Kura Sushi USA Inc (KRUS) 2022 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded. On the call today, we have Jimmy Uba, President and Chief Executive Officer; and Benjamin Porten, Vice President, Investor Relations and Business development. And now I would like to turn the call over to Mr. Porten.

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal third quarter 2022 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 discussions 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 to 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.

Thank you, Ben, and thank you, everyone, for joining us today. It has been a few projects how rapidly and completely our business has recovered since the most challenging days of the pandemic. This has been a year of inspiration for Kura. In fact, we've gone past mare inspiration, and we are performing better than ever. It's a challenge that COVID presented ultimately proving to be an opportunity for us.

In March, as strong as we have but harder to imagine when we are in the peak of the pandemic. And I'm so proud and grateful for everything that our team members have done to make this possible. Now I'd like to discuss our performance in our most recent quarter, and why we think we are positioned for even greater things to come. The strong sales momentum from the first half of our fiscal year has continued into our third quarter, which once again has proven to be a record sales quarter for the company.

As compared to our pre-pandemic fiscal 2019 results, comparable sales growth in our third quarter was 28.3%. On a single year comparison against our fiscal 2021 third quarter, comparable sales grew by 65.3%. Whether we are looking at last year or back to prepandemic, our comparable sales growth has been spectacular. Sales recovery in our California market have been especially pronounced with third quarter comp growth of 95.5% as compared to our 2021 results, reflecting the sales impact of dining room restrictions during the previous year.

During the same period, (inaudible) delivered 33.6% comparable to its growth as compared to our 2021 results. Additionally, our operating sales revenue in the third quarter was $1.3 million or 3.5% of our sales mix. It's great to see such strong recovery across the board. In spite of ongoing inflationary pressures, consumer sentiment for Kura Sushi remains extremely strong as demonstrated by our recent results.

As our typical customers have higher incomes, and we offer an excellent value proportion, we are seeing continued strength in their spending and our tech sizes continue to grow. Our sales performance as we enter the summer continued to be very strong with June revenue of $12.7 million. While much of the restaurant industry has been facing headwinds in terms of staffing and inflation, I'm extremely pleased that we say that we have been largely fared and believe that we continue to occupy a uniquely privileged position to weather these macro pressures.

Our COGS as a percentage of sales for the first half of the fiscal year were up 30%, marking an all-time best in corporate history. While we haven't been entirely free from commodity pressures, taking price in conjunction with smart processing practices, have allowed us to offset commodity inflation.

In fact, COGS as a percentage of sales decreased by a further 30 basis points in our third quarter. As a percentage of sales, labor is running at 31%, representing a sequential improvement of 230 basis points over the prior quarter driven by (inaudible). While we had previously faced staffing headwinds as a result of ongoing related staff quarantining during the second quarter, we are pleased to say that we have no such issues during our third quarter, and we remain very close to achieving optimal staffing levels.

These combined factors have resulted in restaurant operating profit margin of 22.5%, representing 470 basis points of margin expansion relative to the prior quarter and 210 basis points as compared to the same period in pre-pandemic fiscal year 2019. There remains ample opportunity for our full year restaurant margins to exceed at 20% with historically achieved pre-pandemic.

Turning to development. We opened 1 unit during the quarter in our new market of Watertown, Massachusetts. We are very encouraged by Watertown's added performance as well as the continued strength of our other fiscal '22 openings. In terms of upcoming openings, we expect our [Nova] restaurant to open in the coming weeks and to close out our fiscal year with a total of 8 new restaurant openings.

We expect the remaining stores under construction to open early in fiscal 2023. Now I would like to turn to an update on recent initiatives. In past earnings calls, I have mentioned that we plan to complete the system-wide rollout of our load servers, [sales] payment and touch ongoing order systems by the end of the fiscal year.

I'm proud to say that we are ahead of schedule and that we completed the rollout as of the end of May. As we previously mentioned, guest response and employee response have been phenomenal. The robot servers are a great addition to the current experience and was the focus of a recent marketing campaign. Now that we've completed the rollout of these 3 different initiatives, I would like to discuss what we have coming up in our pipeline.

We are in the process of upgrading our waitering system through a partnership with Ivory, which we hope will improve the guest experience and reduced attrition rates associated with our long runs. We're also in the process of moving loyalty platform to punch. Our reward membership base is now approaching 0.5 million members. And by moving to more -- moving to the more powerful platform, we believe we can truly begin to unlock a data-driven benefit that reward program can offer. We expect to implement these initiatives even in the first half of the upcoming fiscal year.

As a final note, we took pricing of approximately 6% as of July 1. Although the minor pricing adjustments we took in March, was enough to offset inflationary pressures through the third quarter. In that of month-over-month inflationary trend through the quarter, including the minimum wage increase in our California market, we believe this 6% is appropriate considering the excellent value, we continue to provide relativity to our competitors, especially those in the sushi space. We will also be lapping a pricing event as we leased September at which point, effective pricing will be 7.8%.

Again, I would like to extend my thanks to all of our team members in our restaurants and support center. The hard work that they put in every day is the reason that Kura Sushi is such a special concept. And with that, I'll turn it over to Ben to briefly discuss our financial results and liquidity. Ben?

Thank you, Jimmy. For the third quarter, total sales were $38 million as compared to $18.5 million in the prior year period. Comparable sales growth as compared to the prior year period was 65.3% with regional comps of 95.5% in California and 33.6% for Texas.

As compared to our pre-pandemic results of the fiscal 2019 third quarter, our comparable sales growth was 28.3% and with regional comps of 18.2% in California and 40.5% in Texas. Turning to costs. Food and beverage costs as a percentage of sales were 29.7% compared to 31.7% in the prior year quarter due to pricing taken at the start of the fiscal first and third quarters and higher food spoilage costs in the prior year, partially offset by food cost inflation.

Labor and related costs as a percentage of sales increased to 31% from 8.9% in the prior year quarter due to the lapping of the employee retention credits recognized in the prior year. Excluding the impact of the ERC and retention of hiring bonuses, labor and related costs as a percentage of sales in the prior year quarter would have been 36.6%.

The year-over-year improvement in labor and related costs as a percentage of sales, excluding the ERC was due to higher sales leverage partially offset by increases in minimum wage. Occupancy and related expenses as a percentage of sales improved to 7.1% from 10.2% in the prior year quarter, primarily due to higher sales leverage.

Other costs as a percentage of sales decreased to 11.5% compared to 14.7% in the prior year quarter due to higher sales leverage as well. General and administrative expenses were $5.9 million compared to $4.3 million in the prior year quarter. Excluding the impact of the ERC recognized in the prior year quarter, general and administrative expenses would have been $4.8 million. This increase was primarily due to compensation-related expenses as we made investments in our team to support our accelerated growth plans partially offset by a litigation accrual in the prior year quarter.

As a percentage of sales, general and administrative expenses were 15.5% compared to 23.2% in the prior year quarter. Operating income was $473,000 compared to operating income of $866,000 in the prior year quarter. Excluding the impact of the ERC and litigation accrual in the prior year quarter, operating loss would have been a negative $4.4 million. Income tax provision was a benefit of $2,000 compared to an income tax expense of $30,000 in the prior year quarter.

Note that we expect to continue to incur nominal income tax expense irrespective of our pretax income or loss as a result of a full valuation allowance against our deferred income tax assets and incurrence of minor income taxes payable at state levels. Net income was $477,000 or $0.05 per diluted share compared to net income of $770,000 or $0.09 per diluted share in the prior year quarter. When adjusting for the ERC benefit and litigation accrual in the prior year quarter, adjusted net loss would have been $4.5 million or negative $0.54 per diluted share.

Restaurant level operating profit as a percentage of sales was 22.5% compared to restaurant-level operating profit as a percentage of sales of 5.8% in the prior year quarter. Adjusted EBITDA was $3.2 million compared to a negative $2.6 million in the prior year quarter.

Turning to our cash and liquidity. At the end of the fiscal third quarter, we had $36 million in cash and cash equivalents and no debt. In light of our fiscal third quarter results, I would like to provide the following updated guidance. We expect total sales between $137 million and $142 million. We expect general and administrative expenses as a percentage of sales of approximately 16.5%, and we expect the opening of 8 new units with net capital expenditures per unit of $2.2 million. Now I'll turn the call back to Jimmy.

Thanks, Ben. 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. Please bear with us.

(Operator Instructions) And our first question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group.

Congratulations on the strong results. I wanted to focus first on your restaurant level margins, 22.5%, I think, is a record for the company, labor down to 31%. And obviously, you're doing that in a fairly high food and labor inflation environment. So I wanted to get a sense of the sustainability of those margins. How much of the improvement in labor is a reflection of the price increases versus the use of robots?

Jeremy, this is Ben. It's great to talk to you. In terms of pricing, we really used pricing to manage our prime cost of COGS and labor. That's really why we've been able to keep it so consistent over the last 3 quarters. In terms of the improvement to our restaurant-level operating profit margin, that would be a function of greater sales leverage, part of which we would give curb on.

Got it. And then just in terms of -- you provided some color on -- back in April on your March sales trends, I think you did about $12.5 million in the month of March. It looks like you kind of sustained those trends in April and May but in terms of looking forward here to this kind of implied guidance for Q4, it looks like you've seen some acceleration in productivity. Typically, Q4 has your highest average unit volumes. Can you give us a sense of what you've seen quarter-to-date thus far? And how much of the increased guidance is reflective of the price increase?

Sure. In terms of June results as Jimmy discussed in the opening remarks, we had $12.7 million in revenue. That -- if that were to be the run rate for the remainder of the quarter, that would be the sort of the lower end of the guidance.

In terms of seasonality, Q4 is certainly the strongest quarter that we have. You can see that effect very meaningfully in pretty much every year. So why in August are the -- really when the summer begins to ramp up. And so we do expect improvement over that 12 that we saw in June, which is what gets us to the higher end of that guidance.

Please allow me some additional explanation, but please allow me to speak in Japanese. Ben is going to translate (foreign language)

[Interpreted] To give you some additional granular detail. Historically, the sales improvement in Q4 relative to Q3 has been 5.9%. And then we took an additional 6% of price in July. And so that gets us higher up in that guidance range that we get.

And then we have a number of other things that are in place (inaudible), Demon Slayer collaboration campaign, which if it proves as successful as we hope it will be then that would get us to the high end of that guidance.

Got it. That's great color. One last follow-up here. In terms of your average volumes versus kind of pre-pandemic levels, I calculate it's up about 25% in the May quarter versus what you were generating 3 years ago. Can you give us a sense for the components of that? How much of that is average check change versus transactions?

Sure. So if we look at a 3-year stack going back to fiscal '19, which is our pre-pandemic comparison, the effect of pricing is a little over 22%. Our comps over that same period are 28.3%, and we're still not 100% back to pre-panemic traffic. And so that offsets a little bit. But the rest of it would be an organic ticket group just from people eating more plates than they used to.

Our next question comes from the line of Sharon Zackfia with William Blair.

I guess I just wanted to follow up on the restaurant level margin because it was a very impressive metric. And I understand the sales leverage component of it. But can you talk about structurally, do you think there's a change in where your restaurant level margin can settle out now over the next maybe 3 to 5 years? And I'd also be curious to hear your thoughts, and I'm sorry if I missed this, on development for 2023, particularly this sounds like maybe 1 or 2 locations might have slipped into '23.

Sure. Let me answer that second question first. So you're right, we did tighten our guidance from 8 to 10 units to 8 units. And so those remaining 2 units we expect to open early in fiscal '23. We're excited to provide more granular guidance in terms of our unit growth expectations for fiscal '23 of the Q4 earnings call or next earnings call.

But what we can say at this point is that since going public, we told the Street that we expect to maintain a 20% unit growth CAGR. And we absolutely expect the same for 2023 with that 20% as of forward. In terms of the restaurant level operating profit margin expectations, it's -- I don't have a crystal ball for 5 years in the future, but just looking at the trends from Q1 and Q3, I think you could certainly expect an elevated rate for restaurant level operating profit margin. We don't think this is a fluke, this should continue into the next fiscal year.

Okay. And then just a follow-up. It sounds as if you feel very confident about the cadence of your business and clearly the fourth quarter guidance implies such. Are you seeing any signs of your customer weakening at all? Or anything on the margins that would suggest that the trends you're seeing right now might not be sustainable?

(foreign language)

[Interpreted] So we've been extremely fortunate in that we really haven't seen any sort of softening in consumer sentiment. One of the things that we found most encouraging was that our March pricing of 1.8% was significantly outpaced by tech growth of 4.9% over that same period between Q2 to Q3. And so we know that our guests are not managing their tech sizes.

But I think that's a great indicator that we've yet to hit any sort of consumer elasticity point and that gave us a lot of comfort about that 6% that we decided to take at the beginning of July. And looking at our traffic rates, we're really -- Q3 is pretty much in line with Q1, which was exceptionally strong and certainly better than Q2, which had those Omicron headwinds. And so yes, in terms of customer sentiment, we feel that we're in a very fortunate to the issue.

Our next question comes from the line of George Kelly with Ross Capital.

And congrats on a strong quarter. The first one is, did I hear you right that you're contemplating taking pricing again in September as well?

No. Just to clarify, that was referring to the September 2021 pricing. We were just mentioning that we'd be lapping that price in 2 months.

Okay. Got you. And then still on pricing. I mean, I understand that it's a challenging environment as far as labor and food costs, I know inflation hitting everywhere. But you just generated such a strong four-wall margin in the quarter.

And here, you're taking another 6% pricing. And I understand that your consumer is showing no kind of signs of hesitation or it doesn't seem like you've hit a ceiling. But I guess the question is just a higher level one, which is why continue to kind of push margin through pricing? And if you can just talk sort of directionally about -- should we expect more going forward? Or it just seems like maybe you've changed your thought process on the opportunity around pricing?

Sure. In terms of our decision for that 6% in July, this is really reflective over -- reflective of the month-over-month inflation that we saw through Q3 and then into June.

If you look at our past quarters through fiscal '22, you can see that our prime cost structures stayed very, very stable. And so basically, that's to say that our FP&A team has done a tremendously good job in terms of forecasting inflation for the upcoming period. And that's what we've done for July as well. The goal isn't to drive margin by taking price. It's really just to keep our labor and COGS consistent. The growth in margin is more from just greater sales leveraging combined with that seasonal boost that we get.

Okay. Okay. Great. And then last one for me, I think you mentioned a couple -- a pipeline of initiatives you're working on and expect to implement in the first half of fiscal year '23. I missed the first one. Could you just walk through what that longer-term initiative is? And that's all I had.

(foreign language)

So I think you're talking about the wait list improvement, George, is that correct?

Yes, I think that was it.

Okay. Great. So just to give you -- so we've been very happy with the waitlist gap, it served us very well, but we know that we can get to a greater level of accuracy in terms of the wait times, the algorithm that we use is pretty straightforward and doesn't really take historical behavior into account. And so just to give you an idea, let's say, we're an hour before closing, but the wait time says there's a 2-hour weight. And actually, you're going to have a lot of people drop off because they think they're not going to be able to get a seat. But then because those people have dropped off, the wait list is also -- the wait time should also shrink.

But because those people who have already left, that's traffic that we can't capture. And so incorporating these attrition rates around -- especially shoulder periods and stuff like that. We think that we'll be able to see a couple of more people per day. And certainly, just having a more accurate time is better for the consumer experience.

(Operator Instructions) Our next question comes from the line of Andrew Strelzik with Bank of Montreal.

This is Daniel on for Andrew. I just had a question on off-premise. I was curious where that mix is standing now and maybe also some information on the driver outlook?

Sure. Off-premises mix was 3.5% of sales in Q3 or about $1.3 million. That's on a dollar basis, very, very close to what we had in Q1. And so that lower mix is really just reflective of greater revenue in total. In terms of our expectations for the future, we think this is in line.

We think this is appropriate. Off-premises is gravy for us. We're basically hitting our kitchen capacity limits. And so there's a point where trying to push additional off-premise is no longer incremental. In terms of our top line and bottom line growth, the opportunity is vastly greater than just unit growth. And so for the foreseeable future, we're going to be putting our energies as a company into just growing our unit base as opposed to trying to deliver additional off-premise sales.

Got it. And would you also be able to provide any color on where your pipeline is right now?

Sure. So we're -- we've got 3 units that we expect to open in July and August and then 2 early in fiscal '23. But in terms of any further details on that, I think we're going to wait until the next quarter to give a guidance update.

And our next question comes from the line of George Kelly with ROTH Capital.

Just one more quick one for me. Can you remind me when you open a new restaurant, like you're doing 3 here in the last quarter, how much pre-open marketing expense and training and all this kind of stuff, like what is the expense around opening a restaurant?

(foreign language)

[Interpreted] Looking at our preopening marketing fees, it's pretty insignificant. We don't do anything like big ad buys, no television campaigns for TV commercials. We focus mostly on digital and then leveraging local media. So the spend could be -- it's pretty insignificant. In terms of -- and we think that -- sorry, Jim, did I hear you right when you said it was $2,000 to $3,000 per store or to the $20,000 to $30,000.

Yes, $20,000, sorry.

Yes. So $20,000 to $30,000, which obviously is not a very big spend, but just given how strong our openings continue to be in spite of inflation, we think that spend rate is appropriate. In terms of preopening labor costs, our operations are very simple and automated as you know. And so the trading period is very truncated. We're able to open pretty rapidly following our final inspections and approvals. And so because that trading period is short preopening labors is, I imagine, substantially less than a comparable casual dining restaurant.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group.

So I wanted to get an understanding rather than asking about the number of units on a go-forward basis, I wanted to get a better understanding of the type of unit and potential size that you're looking at? I know the Watertown, Massachusetts has been great. I think the San Antonio location has been off the charts and may be challenging for the best unit you have in the system. But in terms of thinking about the square footage and wait times and so forth, are you thinking about having a slightly bigger footprint on a go-forward basis given where demand is? Any color you can share on that would be great.

(foreign language)

[Interpreted] So thank you for coming on Watertown and San Antonio. We couldn't be prouder of those locations. We've mentioned this in past calls, but the vintages in fiscal '21 and '22 have been the best vintages we've ever put out. So we've been very pleased by their strong performance.

If there's very strong demand within one of those -- within a given market and there happens to be a larger box that's available in a grand site location within that market. That's something that we would consider taking. But we've always thought of our box flexibility is a huge competitive strength. We don't have a set prototype. We don't have a set square footage. We're able to look at the entire country and just identify sites that mirror or best successes and then fit our concept into those spaces. And that's one of the reasons that we've had strong unit economics.

One other thing is that regardless of the size, are units going to be highly successful. We could have a smaller unit that maybe has a lower AUV than the system average. But the cash on cash returns for that unit are going to be just in -- just as strong as the system average or even stronger. And square footage doesn't necessarily correlate 1:1 with higher sales. For example, our Fort Lee location is actually lower than the system average, but it's in our top 3 performers. And so the bigger factor really here is just the quality of the site selection more than the square footage.

Got it. Then I can target the question in a slightly different way. In terms of thinking about your occupancy costs, which pre-pandemic were right around 7%. I think before you were public, they were closer to 6%. Do you have kind of a target range? Are you looking to be back in that 6% to 7% on a longer-term basis? Or how do you think about that?

So that 6% goes out...

Okay. (foreign language)

So when you think about our units holistically, whenever we do a go/no-go decision with the real estate committee in terms of opening any new site, we evaluate a pro forma of the expected financials for that unit. And really, the single most important metric that we focus on is on cash on cash return. And so there might be a location that has higher rent, but it's in a lower labor market with high earnings or whatever. We look for a unit that can deliver the cash-on-cash returns that we're accustomed to. And so rent is just a part of that. So we don't necessarily have a target for rent. It's really more our expectations for all the cost items.

And we have reached the end of the question-and-answer session, and this also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]