Recent pressures have led to customers viewing the entire category as more expensive, CEO says.

Nothing at Kura Sushi had changed. Guest survey scores were as strong as ever, if not higher in some units. Social media mentions were buzzing. Consumer value perception was strong—the brand took just low-single digit pricing. Food quality remained high. Portions didn’t change. Either did guest experience. And yet, in a matter of weeks, everything on the sales front turned.

Kura Sushi posted 7.3 percent same-store sales growth in March. In California in particular—a market that accounts for more than half of the chain’s comp performance—the line was 14.1 percent higher, year-over-year.

But in mid-April, trends abruptly spun. As a result, West Coast comps climbed 7.3 percent in Q3 as Kura Sushi’s overall figure inched up only 0.6 percent. While the brand expected Southeast softness (sales slowed from up 1.8 percent in March to down 3.9 percent for the quarter) due to cannibalization from increased infill of units, this California shift was “sudden and unexpected,” CEO Hajime Uba told investors Tuesday on Kura Sushi’s Q3 call.

Normally, cannibalization is a factor Kura Sushi and its 20 percent annual growth pace offsets with strength in California. Remove that buffer, though, and the impact of single-unit markets becoming second- and third-unit areas became more vivid than usual.

However, refocusing on what suddenly tipped in April, Kura Sushi mentioned previously it expected California’s FAST Act (which pushed certain quick-service chain wages up to $20) to provide a tailwind as pressures promoted more aggressive pricing among competitors. That would, in theory, only serve to clarify Kura Sushi’s relative value, both versus other sushi brands and now also fast-food ones. But what happened instead, Uba said, is there was a general perception that restaurants as a category became more expensive, “introducing industry-wide pressures regardless of a given restaurant’s relative value,” he noted.

Once Kura Sushi began to see the dip in April, it took on a “litany of cost management measures,” Uba added. That’s one of the reasons it was able to maintain restaurant-level operating profit margin of 20 percent and expects those efforts to ramp up in Q4 2024 and Q1 2025. It also hired its first VP of marketing in April (the timing happened to coincide) and has a bevy of tech plans to draw on additional sales levers, as well as an August change to serve 100 percent Canadian snow grab in rolls. Total sales in Q3 were $63.1 million, comprised of the 0.6 percent comp and traffic growth of 0.3 percent.

Before getting deeper into some upcoming changes, Uba said it’s a bit early to know whether this larger macro roadblock is an industry-wide or subsector setback—Kura Sushi is one of the early reveals each earnings season. But Uba expects the summer reports to mirror what the brand saw on a wide scale, which, again, goes back to the “reams and reams” of consumer data he dug into when the arrow reversed. “This is obviously a massive topic of discussion. It’s really an ongoing discussion within the company,” he said of pricing. “But at the end of the day, we do think that maintaining the value proposition of Kura Sushi is extremely important, not just now when people are going for discount orders, but really for the long-term health of the company.”

Kura Sushi has spent more than a decade becoming 30–50 percent cheaper than sushi peers through scale and long-term planning. It’s currently running price at about 4 percent after a 1 percent take in May and an additional 1.7 percent in July. Price/mix in total was negative 0.3 percent in Q3, with pricing of about 3.4 percent and mix of negative 3.7 percent, which was a meaningful improvement over the prior quarter when price/mix was negative 3 percent (price of 3 percent and mix of negative 6 percent).

“So it would be that 4 percent pricing in combination with the operational streamline that is going out across our system as well as the tech pipeline that we have,” Uba said. “That’s a unique opportunity to Kura. And so, we’re taking advantage of that as much as possible in terms of not needing to take as much price, continuing to be a very strong value, and making sure that our brand identity remains intact.”

Trends appear to have stabilized in Q4 to date (ending August), with underlying comps in June and July similar to the second half of the third quarter, William Blair shared in a report. Uba said comps are expected to decline at a mid- to high-single digit pace, which would keep with quarter-to-date trends.

Uba, as he did when Kura Sushi hinted this decline was coming a couple of weeks ago, said he feels the current headwinds are macro-driven and transitory. For how long? There’s no real way to guess. That’s where some of the cost-saving and innovative adjustments come in.

“It is unfortunate that the macro environment has weakened, but consumer confidence [has] always bounced back,” he said. “We continue to regularly set new guest survey records, and so we know that our guests like Kura as much as they always have. As restaurant visitation habits normalize, we know that guests will put us at the top of their list because of the exceptional value we have always offered. In the meantime, we are focused on driving incremental operational efficiencies at our restaurants and reducing other costs so that we can continue to post strong unit-level economics and leverage G&A regardless of the overall macro environment.”

Namely, Kura Sushi plans to take aim at incremental operational efficiencies in hourly labor, reductions in pre-opening expenses (primarily labor and the travel associated with management trainees) as it leverages the upside of its infill strategy. More stores unlock shared resources. G&A as a percentage of sales in Q3 was 14 percent, a 20 basis-point improvement year-over-year.

Kura Sushi recently completed a January-introduced rollout of its smartphone mobile ordering system, where guests can order direct tableside, and in-store testing for an additional feature that allows guests to earn prizes through the side menu. Previously, they could only do so with sushi plates.

The “Sushi Slider” is undergoing U.S. certification and the brand is making improvements on a robotic dishwasher in preparation of a final, mass production model. Previous pilot results showed a potential reduction in dishwasher headcount from two to one.

While those updates were announced previously, Uba lifted the lid on some new technologies, including a reservation feature it’s working with the Japan side on for the first time. He called it a “massive upgrade” from Kura Sushi’s current remote check-in system. It will provide guests more control over their dining experience as it addresses the long wait times that have defined the brand for years. Now, customers can identify the busiest times and avoid them by making reservations outside of peak demand, “which we believe is a traffic opportunity particularly on the weekends,” Uba said.

“This technology is accompanied by an automated seating system, reducing the workload of our front-of-house employees,” he added. “These features are top priority, and we are pushing to roll them out as quickly as possible.”

Uba said, even when he personally decides to eat at Kura Sushi, he has to balance the commitment of waiting in line. “And I don’t think that’s a problem that most restaurants have to deal with,” he said. “Being able to address this, I think, is a very meaningful lever for us to pull. But the reason we’re going into such detail is we’re just going to be as clear as we can that we are aggressively managing costs and we’re being very prudent in our approach to driving sales. We’re not taking aggressive discounting or anything that’s going to result in just short-term gains. The focus is to improve products or to add incremental technologies, things that will continue to serve us well regardless of the macro environment, things that will stay with us as things improve.”

Kura Sushi launched a rewards program in mid-October and continues to appreciate lift. Frequency among these users has been sequentially stable at about 1.3 transactions per month.

Kura Sushi doesn’t expect the climate to stall growth on the unit count front, either. It’s still targeting at least 20 percent annual expansion after opening four stores in Q3—Waterford Lakes, Florida; Atlanta; Scarsdale, New York; and Roseville, California. That latter marked the 14th restaurant of fiscal 2024—10 of which have been in existing markets—and the high-end of its previously shared guidance. Additionally, there are six units under construction.

“We know that while we can’t control the macro environment, we can control our offering,” Uba said. “We know that guests like sushi, and people just don’t make sushi at home. And so, eventually, people will want to go out and eat sushi. And we just need to be the restaurant that they immediately think of when they think about, ‘where do we want to go to eat sushi?’”

On the topic of cannibalization, Kura Sushi views the adjustment as something with broader benefits. It plans to open “several” new restaurants in existing markets next year, which “will allow us to grow on the talent pool developed by local restaurants and meaningfully reduce our third-party recruiting agency fees,” Uba said.

The mix of new and existing market growth in 2025 should be about a 40/60 split. That’s a bit higher than 2024, Uba said, but none of the markets have reached penetration for the 64-unit chain (a unit in Lake Grove, New York, opened in Q4 so far), which has locations across 17 states and Washington DC.

“It’s just we’ve learned some things,” Uba said. “So, for instance, one would be, our expectation before was that 30 minutes was sufficient in terms of minimizing cannibalization, but what we’ve learned is that for some of our restaurants, [it’s] 45 minutes very consistently.”

Two stores from the past year that potentially portend the future, he continued, are Kansas City and Columbus, Ohio. Those were new-market entries and not, generally, considered obvious sushi spots. But they’re doing well, the rent is lower, and the cost of doing business friendlier. “And so, they not only are very popular, they’ve very profitable,” Uba said. “And again, because they’re not obvious sushi markets, the success there not just demonstrates our portability, which every single one of our openings has done, but it’s really given us that much more flexibility in terms of what we think of as being an extremely productive restaurant.”

One thing that won’t change, even with a new marketing VP, is Kura Sushi has no plans to try “something new and massive as a Hail Mary,” Uba explained. The brand won’t gamble millions on advertising. It will instead focus on guarding costs and smaller marketing wins.

“We believe that whitespace potential remains just as strong as ever and that our growth prospects are extremely strong,” Uba said of the brand, which believes it can reach 300 domestic stores. “So nothing has changed in terms of our appetite.”

Casual Dining, Chain Restaurants, Feature, Finance, NextGen Casual, Kura Sushi