Kura Sushi USA Inc (KRUS) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded today, July 14, 2020.

On the call today, we have Jimmy Uba, President and Chief Executive Officer; Koji Shinohara, Chief Financial Officer; and Benjamin Porten, Investor Relations Manager. I would now like to turn the conference over to Mr. Porten. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal third quarter 2020 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 an 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 can cause actual results to differ materially from what we expect. We refer all of you to our recent 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 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.

Thank you, Ben, and thank you, everyone, for joining us today. As most of you know, our restaurants have been largely closed during our fiscal third quarter. As a result, we would like to explain that today's call providing you with an update on our business operations and initiatives. If you have specific questions about our third quarter financial results, we will be happy to answer your questions during Q&A.

As we discussed on our last call, we entered 2020 with solid momentum across our restaurants that continued into January and February of this year. March was a challenging month across the restaurant industry as news about COVID-19 began to spread. On March 18, as all our guidelines featured to mandatory shutdown of indoor dining, we made the difficult decision to close all our restaurants system-wide. From the start of the pandemic, our primary concerns have been the safety of our guests, the ongoing help and the welfare of our team, our liquidity and our ability to quickly and efficiently resume operations when the time was right.

To support our team during this difficult time, we maintained payroll for all employees through April 5 and extended payroll for all kitchen employees through May 9. We have also continued to pay the full cost of health insurance for all of our furloughed employees and stayed connected with our furloughed hourly team members throughout of their absence. In addition to our store managers, critical kitchen staff members have remained on payroll, as we believe that the near-term expense of retention will be less of the potential of reduced sales due to understaffing.

Finally, all store employees that were furloughed in April were eligible for a written bonus in June to further incentivize their return to Kura. These actions have allowed us to bring back our people quickly and open our restaurants with minimal delays. Thanks to our team engagement efforts, [2 as in] 10% of our employees left the company between the end of March to early July, which has positioned us to ramp up swiftly, as indoor dining restrictions are lifted and the seating capacity limitations are relaxed. As offshore restrictions have been lifted across the company, we have opened our restaurants promptly and successfully, however, at reduced capacity in accordance with local government requirements.

We began the reopening process on May 22, and by the end of May, we had reopened 7 of our restaurants. 14 additional restaurants were opened throughout June, and as of today, all Kura Sushi restaurants are opened for business. However, as you are likely aware, Governor Newsom of California announced a restriction on all indoor dining on July 1 for a minimum of 3 weeks. As a result, all of our California stores, most of which had reopened with limited indoor dining, are currently open for to-go service only.

We are now actively working on building out our opportunities business and infrastructure for all of our platter. We have taken a number of steps to create a safer environment in our restaurants, such as providing personal protective equipment for our team members, enhancing training processes, maintaining social distancing and performing team members health checks before the start of each shift. The health and safety of our guests and the team members will always be our top priority. As part of our checkout process, we have a customer survey, which is now focused on our COVID-19 safety procedures.

I'm pleased that, by the end of June, we had received more than 15,000 guest responses and over 96% rated our efforts at a 4 or 5 out of our 5-point scale. Considering our restaurants were closed during most of the third quarter, I would like to discuss some results for the month of June. Overall, we're impressed with the initial results of our openings. However, as you might imagine, subtleness of the reopening and closing policy changes in our various markets as well as other COVID-19-related issues throughout the country have made recent sales trend more challenging to assess. Due to our sudden reopening schedule in May and June, only 7 stores were opened for the entire month of June. Of these 7 stores, 5 stores were in our comp days and saw same-store sales decline of 48.6%, largely reflecting the 50% seating capacity restrictions for these stores. We are extremely encouraged by these comps, which we feel illustrate the strong consumer demand for our unique running experience.

We believe our reopenings are moving in the right direction and reopening our valued room has allowed us to better manage our pandemic-related losses. Now I would like to provide a brief update on our development efforts.

As most of you know, we began the year with the expectation of opening 6 new restaurants in fiscal 2020. Two new restaurants in Katy, Texas, and Glendale, California, opened during the fiscal Q2 prior to the temporary shutdown. However, as we mentioned during investor quarter earnings call, our opening schedule has been slowed due to the pandemic. All restaurants were under construction in mid-March: Fort Lee, New Jersey; Sawtelle in Los Angeles; Washington, D.C.; and Sherman Oaks, California. After a brief interruption, all 4 have risen the construction, and we have started to work on our Bellevue Washington site as well. Fort Lee and Koreatown are both very nearly complete. Also, the actual opening date will depend on the coronavirus situation in their respective areas.

During our temporary closure, we also completed renovations for 7 of our restaurants. By completing these innovations during the pandemic, we are able to avoid the sales losses associated disclosure for innovations during non-pandemic period. I would like to announce the latest addition to our executive team, Robert Kluger, our first Chief Development Officer. Most recently, Robert was the Senior Vice President of Development for Blaze Pizza, where he oversaw the company's growth from 140 to 350 units. Prior to Blaze Pizza, he spent 6 years at Panera Bread, ultimately becoming the Senior Manager of Franchise Development; and 12 years at the Panda Restaurant Group, where he was Vice President of Real Estate and Strategy. Robert has been responsible for over 1,000 store openings with nationally successful brands, and we are incredibly excited about the impact we believe he can have on our long-term growth.

Speaking to our liquidity. Despite the ongoing uncertainty, we are very fortunate to have entered this unique situation with a strong capital position. As of today, we have approximately $14 million in cash on hand and no debt. Our $20 million revolving line of credit from Kura Sushi Japan remains secure. Although we have not borrowed any amount against it, we will likely begin tapping our revolver to fund our capital expenditures during the upcoming fiscal year. We appreciate the support of Kura Japan, and we have confidence in the long-term success of our business.

Considering Governor Newsom's announcement yesterday, concerning additional COVID-19 prevention measures, which include more extensive dining prohibitions in California, it appears unlikely that we will be able to reopen our California dining rooms prior to the end of our fiscal year. During our California dining room closures, we expect our weekly cash burn rate to be in the area of $800,000 to $850,000, which includes $400,000 of CapEx. Once we are able to reopen our California restaurants, we would expect this weekly burn rate to be reduced by approximately $50,000. Although we've been able to reduce our operating losses by reopening our restaurants, these gains have been offset by the additional capital expenditures associated with the construction of 5 new units previously mentioned.

One final reminder, due to the uncertainty driven by COVID-19, we will not issue financial guidance for the remainder of fiscal year 2020 at this time. Thank you for joining us this afternoon and for your interest in Kura Sushi USA. We were extremely excited about the potential of our business before the threat of COVID-19, and we remain equally confident that when this crisis passes, we have a long runway for opportunity ahead of us. Before we open the line for questions, I would like to thank all of our team members for their hard work, flexibility and support as we navigate this uncharted territory. This concludes our prepared remarks. We are now happy to answer any questions you have. As a reminder, during the Q&A session, I may answer in Japanese before my response is translated in English. Please bear with us.

Operator, please open the line for questions.

(Operator Instructions) Our first question comes from the line of Andrew Strelzik with BMO.

Hope everyone's doing well. My first question is just on the recent sales trends. It's helpful that you gave those June numbers. But I believe they were just the June numbers, and I'm curious if you could maybe give an update on the stores that have remained open for dine-in that are in the comp base? How the sales have trended since or even those outside the comp base, kind of, how the trajectory has been more recently?

Sure. Thank you, Andrew, for your question. Please allow me to answer in Japanese. (foreign language)

[Interpreted] So looking at the -- our performance over June and July, for the restaurants where we've had -- where we've been able to keep our dining rooms open with a 50% seating capacity limit, we've seen comps and sales levels be approximately half of pre-pandemic levels or the past year, more or less mapping perfectly onto the capacity limits.

(foreign language)

[Interpreted] Having said, California is now current -- all of our restaurants in California are currently open for to-go only. So unfortunately, we have seen a sales decline in California relative to pre-pandemic.

Okay. That's very helpful. Oh, I'm sorry, go ahead.

If I could just add a little bit more color. In terms of our to-go sales, one of the reasons that we decided to keep our to-go stores open this time as opposed to March is when we made our mid-March store closures, we kept a couple of our stores open for to-go only. But our June's to-go sales, even for our stores that were open for indoor dining, were significantly outpacing those sales that we saw in March. And so we are seeing an upward trend in that respect.

Okay. So that brings me to my next question. I wanted to ask a little bit about the off-premise strategy, generally. I mean it seems like a little bit more of a push behind to go. How are you communicating that to the guests? I think you made some comments about some investments behind infrastructure there. Can you just talk about what that entails? And have you changed your view or thinking at all around delivery? I know it has not been a priority. I'm just curious where that fits in the to-go and the off-premise picture for you at this point?

(foreign language)

[Interpreted] So to sort of answer your last question first, we'd like to reiterate that the core of our business remains the -- our indoor dining experience, and we believe that it's still very popular with our guests as demonstrated by our sales in our reopened dining room areas. Go ahead.

(foreign language)

[Interpreted] So as we mentioned in our previous earnings call, because of our focus being primarily on the indoor dining experience, the last 3 months we've focused on developing the projects that we've mentioned before being the touch-pedal drink order system and the table-side delivery -- I'm sorry, table-side payment system. And given that we've made significant process on both of those, we are -- we've decided to shift our energies towards off-premises. And again, while -- we think of this as a long-term addition to our business, and if there's going to be incremental sales or profitability from that, there's absolutely no reason not to capture that.

(foreign language)

[Interpreted] So in terms of infrastructure investments, our ultimate goal is to build out our own online ordering platform, which would ideally be hosted in an all-in-one package that would include our waitlist app, our rewards program and then our online ordering system. That being said, given the sort of sudden -- the suddenness of the announcement from Governor Newsom has pushed the time line forward. And now our top priority is to roll out online ordering capabilities as soon as possible.

So we're thinking just in the interest of time that we're going to use this period -- and we're going to use a third-party service to power our online ordering capabilities right now. It's going to be less profitable than having our own in-house ordering system just because of service fees. But this is all -- we're treating all of this as like an investment. It's a learning process. We're all -- every day, we're learning more things about how to operate off-premises, and we're hoping that we can implement all of these new learnings into the development of our online ordering system.

(foreign language)

[Interpreted] So in terms of your first question about advertising, right now, our orders are limited to in-store orders or phone orders. And so the online ordering is the top priority because that would make things vastly more convenient and it's easier to advertise as well.

Can you just -- I guess the question is, where is takeout, to-go mixing right now? And what is kind of the breakeven level there? Can you just give us any sense for how we should think about the economics of that piece of the business, and I'll leave it there.

(foreign language)

[Interpreted] So looking at June, and this includes our restaurants that were open for indoor dining as well. Our off-premises mix was 6.5%, which is significantly higher than our historical mix, which is around 1%. Looking specifically at California, about half of our system had delivered -- our off-premise mix is around 9% or more.

And our next question comes from the line of James Rutherford with Stephens Inc.

My first one is, just on the various kind of ways you can reopen for indoor dining. My understanding is that in certain cases, you can open with the express belt only. In certain cases, it has to be table service only. So I'm just curious what impact those different statuses would be or are those different levels of operations on your comps or average check or really anything else that you care to speak to on that particular topic?

(foreign language)

[Interpreted] So in terms of average ticket -- so we haven't changed pricing as a result of not having the conveyor belts, but we've actually seen ticket growth year-over-year, which was a pleasant surprise for us.

(foreign language)

[Interpreted] So the most onerous restrictions in terms of our conveyor belts are in California. And so in those markets, we're not operating our express belt. And we did have incremental labor from the additional servers we needed to hire to run the food. But as everybody is aware, California is closed for indoor dining now anyway, so it's kind of a moot point for us. One thing that was really interesting is that people were very understanding and forgiving of not having the conveyor belt live just because it's the pandemic.

But given that this is one of the signature features of our restaurant, we plan on bringing this back as soon as we think the timing is right. We don't want to lose something that's so core to our identity. I spoke to the customer service department, and I believe there's only one complaint, and that was because a family had driven 30, 40 minutes for the excitement of the conveyor belt, and they were a little bit disappointed that we weren't able to provide that. So if this were to -- if this disuse of the primary belt were to continue for a long time, we do think this would make us a little bit less attractive. But on the exact flip side, we think that the experiential nature really positions us as a destination restaurant.

Great. That's helpful. And then my second question is on development. I understand there's a lot of moving pieces here, but I believe at one point, you had said that the construction on a couple of the up-and-coming units are nearing completion. And so I'm just curious, your view on the possibility that Fort Lee or Koreatown would open this fiscal year or if those would be more likely to open kind of next year and beyond?

(foreign language)

[Interpreted] So in terms of the construction, both Fort Lee and Koreatown in Los Angeles are completely completed. Fort Lee is -- just has its final inspection to go through. Koreatown is actively going through the inspection process. And so these stores are largely ready to open. Although, like -- again, as everybody knows, both in Fort Lee -- or New Jersey, Glendale and California, indoor dining is prohibited, and so the gating factor for opening those stores remains these externalities. And that being said, we are hopeful that we'll be able to open at least one of these stores this fiscal year. But again, this is going to depend on the indoor dining restrictions being lifted.

(foreign language)

[Interpreted] So we just wanted to give you some context behind the thinking around our store openings during the pandemic. And our calculations have indicated that as long as we're able to open for -- at a 50% seating capacity limit, we will be able to secure restaurant-level operating profit from those stores. And so as long as we can have -- so that's one of the major considerations in terms of the opening timing for a given store.

Our next question comes from the line of Peter Saleh with BTIG.

I just wanted to come back to the cash burn real quick. It looks like you guys burned through about $10 million or so of cash over the course of the quarter. And if I heard you correctly, I think you're burning another, call it, $800,000 to $850,000. I believe that was a weekly number that you guys provided. So what is the thought process behind the cash burn? If this continues, if this environment continues longer than another, call it, 3 months, how do you guys plan to address that? And will we see a slowing of development? Will you put a halt on development to kind of ease the cash burn? Or will you tap revolvers to kind of move forward on development?

(foreign language)

[Interpreted] So we just want to make it really clear that the weekly cash burn we gave during the prepared remarks are not -- they are near term. We do not expect that cash burn rate to continue for the next 12 months.

(foreign language)

[Interpreted] So there are a couple of pressures on our cash burn rate. The first one would be that this burn rate reflects our 14 stores in California not being able to offer indoor dining. And so that is a pressure, a downward pressure, on our revenue. The other would be that we resumed construction on 5 new units. And so we have a lot of capital expenditures because we've already executed these leases. These are in mid-construction before, but the capital expenditures will -- that remains a lever that we can pull at any point. And the CapEx represents about $400,000 of that burn rate.

So that would be a very material lever for us to pull. And then in terms of the dining capacity, we think it's extremely unlikely that indoor dining will be not allowed for 4 months -- or 4 quarters. We're hopeful that it's going to be shorter than that. So that pressure from the burn rate to be lifted as well when that happens.

(foreign language)

[Interpreted] So again, in terms of managing the burn rate, the CapEx is something that is completely within our control, and so -- and it is also the most material bucket. And so we think there is a lot of room in terms of our burn rate going forward if the situation were to get worse or it became clear that it's going to go on much longer than initially expected.

Understood. Okay. And I appreciate that you guys gave the takeout mix, I think, in June or the off-premise mix, if you will. But can you quantify that in dollars? Because I know there's a lot of moving parts here with pre-pandemic and post-pandemic AUVs. So can you quantify what the actual maybe dollar weekly sales were per restaurant in any way on off-premise?

(foreign language)

[Interpreted] So in terms of absolute numbers, for July, we've only been operating for to-go only for a couple of weeks. And so our advertising pushes haven't really begun in earnest, and this isn't necessarily reflective of where this can go. And in terms of June, just the nature of our staggered schedule means that every -- staggered reopening schedule means that every single restaurant is a different number of opening -- operating days. And so giving you an absolute number for June, as well, would also not necessarily give you a meaningful look into what we can do in the future.

(foreign language)

[Interpreted] That being said, in terms of your modeling purposes, we do believe that we'll be able to capture 10% to 20% of our pre-pandemic sales through off-premises.

Okay. Very helpful. Okay. Just last question. Are you seeing or getting any sort of rent concessions or any opportunities to lower your rent expense from landlord, are you seeing any of that yet?

(foreign language)

[Interpreted] So our development team has been working very hard on this. And having our new CDO, Robert Kluger join us has been huge -- immensely helpful. We're very happy that he's on our team. And so we've been in ongoing negotiations since April. We've negotiated for April, May, June, and we're currently negotiating for July. But for both May and June, we received modest abatements and then deferrals representing approximately half of the cash rent expense.

(foreign language)

[Interpreted] One thing we'd like to note is that because we use -- we book our rent on a straight-line basis, this is not going to -- these deferrals are not going to be reflected on a P&L level.

(Operator Instructions) Our next question comes from the line of Jeremy Hamblin with Craig-Hallum.

I wanted to just start with thinking about your average location and the level of sales, like on an average weekly sales level that you need to break even. I think you said that you'd open if you had 50% seating capacity, but if you were to make that more granular and just look at the average weekly sales volume that you needed to do to break even at a restaurant level, could you give a range on where that would be?

(foreign language)

[Interpreted] So our pre-pandemic AUVs are $3.5 million. We're able to secure half of the pre-pandemic sales levels, that brings us to about a monthly revenue of $150,000, which would allow us to breakeven.

Great. That's helpful. And then thinking about cash burn and moving forward, the 5 restaurants under construction, I just wanted to confirm that excludes Fort Lee and Koreatown. As you think...

That does include Koreatown and Fort Lee. Sorry to interrupt.

Okay. That's helpful. As we think about -- I know this is such a fluid situation, and it's hard to forecast. But thinking ahead to fiscal '21 and the unit growth rate that you've maintained, is there a threshold on cash that you need to think about, we're going to back off the CapEx for new unit construction because this is just a prolonged recovery that we hit, whether it's something that you're below $8 million, let's say, on your cash, and you still haven't tapped your revolver. Is there a total level of liquidity where you say, at this point, we want to make sure that we have ample liquidity, we don't want to get in a situation where this is carrying on longer, and we're not going to develop new units? Is there kind of a level or a range that you have in mind to -- before you make that difficult decision?

(foreign language)

[Interpreted] So Jeremy, that's really been top of the mind, I imagine. It's top of the mind for pretty much any other player in the restaurant industry, and it's certainly guiding our thinking and our development strategy going forward. One thing that we can say is that we're very confident that we'll be able to meet or beat the 20% unit growth CAGR that we've been discussing in the past.

(foreign language)

[Interpreted] So in terms of -- we realize that our development strategy is more aggressive in comparison to the rest of the restaurant space right now. But we have 2 main things that are really working in our favor and is driving us forward. And one is the ongoing financial support from the parent and their very strong financial position, and the other would be that our calculations have indicated that we're able to capture restaurant-level operating profit as long as we're able to open at 50% or more. And so if one of these factors were to no longer be true, then we would certainly reevaluate.

Understood. That's helpful. Last question is, you've been, I think, very generous relative to your public company restaurant peers in how you've managed your staff, providing full health care benefits and really have weighted to furlough really any employees for extended periods. Is that another situation that you would reevaluate at some point? How much of your staff is furloughed at this point? But how do you make that decision moving forward as well?

(foreign language)

[Interpreted] A just to give you some context on our -- the reasons why we were more generous than some of our peers, this was a financially strategic move by us, where we believe that being able to maintain high-retention rates and being able to reopen immediately when it was the right time to do so or reopen at the exact timing where we wanted to be able to reopen and capture those profits without having to worry about understaffing. The profits we'd be able to capture were more meaningful than the long term.

(foreign language)

[Interpreted] And just as a reminder, our lack of furloughing anybody until early April was predicated on the assumption that we would be receiving the PPP Loan.

(foreign language)

[Interpreted] And then the situation obviously changed and continues to change, so there's been a pretty material difference. So in May, we did another significant furlough, kitchen employees. We brought them back in June, but July -- the number of shifts that we need has been significantly cut in California. And so not every employees is working right now, but the cash support is largely done.

Our final question comes from the line of George Kelly with ROTH Capital.

So just 2 for you. First, I understand there's all sorts of barriers and kind of issues with getting your guests into a seat. But my question, you mentioned on the -- in response to another question that average ticket has grown. And I was just wondering if you could expand on that? And what do -- what's kind of changed versus February with an average customer? How is -- as an average guest, how do they look? Are they cautious, in general? Or just what have you seen?

(foreign language)

[Interpreted] Sure. So in terms of the average ticket, while we have seen an increase -- we haven't been able to draw a direct conclusion behind what's driving it. In terms of what our guest looks like, we've seen a modest shrinking of our average party size. We're no longer seeing large parties of 5 or 6. And so that's been driving that. It's possible that fewer kids are coming because there are fewer large parties, and children bring down average tickets, and so not having as many children could be one of the reasons that I've heard.

Okay. Okay. Got you. And then second question for me is just about your development pipeline. So you mentioned the 20% CAGR, but I was just wondering if you could be more specific for fiscal year '21? And can you talk about any of the sites that you're continuing to -- you mentioned Washington, D.C. and Sherman Oaks, but what else is on the -- are you continuing to invest in with plans 2021 open?

(foreign language)

[Interpreted] So as some context for everything we'd like to go over how -- right now, we have 10 leases that are executed. We expect to open 1 of those 10 stores this fiscal year. And then for the remainder to be distributed over fiscal '21 and fiscal '22. And the pacing and the distribution is going to depend on what our burn rate looks like as a result of -- how we did -- as a result of our sales recovery.

(foreign language)

[Interpreted] And then looking directly towards fiscal '21, beyond the -- yes, fiscal '21 beyond the 5 stores that are actively under construction now. We think these 3 stores will be the likeliest candidates for a fiscal '21 opening, which would be Aventura, Florid; Troy, Michigan; and then the Stonestown Galleria mall in San Francisco.

Okay, great. That's helpful. And I guess I do have one follow-up to that. Any significant changes as you think of just an average -- your average store and the construction. Does all this COVID-related stuff cause you to rethink any of that -- what the box looks like?

(foreign language)

[Interpreted] So every construction we do is a 20-year investment given the 20-year leases, and the pandemic is not going to last 20 years. So we're a little bit reluctant to make construction-related changes related to the pandemic. That being said, and this was already part of our planned pipeline. But we are testing new models that are designed more towards off-premises, whether that means a dedicated make line in the kitchen or pickup racks in the front of the house. So that would be the main change that we're considering.

(foreign language)

[Interpreted] And on a cost level, there's not going to be a material difference between to-go -- a traditional store and a store that's geared more towards to-go.

This concludes today's question-and-answer session. And now I would like to turn the floor back over to Mr. Jimmy Uba for any closing remarks.

Thank you, everybody, for joining us today. Please take care and stay safe. Thank you very much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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