Kura Sushi USA, Inc. — Q3 FY2024 Form 10-Q
Business context and period. The filing covers the fiscal third quarter and nine months ended May 31, 2024; amounts are in U.S. dollars. Kura Sushi operates technology-enabled revolving-sushi restaurants. It had 63 restaurants in 17 states and Washington, D.C., versus 46 a year earlier.
Financial performance
| Metric | Three months ended May 31, 2024 | Year-over-year | Nine months ended May 31, 2024 | Year-over-year |
|---|---|---|---|---|
| Sales | $63.1 million | +28.1% | $171.8 million | +29.7% |
| Comparable restaurant sales | +0.6% | vs. +10.3% | +2.4% | vs. +11.0% |
| Operating income (loss) | $(1.2) million | vs. $1.3 million income | $(5.7) million | vs. $(1.9) million |
| Net income (loss) | $(0.6) million | vs. $1.7 million income | $(3.6) million | vs. $(1.4) million |
| Adjusted EBITDA (non-GAAP) | $4.5 million; 7.1% margin | vs. $5.1 million; 10.4% | $9.1 million; 5.3% margin | vs. $8.1 million; 6.1% |
| Restaurant-level operating profit (non-GAAP) | $12.6 million; 20.0% margin | vs. $11.6 million; 23.5% | $33.9 million; 19.7% margin | vs. $27.7 million; 20.9% |
Quarterly operating costs grew faster than sales: labor was 32.3% of sales versus 29.2%, depreciation 5.0% versus 4.0%, and other costs 14.4% versus 12.5%. Food and beverage costs improved to 29.2% from 30.0%. Management cited higher wage rates and pre-opening labor, new-store costs, and increased advertising, supplies, repairs, utilities and software expenses.
Cash, liquidity and obligations
- At May 31, 2024, cash and cash equivalents were $59.4 million and short-term investments were $1.3 million, down from $69.7 million and $8.5 million, respectively, at August 31, 2023.
- Nine-month operating cash flow was $14.9 million; investing cash outflow was $27.3 million, including $34.0 million of property and equipment purchases; financing cash inflow was $2.0 million. Cash decreased $10.3 million over the period.
- No borrowings were outstanding on the $45.0 million revolving credit facility; the full amount remained available. The company reported no material off-balance-sheet arrangements.
- Operating lease liabilities totaled $135.6 million, including $11.7 million current. The balance sheet also included $117.0 million of operating lease right-of-use assets. These lease obligations are distinct from funded debt.
- Current assets were $72.3 million and current liabilities $33.7 million. Stockholders’ equity was $166.4 million.
- Management said cash, operating cash flow, investments and available credit should fund lease obligations, capital spending and working capital for at least the next 12 months. Contractual construction and purchase commitments were $13.0 million, expected to be paid within 12 months.
Changes, outlook and risks
- Sales growth primarily reflected 17 restaurants opened after May 31, 2023 and menu price increases; comparable sales growth slowed markedly. Management said restaurant sales had softened since mid-April amid lower consumer spending.
- The company opened 13 restaurants in the first nine months and expected to open 14 in FY2024. It anticipated higher full-year revenue and restaurant operating costs from expansion, and higher G&A spending to support growth and public-company compliance.
- Management cited inflation in labor, repairs and maintenance, restaurant supplies and energy. Menu pricing, productivity efforts and supply-chain initiatives had partially offset cost pressures; inflation could continue to affect results.
- Two groups of former employees initiated separate arbitrations alleging FLSA and Washington, D.C. wage-law violations. The company accrued $0.6 million in the quarter; the estimated liability could increase and adversely affect results or cash flows.
- At May 31, the company had $44.7 million of restaurant leases for which it had not yet taken possession. After quarter-end, it entered into two further leases with $15.6 million of associated lease liabilities; the leases are expected to commence in FY2025.
- A full valuation allowance was recorded against net deferred tax assets, primarily reflecting recent cumulative losses and other realization factors. Management reported disclosure controls were effective and no material changes in internal control during the quarter.
Most important facts for investors to verify
- Whether softened sales and low comparable-sales growth persist, and how traffic, average check and consumer spending develop.
- Whether new restaurants achieve expected sales and margins as labor, pre-opening, depreciation and other operating costs rise.
- Whether management achieves the FY2024 target of 14 openings and how expansion affects cash use and capital spending.
- Whether the employee arbitrations result in costs above the $0.6 million quarterly accrual.
- The scale and timing of new lease commitments, and continued cash availability given the company’s substantial lease obligations and investment program.
- Adjusted EBITDA and restaurant-level operating profit are non-GAAP measures; compare their definitions and reconciliations with GAAP results.