Kura Sushi as we enter the luncheon timeframe. We're going to do a fireside chat format. I'll be standing because, as you see, there aren't enough tables, not long enough for all of us. But before I hand the mic over to Ben, who's going to give the brief overview before the fireside chat, I do want to welcome the team. So we have Jimmy Uba, who's President and CEO; Jeff Uttz, CFO; and Ben Porten, who's the VP of everything but mainly Investor Relations and Systems Development. So Ben, if you want to give a brief overview for the crowd, and then I will go ahead and get into the Q&A.
Perfect. Thank you so much, Sharon. Can everybody hear me? Great. Thanks so much for coming today, especially during the lunch break. We very much appreciate it. For the people that are new to our story, Kura Sushi began as the wholly owned subsidiary of Kura Japan. We opened our first restaurant in the United States in 2009 in Irvine, California. We went public in July of 2019. We had 20-ish restaurants at that point.
Today, we are in four states. Today, we are in 20 states plus D.C. and have over 70 restaurants. We've really quite rapidly grown over the last five years. We've been one of the more exciting growth stories among the publicly traded restaurants, being able to maintain that 20%+ unit growth every year for the last five years. One thing that's very unique about ourselves would be just the nature of the sushi industry being extremely fragmented. The top two players, which would be ourselves and then Nobu, control just over 2% of revenue. It's effectively all independently owned restaurants.
There are no major chain players besides ourselves. We've just been cleaning up, so to speak, over the last several years. Another part that's really unique about us is how tech-driven that we are. We're able to leverage our relationship with Kura Japan to punch far above our weight as a 70-some unit chain. Right now, what we've been working on would be the implementation of the reservation system, which we think is a very meaningful opportunity in terms of traffic growth. The next thing that we have in our pipeline would be the dish robot, which Sharon is finally coming. I'm really, really happy about that. Just given the uniqueness of the space and the opportunity, as well as the uniqueness of ourselves as a company and how tech-driven we are, we've been having a fun time since being a publicly traded company.
I think one of the things that you do very well is that you have these advantages from automation, and then you've reinvested that into pretty low price points for the consumer. So can you talk about kind of the value proposition at Kura and how you think about what the right gap is relative to the competition, which is primarily independent?
Sure. I'm happy to answer this question, but please allow me to speak in Japanese. He's going to translate my Japanese into English. [Foreign language]
We perform customer studies annually. We also, as part of our checkout process, have a very simple three-question survey, which gives us a ton of visibility pretty much in real time in terms of how guests are experiencing Kura. The value scores, we're very pleased to say, remain extremely high or are actually the highest they've ever been. Part of that would be the incredible efforts made by our supply chain department. They're always traveling around the world trying to secure the best possible ingredients at the best possible price. One very visible thing that we did recently was switch over our LTO format from Kura Monthly Discovery to Kura Reserve, which is less frequent and higher quality.
Our expectation is that we'll be able to build more excitement about this. But we've done two. We've got one going right now. I very much encourage you guys to go try the soft-shelled shrimp during our current LTO. Our previous LTO, we offered three pieces, three different cuts of bluefin tuna for under $6. I don't think you'd be able to find that. I don't think you'd be able to find a single piece of bluefin tuna under $6 at a typical restaurant. Being able to offer three really speaks to the uniqueness of our brand. We're only able to do this because of the incredible efficiencies that we have from our automation. We're able to reinvest that, as you mentioned, back into our food quality.
[Foreign language]
In terms of the price gap, we do menu analyses of our direct competitors, other sushi restaurants across the core markets. The area where we like to be is about 50%. So if we're charging $3.50 for two pieces of tuna, the other sushi restaurants in our area typically charge $7 or $8 for the same.
I wanted to touch on IP collaborations because the comp trends over the past year have been maybe a little bit more volatile than normal, in part due to the IP collaborations and the timing of those. Can you talk about the strategies that you have in place to help kind of lessen that volatility going forward and maybe help us understand what the optimal frequency is of IP collabs going forward?
Thank you Sharon. I'm exceptionally proud to say that as of May, through the end of the fiscal year, we have constant rolling IP collaborations. For the next fiscal year, we actually have seven or eight against the typical five or six. The seven or eight would be a record for us. In terms of eliminating comp lumpiness, really the first and best thing we could do is fill the calendar. The second is we know that the first month of a campaign tends to outperform the second month of a campaign. The seven to eight gets us more first months than second months.
Thirdly would be the quality of the campaigns. But those remain somewhat unpredictable, which is one of the reasons we're happy to just have the seven to eight, which we know will outperform agnostic of the quality of the properties. We're looking to fiscal 2026. We're all very excited from a comp perspective, just given the IPs that we have lined up. Thinking about this year, we had four to five months with no IPs. That makes for a naturally easier comparison. We also have the benefit of the reservation system, which, as we mentioned previously, we think could be a very meaningful traffic opportunity.
I'm going to take the bait on the reservation system since it's been mentioned twice. Can you talk about where you are in the rollout of the reservation system? And you've talked about benefiting results. Can you kind of help the audience understand why you think that will actually help you generate higher volumes?
Yes. We're actually almost done with the reservation system. The majority of our system, over 60 units, have the reservation system live. As soon as we understood the potential, it was a race to get them live system-wide so that we could capture the major Q4 opportunity. Summer is always our busiest season, and we really wanted to get the most out of it. I'm incredibly grateful and proud of the work that everybody's done in terms of making this possible. You sort of talked about value before.
Historically, we've thought about value in terms of money. But we realized that value is also very much a function of time. For people that haven't been to one of our restaurants, on a weekend, it's extremely typical to have a one to two-hour wait. Prior to the reservation system, we had a wait list, but you couldn't join until there was already a wait, at which point you would be 30 minutes to an hour and 30 minutes, making it basically impossible to plan anything before or afterwards. It wasn't, is this meal worth $28? Is this meal worth my Saturday, which is a completely different question. Now, with the reservation system, that's taken off the table completely.
We're the only publicly traded restaurant that has to deal with that two-step decision-making process where it's not just, do I want to go to that restaurant? Now, with the reservation system, that's really the only decision they have to make. We know that it's already benefiting our guests when they know that they can come in, they'll be seated within 10 minutes or so when they expect to be seated versus maybe 60 minutes after they arrive. We're able to guide people to better shoulder periods because they have more visibility on when it's going to be when they'll be able to actually be seated.
Are you seeing any benefit in the shoulders of the peak periods with the reservations?
It's early, but I would expect absolutely yes. I'm excited to report more on the upcoming call.
Awesome. I don't want Jeff to have too easy of a time up here. I'm going to ask you about tariffs, Jeff, because it wouldn't be 2025 if we didn't talk about tariffs. On your last earnings call, we were kind of in the midst of a lot of new news about tariffs. Can you kind of talk about today what your thought process is on tariffs and the anticipated impact? I think on the call, you mentioned 60% of your baskets sourced overseas. I think much of that from Asia and Japan.
When we had our call, it was on, I think, April 8th, and the announcement was April 2nd. It was only six days in. We didn't have a lot of information at that time. We did tell people that we've been having conversations with our suppliers. They've been very open to sharing tariff costs and not passing all of it through to us. We've continued with those conversations. Right now, because it's such a moving target, we haven't seen much more than, say, 20 basis point impact to COGS from the tariffs. We're going to continue those conversations.
It's actually turned out pretty favorable for us recently with the announcement of the China tariff going down so much, where our main seafood buyer called me up and said, "I'm just going to go buy a bunch." We buy one particular seafood item from China. That's one of the only things we buy from China. He went and bought a bunch and stocked us up. We're sitting pretty good there as it relates to COGS.
One thing, when you think about our cost of goods sold too, when I joined the company three years ago, we were at about 30% cost of goods sold. Then the bar kind of became 29.5%, low 29s%. Then we always look at each other and say, "We got to be in the 28s%." We've done a lot of really good work over the last three to four years in bringing our cost of goods sold down and positions us in a pretty good spot that if tariffs do go higher than we anticipate, that our cost of goods sold number is still going to be one of the best in the industry.
I'm assuming that some of the opportunities you've had to talk with your suppliers are unlike what your mom-and-pop competition would be able to execute. So when you say that 20 basis point impact for you, do you have any kind of read on what the broader space is seeing from a tariff impact standpoint?
I haven't. I mean, certainly, our purchasing is a little bit different because it's all primarily seafood. A lot of times, a certain fish doesn't swim all over the world. You have to get it from a certain place. So our supply chain is a little bit different than a lot of companies. I haven't heard too many numbers out there because it's just still such a moving target right now. But I'm happy with our progress and the relationship that we have with our vendors. We can sit there and say, "Look, we really need you to share this with us and not push everything through to us." Our two biggest suppliers have said, "Absolutely." So we're in a very good position going forward in case they go north of where we want them to be.
[Foreign language]
We're also even beyond just negotiations with the vendors. We're also taking operational measures to address potential elevation in COGS' percentage of sales. One thing that's unique about us is we sort of determine what people eat by choosing what goes on the belt. We can guide guests towards better margin items that we know are still very popular. That allows us to reduce the frequency of more expensive items or make those order-only. They're still available.
So people that come for those specific items, their experience isn't impacted. It does allow us to at least partially offset elevated costs. The other is I'm extremely excited to announce this is we're now in the process of rolling out or introducing a half-riced option, which I've seen a lot of wasted rice in the past. Even beyond that, it's exciting because people will be able to eat more plates. That is something that I'm extremely excited about.
Also, we can stick on tariffs for one second. Another piece that we look at is when tariffs not only are costs of goods sold in our supply chain, but also our construction costs. We talked about on the last call that we had in April that in a very worst-case scenario, our construction costs would go up $300,000- $400,000. Our average build-out per unit right now is about $2.5 million. However, in that $2.5 million, which is what we're running right this year, if you pull out just three restaurants, which are somewhat anomalies, there's two union projects, and there's one pad site, which is a conversion from retail. It was actually a bank.
We had to take out the vault and do a bunch of extra work that we typically don't have to do. If you pull those three restaurants out, our average build-out is $2.3 million. So even if we do see a worst-case scenario, say $300,000, we're still only at $2.6 million, which is just barely over where we've always talked about, the $2.5 million. Even at that build-out cost, we're still confident that we're going to be above a 25%, somewhere between a 25% and a 33% cash-on-cash return.
I wanted to also delve into labor because the high single-digit labor inflation that you're seeing is a bit higher than what we're hearing more broadly. I know you have some geographic concentration in certain regions. So can you talk about if that has been a surprise to you that it's up that much this year, or if you're seeing a concentration in specific areas or specific skill sets that's really driving that?
[Foreign language]
The high single-digit labor inflation was a surprise to us. We're typically accustomed to low to mid-single digits. In terms of the driving factor, we'd really just be being competitive with the market. We paid what we had to make sure that our restaurants were fully staffed. But having gone through Q3, entering Q4, our expectation based off the trends that we've seen is a return to that low to mid-single digit labor inflation. We're really pleased that that high single digit was momentary.
[Foreign language]
We're feeling very optimistic about Q4 labor, especially because all of the labor-related initiatives that we've been working on for the past year plus, the impact is going to be much more visible during high sales volume periods. For instance, at the close of last year, we were able to streamline our positions from, say, five to four positions, four to three positions. For quarters one through three, it's pretty much only the weekends where you have enough volumes to be able to justify that consolidation. But for the summers, you can do it seven days a week. You get the full impact of that. We have the new Mr. Freshes, the new touch panels, and the new reservation system, all of which meaningfully simplify front-of-house work. We're really, really excited to see the fruits of our labors on the labor line.
I guess, given that, can you talk about your confidence in hitting a 20% unit-level margin this year?
[Foreign language]
20% is our goal. That's not just true for this year. It's been true for past years and true for future years. We've spent some time talking about all the tech initiatives that we have and how that's helping us manage labor. Even beyond that, we've got a lot of stuff coming into pipeline. Like fiscal 2026 will be the first restaurants that have the new dish robots. Regardless of labor inflation broadly, we know that we're always going to be able to come out better than our competitors or our peers just because we have all these initiatives that are truly unique to us.
I want to talk about new unit expansion because clearly that's the biggest driver of future value creation for the company. I think the class of 2024, if I'm not mistaken, was one of your best classes ever in terms of new unit performance. Can you talk about if there was any common underlying denominator that really helped that class, or if you're starting to see burgeoning brand awareness, or how we should think about that outperformance you saw last year?
[Foreign language]
I think we might be talking about fiscal 2025. Fiscal 2025 is an exceptionally strong year.
[Foreign language]
The biggest reason would be that we're finally able to capitalize on some of the investments that we've made over the last five years. As I mentioned, we're in 20+ states, even though we're only 70-some restaurants. If you look at our map, an uncharitable description would be it looks like we took a shotgun approach. But this was actually very measured, where we wanted to be able to identify the greatest pockets of opportunity as quickly as possible, as opposed to relying on just a hub-and-spoke model where your geographic findings are a function of time relative to how close you are to headquarters.
When we opened up the Pacific Northwest a couple of years ago, we realized immediately just how meaningful of an opportunity it is. That made us extremely hungry to open up locations in the Pacific Northwest, but also very choosy because we didn't want to waste this amazing opportunity on B-level sites. Bellevue has been our top performer for years. But because of how selective we've been, it's only fiscal 2025 that we've started opening up that market. This year, we opened up three in the Pacific Northwest, our first in Oregon and two more in Washington. All of those are performing amazingly. It's really just being able to use everything that we've learned over the last several years.
And also, excuse me, for some context on our fiscal year for those that aren't familiar, we're in August 31st year-end. So we just started Q4 on June 1st.
When you think about the markets that you target for Kura because you took that deliberate shotgun approach, what correlates the best with where you perform well in terms of demographics, psychographics, density?
Do you want to answer?
Sure. Well, really, the single biggest predictor would be the proportion of bachelor's degree holders and above in the surrounding area that ties pretty closely with household income. About half of our guests earn more than $100,000. So that certainly works in our favor when there's macro pressure. In terms of really the way that we approach site selection post-IPO, we looked at all the top 20 DMAs in the United States. We wanted to lock those down, establish first mover advantage, and build the defensive mode against any potential competitors.
That is part of the process that allowed us to identify places like Fort Lee being the first East Coast location. We've opened up the East Coast on the strength of that. Now we're opening up the Pacific Northwest on the strength of Bellevue. In terms of site selection, I think the most exciting thing for us that's happened recently would be the opening in Bakersfield, where historically, after we'd hit that top 20 DMAs, we looked to the top 30, top 40 DMAs. Bakersfield was our first one outside of that. It's the 120th largest DMA. So many buckets below what we would have previously considered as being a viable site. But it's just as successful as any of our other restaurants. So that's really opened up our eyes in terms of what kind of markets can sustain a Kura Sushi.
Now we're looking at places we hadn't considered before, like Tulsa, Boise, Oklahoma City. That's really the lever that's going to help us get back to a 50/50 split between new and existing markets. Based off of the pipeline that we're building now, we think we could achieve that by fiscal 2027. Just with the infilling that we've been doing over the last several years, our estimate in terms of a comp headwind has been about 400 basis points. By adjusting that ratio, we can turn that headwind effectively into a tailwind.
Is the 50/50 split a fiscal 2026 target?
That's a 2027.
2027. Can you talk about the pace of expansion? Because you are clearly one of the fastest growing publicly traded restaurants in that 20%+ clip. What is the gating factor there for maintaining that pace of growth?
[Foreign language]
In terms of our growth, we've been exceptionally proud of the 20% unit growth. But we're even prouder that our unit economics have improved since the time of the IPO. In terms of the gating factors, it would really be the quality of the management pipeline as well as the quality of the available sites. We see the 20% as a reasonable goal for the foreseeable future. But we would never want to compromise the quality of the restaurant just to hit that 20% mark.
Jeff, can you talk about whether or not you can fund to sustain that rate of expansion?
I was going to say we have $100 million on the balance sheet right now. We did a capital raise in November of 2024 of almost $70 million, which was led by William Blair. Give them a plug. It was a very good transaction for us. So my projections show that if we continue to maintain the 20% restaurant level margins at our target, that we shouldn't have to do another capital raise. We have a line of credit out there with our parent or our majority shareholder, Kura Japan, of $45 million. If we got anywhere close, we could certainly draw on that. But I don't believe we'll have to do another capital raise. It's not a promise, but it certainly looks that way.
I think one thing about the concept, I mean, we talked about the domes and how new users of Kura might have a challenge kind of figuring out how to open them and how you fix that with the next gen. What else do you hear from customers in terms of things that they would like you to change, either with the menu or the format or ease of use? Reservations is probably one of them, but.
That would absolutely be the top one. The top two complaints have always been the wait times and the accuracy of the wait times. The reservation system should take care of both of those. The goal is to be able to get people seated within 10 minutes of when they expect to be seated versus an hour to two hours after when they expect to be seated. Spending all this time in this restaurant is part of the rollout. We've noticed things that we thought would be obvious. Our concept is famous for having these toy dispensers where for every 15 plates, you win a prize. But I see all these guests say, how do I get that prize? We realized that some very fundamental parts of our concept were not being adequately communicated.
The focus is on trying to make the concept as approachable as possible. We're making the bigger upon advertising much blunter. It's impossible to miss. The domes would be another great point where the original design was finicky that you needed a server to bring a practice dome over and spend a couple of minutes. It was not a good guest experience. It ate up server time unnecessarily. Now we have just a push trigger dome that we're replacing it with. We realized there are lots of opportunities to just reduce friction. We're starting to just check them off one by one.
[Foreign language]
We perform a consumer research survey, a research study every year. We basically look at the top problems and try to knock them out. The top two have always been wait times and wait time accuracy. We're very hopeful that the reservation system will finally put this to bed. The next complaint after that is from families about the second prize at Chuck E. Cheese. Right now, you get a prize for every 15 plates. A family of four might eat 22- 24 plates, depending on how hungry the kids are. Asking them to eat six to eight more plates to get that second prize is kind of a big ask.
The kids end up fighting. We were fine with that because we wanted people to reach for those 30 plates. But if it's an impossible goal, then it's not worth it or it's not sensible. This was Jeff's idea. But we've actually adjusted the threshold for the second toy. You can get it at 25, which is a much more reasonable 2, 3 plate reach.
The finance guy has a good idea.
[Foreign language]
We did see a minor improvement in plates per person in May following the rollout. We're extremely excited to see Q4, where because of summer break, we have that many more families, children coming in, and because we have IP collaborations running through the entirety of Q4.
Great. Well, I think we're pretty much out of time. I want to thank everyone for joining us. We will be doing a breakout upstairs. Thank you.
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