KRUS

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Kura Sushi USA Incorporated fiscal third quarter 2026 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 Jimmy Uba, President and Chief Executive Officer, and Benjamin Porten, SVP, Investor Relations and System Development. Now, I would like to turn the call over to Mr. Porten.

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal third quarter 2026 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 the 8-K submitted to the SEC. Before we begin our 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, 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 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 useful in evaluating our performance. The presentation of this additional information should not be considered in isolation, nor as a substitute for results for private accordance with GAAP, and the reconciliations to comparable GAAP measures are available in our earnings release. With that out of the way, I would like to turn the call over to Jimmy.

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 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 due to tariffs, our operational discipline 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 -0.4%, with -5.1% of traffic offset by +4.7% in price on the mix. Effective pricing for the quarter was 4.5%. During our last earnings call, we mentioned that mix being close to flat at -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 guest growth exceeding effective pricing. Pricing leapt 1% as of June 1st, which we offset with 1% pricing on July 1st, making our effective pricing for fiscal fourth quarter 4.2%.

Cost of goods sold as a percentage of sales was 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 COGS 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 2025's full-year labor cost of 32.9%. I'm very pleased to share that as of the end of our third quarter, we've 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 labor line. Turning to unit development, we opened seven 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 restaurants 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 for a number of restaurant openings in both Q3 and Q4. A loss of approximately six revenue months has impacted our revenue expectations for the year, which we will discuss shortly.

These delays occurred following the April earnings call across different geographies and for different reasons. For many unrelated delays to coincide with one another is highly unusual. Our marketing team has been hard at work building our IP pipeline for fiscal 2027, which is shaping up to be one of our strongest ever. Following our current collaboration with Honkai: Star Rail, we have a collaboration with Atlus' Persona. In June, Atlus officially announced the release of the much-awaited Persona 6, making the end of a decade-long wait for fans since 2016's Persona 5. In September and October, we are partnering with The Apothecary Diaries, coinciding with the release of the anime's latest season. I'm 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 the Mysterious Book for the Nintendo Switch 2.

In other marketing news, we remain on track for our fiscal 2027 launch for our upgraded status tiered rewards program. We are also in the process of introducing optionality to our Bikkura Pon system by giving guests the 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 cost. Development is currently underway, and we hope to have updates for you at our November earnings call. Now, I'll 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 -0.4%, with -5.1% from traffic and 4.7% from price and mix.

Comparable sales growth in our West Coast market was -1.2% and -2.1% in our Southwest market. Effective pricing for the quarter was 4.5%. As a reminder, beginning in the first quarter of fiscal 2027, we will no longer provide regional breakdowns for comparable sales as regional comps are largely determined by the timing of inflows, and we do not believe they are indicative of our overall company trends. Turning to costs, 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. 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 were 7.8% compared to prior year quarter's 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%. General and administrative expenses as a percentage of sales were 11.9% as compared to 11.8% in the prior year quarter. Operating loss was $39,000 compared to operating loss of $162,000 in the prior year quarter. Income tax expense was $49,000 as compared to $55,000 in the prior year quarter. Net income was $423,000, or $0.03 per share, compared to net income of $565,000 or $0.05 per share in 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.

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 2026. 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%, with average net capital expenditure per unit continuing to approximate $2.5 million. We continue to expect G&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 and 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 margin and restaurant 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 all of our team members for their continued efforts. This concludes our prepared remarks. I'm now happy to answer any questions you have. Operator, please open the line for questions. As a reminder, during the Q and A session, I may answer in Japanese before my response is translated into English.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 star keys. One moment while we pull for questions. Our first question is from Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

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. With the guidance range that you've provided on revenues for FY 2026, what's 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?

Sure. Thank you, Jeremy, for your first question. Please allow me to speak in Japanese, Ben is going to translate. [Non-English content]

Hi, Jeremy, this is Ben. We were certainly disappointed that traffic came in negatively as well. 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're beginning to see a little bit of benefit as we've entered Q4, but those benefits are partially offset by how popular the World Cup is. The guidance that we're providing for the revenue contemplates the Q3 and Q4 macro background as well as the construction delays.

[Non-English content]

Jeremy, as it relates to comps, we continue to be confident in our ability to deliver slightly positive comps for the full year. This year's been choppy, but we're very much looking forward to fiscal 2027. As we've discussed in the past, the real estate pipeline is extremely promising. It's the first time that we've had a majority new market ratio in many years, that'll be a catalyzation tailwind, and so that'll be a comp tailwind for us. The fiscal 2027 IP pipeline is phenomenal. I could not be happier with it, that should be a pretty meaningful tailwind as well. We have the rewards program step up coming on as we enter the new year. As it relates to fiscal 2027, we're very bullish about where we can land for the comps.

Got you. Okay. I think it implies something more like down 3%-4%, maybe in Q4. I did have a follow-up question. Just, the company had a fairly consistent history of comp performance. Consistently positive with some volatility, but there's clearly been a bit more volatility over the past two years. Wanted to just understand what you think might be driving that. In terms of thinking about as the company is closing in on 100 locations over the coming couple of quarters, how should we be thinking about the long-term growth algorithm for Kura as a concept? Is this something where you think of long-term comps in the range of, let's say, low single digit, positive low single digit, obviously with some variability.

Color on what internally you expect and obviously there has been some noise in 2026, but it seems as though the IP collaborations have had maybe a bit of a bigger impact than typical on results. Of course, you got to throw in there the higher gas prices. Thoughts on those two questions.

[Non-English content]

In terms of the things that are under our control as it relates to comp, we see that really pipeline management is the dominant factor, that relates both to IP pipeline as well as real estate pipeline. As it relates to the IP pipeline, you know that last year we had a five-month stretch without IPs, that was a very visible comp impact. We've since remedied that. We have seven this year, and we're actually continuing to grow the number that we're doing every year as we know that there's maximal excitement at the beginning of every campaign. Fiscal 2027, beyond having higher quality IPs, we'll also have a total of eight IPs. We're also supplementing this by putting more energy into our food-based promotions.

Our Kura Reserves have been very successful with our guests, we're increasing the frequency from nine a year to 12 a year. 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. As it relates to the last two years' comps, I would also add just that this hasn't happened in a vacuum. We're in a war now with elevated gas prices. Last year, we had the FAST Act come online and we've got a pretty big California presence. There are factors beyond our control, but we feel extremely good about the factors that are in our control.

Great. All right. Well, thanks for taking my questions, and best wishes.

Thanks, Jeremy.

Thank you. Our next question is from Andrew Charles with TD Cowen & Co. Please proceed with your question.

Thank you. This is Zach 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. Can you just talk about where that down 40 basis points same-store sales for the quarter fell relative to your expectations, then how your expectations for 4Q have changed over the last 90 days?

[Non-English content]

[Non-English content]

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Hey, Zach, this is Ben. In terms of the -0.4 for comps, this was within our range of possibilities. It was not a surprise to us, just given the overall macro pressure and the meaningfully elevated gas prices, especially in California. In terms of our thoughts on comps over the last 90 days, they haven't really changed. We continue to believe that we can deliver positive comps for the full year.

[Non-English content]

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 at the time of the last call.

Got it. Okay, thank you. The second question is on mix. Could you just unpack what made that flip positive in the quarter? Last call, it did sound like you weren't expecting that to remain flat, what drove mix to actually be positive and better than you were expecting?

[Non-English content]

Hey Zach. I'm a little surprised, it was a pleasant surprise at the beginning of the year when we began to see mixed terms so favourable, 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 our interpretation is that this is what completely a result of our pricing strategy. The 3.5% that we priced out, because of that we took in November, meaningfully underprices our competitors and so our guests who have been going to other sushi restuarants have just, they've become accustomed to paying much higher price than they have, say, a year ago, and they come into our restuarants with those higher price expectations, they see how much cheaper we are than they expect and so they end up spending more as a result. We are seeing growth not just in per person plates but also nice attachment drinks as well.

[Non-English content]

So, I think, generally in the restuarant insudtry, when there are macro pressures on the consumer, the expectation is that people reduce frequency, We're seeing that in traffic and you know, given the 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're spending more than ever before. Clearly they're very, they're responding well to the efforts that we've been putting in place, whether it be thr, you know, the Coke Float promotions that we're running in June, our new giveaways, hand roll campaigns. Our promotional calendar has really been packed and seeing that mix improving sustain over, you know, more than six month now gives us that much more confidence that competitive advantage between ourselves and the rest of the sushi industry is really, it cannot be crossed.

[Non-English content]

We feel that we've been able to take minimal pricing because of the aggressive cost controls and our strong hope is that as, you know, the macro enviroment normalises and the World Cup is no longer a factor, our traffic returns but our price mix remains elevated. Our pricing for fiscal 2027 are actually below where we came for fiscal 2026. We just hope to keep compounding this advantage.

Got it. Thanks guys.

Thank you. Our next question comes from Todd Brooks from The Benchmark Company. Please proceed with your question.

Hey, thanks for taking my questions. Just one to kind of dimensionalize the permitting delays and getting the new units open that you've experienced, and that kind of caught you by surprise. I think you framed it up maybe six months of lost unit operating time, 4 million AUVs. I mean, can we ballpark the revenue guide down kind of a couple million attributable to the delays and the balance just same sales performance?

[Non-English content]

Yeah, that's fair analysis.

Okay, great. Thanks. And then just looking forward, you talked about how pleasantly surprised you've been by the mixed performance the last couple quarters. I think coming to this quarter you has looked for mix to revert. That did not happen. Based on what you're learning here as you're thinking about Q4, are you still assuming that you can kind of hold the hill on mix, or are you expecting in kind of the guidance horizon moving forward for the balance of the fiscal year mix to switch back to slightly negative?

[Non-English content]

Just given that the mix is actually, you know, improved as we've entered the quarter. We remain very optimistic. In terms of the remainder of the quarter, we really don't see a reason for trends to change.

That being said, anything is possible, that's reflected in the range of our restaurant-level margin guidance, as well as our expectations to have slightly positive comps for the full year.

[Non-English content]

We believe the macro situation, as every macro situation in the past, will be ultimately transitory, but we believe that the mix flow through that we're seeing now is potentially a sustainable advantage. Net-net, this overall could be a very positive tailwind for us in the coming years.

Great. One final, I'll jump back in 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 last quarter of the fiscal year? 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 impactful promotions with Nintendo? Thanks.

Yeah. It would be my pleasure. After Honkai: Star Rail, we have Persona, which is a role-playing game. In September, October, we have The Apothecary Diaries, which is a popular light novel series, which has since become a very popular anime. November and December, we have Yoshi.

Just Yoshi relative to Kirby, just on magnitudes of expected impact.

I would say it's comparable. You're asking me to choose between children. I love them both.

Yeah.

It's hard to pick.

[Non-English content]

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

Okay, perfect. Thank you both.

No problem.

Thanks, Todd.

Thank you. Our next question is from Matt Curtis with D.A. Davidson. Please proceed with your question.

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 were same-store sales trends affected as you began to lap the resumption of IP collabs, which, correct me if I'm wrong, I believe happened at the end of April?

[Non-English content]

Hey, Matt, this is Ben. For really any IP, our base case expectation is a low single digit contribution. When we have marquee items like Kirby or Yoshi, the expectation is a mid-single digit contribution. We're excited to continue to introduce more and more mid-single digit contributing IPs as we continue.

[Non-English content]

As it relates to Q3, we believe the IPs contributed low single digits. Part of the offset for the traffic pressure that we saw 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's been a pretty big part of the mix growth, so we're very excited for the incremental benefit that we'll have next year by having an extra three of these.

Okay. Thanks. A different topic. I think last quarter you mentioned a 1% comp lift from the reservation system. I was just wondering if that persisted in the third quarter.

Yeah.

Okay, great. Thank you.

Thank you, Matt.

Thanks, Matt.

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

Hey, thanks for taking the question. I'm curious, as you've seen this slowdown in traffic, is there any difference in what you're seeing with new customer acquisition versus your existing customer frequency?

[Non-English content]

We aren't seeing too much of a difference in terms of behavior between non-members and members. The defining feature really for Q3 is just a reduction of frequency.

[Non-English content]

Going back to the reduction of frequency being tied to the macro environment with the higher gas prices, competing attention with the World Cup, all of these factors we understand is transitory. We're very confident that we'll be able to maintain the momentum of our mix and come out stronger than before.

Thanks for that. On the restaurant delays, are there steps that you're taking to help ensure that we don't see kind of any incremental issues in 2027? Are you adding more buffer to the pipeline as you think about that?

[Non-English content]

Of the four stores, three of the delays were caused by fire inspections. In fact, when we do have delays, it's typically because of a fire inspection. When we do have a correction that we need to make, it's usually something that we can do in two weeks. The asks this time were much more involved. They took on average six weeks with extra time added on top on the end as we were waiting for re-inspection to be scheduled. That was pretty frustrating. Obviously, we adjust our practices with every hiccup of these types that we face, unfortunately, it's always a different issue. Different counties have different rules, different inspectors, even in the same county, are idiosyncratic. That makes it pretty hard to head off. We do bake in to our expectations a certain degree of delays.

For so many to fall on each other at the same time and for them to be much longer than we typically experience, that was what was so unexpected.

[Non-English content]

We're happy to say that we just opened our Charlotte, North Carolina location today. It's our 94th restaurant. As part of that inspection process, there was a request for a third-party inspection of our conveyor belts, which had never happened with our preceding 93 restaurants. These kinds of surprises can always pop up. Now that that's happened, we know, whenever we're opening up in a new county, to come with that third-party inspection ready and head off that issue for the future.

Okay. Thank you.

Thanks.

Thank you. Our next question is Mark Smith with Lake Street Capital. Please proceed with your question.

Hi, guys. You mentioned some cannibalization kind of easing here, but I'm curious any real impact in the quarter as well as your outlook for many of the restaurants that you've opened over the last several months from cannibalization.

[Non-English content]

Hey, Mark, this is Ben. In the past, I think our estimate for the comp headwinds, broadly speaking, were between 300 to 400 basis points. Now we've been able to bring it down to about 250 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 infills and next key performers. As we start to benefit from the 55% new market mix, we would expect that cannibalization impact to steadily lessen over fiscal 2027 and 2028.

Okay. You talked about opening delays. I'm curious if that's added any incremental costs. I know that you guys maintained your guidance here for kind of new restaurant build out costs. Are you seeing any incremental costs from delays or just inflationary pressure that's leading to higher opening costs?

[Non-English content]

Hey Mark. When we have an opening delay by an inspection, really the primary cost would be in training costs or rehiring costs, because you can't ask somebody to wait for a month with no job. That being said, in spite of those incremental costs, we were able to raise our restaurant level operating profit margin guidance to 18.5%. We are spectacularly proud of just how efficient all of our restaurant level members have been. As we get closer to the end of the year and have more visibility into fiscal 2027, we think that we are going to get a lot closer to that 20% historical goal a lot faster than we'd expected. We're very excited to give you guys an update on that as well in November.

Perfect. The last one from me is just thinking about menu price increases, what you guys have taken. It sounds like you're seeing positive results out of offering a value proposition, but I'm curious if you want to speak to elasticity in the price increases that you've taken and response from consumers.

Well, I think the mix growth really speaks for all of it. Our plan is really to just keep the value as intact, as aggressive as it has been, and wait for that traffic to return and then just benefit on both ends.

[Non-English content]

We're actually in the process of performing an analysis to get an empirical view of just how much pricing our competitors have been taking. We can speak anecdotally that against our 4%, it's much typically closer to 20%. It's really just a gulf that has continued to widen exactly as we'd expected post tariff. While it's 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, we're extremely excited.

Excellent. Thank you, guys.

Thanks, Mark.

Thank you. Our next question is from J.P. Wollam with Roth Capital Partners. Please proceed with your question.

Great. Hi, guys. Appreciate you taking my questions. I want to just follow up on maybe the new customer or the understanding that you talked about earlier, guests going to competitors and then coming to you guys and spending a little bit more. I'm curious, is there anything to show that new customers or customers maybe trading down from others is actually increasing as a percent of mix relative to your repeat customers? I'm trying to get a sense of whether you think there's some real market share gains that are going on here that maybe some customers have fallen off, but as that lower income traffic maybe returns, you see this big boost ahead.

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 non-members than reward members, which has never been the case before. Our interpretation is that that is the reflection of a higher spending tranche of guests coming to us.

[Non-English content]

We commission a consumer study twice a year. Obviously that'll be one of the top questions that we'll have for the next analysis, and we look forward to updating you guys.

[Non-English content]

on just how much market we've been able to capture.

Okay, great. One more, maybe more on a strategic lens. As you sit here, almost 100 units, thinking about your guys' centralized operations management at HQ, as you think about the next 100 units from here, how would you categorize where your infrastructure is at to support that? Is there anything that you're seeing in the next 6 to 12 months that's needed?

[Non-English content]

Right. Hey, J.P., this is Ben. As it relates to fiscal 2027, we already have the pipeline locked and loaded, and we know that it's higher than 20%, so we're happy to report that. In terms of the G&A and support center, we really do think that we have everything intact. We'll just sort of need proportionate growth to manage the more volume of work as we continue to grow. 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 of capital, and our management pipeline. We feel very good about our trading department and our personnel. We've got a great bench. We opened seven restaurants in Q3, but our cash burn was only $3 million.

We're very, very pleased with how our balance sheet management has been going. Really, the remainder is just the availability of high-quality sites. We want to be flexible on that just so that we don't force ourselves to commit to sites that we wouldn't otherwise choose.

Great. Thanks, guys. Best of luck.

Thanks, J.P.

Thank you. Our next question is from Jon Tower with Citi. Please proceed with your question.

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 2026. Can you just speak to exactly what you're doing at the store level to get that level of leverage, particularly in the context of very modest same-store sales growth on the year?

[Non-English content]

Hey, Jon. In terms of the labor gains this year, a lot of it comes down to the work that we did in fiscal 2025. The reservation system was installed system-wide by Q4 of last year, that has resulted in headcount reduction in front of house. We have also gotten better at scheduling appropriately. We have gotten a lot tighter with that. Those two factors have really been the driving factors for the improvement in fiscal 2026. We will be lapping the benefit of the reservation system implementation in Q4, but we have the robotic dishwashers to look forward to for fiscal 2027. This, again, and going back to your comment about leveraging 200 basis points on modest comps, this is really, I think, something that only Kura could do.

Okay. I appreciate all that color. Thank you for that. In terms of thinking about the other OpEx line into next year, obviously right now, you have upped the IP cadence, which I know is going to, or has cost a little bit more money. 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 one more IP, and also you are going to have these Kura Reserve 12 months or 12 Kura Reserve options throughout the year versus nine this year. Broadly, how are you thinking about marketing spend next year versus this year?

[Non-English content]

Jon, we are happy you asked this because this is something that Jimmy and I have been working on. Jimmy kind of touched on this in the prepared remarks, but the Bikkura Pon, we think, is actually going to be maybe a bigger lever than people are initially appreciating. To give you some context, with the last consumer study, we saw that guests really saw the challenge of getting to that 15th plate and getting the prize is very compelling. They found the prizes themselves not compelling. We were dispersing these prizes every time, regardless of whether guests were interested in it or not. By introducing the ability to give 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.

The cost of the dessert is really offset by the incremental visit that we get when guests come to redeem it. 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 the additional frequency of IP campaigns and food LTOs.

[Non-English content]

We're really putting in every effort that allows us to expect meaningful leverage in fiscal 2027 over fiscal 2026 as it relates to other costs as a percentage of sales. As we get ready for fiscal 2027, we've been pretty aggressively negotiating our contracts with our vendors for our other cost items. We're in the process of bringing a lot of our preventive maintenance work in-house, and that would be a very meaningful cost savings. With that and the Bikkura Pon savings as well, we're feeling very good about the other cost expectations for fiscal 2027.

[Non-English content]

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. Thank you for taking the questions. Appreciate it.

Thanks, Jon.

Thank you. Our next question is from Jim Sanderson with Northcoast Research. Please proceed with your question.

Hey, thanks for the question. Wanted to go back to the margin discussion. I think you're guiding towards 18.5% on a non-GAAP basis, which 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 2027?

[Non-English content]

As it relates to margin, yes, a lot of the benefit is coming from the labor. We will be lapping the introduction in Q4, and 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 2027, we're 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're getting some refunds on tariffs paid for our other cost items where we are the importer of record, and so that's a one-time tailwind, but that does play into the 18.5% expectation as well.

That one-time tailwind.

expansion.

That being said, all of our efforts, they're designed to be structural, and so they're just baked into the business now, and we expect the gains to only accelerate as we enter fiscal 2027.

There will still be the opportunity for the robotic dishwashers to add value in fiscal 2027 as they roll out.

Absolutely. Yes. 100%.

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Really everything outside of the nominal refund that we received on the tariffs for other costs, all of those factors continue to benefit us.

The one-time tariff will be fourth quarter pending?

Yes.

Okay.

Yes.

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

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There really wasn't enough difference between the months to really call out any sort of trend.

Okay. Pretty much the same. Yep.

The only thing I was going to add is the June mix has seen. It genuinely surprised me. It's good to be surprised in a positive way.

Right. Relatively stable traffic trend throughout the quarter by month is the right way to look at this?

Yes. Yes, sir.

All right. I'll pass it on. Thank you.

Thank you.