Kura Sushi USA, Inc. (NASDAQ:KRUS) Q1 2023 Earnings Call Transcript

Kura Sushi USA, Inc. (NASDAQ:KRUS) Q1 2023 Earnings Call Transcript January 5, 2023

Kura Sushi USA, Inc. misses on earnings expectations. Reported EPS is $-0.21 EPS, expectations were $-0.18.

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal First Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. And the lines will be open for your questions following the presentation. Please note that this call is being recorded. On the call today, we have Jimmy Uba, President and Chief Executive Officer; Jeff Uttz, Chief Financial Officer; and Benjamin Porten, Senior Vice President, Investor Relations and Business Development. And now, I’d like to turn the call over to Mr. Porten.

Benjamin Porten: Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal first quarter 2023 earnings release. It can be found at www.kurasushi.com in the Investor Relations section. A copy of the earnings release has also been included in the 8-K we submitted to the SEC. Before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect.

We refer all of you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. Also during today’s call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation nor as a substitute for results prepared in accordance with GAAP. And the reconciliations to comparable GAAP measures are available in our earnings release. With that out of the way, I would like to turn the call over to Jimmy.

Jimmy Uba: Thank you, Ben. And thank you everyone for joining us today. I’m excited to report another strong quarter where we outperformed industry averages with regards to traffic growth, saw two strong restaurant openings, and delivered restaurant-level operating profit margin that exceeded the same period prior to the pandemic. Our performance has been driven by the steadfast support from our loyal guests and warm receptions by new fans alike. In an environment where consumers are forced to be more careful with their discretionary spending, we’re delighted to see that when our guests go out to eat, they choose to dine with us. Our three goals for this year are to continue our rapid unit expansion, grow into our G&A, and to maintain the operational excellence and incredible values that have made us our guest’s top choice for dining out.

Our first quarter sales were $39.3 million represent revenue growth of over 30% over the previous year’s first quarter revenue. We saw comparable sales growth of 6.9%, while facing headwinds created by adopting of 8% of pricing at the beginning of September. This 6.9% comp figure breaks down to 4% from traffic and 2.9% from price and mix. We are especially pleased by our traffic growth, which outpaced the casual dining segment by a monthly average of more than 700 basis points and which we believe is an indication of our concept resilience in a potential economic downturn. As mentioned in our previous earnings call, we believe that there is significant opportunity in capturing new guests as they trade down from local sushi restaurants will have taken price much aggressively than we have.

On traffic growth during the period in casual dining as a whole is suffering from declining traffic only underscores opportunity created by our unparalleled value progression. Looking at our operating results. We are pleased to note that our labor costs as a percentage of sales are 60 basis points below the prior year, confirming the expectation that a 50 basis point labor improvement in the prior quarter, driven by the implementation of our three technology initiatives was not just a onetime benefit, but potentially a long term tailwind for our operational efficiencies. Due to ongoing inflation, our cost of goods sold as a percentage of sales was 160 basis points higher compared against the previous year. And it’s largely responsible for the year over year decline in restaurant-level.

But it is difficult to predict when we can expect a moderation in commodity cost. We do not expect this inflation to be permanent and remain optimistic that we can achieve the margin price we saw in the previous fiscal year as we enter a more normalized environment. As Jeff mentioned in the last earnings call, key area of focus as our new CFO was to manage G&A expense. For a growing company, there are certain investments in people and infrastructure that are necessary to support the growth and we will not compromise that. However, this does not mean that there are not opportunities for savings and pursuing these savings is a top priority. Since the IPO, we have said that the best possible profitability for us is it to leverage our G&A cost against an increasing larger store base.

While this leveraging will be a multi-year process, we are proud to announce that we are making substantial progress throughout this call as demonstrated by the improvement in G&A expense as a percentage of sales of over 100 basis points as compared to the prior year. I’m particularly impressed by the teams efforts to control cost and for us to have achieved the leverage during the period when we are continuing to see inflation in the underlying items. Our G&A strategy is to renegotiate existing contracts and to efficiencies, which will allow us to minimize new hires. Our support center employees have listened to the occasion and I’m proud of the company wide cooperation that had made this possible. Turning to development. We opened two new locations in the first quarter, one in the Mall of America in Bloomington, Minnesota and one in Jersey City, New Jersey.

Subsequent to the end of the quarter, we opened our Philadelphia location in late December. As I’m sure you heard on our previous earnings call, construction and permitting delays have been a headache for the rest of the industry. And two of these units similarly suffered from unusually long opening delays. That being said, we believe that the worst is behind us as the remainder of our fiscal €˜23 pipeline is really survival, which typically make for further experiences. Additionally, we are very pleased by the early performance of these three units. It’s great to see our restaurant drive in the Mall of America, further indicating cross national portability and across demographics and Jersey City continue to show the east coast market tremendous potential.

We currently have four units under active construction is still more breaking ground later this month. With still more restaurant openings expected in Q2, we are on track to achieve the annual guidance — growth guidance we provided in the last earnings call. Lastly, I’m very excited to announce that we have made significant progress in the implementation of our new Waitlist app and reward program platform and expect the testing to begin during this quarter. The Waitlist app we will have an immediate positive impact on customer satisfaction by improving waiting time accuracy, which we hope will translate into improved attrition rate for guest waiting time. With the new reward program platform, not only will we have greater flexibility in the way that we can reward our guests, but we will be able to begin leveraging environmental data for targeted marketing for the faster time.

Our levered program has been hugely effective in driving frequency and average check growth, but still mid of program based in the power of data and the utilization of this data represents a new chapter in our marketing efforts. On that note, we began our targeted marketing efforts specifically geared towards first time guests in December. But it’s too early for us to discuss the impact yet, we believe that the opportunity in capturing new guests who have been discouraged by the aggressive price taking we have seen among local fish competitors. It’s truly significant that capturing these guests remains a key pillar of our marketing strategy for the fiscal year. Before I hand things over to Jeff, I would like to note that we took pricing of approximately 7% in the first week of December.

Finally, I would like to thank all of our team members, both at our restaurant and the support center for the great work they do every day to create the magic that is a great experience. And with that, I’ll turn it over to Jeff to briefly discuss our financial results and liquidity. Jeff?

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Jeff Uttz: Thank you, Jimmy. For the first quarter, total sales were $39.3 million as compared to $29.8 million in the prior year period. Comparable sales growth as compared to the prior-year period was 6.9% with regional comps of 10.3% in California, and 2.1% in Texas. Turning to cost, food and beverage costs as a percentage of sales were 31.6% as compared to 30% in the prior year quarter due to food cost inflation, partially offset by pricing taken over the course of fiscal 2022. Labor and related costs as a percentage of sales decreased to 31.9% from 32.5% in the prior year quarter. This decrease is due to incremental efficiencies created by the implementation of technological initiatives, as well as sales leveraging from pricing taken over the course of fiscal 2022.

This leveraging was partially offset by wage increases and incremental pre-opening labor. Occupancy and related expenses as a percentage of sales were 7.3% and were largely flat year-over-year compared to the prior year quarter 7.4%. Other costs as a percentage of sales increased to 13.5% compared to 12.1% in the prior year quarter due to increases in pre-opening costs, advertising and promotional costs and repair and maintenance costs. General and administrative expenses as a percentage of sales decreased to 16.9% as compared to 18% in the prior year quarter. On a dollar basis, general and administrative expenses were $6.6 million as compared to $5.4 million in the prior year quarter. With the increase, largely driven by compensation and partially offset by reductions in professional fees and insurance costs.

Operating loss was $2.2 million as compared to an operating loss of $1.3 million in the prior year quarter. As a percentage of sales, operating loss was 5.5% as compared to a loss of 4.2% in the prior year quarter. Income tax expense was $10,000 compared to $12,000 in the prior year quarter. Net loss was $2.1 million or $0.21 diluted share compared to a net loss of $1.3 million or $0.13 per diluted share in the prior year quarter. Restaurant level operating profit as a percentage of sales was 18.2% compared to 19.5% in the prior year quarter. Adjusted EBITDA was $0.6 million compared to $0.8 million in the prior year quarter. Turning to cash and liquidity. At the end of the fiscal first quarter, we had $26.9 million in cash and cash equivalent and no debt.

Lastly, I would like to reaffirm the following guidance for fiscal year 2023, we expect our total sales to be between $183 million and $188 million, we expect general and administrative expenses as a percentage of sales to be approximately 16% and we expect to open between nine and 11 new units with average net capital expenditures per unit of approximately $2.5 million. And with that, I’d like to turn it back over to Jimmy.

Jimmy Uba: Thanks, Jeff. This concludes our prepared remarks. We are now happy to answer any questions you have. Operator, please open the line for questions. As a reminder, during the Q&A session, I may answer in Japanese before my response is translated into English. Please bear with us.

Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question comes from the line of Andrew Strelzik with BMO Capital Markets. Please proceed with your question.

Daniel Gold: Hi, this is Daniel Gold on for Andrew. Thanks for taking the question. When we think about the results in the quarter, our math suggests your comp slowed throughout the quarter to 2.5% in November. What do you attribute that to? And what are you tracking quarter to date or in December?

Jimmy Uba: Thank you Daniel for your question. Please allow me to answer your question in Japanese and Ben is going to translate it. In terms of our comps, we were exceptionally pleased to see that in this environment we were able to achieve comps of 6.9%, particularly because our traffic was up 4% over the course of the quarter, which, as everybody knows in this environment is pretty rare. So looking at industry averages, like those provided by NATRAX over the period that was our Q1. It’s pretty clear that our peers in the casual dining space are down in traffic. And so, again, the fact that traffic is up for us is a great sign for concept, it’s a great sign for the strength of the consumer. But that being said, as Jimmy mentioned in the prepared remarks, our focus for fiscal ’23 is going to be in terms of capturing first-time guests in this sort of environment, it’s only natural that people are going to reduce the frequency of their out-of-home dining occasions, and we’ve been able to remain one of them for — remain a dining occasion for our guests.

But for us to maintain the traffic growth that we’ve seen in the last quarter, we think it’s imperative for us to capture first-time guests. Jeff, is there anything you wanted to add?

Jeff Uttz: No, I think the traffic that we were able to get is something we’re very happy with. Getting people in the door is the first step, and we’ve been able to do that. We’ve been able to increase the number of people coming in by 4% over last year in a very, very tough environment. So we’re not really going to give monthly comps, and I know we did give September and October on the last call, so you can obviously do math yourself. But we’re very, very happy with where the comp came out for the first quarter of our fiscal year, especially compared to our peers. People are still coming in. And as Ben said, if people were going out 3 times, now they’re only going out 2 times. It appears based on the numbers that we’ve been lucky enough to remain one of those two dining occasions that people do choose to eat away from home.

Daniel Gold: Got it. That’s really helpful. Thank you. And one other question for me. One of the stated goals for the year is G&A. I’m curious on what your plans are on a multiyear basis. You’ve guided to 16% sales — G&A as a percent of sales for the year. What do you think is a reasonable place to get to longer term? Are you expecting linear progression down or plans for G&A investment?

Jeff Uttz: I’m expecting near progression down. We’re not going to give any guidance past this current fiscal year. We are a growth company. I do think that our G&A is elevated. And as we’ve said many times on these calls and then in meetings with investors and conferences and whatnot that we — one of my goals — my top goal is to get it down. We did see a little bit of leverage when you compare the first quarter of this year to the first quarter last year, which we’re very pleased with. But it’s not a trend yet, and we’re going to continue to guide towards the 16%. The number came in where we expected it to for Q1, so there were no surprises, but stick with the 16% for now. I do expect that to get better in future years, but I’m just not able to quantify that at this time.