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 included in this Quarterly Report on Form 10-Q and with the
audited financial statements and the related notes included in our Annual Report
on Form 10-K for the fiscal year ended
In addition to historical information, the following discussion and analysis contains forward-looking statements, such as statements about our plans, objectives, expectations, and intentions, which are based on current expectations and that involve risks, uncertainties and assumptions as set forth and described 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 this Quarterly Report on Form 10-Q.
"
Overview
Business Trends; Effects of COVID-19 on Our Business
The negative effects of the COVID-19 pandemic on our business have been
significant. In
In response to the ongoing COVID-19 pandemic, we have prioritized taking steps to protect the health and safety of our employees and customers. We have maintained cleaning and sanitizing protocols for our restaurants and have implemented additional training and operational manuals for our restaurant employees, as well as increased handwashing procedures. We also provide each restaurant employee with face masks and gloves, and require each employee to pass a health screening process, which includes a temperature check, before the start of each shift.
Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act") signed into law on
Consistent with our long-term growth strategy, we expect to continue to open new restaurants in locations where we believe such restaurants have the potential to achieve profitability. The future sales levels of our restaurants and our ability to implement our growth strategy, however, remain highly uncertain, as the full impact and duration of the COVID-19 pandemic continues to evolve as of the filing date of this Quarterly Report on Form 10-Q, including the recent acceleration of the spread of the Delta and Omicron variants of COVID-19.
14
--------------------------------------------------------------------------------
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 performance.
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 grow.
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 grow. 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 credit card processing fees, repairs and maintenance, restaurant-level advertising and promotions, restaurant supplies, royalty payments to Kura Japan, stock-based compensation expenses for restaurant-level employees, utilities 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 unit base grows.
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. Provision for income taxes represents federal, state and local current and deferred income tax expense.
15
--------------------------------------------------------------------------------
Results of Operations The following tables present selected comparative results of operations for the three months endedNovember 30, 2021 and 2020. 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 tables below may not sum to 100% due to rounding. Three Months Ended November 30, 2021 2020 $ Change % Change (dollar amounts in thousands) Sales$ 29,832 $ 9,414 $ 20,418 216.9 % Restaurant operating costs Food and beverage costs 8,957 3,053 5,904 193.4 Labor and related costs 9,710 4,360 5,350 122.7 Occupancy and related expenses 2,200 1,690 510 30.2 Depreciation and amortization expenses 1,171 927 244 26.3 Other costs 3,610 2,079 1,531 73.6 Total restaurant operating costs 25,648 12,109 13,539 111.8
General and administrative expenses 5,360 3,521 1,839 52.2 Depreciation and amortization expenses 88
75 13 17.3
Total operating expenses 31,096 15,705 15,391 98.0
Operating loss (1,264 ) (6,291 ) 5,027 79.9
Other expense (income):
Interest expense 25 34 (9 ) (26.5 )
Interest income (26 ) (4 ) (22 ) (550.0 )
Loss before income taxes (1,263 ) (6,321 ) 5,058 80.0
Income tax expense 12 29 (17 ) (58.6 )
Net loss $ (1,275 ) $ (6,350 ) $ 5,075 79.9 %
Three Months Ended November 30,
2021 2020
(as a percentage of sales)
Sales 100.0 % 100.0 %
Restaurant operating costs
Food and beverage costs 30.0 32.4
Labor and related costs 32.5 46.3
Occupancy and related expenses 7.4 18.0
Depreciation and amortization expenses 3.9 9.8
Other costs 12.1 22.1
Total restaurant operating costs 86.0 128.6
General and administrative expenses 18.0 37.4
Depreciation and amortization expenses 0.3 0.8
Total operating expenses 104.3 166.8
Operating loss (4.3 ) (66.8 )
Other expense (income):
Interest expense 0.1 0.4
Interest income (0.1 ) -
Loss before income taxes (4.3 ) (67.2 )
Income tax expense - 0.3
Net loss (4.3 ) % (67.5 ) %
16
--------------------------------------------------------------------------------
Three Months Ended
Sales. Sales were
Food and beverage costs. Food and beverage costs were
Labor and related costs. Labor and related costs were
Occupancy and related expenses. Occupancy and related expenses were
Depreciation and amortization expenses. Depreciation and amortization expenses
incurred as part of restaurant operating costs were
Other costs. Other costs were
General and administrative expenses. General and administrative expenses were
Interest expense. Interest expense was
17
--------------------------------------------------------------------------------
Interest income. Interest income was
Income tax expense. Income tax expense was
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 Operating Profit, Restaurant-level Operating Profit margin, Average Unit Volumes ("AUVs"), comparable restaurant sales performance, and the 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 (loss) before interest, income taxes and depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus stock-based compensation expense, non-cash lease expense and asset disposals, closure costs and restaurant impairments, as well as certain items, such as employee retention credits, litigation accrual, and certain executive transition costs, that we believe are not indicative of our core operating results. Adjusted EBITDA margin is defined as Adjusted EBITDA divided by sales. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin 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, Adjusted EBITDA and Adjusted EBITDA margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results.
We believe that the use of EBITDA, Adjusted EBITDA and Adjusted EBITDA margin provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our 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, Adjusted EBITDA and Adjusted EBITDA margin 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 and Adjusted EBITDA margin may not be comparable to other similarly titled measures computed by other companies, because all companies may not calculate Adjusted EBITDA and Adjusted EBITDA margin in the same fashion.
Because of these limitations, EBITDA, Adjusted EBITDA and Adjusted EBITDA margin 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, Adjusted EBITDA and Adjusted EBITDA margin on a supplemental basis. You should review the reconciliation of net loss to EBITDA, Adjusted EBITDA and Adjusted EBITDA margin below and not rely on any single financial measure to evaluate our business.
18
--------------------------------------------------------------------------------
The following table reconciles net loss to EBITDA and Adjusted EBITDA for the
three months ended
Three Months Ended November 30,
2021 2020
(amounts in thousands)
Net loss $ (1,275 ) $ (6,350 )
Interest (income) expense, net (1 ) 30
Income tax expense 12 29
Depreciation and amortization expenses 1,259 1,002
EBITDA (5 ) (5,289 )
Stock-based compensation expense(a) 443 266
Non-cash lease expense(b) 354 576
Executive transition costs(c) - 390
Adjusted EBITDA $ 792 $ (4,057 )
Adjusted EBITDA margin 2.7 % (43.1 )%
(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. For further details of stock-based
compensation, see "Note 5. Stock-based Compensation" in the notes to
condensed financial statements included in this Quarterly Report on Form
10-Q.
(b) Non-cash lease expense includes lease expense from the date of possession of
our restaurants that did not require cash outlay in the respective periods.
(c) Executive transition costs include severance and search fees associated with
the transition of our Chief Financial Officer.
Restaurant-level Operating Profit and Restaurant-level Operating Profit Margin
Restaurant-level Operating Profit (Loss) is defined as operating income (loss) plus depreciation and amortization; stock-based compensation expense; pre-opening costs and general and administrative expenses which are considered normal, recurring, cash operating expenses and are essential to support the development and operations of our restaurants; non-cash lease expense; and asset disposals, closure costs and restaurant impairments; less corporate-level stock-based compensation expense and employee retention credits recognized within general and administrative expenses. Restaurant-level Operating Profit (Loss) margin is defined as Restaurant-level Operating Profit (Loss) divided by sales. Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) 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 Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and operating results, as these measures depict normal, recurring cash operating expenses essential to supporting the development and operations of our restaurants. However, these measures may not provide a complete understanding of the operating results of the Company as a whole and such measures should be reviewed in conjunction with our GAAP financial results. We expect Restaurant-level Operating Profit (Loss) to increase in proportion to the number of new restaurants we open and upon comparable restaurant sales growth, if any.
We present Restaurant-level Operating Profit (Loss) because it excludes the impact of general and administrative expenses, which are not incurred at the restaurant-level. We also use Restaurant-level Operating Profit (Loss) to measure operating performance and returns from opening new restaurants. Restaurant-level Operating Profit (Loss) margin allows us to evaluate the level of Restaurant-level Operating Profit (Loss) generated from sales.
However, you should be aware that Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin are financial measures which are not indicative of overall results for the Company, and Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin do not accrue directly to the benefit of stockholders because of corporate-level expenses excluded from such measures.
In addition, when evaluating Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) 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 Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin may not be
19
--------------------------------------------------------------------------------
comparable to other similarly titled measures computed by other companies, because all companies may not calculate Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin in the same fashion. Restaurant-level Operating Profit (Loss) and Restaurant-level Operating Profit (Loss) margin have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.
The following table reconciles operating loss to Restaurant-level Operating
Profit (Loss) and Restaurant-level Operating Profit (Loss) margin for the three
months ended
Three Months Ended November 30,
2021 2020
(amounts in thousands)
Operating loss $ (1,264 ) $ (6,291 )
Depreciation and amortization expenses 1,259 1,002
Stock-based compensation expense(a) 443 266
Pre-opening costs(b) 73 235
Non-cash lease expense(c) 354 576
General and administrative expenses 5,360 3,521
Corporate-level stock-based compensation in
general and administrative expenses (408 ) (243 )
Restaurant-level operating profit (loss) $ 5,817 $ (934 )
Operating loss margin (4.2 )% (66.8 )%
Restaurant-level operating profit (loss) margin 19.5 % (9.9 )%
(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. For further details of stock-based
compensation, see "Note 5. Stock-based Compensation" in the notes to
condensed financial statements included in this Quarterly Report on Form
10-Q.
(b) Pre-opening costs consist of labor costs and travel expenses for new
employees and trainers during the training period, recruitment fees, legal
fees, cash-based lease expenses incurred between the date of possession and
opening day of our restaurants, and other related pre-opening costs.
(c) Non-cash lease expense includes lease expense from the date of possession of
our restaurants that did not require cash outlay in the respective periods.
Comparable Restaurant Sales Performance
Comparable restaurant sales performance 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. We did not make any
adjustments for the temporary restaurant closures due to COVID-19 during the
three months ended
Measuring our comparable restaurant sales performance allows us to evaluate the performance of our existing restaurant base. Various factors impact comparable restaurant sales, including:
• government restrictions on indoor dining capacity due to COVID-19;
• 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;
• marketing and promotional efforts;
20
--------------------------------------------------------------------------------
• 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 performance is only one measure of how we
evaluate our performance. The following table shows the comparable restaurant
sales performance for the three months ended
Three Months Ended November 30,
2021 2020
Comparable restaurant sales performance (%) 154.3% (50.8)%
Comparable restaurant base 25 20
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
Three Months Ended November 30,
2021 2020
Restaurant activity:
Beginning of period 32 25
Openings 1 3
End of period 33 28
Subsequent to
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, cash proceeds from our initial public offering in fiscal 2019 and our secondary offering in fiscal 2021 and availability under our Revolving Credit Agreement. The ongoing impact of the COVID-19 pandemic remains highly uncertain and may have a material adverse impact on our business, financial condition, liquidity and financial results. For further discussion, see above "Business Trends; Effects of COVID-19 on our Business."
During the three months ended
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.
21
--------------------------------------------------------------------------------
Summary of Cash Flows
Our primary sources of liquidity and cash flows are operating cash flows, cash on hand and proceeds from our Revolving Credit Agreement. We use this to fund investing expenditures for new restaurant openings, reinvest in our existing restaurants, and contribute to our working capital. Our working capital position is impacted by collecting 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:
© Edgar Online, source
