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Edited Transcript of KRUS.OQ earnings conference call or presentation 6-Nov-19 10:00pm GMT

Q4 2019 Kura Sushi USA Inc Earnings Call

Nov 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Kura Sushi USA Inc earnings conference call or presentation Wednesday, November 6, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin Porten

Kura Sushi USA, Inc. - IR Manager

* Hajime Uba

Kura Sushi USA, Inc. - Chairman, President & CEO

* Koji Shinohara

Kura Sushi USA, Inc. - CFO, Chief Compliance Officer, Treasurer & Secretary

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Conference Call Participants

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* Andrew Strelzik

BMO Capital Markets Equity Research - Restaurants Analyst

* Peter Mokhlis Saleh

BTIG, LLC, Research Division - MD and Senior Restaurant Analyst

* Stephen Anderson

Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst

* William Everett Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded today, November 6, 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.

And now I would like to turn the conference over to Mr. Porten. Please go ahead.

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [2]

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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 these additional materials 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.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [3]

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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 will 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 slot. Our menu is comprised of small plates, featuring over 140 freshly prepared items. We pay particular attention to the taste, saucing 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 5 states. For our fiscal year 2020, we anticipate opening 6 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 the 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 5 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 U.S. 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 2 restaurants to 16 restaurants. We are pleased with the early result 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 am pleased to announce that we will begin testing touch panel during ordering this month. This feature should improve guest satisfaction by giving them greater control over the dining experience, and we believe that this should also have an incremental impact on check 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 [leader] 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.

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Koji Shinohara, Kura Sushi USA, Inc. - CFO, Chief Compliance Officer, Treasurer & Secretary [4]

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Thanks, Jimmy. Before I get to our fourth quarter results, I'd like to touch briefly on our recent IPO. On July 31, 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 their over-allotment option, bringing our current shares outstanding to approximately 8.3 million shares.

We realized net proceeds of approximately $39 million, net of [deferred] 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.

Now let's review the results for our fiscal fourth quarter ended August 31, 2019, comparison to the same period of 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.

The total sales increased 28% to $18.8 million from $14.6 million in the same period of last year, primarily driven by incremental revenue from the 6 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 5.7% increase in traffic. Effective pricing during the quarter was approximately 3%. As a reminder, we consider our restaurant to be comparable after it has been open for at least 18 months prior to the start of the accounting period presented, including those temporarily closed for innovation 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 are 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 2 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 preopening rent due to the timing of our openings noted above. We also experienced a onetime 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, as the increase in our fourth quarter of 2019 can be attributed to the timing of 2 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 points to 11.6%, primarily due to last year's approximately $200,000 of occupancy credit, other costs 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 0 outstanding debt under our credit facility.

Based on our current growth front, 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 annual tax provision. For fiscal 2019, our effective income tax rate was 4.5% compared to an effective tax rate of 0.3% over the prior year.

And with that, I turn it back to Jimmy to discuss guidance and our outlook for fiscal year 2020.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [5]

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Thanks, Koji. Turning to our annual outlook, we are providing the following guidance for fiscal year 2020, which ends on August 31, 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%, and we expect opening of 6 new restaurants with 1 expected to open in Q1, 1 in Q2, 2 in Q3 and 2 in Q4. Roughly, 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 varied through the second half of the fiscal year.

In line with our historical cadence, we expect our net loss in Q1 and a near breakeven in 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 rate. 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 over conversations in Japanese before we answer a question. Please bear with us as we want to ensure that we answer your questions correctly.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Will Slabaugh with Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [2]

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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?

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [3]

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Bill, thank you for asking. Please, I will need to answer in Japanese, then we will be translating.

(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [4]

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[Interpreted] Will, this is Ben. We'd like to (inaudible) be commenting on specific store preferences at this point.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [5]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [6]

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[Interpreted] Just like all of -- any class of restaurants, we've seen some restaurants beat expectations, some restaurants (inaudible) expectations and some restaurants fall below expectations.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [7]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [8]

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[Interpreted] That being said, as of the end of fiscal year '19, all restaurants that have been open for over 12 months are cash flow positive.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [9]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [10]

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[Interpreted] And of course, the guidance we provide for FY '20 takes all the store performances in mind.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [11]

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Okay. Great to hear. And 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 9 plus percent comp. And how much of that was pricing?

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Koji Shinohara, Kura Sushi USA, Inc. - CFO, Chief Compliance Officer, Treasurer & Secretary [12]

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The comparable sales growth of 9.5% was driven by -- mainly driven by traffic increase of 5.7% and also average check increase of 3.5%. And traffic increase was driven by improved store creation. That was driven by a higher (inaudible) score and service scores. Also, average check increase was mainly driven by price increase.

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [13]

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One thing that I'd like to note is that there were 2 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 2 stores.

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Operator [14]

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Our next question is from Peter Saleh with BTIG.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [15]

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Great. And congrats on a great end to the year as well. I wanted to ask about 2020, your guidance suggests like low- to mid-single-digit type comp. How should we be thinking about menu pricing next year? And also the impact of traffic? I mean, it seems like you're at least exiting 2019 with strong traffic. I think your guidance probably suggests that, that traffic may not hold? So just any thoughts on how we should be thinking about your comps next year in terms of traffic and pricing?

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [16]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [17]

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[Interpreted] Peter, this is Ben. In terms of pricing, we expect to take the same level of pricing that we did in FY '19.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [18]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [19]

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[Interpreted] There are a couple of factors contributing to our 2% to 4% comp growth expectations. One would be that, as you saw, we have 9.4% for Q4. So we're -- we'll be taking a very tough comparison a year from now.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [20]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [21]

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[Interpreted] And then like we mentioned earlier, we saw a very significant traffic boost in 2 restaurants that were now in shopping centers that are fully occupied. And so while we expect those traffic levels to continue, we don't expect incremental -- significant incremental growth on top of that for those stores.

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Peter Mokhlis Saleh, BTIG, LLC, Research Division - MD and Senior Restaurant Analyst [22]

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Okay. Very helpful. And then can you just comment a little bit on how you're viewing takeout? And if that's -- it seems like it's an opportunity, but is that something you try to capitalize in 2020? Or is that something we should think about further out into 2021?

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [23]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [24]

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[Interpreted] For off-premises -- for FY '20, we haven't given any expectations regarding off-premises sales into our model.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [25]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [26]

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[Interpreted] 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.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [27]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [28]

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[Interpreted] So what we'd like to emphasize here is that we've seen 11 (inaudible) quarters, which we think is a reflection of how well our guests have received the Kura experience. We believe that as we're continuing to offer this strong experience for guests, we'll probably successfully grow the company.

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Operator [29]

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(Operator Instructions) Our next question is from Andrew Strelzik with BMO Capital Markets.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [30]

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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, and LOIs and those types of things?

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [31]

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We are planning to open Katy in Q1 and (inaudible) in Q2, Glendale and Koreatown in Q3 and in Q4, we expect to open 2 of the following 3 locations, they will be Washington, Sherman Oaks, California, and Washington D.C.

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [32]

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All 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 '21, while we're actively working on pipeline for FY '21, we'd like to keep the pace on FY '20 for right now.

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Andrew Strelzik, BMO Capital Markets Equity Research - Restaurants Analyst [33]

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Great. That's helpful. And then I believe you said you expanded the number of stores in which you're testing the loyalty program. So I am curious, when did you expand the pilot? What have you seen so far? And 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 incremental stores?

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [34]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [35]

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[Interpreted] So we expanded from 2 stores to 16 stores at the end of August.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [36]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [37]

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[Interpreted] So in terms of the metrics that we were very excited about, the first, which is the enrollment numbers, have been extremely encouraging. And then we've seen boosts in both average check size and repeat frequency for our registered guests as compared to unregistered guests.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [38]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [39]

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[Interpreted] So 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. But as long as that holds true, we plan on expanding the rewards program to all stores by the end of the fiscal year.

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Operator [40]

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Our next question is from Stephen Anderson with Maxim Group.

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Stephen Anderson, Maxim Group LLC, Research Division - Senior VP & Senior Equity Research Analyst [41]

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I am calling to ask about the EBITDA margin guidance, and certainly in this past year saw some good progress there. Wanted to just ask what kind of outlines specifically within the EBITDA margin guidance? Do you see improvement, particularly in California, still a pressure point with labor? I just want to see where you see improvement.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [42]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [43]

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[Interpreted] Steven, in terms of the FY '20 adjusted EBITDA margin, we -- there are going to be 4 primary factors that drive expansion.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [44]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [45]

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[Interpreted] The first would be more efficient usage of utilities.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [46]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [47]

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[Interpreted] The second would be more efficient staffing

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [48]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [49]

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[Interpreted] The third would be reduce food waste.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [50]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [51]

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[Interpreted] And the fourth would be pricing.

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Hajime Uba, Kura Sushi USA, Inc. - Chairman, President & CEO [52]

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(foreign language)

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Benjamin Porten, Kura Sushi USA, Inc. - IR Manager [53]

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[Interpreted] So if you look at the cumulative percent of revenue between labor and COGS, we've seen consistent improvement in both FY '18 and FY '19, in that it's been contracting as a result of pricing. So we believe we can continue that trend.

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Operator [54]

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This concludes the question-and-answer session, and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.