Kura Sushi USA, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended August 31, 2020. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are included below where relevant. Amounts are in U.S. dollars.
Business context
Kura Sushi operates a technology-enabled Japanese restaurant concept. It had 25 restaurants in five states at fiscal year-end, up from 23 a year earlier, after opening two locations. COVID-19 forced temporary closure of all 25 restaurants on March 18, 2020, followed by partial reopenings under capacity and service restrictions. At the filing date, the company reported 28 restaurants: 12 with reduced-capacity indoor dining, 15 offering outdoor dining or takeout only, and one temporarily closed.
Financial and operating results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $45.2 million | $64.2 million |
| Operating income (loss) | $(16.5) million | $1.7 million |
| Net income (loss) | $(17.4) million | $1.5 million |
| Diluted earnings (loss) per share | $(2.08) | $0.26 |
| Adjusted EBITDA | $(13.0) million | $5.2 million |
| Restaurant-level operating profit (loss) | $(0.7) million | $12.9 million |
| Comparable restaurant sales growth | (37.8)% | 6.2% |
| Average unit volume | $1.94 million | $3.50 million |
Sales fell 29.7%, primarily due to COVID-related closures and reduced dining capacity. Restaurant-level operating margin was (1.6)%, versus 20.1% in FY2019; operating margin was (36.5)%, versus 2.6%. These results reflect substantial deleveraging of labor, occupancy and other costs as sales declined. FY2020 included a $1.8 million CARES Act employee retention credit that reduced labor costs, and a $5.6 million valuation allowance against deferred tax assets. No long-lived-asset impairment was recorded.
Fourth quarter: Sales were $5.5 million, operating loss was $6.8 million, and net loss was $6.8 million. The prior-year fourth quarter recorded sales of $18.8 million and net income of $0.9 million.
Cash, liquidity, debt and obligations
- Cash and cash equivalents were $9.3 million at August 31, 2020, down from $38.0 million a year earlier.
- Operating cash flow was $(13.0) million; investing cash flow was $(14.8) million, primarily reflecting property and equipment spending; financing cash flow was $(1.0) million. Cash decreased by $28.8 million during the year.
- The company had no borrowings under its Kura Japan revolving credit facility at year-end. The facility was increased after year-end from $20 million to $35 million; the company subsequently borrowed $3 million through the filing date. Advances have a 60-month maturity under the amended terms.
- Finance lease liabilities totaled $2.5 million. Operating lease liabilities totaled $62.0 million, with $98.5 million of undiscounted operating lease payments. These lease obligations are significant fixed commitments, not equivalent to conventional funded debt.
- Management stated cash on hand, operating cash flows and available credit were expected to cover lease obligations, capital expenditures and working capital needs for at least the next 12 months.
Changes, outlook and risks
- COVID-19 sharply disrupted restaurant operations and demand. California locations had suspended conveyor-belt service under local restrictions; employee delivery, outdoor dining and takeout increased labor needs. The full duration and financial impact remained uncertain.
- The company slowed new openings to conserve cash, but stated it expected to continue opening restaurants where it believed they could be profitable. Its longer-term targets included approximately 20% average annual unit growth over five years and estimated U.S. potential exceeding 290 restaurants; these are aspirations, not assured guidance.
- Adoption of lease accounting standard ASC 842 added $56.1 million of operating lease right-of-use assets and $62.0 million of operating lease liabilities at August 31, 2020. The company said adoption materially affected the balance sheet but had an immaterial effect on reported operations and cash flows.
- Key risks include renewed closures or capacity restrictions, concentrated exposure to California and Texas, reliance on Kura Japan and major food suppliers, long-term non-cancelable leases, labor and food-cost pressures, and the capital required for expansion. JFC accounted for 59% and Wismettac for 27% of FY2020 food and beverage costs.
- A putative California wage-and-hour class action was pending; the company said it could not estimate the possible loss range and intended to defend the matter. Management did not believe the litigation then known would materially harm the company, but noted claims could increase costs or losses.
- Kura Japan controlled approximately 81% of combined voting power. The company reported effective management disclosure controls and internal control over financial reporting; the external auditor was not engaged to attest to internal-control effectiveness.
Important facts for investors to verify
- Current restaurant operating status, sales trends, comparable sales and unit economics as pandemic restrictions change.
- Cash burn, available borrowing capacity, subsequent draws and terms or covenants of the related-party credit facility.
- Ability to meet long-term lease commitments and fund planned openings without additional financing.
- Whether deferred tax assets, including tax-credit and net operating loss carryforwards, can ultimately be realized.
- Developments and potential exposure in the wage-and-hour litigation, and continued dependence on Kura Japan and concentrated suppliers.