Kura Sushi USA, Inc. (NASDAQ:KRUS) Q3 2023 Earnings Call Transcript

Kura Sushi USA, Inc. (NASDAQ:KRUS) Q3 2023 Earnings Call Transcript July 6, 2023

Kura Sushi USA, Inc. beats earnings expectations. Reported EPS is $0.16, expectations were $0.13.

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Third Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and their lines will be open for your questions following the presentation. Please note that this call is being recorded. On this call today, we have Hajime Jimmy Uba, President and Chief Executive Officer; Jeff Uttz, Chief Financial Officer; and Benjamin Porten, Senior Vice President, 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 third 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: Thanks, Ben, and thank you to everyone for joining us today. I’m pleased to announce another excellent quarter for Kura Sushi, both in terms of restaurant-level performance and corporate initiatives. Year-over-year revenue has grown by approximately 30%, driven by our aggressive unit growth and industry-leading comparable sales trends. Our G&A leveraging efforts continue to bear fruit, with an improvement of 130 basis points over the prior year, as well. I’m exceptionally proud to see Kura Sushi continue to mature as a company as it expands its footprint and takes strides towards greater profitability. Third quarter revenue was $49.2 million, with comparable sales of 10.3%, which breaks down to 3% traffic growth and 7.3% in price and mix.

[indiscernible] continued to lead the casual dining industry with our third quarter traffic or outperforming industry averages by 830 basis points. June performance has been even better with total sales of $17.6 million and the comps of 14.7%. As these results demonstrate, guests [indiscernible] for Kura remains extremely strong. The inflationary pressures that we saw earlier in our fiscal year continued to ease with cost of goods sold as a percentage of sales coming in at 30%, which is in line with all the time best, we saw in fiscal 2022. Labor cost as a percentage of sales were 29.2% representing an improvement of 180 basis points over the prior year. Our third quarter restaurant-level operating profit margin of 23.5% represents an improvement of 100 basis points over the prior year.

I’m also very happy to note that between our growth in restaurant-level operating profit margin and the improvements in G&A, we were able to grow our adjusted EBITDA margin by 200 basis points over the prior year under our net income margin by 210 basis points. During Q3, we opened one new restaurant Buford, Georgia and one more new restaurant subsequent to the quarter end in Framingham, Massachusetts for a total of seven new restaurants opened to-date during the fiscal year. We have seven units under construction, as well as 11 more executed produces (ph). We are in an excellent position to achieve our unit growth goals for fiscal ‘23 and couldn’t be happier with the pipeline, we have showed up for fiscal ‘24. Our new Waitlist app have been successfully rolled out across our entire restaurant system.

While it’s too early for us to provide quantitative data on its impact, we are very encouraged by early results. Wait (ph) times are meaningfully more accurate and we believe, this is part of why we continue to outperform our peers in terms of traffic, which is further underlined by the exceptional performance we’ve seen in June. Our revised membership continued to grow with approximately 120,000 new members, over the course of the quarter. Our Demon Slayer campaign held during April and May, again, improved to be another great success and comp driver and our current collaboration with We Bare Bears, a television program on Cartoon Network has far exceeded our initial expectations and has delivered some of the strongest guest responses we’ve seen of any collaboration which set our restaurants up for our amazing journey.

As a final note, I would like to provide some updates on pricing. We lapped approximately 2% of pricing on March 1, bringing our effective repricing for our fiscal third quarter to 13%. Subsequent to the quarter, we lapped 6% of pricing on July 1, which was partially offset by 2% of pricing that we took concurrently. Relatively modest scale of this most recent pricing event reflects our confidence in the normalization of inflationary pressures seen earlier in the fiscal year. Lastly, I would like to share my deep appreciation for the amazing work by our employees both at our restaurants and corporate support center. Thank you, everyone. And with that, I’ll turn it over to Jeff to discuss our financial results and liquidity. Jeff?

Jeff Uttz: Thanks, Jimmy. For the third quarter, total sales were $49.2 million as compared to $38 million in the prior year period. Comparable restaurant sales performance as compared to the prior year period was positive 10.3% with regional comps of 15.5% in California and 4% in Texas. Turning to costs. Food and beverage costs as a percentage of sales were 30% as compared to 29.7% in the prior year quarter. We’re very pleased to see that the flattening of the inflation curve that began during our second quarter has continued to hold and we continue to be encouraged in the trends that we are seeing. Labor and related costs as a percentage of sales decreased to 29.2% from 31% 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.

This leveraging was partially offset by wage increases. Occupancy and related expenses as a percentage of sales were 7.2% compared to the prior year quarter’s 7.1%. Other costs as a percentage of sales increased to 12.5% compared to 11.5% in the prior year quarter due to an increase in marketing costs as well as general cost inflation. General and administrative expenses as a percentage of sales decreased to 14.2% as compared to 15.5% in the prior year quarter. On a dollar basis, G&A expenses were $7 million as compared to $5.9 million in the prior year quarter. As we’ve mentioned in the last several calls, leveraging our G&A line has been a main focus of ours this year. The quarter-over-quarter increase of $1.1 million represents an increase of 18.8% against a revenue increase of approximately 30%.

We’re very pleased with this level of leverage and we will continue to keep this as a main focus going forward while making sure that we continue to make the key hires necessary to fuel our aggressive growth, such as in our construction and in our operations departments. Operating income was $1.3 million as compared to operating income of $0.5 million in the prior year quarter. As a percentage of sales, operating income was 2.7% as compared to 1.2% in the prior year quarter. Income tax expense was $41,000 compared to a benefit of $2,000 in the prior year quarter. Net income was $1.7 million, or $0.16 per share compared to net income of $0.5 million or $0.05 per share in the prior year quarter. Restaurant level operating profit as a percentage of sales was 23.5% compared to 22.5% in the prior year quarter.

Adjusted EBITDA was $5.1 million compared to $3.2 million in the prior year quarter. Turning now to our cash and our liquidity. At the end of the fiscal third quarter, we had $70.5 million in cash and cash equivalents and no debt. This large increase in our cash balance is due to the follow-on offering, which we closed in April of this year. Lastly, I want to reiterate and update the following guidance for fiscal year 2023. We expect total sales to be between $187 million and $189 million. We expect to open between nine and 11 new units with average net capital expenditures per unit of approximately $2.5 million. And lastly, we expect general and administrative expenses as a percentage of sales to be between 15% and 15.5%. Please note also that our guidance assumes no material changes as consumer behavior or broader macroeconomic trends.

In addition, as mentioned during our previous earnings calls, at the conclusion of the current fiscal year, beginning with our first quarter 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.

Jimmy Uba: Thanks, Jeff. This concludes our prepared remarks. We are now happy to answer any questions you might 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 Jon Tower with Citigroup. Please proceed with your question.

Jon Tower: Great. Thanks for taking the questions. Just curious, if you could dig in a little bit on the quarter-to-date, I believe you said 14.7% comps quarter-to-date. Do you attribute that primarily to the promotional activity that — and I apologize for not following exactly the promo that’s on air at the moment. But would you attribute most of that to the promotion and how long do you anticipate that promotion to stay intact?

Jimmy Uba: Thank you, Jon, for your first question. Please allow me to answer your question in Japanese. Ben, do you want to translate? [Foreign Language] [Interpreted] Yeah. We’re extremely pleased with the results with We Bare Bears, our marketing team did an amazing job with setting us up with that collaboration. And it’s definitely — it’s played a very meaningful part in this 14.7% comps that we’ve mentioned — all of our campaigns are over a two-month period. So began in June for We Bare Bear and we’re going to go through the end of July with We Bare Bears. The historical pattern that we’ve seen is typically the exciting for Demon (ph) campaigns is greater in the first month than the second month. And so our expectations are relatively tempered for July’s We Bare Bears impact versus Demons (ph), but for the first week of July, the enthusiasm certainly help. We’re very pleased.

Jon Tower: Great. And just to kind of continue that line of thinking, I believe you had a planned promotion with DC Comics still on track for hitting in August, if I’m — is that correct?

Jimmy Uba: Yeah, absolutely. We Bare Bears is one of our first sort of nationally known American brands. And DC being another one of those brands, we’re very excited about August. If we had to put anybody up again [indiscernible], I’m glad that it’s DC.

Jon Tower: Okay. And then just on the labor cost per operating week, I was just looking at that in the model and I was surprised to see it actually go down on a year-over-year basis considering, I’m assuming some of the inflation you’re seeing. So can you perhaps speak to what the drivers were behind that? Anything funky in the last year’s third quarter or — are we just talking about a combination of sales leverage and technology rolling through the system and therefore, the sustainability of this trend moving forward? How should we think about that?

Jimmy Uba: [Foreign Language] [Interpreted] Yeah. So looking at labor cost performance year-over-year, you’re right, the two driving factors or the three driving factors, one would be sales leverage. The other would be the effectiveness of our three initiatives. We completed rollout at the end of Q3 of last year. And so this year, we had benefit for the full quarter from the server robots, whereas we only had a partial benefit in the preceding year. And the others, our operations team and our COO’s taken store operationsm, store management or labor management. They made that one of their top priorities, and they’ve really been executing on that. And so we’re very pleased with where we’ve come in for Q3. In terms of sustainability on a go-forward basis, we would like to provide some more context because we’ll be coming up against some fiscal comparisons.

Looking to Q4, historically, we’ve always seen leverage from Q3, Q4 and we do expect a degree of leverage, but certainly not in the range of 200 basis points or anything like that. The first factor being that the three initiatives have, they’ve been live for full 12 months, and so they’re baked in from a cost perspective. The other is that we had a bonus adjustment in Q4, which we don’t expect in Q4 of this fiscal year and so while we do expect leveraging in sales, basically, we think the way to look at it is just look at Q4’s labor as a percentage of sales and that’s probably going to get you pretty close to Q4 of this year as opposed to trying to triangulate from the quarter-over-quarter basis points stepdown that was in Q3 ‘22 to Q4 ’22 (ph).