Kura Sushi USA, Inc. (KRUS) Earnings Call Transcript & Summary

Good afternoon, everyone. I hope everyone had a chance to grab some lunch, whether you're in the room or on the webcast. My name is Jeffrey Bernstein, and I'm the restaurant and foodservice distribution analyst here at Barclays. I'm excited to introduce our next presenting company, Kura Sushi. With us this afternoon from Irvine, California, we have Jimmy Uba, President and CEO; Jeff Uttz, CFO; and Ben Porten, SVP of IR and Business Development. By way of background, for those is not familiar; Kura Sushi is interestingly a technology-enabled casual dining restaurant chain with a very modest 50 company-operated units across the U.S. and with long-term guidance for a 20% annual unit growth rate, managing this confident and long-term guidance for 300 U.S. units. And, we would estimate that likely conservative with their total addressable market analysts or analysis not updated for a number of years and the success they've had since then. So, we are excited to have Kura Sushi here. We recently launched coverage of the name. And so, we wanted to thank the team for joining us. I've got a handful of questions introducing the brand to a lot of people, but then I will pause and if there's any questions from the audience, be happy to take it. But with that said, we want to thank Jimmy, Jeff and Ben for joining us along with broader Kura Sushi.

So to give some context, we began as a subsidiary of Kura Sushi Japan, which now has 550 units in Japan. Jimmy came to the United States in 2008. We opened our first restaurant in 2009 in Irvine, California. We went public in July of 2019. Our AUVs at that point were $3.5 million, restaurant-level profit margins of 20.1% and we were in 3 states. Today, we have 54 units. Our AUVs are 4.3 million and grew 21.9% [ resonating ] profit margins, and we're in 15 states from most Washington, D.C. We're exceptionally proud to have been able to grow our restaurant-level economics while expanding into so many different markets, especially given how geographically concentrated we were at the beginning of our life cycle. As Jeff had mentioned, we are an extremely tech-driven company. We benefit greatly from our relationship with the parent. They've been around for over 40 years. They hold over 50 patents, some of which are so important to -- we've actually filed them with the U.S. patent office as well. And what's really unique is that for us to have, for a restaurant company to have the level of technology investment that we do, you typically need a unit base of 200, 300 units or more. But at that point, it's [prohibitively] expensive to retrofit your restaurants to accommodate that technology. For us, our restaurants are designed for the ground up to be modular and adapt to new technologies. And so, I'd say we're in a truly unique position.

From a bigger picture perspective, we're just thinking about your company, you IPO-ed in your infancy presumably, obviously, you have a parent company that has a lot of units, you have had a contrast of a lot of intelligence from a brand in Japan, but relatively small here. I'm just wondering if you could talk about, with 54 units now already haven't been public for a number of years. Can you talk about the pros and cons you found of coming public at such an early age?

[Foreign Language]

One of the biggest pros would be, our friend, Jimmy time said that the caliber of our team members has grown exponentially, becoming a public company, being able to grant equity, especially having gone public at $14 those options are very attractive. We've been able to grow our executive team by leaps and bounds the way that would have been simply impossible as a private company. The other that as a publicly traded company, we get respect from landlords. Our first 10 units are great, but they're in odd places. It's really getting where you can sit in type locations. They're highly profitable, but nobody knew what Kura was, let alone what Revolving Sushi was. Now the Westfields of the world, the Simons of the world, we're beating it down our doors. Developers come giving us the pick of the litter. They know that we've got 2-hour lines better, and so we're the perfect tenant. And that's been a tremendous tailwind for us.

[Foreign Language]

As a side note, along with every other restaurant company or stock greater during the pandemic, but we actually took that as an opportunity aggressively hire C-suite. Our stock business as low as $5 at one point. And so, anybody who got in at that point is extremely happy today. And the same with Ladner, still established a $45 million revolver with the parent. When everybody else is turtling up on their CapEx and breaking leases, that gave us access to AAA locations that would have been previously inaccessible which really in the success of those locations is just snowballed into more and more real estate opportunities for us.

[Foreign Language]

In terms of comms, obviously, public company cost was a pretty significant step-up in terms of our G&A. But in terms of governance, in terms of our ability to attract team numbers, we see it as a [ work-life investment ] in the company.

Understood. Ben, you mentioned it earlier, but the greatest attribute it would seem to me is the ability to operate as if you have 500 restaurants when you only have 50 exactly whether it's the technology that comes with it or the learnings you can share. Is there something you're next excited about when you get to 100 or 200 units that maybe, Jimmy, maybe you've seen at the parent company that when you can now say, I know what's going to happen at a certain point in time, like what's the next big hurdle or something exciting that you see coming when you get to $100 million, $200 million $300 million.

[Foreign Language]

Since going public, the first major hurdle that we have is demonstrating our portability. As we mentioned earlier, we were only in 3 states. Now we've established beachheads in our top 20 G&A. And as we infill, we expect tailwinds in regional G&A. It's a very meaningful; it's going to be a very meaningful benefit to be able to have regional managers will go over 7 restaurants in one state as opposed to for restaurants and 4 states. And so, we're very excited about the [ insulin ]process. One thing that's always top of mind for us is an appropriate growth case. Can you join the parent at 30 units and help them grow to 180 units over 8 years. And we've seen in the years prior to our IPO, basically, a lot of cautionary tales, stories that have restaurants and our growing faster than initiative. And while we've been maintaining that 20% unit growth case, our midpoint of guidance is 24%, we feel like we're growing at a great [ clip ]. And that's because of the experience that we have had around the 30 to 180 units.

But Jeff, I think maybe you could touch on the G&A expectation.

When I was hired, one of the things that Jimmy really asked me to focus on was G&A leverage. Coming in, a lot of low-hanging fruit. We were able to leverage our G&A from fiscal '22 to fiscal '23 by 80 basis points. Our guidance this year is to have another 50 basis points of leverage. And the reason the debt is eased a little bit is because of the public company cost that Jimmy mentioned. This is our first year for 404(b) compliant. So we will be a little bit more public company costs associated with that. But still 1.3% over 2 years, we're pretty happy with that guidance of $240 million or so of revenue, that's $3 million straight to the bottom line, which I'm really proud of. And as we continue to open up more and more infill, we're going to see that continue to leverage as well going forward.

[Foreign Language]

And so to return to your original question, our goal is to maintain our restaurant-level operating profit margins above 20%. We're happy with anything with a 2 handle, and we expect that the increased scale to directly flow through to the bottom line with improvements in G&A. And that's really our core focus for the foreseeable future.

I know Jeff has mentioned on a number of occasions, the long-term goal to be getting that in the single digits as a percentage of sales, it would seem like that's a long way off relative to '14 and change that we're sitting on now, but is there any big hurdles that you see to achieving that or big milestones when you get to a certain number of units? I mean, you've gone through this process before with other growth companies. Like what's the big unlock that gets you there because some of people say, once you get to a certain point, it's hard to bring that G&A down because it's certain fixed cost components.

Right. I mean the more leverage you get, the harder it is to get further. I think we look at it as corporate G&A and regional G&A. The regional G&A, as Jimmy mentioned, will get by infilling and having our area managers be more efficient with less travel, less time on the road and you'll get leverage there automatically. But really, it's in in the support center, the corporate G&A and its systems, the unlock systems and making sure that we have the proper technology to reduce keystrokes, reduce headcount, you don't ever want to be at the point where every time you open 8 restaurants or 10 restaurants, you have to add people. And I would rather invest in systems and not have to keep adding people every single time we open the restaurants. And we started that process. I've challenged every department head and every C-level executive to think about what would you like to buy that will make your life easier and more efficient in your departments. So, everybody is really thinking about that. And I think over the next 12 to 18 months, we're going to see some considerable improvements there. We've already started in the finance area, we've already purchased a couple of things on the FP&A side, which are making our analysis much easier and much more efficient. But we're going to dovetail that into the rest of the company.

Understood. And I know when we were having our initial discussions, I mean I've covered the rest of the industry for a long, long time, but I've never covered a primarily Japanese concept and a lot of people say, well, it's hard to take Japanese national because it's already an international brand and every market has a different flare for what Japanese is. Can you just talk about -- it just seems like the category fragmentation is just such a tremendous opportunity when there is no significant change in all I know we're mom-and-pop. So how do you think about the market share opportunity for your brand relative to the [indiscernible].

I would love to answer. So the industry, according to IBS is approximately $26 billion. The top 2 players control 1% to 2%, that would be ourselves in Nobu. And so effectively, every sushi restaurant is a mom-and-pop. And with COVID, as difficult as the restaurant industry as a whole. This is practically an extinction event for Japanese restaurants. In we were the only ones with the balance sheet that survive month after month with no revenue. In 2021, we did a data scrape on Yelp to see how many Japanese restaurants have closed within a 5-mile radius of our then 32 units and over 200 closed. And it's not like a Pizzeria where if the Pizzeria closes, you can use the oven and come back as a Pizzeria; there's a lot of operational know-how that's pretty rare involved with Japanese restaurants. And so we don't expect those to come back; they haven't come back as Japanese restaurants. And so that's one of the reasons we've maintained such consistently positive traffic since the end of the pandemic. And as you mentioned earlier, about the white space potential, I believe that it's significantly larger than the 300 number that we arrived at originally pre-IPO.

[Foreign Language]

And so with the $26 billion size of the sushi industry, it's obviously a very popular category, and yet we've yet to see a truly national chain. I'd say that we're really the first one. And the reason for that is that there's such a high skilled floor for making sushi or sushi robots make right falls, that's typically a 5-year training period; the second largest player, I'm sure they'd love to open more restaurants, but it's a 10-15-year trading period to get to that level being a headset, at which point, it makes a lot more sense to go out and say, "Hey, I was the head chef of Nobu, come to this restaurant I have opened and make a lot more money. In terms of portability, we pursued a non-continuous growth strategy, which is exceptionally rare, I'd say this early in our -- with this few units, typically, you take a hub-and-spoke model. And this is only possible because of what we call the remote management system, which is actually technology that Jimmy developed for the parent as we help them scale from 30 to 180 units. And the reason that we pursued this noncontinuous growth strategy is not only to establish improve our portability to our investor base, which I think we've done a great job of considering that our top 3 units are in Fort Lee, New Jersey, Bellevue, Washington and Austin, Texas. It's a triangle basically the perimeter of the country. You could not take them further apart. But also, this has allowed us to identify the greatest pockets of opportunity in the country that much more quickly. If we've gone with the hub-and-spoke model, it would have taken us a decade or two to get to the East Coast and realize just how lucrative market it is. On the strength of Fort Lee, we've opened 2 more New Jersey locations. We've opened 2 in Pennsylvania. We've opened 2 in New York. We booked 3 in Boston. We've opened 2 in D.C. And now we've got a lot of leases lined up for the Big Northwest as well because Bellevue is such a great market. We're very pleased.

That's incredible. I think most of your peers would say let's open up a first, let's open up a second and third immediately around there and then just go one continuous market at a time. So it seems like a pretty big risk that was taken to plant flags all across the country, but the fact that you've seen successful that now it allows you to do the infilling, which is tremendous.

That's one of the things that attracted me to the company when I joined a little over a year ago as well. The portability was shown because I knew at [indiscernible], one of the biggest questions we always got Jeff, you were beginning with and how does this concept do outside of New York City. And the fact that currently are proven that it does well, the kind of concept does well outside of its core market of California was very attractive to me. So, I will just start by saying that if you haven't been to a Kura Sushi before. I've now been there a couple of times, but it is for those that aren't familiar, I mean, it's sushi that literally fits out a little train set and zips around all the tables and you pull off whatever plate you want and the old plates are a set price. And the technology aspect, I mean, I've not heard that the dishwasher aspect of things. Now when you're done with your plate, you put it back on to the assembly line it goes back and it's going to get washed automatically and just the ability to remove labor from the system is tremendous when every other restaurant company talks about labor is such a big, big challenge.

From a consumer standpoint, I feel like I don't know the Japanese segment as well and whether it's viewed as more discretionary or more occasion-based but a lot of restaurant investors have -- well, I'm surprisingly pleased with how resilient the industry has been this year. There was a little bit of a slowdown in August and September, maybe for the industry, and there were concerns that maybe consumer headwinds had finally taken hold. But more recently, the industry seems to have recovered a little bit, whether it's a return to seasonality or what not. So I'm just wondering, just based on looking at your 54 units and not reading the macro, how would you describe the health of the U.S. consumer?

[Foreign Language]

Certainly, we're not immune for the macro environment. But we do believe that we're among the best position, if not the best positioned to survive and thrive in such an environment. When there are macro pressures, people typically reduce frequency. So, when people are used to going out 4x a month or 5x a month, and now they're going out 2 or 3x a month. They're that thoughtful about where they want to eat and you can roll a bread at home, you can put a pizza in the oven at home, you can grill a steak at home. Nobody makes sushi at home. Certainly, nobody has revolving sushi at home. And so, it's very easy for us to be top of mind, and it's one of the core reasons that we maintain such strong traffic. Another part is the benefit of scale. With our purchasing power, we're able to absorb inflationary costs much better than the average mom-and-pop. We've done a menu analysis of our core markets, and they're charging approximately double what we are. If we're talking 350 for 2 pieces of salmon, they're charging $7 or $8. And so for consumers, I mean the choice is obvious. One of the things that I like to tell the team, too, is we can control what we can control, and that's our quality of service and the quality of our food and the guest experience. And as long as we continue to do that, and we've hit on all those cylinders for the last year that I've been with the company even prior, people are going to continue to come back. And as you know, we had 5.6% traffic in our fall quarter, which we're very proud of, one of the few concepts had positive traffic in that quarter. So, if we continue to execute at the restaurant level, people will keep coming in. And I'm very bullish if we're going to continue that positive traffic for the future. And that 5.6% traffic was lapping 14% traffic the prior year. It was not an easy comparison.

Right. And as you think about fiscal '24, I think you gave us guidance in early November, so just a few weeks ago, but it seemed like it was -- correct me if I'm wrong, but implied kind of mid-single-digit comp growth for fiscal '24. I'm just wondering what are the components like over the next 12 months? Like how do you see that comp components between traffic and pricing and check?

Certainly, we're not immune for the macro environment. But we do believe that we're among the best position, if not the best positioned to survive and thrive in such an environment when there are macro pressures, people typically reduce frequency. So, when people are used to going out 4x a month or 5x a month, and now they're going out 2 or 3x a month. They're that thoughtful about where they want to eat and you can roll a bread at home, you can put a pizza in the oven at home, you can grill a steak at home. Nobody makes sushi at home. Certainly, nobody has revolving sushi at home. And so, it's very easy for us to be top of mind, and it's one of the core reasons that we maintain such strong traffic. Another part is the benefit of scale. With our purchasing power, we're able to absorb inflationary costs much better than the average mom-and-pop. We've done a menu analysis of our core markets, and they're charging approximately double what we are. If we're talking 350 for 2 pieces of salmon. -- they're charging $7 or $8. And so for consumers, I mean the choice is obvious. One of the things that I like to tell the team, too, is we can control what we can control, and that's our quality of service and the quality of our food and the guest experience. And as long as we continue to do that, and we've hit on all those cylinders for the last year that I've been with the company even prior, people are going to continue to come back. And as you know, we had 5.6% traffic in our fall quarter, which we're very proud of, one of the few concepts had positive traffic in that quarter. So, if we continue to execute at the restaurant level, people will keep coming in. And I'm very bullish if we're going to continue that positive traffic for the future. And that 5.6% traffic was lapping 14% traffic the prior year. It was not an easy comparison.

Right. And as you think about fiscal '24, I think you gave us guidance in early November, so just a few weeks ago, but it seemed like it was -- correct me if I'm wrong, but implied kind of mid-single-digit comp growth for fiscal '24. I'm just wondering what are the components like over the next 12 months? Like how do you see that comp components between traffic and pricing and check?

[Foreign Language]

Well, we haven't provided formal comp guidance, absolutely, it's one of our goals to continue to produce positive comps ideally, bolstered primarily by traffic. We think that's indicative more of the health of our company and the longevity of our company, the portability of our company than comps that are driven by pricing. Certainly, we have a great pipeline of marketing efforts. But we also believe that we have a number of tailwinds in looking at the sort of trends that other restaurants are concerned about in earnings calls, one would be GLT 1. We think that as people are making more decisions based off of health concerns, we are perfectly positioned for this. I don't mean to single out of company, but just for the ease of comparison, a big back is 590 calories. 2 pieces of Tuna sushi in our restaurant is 70 calories. I had to ask our purchasing effort officer, if I was right because I couldn't believe it. And so, if GLT becomes more and more popular, we just stand to benefit. The other would be the FAST [ Act ]. And I bring this up because we've 35% to 40% of our restaurants in California. Our average check is $26, which is in line with casual dining.

For those that aren't familiar, the FAST Act applies to units that are changeover 100 units. And their definition for Fast food is places where you pay before you eat. And so given that that's not the case for us, even after we exceed 100 units, this is not going to apply to us. But for all the QSRs, they're going to have to raise their minimum wages from $16 to $20. And I'm sure you guys have seen the headlines where people are freaking out about $18 Big Mac. That $18 puts us in spinning distance of our $26 average check. And so I think, I couldn't be happier about these tailwinds.

And also, Jeff, just back on your original question to talk about our pricing philosophy in terms of how much price is in our comp. We don't take price and it's not our philosophy to take price to chase comp or margin. Really, what we do is we take price as a defensive measure against anticipated or current rising costs, operating costs such as labor inflation and our wage food inflation. So, it's kind of hard to quantify how much we believe will be price versus mix versus traffic. But like I said previously, I'm pretty confident that our positive traffic trends will continue.

[Foreign Language]

To add on to my earlier comment about the FAST Act in our California locations, our back-of-house employees are eligible for tips, and so they're already making more than $20. It's also a highly automated kitchen. It's easy to work. I can't imagine anybody going from one of our restaurants to QSR, where they're going to have to do more work for less pay. And so, we're not expecting the same labor inflation that other chains are.

That's encouraging considering all the discussions we've had about FAST Act. It seems like you're in a pretty good position relative to peers. We talked about comp growth, but I'd be remiss if I didn't spend even more time on the unit growth because that is the primary driver of your top line with only 54 units doing 22%, 24% type unit growth north of 20%. It's only 10 or 11 or 12 units, I think, for this coming year, you go to 11% to 13%, which would be 22% to 26% unit growth; how do you arrive at that? I mean it seems like tell me if I'm wrong, but you could probably do a lot more or you could justify doing a lot less. But how do you think about -- like how did that come in to be the right number on a larger base? Is that a sustainable promise? Or how do you think about that coming off such a low base?

[Foreign Language]

In terms of setting unit growth pace, a lot of this is informed by Jimmy's experience in Japan. I mean going from 30 to 180 units, it gives you a really good idea of what is the appropriate growth case. And we've got 3 parks as a guiding philosophy. We think of this as 3 gating factors. One would be liquidity with our capital raise in April. We've an abundant balance sheet, that's not an issue with the brand recognition that we have among landlords site selection is better than ever before. So that's our second gating factor. The third is our management pipeline. And so that's really been the major focus for ourselves for the last 2 to 3 years. One of the reasons we hired a new COO, hired our first CPO. I'm sure if you go back to our earnings calls we mentioned, you'll see that that's something that we mentioned every time. But one of the reasons that our stock has performed so well is that we have more than doubled our unit base. We've gone from 3 states to 15, and yet at the same time, we've improved our unit-level economics. And so, we could -- just as an example, say that we're going to do 40% unit growth. But if our restaurant level operating profit market in small part, nobody is going to be happy about that. And so, I feel like we're threading a needle and doing it. We're very pleased with what we've accomplished so far.

One of the areas that I've said that we would invest in further also as management recruiting, and we put a lot of money and a lot of time into our recruiting efforts. And it's even over the last 6 months, we've increased substantially our pipeline and where we are, not only for new restaurants, but also existing restaurants, fulfilling any vacancies that we may have there. So, our human resources team has done a really, really good job increasing those efforts along with our investments we've put into that.

So if you were to open 12 units on a base of 54% in the low to mid-20% range, how many managers or however you define individual store level operator, but maybe you have in the pipeline that you'd say are ready to take on the responsibility and presumably when they do so, I mean, that person is getting moved just see it a lot of disruption as you open up a lot of stores in terms of the transporting of leadership that's ready to handle that responsibility.

It is. So I'd say the answer, not to give a number, but the answer is enough. But what I would say is that the majority of our units right now are in single unit markets. For every sport that we open, we have 1 general manager, 3 assistant managers. With the single unit markets, we're having people fly out of state for maybe 2 to 3 months at a time, which leads to greater attrition. Now that we're going from a 50-50 split from existing and new markets to a 75-25 split of existing to new markets. It becomes that much easier to recruit and build the second cohort of labor. And that's what we've seen every time we've done in fills and that's what we expect with all of our markets.

Well, we've got another 5 minutes or so. I've got a lot more questions, but figured I would open it up to see if there's any questions in the audience. I think we have a lot here.

I have three questions. One, do you describe yourself as casual? Or do you describe yourself as fast casual?

We describe ourselves as casual dining.

By the way, I'm the person that wrote the definitions.

So maybe you could tell us.

No, you would fit casual because you [perfect] the divide line and it's very bright, and I worked with the labor department; it used to go by types of food, and how big the menu was. And then that really didn't work anymore. And so I looked at it from service and there's restaurants that either you pay before or you pay after. And everyone can understand that. So that's how it happened. You're competing with suppliers who basically operate out of supermarkets. So do you think having a restaurant is a different occasion and a different experience. And the third question is, do you also have takeout?

[Foreign Language]

So to answer your third question first. We do offer takeouts.

[Foreign Language]

Yes. And we do see the supermarket sushi as a fundamentally different occasion. We see our white space potentials being more than 300 units. There's still abundant space. There's a rising tide races all ships. Sometime down the line, entry into grocery stores might be attractive to us. But at this point, there's so much money to be made during our bread and butter that we want to keep our eye on the price.

Yes. I was just looking at the competitive situation.

[Foreign Language]

So I am going [to comment on] competition, we're extremely pleased to say that when we were talking about Revolving Sushi, it's not that there hasn't been competition that we've seen competition come and fail. There are no chains that have double digits. The year that we went public, there was a chain in the Pacific Northwest called Blue C. They went bankrupt the year that we went public. There's in the U.K., there's a chain called YO! Sushi They used to have 100 units. I think they've shrunk to 70. They opened 5 on the East Coast. They've closed the mall and they've given up on the revolving sushi there.

I'm familiar with them.

Great. And there are four major evolving set changes in and all four of attempted entry into the United States. We're the only ones that have found any level of success. The rest have refocused their efforts on Asia. I feel that we've built an exceptional defensive, not just with the technology, but with the 10-year incubation period that we spent really learning the cultural nuances of the United States before we decided to go public.

I mean, you are smaller-cap in nature. you're a newer brand for a lot of investors to get comfortable with. I'm sure there's a lot of misunderstanding. But what would you say is the biggest question you get or just something we'd say, you know what, we need to clarify that because you're thinking of it one way and we think of it somewhat totally different.

[Foreign Language]

This isn't so much a misconception as much of an opportunity for us to clarify our corporate goals. But especially with our restaurant level operating profit margins having improved substantially from the IPO to now, people are asking us, how can we get to 25% get the 30% restaurant-level margins. And that's just not a goal for us. We see the real opportunity as corporate-level profitability, which just comes from a greater scale. And certainly, now that we're beginning a new process of infilling, we expect regional G&A benefit. We expect just a greater leverage against fixed costs. But obviously, infilling is going to have a degree of headwinds, but that's perfectly within our plan. And we want people to be focused on the corporate profitability as opposed to short-term changes in restaurant-level operating profit margins. Of course, we have many technological initiatives to continue to grow that, but really, the opportunity is just in the system-wide growth.

Understood. Well, it's a new business model for a lot of people, but it's definitely very intriguing. We've finished our time, but our investors that are interested. We want to thank Jimmy, Jeff and Ben for joining us and Kura Sushi more broadly. Thank you very much.

Thank you for having us.