Kura Sushi USA, Inc. — Q1 FY2021 Form 10-Q
Reporting period: Three months ended November 30, 2020; comparative period is the three months ended November 30, 2019. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context
Kura Sushi operates technology-enabled Japanese restaurants featuring a revolving sushi service model. COVID-19 restrictions sharply reduced dining capacity. At quarter-end, 27 of 28 restaurants were open in some capacity. After quarter-end, the company opened an Aventura, Florida restaurant; as of the filing date, all 29 restaurants were open, although many had takeout-only, outdoor-only, or reduced-capacity operations.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Sales | $9.414 million | $17.440 million |
| Operating loss | $6.291 million | $1.391 million |
| Net loss | $6.350 million; $0.76 per share | $1.224 million; $0.15 per share |
| Net cash used in operating activities | $2.731 million | $1.538 million |
| Net cash used in investing activities | $6.619 million | $3.244 million |
| Net cash from (used in) financing activities | $2.836 million | $(0.252) million |
| Cash and cash equivalents at period-end | $2.745 million | $33.010 million |
Restaurant operating costs were $12.109 million, or 128.6% of sales, versus $15.483 million, or 88.7%. Food and beverage costs were 32.4% of sales (32.6% prior year); labor was 46.3% (32.3%); occupancy was 18.0% (8.3%); and other costs were 22.1% (11.7%). Restaurant-level operating loss was $0.934 million, a 9.9% negative margin, compared with profit of $3.024 million, or 17.3%. Adjusted EBITDA was a loss of $4.057 million, versus a loss of $0.342 million; adjusted EBITDA margin was negative 43.1%, versus negative 2.0%.
At November 30, 2020, total assets were $115.393 million, total liabilities $75.670 million, and stockholders’ equity $39.723 million. Cash was $2.745 million. The company had $3.0 million outstanding under a $35 million revolving credit facility from majority stockholder Kura Japan, at a fixed 1.1% rate, with no financial covenants. After quarter-end it borrowed an additional $6.0 million; $26 million remained available as of the filing date. Operating lease liabilities totaled $61.224 million and finance lease liabilities $2.227 million.
Material changes versus prior year
- Sales declined 46.0%; comparable restaurant sales fell 50.8%, compared with 7.9% growth in the prior-year quarter. Management attributed the decline principally to COVID-19 capacity restrictions and temporary closure, partly offset by sales from new restaurants.
- Operating loss widened by $4.900 million. Sales fell faster than costs: minimum staffing needs and fixed occupancy, depreciation, and other expenses weighed more heavily on revenue.
- General and administrative expenses rose 5.9% to $3.521 million, including $0.390 million of executive transition costs; lower legal and audit fees partly offset increased costs.
- Cash decreased $6.514 million during the quarter. Capital expenditures and liquor-license purchases totaled $6.619 million; property and equipment purchases included $1.214 million unpaid at period-end.
- The company expanded the Kura Japan credit line from $20 million to $35 million and extended the maturity of advances to 60 months. It opened three restaurants during the quarter, ending at 28, then opened a 29th after quarter-end.
Outlook, risks, and contingencies
Management gave no quantified financial guidance. It intends to continue opening restaurants at locations it believes can become profitable, while focusing on permitted dining capacity, mobile ordering and takeout, operating efficiency, safety, and liquidity. Management said sales and execution of its growth strategy remain highly uncertain as the pandemic evolves, and warned that current sales levels and the economic downturn could materially adversely affect business, financial condition, liquidity, and results.
The company stated that cash on hand, operating cash flows, and available Kura Japan credit were expected to fund lease obligations, capital expenditures, and working capital for at least 12 months. This outlook depends on uncertain restaurant sales and access to related-party financing. Certain landlord rent abatements and deferrals were immaterial for the quarter; discussions about possible future concessions continued. No long-lived-asset impairment was recorded.
A putative California wage-and-hour class action, amended to add claims under the Private Attorney General Act, is being contested. The company could not estimate the possible loss range. It reported $1.5 million of purchase and construction commitments due in the current fiscal year. Operating leases not yet commenced represented $13.7 million of expected liabilities. Principal operating risks include continuing pandemic restrictions, food and labor inflation, commodity costs, and limited ability to pass cost increases to customers.
Important facts for investors to verify
- Whether restaurant capacity restrictions and comparable-store sales recover, and how takeout performance and new openings affect revenue.
- Cash burn, capital spending, and the timing and terms of further draws on the Kura Japan credit facility.
- Whether labor and occupancy costs can be scaled with sales, given the quarter’s sharply increased expense ratios.
- The status and potential financial exposure of the wage-and-hour litigation, for which the company could not estimate a loss range.
- Management’s 12-month liquidity assessment against lease commitments, planned restaurant development, and pandemic uncertainty.