Kura Sushi USA, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended May 31, 2023. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless noted.
Business context and results
Kura Sushi operates technology-enabled Japanese restaurants featuring its revolving-sushi service model. At May 31, 2023, it operated 46 restaurants, versus 37 a year earlier. It opened six restaurants in the first nine months of FY2023, including one in the third quarter. Nine restaurants had opened since May 31, 2022.
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Sales | $49.2 million | $38.0 million | $132.5 million | $99.1 million |
| Comparable restaurant sales growth | 10.3% | 65.3% | 11.0% | 118.7% |
| Operating income (loss) | $1.3 million | $0.5 million | $(1.9) million | $(2.7) million |
| Net income (loss) | $1.7 million | $0.5 million | $(1.4) million | $(2.7) million |
| Adjusted EBITDA (non-GAAP) | $5.1 million | $3.2 million | $8.1 million | $4.4 million |
| Adjusted EBITDA margin (non-GAAP) | 10.4% | 8.4% | 6.1% | 4.4% |
Financial position, cash flow and liquidity
- Q3 sales increased 29.7%; management attributed growth primarily to the nine restaurants opened since May 2022 and menu price increases. Comparable sales rose 10.3%.
- Q3 restaurant operating costs were 82.9% of sales, compared with 83.0% a year earlier. Food costs increased to 30.0% of sales from 29.7%; labor improved to 29.2% from 31.0%. Other costs increased to 12.5% from 11.5%, while general and administrative expense declined to 14.2% from 15.5% of sales.
- For the nine months, sales grew 33.7%, but food and beverage costs grew 36.6% and other costs grew 40.8%. The company remained loss-making for the period, although its net loss narrowed year over year.
- Net cash provided by operations was $7.1 million for the nine months, down from $17.0 million. The prior-year period included an $8.0 million employee retention credit collection; the current period also had net cash outflows from changes in operating assets and liabilities.
- Investing activities used $37.2 million, including $27.2 million for property and equipment and $8.7 million for short-term investments. Financing activities provided $64.9 million, principally reflecting the April offering.
- Cash and cash equivalents were $70.5 million and short-term investments were $8.7 million at May 31. Current assets were $89.3 million and current liabilities $25.1 million.
- No borrowings were outstanding on the $45.0 million revolving credit facility, which remained fully available. Finance lease liabilities were $0.1 million; operating lease liabilities totaled $109.4 million. Operating lease obligations are substantial and long-dated.
Changes, outlook and risks
- On April 13, 2023, the company sold 1.265 million Class A shares at $54 per share and reported net proceeds of approximately $64.3 million after underwriting discounts, commissions and offering expenses. Proceeds are intended for general corporate purposes, including capital expenditures and working capital.
- Management said inflationary pressures in food, labor, construction and energy, as well as supply and freight disruptions, were expected to continue through the remainder of FY2023. Menu pricing, productivity improvements and supply-chain initiatives had partly offset these pressures; continued offsets are not assured.
- The company stated that cash, operating cash flow, short-term investments and available credit were expected to fund lease obligations, capital expenditures and working capital needs for at least the next 12 months. No specific sales or earnings guidance was provided.
- As of May 31, the company had $11.4 million of contractual commitments for restaurant construction and operating goods, expected to be paid within 12 months. It also disclosed $39.0 million of operating leases for restaurants not yet taken into possession, plus a subsequent lease with a $0.6 million liability.
- A wage-and-hour class action settlement of $1.75 million, plus estimated employer payroll taxes, received final court approval in November 2022; $1.78 million was deposited with a settlement administrator in December 2022. The filing notes other ordinary-course legal matters and that increased claims could adversely affect results.
- A full valuation allowance was recorded against net deferred tax assets, based in part on recent cumulative losses. Management reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether comparable-sales growth and new-restaurant openings can be sustained, and how much sales growth depends on menu pricing versus guest traffic and check size.
- Whether food, labor, construction and other cost inflation continues to pressure restaurant-level economics and margins.
- Capital spending, restaurant pipeline and lease commitments, including the $39.0 million of leases not yet commenced, relative to operating cash generation.
- The company’s path to sustained GAAP profitability; nine-month results remained a net loss despite positive Q3 net income and higher non-GAAP Adjusted EBITDA.
- Settlement fund distribution and any developments in the disclosed litigation, as well as the continued availability of the related-party revolving credit facility.