Kura Sushi USA, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended May 31, 2022. Amounts are in millions of dollars unless stated otherwise. The company operates technology-enabled Japanese restaurants using a revolving-sushi service model.
Financial performance
| Metric | Three months ended May 31, 2022 | Prior-year quarter | Nine months ended May 31, 2022 | Prior-year period |
|---|---|---|---|---|
| Sales | $38.0 | $18.5 | $99.1 | $37.0 |
| Comparable restaurant sales growth | 65.3% | 455.6% | 118.7% | (20.5)% |
| Operating income (loss) | $0.5 | $0.9 | $(2.7) | $(9.2) |
| Net income (loss) | $0.5 | $0.8 | $(2.7) | $(9.5) |
| GAAP operating margin | 1.3% | 4.7% | (2.7)% | (25.0)% |
| Adjusted EBITDA | $3.2 | $(2.6) | $4.4 | $(11.6) |
| Adjusted EBITDA margin | 8.4% | (14.0)% | 4.4% | (31.3)% |
- Q3 sales increased 105.6%; nine-month sales increased 168.1%. Management attributed growth to unrestricted indoor dining and six restaurants opened after May 31, 2021. The company had 37 restaurants at May 31, 2022, versus 31 a year earlier.
- Restaurant-level operating profit, a company-defined non-GAAP measure, was $8.5 million (22.5% margin) for the quarter and $19.9 million (20.1% margin) for nine months. These figures exclude corporate and other costs and are not GAAP profit.
- Q3 food and beverage costs were 29.7% of sales, versus 31.7%; labor was 31.0%, versus 8.9%; occupancy was 7.1%, versus 10.2%. Nine-month food costs were 29.9% of sales, labor 32.1%, and occupancy 7.3%.
Cash, liquidity, and obligations
- Cash and cash equivalents were $36.0 million at May 31, 2022, down from $40.4 million at August 31, 2021. Current assets were $45.2 million and current liabilities $24.4 million.
- Nine-month operating cash flow was $17.0 million, compared with cash used of $9.7 million in the prior-year period. Investing cash outflow was $20.7 million, primarily for property and equipment; financing cash outflow was $0.7 million. Cash declined $4.5 million over the period.
- No borrowings were outstanding on the $45 million revolving credit facility with majority shareholder Kura Japan; the full $45 million remained available. The facility has no financial covenants and is available for advances through April 10, 2025.
- Operating lease liabilities were $87.7 million and finance lease liabilities $0.7 million. The filing also disclosed $31.2 million of operating lease liabilities for restaurants not yet taken into possession, expected to commence in FY2023, plus $6.8 million related to leases entered into after May 31, 2022.
- Property and equipment purchases were $19.5 million during the nine months. The company reported $3.2 million in construction and operating-goods commitments expected to be paid within 12 months.
Changes, outlook, and risks
- Year-over-year comparisons are affected by prior-year COVID-19 dining-capacity restrictions and $6.3 million of employee retention credits recognized in the prior-year quarter ($8.9 million for the prior-year nine-month period). The company reported receiving $8.0 million of these refunds during the current nine months and $12.1 million cumulatively through the filing date. Prior-year adjusted EBITDA also included a $1.0 million litigation accrual.
- Management said all restaurants were operating without government indoor-dining capacity restrictions and expects to continue opening restaurants where it believes they can be profitable. No specific revenue, earnings, or opening-count guidance was provided.
- Management stated cash, operating cash flows, and available credit should fund lease obligations, capital expenditures, and working capital for at least the next 12 months. It cautioned that COVID-19 resurgence, restrictions, or weaker consumer demand could impair results and growth plans.
- Food, labor, and energy inflation—including supply-chain-related food cost pressure—could weigh on margins. Menu pricing and operational improvements have partly offset higher costs, but the company warned it may not be able to pass on future increases without affecting customer traffic or spending.
- A California wage-and-hour class action settlement of $1.75 million, plus estimated employer payroll taxes, had been accrued in FY2021. A court approval hearing occurred May 9, 2022, and was scheduled to continue July 8, 2022.
- The company recorded a full valuation allowance against net deferred tax assets at May 31, 2022, citing recent cumulative losses. It reported no material changes to risk factors and said disclosure controls were effective.
Most important facts for investors to verify
- Whether strong comparable sales and restaurant-level margins persist as pandemic-related comparisons normalize, and whether new locations achieve profitability.
- Labor expense and food inflation trends, including the effects of pricing, staffing, and supply costs on GAAP margins.
- Cash conversion and planned capital spending relative to available cash, the credit facility, and substantial existing and forthcoming lease commitments.
- Final approval and payment of the wage-and-hour settlement, and any material developments in other legal matters.
- The sustainability of performance excluding prior-year employee retention credits and other adjustments used in non-GAAP measures.