KURA SUSHI USA, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited financial statements and the related notes and with the audited financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year endedAugust 31, 2019 (the "Annual Report"). In addition to historical information, the following discussion and analysis contains forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations, and intentions set forth in the "Special Note Regarding Forward-Looking Statements" and "Risk Factors" sections of the Annual Report. You should review those sections in our Annual Report for a discussion of important factors, including the continuing development of our business and other factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
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Overview
Kura Sushi USA, Inc. is a fast-growing, technology-enabled Japanese restaurant concept that provides guests with a distinctive dining experience by serving authentic Japanese cuisine through an engaging revolving sushi service model, which we refer to as the "Kura Experience". We encourage healthy lifestyles by serving freshly prepared Japanese cuisine using high-quality ingredients that are free from artificial seasonings, sweeteners, colorings, and preservatives. We aim to make quality Japanese cuisine accessible to our guests acrossthe United States through affordable prices and an inviting atmosphere.
Business Trends
We have expanded our restaurant base from eight restaurants inCalifornia as of the beginning of fiscal year 2016 to 23 restaurants in five states as ofNovember 30, 2019 . We opened four restaurants in fiscal year 2018 and six restaurants in fiscal year 2019. We did not open any new restaurants during the three months endedNovember 30, 2019 . Subsequent toNovember 30, 2019 , we opened one restaurant inKaty, Texas . We expect to open six new restaurants in fiscal year 2020, resulting in significant increases to both revenue and restaurant operating costs in fiscal year 2020. Additionally, we expect our general and administrative expenses will increase as a percentage of sales in our fiscal year 2020 due to additional costs associated with being a public company.
Key Financial Definitions
Sales. Sales represent sales of food and beverages in restaurants. Restaurant sales in a given period are directly impacted by the number of restaurants we operate and comparable restaurant sales growth. Food and beverage costs. Food and beverage costs are variable in nature, change with sales volume and are influenced by menu mix and subject to increases or decreases based on fluctuations in commodity costs. Other important factors causing fluctuations in food and beverage costs include seasonality and restaurant-level management of food waste. Food and beverage costs are a substantial expense and are expected to grow proportionally as our sales grows. Labor and related expenses. Labor and related expenses include all restaurant-level management and hourly labor costs, including wages, employee benefits and payroll taxes. Similar to the food and beverage costs that we incur, labor and related expenses are expected to grow proportionally as our sales grows. Factors that influence fluctuations in our labor and related expenses include minimum wage and payroll tax legislation, the frequency and severity of workers' compensation claims, healthcare costs and the performance of our restaurants.
Occupancy and related expenses. Occupancy and related expenses include rent for all restaurant locations and related taxes.
Depreciation and amortization expenses. Depreciation and amortization expenses are periodic non-cash charges that consist of depreciation of fixed assets, including equipment and capitalized leasehold improvements. Depreciation is determined using the straight-line method over the assets' estimated useful lives, ranging from three to 20 years.
Other costs. Other costs include utilities, repairs and maintenance, credit card fees, royalty payments to Kura Japan, stock-based compensation expenses for restaurant-level employees and other restaurant-level expenses.
General and administrative expenses. General and administrative expenses include
expenses associated with corporate and regional supervision functions that
support the operations of existing restaurants and development of new
restaurants, including compensation and benefits, travel expenses, stock-based
compensation expenses for corporate-level employees, legal and professional
fees, marketing costs, information systems, corporate office rent and other
related corporate costs. General and administrative expenses are expected to
grow as our sales grows, including incremental legal, accounting, insurance and
other expenses incurred as a public company.
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--------------------------------------------------------------------------------Interest expense. Interest expense includes cash and non-cash charges related to our line of credit and finance lease obligations.
Interest income. Interest income includes income earned on our investments.
Income tax expense (benefit). Provision for income taxes represents federal, state and local current and deferred income tax expense.
Results of Operations
The following table presents selected comparative results of operations for the three months endedNovember 30, 2019 compared to the three months endedNovember 30, 2018 . Our financial results for these periods are not necessarily indicative of the financial results that we will achieve in future periods. Certain totals for the table below may not sum to 100% due to rounding. Three Months Ended November 30, Increase / (Decrease) 2019 2018 2019 vs 2018 (dollar amounts in thousands) Sales$ 17,440 $ 13,420 $ 4,020 30.0 % Restaurant operating costs Food and beverage costs 5,693 4,518 1,175 26.0 Labor and related costs 5,641 4,138 1,503 36.3 Occupancy and related expenses 1,439 920 519 56.4 Depreciation and amortization expenses 663 448 215 48.0 Other costs 2,047 1,645 402 24.4 Total restaurant operating costs 15,483 11,669 3,814 32.7 General and administrative expenses 3,326 2,148 1,178 54.8 Depreciation and amortization expenses 22 23 (1 ) (4.3 ) Total operating expenses 18,831 13,840 4,991 36.1 Operating loss (1,391 ) (420 ) (971 ) 231.2 Other expense (income) Interest expense 34 41 (7 ) (17.1 ) Interest income (197 ) (5 ) (192 ) 3,840.0 Loss before income taxes (1,228 ) (456 ) (772 ) 169.3 Income tax benefit (4 ) (65 ) 61 (93.8 ) Net loss$ (1,224 ) $ (391 )$ (833 ) 213.0 % Three Months Ended November 30, 2019 2018 (as a percentage of sales) Sales 100.0 % 100.0 %
Restaurant operating costs
Food and beverage costs 32.6 33.7
Labor and related costs 32.3 30.8
Occupancy and related expenses 8.3 6.9
Depreciation and amortization expenses 3.8 3.3
Other costs 11.7 12.3
Total restaurant operating costs 88.7 87.0
General and administrative expenses 19.1 16.0
Depreciation and amortization expenses 0.1 0.2
Total operating expenses 107.9
103.2
Operating loss (7.9 ) (3.2 )
Other expense (income)
Interest expense 0.2 0.3
Interest income (1.1 ) -
Loss before income taxes (7.0 )
(3.5 )
Income tax benefit - (0.5 )
Net loss (7.0 ) % (3.0 ) %
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Three Months Ended
Sales. Sales were$17.4 million for the three months endedNovember 30, 2019 compared to$13.4 million for the three months endedNovember 30, 2018 , representing an increase of approximately$4.0 million or 30.0%. The increase in sales was primarily driven by four new restaurants that opened subsequent toNovember 30, 2018 , as well as 7.9% comparable restaurant sales growth. Food and beverage costs. Food and beverage costs were$5.7 million for the three months endedNovember 30, 2019 compared to$4.5 million for the three months endedNovember 30, 2018 , representing an increase of approximately$1.2 million , or 26.0%. The increase in food and beverage costs was primarily driven by sales from the four new restaurants that opened subsequent toNovember 30, 2018 . As a percentage of sales, food and beverage costs decreased to 32.6% in the three months endedNovember 30, 2019 , compared to 33.7% the in three months endedNovember 30, 2018 . The decrease in food and beverage costs as a percentage of sales was primarily driven by decreases in avocado prices and increases in our menu prices. Labor and related costs. Labor and related costs were$5.6 million for the three months endedNovember 30, 2019 compared to$4.1 million for the three months endedNovember 30, 2018 , representing an increase of approximately$1.5 million , or 36.3%. The increase in labor and related costs was driven by additional labor costs incurred with respect to four new restaurants that opened subsequent toNovember 30, 2018 , as well as wage increases. As a percentage of sales, labor and related costs increased to 32.3% in the three months endedNovember 30, 2019 , compared to 30.8% in the three months endedNovember 30, 2018 , which was primarily driven by higher wage rates in our newer restaurants and wage increases in existing restaurants. Occupancy and related expenses. Occupancy and related expenses were$1.4 million for the three months endedNovember 30, 2019 compared to$0.9 million for the three months endedNovember 30, 2018 , representing an increase of approximately$0.5 million , or 56.4%. The increase was primarily a result of additional lease expense incurred with respect to four new restaurants that opened subsequent toNovember 30, 2018 . As a percentage of sales, occupancy and other operating expenses increased to 8.3% in the three months endedNovember 30, 2019 , compared to 6.9% in three months endedNovember 30, 2018 . The increase in occupancy and related expenses as a percentage of sales was primarily driven by higher occupancy rates in our newer restaurants and the increase in pre-opening lease expense. Depreciation and amortization expenses. Depreciation and amortization expenses incurred as part of restaurant operating costs were$0.7 million for the three months endedNovember 30, 2019 compared to$0.4 million for the three months endedNovember 30, 2018 , representing an increase of approximately$0.2 million , or 48.0%. The increase was primarily due to depreciation of property and equipment related to the opening of four new restaurants that opened subsequent toNovember 30, 2018 As a percentage of sales, depreciation and amortization expenses at the restaurant-level increased to 3.8% in the three months endedNovember 30, 2019 as compared to 3.3% in the three months endedNovember 30, 2018 . The increase is primarily due to higher build-out costs of our newer restaurants. Depreciation and amortization expenses incurred at the corporate-level were immaterial for the three months endedNovember 30, 2019 and 2018, and as a percentage of sales remained relatively consistent at 0.1% and 0.2%, respectively. Other costs. Other costs were$2.0 million for the three months endedNovember 30, 2019 compared to$1.6 million for the three months endedNovember 30, 2018 , representing an increase in approximately$0.4 million , or 24.4%. The increase was primarily due to costs related to the opening of four new restaurants that opened subsequent toNovember 30, 2018 , such as credit card fees, kitchen supplies, and utilities. The remaining year-over-year increase is due to other individually insignificant items. As a percentage of sales, other costs decreased to 11.7% in the three months endedNovember 30, 2019 from 12.3% during the three months endedNovember 30, 2018 . The decrease is primarily due to lower advertising, insurance and recruiting costs. General and administrative expenses. General and administrative expenses were$3.3 million for the three months endedNovember 30, 2019 compared to$2.1 million for the three months endedNovember 30, 2018 , representing an increase of approximately$1.2 million , or 54.8%. This increase in general and administrative expenses was primarily due to$0.9 million of public company costs and$0.3 million in employee compensation-related expenses associated with increased wages and additional headcount to support our growth in operations. As a percentage of sales, general and administrative expenses increased to 19.1% in the three months endedNovember 30, 2019 from 16.0% in three months endedNovember 30, 2018 , primarily due to the increase in the expenses mentioned above.
Interest expense. Interest expense was insignificant in both the three months
ended
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Interest income. Interest income was $0.2 million for the three months ended
November 30, 2019 compared to $5 thousand for the three months ended November
30, 2018 , representing an increase of approximately $0.2 million , or 3,840.0%,
due to a higher cash and cash equivalents balance.
Income tax benefit. Income tax benefit was $4 thousand in the three months ended
November 30, 2019 compared to an income tax benefit of $0.1 million in the three
months ended November 30, 2018 .
Key Performance Indicators
In assessing the performance of our business, we consider a variety of financial and performance measures. The key measures for determining how our business is performing include sales, EBITDA, Adjusted EBITDA, Restaurant-level Contribution, Restaurant-level Contribution margin, comparable restaurant sales growth, and number of restaurant openings.
Sales
Sales represents sales of food and beverages in restaurants, as shown on our statements of operations. Several factors affect our restaurant sales in any given period including the number of restaurants in operation, guest traffic and average check. EBITDA and Adjusted EBITDA EBITDA is defined as net income before interest, income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus stock-based compensation expense, pre-opening lease expense, pre-opening costs, non-cash lease expense and asset disposals, closure costs and restaurant impairments, as well as certain items that are not indicative of core operating results. EBITDA and Adjusted EBITDA are non-GAAP measures which are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. We believe that EBITDA and Adjusted EBITDA provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. We believe that the use of EBITDA and Adjusted EBITDA provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company's financial measures with those of comparable companies, which may present similar non-GAAP financial measures to investors. However, you should be aware when evaluating EBITDA and Adjusted EBITDA that in the future we may incur expenses similar to those excluded when calculating these measures. In addition, our presentation of these measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Our computation of Adjusted EBITDA may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA in the same fashion. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA on a supplemental basis. You should review the reconciliation of net income to EBITDA and Adjusted EBITDA below and not rely on any single financial measure to evaluate our business.
The following table reconciles net income to EBITDA and Adjusted EBITDA for the
three months ended
Three Months Ended
November 30,
2019 2018
(amounts in thousands)
Net loss $ (1,224 ) $ (391 )
Interest (income) expense, net (163 ) 36
Taxes (4 ) (65 )
Depreciation and amortization 685 471
EBITDA (706 ) 51
Stock-based compensation expense(a) 121 160
Pre-opening lease expense(b) 174 136
Pre-opening costs(c) 141 36
Non-cash lease expense(d) 127 118
Adjusted EBITDA (143 ) 501
Adjusted EBITDA margin -0.8 % 3.7 %
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(a) Stock-based compensation expense includes non-cash stock-based compensation,
which is comprised of restaurant-level stock-based compensation included in
other costs in the statements of operations and of corporate-level
stock-based compensation included in general and administrative expenses in
the statements of operations. In the three months ended
restaurant-level stock-based compensation was
corporate-level stock-based compensation was
months ended
(b) Pre-opening lease expense includes lease expenses incurred between date of
possession and opening date of our restaurants
(c) Pre-opening costs consist of labor costs and travel expenses for new
employees and trainers during the training period, recruitment fees, legal
fees and other related pre-opening costs.
(d) Non-cash lease expense includes lease expense from the opening date of our
restaurants that did not require cash outlay in the respective periods.
Restaurant-level Contribution and Restaurant-level Contribution Margin
Restaurant-level Contribution is defined as operating income plus depreciation and amortization, stock-based compensation expense, pre-opening lease expense, pre-opening costs, non-cash lease expense, asset disposals, closure costs and restaurant impairments, general and administrative expenses, less corporate-level stock-based compensation expense. Restaurant-level Contribution margin is defined as Restaurant-level Contribution divided by sales. Restaurant-level Contribution and Restaurant-level Contribution margin are intended as supplemental measures of our performance and are neither required by, nor presented in accordance with, GAAP. We believe that Restaurant-level Contribution and Restaurant-level Contribution margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. We expect Restaurant-level Contribution to increase in proportion to the number of new restaurants we open and our comparable restaurant sales growth.
We present Restaurant-level Contribution because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant-level. We also use Restaurant-level Contribution to measure operating performance and returns from opening new restaurants. Restaurant-level Contribution margin allows us to evaluate the level of Restaurant-level Contribution generated from sales.
However, you should be aware that Restaurant-level Contribution and
Restaurant-level Contribution margin are financial measures which are not
indicative of overall results for the Company, and Restaurant-level Contribution
and Restaurant-level Contribution margin do not accrue directly to the benefit
of stockholders because of corporate-level expenses excluded from such measures.
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In addition, when evaluating Restaurant-level Contribution and Restaurant-level
Contribution margin, you should be aware that in the future we may incur
expenses similar to those excluded when calculating these measures. Our
presentation of these measures should not be construed as an inference that our
future results will be unaffected by unusual or non-recurring items. Our
computation of Restaurant-level Contribution and Restaurant-level Contribution
margin may not be comparable to other similarly titled measures computed by
other companies, because all companies may not calculate Restaurant-level
Contribution and Restaurant-level Contribution margin in the same fashion.
Restaurant-level Contribution and Restaurant-level Contribution margin have
limitations as analytical tools, and you should not consider it in isolation or
as a substitute for analysis of our results as reported under GAAP. The
following table reconciles operating income to Restaurant-level Contribution and
Restaurant-level Contribution margin for the three months ended November 30,
2019 and 2018, respectively:
Three Months Ended
November 30,
2019 2018
(amounts in thousands)
Operating loss $ (1,391 ) $ (420 )
Depreciation and amortization 685 471
Stock-based compensation expense(a) 121 160
Pre-opening lease expense(b) 174 136
Pre-opening costs(c) 141 36
Non-cash lease expense(d) 127 118
General and administrative expenses 3,326 2,148
Corporate-level stock-based compensation and pre-opening
costs included in General and administrative expenses (138 ) (139 ) Restaurant-level Contribution 3,045
2,510
Operating profit margin -8.0 % -3.1 % Restaurant-level Contribution margin 17.5 % 18.7 %
(a) Stock-based compensation expense includes non-cash stock-based compensation,
which is comprised of restaurant-level stock-based compensation included in
other costs in the statements of operations and of corporate-level
stock-based compensation included in general and administrative expenses in
the statements of operations. In the three months ended
restaurant-level stock-based compensation was
corporate-level stock-based compensation was
months ended
(b) Pre-opening lease expense includes lease expenses incurred between date of
possession and opening date of our restaurants.
(c) Pre-opening costs consist of labor costs and travel expenses for new
employees and trainers during the training period, recruitment fees, legal
fees and other related pre-opening costs.
(d) Non-cash lease expense includes lease expense from the opening date of our
restaurants that did not require cash outlay in the respective periods.
Comparable Restaurant Sales Growth
Comparable restaurant sales growth refers to the change in year-over-year sales for the comparable restaurant base. We include restaurants in the comparable restaurant base that have been in operation for at least 18 months prior to the start of the accounting period presented due to new restaurants experiencing a period of higher sales upon opening, including those temporarily closed for renovations during the year. For restaurants that were temporarily closed for renovations during the year, we make fractional adjustments to sales such that sales are annualized in the associated period.
Measuring our comparable restaurant sales growth allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
• consumer recognition of our brand and our ability to respond to changing
consumer preferences;
• overall economic trends, particularly those related to consumer spending;
• our ability to operate restaurants effectively and efficiently to meet
consumer expectations;
• pricing;
• guest traffic;
• per-guest spend and average check;
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• marketing and promotional efforts; • local competition; and • opening of new restaurants in the vicinity of existing locations. Since opening new restaurants will be a significant component of our sales growth, comparable restaurant sales growth is only one measure of how we evaluate our performance. The following table shows the comparable restaurant sales growth for the three months ended three months endedNovember 30, 2019 and 2018: Three Months EndedNovember 30, 2019 2018
Comparable restaurant sales growth (%) 7.9 % 4.4 %
Comparable restaurant base 14 10
Number of Restaurant Openings
The number of restaurant openings reflects the number of restaurants opened
during a particular reporting period. Before we open new restaurants, we
incur pre-opening costs. New restaurants may not be profitable, and their sales
performance may not follow historical patterns. The number and timing of
restaurant openings has had, and is expected to continue to have, an impact on
our results of operations. The following table shows the growth in our
restaurant base for the three months ended November 30, 2019 and 2018:
Three Months Ended
November 30,
2019 2018
Restaurant activity:
Beginning of period 23 17
Openings - 2
Closings - -
End of period 23 19
Liquidity and Capital Resources
Our primary uses of cash are for operational expenditures and capital
investments, including new restaurants, costs incurred for restaurant remodels
and restaurant fixtures. Historically, our main sources of liquidity have been
cash flows from operations and annual capital contributions from Kura Japan.
Since the completion of our initial public offering, we do not expect to receive
any additional capital contributions from Kura Japan.
The significant components of our working capital are liquid assets such as
cash, cash equivalents and receivables, reduced by accounts payable and accrued
expenses. Our working capital position benefits from the fact that we generally
collect cash from sales to guests the same day or, in the case of credit or
debit card transactions, within several days of the related sale, while we
typically have longer payment terms with our vendors.
We believe that cash provided by operating activities, cash on hand and
availability under our existing line of credit will be sufficient to fund our
lease obligations, capital expenditures and working capital needs for at least
the next 12 months.
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Summary of Cash Flows
Our primary sources of liquidity and cash flows are operating cash flows and cash on hand. We use this to fund investing expenditures for new restaurant openings, reinvest in our existing restaurants, and increase our working capital. Our working capital position benefits from the fact that we generally collect cash from sales to guests the same day, or in the case of credit or debit card transactions, within several days of the related sale, and we typically have at least 30 days to pay our vendors.
The following table summarizes our cash flows for the periods presented:
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