Kura Sushi USA, Inc. — Form 10-Q Summary
Business context and reporting period
Fiscal second quarter ended February 28, 2021; comparisons are with the quarter ended February 29, 2020. Kura Sushi operates technology-enabled Japanese revolving sushi restaurants. COVID-19 restrictions reduced restaurant capacity and materially disrupted operations. At quarter-end, 28 of 30 restaurants were open in some capacity; one additional restaurant opened in Sherman Oaks in April 2021, bringing the total to 31 as of the filing date.
Key financial metrics
Amounts are in millions except per-share data and percentages.
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Sales | $9.08 | $19.39 | $18.50 | $36.83 |
| Operating loss | $(3.80) | $(0.24) | $(10.09) | $(1.63) |
| Net loss | $(3.88) | $(0.13) | $(10.23) | $(1.36) |
| Basic and diluted loss per share | $(0.46) | $(0.02) | $(1.22) | $(0.16) |
| Adjusted EBITDA (non-GAAP) | $(4.70) | $0.98 | $(8.96) | $0.64 |
- Q2 operating loss margin was 41.8% negative; restaurant-level operating margin was 14.8% negative, versus 20.0% positive a year earlier. Adjusted EBITDA margin was 51.7% negative versus 5.1% positive.
- Q2 restaurant costs were 109.2% of sales, versus 86.7% a year earlier. Food and beverage costs were 35.0% of sales; labor was 22.7%, including a $2.2 million employee retention credit; occupancy was 17.9%.
- Six-month net cash used in operations was $8.93 million and cash used in investing was $9.90 million, principally for property, equipment and restaurant development. Financing provided $11.85 million, including a $12 million affiliate loan.
- At February 28, cash and cash equivalents were $1.75 million; cash, cash equivalents and restricted cash totaled $2.27 million. Current assets were $11.28 million and current liabilities $13.35 million.
- Total liabilities were $81.99 million, including $60.75 million of operating lease liabilities and $12 million borrowed from majority stockholder Kura Japan. Finance lease liabilities were $1.97 million. The affiliate loan carried a fixed 1.1% rate and had no financial covenants.
Material changes versus the prior comparable period
- Sales fell 53.2% in Q2 and 49.8% for the six-month period, primarily due to COVID-related capacity restrictions and temporary restaurant closures. Comparable restaurant sales declined 60.2% and 55.2%, respectively.
- Despite lower sales, restaurant operating costs did not fall proportionately; fixed and semi-fixed costs increased as a share of revenue. Food costs also reflected spoilage and, in Q2, a geographic mix shift.
- Net loss widened to $3.88 million for Q2 and $10.23 million for the six months. Adjusted EBITDA deteriorated from positive results in both prior-year periods.
- Cash used in operations increased to $8.93 million from $0.27 million for the six-month comparison. Capital spending increased to $9.79 million from $7.07 million.
- Cash declined from $9.26 million at August 31, 2020 to $1.75 million at February 28, 2021, while the Company drew $12 million from its related-party credit facility.
Outlook, commentary, risks and unusual items
- Management provided no numerical revenue or earnings guidance. It stated that future sales and execution of its growth strategy remain highly uncertain as the duration and full effects of COVID-19 evolve. Management expects to continue openings where it believes restaurants can be profitable.
- Management’s stated priorities include using permitted dining capacity, emphasizing mobile ordering and takeout, maintaining safety and operating efficiencies, and preserving liquidity. It believes cash, operating cash flows and credit-line availability will fund obligations and needs for at least 12 months.
- The affiliate revolving facility was increased to $45 million on April 9, 2021, after quarter-end. The Company had borrowed an additional $2 million by the filing date and reported $31 million of remaining availability.
- A $2.6 million refundable employee retention credit was recognized in Q2, reducing labor and general and administrative expenses. Adjusted EBITDA excludes this credit; the reported non-GAAP measure should be considered alongside GAAP results.
- COVID-related rent concessions were immaterial for the periods. The Company recorded no long-lived asset impairment charges. It also disclosed $16.6 million of operating leases expected to commence in fiscal 2021 or 2022, plus a subsequent $2.9 million lease, generally with 20-year terms.
- A putative California wage-and-hour class action, including a Private Attorney General Act claim, remains pending. The Company said it cannot estimate the possible loss range and intends to defend the matter. It reported no material changes to previously disclosed risk factors.
- Food, labor and energy inflation, minimum-wage changes, commodity prices, competitive limits on menu pricing and continued pandemic restrictions could pressure results. A full valuation allowance was maintained against deferred tax assets due to cumulative losses.
Important facts for investors to verify
- Whether dining capacity and comparable-store sales recover, and how quickly the restaurants return to positive restaurant-level economics.
- Cash burn, capital spending, and the timing and terms of further borrowing under the Kura Japan facility; distinguish unrestricted cash from restricted cash.
- The continuing eligibility, amount and timing of employee retention credits, and their effect on reported labor costs and non-GAAP measures.
- New-store returns and lease commitments, including the substantial long-term operating lease obligations and leases not yet commenced.
- Developments and any estimable exposure in the wage-and-hour class action.