Good day, ladies and gentlemen, thank you for standing by. Welcome to the Kura Sushi USA, Inc. fiscal fourth quarter 2019 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 conference is being recorded today, November 6th, 2019. On the call today, we have Hajime "Jimmy" Uba, President and Chief Executive Officer of the company, Koji Shinohara, Chief Financial Officer, and Benjamin Porten, Investor Relations Manager. Now, I would like to turn the conference over to Mr. Porten. Please go ahead.
Thank you, operator. Good afternoon, and welcome to Kura Sushi's inaugural conference call. By now, everyone should have access to our fiscal fourth quarter 2019 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 an 8-K we submitted to the SEC. Before we begin our review of the formal remarks, I need to remind everyone that part of our discussions 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 recent 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 measures which we believe can be useful in evaluating our performance. The presentation of this additional material should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and the reconciliation to comparable GAAP measures are available in our earnings release. With that out of the way, I'd like to turn the call over to Jimmy.
Thank you, Ben, and good afternoon, everyone. As this is our first earnings call as a public company, I would like to start by briefly introducing you to Kura Sushi. Next, I'll provide commentary on our strategy and some of our current initiatives before Koji walks you through our financial results. We will then open the call up for your questions. We are proud to be part of Kura brand, which has a long and successful history. Our parent company, Kura Sushi, Inc., started in Japan in 1977 with a single restaurant. As pioneer of the revolving sushi concept, Kura has developed innovative systems combining advanced technology, premium ingredients, and affordable price points to create a revolutionary dining experience. Today, Kura Sushi, Inc. is a Tokyo Stock Exchange-listed company with over 400 restaurants and $1.2 billion in revenue.
Kura Sushi USA is a fast-growing, technology-enabled Japanese restaurant concept with a revolving sushi service model and a distinctive dining experience, which we call the Kura experience. The key elements of this multi-sensory experience are the revolving conveyor belt, the on-demand ordering screen and express belt, the Mr. Fresh Dome, the Bikkura Pon reward machine, and our unique in-table plate slots. Our menu is comprised of small plates featuring over 140 freshly prepared items. We pay particular attention to the taste, sourcing, and preparation of all of our dishes using old world techniques and high-quality ingredients that are free from artificial seasonings, colorings, sweeteners, and preservatives. We believe our guests can taste the difference. Switching to our store base, as of the end of our fiscal year, we operated 23 restaurants across five states. For our fiscal year 2020, we anticipate opening six new restaurants.
We believe we have significant runway for growth in both existing and new markets, with an estimated long-term total restaurant potential of nearly 300 restaurants. In growing our brand, we will follow the same disciplined unit growth and real estate strategy that has allowed us to successfully grow over the last 10 years, focusing on high-traffic retail centers in markets with diverse populations and above-average household income. We expect to grow units at a 20% CAGR over the next five years. In addition to new unit development, we expect to drive continued growth in comparable restaurant sales through a combination of new marketing initiatives, new menu items, and expanding our rewards program. Our customer satisfaction continues to grow as reflected by higher guest service scores. Additionally, we expect a modest boost to traffic as the shopping and lifestyle centers that some of our restaurants are located in become fully occupied.
During the fourth quarter, we also expanded our rewards program test from two restaurants to 16 restaurants. We are pleased with the early results and plan to continue our pilot with our new restaurants. As we look to the new fiscal year, we remain focused on new technology initiatives. I'm pleased to announce that we will begin testing touch panel drink ordering this month. This feature should improve guest satisfaction by giving them greater control over their dining experience, and we believe that this should also have an incremental impact on ticket sizes as guests are encouraged to order more drinks. Before I hand things over, I would like to express my sincere gratitude to everybody that made our IPO possible. Our founder, Mr. Tanaka, our employees, our investment bank syndicate, our legal team, our investors and our restaurant guests.
We believe that our IPO has provided us with the financial flexibility and improved the capital structure necessary to execute our growth strategy in 2020 and the years to come. Our team is excited to bring the Kura experience to even more people as we open innovative technology-enabled restaurants in both new and existing markets, and in the process, create long-term value for our shareholders. With that, I would like to turn the call over to our CFO, Koji Shinohara.
Thanks, Jimmy. Before I get to our fourth quarter results, I'd like to touch briefly on our recent IPO. On July 31st, we completed the initial public offering of our common stock by issuing approximately 3.3 million primary shares, including 435,000 shares sold to our underwriter as a part of the over-allotment option, bringing our current shares outstanding to approximately 8.3 million shares. We realized net proceeds of approximately $39 million, net of related offering costs. We used a portion of proceeds to repay, in total, our outstanding debt of approximately $3 million under our term loans. The remainder of the net proceeds will be used for working capital to fund new unit growth and for other general corporate purposes. Let's review the results for our fiscal fourth quarter, ended August 31st, 2019, comparison to the same period last year.
On a GAAP basis, net income in the fourth quarter was $0.9 million, or $0.15 per diluted share, compared to $1 million, or $0.20 per diluted share in the prior year quarter. Total sales increased 28% to $18.8 million from $14.6 million in the same period last year, primarily driven by incremental revenue from the six new restaurants opened during fiscal 2019, partially offset by the closure of one restaurant in Laguna Hills. Comparable restaurant sales during the fourth quarter increased 9.4%, including a 3.5% increase in average check and a 5.7% increase in traffic. Effective pricing during the quarter was approximately 3%. As a reminder, we consider a restaurant to be comparable after it's been open for at least 18 months prior to the start of the accounting period presented, including those temporarily closed for renovation during the year.
There are 13 restaurants included in the comparable store base during the fourth quarter of 2019. Turning to expenses. Food and beverage costs as a percentage of sales held steady at 32.9%, reflecting inflated avocado prices and offset by pricing. Labor and related costs as a percentage of sales increased approximately 90 basis points to 30.2%. This increase was largely due to wage increases in existing stores and increased training costs resulting from the two new store openings in our fourth quarter of 2019, compared to no new store openings in our fourth quarter of 2018. Occupancy and related expenses as a percentage of sales increased approximately 230 basis points to 6.9%. In last year's fourth quarter, we recognized an approximately $200,000 credit related to the closure of our Laguna Hills restaurant.
Excluding last year's credit, occupancy and related expenses would have increased approximately 90 basis points year-over-year, driven by higher pre-opening rent due to the timing of our openings noted above. We also experienced a one-time rent adjustment in the fourth quarter of 2019. Other costs as a percentage of sales increased 40 basis points year-over-year to 10.6%, primarily attributable to higher costs related to kitchen supplies and repair and maintenance costs. The majority of kitchen supplies are purchased for new store openings, and the increase in our fourth quarter of 2019 can be attributed to the timing of two new store openings. General and Administrative costs increased $0.5 million to $2 million in the fourth quarter of 2019, or to 10.9% of sales.
G&A in the fourth quarter included approximately $150,000 of new expenses related to being a public company and $75,000 of expenses related to a legal settlement. Adjusted EBITDA for the fourth quarter was $2.2 million, compared to last year's $2.1 million. As a percentage of sales, adjusted EBITDA margin decreased approximately 300 basis point to 11.6%, primarily due to last year's approximately $200,000 of occupancy credit as a cost, as well as G&A costs associated with being a public company. Interest expense during the fourth quarter increased to $62,000 from $31,000 in the prior year period, due to $3.1 million of debt incurred in the third quarter of 2019. This debt was repaid in full using proceeds from our IPO, and we currently have zero outstanding debt under our credit facility.
Based on our current growth plan, we believe our steady cash flows from operations and the balance of the IPO proceeds will be sufficient to fund our capital expenditure needs for the foreseeable future. Income taxes decreased to $27,000 from $91,000 last year. The decrease was primarily due to the current quarter allocation of the annual tax provision. For fiscal 2019, our effective income tax rate was 4.5%, compared to an effective tax rate of 0.3% for the prior year. With that, I turn it back to Jimmy to discuss guidance and our outlook for fiscal year 2020.
Thanks, Koji. Turning to our annual outlook, we are providing the following guidance for fiscal year 2020, which ends on August 31st, 2020. We expect total sales between $84 million and $87 million. We expect comparable restaurant sales growth between 2% and 4%. We expect restaurant-level contribution margin to be between 20.5% and 21.5%. We expect an adjusted EBITDA margin between 9% and 10%, we expect the opening of six new restaurants, with one expected to open in Q1, one in Q2, two in Q3, and two in Q4. Lastly, given the small size of our current store base, the timing of certain public company costs, and our back-end loaded development schedule, we expect our profitability to be materially weighted to the second half of the fiscal year.
In line with our historical cadence, we expect a net loss in Q1 and a near breakeven Q2 before steady improvement in the back half of the year. Additionally, as the year progresses, we expect to drive operating margin improvement through pricing, technology-driven utility efficiencies, more efficient staffing, and reduced waste. All in all, we are excited about the coming year. That concludes our prepared remarks. Thank you for your interest in Kura Sushi USA, and we are now happy to answer any questions. During the Q&A session, you may hear a brief pause or conversations in Japanese before we answer a question. Please bear with us, as we want to ensure that we answer your questions correctly.
Thank you, sir. We will now begin the question and answer session. To join the question queue, you may press *1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press *2. Once again, to ask a question, please press *1 at this time. We will pause for a moment as callers join the queue. Our first question comes from Will Slabaugh with Stephens Inc. Please go ahead.
Thank you, and congratulations on a great first quarter as a public company. I wanted to ask about some of your more recent unit openings, if you had an update there on how those more recent openings are performing relative to your expectations.
Will, thank you for asking. Please allow me to answer in Japanese, then we'll be translating.
Hi, Will, this is Ben. We'd like to commenting on specific store performances at this point. Just like any class of restaurants, we've seen some restaurants exceed expectations, some restaurants, you know, expectations, and some restaurants fall below expectations. That being said, as of the end of fiscal year 2019, all stores that have been open for over 12 months are cash flow positive. Of course, the guidance we provide for FY 2020 takes all of the store performances in mind.
Okay, great to hear. One more quick one if I could. Obviously, you guys had great same-store sales growth in the quarter. I was wondering if we could get your thoughts on what were the biggest drivers behind that, the nine-plus % comp, and how much of that was pricing.
The comparable sales growth of 9.5% was mainly driven by traffic increase of 5.6% and also average check increase of 3.5%. Traffic increase was driven by improved store operation. That was proven by higher Yelp score and survey scores. Average check increase was mainly driven by price increase.
One thing that I'd like to note is that there were two stores that contributed in traffic in particular. These stores were located in shopping centers that were newly fully occupied, and so we saw a lot of incremental traffic growth for those two stores.
Great. Thanks, and congrats.
Thank you.
Thank you.
Our next question is from Peter Saleh with BTIG. Please go ahead.
Great, thank you. Congrats on a great end to the year as well. I wanted to ask about 2020. Your guidance suggests a low to mid-single-digit type comp. How should we be thinking about menu pricing next year and also the impact of traffic? It seems like you're at least exiting 2019 with strong traffic. I think your guidance probably suggests that traffic may not hold. Just any thoughts on how we should be thinking about your comps next year in terms of traffic and pricing?
Hi, Peter, this is Ben. In terms of pricing, we expect to take the same level of pricing that we did in FY 2019. There are a couple factors contributing to our 2%-4% comp growth expectations. One would be that, as you saw, we have 9.4% for Q4, so we'll be facing a very tough comparison a year from now. Then, like we mentioned earlier, we saw a very significant traffic boost at two restaurants that were now in shopping centers that are fully occupied. So while we expect those traffic levels to continue, we don't expect incremental or significant incremental growth on top of that for those stores.
Okay. Very helpful. Can you just comment a little bit on how you're viewing takeout and It seems like it's an opportunity, but is that something you try to capitalize in 2020? Is that something we should think about further out into 2021?
For FY 2020, we haven't any expectations regarding off-premises sales into our model. Our focus right now is to continue to deliver an excellent Kura Experience to all of our guests and make sure that we can execute our store operations perfectly and maintain our profitability. What we'd like to emphasize here is that we've seen 11 quarters of positive comp out of the last 12 quarters, which we think is a reflection of how well our guests have received the Kura Experience. We believe that by continuing to offer this strong experience for our guests, we'll be able to successfully grow the company.
All right. Thank you very much.
Once again, if you have a question, please press *1. Our next question is from Andrew Strelzik with BMO Capital Markets. Please go ahead.
Hi. Good evening. I'd like to also offer my congratulations on a good end to the year. My first question, can you give us an update on your site pipeline that you have secured? How far out are you, how many sites, LOIs and those types of things?
We are planning open Katy in Q1 and Plano in Q2, Glendale and Koreatown in Q3. In Q4, we expect to open two of the following three locations: Bellevue, Washington, Sherman Oaks, California, and Washington, D.C.
All of those locations are either under construction or have executed leases, with the exception of Sherman Oaks, that we have executed LOI there. Given that we're still in the first quarter of FY 2020, while we're actively working on pipeline for FY 2021, we'd like to keep the focus on FY 2020 for right now.
Great. That's helpful. I believe you said you expanded the number of stores in which you're testing the loyalty program. I'm curious, when did you expand the pilot? What have you seen so far? If it's too soon to say in the incremental stores, what were some of the metrics that had you excited enough to expand that to the incremental stores?
We expanded from two stores to 16 stores at the end of August. In terms of the metrics that we were very excited about, the first was just the enrollment numbers, have been extremely encouraging. Then we've seen boosts in both average check size and repeat frequency for our registered guests as compared to unregistered guests. We're going to continue to monitor the profitability and whether or not there are any negative impacts to operations. We just want to make sure that the guest experience surrounding the rewards program is excellent, and that this doesn't result in any losses. As long as that holds true, we plan on expanding the rewards program to all stores by the end of the fiscal year.
Great. Thank you very much.
Our next question is from Stephen Anderson with Maxim Group. Please go ahead.
Yes, good afternoon. I am calling to ask about the EBITDA margin guidance. Certainly in this past year, saw some good progress there. Wanted to ask, what kind of lines specifically within the EBITDA margin guidance do you see improvement? Particularly, California, still a pressure point with labor. I just want to see where you see improvement.