Kura Sushi USA, Inc. (NASDAQ:KRUS) Q1 2024 Earnings Call Transcript

Kura Sushi USA, Inc. (NASDAQ:KRUS) Q1 2024 Earnings Call Transcript January 4, 2024

Kura Sushi USA, Inc. misses on earnings expectations. Reported EPS is $-0.18 EPS, expectations were $-0.11. 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 First 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’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 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 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. 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 Happy New Year to everyone joining us today. Fiscal 2024 is off to an exceptionally strong start with meaningful improvement in restaurant-level operating profit margin and adjusted EBITDA, as well as six new units opened to date with another seven under construction. Our goals for this fiscal year remain the same as last year: maintain excellent operations, continue to rapidly grow the number of our restaurants, and leverage our G&A against our increasingly large restaurant base. I’m pleased to say that we are continuing to make excellent progress on all three fronts. Total sales for the fiscal first quarter were $51.5 million, representing comparable sales growth of 3.8% with traffic growth being responsible for 3.3% of our overall comp.

Sales momentum has accelerated since our last earnings call, as implied by the 110 basis point improvement over the branded September-October comps of 8.7%, this improvement being delivered entirely by traffic growth. Effective price was 9% during the fiscal first quarter. As of the first week of December, we dropped (ph) 7% in price which we partially offset in January with pricing of approximately 1%. Our current 3% effect pricing is a return to our historical pricing cadence which reflects our confidence in the ongoing normalization of our prime costs as well as a strong strategic decision to best to take advantage of current macro factors to maintain traffic growth and capital market share. Commodity costs have seen a marked improvement over the prior year quarter with our cost of goods sold as a percentage of the sales coming up 29.8% of Q1 as compared to last year 31.6%.

Labor costs have largely remained the same at 31.6% as compared to prior year quarter of 31.9%. Restaurant-level operating profit margins improved from 18.3% in the prior year quarter to 19.5% and adjusted EBITDA grew from $0.6 million to $1.8 million, representing year-over-year growth of approximately 200%. It’s worth mentioning that, much of the adjusted EBITDA growth was driven by improvements in commodity costs, but it is particularly encouraging to see such dramatic growth even while we faced the other headwinds associated with full of [indiscernible] compliance and restaurant level headwind associated with a record number of new restaurant openings and the units under construction. I believe this adjusted EBITDA growth is only a test of what we can expect in future years as we grow our unit base, but as a company and are even better able to leverage our G&A.

In the fiscal first quarter, we opened four new restaurants, Pittsburgh, Pennsylvania; Flushing, New York; Tampa, Florida; and Naperville; Illinois. Subsequent to the quarter end, we opened two more new restaurants in Kansas City, Missouri and Skokie, Illinois. Additionally, we have 7 units currently under construction. Accordingly, we are excited to increase our unit openings guidance for fiscal 2024, which Jeff will expand on shortly. The incredible reception that we are seeing as we establish ourselves in new market demonstrates the purely national cost of food cost affordability of Kura Sushi and the performance of the new units in existing market is confirming our expectations that the massive consumer appetite of Sushi more than enough to sustain our infield brand.

It’s been a couple of months since we launched the new version of our rewards program and I’m very pleased to be able to share that early momentum that we discussed in our previous earnings calls has remained just as strong. Registration rates for new members approximately tripled what they are with the previous program and given that these are all new users, we expect greater engagement on a per user basis and overall comfort of the previous reward program. While it is still very much early days in terms of the new reward program and our earnings on how to best leverage it, we expect to give more concrete update in future earnings call in terms of newly unblocked opportunities and its potential to drive incremental revenue. Our current ID collaboration peanuts has been very well received via our guests.

Our next brand collaboration is SPY x FAMILY and we believe pipeline for the remainder of the fiscal year is the strongest one we’ve ever had. As we enter the New Year, I would like to thank all of our team members both at our restaurants and at our corporate support center for all of their hard work which have allowed us to share great news quarter-after-quarter on our earnings call. And with that, I will turn it over to Jeff to discuss our financial results and liquidity. Jeff?

Jeff Uttz: Thank you, Jimmy. For the first quarter, total sales were $51.5 million as compared to $39.3 million in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 3.8% with regional comps of 9% in our West Coast market, and 1.3% in our Southwest market. Turning now to costs. Food and beverage costs as a percentage of sales were 29.8% as compared to 31.6% in the prior year quarter, largely due to pricing and the easing of commodity inflation. Labor and related costs as a percentage of sales decreased to 31.6% from 31.9% of prior year quarter. This decrease is due to sales leveraging from increased traffic and pricing which was largely offset by increased training costs associated with new store openings and general wage increase.

Occupancy and related expenses as a percentage of sales were 7.6% compared to the prior year quarter 7.3% due to incremental pre-opening rents associated with a greater number of units construction. Depreciation and amortization expenses as a percentage of sales increased to 4.8% as compared to the prior year’s quarters 4% largely due to the additional newly opened units as well as the accelerated depreciation of assets being replaced due to planned remodels. Other costs as a percentage of sales increased to 14.7% compared to 13.5% 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 and general cost inflation. General and administrative expenses as a percentage of sales decreased to 16.7% as compared to 16.9% in the prior year quarter due to greater sales leverage, which was largely offset by incremental public company costs and recruiting and travel costs associated with new unit opening.

Operating loss was $3.8 million as compared to an operating loss of $2.2 million in the prior year quarter, largely driven by incremental other costs, depreciation and amortization, and occupancy associated with a greater number of unit openings and units under construction. Income tax expense was $38,000 compared to $10,000 in the prior year quarter. Net loss was $2 million or $0.18 per share compared to a net loss of $2.1 million or $0.21 per share in the prior year quarter. Restaurant-level operating profit as a percentage of sales was 19.5% compared to 18.2% in the prior year quarter. Adjusted EBITDA was $1.8 million compared to $0.6 million in the prior year quarter. Turning to our cash and liquidity. At the end of the fiscal first quarter, we had $64.2 million in cash and cash equivalents and no debt.

And lastly, I would like to update and reaffirm the following guidance for fiscal year 2024. We now expect total sales to be between $239 million and $244 million. We now expect to open between 12 and 14 units with average net capital expenditures per unit of approximately $2.5 million. And we continue to expect general and administrative expenses as a percentage of sales to be approximately 14.5%. Now, I will turn it 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: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Joshua Long with Stephens. Please proceed with your question.

Joshua Long: Great. Thank you for taking my question. Just curious if you could share a little bit more about the unit development pipeline and what seems to be a nice strengthening in that. I know in the prior call, you talked about the potential for upside to the unit — new unit development pipeline for the year. That seems to be coming into fruition. Just curious if this is a function of site selection, maybe if permitting has gotten any better or anything you could share there in terms of just how the new stores are coming together.

Hajime Jimmy Uba: Sure. Thank you, Josh, for your thoughtful question. Please, allow me to speak in Japanese then it will have translated for me. [Foreign Language] [Interpreted] So as Jimmy mentioned in the prepared remarks, we have 7 units under construction. We’re extremely pleased to be able to say that three of those were pretty far into construction, and so we’re very happy with where we are. It’s one of the reasons that we are confident in terms of raising our guidance. In terms of the permitting delays that you mentioned in the past fiscal year, those have meaningfully eased and so we’re very happy with the rollout and how smooth that’s been this year.

Joshua Long: Great. That’s very helpful. Thank you. Thinking maybe more about the performance of newer stores, it sounds like that’s pretty strong. Could you give a little bit of extra context or color in terms of just how the results for the quarter performed versus your expectations? I know, if there’s — always there is going to be a little bit of difference in between what you all see and how we model it. But I’m thinking particularly in terms of just kind of how average weekly sales growth was growing through the quarter and maybe if at some point we kind of get away from looking at this on a multiyear stack comparison, I know we’re getting further away from kind of COVID and some of those disruptions, but just curious if you’re starting to see any sort of normalization there and any sort of commentary you could share on how new store performances is unfolding.

Hajime Jimmy Uba: [Foreign Language] [Interpreted] In terms of new restaurants, we — fiscal ’23 had a record year. This year we’ve already opened six to date. And so we’ve had a lot of new openings. In terms of the major new markets that we’ve hit, we’ve entered Minneapolis. We’ve opened a couple of restaurants in New York. We hit Pittsburgh. We’re in Tampa. It’s been it’s a pleasure really to see how warm the receptors that in each of these markets. And every time we open — every time we enter a new market, it’s just a confirmation of the portability of our concept and so it’s really encouraging for us. In terms of the existing markets, we’ve opened a couple in New Jersey, Chicago, the Atlanta area, and those are all doing very well as well as Jimmy mentioned in the earlier prepared remarks, there’s abundant appetite for Sushi across the United States and so we feel very confident, but not only in terms of our existing — our new markets, which are gangbusters but infilling our existing markets as well.

[Foreign Language] [Interpreted] Okay. Understood. So — and in terms of the multiyear stack, we’re not — we are being totally frank. We’re not internally doing a multiyear stack anymore. We’ve returned to normalcy. And so we’re very pleased to be able to say that.

Joshua Long: Great. Thank you. That’s helpful. Then one last one for me. In terms of the food deflation or just the overall COGS basket that you talked about in your prepared remarks, I think also in the past there was conversation around the potential to reinvest in food quality or other areas if the food cost margin went materially below 30% was just — as kind of a starting point. So realize it’s probably early on in the old process, and there’s still a little bit of fluidity there. But could you just remind us how you’re thinking about the food cost line and when and where some of those pivot points or thought process might lie in terms of the potential for seeing leverage or maybe reinvesting in that line item?

Jeff Uttz: Hey, Josh. It’s Jeff. Yeah. The 30% number on the COGS line is something that we’re very happy with. It’s something that we would like to see a little bit lower, and it has gotten lower. In terms of deflation, just to give you the numbers of what we’ve seen this year, year-over-year our deflation was about 4%. And sequentially, quarter-over-quarter, our deflation was about 2%. So that deflation, combined with the price increases that we’ve taken over the last year, and as Jimmy mentioned, we did take about 1% on January 1. We believe that with the price increases and the deflation, that we’re going to be successful in having that COGS number show up even below 30%. But as we’ve mentioned in the past, there’s a floor to that.

We — if that COGS number were to get somewhere 27%, 28%, that may be a little bit too low, and then you do risk, hurting your food quality, which is not something we’re going to do. So as long as we can keep that number in the very, very high 20s or right around 30%, we’re going to be happy.

Joshua Long: Got it.

Jeff Uttz: In terms of reinvesting that, some things that we’ve done have materially — significantly improved the quality of our core proteins, especially tuna and salmon. Very pleased to be able to say that we’ve done that while also lowering our COGS basket or COGS cost. And so that’s really been pretty remarkable for us. One other thing that we like to do is our LTOs. For example, in December, we did a crab fair, very high quality crab. Winter is crab season in Japan, and this was one of the most popular LTOs ever. And I think our guests really enjoyed it and sort of appreciated that we were giving back to our guests through crab.

Joshua Long: Great. Thank you so much.

Jeff Uttz: Thanks, Josh.

Hajime Jimmy Uba: Thank you, Josh.

Operator: Thank you. Our next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.