Kura Sushi USA, Inc. (NASDAQ:KRUS) Q2 2024 Earnings Call Transcript

Kura Sushi USA, Inc. (NASDAQ:KRUS) Q2 2024 Earnings Call Transcript April 4, 2024

Kura Sushi USA, Inc. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.032. KRUS  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Second Quarter 2024 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 Hajime Jimmy Uba, President and Chief Executive Officer; Jeff Uttz, Chief Financial Officer; and Benjamin Porten, Senior Vice President of Investor Relations and System Development. And now, I would 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 2024 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 reconciliation 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.

Hajime Jimmy Uba: Thanks Ben and thank you to everyone for joining us today. I’m very pleased to report that the ongoing strength of our business as we progress through a record fiscal year. Jeff will go into greater later, but for those of you have read our earnings release, I’m sure you know the result. We have announced further raises in guidance. It was unprecedented for us when we announced our guidance raise so early in the year with our first quarter call and being able to follow the next quarter, is rightly [ph] for each of our guidance items demonstrates our incredible confidence in our business. We’ve opened 10 restaurants to-date, putting us well on track for our new unit guidance of 13 to 14 openings this fiscal year.

We leverage G&A year-over-year by 190 basis points and grew adjusted EBITDA dollars by 23%. We’ve introduced big new projects and our operational teams have more than risen to the challenge of implementing them. I’m extremely proud of everyone’s efforts and wanted to begin the call by acknowledging all of our team members and thanking them for creating so much great news that I get to share today. Total sales for the fiscal second quarter were $57.3 million, representing comparable sales growth of 3%. A profit growth of 5.9% is a meaningful acceleration over the prior quarter’s profit growth of 3.3%. We are very pleased that we have achieved these results in spite of the severe weather that impacted the entire industry. During our fiscal second quarter, Black Box [ph] Restaurant Industry Traffic Index was negative 3.5%, a spread of 940 basis points.

Compared to the casual dining industry, our profit outperformance was 1,180 basis points. It’s clear that our guest love Kura as much as we love them. As a reminder, 7% of the pricing paid off during the first week of December, which we offset with only 1% in January for current effective pricing of 3%. [Indiscernible] tailwinds in January and we are very pleased to see that this is continuing through the quarter. This clearly has been a special quarter for Kura and I’m proud of that. We provide the kind of guest experience that keeps guests coming back to us. During the second quarter, commodity costs continued to be right where we want them, up 29.6% of sales. Labor as of percentage of sales was 32.8% as compared to 31.5% in the prior year quarter.

In addition to the meaningfully higher pre-opening labor cost due to accelerated openings, we experienced the same severe weather that impacted the rest of the restaurant industry. We are confident that this increase in labor costs is not structural in nature and expected the same seasonal leverage in good labor that we’ve always seen. As I previously mentioned, we are aggressively executing on one of our key strategic pillars to drive overall corporate profitability, leveraging G&A. We were able to bring G&A cost down to 14.3% as a percentage of sales as compared to last year’s 16.3%. And as a result, we now expect to achieve even greater G&A leverage for the year, which Jeff will discuss later. Our support center team have done a great job in managing incremental headcount and we expect further tailwinds in future years as we infill markets and the benefit from efficiencies in regional Restaurant management.

In the fiscal second quarter, we opened five new restaurants; Kansas City, Missouri; Skokie, Illinois; Columbus, Ohio; and Euless and Webster in Texas. Subsequent to quarter end, we opened one more restaurant in Orlando, Florida. We also have five units currently under construction. In the fiscal year-to-date alone, we’ve opened as many restaurants as we did during the first six years of Kura Sushi’s operations in the U.S. I’m incredibly proud of what our brand have become and for us to have established our footprint as a truly national brand with restaurants in 17 states today. We are also pleased with the performance of our new Rewards program. U.S. members are now responsible for approximately a third of our sales as compared to less than the quarter with our prior program.

Our recent analysis on average Rewards members spend 10% more per ticket, even after factoring in discounts and visit 1.3 times per month. For the last several calls, I’ve hinted up our IT collaboration that I was extremely excited about and it’s my pleasure to finally be able to share that our next IT partner is Dragon Ball [ph]. I think this might be our first non-American property that everybody on this call is already familiar with. We believe Dragon Ball is the most exciting partnership we’ve ever had and I’m truly looking forward to sharing the results. I have a lot of great news this year regarding our tech pipeline as well. We have completed our first in-restaurant test of our robotic dishwasher in Japan and early results have confirmed our expectations on how meaningful they will be for our operations.

While we don’t have timelines for safe side [ph] implementation, I’m very pleased with our flood momentum. Our table-side mobile ordering function implementation is going smoothly as well and I’m happy to be able to announce a new teaser for table-side mobile ordering that we are developing in parallel. The ability for guests to club-on [ph] prices through side menu purchases rather than just through sushi place. One more thing on the tech front. We have a completely new battle-tested technology from Kura Japan that we are currently getting certified for the U.S. We call it the Sushi Slider. We put our rice balls directly on to our sushi plates and then takes them to each dine-in employee, [indiscernible]. During peak hours, we can have two to three employees spending half of their shift, placing rice balls on the sushi plates and handling them to the next person on the make line [ph].

So, the operational upside here is obvious. Our expectation is that we’ll be able to bring the Sushi Slider certified for testing this summer and that we’ll actually be able to retrofit some of our existing restaurants to accommodate it. As you can see, we’ve made a lot of progress in this last quarter. Lastly, I’m pleased to announce that we were able to secure a very favorable review with DoorDash, prompting our exclusive partnership and rapid rollout of the program. In these difficult times, we are able to keep our menu prices the same as in-store dining, and we expect the DoorDash sales to be beneficial to the margins. We are very pleased with our partnership with DoorDash so far and I’m looking forward to providing quantitative color in future calls.

I would like to again thank all of our team members at our restaurants and our support center. Every department can point to a remarkable achievement this quarter. We are looking at some 10 restaurants that we’ve already opened, the incredible traffic outperformance of our restaurants, G&A leverage of 190 basis points, our IT collaboration pipeline, and the success of new device program, our progress in technology or a successful and rapid rollout of DoorDash. It’s been an amazing quarter. Thank you, everyone. Jeff, now I’ll turn it over to you to discuss our financial results and liquidity.

Jeff Uttz: Thanks Jimmy. For the second quarter, total sales were $57.3 million as compared to $43.9 million in the prior year period. Comparable restaurant sales performance compared to the prior year period was positive 3%, with regional comps of 8.7% in our West Coast market and flat comparable sales in our Southwest market. Turning now to our costs. Food and beverage costs as a percentage of sales were 29.6% compared to 30.1% in the prior year quarter, largely due to pricing and supply chain initiatives. Labor and related costs as a percentage of sales were 32.8% as compared to 31.5% in the prior year quarter. This increase was largely due to adverse weather conditions, increased training costs associated with new store openings, and general wage increases.

Occupancy and related expenses as a percentage of sales were 6.9% compared to the prior year quarter’s 7%. Depreciation and amortization expenses as a percentage of sales increased to 4.7% compared to the prior year quarter’s 4%, largely due to additional newly-opened units as well as the accelerated depreciation of assets that were being replaced due to planned remodels. Other costs as a percentage of sales increased to 14.6% compared to 13.3% in the prior year quarter, due mainly to preopening costs associated with a greater number of store openings as well as an increase in marketing costs, repairs and maintenance, and general cost inflation. General and administrative expenses as a percentage of sales decreased to 14.3% compared to 16.2% in the prior year quarter due to greater sales leverage, which was partially offset by incremental public company costs and recruiting and travel costs associated with new unit openings.

Operating loss was $1.7 million compared to an operating loss of $1 million in the prior year quarter, largely driven by incremental other costs associated with a greater number of unit openings and units under construction and depreciation and amortization. Income tax expense was $50,000 compared to $15,000 in the prior year quarter. Net loss was $1 million or $0.09 per diluted share compared to a net loss of $1 million or $0.10 per diluted share in the prior year quarter. Restaurant-level operating profit as a percentage of sales was 19.6% compared to 20.3% in the prior year quarter. Adjusted EBITDA was $2.9 million compared to $2.3 million in the prior year quarter. Now, turning to our cash and liquidity. At the end of the fiscal second quarter, we had $56.8 million in cash and cash equivalents and no debt.

And lastly, I’d like to update the following guidance for fiscal year 2024. We now expect our total sales to be between $243 million and $246 million. We now expect to open between 13 and 14 new units with average net capital expenditures per unit of approximately $2.5 million. And we now expect G&A expenses as a percentage of sales to be between 14% and 14.5%. And with that, I’d like to turn the call back over to Jimmy.

Hajime Jimmy Uba: Thank you, 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 to English. Thank you for your attention.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question will come from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Jeffrey Bernstein: Great. Thank you very much. A couple of questions. The first one, just looking at the comp, I think you said 3%. Just wondering if you can talk about maybe the trends through the quarter and what you’ve seen in the month of March, it does seem like the industry is perhaps talking about a little bit of a slowdown in March going into April, especially in the lower-income consumer. So, just trying to get your perspective on the consumer environment and what trends you’ve seen in recent months?

Hajime Jimmy Uba: [Foreign Language] In terms of the monthly cadence of the comps, obviously, we saw some pressure in January with the inclement weather that everybody else saw. We’re very [Technical Difficulty] we think there were 45 [ph] remodels, especially after promotion appears to be slow. One thing that we really feel tremendous on 5.9% traffic that we did, which really have a 1,000 basis points spread between ourselves and the casual dining increased tremendously. We’re incredibly pleased with how markets performed and we’re just [indiscernible] we’re very happy with April’s as well and so it’s great to see that we’re maintaining positive momentum that we’ve seen as we’ve exited Q2. It’s been really great.

Jeffrey Bernstein: No, that’s encouraging. And then just separately on the new markets you’re going into from a geography standpoint, any surprises in terms of reception from the consumer whether positive or negative? Just curious your learnings in your newest markets you’ve got such a big opportunity for you.

Hajime Jimmy Uba: In terms of geographic trends, we’ve seen the same trends as before in terms of new markets, every single one of them has been a hit. So, in other words, no surprises, we’ve expected hits and we’ve gotten hits and so that’s really nice. In terms of differences in geographic performance, that would really just be associated with wherever the weather was. For us, we’ve got a lot of places in California and so when it rains in California that can have an impact on the West Coast comps.

Jeffrey Bernstein: — was pressured relative to at least Street expectations on the labor line and the other line, both being well above expectation, which drove pressure on the margin, but I get the feeling those aren’t necessarily structural. It sounds like the labor was because of some accelerated unit opening, does that mean other costs that were some unusual. So, just wondering, as you think about the restaurant margin for the second half of fiscal 2024, what your thoughts are there and maybe what line item you think has the greatest visibility versus the greatest level of uncertainty as we think about the back half of the year restaurant margin? Thank you.

Jeff Uttz: We’re very confident about the restaurant-level operating profit margins for the second half of the year. As you know, we’ve already opened the bulk of the units for this fiscal year and so those preopening labor-related headwinds are largely behind us. The other factor is that we’re going to see the same seasonality, the same sales leverage that we’ve seen every year. We also have a number of promotions that are in the pipeline that we could not be more excited about. As Jimmy mentioned, we’ve got Dragon Ball. We think that’s literally, the biggest promotion ever. Jimmy and I are super, super proud and pleased to have that there. And so we’ve got a lot of tailwinds and even besides that, we’ve got the tech stuff, we’ve got DoorDash. There are a lot of things to look forward to for restaurant-level operating profit margin.

Hajime Jimmy Uba: And the other would be the first month that you open a restaurant it’s typically not profitable and we’re over the hub for all those restaurants. They’re operating at full capacity. There’d be tailwind for the back half of the year. So, yes, we’re really excited.

Jeff Uttz: And Jeff too, what I’ll add is, as we talked about the restaurant-level margins, which are really excited about all these new things we have in the pipeline, we also really want to point out the G&A reduction and leverage that we’re getting on the total adjusted EBITDA on the G&A. I mean, we went from 15.8% in 2022 to 15% in 2023. And with earning guidance, if we hit the midpoint, that’s another 80 bps [Technical Difficulty] basis points of [Technical Difficulty], something very proud and very excited about.

Jeffrey Bernstein: Absolutely. Thank you guys very much.

Hajime Jimmy Uba: Thanks Jeff.

Jeff Uttz: Thank you.

Operator: Our next question comes from the line of Jon Tower with Citigroup. Please proceed with your question.

Jon Tower: Great. Thanks for taking the questions. Maybe starting off with the comps and specifically during the period. It’s great to see the traffic growth, that’s awesome, but the price/mix implications behind that, you guys moved into negative territory. And I know there’s not a ton of history here, but I’m curious that would seem to indicate that consumers are perhaps managing their check a little bit differently than in years past. So, how is that manifesting? Are people just getting fewer plates? Are they pulling less off of the — or ordering less off of the tablets and pulling more off of the belts? Just curious to see how it’s showing up in your business?

Hajime Jimmy Uba: In terms of mix, our per person plate consumption has stayed flat at 6.3 plates year-over-year and so really no difference there. The delta would be in side-menu orders or people trading out from soft drinks to water. In terms of mix, we’re actually — we’re very pleased. I don’t know if you caught what we mentioned at ICR in January. But as of December, mix has gone from negative high single-digits to negative mid-single-digits. And as you can see from our comp breakdown back into from traffic, that strength has helped. And so the consumer is showing greater strength in the most recent quarter relative to the last couple of quarters where we’ve mentioned mix being negative high single-digits. We’re exceptionally proud, again, of the 6% traffic.