Kura Sushi USA, Inc. (NASDAQ:KRUS) Q4 2023 Earnings Call Transcript

Kura Sushi USA, Inc. (NASDAQ:KRUS) Q4 2023 Earnings Call Transcript November 11, 2023

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Fourth 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. [Operator Instructions] Please note that this call is being recorded. On the call today, we have Hajime Jimmy Uba, the President and Chief Executive Officer; Jeff Uttz, the Chief Financial Officer; and Benjamin Porten, SVP, Investor Relations and System Development. And now I’d like to turn the call over to Mr. Porten. Thank you, and you may proceed, sir.

Benjamin Porten: Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal fourth 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 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 announce that we closed another record-breaking year with a great fiscal fourth quarter. Before we dive into discussing our most recent quarter, I would like to have a quick recap of what we have achieved over the full fiscal year. At the beginning of the year, we mentioned three major goals for fiscal 2023, maintaining excellent operations, continuing to rapidly grow our restaurant base and leveraging our G&A against our increasingly large restaurant base. I’m proud to report our success on all of these fronts as demonstrated by our full year restaurant-level operating profit margins improving 70 basis points year-over-year to 21.9%, a record 10 new unit openings and full year G&A leveraging of 80 basis points over the prior year.

Our AUVs have grown from $3.8 million in fiscal 2022 to $4.3 million in fiscal 2023, reflecting the incredible number of new unit openings we’ve had in recent years. These successes absolutely translated to improvement in profitability. Our adjusted EBITDA grew from $9.2 million in fiscal 2022 to $14.3 million in fiscal 2023, representing a growth rate of over 56% in a single year. Total sales for the fiscal fourth quarter were $54.9 million, representing comparable sales growth of 6.5%, with traffic growth being responsible for 5.6% of our total comp. In spite of ongoing concerns of a deteriorating macro environment, more guests are coming to Kura Sushi than ever before. Our traffic is absolutely outperforming pre-pandemic levels. We continue to be pleased with our sales performance as we enter the new fiscal year with branded comps for September and October of 2.7%, total revenue of approximately $34.3 million and the quality of traffic in both months.

Commodity costs have continued to improve. Our cost of goods sold as a percentage of sales of 29.5% is a 120 basis point improvement over the prior year quarter and a 50 basis point sequential improvement over the prior quarter. Labor costs as a percentage of sales have held steady at 28.8%, confirming the expectations we had shared during the previous earnings call. Restaurant-level operating profit margins reached to an all-time high of 24.4%, representing a 50 basis point improvement over the prior year quarter. During our fiscal fourth quarter, we opened 4 new restaurants, Long Island, New York, San Jose, California, and Framingham and Dorchester in Massachusetts, for a total of 10 unit openings in fiscal 2023. Our momentum on the development front is better than ever.

Since entering the new fiscal year, we’ve already opened four units, Pittsburgh, Pennsylvania, Flushing, New York, Tampa, Florida, and Naperville, Illinois, with another seven units currently under construction. It’s been wonderful to see Kura continue to resonate in new markets as we expand across the country. Turning to new initiatives. I’m very happy to announce that we launched our new reward program app in mid-October and guest response through the new app has been uniformly positive. While our previous reward app has been very effective in growing traffic by encouraging repeat visits, the visual presentations app and its usability was lacking. In comparison, our new app is very highly rated on the App Store and the Google Play Store with many users commenting on the significant improvement the new app has delivered.

The response from existing users has been nothing short of great. But what’s really exciting is that since launching our new app, the number of weekly new user registrations has more than doubled. To be clear, these are not existing users that are migrating their accounts, but completely new guests that are joining our rewards program due to the improvements that we have made. I would encourage everyone on this call to download our new app as you’ll be able to immediately see the difference in quality. On top of the improvement to the guest experience, our new reward platform has unlocked completely new opportunities for our marketing team, such as customer segmentation, targeted marketing and new ways of rewarding and engaging with our guests.

I’m extremely excited for its potential and expect this to be a meaningful sales driver for us as we learn to unlock its potential. Development of the robotic dishwashers will continue to progress with the first in-restaurant implementation in Japan expected in spring of 2024. Following this pilot, we’ll be able to begin the certification process for implementing the robotic dishwashers in the U.S. While we do expect the dishwasher robots to have a meaningful impact on our labor model in future years, as we have stated in past earnings call, we do not expect implementation during this fiscal year, and we expect its impact to slowly ramp as these dishwasher robots will be limited to newly opened restaurants. Our current Jujutsu Kaisen IP collaboration has had a great guest response and our upcoming pipeline of brand collaborations is our strongest one yet.

I’m so excited to see what we can achieve in fiscal 2024, and I’m deeply grateful for the continuous hard work by our team members at our restaurants and at our corporate support center for setting us up for another amazing year. And with that, I’ll turn it over to Jeff to discuss our financial results and liquidity. Jeff?

Jeff Uttz: Thank you, Jimmy. For the fourth quarter, total sales were $54.9 million as compared to $42 million in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 6.5% with regional comps of 12.1% in California and 3.3% in Texas. Turning now to costs. Food and beverage costs as a percentage of sales were 29.5% as compared to 30.7% in the prior year quarter, largely due to pricing and the stabilization of commodity inflation. Labor and related costs as a percentage of sales decreased to 28.8% from 28.9% in the prior year quarter. This decrease is due to incremental efficiencies created by the implementation of technological initiatives and sales leveraging from increased traffic and pricing, which was largely offset by wage increases.

Occupancy and related expenses as a percentage of sales were 6.6%, compared to the prior year quarter’s 6.5%. Other costs as a percentage of sales increased to 13.8% compared to 12.4% in the prior year quarter due to costs associated with a greater number of store openings as well as an increase in marketing costs and general cost inflation. General and administrative expenses as a percentage of sales decreased to 13.2% as compared to 13.3% in the prior year quarter. On a full-year comparison, G&A expenses as a percentage of sales decreased to 15% as compared to the prior year’s 15.8%. This represents an increase of G&A dollars of 25.8% for fiscal year 2023 as compared to sales growth of 32.8% over the same period. With the leveraging of G&A being one of our key goals for fiscal 2023, we are very pleased with these results and expect to achieve further leverage in the coming fiscal years.

Operating income was $2.2 million as compared to operating income of $1.9 million in the prior year quarter. Income tax expense was $167,000 compared to $61,000 in the prior year quarter. Net income was $2.9 million or $0.25 per diluted share, compared to net income 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 24.4% compared to 23.9% in the prior year quarter. Adjusted EBITDA was $6.3 million compared to $4.8 million in the prior year quarter. Turning now to our cash and liquidity. At the end of the fiscal fourth quarter, we had $69.7 million in cash and cash equivalents and no debt. And lastly, I’d like to provide the following guidance for fiscal year 2024.

We expect total sales to be between $238 million and $243 million. We expect to open between 11 and 13 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 approximately 14.5%. In addition, as we have communicated over the last year, beginning with our next earnings call, we will no longer quantify quarter-to-date performance. And with that, I’d like to turn the call back over to Jimmy.

Hajime 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: [Operator Instructions] The first question comes from Joshua Long from Stephens. Please proceed with your question, Joshua. Joshua, you may proceed with your question. If your line is muted, please unmute your line, so that you can post your questions.

Joshua Long: Great. Thank you for taking my question. Curious if we could talk through the trends that you saw through before your fiscal fourth quarter that we had previously talked about in June and kind of the almost 15% range. But curious how that trended in July and August? And then as you think about kind of the early trends here in 1Q ’24, can you remind us kind of what we’re lapping over and/or how you think about some of the brand awareness initiatives that you’ve been working on in terms of the traffic driving tool? Thank you so much.

Hajime Jimmy Uba: Sure. Thank you, Josh, for your first question. Please allow me to answer in Japanese. Ben, you can translate. [Foreign Language] [Interpreted] Regarding — Josh, this is Ben. Regarding the June comps, we were very pleased. And as we mentioned in the prior earnings call, July and August were among most difficult comparisons, if not the most difficult comparison that we’ve been up against since going public. We were — we had the Demon Slayer campaign. We had the benefit of the full rollout of the 3 initiatives for the first time in Q4. And we also had different operating conditions in 2022, which made — I’m sorry, in 2021, making comparison for 2022 a little easier. And so the costs for Q4 of 2022 were 28%.

For us to have hit 6.5% and in fact to have comped 5.6% in positive traffic over that 14% or so positive traffic from last year, we think is quite an achievement. And so we’re very pleased with these results. Josh, did you have — did we answer your whole question? Or were there any — anything that I didn’t address?

Joshua Long: I appreciate that. And then just thinking forward, I mean, you’ve done a great job in terms of broadening the awareness of the brand with some of your brand partner collaborations. Curious how those are performing and kind of any sort of early read or additional context you could offer for 2024?

Hajime Jimmy Uba: [Foreign Language] [Interpreted] And so as you mentioned before, for us to have lapped that 28% comps with positive traffic, we’re very pleased. And certainly, the IP collaborations that we’ve been working with has been a big part of it. In the last earnings call, we mentioned just how strong We Bare Bears was, and that was certainly a lift from a traffic perspective. Right now, our current collaboration is with Jujutsu Kaisen, which is a very popular anime that’s going very well. And while I can’t disclose the full pipeline for the remainder of the year, we do have, I would say, the most exciting brands ever to have collaborated with Kura coming up. And so I’m extremely excited to give you updates on that as we get further into the quarter — or I’m sorry, the fiscal year.

Joshua Long: Thank you.

Hajime Jimmy Uba: Thanks, Josh.

Operator: Thank you. The next question comes from Jeffrey Bernstein from Barclays. Please proceed with your question, Jeffrey.

Jeffrey Bernstein: Great. Thank you very much. Two questions. First, I just wanted to follow-up on the comp trend. Totally appreciate lapping a 28% comp is extremely difficult. But in order to flush out the comparisons that I think you said got more difficult as the quarter went along, perhaps you can share on a two or three year basis, however you look at it, because it does seem like the comp if you’re running close to 15% in the first five weeks and you did a six and change for the full quarter that it was pretty flattish in the back nine weeks. I’m just trying to gauge whether you think it was a sequential slowdown at all or whether on a multiyear basis, it was actually fairly stable? Just trying to get a sense for the trend throughout the quarter, flushing out the comparisons.

Benjamin Porten: Yes. On a multiyear basis, I would say that it’s stable. Last year was really exceptional. July and August, in particular, had the Demon Slayer collaboration, which really brought unprecedented traffic for us.

Jeffrey Bernstein: Can you share them — just to be able to figure out kind of how that was in terms of two and three year, can you share the monthly numbers last year so we can kind of gauge?

Benjamin Porten: I don’t have them in front of me, but I believe if you go to our past earnings calls, you’ll be able to see them in the archives.

Jeffrey Bernstein: Okay. And then my second question was looking forward from a restaurant margin perspective, I appreciate that you gave top line guidance in terms of revenues and units and whatnot. But as we think about the margins and the flow-through to earnings, any thoughts you can give in terms of fiscal ’24? I mean the commodity and labor basket inflation, I presume, just wondering what you’re thinking for each of those and whether you have an ability or desire to hold the margins flat? Maybe how much pricing you’re anticipating in fiscal ’24? Any color on the key line items on the pricing to offset ultimately leading to restaurant margin would be great.

Hajime Jimmy Uba: [Foreign Language] [Interpreted] So we’ll let Jeff handle commodities. But just to discuss labor, in past earnings call, we’ve been mentioning that we’ve been seeing about double-digit year-over-year labor inflation. We’re very pleased to be able to say that that’s moderated down to mid-single-digits, which really is sort of reflected in our pricing decision that we made in July. As you know we lapped 7%, we only took 2% to offset that. And the relatively modest price increase really reflects the bullishness that we have on the overall labor environment. As we’ve mentioned in the past earnings calls, anything about 20% is an exceptional restaurant-level operating profit margin. We’re very pleased to actually grow that substantially this year with 80 basis points year-over-year. But anything over 20% is something that we’re very pleased with.

Jeff Uttz: Yes. Jeff, it’s Jeff. I’ll just add to what Jimmy and Ben said as well. When we think about restaurant-level operating profit, the 20% number is great. We’ve never historically taken price to chase margin. What we’ve done is we’ve taken price in response to minimum wage increases and other outside forces that are increasing the cost of us doing business. And that’s what we’re going to continue to do going forward. In terms of what we’ve seen on the COGS line, it has been really very encouraging. In the last two or three calls, I’ve said we’ve seen the really high increases slowdown and even out. And I’m really happy to report that in this past quarter, we saw not only sequential quarter-to-quarter but also year-over-year very slight deflation in our basket.