Kura Sushi USA, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Fiscal quarter and six-month period ended February 28, 2023. Financial amounts below are in U.S. dollars; unless noted, amounts are in millions. The company operates a technology-enabled Japanese restaurant concept.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Sales | $43.9 | $31.3 | $83.3 | $61.1 |
| Operating loss | $(1.0) | $(1.9) | $(3.2) | $(3.1) |
| Net loss | $(1.0) | $(1.9) | $(3.1) | $(3.2) |
| Net loss per share, basic and diluted | $(0.10) | $(0.19) | $(0.32) | $(0.32) |
| Adjusted EBITDA (non-GAAP) | $2.3 | $0.4 | $2.9 | $1.2 |
| Adjusted EBITDA margin (non-GAAP) | 5.3% | 1.2% | 3.5% | 1.9% |
- Q2 sales grew 40.4%; comparable restaurant sales increased 17.4%. For the six-month period, sales grew 36.2% and comparable sales increased 11.8%.
- Q2 restaurant operating costs were 86.0% of sales, versus 88.3% a year earlier. Food costs were 30.1% of sales (30.0% prior year); labor was 31.5% (33.1%); occupancy was 7.0% (7.4%). Q2 operating margin improved to (2.4%) from (6.0%); net margin was (2.3%) versus (6.0%).
- Six-month restaurant operating costs were 87.0% of sales versus 87.2%; operating margin was (3.8%) versus (5.2%), while net margin was (3.6%) versus (5.2%). Food costs rose to 30.8% of sales from 30.0%; labor declined to 31.7% from 32.8%.
- Q2 basic and diluted loss per share improved year over year; six-month loss per share was unchanged. Approximately 768,000 potentially dilutive options and restricted stock units were excluded as anti-dilutive.
Cash, liquidity, debt, and investment
- Cash and cash equivalents were $22.3 million at February 28, 2023, down from $35.8 million at August 31, 2022. Current assets were $30.8 million and current liabilities $25.5 million.
- For the six months, operating cash flow was $1.7 million, compared with $9.7 million a year earlier; investing cash outflow was $15.4 million versus $13.2 million; financing provided $0.2 million versus a $0.6 million outflow. Capital spending included $14.3 million for property and equipment and $0.8 million for liquor licenses.
- No borrowings were outstanding under the $45 million revolving credit facility with majority stockholder Kura Japan; the full $45 million remained available. The facility’s advance period runs through April 10, 2025, and it has no financial covenants.
- Operating lease liabilities totaled $102.9 million; finance lease liabilities were $0.2 million. The company also disclosed $41.1 million of restaurant operating leases for which it had not yet taken possession.
- A universal shelf registration effective January 6, 2023 permits offerings of up to $125 million over three years; the filing does not report an offering under it. Management said cash on hand, operating cash flows, and facility availability should fund lease obligations, capital expenditures, and working capital for at least 12 months.
- Contractual obligations for restaurant construction and operating goods were $10.0 million, expected to be paid within 12 months. The company reported no material off-balance-sheet arrangements.
Changes, outlook, and risks
- Sales growth was driven by nine restaurants opened after February 28, 2022, menu-price increases, and comparable-sales growth. The company ended the quarter with 45 restaurants, up from 36 a year earlier; it opened three in Q2 and five in the six-month period.
- Q2 net loss narrowed to $1.0 million from $1.9 million, while six-month net loss was broadly stable at $3.1 million. Q2 adjusted EBITDA rose to $2.3 million from $0.4 million. These adjusted and restaurant-level measures are non-GAAP and are not substitutes for GAAP results.
- Management reported inflation and cost pressures in food, labor, construction, and energy, as well as temporary supply shortages and higher freight costs. It said menu pricing, productivity, and supply-chain initiatives had partly offset these pressures, which were expected to continue through the rest of FY2023. Further price increases may be constrained by competition or consumer response.
- No specific financial or restaurant-opening guidance was provided in the filing. Management cautioned that interim results may not indicate future results and new restaurants may not be profitable or follow historical sales patterns.
- A California wage-and-hour class action settlement of $1.75 million, plus estimated payroll taxes, was approved in November 2022; $1.78 million was deposited with the settlement administrator in December. A distribution report was due July 6, 2023, with a case review scheduled for July 13, 2023. Management said other ordinary-course legal matters were not expected to have a material adverse effect, while noting claims could increase.
- The company recorded a full valuation allowance against net deferred tax assets, citing recent cumulative losses. Management identified long-lived asset impairment estimates as a critical accounting judgment; it reported no material change in critical accounting policies.
Important facts for investors to verify
- Whether comparable-sales growth and menu pricing remain strong, and how guest traffic and average checks contribute to growth.
- Whether food inflation, wage increases, and other operating costs are offset by pricing, technology, and productivity improvements.
- Cash use and capital spending relative to restaurant expansion, and the adequacy of the $22.3 million cash balance plus the undrawn related-party facility.
- The economics and timing of planned openings, including the $41.1 million of leases for restaurants not yet in possession and the $10.0 million of other near-term commitments.
- Progress on settlement-fund distributions and any developments in other legal matters; also confirm whether the shelf registration is used for future financing.