Kura Sushi USA, Inc. (NASDAQ:KRUS) Q2 2023 Earnings Call Transcript

Kura Sushi USA, Inc. (NASDAQ:KRUS) Q2 2023 Earnings Call Transcript April 4, 2023

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Second 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 second 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 to everyone for joining us today. It’s been an exceptional quarter for Kura Sushi. In the previous earnings call, I had mentioned our three goals for this fiscal year; maintaining great operations and delivering unbeatable value to our guests, continuing our rapid unit expansion, and leveraging our G&A investment. It’s my pleasure to be able to say that we are seeing excellent results on each of these goals. We continue to the lead the industry with traffic growth of 7.4% in our second quarter. And as demonstrated by our traffic performance, consumer sentiment remains extremely strong. Our unit pipeline is the strongest it has ever been, with nine units under construction and another nine executed leases across existing and the new markets.

Our success in leveraging G&A, combined with improvements in restaurant-level costs, has resulted in a 400 basis point adjusted EBITDA margin expansion over the previous year. Our second quarter sales of $43.9 million represent 40% revenue growth over the prior year. Our restaurant delivered comparable sales growth of 17.4%, which breaks down to 7.4% in traffic growth and 10% in price and mix. Despite our pricing, our value remains unparalleled and the consumer sentiment and the strengths have never been stronger. Our strong sales performance continued into March with revenue over $16.4 million and comparable sales of 11.2%. Turning to operating results. We have seen material improvement in both labor and cost of goods sold. Our labor cost as a percentage of sales have improved by 160 basis points over the prior year, and our COGS as a percentage of sales are approaching the all-time best we saw in fiscal 2022.

Photo by Derek Duran on Unsplash

Between the flattening of further cost inflation and our December pricing, we saw COGS as a percentage of sales improved by 150 basis points over the prior quarter. Restaurant efficiency continue to be realized resulting in restaurant-level operating profit margin of 20.3%, a 250 basis point improvement over the prior year. In terms of corporate cost, we were able to improve G&A as a percentage of sales by 120 basis points over the prior year. Cumulatively, we were able to grow adjusted EBITDA margin by 400 basis points and net income margin by 370 basis points as compared to the prior year. It’s been pleasure to see our strategies for growing corporate profitability succeed and we believe this is only an early indication of what we can expect as we continue to grow and achieve our scale.

During our second quarter, we opened three new restaurants, Philadelphia; Edison, New Jersey; and Oak Brook, Illinois. We are very pleased with the performance of these restaurants with the Philadelphia and Edison locations in particular, underscoring the tremendous opportunity that East Coast market represents. In our previous calls, we have mentioned unprecedented permitting delays that impacted the opening of Jersey City and Philadelphia. We haven’t seen any such permitting concern since, and we believe those are one of anomalies. Looking ahead, our unit pipeline is stronger than it has ever been, with nine restaurants under construction and nine more executed leases. We not only feel extremely comfortable about achieving our fiscal 2023 unit growth guidance, but also have an excellent head start on our fiscal 2024 development.

As a note on the cadence of unit openings, we expect one opening during the third quarter with the remainder in Q4. Finally, we have made meaningful progress on the implementation of our new Waitlist app, which we believe has the potential to be the biggest of our fiscal 2023. As we mentioned in past calls, our current Waitlist app algorithm provides highly conservative estimate of wait times, particularly close to the end of the evening. We expect the revised algorithm to have three major impacts on improvement in customer satisfaction, reduced attrition, and the potential to drive additional traffic in off-peak hours. I’m extremely pleased with the progress that we have seen on our marketing initiatives as well. The targeted advertising and search engine optimization we began in December has been highly effective in growing first time guest.

Our reward membership-based growth continues to be extremely with the current account of 700,000 members as compared to the 500,000 members we noted during our November earnings call. However, the implementation of the new Waitlist app is a more immediate priority. We are also working on loading out our updated rewards program with Punch. Additionally, we just began our second demonstrated campaign in April, which I’m sure we remember from the prior summer as being our most successful brand collaboration yet. As a preview of things to come, I’m very happy to announce that we will be partnering with DC Comics this summer, which is just another indication of the momentum that Kura brand has seen over recent years. It’s an honor and a privilege to be able to report such strong result and progress on our initiatives, and I’m incredibly grateful for the consistently spectacular work by our restaurant team members and corporate support staff to make this possible.

And with that, I’ll turn it over to Jeff to discuss our financial results and liquidity. Jeff?

Jeff Uttz: Thanks, Jimmy. For the second quarter, total sales were $43.9 million as compared to $31.3 million in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 17.4% growth with regional comps of 20% in California and 14% in Texas. The variance in regional comparable sales reflects the relatively easier comparison for California due to Texas’s faster recovery from the pandemic. This regional difference becomes minimal with a pre-pandemic three-year comparison against fiscal 2020 Q2 with California comps of 27.3% and Texas comps of 29.4%. Turning to costs, food and beverage costs as a percentage of sales were 30.1% as compared to 30% in the prior year quarter. We are very pleased that with the flattening of the inflation curve combined with our price increases, we were able to minimize the impact to our food and beverage costs and continue to be encouraged in the trends that we are seeing.

Labor and related costs as a percentage of sales decreased to 31.5% from 33.1% in the prior year quarter. This decrease is due to incremental efficiencies created by the implementation of technological initiatives, a favorable comparison in the lapping of the impact of Omicron in fiscal 2022 and sales leveraging from increased traffic and pricing. This leveraging was partially offset by wage increases. Occupancy and related expenses as a percentage of sales were 7% compared to the prior year quarters 7.4% due to sales leverage. Other costs as a percentage of sales decreased to 13.3% compared to 13.9% in the prior year quarter also due to sales leverage. General and administrative expenses as a percentage of sales decreased to 16.2% as compared to 17.4% in the prior year quarter.

On a dollar basis, G&A expenses were $7.1 million as compared to $5.5 million in the prior year quarter with the increase largely driven by compensation as we invested in both recruiting and internally developing the management talent. As Jimmy previously mentioned, we are very pleased with the leverage we have seen in our G&A expenses and continue to hold G&A leverage as a main focus going forward. Operating loss was $1 million as compared to an operating loss of $1.9 million on the prior year quarter. As the percentage of sales operating loss was 2.4% as compared to a loss of 6% in the prior year quarter. Income tax expense was $15,000 compared to $3,000 on the prior year qurater. Net loss was $1 million or $0.10 per diluted share compared to a net loss of $1.9 million or $0.19 per diluted share in the prior year quarter.

Restaurant-level operating profit as a percentage of sales was 20.3% compared to 17.8% in the prior year quarter. Adjusted EBITDA was $2.3 million compared to $0.4 million in the prior year quarter. Turning to cash and liquidity. At the end of the fiscal second quarter, we have $22.3 million in cash and cash equivalents and no debt. Lastly, I would like to reiterate and update the following guidance for fiscal 2023. We expect total sales to be between $185 million and $188 million. We expect to open between nine and 11 units with average net capital expenditures per unit of approximately $2.5 million, and we expect general and administrative expenses as a percentage of sales to be between approximately 15.5% and 16%. Please note that our guidance assumes no material changes in consumer behavior or broader macroeconomic trends.

In addition, as we move on from the pandemic era, at the conclusion of the current fiscal year, beginning with our first quarter earnings call, we will no longer quantify quarter-to-date performance in keeping with pre-pandemic reporting policies. 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. Thank you for your attention.

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Q&A Session

Operator: Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from the line of Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Jeremy Hamblin: Thanks, and congratulations on the really strong momentum in the business. I wanted to come back to the wait time app and just get an understanding of in terms of the potential for efficiencies in the process, when do you expect the new version to be going live fully and what do you think is the opportunity based on what you’re seeing with initial results to potentially have a positive impact on comps? You mentioned that you think some of the kind of lower volume day parts could really see a benefit. Wanted to get a sense for what you think the potential magnitude can be.

Jimmy Uba: Sure. Thank you, Jeremy for your first question. I’m happy to answer this question, but please allow me to speak in Japanese. Ben is going to translate.

Benjamin Porten: We are currently testing the updated wait list in five stores and we expect a full rollout by the end of the fiscal year wait list.

Jimmy Uba:

Benjamin Porten: We’re very encouraged by the initial test results. What we’ve seen is, we’ve seen very concrete improvements in waiting time accuracy. If we were to say, prior to implementation, about 70% of the wait times, we’re accurate within five minutes. We’re now seeing upwards of 85%. In terms of the shoulder periods that we’ve mentioned, we think there’s pretty meaningful opportunity especially at the end of days. Those are when you get the worst attrition rates because, say, you and I go to dinner at 9 o’clock and we know the restaurant closes at 10 and the wait time says two hours, we’re not going to wait because we’re not going to get a seat, but because everybody has the same reaction, had we waited, we would’ve gotten a seat.

And so just by having that more accurate wait time that unlocks greater operational efficiencies for that last hour. In terms of the other shoulder periods, one big opportunity we see is in weekday €“ weekday lunches. If a dinner wait time is off by 15 or 20 minutes, it’s annoying, it’s frustrating, but your day is over and so you can just wait a little bit longer. If your lunch wait time is off by 15 or 20 minutes, you’ve lost your lunch, your meal opportunity. And so €“ we think that once we can really dial in the accuracy and communicate that to our guests, that’s a very meaningful opportunity for us.

Jimmy Uba:

Benjamin Porten: So while we’re tremendously excited for the opportunity represented by just given the rollout expectations, we haven’t built this upside into our existing financial models into our guidance. And so if there’s a lift that’s crazy for us.

Jeremy Hamblin: Great. That’s helpful color. And then just last one for me. In terms of €“ I think in April now you’re running the Demon Slayer promo, and could you just talk about that? I think you ran that at the end of last summer, bringing it back, I think it’s a pretty significant licensing partner. But any color that you might be able to share on that particular license partner in terms of the potential to impact results versus some of the other promos that you’ve run?