Kura Sushi USA, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Second quarter and six months ended February 29, 2020; comparative periods ended February 28, 2019. Amounts below are in U.S. dollars. Financial statements are unaudited.
Business context
Kura Sushi operates technology-enabled revolving sushi restaurants. It had 25 restaurants in five states at quarter-end, after opening two during the quarter. The company reported five more restaurants than a year earlier.
Financial results
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Sales | $19.4 million | $15.1 million | $36.8 million | $28.5 million |
| Operating income (loss) | $(0.2) million | $0.3 million | $(1.6) million | $(0.1) million |
| Net income (loss) | $(0.1) million | $0.2 million | $(1.4) million | $(0.2) million |
| Operating cash flow | — | $(0.3) million | $1.0 million | |
| Capital expenditures | — | $7.1 million | $4.9 million |
Quarterly sales grew 28.3%; six-month sales grew 29.1%. Management attributed growth to new restaurants and comparable restaurant sales growth of 10.8% in the quarter and 8.9% for six months. For the quarter, food and beverage costs were 31.5% of sales and labor costs 31.7%; occupancy was 8.4%, versus 7.1% a year earlier. General and administrative costs increased to 14.4% of sales from 12.0%.
Adjusted EBITDA was $1.4 million for the quarter (7.1% margin), versus $1.2 million (8.2%) a year earlier; for six months, it was $1.2 million (3.3%), versus $1.7 million (6.1%). These are non-GAAP measures defined by the company and exclude specified expenses. Restaurant-level Contribution margin was 20.1% for the quarter and 18.8% for six months.
Financial position and liquidity
- At February 29, 2020, cash and cash equivalents were $30.0 million, down from $38.0 million at August 31, 2019. Current assets were $33.5 million and current liabilities $11.5 million.
- Total assets were $125.0 million and stockholders’ equity was $61.2 million. The balance sheet included $54.6 million of operating lease liabilities and $3.0 million of finance lease liabilities. The company reported no outstanding borrowings under its bank credit facility.
- The existing non-revolving bank facility was up to $5 million and matured July 31, 2020; the filing reported $1.1 million available as of February 29 and compliance with its financial covenants.
- Operating cash flow was negative $0.3 million for the first six months, while investing activities used $7.3 million, primarily for property and equipment. Cash declined by $8.1 million over the period.
Material changes, outlook and risks
- COVID-19: On March 18, 2020, the company temporarily closed all 25 restaurants and furloughed certain employees. With no takeout or delivery service, closures eliminated restaurant sales during the closure period. Management warned of a material adverse effect on future business, financial condition, liquidity and results, and said the duration and growth-plan impact were highly uncertain.
- Additional liquidity: On April 10, 2020, the company and controlling stockholder Kura Japan entered into a $20 million revolving credit agreement, terminating March 31, 2024. Borrowings mature 12 months after disbursement unless both parties extend them. The company also applied for a Paycheck Protection Program loan; approval and forgiveness were uncertain.
- Management stated that cash on hand, operating cash flows, credit availability and potential government assistance were expected to fund lease obligations, capital expenditures and working capital for at least 12 months. This assessment was made amid substantial uncertainty from closures and the pandemic.
- Lease accounting standard ASC 842 was adopted September 1, 2019, materially increasing reported assets and liabilities; prior periods were not restated. The company also disclosed $18 million of operating leases for restaurants not yet taken into possession, with terms of 20 years.
- Other items to monitor include $4.0 million of purchase and construction commitments expected to be paid during the fiscal year, and a former employee’s California wage-and-hour putative class action for which the company could not estimate possible losses.
- No specific earnings or sales guidance was provided. The company cited exposure to food, labor, energy and interest-rate costs; it noted menu pricing and operational efficiencies may not fully offset cost increases.
Important facts for investors to verify
- Restaurant reopening timing, sales recovery and whether the company establishes takeout or delivery capabilities.
- Actual draws, terms and availability under the $20 million Kura Japan facility and the existing bank credit facility.
- PPP application outcome and any loan forgiveness or other government relief.
- Cash burn, liquidity runway, planned capital expenditures and lease commitments during and after closures.
- Comparable-store sales trends, new-restaurant economics, and whether elevated overhead and occupancy costs improve with scale.
- Potential impairment of long-lived assets and realization of deferred tax assets, both identified by management for assessment.