Kura Sushi USA, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Kura Sushi USA operates technology-enabled revolving sushi restaurants offering freshly prepared Japanese cuisine. The company operated 23 restaurants in five states as of August 31, 2019, up from 17 at August 31, 2018. Fiscal year 2019 covered September 1, 2018 through August 31, 2019. The company completed its initial public offering on August 5, 2019 and began trading on Nasdaq under the symbol KRUS on August 1, 2019.
Kura Sushi, Inc. of Japan remained the controlling stockholder, owning approximately 81% of combined voting power through the dual-class structure. The company entered into shared-services and exclusive intellectual-property license agreements with Kura Sushi, Inc.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Sales | $64.245 million | $51.744 million | Up 24.2% |
| Operating income | $1.661 million | $1.863 million | Down 10.8% |
| Net income | $1.456 million | $1.742 million | Down 16.4% |
| Diluted EPS | $0.26 | $0.34 | Declined |
| Operating profit margin | 2.6% | 3.6% | Down 100 basis points |
| Adjusted EBITDA | $5.782 million | $4.506 million | Up 28.3% |
| Adjusted EBITDA margin | 9.0% | 8.7% | Up 30 basis points |
| Restaurant-level contribution | $12.945 million | $10.380 million | Up 24.7% |
| Restaurant-level contribution margin | 20.1% | 20.1% | Flat |
| Comparable restaurant sales growth | 6.2% | 2.9% | Improved |
| Average unit volume | $3.498 million | $3.457 million | Up 1.2% |
Sales growth was driven primarily by six new restaurants, a full year of operations from four restaurants opened in fiscal 2018, 6.2% comparable sales growth and menu price increases. Food and beverage costs improved to 32.8% of sales from 34.0%, while labor costs remained approximately 31.0% of sales. Occupancy costs increased to 7.1% of sales from 5.8%, principally because of pre-opening rent and expansion activity. General and administrative expense increased to $7.748 million, or 12.1% of sales, from $5.965 million, or 11.5%.
Net cash provided by operating activities was $5.993 million, compared with $5.243 million in fiscal 2018. Investing cash outflow was $11.255 million, primarily for property and equipment and restaurant development. Financing cash flow was $37.595 million, reflecting IPO proceeds, borrowings and repayments, and capital-lease payments. Cash and cash equivalents increased to $38.044 million from $5.711 million.
The IPO issued 3,335,000 Class A shares at $14.00 per share. The filing states net proceeds of approximately $39 million after underwriting discounts and offering expenses. The company used approximately $3.1 million to repay outstanding Credit Facility borrowings, with the balance intended for expansion, working capital and general corporate purposes.
There were no outstanding Credit Facility borrowings at August 31, 2019, and $1.1 million remained available. Capital lease liabilities totaled $3.418 million, including $2.424 million classified as non-current. Total contractual obligations were $89.138 million, including $80.954 million of operating lease payments, $3.649 million of capital lease payments and $4.535 million of purchase obligations.
Material changes versus the prior comparable period
- Restaurant count increased by six locations, from 17 to 23.
- Sales increased 24.2%, but operating income and net income declined because occupancy, other operating and corporate costs grew faster than sales.
- Comparable restaurant sales growth improved from 2.9% to 6.2%; AUV increased modestly from $3.457 million to $3.498 million.
- Adjusted EBITDA increased despite lower GAAP operating income, partly reflecting add-backs of $590,000 in stock-based compensation, $556,000 in pre-opening rent, $273,000 in pre-opening costs, $462,000 in non-cash rent and a $75,000 legal settlement expense.
- Cash increased substantially following the IPO. Unlike fiscal 2017 and 2018, when Kura Japan contributed $5.0 million annually, no affiliate capital contribution was received in fiscal 2019.
- The company adopted the new revenue-recognition standard effective September 1, 2018; management reported no impact on revenue timing or retained earnings.
- The company expected to adopt the new lease standard on September 1, 2019, with an estimated $38 million to $41 million increase in operating lease liabilities and a $35 million to $38 million increase in operating right-of-use assets.
Guidance, outlook, commentary, risks and unusual items
Management planned to open six restaurants in fiscal 2020 and expected revenue and restaurant operating costs to increase significantly. The company also expected general and administrative expense as a percentage of sales to increase because of public-company costs. Its longer-term objective was approximately 20% average annual restaurant growth over five years and potential for more than 290 U.S. locations, although the filing cautions that these objectives may not be achieved.
Management stated that cash from operations, cash on hand and available credit were expected to fund lease obligations, capital expenditures and working capital for at least the next 12 months. The company does not plan to pay dividends in the foreseeable future.
- Approximately 90% of restaurants were concentrated in California and Texas, creating geographic and local economic exposure.
- JFC and Wismettac together represented approximately 83% of fiscal 2019 food and beverage costs, creating supplier-concentration risk.
- Food, labor, minimum-wage, commodity, occupancy and construction costs could pressure margins. The company does not hedge seafood or other food commodity prices.
- The company relies on Kura Japan for intellectual property, certain supplies, expatriate personnel and other services. The license requires a royalty of 0.5% of net sales.
- A putative California wage-and-hour class action was filed on May 31, 2019. The company disputes the allegations and could not estimate potential losses.
- The company is subject to food-safety, employment, licensing, regulatory, technology, cybersecurity, equipment-failure and competitive risks.
- The dual-class structure gives Class B shares 10 votes per share, enabling Kura Japan to control corporate matters and qualify the company as a Nasdaq “controlled company.”
- Management’s disclosure controls were deemed effective, but the filing did not include management’s assessment or auditor attestation of internal control over financial reporting because of the company’s emerging-growth-company transition status.
Most important facts for investors to verify
- Whether the planned six fiscal 2020 openings were completed on budget and achieved targeted unit economics.
- Whether comparable sales growth, AUVs and restaurant-level margins remained positive as the restaurant base expanded.
- The effect of public-company expenses, labor inflation, minimum-wage increases and occupancy costs on GAAP operating margins.
- Actual post-IPO cash deployment, capital expenditures, remaining credit availability and capital-lease obligations.
- The adoption impact of the lease standard on reported assets, liabilities, leverage and covenant calculations.
- Developments and potential financial exposure from the California wage-and-hour litigation.
- Continuity and economic terms of the Kura Japan services, supply, royalty and intellectual-property arrangements.
- Supplier concentration and the company’s ability to maintain food availability and pricing.
- The implications of Kura Japan’s approximately 81% voting control, future share sales and the absence of dividends.