Kura Sushi USA, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended May 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and operating conditions
- Kura Sushi operates technology-enabled Japanese restaurants using a revolving-sushi service model. It had 31 restaurants at May 31, 2021; one more opened in Bellevue, Washington, in June.
- Weighted average permitted indoor dining capacity was 35%, 26%, and 62% in fiscal Q1, Q2, and Q3, respectively. At the filing date, all 32 restaurants were operating at full indoor capacity with no restrictions.
- Management reported comparable restaurant sales remained below pre-pandemic levels by 19% for Q3 and 39% year to date. Year-over-year comparable sales rose 455.6% in Q3, reflecting the exceptionally low prior-year comparison.
Financial performance and liquidity
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Sales | $18.5m | $2.8m | $37.0m | $39.6m |
| Operating income (loss) | $0.9m | ($8.0m) | ($9.2m) | ($9.7m) |
| Net income (loss) | $0.8m | ($9.2m) | ($9.5m) | ($10.5m) |
| Adjusted EBITDA | ($2.6m) | ($8.2m) | ($11.6m) | ($7.6m) |
| Adjusted EBITDA margin | (14.0%) | (292.5%) | (31.3%) | (19.1%) |
- Q3 operating margin was 4.7% and net margin 4.1%; year-to-date operating margin was (25.0%) and net margin (25.6%). The Q3 GAAP profit includes a $6.3m employee retention credit; Adjusted EBITDA excludes that credit and the $1.0m litigation accrual, among other adjustments.
- Food and beverage costs were 31.7% of Q3 sales and 32.7% year to date. Labor costs were 8.9% and 21.8%, respectively; the employee retention credits materially lowered reported labor expense.
- Cash was $4.7m at May 31, down from $9.3m at August 31, 2020. Current assets were $20.4m and current liabilities $16.9m. Prepaid and other current assets included $10.7m of employee retention credits claimed but not yet refunded.
- Operating cash outflow was $9.7m and investing cash outflow $11.5m for the nine months. Financing provided $16.7m, principally from the affiliate credit facility. Capital spending on property and equipment was $11.4m.
- Borrowings from majority shareholder Kura Sushi, Inc. totaled $17.0m: $14.0m at 1.1% and $3.0m at 2.8%. The amended facility provides up to $45m, with $28m available; advances mature 60 months after disbursement, and the agreement has no financial covenants.
- Total liabilities were $92.8m, including $62.9m of operating lease liabilities and $1.7m of finance lease liabilities. Stockholders’ equity was $37.7m.
Material changes versus comparable periods
- Q3 sales increased 556.9% year over year as dining capacity recovered, six restaurants opened after May 2020, and off-premises sales increased. Q3 FY2020 sales had been severely affected by closures and restrictions.
- Nine-month sales declined 6.7% year over year as capacity limits during FY2021 outweighed contributions from new restaurants and off-premises sales. The nine-month net loss narrowed by $1.0m, while Adjusted EBITDA loss widened by $4.0m.
- The company recognized $8.9m of employee retention credits during the first nine months of FY2021, compared with $1.6m in the prior-year period. Refund timing was uncertain, and management believed it became ineligible for further credits after California dining restrictions were lifted on June 15, 2021.
- Cash used in operations improved to $9.7m from $10.7m in the prior-year nine-month period. The company drew $17.0m from the affiliate facility during FY2021.
Outlook, risks, and unusual items
- No specific revenue, earnings, or restaurant-opening guidance was provided. Management expects to continue opening restaurants where it believes they can be profitable and stated that future sales and execution of its growth strategy remain uncertain.
- Management said cash on hand, operating cash flows, and remaining credit-facility availability should fund lease obligations, capital expenditures, and working capital needs for at least 12 months. It also cautioned that the pandemic’s impact and duration remain uncertain.
- Staffing shortages followed the lifting of dining restrictions; the company incurred $0.7m in retention and new-hire bonuses during the three- and nine-month periods.
- A California wage-and-hour putative class action led to a $1.0m accrual in Q3 after a potential settlement loss became probable and reasonably estimable. The company could not estimate the upper end of possible loss; mediation was scheduled for September 2021 and the class-certification hearing for March 2022.
- The company reported no long-lived-asset impairment charges. It had $2.1m of purchase and construction commitments, plus restaurant leases not yet commenced with stated liabilities of $22.8m and a subsequent $5.5m lease.
- A $50m universal shelf registration statement became effective in May 2021, allowing potential future securities offerings; the filing does not report a sale under it.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether and when the $10.7m employee retention credit receivable is collected, and the sustainability of results after those credits cease.
- Restaurant-level sales, traffic, staffing availability, and margins as all locations operate without capacity restrictions; compare performance with pre-pandemic levels, not only the unusually depressed prior-year quarter.
- Cash burn, capital spending, and use of the remaining $28m related-party credit availability, including the facility’s terms and reliance on the majority shareholder.
- The eventual outcome and potential additional cost of the wage-and-hour litigation.
- Lease commitments and new restaurant economics, including the leases and construction obligations for locations not yet open.