Kura Sushi (KRUS) Q3 2026 Earnings Call Transcript

DATE

Tuesday, July 7, 2026 at 5:00 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer – Hajime Uba
• SVP, Investor Relations and System Development – Benjamin Porten

TAKEAWAYS

• Total Sales — $85.9 million, representing a 16% increase compared to $74.0 million in the prior year quarter.
• Comparable Restaurant Sales — Negative 0.4%, reflecting a decline in guest traffic offset by gains in price and mix.
• Traffic and Price/Mix — Negative 5.1% in traffic, which was countered by a positive 4.7% contribution from price and mix.
• Effective Pricing — 4.5% for the fiscal third quarter, with management projecting 4.2% for the fourth quarter following a 1% roll-off in June.
• Cost of Goods Sold — 30.2% of sales, up from 28.3% in the prior year primarily due to a 200-basis-point impact from tariffs on imported ingredients.
• Labor and Related Costs — 30.6% of sales, a 250-basis-point improvement from 33.1% in the prior year driven by operational efficiencies and automated systems.
• Restaurant-Level Operating Profit Margin — 19.1%, an increase from 18.2% in the prior year quarter.
• Adjusted EBITDA — $6.6 million, an increase of more than 20% compared to $5.4 million in the third quarter of 2025.
• Net Income — $0.4 million, or $0.03 per diluted share, compared to $0.6 million, or $0.05 per diluted share, in the prior year period.
• Fiscal Year 2026 Sales Guidance — $330.5 million to $331.5 million, narrowed from previous expectations due to development delays.
• Fiscal Year 2026 Margin Guidance — Approximately 18.5% for restaurant-level operating profit, raised from previous targets despite top-line pressures.
• Restaurant Development — 7 new locations opened during the quarter, with 3 additional openings subsequent to quarter-end for a total of 15 new units to date.
• Revenue Impact of Delays — Approximately 6 revenue months were lost due to unexpected permitting and fire inspection delays in various geographies.
• Capital Expenditures — $2.5 million average net expenditure per new unit, with total unit growth rate targeted above 20%.
• Cannibalization Impact — 52 basis points, a significant reduction from historical headwinds of 300-400 basis points as the company shifts toward new market expansion.
• Liquidity and Debt — $66.1 million in cash, equivalents, and investments as of quarter-end with zero debt.
• Bikkura Pon System Savings — 50 basis points of expected margin benefit through a new option for guests to choose a dessert voucher instead of a physical prize.
• IP Collaboration Strategy — 8 campaigns planned for fiscal year 2027, up from 7 in the current year, to maintain guest engagement.
• Food-Based Promotions — 12 annual promotions planned for fiscal 2027, increasing from 9 in the current fiscal year to drive repeat visits.
• G&A Expenses — Approximately 12% of sales for the full fiscal year, excluding litigation expenses.

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RISKS

• Porten stated, “We were certainly, disappointed that traffic came in negatively as well,” noting that elevated gas prices and attention on the World Cup pressured guest frequency.
• Uba noted that the company “faced significant unexpected delays in a number of restaurant openings,” primarily stemming from idiosyncratic fire inspection requirements in new counties.
• Porten indicated that regional comparable sales in the West Coast and Southwest markets were negative 1.2% and negative 2.1%, respectively, driven by the timing of new restaurant infills.

SUMMARY

Management reported that operational efficiencies and labor cost management successfully offset a 200-basis-point increase in food costs caused by tariffs on imported ingredients. The company achieved a restaurant-level operating profit margin of 19.1%, moving closer to its long-term 20% target. While guest traffic was negatively impacted by macroeconomic factors and external events, management indicated that a favorable shift in sales mix and effective pricing strategies supported margin expansion. The company is adjusting its full-year revenue guidance to reflect the loss of six revenue months caused by permitting delays, though it maintains its 20% annual unit growth objective and expects improved cannibalization trends as it enters new markets in fiscal 2027.

• Management announced a collaboration with Nintendo for November and December to celebrate the release of “Yoshi and some mysterious books” for the Nintendo Switch 2.
• The company plans to launch a major rewards program and app upgrade in the first quarter of fiscal 2027 to enhance digital engagement.
• Porten noted that average check growth is currently faster among non-members than reward members, stating this is “the reflection of a higher spending cost of guests coming to us.”
• The company is transitioning preventive maintenance work in-house and negotiating vendor contracts to drive further structural margin improvements in fiscal 2027.
• SVP Porten stated, “We believe the macro situation… will be ultimately transitory,” while expressing confidence that the current “mix flow through” is a sustainable competitive advantage.
• Management highlighted that the upcoming IP pipeline includes “Apothecary Diaries,” “Honkai: Star Rail,” and Atlus’ “Persona” series following the announcement of “Persona 6.”
• The company will discontinue reporting regional comparable sales breakdowns starting in fiscal 2027, as these figures are largely determined by the timing of restaurant infills.

INDUSTRY GLOSSARY

• Bikkura Pon: A proprietary prize machine system at Kura Sushi that dispenses a capsule toy for every 15 plates consumed.
• Comp (Comparable Restaurant Sales): A metric comparing sales for restaurants open for at least 18 full calendar months.
• IP (Intellectual Property): In this context, third-party brands or characters used for marketing collaborations and prizes.
• LTO (Limited Time Offer): Seasonal or temporary menu items or promotional campaigns.
• Infill: The strategy of opening new restaurant locations in an existing market where the company already has a presence.

Full Conference Call Transcript

Operator: Good afternoon. Ladies and gentlemen. Thank you for standing by. Welcome to the Kura Sushi USA Incorporated Fiscal Third Quarter 26 Earnings Conference Call. At this time, participants have been placed in a listen-only mode. And the lines will be open for your questions following the presentation. Please note that this call is being recorded. On the line today, we have Hajime Uba, President and Chief Executive Officer and Benjamin Porten, SVP, Investor Relations and System Development, And now I would like to turn the call over to Mr. Porten.

Benjamin Porten: Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal third quarter 26 earnings release. It can be found at www.kurosushi.com in the Investor Relations section. A copy of the earnings release is also being included in the 8-K submitted to the SEC. Before we begin our formal remarks, 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 2 thousand. These forward-looking statements are not guarantees of future performance. And therefore, you stop it under reliance on them.

These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We refer all of you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Also during today’s call, we will discuss certain non GAAP financial measures which we believe can be used when evaluating our performance. The presentation of this additional information should not be considered in isolation nor is the substitute for results for prepared in accordance with GAAP. And the reconciliations to comparable GAP measures are available in our earnings release.

With that out of the way, like to turn the call over to Jimmy.

Hajime Uba: Thanks, Ben, and thank you to everyone who is joining us on our call today. During our fiscal third quarter, we were able to make significant progress towards our goals of sustainable margin improvement and returning it to our historical 20% restaurant-level operating profit margins. Regardless of tariff relief. Despite our cost of goods sold as a percentage of sales, being 200 basis points higher than last year’s due to tariffs. Operational efficiencies allowed us to more than offset this impact. And improve our restaurant level operating profit margin by 90 basis points over the prior year to 19.1%.

We were also able to improve adjusted EBITDA margins by 40 basis points to 7.7% and grew our adjusted EBITDA dollars by more than 20% over the prior year. Our ability to improve profitability in a challenging environment speaks to what we do best. Responding rapidly to control what we can control. Total sales for the fiscal third quarter were $85.9 million representing comparable sales of negative 0.4%. Negative 5.1% of traffic. Offset by positive 4.7% in price and mix. Effective pricing for the quarter was 4.5%. During our last earnings call, we mentioned that mix being close to flat at negative 0.2% was the best flow through in pricing that we had ever seen.

Mix actually saw further improvement in the third quarter with average check growth exceeding effective pricing. Pricing rolled off 1% as of June 1, which we offset with 1% of pricing on July 1. Making our effective pricing for fiscal third fiscal fourth quarter 4.2%. Cost of goods sold as a percentage of sales were 30.2%. As compared to 28.3% in the prior year quarter. Due to the impact of tariffs. While COGS remain meaningfully higher than historical levels, we are pleased with the progress of our vendor negotiations and cost management efforts, which resulted in A sequential improvement of 20 basis points over Q2. Our full year COX expectations as a percentage of sales remain approximately 30%.

Labor as a percentage of sales improved by 250 basis points to 30.6%, due to operational initiatives. At the beginning of the fiscal year, we had shared an expectation to lever labor cost by 100 basis points over fiscal 2020 5 full year labor cost of 32.9%. I am very pleased to share that as of the end of our third quarter, we have been able to drive down our year to date labor cost. As a percentage of sales to 31.2%. It now looks like we are going to land in the neighborhood of 200 basis points of improvement. On our. Turning to clinical development. We opened 7 new restaurants in the third quarter.

Orange, Union City, Temecula, and San Diego in California. Goodyear, Arizona, Wellington, Florida, and Denton, Texas. Subsequent to quarter end, we opened the reference in Tulsa, Oklahoma. Sunset Valley, Texas. And Charlotte, North Carolina, bringing us to 15 new unit openings to date. While we continue to expect to open 16 new restaurants for this fiscal year, We have unfortunately faced significant unexpected delays in a number of restaurant openings in both Q3 and Q4, and the loss of approximately 6 revenue months has impacted our revenue expectation for the year. Which we will discuss shortly. These delays occurred following the April earnings call across different geographies. And for different reasons.

And for many unrelated reasons to coincide with 1 another. Is highly unusual. Our marketing team has been hard at work building our IP pipeline for fiscal 2020 7, which is reshaping up to be 1 of our strongest ever. Following our current collaboration with Honkai: Star Rail, we have a collaboration with Atlus’ Persona. In general, Atlus officially announced the release of the much awaited Persona 6. Making the end of a decade long wait for fans since Persona 5 in February. In September and October, we are partnering with The Apothecary Diaries coinciding with the release of the anime’s latest season. I am extremely excited to announce that. November marks our third collaboration with Nintendo.

Our IP campaign for November and December is Yoshi to celebrate the recently released Yoshi and some mysterious books for the Nintendo Switch 2. In other marketing news, we remain on track for our fiscal 2020 launch of our app upgrade. to our rewards program. We are also in the process of introducing optionality to our Bikkura Pon system, by giving guests a choice. Between the capsule prize and the free dessert voucher that can be redeemed on their next visit. We believe this addition will improve guest satisfaction encourage repeat visits and reduce our prize production costs. Development is currently underway and we hope to have an update for you at our November earnings call.

Now I will discuss our financials. and liquidity. For the third quarter, total sales were $85.9 million as compared to $74 million in the prior year period. Comparable restaurant sales growth compared to the prior year period was negative 0.4%. It is composed of negative 5.1% from traffic and 4.7% from price and mix. Comparable sales growth in our West Coast market negative 1.2% and negative 2.1% in our Southwest market. Effective pricing for the quarter was 4.5%. As a reminder, beginning in the first quarter of fiscal 2020 7, we will no longer provide regional breakdowns for comparable sales. Regional comps are largely determined by the timing of infills.

And we do not believe they are indicative of overall company trends. Turning to cost. Food and beverage cost as a percentage of sales was 30.2%. Compared to 28.3% in the prior year quarter. Due to tariffs on imported ingredients. There were Labor and related costs as a percentage of sales were 30.6%. as compared to 33.1% in the prior year quarter, Due to operational efficiencies and pricing partially offset by low single digit wage inflation. Occupancy and related expenses as a percentage of sales was 7.8% compared to prior year quarters 7.5%. Depreciation and amortization expenses. As a percentage of sales were 4.9%. As compared to the prior year quarter’s 4.7%.

Other costs as a percentage of sales were 14.6%. As compared to the prior year quarter’s 14.7%. And other administrative expenses as a percentage of sales were 11.9%. As compared to 11.8% in the prior year quarter. Operating loss was $39 thousand compared to operating loss of $162 thousand in the prior year quarter. Income tax expense Was $49 thousand. As compared to $55 thousand in the prior year quarter. Net income was $123 thousand or $0.03 per share. Compared to net income of $565 thousand or $0.05 per share. The prior year quarter. Restaurant-level operating profit as a percentage of sales Was 19.1%. Compared to 18.2% in the prior year quarter. Adjusted EBITDA was $6.6 million.

As compared to $5.4 million in the prior year quarter. And at the end of the fiscal third quarter, we had $66.1 million in cash equivalents, and investments and no debt. Lastly, I would like to update and reiterate the following guidance for fiscal year 2020. We now expect total sales to be between $330.5 million and $331.5 million. We continue to expect to open 16 new units maintaining an annual unit growth rate above 20%. This average net capital expenditure per unit to continue to approximate $2.5 million. We continue to expect G and A expenses as a percentage of sales to be approximately 12% excluding litigation expense.

And we now expect full year restaurant-level operating profit margins to be approximately 18.5%. Before we open the call to Q&A, I want to conclude my prepared remarks. By acknowledging our team whose execution during the quarter was excellent. Despite a challenging top line. This is best showcased in our improved guidance on restaurant-level margin and restaurant-level margin dollars which are both higher than our previous expectations for the year. We remain confident in our team’s ability to deliver this kind of execution going forward. And I thank our team members for their continued effort. This concludes our prepared remarks. And I am happy to answer any questions you have. Operator, please open the line for questions.

As a reminder, during the Q&A session, I may answer in Japanese before my response is translated into English. Thank you.

Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the number keys. 1 moment while we poll for questions. Our first question is from Jeremy Hamblin with Craig Hallum. Please proceed with your question.

Jeremy Hamblin: Thanks for taking the questions. I thought I might start with the comp trends. Obviously, a little bit disappointing with where traffic fell down 5% in the quarter. Wanted to see if you could provide us an update on how current quarter trends are looking, how June shaped up. And with the guidance range that you provided on revenues for FY 2026, what is the implied same store sale range that you would expect to hit those revenue figures given what you expect for unit openings? The remainder of the year?

Hajime Uba: Sure. Thank you, Jeremy, for your first question. Please allow me to speak in Japanese. Benjamin is going to translate.

Benjamin Porten: Hi, Jeremy. This is Benjamin. We were certainly, disappointed that traffic came in negatively as well. But we believe that this is largely due to elevated gas prices and along the lines of what we discussed in the prior earnings call. As the gas prices have eased, we are beginning to see a little bit of benefit as we have entered Q4, but those benefits are partially offset by how popular the World Cup is. And so the guidance that we are providing for the revenue contemplates the Q3 and Q4 macro background as well as the comp as well as the construction delays. Right?

Jeremy, as it relates to comps, we continue to be confident in our ability to deliver slightly positive comps for the full year. it is this year has been choppy, but we are very much looking forward to fiscal 2020 7. As we have discussed in the past, the real estate pipeline is extremely promising. We it is the first time that we have had a majority new market ratio in many years, and so that will be a cannibalization tailwind. And so that will be a comp tailwind for us. The fiscal 2020 7 IP pipeline is phenomenal. I could not be happier with it, and so that should be a pretty meaningful tailwind as well.

And we have the rewards program coming on as we enter the new year. And so as it relates to fiscal 2020, we remain very bullish about where we can land for the comps.

Jeremy Hamblin: Gotcha. Okay. I think it implies something more like down 3%, 4% maybe in Q4. But I did have a follow-up question. Just you know, the company had a fairly consistent history of comp performance consistently positive with some volatility, but there is clearly been a bit more volatility over the past 2 years and wanted to just understand what you think might be driving that. And then in terms of thinking about as the company is closing in on 100 locations over, you know, the coming couple of quarters. How should we be thinking about kind of the long term growth algorithm for Kura, you know, as a concept?

Is this something where you think of, kind of long term comps you know, in the range of, let’s say, low single digit you know, positive low single digit, obviously, with some variability. But, you know, color on what internally you expect and whether, you know, obviously, there has been some noise in 26, but it seems as though the IP collaborations you know, have had maybe a bit of a bigger impact, you know, than you know, typical on results. Of course, you gotta throw in there the higher gas prices. But you know, thoughts on those 2 questions.

Benjamin Porten: Sure. In terms of the things that we can the things that are under our control as it relates to comp, we see the real estate pipeline management is the dominant factor, and that really spoke to the real estate pipeline. As it relates to the IP pipeline, last year, we had a 5 month stretch without IPs, and so that was a very visible comp impact. We have since remedied that. We have done 7 this year, and we are actually, continuing to grow the number that we are doing every year as we know that there is maximal excitement at the beginning of every campaign.

So fiscal 2020, beyond having higher quality IPs, we will also have a total of 8 IPs. We are also supplementing this by putting more energy into our food-based promotions. Our Kura Revolving Sushi Bar have been very, very successful with our guests, and so we were increasing the frequency from 9 a year to 12 a year. And these will also be supplemented by a different type of food-based promotion that allows us to be more reactive should there be macro pressure. So we can lean more into value if that were necessary.

And as it relates to the last 2 years’ comps, I would also add just that this has not happened in a vacuum We are in a world now with elevated gas prices last year. We had the FAST Act come online, and we have got a pretty big California presence. And so it is there are factors beyond our control, so we feel extremely good about the factors that are in our control.

Jeremy Hamblin: Great. Alright. Well, thanks for taking my questions, and best wishes.

Hajime Uba: Thanks, Jeremy. Thank you.

Operator: Our next question is from Andrew Charles with TD Cowen. Please proceed with your question.

Zachary Ogden: This is Zachary Ogden on for Andrew. Just have a follow-up to Jeremy’s first question. I know you called out the delayed openings being partly responsible for the lower revenue guidance, but can you just talk about where that down 40 basis points same store sales for the quarter fell relative to your expectations? And then how your expectations for 4Q have changed over the last 90 days?

Benjamin Porten: Hey, Zachary. This is Benjamin. In terms of the negative 0.4 for comps, this was not a this is within our range of possibilities, and so it was not a surprise to us. Just given the overall macro pressure and meaningfully elevated gas prices, especially in California, In terms of our thoughts on comps over the last 90 days, they have not really changed. We continue to believe that we can deliver positive comps for the full year. If we are talking about surprises, though, the restaurant delays are certainly the biggest surprise for us. This was not something that we had anticipated at all, during the at the time of the last call.

Zachary Ogden: Got it. Okay. Thank you. And then the second question is on mix. Can you just unpack what made that flip positive in the quarter? Last call, it did sound like you were not expecting that to remain flat. So what drove mix to actually be positive and better than you were expecting?

Benjamin Porten: Sure, Zachary. I am gonna have the surprises. It was a pleasant surprise at the beginning of the year when we began to see the mix turn so favorable. Especially after it had been a headwind for multiple years. That having continued through present day and actually further accelerating in June, have led us to believe that this is not, you know, just a coincidence or luck. And, we our interpretation is that this is completely a result of our pricing strategy. The 3.5% that we have priced up, that we took in November meaningfully under prices our competitors.

And so our guests who have been going to other sushi restaurants have just become accustomed to paying a much higher price than they have, say, a year ago. And then they come into our restaurant with those higher price expectations. They see how much cheaper we are than we than they expect, and so they end up spending more as a result And so we are seeing growth not just in, per person plates, but also mix attachment and drinks. As well. So I think, generally in the restaurant industry, when there are macro pressures on the consumer, the expectation is that people reduce frequency.

And so we are seeing that in traffic, and you know, given higher gas prices and the popularity of the World Cup, this is something that we would expect But seeing the mix grow is giving us enormous confidence just in terms of when our guests do come in, they are spending more than ever before. And so, clearly, they are responding extremely well to the efforts that we have been putting in place, whether it be the you know, the Coke float promotions that we are running in June, our new giveaways, hand roll campaigns, we have been, our promotional calendar has really been packed.

And seeing that mix improvement sustain over, you know, more than 6 months now gives us that much more confidence that the competitive advantage between ourselves and the rest of the sushi industry is really it is it is it cannot be overstated. We feel that we have been able to take minimal pricing because of the aggressive cost controls, and our strong hope is that as, you know, the macro environment normalizes and the World Cup is no longer a factor, traffic returns, but our price mix remains elevated. Our pricing expectations for fiscal 2027 are actually to be below where we came in for fiscal 2020. And so we just hope to keep compounding this advantage.

Zachary Ogden: Got it. Thanks, guys.

Hajime Uba: Thanks, Zachary.

Operator: Our next question is from Todd Brooks with Benchmark StoneX.

Todd Brooks: Hey, thanks for taking my questions. Wanted to kind of dimensionalize the permitting delays in getting the new units open that you have experienced and that kind of caught you by surprise. I think you framed it up as maybe 6 months of lost unit operating time $4 million AUVs. I mean, can we ballpark the revenue guide down a kind of a couple of million attributable to the delays and the balance just same store sales performance?

Operator: Go ahead.

Hajime Uba: Just put them all.

Benjamin Porten: Yeah. That yes. that is a fair analysis.

Todd Brooks: Okay. Great. Thanks. And then just looking forward, you talked about how pleasantly surprised you have been by the mixed performance the last couple of quarters. I think coming into this quarter, you had looked for mix to revert that did not happen. Based on what you are learning here and as you are thinking about Q4, are you still assuming that you can kind of hold the hill on mix? Or are you expecting, in the guidance horizon going forward for the balance of the fiscal year mix to switch back to slightly negative?

Benjamin Porten: Just given that the mix has actually, you know, improved as we have entered the quarter, we remain very optimistic We, in terms of the remainder of the quarter, we really do not see a reason for trends to change. That being said, you know, anything is possible, and so that is why we you know, that is the range of our that is reflected in the range of our restaurant level margin guidance as well as our expectations have slightly positive comps for the full year. So our we believe the macro situation as every macro situation will be ultimately transitory.

But we believe that the mix flow through that we are seeing now is potentially a sustainable advantage And so net, this overall could be a very positive tailwind for us. In the coming years.

Todd Brooks: Great. And then 1 final, and I will jump back in the queue. You quickly ripped through the review of the upcoming IP collab schedule. I know that Honkai just recently launched. Can we just review kind of the calendar for the back of this fiscal or this last quarter of the fiscal year? And then more importantly, can you quantify or maybe even qualify a product of the quality of Yoshi as a platform with Nintendo and this phenomena that seems like you keep earning your way up into a higher tier and maybe more impact promotions with Nintendo. Thanks.

Benjamin Porten: Yep. It would be my pleasure So, after Honkai: Star Rail, we have Persona, Which is a role playing game. And then in September, October, we have the Apothecary Diaries which is a popular light novel series, which has since become a very popular anime. And then November and December, we have Yoshi. And just Yoshi relative to Kirby? Just on magnitudes of expected impact? I would say it is comparable. If not, yeah. I mean, you are asking me to choose between children. I love them both. Yeah. it is hard to pick.

You can be very excited for the November call because we are extremely excited to share what we have for the back half of the year. in terms of the IP pipeline.

Todd Brooks: Okay. Perfect. Thank you both.

Hajime Uba: Thanks, Todd. Thank you.

Operator: Our next question is from Matthew Curtis with D. A. Davidson. Please proceed with your question.

Matt Curtis: Hi. Good afternoon. I was just wondering if we could get back to the third quarter for a minute. Could you guys describe maybe the sales impact that IP collabs had in the third quarter relative to second quarter. And then maybe more importantly, how are same store sales trends affected as you began to lap the resumption of IP collabs, which correct me if I am wrong, I believe happened at the end of April.

Hajime Uba: Sure, Matthew.

Benjamin Porten: This is Benjamin. For really any IP, our base case expectation is a low single digit comp. Contribution. When we have marquee items, like Kirby or Yoshi, the expectation is a mid single digit contribution. We are excited to continue to introduce more and more mid single digit contributing IPs as we, you know, continue so as it relates to Q3, we believe the IPs contributed low single digit They put it. [Inaudible] And part of the offset for the traffic pressure that we through the quarter was the success of our food collaborations. The Kura Reserve was very meaningful.

In terms of, not just getting people to come in, but to spend more than they have before. that is been a pretty big part of the mix growth. And so we are we are very, excited for the incremental benefit that we will have next year by having an extra 3 of these.

Matt Curtis: Thanks. And then a different topic. I think last quarter, you mentioned the 1% comp lift from the reservation system. I was just wondering if that persisted in the third quarter.

Benjamin Porten: Yes.

Matt Curtis: Okay, great. Thank you.

Hajime Uba: Thank you. Thanks, Matthew.

Operator: Thank you. Our next question is from Sharon Zackfia with William Blair. Please proceed with your question.

Sharon Zackfia: Hey. Thanks for taking the question. So I am curious, as you have seen the slowdown in traffic, is there any difference in what you are seeing with new customer acquisition versus your existing customer frequency?

Benjamin Porten: We are seeing much of a difference between, in terms of behavior between, nonmembers and members. The defining feature really for Q3 was just a reduction of frequency. And, again, going back to the reduction of frequency being tied to the macro environment with the higher gas prices and competing attention from the World Cup. All of these factors we understand are transitory. And we are very confident that we will be able to maintain the momentum of our mix. And come out stronger than before.

Sharon Zackfia: Thanks for that. And then on the restaurant delays, are there steps that you are taking to help ensure that we do not see kind of any incremental issues in 2027. Are you adding more buffer to the pipeline as you think about that?

Benjamin Porten: Of the 4 stores, 3 of the delays were caused by fire inspections. And in fact, when we do have delays, typically because of a fire inspection. When we do have a correction that we need to make, it is usually, something that we can do in 2 weeks, but the asks this time were much more involved And so that took they took on average 6 weeks with extra time added on top on the end as we were waiting for a reinspection to be scheduled. And so that was, pretty frustrating. Obviously, we adjust our practices with every you know, hiccup of these types that we face.

But, unfortunately, it is always a different issue. it is it is you know, different counties have different rules and different inspectors even in the same county. Are idiosyncratic. And so that makes it pretty hard to head off. And so we do bake in to our expectations a certain degree of delays, but for so many to you know, follow on each other at the same time and for them to be much longer than we typically experience, that was what was somewhat expected. So we are happy to say that we actually just we just opened our Charlotte North Carolina location today, our 90 fourth restaurant.

As part of that, inspection process, there was a request for, a third party inspection for conveyor belts, which had we had never happened with our preceding 93 restaurants. And so these kinds of surprises can always pop up. But now that is happened, we know you know, whenever we are opening up in a new county to come with that third party inspection ready, And head off that issue for the future.

Sharon Zackfia: Okay. Thank you.

Hajime Uba

Operator: Our next question is Mark Smith with Lake Street Capital Markets. Please proceed with your question.

Mark Smith: You mentioned some cannibalization kind of easing here, but I am curious any real impact in the quarter as well as your outlook for many of the restaurants that you have opened over the last several months from cannibalization.

Benjamin Porten: Hey, Mark. This is Benjamin. In the past, I think our estimate for the comp headwinds, probably speaking, were between 300 to 400 basis points. Now we have been able to bring it down to about 52 basis points. We would expect this headwind to, continue into the first half of fiscal 2027, just given the timing of some of the openings, especially the first intels and next set key performers. But as we continue to as we start to benefit from the 55% new market mix, we would expect that cannibalization impact to steadily lessen over fiscal 2020 7 and 2020.

Mark Smith: And then you talked about opening delays. I am curious if that is added any incremental costs. I know that you guys maintained your guidance here for kind of new restaurant build out costs. But, you know, are you seeing any incremental cost from delays or, you know, just inflation pressure that is leading to higher opening costs.

Benjamin Porten: Mark. And so when we have a an opening delay, by an inspection, really, the primary cost would be in training costs or rehiring costs because you cannot ask somebody to wait for a month with no doubt. That being said, in spite of those incremental costs, we were able to raise our restaurant level operating profit margin guidance to 18.5%. And so we are spectacularly proud of just how efficient all of our, restaurant level members have been. And as, we get closer to the end of the year and have more visibility and fiscal 2020 7, we think that we are gonna get a lot closer to that 20% historical goal a lot faster than, we would expected.

And so we are we are very excited to give you guys an update on that as well in November.

Mark Smith: Perfect. I the last 1 for me is just thinking about menu price, increases what you guys have taken. It sounds like you are seeing positive results out of you know, offering a value proposition. But I am I am curious just if you wanna speak to elasticity in the price increases that you have taken and kind of response from consumers.

Benjamin Porten: Well, I mean, I think the mix growth really speaks for it all. And so we are just, we are our plan is really to just keep the value as intact, as you know, as aggressive as it has been. Wait for that traffic to return and then just benefit on both ends. So we are actually in the process of performing an analysis to get an empirical view just how much pricing our competitors have been taking. We can speak anecdotally that against our 4% ish, it is much typically closer to 20%. It they are it is it is really just a gulf that has continued to widen exactly as we would expected. Post tariff.

And so while it is unfortunate that the Q4 top line we expect some pressure. We believe that as long as we keep the pricing at a minimum and continue to drive margin improvement, in spite of that, when traffic returns will really margins will just we are extremely excited.

Mark Smith: Excellent. Thank you, guys.

Hajime Uba: Thanks, Mark. Mark.

Operator: Our next question is from John-Paul Wollam with ROTH MKM.

John-Paul Wollam: Great. Hi, guys. Appreciate you taking my questions. I wanted to kinda just follow-up on maybe sort of the new customer or sort of the understanding that you talked about earlier guests going to competitors and then coming to you guys and spending a little bit more. But I am curious, is there anything to show that you know, new customers or customers may be trading down from others is actually increasing as a percent of mix relative to your repeat customers. I am trying to get a sense of whether you think there is, you know, some real market share gains that are going on here that may be, you know, some customers have fallen off.

But as that lower income traffic maybe returns, you see this big boost ahead.

Benjamin Porten: Yeah. The biggest point in favor of that I could point at now is that the average check growth is actually the growth rate is faster among nonmembers than nonreward than reward members. Which has never been the case before. And so our interpretation is that is the reflection of a higher spending cost of guests coming to us. And we commissioned a consumer study twice a year. And so obviously, our, you know, that will be 1 of the top questions that we will have for the next analysis. And, look forward to updating you guys I am just know, how much we how much more can we be able to capture?

John-Paul Wollam: Okay. Great. And then, 1 more, maybe more on a sort of strategic lens, but know, as you sit here almost a 100 units, thinking about your guys’ centralized operations management at HQ, like, as you think about, you know, the next 100 units from here, how would you categorize where your infrastructure is at to support that? Is there anything that you are sort of seeing in the next 6 to 12 months that is needed?

Benjamin Porten: JP. This is Benjamin. And so as it relates to fiscal 2020 7, we already have the pipeline locked and loaded, and we know that it is higher than 20%. So we are we are happy to report that. In terms of you know, the G&A and, know, support center, we think that we really do think that we have everything intact. We will just sort of need, proportionate growth to manage the more volume of work as we continue to grow.

And so really nothing out of the ordinary there, and we would continue to expect to leverage G&A Just in terms of growth, unit growth broadly, the constraining factors for us have historically been the availability of high quality sites, our availability capital, and our management pipeline. We feel very good about our training department and our personnel We have got a great, bench. And, we opened 7 restaurants in Q3, but our cash burn was only $3 million. And so we are doing we are we are very, very pleased with, how our balance sheet management has been going. And so really, the remainder is just the availability of high quality sites.

And so we wanna be flexible on that just so that we do not, you know, force ourselves to commit to sites that we would not otherwise choose. Great.

John-Paul Wollam: Thanks, guys. Best of luck.

Hajime Uba: Thanks, Jeremy.

Operator: Our next question is from Jon Tower with Citi. Please proceed with your question.

Jon Tower: Great. Thanks for taking the questions. Maybe real quick, obviously, you had spoke to the idea of seeing labor leverage and expecting that to be down, I believe, 200 basis points or so in fiscal 2020 6. Can you just speak to exactly what you are doing at store level to get that level of leverage particularly in the context of you know, very modest same store sales growth on the year?

Benjamin Porten: So in terms of the labor gains this year, a lot of it comes down to the work that we did in fiscal 2020 5. The reservation system was installed system wide by Q4 of last year. And so that is resulted in headcount reduction in front of house. We have also gotten, better scheduling appropriately. We have gotten a lot tighter with that. And so those 2 factors have really been the, the driving factors for the improvement in fiscal 2020 We will be lapping the benefit of the reservation system, in implementation in Q4, but we have the robotic dishwasher to look forward to for fiscal 2020 7.

And so this, again, and, you know, going back to your comment about leveraging 200 basis points on modest comps. This is really, I think, something that only Cura could do.

Jon Tower: Okay. And then I appreciate all that color. Thank you for that. In terms of thinking about the other OpEx line, into next year? You know, obviously, right now, you have upped the IP cadence, which I know is gonna or has cost a little bit more money. But it does look like year over year, at least on a per week basis, that came down pretty nicely in the third quarter. The expectations for next year, given that you are going to be, I think, launching 1 more IP and then also you are gonna have these reserve 12 months or 12 reserve options throughout the year versus 9 this year.

So broadly, how are you thinking about marketing spend next year versus this year?

Benjamin Porten: Sure. Sure. John-Paul, we are we are happy you asked this because, this is something that Jim and I have been working on. So Jimmy touched on this in the prepared remarks, but the Bikkura Pon we think is actually going to be a maybe a bigger lever than people are initially appreciating. So to give you some context, we with the last consumer study, we saw that guests really saw the challenge of getting to that fifteenth plate and getting the prize is very compelling. But they found the prizes themselves not compelling. And so we were dispersing these prizes every time. Regardless of whether guests were interested on it in it or not.

And by introducing the ability to get guests the option to choose between the capsule prizes or a food coupon, we no longer have that wasted toy that is left on the table. And, the cost of the dessert is really offset by the increment the incremental visit that we get when guests come to redeem it. And so altogether, once this is fully in place, we would expect up to a benefit of 50 basis points, and that would, more than offset the incremental investments in need additional frequency of IP campaigns and food LTOs.

So we are we are really putting in every effort that we expect meaningful leverage in fiscal 2020 7 over fiscal 2020 6 as it relates to other costs as a percentage of sales. As we get ready for fiscal 2020 7, we have been pretty aggressively negotiating our contracts with our vendors for other cost items. We are at we are in the process of bringing a lot of our preventive maintenance work in house and that would be a very meaningful cost savings. And so with that and the, the Bikkura Pon savings as well, we are feeling very good about the other cost expectations for fiscal 2020 7.

And this connects back to our earlier comment about you might be pleasantly surprised by how quickly we get back to that 20% restaurant level operating profit margin. Great.

Jon Tower: Thank you for taking the questions. Appreciate it.

Hajime Uba: Thanks, Jon.

Operator: Our next question is from Jim Sanderson with Northcoast Research.

Jim Sanderson: Hi, thanks for the question. Wanted to go back to the margin discussion. I think you are guiding towards 18.5% on a non GAAP basis. is comparable to last year? Is the biggest factor in fourth quarter going to be that continued improvement in labor rate that you would expect to continue into fiscal 2020 7?

Benjamin Porten: As it relates to margin, yes, a lot of the benefit is coming from the labor. We will be lapping the introduction in Q4, so the benefit will be partial, but the bulk of it will be coming from the initiatives that we discussed earlier as well as the tight scheduling. The other costs improvements that we expect for fiscal 2020 7, we are already starting to see a little bit of benefit in Q4. And so some of that is part of our higher margin expectation as well. We also, we are getting some refunds on tariffs paid for our other cost items where we are the importer record.

And so that is a onetime tailwind, but that does play into the 2023 expectation as well. And that 1 time tailwind Sorry. Oh, no. That being said, you know, all of our efforts, they are they are designed to be structural. And so they are just baked into the business now, and we expect the gains to only accelerate as we enter fiscal 2020 7. So we there would still be the opportunity for the robotic dishwashers to add value, in fiscal 2020 7 as we are rolled out. Yes. Yeah. And so, really, everything except outside of the nominal refund that we were on the tariffs for other costs, all of those factors continue to benefit us.

Jim Sanderson: Okay. And the 1-time tariff will be fourth quarter? Pending?

Benjamin Porten: Yes.

Jim Sanderson: Okay.

Benjamin Porten: Yes.

Jim Sanderson: I wanted to also go back to traffic, the negative 5.4%. Can you break that down by month so we can try to get an understanding of how that, trended in the quarter?

Benjamin Porten: There really was not enough difference between the month to really call out any sort of trend. Okay. So pretty much the same. Yep. I was just gonna the only thing I was gonna add is the June mix has seen a pretty it is it genuinely surprised me. So that is really it is good to be surprised, in a positive way. Right.

Jim Sanderson: But relatively stable, traffic trend throughout the quarter. By month. Is the right way to look at this. Yes, sir. Alright. I will pass it on.

Analyst: Thank you.

Hajime Uba: Thanks, Jim.

Operator: This now concludes our question and answer session. Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. Please disconnect your lines and have a wonderful day.