Kura Sushi USA, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended May 31, 2020. Unless otherwise noted, financial amounts below are in millions of dollars. The company operates a technology-enabled Japanese restaurant concept; it had 25 restaurants at quarter-end.
Financial performance
| Metric | Three months ended May 31, 2020 | Prior-year quarter | Nine months ended May 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Sales | $2.812 | $16.955 | $39.640 | $45.492 |
| Operating income (loss) | $(8.028) | $0.834 | $(9.659) | $0.696 |
| Net income (loss) | $(9.152) | $0.719 | $(10.509) | $0.540 |
| Net income (loss) per share, diluted | $(1.10) | $0.14 | $(1.26) | $0.10 |
| Operating cash flow | Not separately provided | Not separately provided | $(10.695) | $3.438 |
- Quarterly sales fell 83.4%; comparable restaurant sales declined 85.4%, versus 7.6% growth a year earlier. Nine-month sales declined 12.9%; comparable sales fell 24.5%, versus 5.8% growth.
- Operating margin was negative 285.5% for the quarter and negative 24.4% for nine months, compared with positive 4.9% and 1.5%, respectively, a year earlier. The extreme quarterly rate reflects the sharp sales drop against continuing expenses.
- Adjusted EBITDA, a company-defined non-GAAP measure, was a loss of $8.438 million for the quarter and $8.045 million for nine months, versus income of $1.644 million and $3.034 million. The 2020 measure subtracts the $1.580 million employee retention credit.
Liquidity, debt and cash flow
- Cash and equivalents were $17.030 million at May 31, 2020, down from $38.044 million at August 31, 2019. Current assets were $21.031 million and current liabilities $9.841 million.
- Nine-month cash used in operations was $10.695 million; cash used in investing was $9.571 million, principally property and equipment; cash used in financing was $0.748 million. Cash decreased $21.014 million.
- The company had no borrowings under its existing credit facility and $1.1 million available; it was out of compliance with the fixed-charge coverage covenant at May 31, but received a waiver on June 29, 2020. The facility matured July 31, 2020.
- A $20 million revolving credit line from majority shareholder Kura Japan, established in April 2020 and terminating March 31, 2024, was undrawn at quarter-end. The company also received and returned a $5.983 million PPP loan in April.
- Finance lease liabilities totaled $2.736 million. Operating lease liabilities totaled $54.314 million; the company also disclosed $18.0 million of leases for restaurants not yet in its possession. Management stated that cash on hand, operating cash flow and the Kura Japan facility should fund obligations and needs for at least 12 months.
Material changes, outlook and risks
- COVID-19 drove the principal deterioration: all 25 restaurants temporarily closed March 18. Seven had reopened by May 31; by the filing date all had reopened, but 14 California locations offered takeout only and dine-in sites operated at 25% or 50% capacity where permitted. The revolving sushi belt was suspended.
- Management warned that reduced sales and the duration and severity of the pandemic and downturn were expected to materially adversely affect the company’s business, financial condition, liquidity and results. No specific financial guidance was provided.
- A $1.580 million refundable employee retention credit reduced labor expense. The company recorded a $1.1 million non-cash valuation allowance against deferred tax assets, contributing to tax expense despite the reported loss. It reported no long-lived-asset impairment at May 31.
- Lease concessions received were immaterial for the quarter; discussions with landlords continued. Capital spending included current and future restaurant openings, renovations and maintenance. The filing cited $4.9 million of purchase and construction commitments expected to be paid in the fiscal year.
- A former employee’s putative California wage-and-hour class action remained pending; the company disputes the allegations and said it could not estimate possible losses. Management did not consider ordinary-course litigation materially adverse, but noted successful claims could affect results.
- Additional risks include renewed closures or dining restrictions, consumer behavior changes, the company’s concentration in California and Texas, and potential pressure on restaurant economics if off-premises demand or safety requirements require changes to its service model.
Important facts for investors to verify
- Whether reopened restaurants can sustain sales and margins under changing capacity limits and public-health rules, particularly in California and Texas.
- Cash burn, remaining liquidity, and continued availability and terms of the Kura Japan credit line; also the status of the July 2020 credit-facility maturity and covenant waiver.
- Whether the employee retention credit and deferred-tax valuation allowance have further effects in later periods.
- Future lease commitments, planned restaurant openings and capital spending relative to operating cash generation.
- Developments in the wage-and-hour litigation and any other material claims.