Kura Sushi USA, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended February 29, 2024; fiscal year ends August 31. Unaudited results are prepared under U.S. GAAP. Dollar amounts below are in millions unless stated otherwise.
Business context and operating performance
Kura Sushi operates technology-enabled Japanese restaurants using a revolving-sushi service model. It had 59 restaurants in 17 states and Washington, D.C. at February 29, 2024, following nine openings in the first half.
Key financial metrics
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Sales | $57.3 | $43.9 | $108.8 | $83.3 |
| Operating loss | $(1.7) | $(1.0) | $(4.5) | $(3.2) |
| Net loss | $(1.0) | $(1.0) | $(3.0) | $(3.1) |
| Adjusted EBITDA | $2.9 | $2.3 | $4.6 | $2.9 |
| Adjusted EBITDA margin | 5.0% | 5.3% | 4.2% | 3.5% |
- Comparable restaurant sales rose 3.0% in Q2 and 3.5% for the first half, versus 17.4% and 11.8%, respectively, in the comparable prior-year periods.
- Restaurant-level operating profit was $11.2 million in Q2, with a 19.6% margin, versus $8.9 million and 20.3%. For the first half, it was $21.3 million and 19.6%, versus $16.1 million and 19.3%. These are non-GAAP measures.
- Operating cash flow was $6.2 million for the first half, compared with $1.7 million. Investing cash outflow was $20.6 million, including $22.8 million of property and equipment purchases; financing cash inflow was $1.5 million.
- At February 29, cash and cash equivalents were $56.8 million and short-term investments were $6.1 million. The company had no revolving-credit borrowings and $45.0 million available under its credit line. Total operating lease liabilities were $129.3 million; the filing reports no material off-balance-sheet arrangements.
Material changes versus prior periods
- Sales increased 30.4% in Q2 and 30.6% for the first half, mainly due to 14 restaurants opened after February 28, 2023 and menu-price increases. Comparable-sales growth slowed substantially from the prior-year comparisons.
- Q2 operating loss widened to $1.7 million from $1.0 million, while net loss was slightly lower, at $1.0 million versus $1.015 million. For the first half, operating loss widened, but net loss improved modestly, aided in part by higher interest income on cash and investments.
- Restaurant operating costs grew faster than sales in several areas. Labor was 32.8% of Q2 sales versus 31.5%; other costs were 14.6% versus 13.3%; restaurant depreciation was 4.7% versus 4.0%. Food costs improved to 29.6% from 30.1%. G&A declined as a share of sales to 14.3% from 16.2%.
- Cash and cash equivalents declined by $12.9 million from August 31, 2023, primarily reflecting capital investment and restaurant growth.
Outlook, risks and unusual items
- Management expects to open 13–14 restaurants in FY2024 and anticipates higher revenue and restaurant operating costs as the company expands. It also expects G&A dollars to increase to support growth and public-company compliance.
- Management cites inflation in labor, repairs and maintenance, restaurant supplies, and energy. Menu pricing, productivity improvements, and supply-chain initiatives have offset some pressure; management cautions inflation may continue to affect results.
- The company had $10.1 million of contractual commitments for restaurant construction and operating goods, expected to be paid within 12 months. It also disclosed $44.8 million of operating leases for restaurants not yet in possession and a subsequent restaurant lease with $4.4 million of associated lease liabilities.
- The filing describes ordinary-course legal matters, including a referenced putative class action. Management does not expect litigation to have a material adverse effect, but says a rise in claims or successful-claim amounts could adversely affect results. A $205,000 litigation accrual was included in first-half Adjusted EBITDA reconciliation.
- A full valuation allowance was recorded against net deferred tax assets, reflecting management’s assessment that realization was not more likely than not. No material changes to previously reported risk factors or market risk were disclosed; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the planned 13–14 FY2024 openings are achieved, and the resulting capital spending, lease commitments, and cash needs.
- Whether comparable-sales growth and restaurant-level margins can hold up as labor, occupancy, depreciation, and other costs rise.
- The status and potential exposure of the putative class action and other legal matters.
- Cash runway and financing flexibility: cash and investments, continued operating cash generation, the $45 million related-party credit facility, and substantial lease obligations.
- How the full deferred-tax valuation allowance and the transition out of emerging-growth-company status affect future disclosures and costs.