million into the robotic dishwasher, and we get to just buy it once it's ready.
The robotic dishwasher is something that's built from the ground up that really is specific to our operations, and so it's not something that anybody else could emulate, which, you know, is nice. But what's really exciting is that this will allow us to reduce dishwasher head count from two to one. And dishwashers are actually one of the highest paid positions in the back of the house. It's a really physically demanding job, and so there's a lot of turnover as well. And so even just, you know, looking at the immediate cost savings from a headcount perspective, it saves on recruiting as well. Because there's such high turnover, we don't need to, you know, let anybody go. It's just a matter of not restaffing after somebody leaves. The opportunity is extremely exciting.
It's, you know, I think one of the reasons Kura, you know, Kura has been so popular with the investment community is we consistently bring, you know, unexpected things to the table. This is actively in development, and starting in, you know, the midpoint of fiscal 25, we're. Our kitchens are already being designed to accommodate this. Because while the technology is still experimental and we don't have a timeline that we can share in terms of the expected rollout, the upside is already clear. And so we're building with the assumption that in the future, you know, we're gonna want them.
We have to talk about Sushi Sliders, 'cause when you first talked about them, I thought it was a new menu item. It is not. So can we talk about what Sushi Sliders are and also if there's applicability for that to be embedded in existing restaurants?
Sushi Slider. So the Sushi Slider, just as some context, we have these sushi robots that produce the balls. Right now, you would have one employee that's taking the balls and plating them and passing them to the person to their right, who then put the fish on. The Sushi Slider just it directly places the balls onto the plate, which is a really meaningful simplification of line operations. We've actually we've been able to implement this for test in one of our California restaurants as of last month, and what we did see is that there was an immediate improvement to efficiency. Unfortunately, it wasn't enough to, you know, for us to think that with the current setup, it would be enough to reduce headcount.
The major complication being that in Japan, you would have five employees all making the same thing with nigiri. For us, we have three separate stations, and so it's a matter of adapting it or even, you know, some operational adaptations before we can reduce headcount, but that's what we're working on now. ... That being said, we are confident that we can, you know, realize the efficiencies in terms of headcount reduction, that we... With that were our initial expectations, and because of that, you know, along the same lines that the robotic dishwasher, our future restaurants are being built with them in mind.
I think we have time for one more question. So, negative mix shift has kind of been persistent in the comp over the last year. Can you talk about what's been driving that negative mix shift, when you expect it to normalize? And then, you know, maybe also along with that, talk about the table-side smartphone ordering and if that's helped, you know, with some of the add-ons.
Well, negative mix. In terms of the negative mix shift, our belief is that this is largely a macro effect, just with people controlling their spending. One thing that's really unique about our restaurant is that guests build their meal check, plate by plate. It's very different from an entree-based meal where you need. You know, you can expect to spend a minimum of $30, and you can't buy part of a steak. With us, you know, you build it $3 at a time, and so that's one of the reasons our traffic has been so strong. We have a structural advantage from that perspective, but it also means that when there's, you know, macro pressures, we can see a negative mix shift. And so people have been ordering water instead of a soda.
You know, if people were getting an extra ramen bowl before, they're getting, you know, a couple sushi plates instead. Plates per person has been very consistent, and we're really pleased to be able to say that negative mix has gone from negative high single digits to negative mid-single digits. And we're actively working on menu development, which we think can bring that down to negative mid, negative low single digits. ... In terms of the smartphone ordering, for people that have never been to our restaurants, we'll have booths, and then we'll have one touch panel. If I have never been to the restaurant and I want to see what's on the touch panel, I have to ask Jimmy to click it, and then—I'll, like, stare at it and ask him to click it again.
And, you know, there are, like, 13 pages. We've got 140 menu items, and so you're sort of on the spot. It's, you know, it's not conducive to leisurely going through the menu items. And so what we've done now is guests can pick or guests can use their smartphones as the tablets by scanning a QR code, and so they have full access to every item. So, you know, if I want to get tuna and I don't want to bug Jimmy, I can just order tuna. But also, the side menu items I can figure out what they are and order them now. The side menu items are generally more expensive.
A bowl of ramen can be $10-$11 against a plate of sushi, which is $3 and change. And so with the implementation of the smartphone ordering, we do expect a further tailwind to mix shift.
Great! We are out of time, so we'll see you at breakout.
Thank you. Thank you.