Kura Sushi USA, Inc. (KRUS) Q2 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Kura Sushi USA, Inc. Fiscal Second Quarter 2020 Earnings Conference Call. [Operator instructions] Please note that this conference is being recorded today, April 14, 2020. On the call today, we have Hajime “Jimmy” Uba, President and Chief Executive Officer; Koji Shinohara, Chief Financial Officer; and Benjamin Porten, Investor Relations Manager. And now, I would like to turn the conference over to Mr. Porten. Thank you. Please begin.

Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal second 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 could 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 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. Before we get started, I would like to say that I hope all of you on the call, your families, and your friends are healthy; and to those of you who have been impacted directly by COVID-19, I hope for a speedy recovery for you or your loved ones. Today’s call was scheduled for what would normally be a discussion of our fiscal second quarter financial results and ongoing operating initiatives, yet as you know these are not normal times, so I will touch only briefly on the second quarter before moving on to a review of our current operations. Our second quarter earnings release contains specific information about the quarter’s results and of course we will be happy to entertain any questions about earnings during today’s Q&A. We were pleased with our second quarter results, which included revenue growth of 28% driven by a 10.8% increase in comparable restaurant sales. Additionally, our loss per diluted earnings per share of $0.02 was in line with our greatest [ph] expectations that we provided on our fiscal first quarter call. Exiting the second quarter, which ended on February 29, we felt very good about the momentum of our business and ongoing operating initiatives. However, as the news about COVID-19 began to spread, we started to see a slowdown in sales across the system, particularly in our West Coast Resaturant. Our initial forecast was to manage store labor hours, but as an increasing number of state and local government issued the new guidelines for public activities, it quickly became apparent that business as usual was a thing of the past. As these guidelines featured mandatory shutdown of non-essential business, we made the difficult decision on March 18 to close all our restaurants system wide. While many food service restaurants have moved to takeout on delivery services, we believe our technology enabled concept with our level of sushi service model and the distinctive multi-sensory dining experience will be impossible to replicate, and so it has not been an avenue we have pursued. Since then, our primary concerns have been the ongoing welfare of our team, our liquidity, and our ability to quickly and efficiently resume operations when the time is right. While we are currently unable to predict when that might be, I would like to provide some insight into our recent activities to give you an idea of how we are currently addressing the impact of COVID-19. Obviously, the closing of our restaurants have forced some difficult decisions, but we were able to continue to pay our employees up until April 4 through the employee emergency relief fund that we established, and they are currently furloughed .. Our kitchen staff is exception, as they will remain on payroll. We made this decision because we believe the near term extent of retention will be lesser than the cost of retraining staff and loss of sales from delayed re-openings. To support our team during these difficult times, we are paying the full cost of health insurance for all of our furloughed employees. In addition, they will have the right of first refusal to occupy their previous positions when we reopen, and we also couldn’t offer [indiscernible] bonuses to help ensure the continuity of our restaurant chains. With regards to our store level expenditures, we have also been in active discussions with all of our landlords. We hope to apply forgivable SBA loan funds towards our April and May debt obligation. Given the overall liquidity of the situation, we will continue to evaluate our occupancy obligations on a month-by-month basis with our landlord partners. On the corporate support side of our business, we have reduced our non-essential operating expenses, including the furlough of the modest group of supportive staff. With regard to our corporate operations, our thoughts in the near-term is to be prepared to ramp our business up as quickly and efficiently as possible once we feel it is safe to do so. From a developmental standpoint, we had previously guided to six new restaurants in fiscal 2020, which represented the majority of our capital expenditures for the fiscal year. Two of those restaurants, Katy, Texas; and Glendale, California opened during fiscal Q2, prior to the temporary shutdown. Additionally, we had four new restaurants under construction in mid-March Fort Lee in New Jersey, Koreatown in Los Angeles, Washington D.C., and Sherman Oaks in California, which are currently on hold, although Fort Lee is largely completed. While our new store development is generally on hold, I would note that some local governments are allowing construction work to continue with certain restrictions. So, we are currently reviewing our options. We are also looking at the possibility of pursuing some renovations during the downtime created by store closures, while adhering to local and federal regulations and the recommendations regarding safety and social distancing. Finally, I have two additional items to note. First, we have applied for a Payroll Protection Program under the CARES Act, which if successful, we’ll apply largely to payroll costs. Under the terms of the plan, we plan to spend the loan fund on expenditures that would maximize [indiscernible]. On the second last week, Kura Sushi Japan, our parent company agreed to make available to us $20 million revolving line of credit over a four-year term. Please note that we have not borrowed any amount against the revolving credit agreement and we have no plans to do so in the immediate future. We very much appreciate the support of Kura Sushi Japan and their confidence in the long-term success of our business. Overall, we are very fortunate to have entered into this unique situation with a strong capital position. As of today, we have approximately $24 million in cash on hand and no debt. If all of our restaurants are closed, we estimate a near-term cash burn rate of approximately $1 million per week. Keep in mind that the above cash outlay includes capital expenditures and minimum rental relief. As you are well aware, the duration of a system-wide shutdown is difficult to predict at this time. However, we are confident that we have more levers to pull in the event that this crisis runs for an extended period of time. One final reminder, due to this uncertainty driven by COVID-19, we withdrew our previous financial guidance for the fiscal year 2020 and will not issue any update at this time. Thank you, again, for joining us this afternoon and for your interest in Kura Sushi USA. Despite the ongoing uncertainty, we believe we’re well-equipped to weather the storm. Even as our stores are closed, our store managers are undergoing retraining. We are working on implementing CrunchTime, our new back-of-the-house platform, and we are engaging with third parties in order to improve our store development and maintenance capabilities after reopening. Additionally, we are continuing with the development process for our previously mentioned technology initiatives. 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 of 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 unchartered 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 into English. Please bear with us. Open it up. Please open the line for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Peter Saleh of BTIG. Please proceed with your questions.

Great. Thank you. I just wanted to ask, I think if I heard you correct, I think, you said $1 million per week in cash burn at this point. Where do you think you can get that down to? Do you think that number can decline from the current levels if the sales environment persists, or is the $1 million per week kind of the best case scenario in terms of cash burn?

Peter thank you for your question. Please allow me to answer in Japanese. Ben is going to translate. [Foreign Language]

[Interpreted] Hi, Peter, this is Ben. The first thing we'd like to make clear is that this $1 million cash burn rate is purely a near-term number. And as Hajime mentioned in his prepared remarks, we do believe there are still several levers that we can pull to materially bring down the burn rate, but [multiple speakers] and payroll. So we've applied for the Payment Protection Program, and we want to make a best faith effort to use the funds as intended, which is keeping people on payroll. So, keeping that in mind as well as the regulations surrounding forgiveness, our labor costs are higher than they would be if we hadn't applied for the loan, because we were keeping our payroll -- keeping more employees on payroll. So, from a bird's-eye view, we furloughed some of our employees, but the remaining employees are staying on at full pay. And it becomes clear that if we've reached the end of the covered period for the PPP loan, and it's clear that the store closures are going to extend for a prolonged period. This would be very difficult, and it'd be a very difficult decision, but we would make additional furloughs. So this $1 million dollar per week cash burn rate assumes that we're going to be continuing with construction at four [ph] new units and renovations during our store closures. And so if we were to decide to stop construction that would shave off the CapEx portion, which is $300,000 out of the $1 million burn rate. So, I'm sure people are curious about why we're going forward with construction when most other companies have been trying to rein in their CapEx costs as much as possible, so we'd like to address that right now. Given that nobody can reasonably estimate when the corona crisis is going to be over, we felt that the responsible course of action was to prepare different plans for different scenarios. And so, we see that there’s -- as we see, there are really three ways this can go. The pandemic can end earlier than anybody expects. The pandemic can end roughly in line with our expectations or the pandemic can continue beyond our expectations. And so, our plan to continue renovations and new unit development is – assumes that the scenarios will be either the pandemic ends earlier than expected or the pandemic ends around the time that was originally expected. And so the reason that we’re assuming -- we're going to former assumptions is that we want to maintain our restaurant-level contributions. If we were to close post pandemic after we reopen to do the renovations, that would have a material impact on our restaurant-level contribution. And we were only able to make this decision, because we are in an exceptionally strong capital position between our $24 million cash on hand and the new $20 million revolver we established with our parent. And so we proceeded, assuming that one of the two earlier scenarios will play out. That being said, it becomes clear that if the pandemic is going to continue longer than expected. We would be able to stop construction and to stop any capital expenditures. So, I hope that clarified things.

Our next questions come from the line of Andrew Strelzik of BMO. Please proceed with your questions.

Hi, good afternoon, and thanks for taking the question. The first one from me, you talked about some of the flexibility on the burn rate. One thing you didn't quantify was the rent piece. So, I was wondering if you could talk about how the conversations with the landlords have been going so far. And how much would that – if you get some flexibility there, how much would that bring down the burn rates?

[Foreign Language]

[Interpreted] So as soon as we decided to close our stores on March 18, we began discussions with our landlords for our existing stores as well as those in our new unit pipeline. We're in the middle of negotiations now, so it's a little bit early to talk about results, but we'd like to speak about general directionality. Our primary objective in our landlord negotiations is to maximize the forgivable expenses under the PPP loan, which we think is going to result in a win-win situation with our landlords, which we need to maintain decades-long relationships with. And so, we've been very focused on getting the PPP process. And so just to add on to that a little bit, the $1 million cash rate – cash burn rate assumes full occupancy costs.

Okay, that’s helpful. And then I understand kind of the reticence to move towards the more of the takeout model, given the inability to kind of replicate the experience, which is a key piece of the brand. I'm just wondering, you've talked about takeout as or maybe delivery is more of a longer-term kind of opportunity. Have you kind of reshuffled at all your thinking around prioritizing that? Have you moved it up at all, just given kind of how things have unfolded? Did you consider this an opportunity to accelerate that at all, or you just kind of ruled it out immediately?

Sure. [Foreign Language]

[Interpreted] We've always felt that our guests come for the entire dining experience. And so our historical focus has been on providing the best possible in-store experience. And so we haven't considered doing to go and we aren’t currently considering doing to do or take out or delivery. That being said, given there are so many unknowns with this ever-changing situation, we haven't ruled anything out and we want to maintain maximum flexibility. As an additional context, we did keep some of our stores open for to sales before we made the decision to close our entire system, but as I'm sure you're aware, given that the dining space or eating in has been largely banned across the country, off premises sales are more competitive now than ever. And so we weren't able to make enough sales to justify keeping those stores open just for to go. And we don't have existing relationships with third-party services and we don't have the infrastructure for existing infrastructure for it to do. So, we felt that it was better to invest our timing and resources into other efforts. What we would like to emphasize now is that, while our stores are closed, we are moving very actively with other projects, whether that be our unit development or with the new store construction and store renovations or if it would be in-store technology, such as drink ordering systems and the table side touch panels, we're implementing crunch time, which is our new back of the house platform, but we are very aggressively using this time in a way that we think is efficient. And so we felt that the best course of action was to invest in these efforts as opposed to the most – as opposed to investing in trying to enter the most competitive off-premises market we’ve ever seen. And our goal right now is to position ourselves to emerge in the best possible position to make ourselves ready for recovery. And we think that this is going to make that easier.

Okay. I appreciate all the color there. And if I could just squeeze in one more, it sounds like a number of the decisions you're making are being made with an eye towards the restart. So, I guess, when you think about reopening the stores and getting running again, what's the biggest challenge in that process?

[Foreign Language]

[Interpreted] We anticipate that decision to reopen our stores is going to be as difficult and require as much thought as our decision to close all of our stores, but what we would like to say is that, our very top priority. And this is true when we closed our stores is the health and well-being of our employees and our guests. The very last thing that we want to do is to compromise the trust that we've established between our guests and our employees. And so that's going to be the primary consideration more than anything else. And then once it's abundantly clear that there are – that it is safe for people to re-enter, open society and the restaurants can safely reopen, we would evaluate whether or not opening our stores would help us control our losses more effectively than keeping our stores closed. And if that were the case, we would reopen. And it goes without saying that even after we get federal or local lifts on the state home restrictions, we're still going to implement additional safety and health measures in our restaurants. And so, we're going to have to be folding in the increased costs to make sure that those safety measures are implemented and executed perfectly into our calculus for reopening.

Great. Thank you very much.

Thank you, Andrew.

Thanks, Andrew. Nice to hear from you.

Our next questions come from the line of James Rutherford of Stephens. Please proceed with your questions.

Hi, thank you for taking the questions here. I’ve got two. And the first one is on the supply chain. I'm just curious if you anticipate any issues with your supply chain as you come out of COVID-19 and begin to reopen the stores?

We have – this is Koji Shinohara, CFO. We have a local stance, but our main suppliers [indiscernible] and mutual and we received written confirmation from them that their financial health is extremely strong, and there is no impact on their – I mean, that these few months won't impact them.

Okay. Thank you for that. And the second one is a follow-up to a couple of other questions we've had on just the tenor of reopening and I understand the difficulty in kind of estimating or forecasting that, my question is, what you will – what kind of authority you're going to watch as you look at this, and I ask the question, because this is a variety of voices talking about when to reopen the state. And I think Texas is trying to be pretty aggressive relative to other states and you’ve got federal versus state kind of conflict as well. And so, I'm just kind of curious what your – what signs you will watch when you decide to reopen?

[Foreign Language]

[Interpreted] So, while we can't – obviously, we can't give a timeline for when we expect this to happen, given that we're in five states and even within those states, there are significantly different markets. There's going to be very different conditions for the recovery of each of these areas. And so we'll be evaluating on a unit-by-unit basis according to the local circumstances in terms of reopening. And the thing would be that we don't expect our sales after reopening to immediately be a pre-pandemic levels. We expect a lower rate of sales and a steady ramp afterwards.

Excellent. And as a follow-up to that question, my last question here is, what are some of the things that you can do to spur demand when those stores reopen? I know you have a nice large database of customer e-mail addresses. Might you use that and perhaps some sort of specialized offers when the stores reopen? I know it may be a bit early to think about that, but what are your thoughts there?

James, please allow to me make sure we [understand] your question correctly. [Foreign Language]

[Interpreted] James it’s funny that you mentioned this because this is a very unique situation and while typically we would do something – in any other circumstance we would do an advertising effort that would be similar to like a new store opening, but given our responsibility to the communities it would be irresponsible of us to have like the sort of crowds that are typically drawn by our store openings and so as you mentioned our first step would probably be to reach out to our existing guests through our rewards. You know, database and sort of monitor the traffic and go from there. The other would be, we need to consider, how many employees we have retained and the workforce levels when we advertise for reopening.

Helpful color, thank you Jimmy, Koji, and Ben.

Thank you, James.

Thanks James.

Our next questions are from Peter Saleh of BTIG. Thank you for rejoining the queue. Please proceed with your questions.

Great. Thank you. Many of the stores have pretty long wait times and I suspect when we get back to somewhat of a normal, you probably won’t have a lot of people just kind of standing around in the lobby, so what are you guys anticipating as your, like capacity levels when we get back over the next call, month or two? Do you anticipate you will be out like 50% capacity, 60%, I guess I am just trying to understanding what you are modeling and also – and there is a level of capacity you would need to get that cash burn rate, you know as close to zero as possible.

[Foreign Language]

[Interpreted] Given the level of uncertainty surrounding consumer sentiment when this is all, when the pandemic is completely over, we don’t want to give guidance or expectations, but we do think the best course of action is to prepare for everything and to build different strategies for different traffic levels. As Jimmy mentioned earlier, after employing their safety, the key consideration is going to be – the key consideration for reopening is going to be whether or not we will be able to more effectively control losses as a result of store – opening the stores as opposed to keeping them closed. And so we will evaluate given the situation and will constantly reevaluate as this progresses and make the best decision for the [long-term health] of the company. Given that we are retaining the majority of our employees, we believe that even in the happy circumstance where traffic levels are higher than expected, we should have an adequate workforce – if we were to reopen at the – let’s say the end of the summer, which is the end of the covered period for the PPP, we would be able to immediately address that demand level.

Alright, thank you very much. Very helpful.

Thank you, Peter.

Thanks Peter.

We have reached the end of the question and answer session. I will now turn the call back over to management for any closing remarks.

Again, thank for joining us today. Please stay safe and we look forward to next earnings call. Thank you for your time.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.