Kura Sushi USA, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended November 30, 2021. The company operates a technology-enabled Japanese restaurant concept. It had 33 restaurants at quarter-end, compared with 28 a year earlier; two additional restaurants opened after quarter-end, bringing the total to 35 as of the filing date.
Financial performance
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $29.8 | $9.4 |
| Operating loss | $(1.3) | $(6.3) |
| Net loss | $(1.3) | $(6.4) |
| Net loss per share | $(0.13) | $(0.76) |
| Adjusted EBITDA (non-GAAP) | $0.8 | $(4.1) |
| Operating cash flow | $10.6 | $(2.7) |
| Capital expenditures and other investing cash outflow | $(6.3) | $(6.6) |
- Sales increased 216.9%, reflecting reopened indoor dining without capacity restrictions, five restaurants opened since the prior-year comparison period, and higher off-premises sales. Comparable restaurant sales increased 154.3%, versus a 50.8% decline in the prior-year quarter; the comparable base was 25 restaurants.
- Restaurant operating costs were 86.0% of sales, versus 128.6%. Food and beverage costs were 30.0% of sales (32.4% prior year); labor 32.5% (46.3%); occupancy 7.4% (18.0%); and other costs 12.1% (22.1%). Management attributed improved cost ratios mainly to higher sales and operating leverage, with food-cost improvement also reflecting menu price increases and higher prior-year spoilage.
- General and administrative expenses were $5.4 million, up 52.2% year over year, but declined to 18.0% of sales from 37.4%. The increase included compensation-related expenses, legal and consulting fees, travel, and other costs.
- GAAP operating margin and net margin were each approximately negative 4.3%, compared with negative 66.8% and negative 67.5%, respectively, in the prior-year quarter. Restaurant-level operating profit margin, a company-defined non-GAAP measure, was 19.5%, versus negative 9.9%.
- Adjusted EBITDA margin was 2.7%, versus negative 43.1%. Adjusted EBITDA excludes specified items and is not a substitute for GAAP results.
Financial position and liquidity
- Cash and cash equivalents were $44.4 million at November 30, 2021, up from $40.4 million at August 31, 2021. Operating cash flow benefited substantially from employee retention credit refunds and changes in working capital; it should not be viewed as solely recurring operating earnings.
- Current assets were $52.9 million and current liabilities $22.7 million. Total assets were $178.8 million; total liabilities were $88.8 million; stockholders’ equity was $90.0 million.
- The company had no borrowings under its $45 million revolving credit facility with majority shareholder Kura Japan, leaving the full $45 million available. The facility has no financial covenants.
- Operating lease liabilities totaled $71.8 million; finance lease liabilities totaled $1.2 million. The company disclosed an additional $30.8 million of operating lease liabilities for restaurants not yet taken possession of, with leases expected to commence in fiscal 2022 and 2023. Subsequent leases added a further $8.6 million of associated liabilities.
- Contractual obligations for restaurant construction and operating goods were $3.4 million, expected to be paid in fiscal 2022. Cash flows from financing activities were a $0.2 million outflow, primarily finance-lease principal repayments.
Outlook, risks, and unusual items
- No quantified revenue or earnings guidance was provided. Management expects to continue opening restaurants in locations it believes can become profitable and stated that cash on hand, operating cash flow, and available credit should fund lease obligations, capital expenditures, and working capital for at least 12 months.
- COVID-19 remained a material uncertainty, including Delta and Omicron spread and potential effects on employees, customers, sales, and growth plans. At filing, all 35 restaurants operated without government indoor-dining capacity restrictions.
- The company had received $8.0 million of employee retention credit refunds and reported $4.1 million remaining; it could not reasonably estimate when the balance would be received. The quarter’s $8.3 million cash-flow inflow from prepaid expenses and other current assets primarily reflected receipt of these credits.
- Management cited food, labor, energy, commodity, and inflation risks. Price increases and operational efficiencies may not fully offset cost pressures and could affect guest traffic or purchasing patterns.
- A wage-and-hour class action settlement of $1.75 million was agreed in September 2021. The company had recorded a $1.78 million liability, including estimated payroll taxes, in fiscal 2021; preliminary court approval was scheduled for May 9, 2022. Other ordinary-course legal matters were not expected by management to have a material adverse effect.
- The company recorded a full valuation allowance against net deferred tax assets, citing recent cumulative losses and uncertainty about realization.
Important facts for investors to verify
- Whether sales and comparable-store momentum persisted after the unusually restricted prior-year comparison period, and how much growth came from new units versus existing restaurants.
- Whether restaurant-level cost ratios and positive Adjusted EBITDA are sustainable as food, labor, and other input costs change; review the non-GAAP reconciliations alongside GAAP results.
- Timing and collection of the remaining $4.1 million in employee retention credit refunds, and the extent to which operating cash flow depends on such receipts and working-capital movements.
- Planned restaurant openings, capital needs, and future lease commitments, including the disclosed leases not yet commenced.
- Final approval and payment terms of the wage-and-hour settlement, and any material developments in other contingencies or COVID-related operating risks.