Kura Sushi USA, Inc. — Q1 FY2020 Form 10-Q
Reporting period: Three months ended November 30, 2019. Unaudited results; amounts below are in U.S. dollars. Kura Sushi operates a technology-enabled Japanese restaurant concept. It had 23 restaurants in five states at quarter-end.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Sales | $17.4 million | $13.4 million |
| Operating loss | $1.4 million | $0.4 million |
| Net loss | $1.2 million; $0.15 per share | $0.4 million; $0.08 per share |
| Net cash from operating activities | $(1.5) million | $1.4 million |
| Capital expenditures and other investing cash flow | $(3.2) million | $(2.6) million |
| Cash and cash equivalents at quarter-end | $33.0 million | $4.0 million |
Sales rose 30.0%, driven by four restaurants opened after the comparable prior-year period and 7.9% comparable restaurant sales growth, versus 4.4% a year earlier. No restaurants opened during the quarter. One location opened in Katy, Texas after quarter-end.
Restaurant operating costs were 88.7% of sales, compared with 87.0%; operating margin was negative 7.9%, compared with negative 3.2%. Food and beverage costs improved to 32.6% of sales from 33.7%, while labor rose to 32.3% from 30.8% and occupancy to 8.3% from 6.9%. Management attributed cost changes to food prices and menu pricing, wage increases, and the higher costs and occupancy of newer restaurants. General and administrative expenses increased 54.8% to $3.3 million, including $0.9 million of public-company costs.
Adjusted EBITDA, a non-GAAP measure, was a loss of $143,000, compared with income of $501,000; adjusted EBITDA margin was negative 0.8% versus 3.7%. Restaurant-level Contribution margin, also non-GAAP, was 17.5% versus 18.7%.
Financial position and liquidity
Cash declined $5.0 million during the quarter. Operating cash outflow included payments that reduced accounts payable by $1.0 million and accrued expenses by $0.6 million. Property and equipment purchases were $3.2 million. Current assets were $36.0 million and current liabilities $10.7 million at November 30, 2019.
The company had no borrowings under its $5 million credit facility and reported compliance with its financial covenants. The facility matures July 31, 2020, is secured by substantially all company assets, and includes liquidity, fixed-charge-coverage, and tangible-net-worth covenants. Finance lease liabilities totaled $3.2 million. Operating lease liabilities totaled $45.5 million; the filing also identifies $17.8 million of leases for restaurants not yet in possession.
Outlook, accounting, and risks
- Management expected to open six restaurants in fiscal 2020, with corresponding increases in sales and restaurant operating costs. It expected public-company expenses to increase general and administrative costs as a share of sales.
- Management said cash on hand, operating cash flows, and credit-facility availability were expected to fund lease obligations, capital expenditures, and working capital needs for at least 12 months.
- The company adopted lease accounting standard ASC 842 on September 1, 2019. Adoption added operating lease right-of-use assets and liabilities to the balance sheet and had an immaterial impact on operations, equity, and cash flows; prior-period figures were not restated.
- A former employee’s putative California wage-and-hour class action remained pending. The company disputes the allegations and said it could not estimate possible losses. Management did not believe the case or other ordinary-course claims would have a material adverse effect, but acknowledged successful claims could affect results.
- Risks discussed include food and commodity price increases, wage and other labor-cost inflation, and the possibility that competition or economic conditions limit menu-price increases or affect customer traffic and spending. Management said there were no material changes to previously reported risk factors.
Important facts for investors to verify
- Whether planned fiscal 2020 openings occur as expected and generate sales and returns sufficient to offset their labor, occupancy, and build-out costs.
- Comparable-sales trends and restaurant-level margins, particularly as labor and occupancy costs rose as a percentage of sales.
- Cash burn, planned capital spending, and liquidity relative to lease commitments and the credit facility’s July 2020 maturity and covenants.
- Any developments in the wage-and-hour class action, for which the company could not estimate a loss range.
- The effects of long-term operating leases, including the $17.8 million of leases for locations not yet in possession.