Day, ladies and gentlemen, and thank you for standing by. Welcome to the Kurosushi USA Inc. Third Quarter 2020 Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, July 14, 2020.
On the call today, we have Jimmy Uva, President and Chief Executive Officer Koji Shinohara, Chief Financial Officer and Benjamin Korten, Investor Relations Manager. I would now like to turn the conference over to Mr. Korten. Thank you. You may begin.
Thank you, operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal Q3 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 ks we submitted to the SEC.
Before we begin our formal remarks, I need to remind everyone that part of our discussion 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 Jim.
Thank you, Ben, and thank you, everyone, for joining us today. As most of you know, our restaurants have been largely closed during our fiscal Q3. As a result, we would like to spend today's call providing you with an update on our business operations and initiatives. If you have specific questions about our Q3 financial results, we will be happy to answer your questions during Q and A. As we discussed on our last call, we entered 2020 with solid momentum across our restaurants that continued into January February of this year.
March was a challenging month aggressively from industry as news about COVID-nineteen began to spread. On March 18, as official guidelines switched to mandatory shutdown of Indes front dining, we made the difficult decision to close all our restaurants system wide. From the start of the pandemic, our primary concerns have been the safety of our guests, the ongoing health and welfare of our team, our liquidity and our ability to quickly and efficiently resume operations when the time was right. To support our team during this difficult time, we maintained payroll for all employees through April 5 and extended payroll for all kitchen employees through May 9. We have also continued to pay the full cost of health insurance for all of our fellow employees and stayed connected with our fellow hourly team members throughout their absence.
In addition to our store managers, critical kitchen staff members have remained on payroll as we believe that near term expense of retention will be less of the potential of reduced sales due to understaffing. Finally, all store level employees that were followed in April were eligible for a return bonus in June to further incentivize their return to Kura. These actions have allowed us to bring back our people quickly and open our restaurants with minimal delays. Thanks to our team engagement efforts, fewer than 10% of our employees exit the company between the end of March to early July, which has positioned us to ramp up swiftly as indoor dining restrictions are lifted and seating capacity retention are relaxed. As offshore restrictions have been lifted across the country, we have opened our restaurants promptly and successfully.
However, reduced the capacity in accordance with local government requirements. We began the reopening process on May 22, and by the end of May, we had reopened 7 of our restaurants. 14 additional restaurants were opened throughout June, and as of today, all Kua Sushi restaurants are open for business. However, as you are likely aware, Governor Newsom of California announced a reflection on all indoor dining on July 1 for a minimum of 3 weeks. As a result, all of our California stores, most of which have reopened with limited indoor dining, are currently open for 2 door service only.
We are now actively working on building out our off premises business and infrastructure for all of our platform. We have taken a number of steps to create a safer environment in our restaurants, such as providing personal protective equipment for our team members, enhancing cleaning processes, maintaining social distancing and performing team members health checks before the start of each shift. The health and the safety of our guests and the team members will always be our top priority. As part of our checkout process, we have a customer survey, which is now focused on our COVID-nineteen safety procedures. I'm pleased that by the end of June, we had received more than 15,000 GET responses and over 96% rated our efforts at 4 or 5 out of our 5 point scale.
Considering our restaurants were closed during most of the Q3, I would like to discuss some results for the month of June. Overall, we've been pleased with the initial results of our openings. However, as you might imagine, the suddenness of the reopening and the closing policy changes in our various markets as well as other COVID-nineteen related issues throughout the country have made recent sales tolerance more challenging to assess. Due to our staggered reopening schedule in May June, only 7 stores were opened for the entire month of June. Of these 7 stores, 5 stores were in our comp base and saw same store sales decline of 48.6%, largely reflecting the 50% shipping capacity restrictions for these stores.
We are extremely encouraged by these comps, which we feel illustrates the strong consumer demand for our unique learning experience. We believe our re openings are moving in the right direction and reopening our dining room has allowed us to better manage our pandemic related losses. Now I would like to provide a brief update on our development efforts. As most of you know, we began the year with the expectation of opening 6 new restaurants in fiscal 2020. 2 new restaurants, KD, Texas and Greenville, California, opened during the fiscal Q2 prior to the temporary shutdown.
However, as we mentioned during last quarter's earnings call, our opening schedule has been slowed due to the pandemic. All restaurants were under construction in mid March, Portland, New Jersey, Colletown, New South Wales, Washington, D. C. And Summer of California. After a brief interruption, all 4 have resumed the construction and we have started work on our Bellevue Washington site as well.
Portly and Koreatown are both very nearly complete. Also, their actual opening date will depend on the coronavirus situation in their respective areas. During our temporary closures, we also completed renovations for 7 of our restaurants. By completing these renovations during the pandemic, we are able to avoid the sales losses associated with closures for renovations during the non pandemic periods. I would like to announce the latest addition to our executive team, Robert Krueger, our 1st Chief Development Officer.
Most recently, Robert was a Senior Vice President of Development for Respira, where he oversaw the company's growth from 140 to 350 units. Prior to Brex Pizza, he spent 6 years at Panera Bread, ultimately becoming the Senior Manager of Franchise Development and 12 years at The Pandales Land Group, where he was Vice President of Real Estate and Strategy. Robert has been responsible for over 1,000 store openings with nationally successful brands, and we are incredibly excited about the impact we believe it can have on our long term growth. Speaking to our liquidity, despite the ongoing uncertainty, we are very fortunate to have entered this unique situation with a strong capital position. As of today, we have approximately $14,000,000 in cash on hand and no debt.
Our $20,000,000 revolving line of credit from Credit Suisse Japan remains secure. Although we have not borrowed any amount against it, we will likely begin tapping our revolver to fund our capital expenditures regarding the upcoming fiscal year. We appreciate the support of Kurejatang and their confidence in the long term success of our business. Considering Governor Newsom's announcement yesterday concerning additional COVID-nineteen prevention measures, which include more expansive dining provisions in California, it appears unlikely that we'll be able to reopen our California dining rooms prior to the end of our fiscal year. During our California dining room closures, we expect our weekly cash run rate to be in the area of $800,000 to $850,000 which includes $400,000 of CapEx.
Once we are able to reopen our California restaurant, we would expect this weekly run rate to be reduced by approximately $50,000 Although we've been able to reduce our operating losses by the opening of our restaurants, these gains have been offset by the additional capital expenditures associated with the construction of 5 new units previously mentioned. One final reminder, due to the uncertainty driven by COVID-nineteen, we will not issue financial guidance for the remainder of fiscal year 2020 at this time. Thank you for joining us this afternoon and for your interest in Kravis USA. We were extremely excited about the potential of our business before the threat of COVID-nineteen, and we remain equally confident that when this crisis passes, we have a long runway for opportunity ahead of us. Before we open the line for questions, I would like to thank all of our team members for their hard work, flexibility and support as we navigate this uncharted territory.
This concludes our prepared remarks. We are now happy to answer any questions you have. As a reminder, during the Q and A session, I may answer in Japanese before my response is translated in English. Please bear with us. Operator, please open the line for questions.
Thank you. At this time, we will be conducting a question and answer session. Our first question comes from the line of Andrew Strelzik with BMO. Please proceed with your question.
Hey, good afternoon. Hope everyone is doing well. My first question is just on the recent sales trends. It's helpful that you gave those June numbers, but I believe they were just the June numbers. And I'm curious if you could maybe give an update on the stores that have remained open for dine in that are in the comp base?
How the sales have trended since or even those outside the comp base kind of how the trajectory has been more recently? Sure.
Thank you, Andrew, for your question. Please allow me to answer in Japanese.
So looking at the our performance over June July, for the restaurants where we've had where we've been able to keep our dining rooms open with a 50% seating capacity limit, we've seen comps and sales levels be approximately half of pre pandemic levels or the past year more or less mapping perfectly onto the capacity limits. That being said, California is now currently all of our restaurants in California are currently open for TUGO only. So unfortunately, we have seen a sales decline in California relative to pre pandemic.
Okay. That's very helpful. I'm sorry, go ahead.
If I just add a little bit more color, in terms of our 2 Go sales, one of the reasons that we decided to keep our 2 Go stores open this time as opposed to March is when we made our mid March store closures, we kept a couple of our stores open for TUGO only. But our June's TUGO sales, even for our stores that were open for indoor dining, were significantly outpacing those sales that we saw in March. And so we are seeing an upward trend in that respect.
Okay. So that brings me to my next question. I wanted to ask a little bit about the off premise strategy generally. I mean, it seems like a little bit more of a push behind to go. How are you communicating that to the guests?
I think you made some comments about some investments behind infrastructure there. Can you just talk about what that entails? And have you changed your view or thinking at all around delivery? I know it has not been a priority. I'm just curious where that fits in the to go in the off premise picture for you at this point.
So to sort of answer your last question first, we'd like to reiterate that the core of our business remains the our indoor dining experience. And we believe that it's still very popular with our guests as demonstrated by ourselves in our reopen dining room areas.
Go ahead.
So as we mentioned in our previous earnings call, because of our focus being primarily on the indoor dining experience, the last 3 months we've focused on developing the projects that we've mentioned before being the touch panel, drink order system and the tableside delivery I'm sorry, tableside payment system. And given that we've made significant process on both of those, we are we've decided to shift our energies towards off premises. And again, while we think of this as a long term addition to our business, and if there's going to be incremental sales or profitability from that, there's absolutely no reason not to capture that? So in terms of infrastructure investments, our ultimate goal is to build out our own online ordering platform, which would ideally be hosted in an all in one package that would include our wait list app, our rewards program, then our online ordering system. That being said, given the sort of sudden the suddenness of the announcement from Governor Newsom has pushed the timeline forward and now our top priority is to roll out online ordering capabilities as soon as possible.
So we're thinking just in the interest of time that we're going to use this period and we're going to use a 3rd party service to power our online ordering capabilities right now. It's going to be less profitable than having our own in house ordering system just because of service fees. But this is all we're treating all this as like an investment. It's a learning process. We're all every day we're learning more things about how to operate off premises and we're hoping that we can implement all of these new learnings into the development of our online ordering system.
So in terms of your first question about advertising, right now, our orders are limited to in store orders or phone orders. And so the online ordering is the top priority because that would make things vastly more convenient and it's easier to advertise as well.
Can you just I guess the question is where is takeout to go mixing right now and what is kind of the breakeven level there? Can you just give us any sense for how we should think about the economics of that piece of the business? And I'll leave it there.
So looking at June, and this includes our restaurants that were open for indoor dining as well. Our off premises mix was 6.5%, which is significantly higher than our historical mix, which is around 1%. Looking specifically at California, about half of our system had delivered or off premise mixes of around 9% or more.
Okay, great. Thank you very much.
Thank you, Andy.
Our next question comes from the line of Jaeme Rutherford with Stephens Inc. Please proceed with your question.
Hey, good afternoon and thanks for taking the questions. My first one is just on the various kind of ways you can reopen for indoor dining. My understanding is that in certain cases you can open with the Express Belts only. In certain cases, it has to be table service only. So I'm just curious what impact those different statuses would be or the different levels of check or really anything else that you care to speak to on that particular topic?
So in terms of average ticket, so we haven't changed pricing as a result of not having the conveyor belts. But we've actually seen ticket growth year over year, which was a pleasant surprise for So the most onerous restrictions in terms of conveyor belts are in California. And so in those markets, we're not operating our express belt and we did have incremental labor from the additional servers we needed to hire to run the food. But as everybody is aware, California is closed for indoor dining now anyway. So it's kind of a moot point for us.
One thing that was really interesting is that people were very understanding and forgiving of not having the conveyor belts live just because it's the pandemic. But given that this is one of the signature features of our restaurant, we plan on bringing this back as soon as we think the timing is right. We don't want to lose something that's so core to our identity. I spoke to the customer service department and I believe there's only one complaint and that was because a family had driven 30, 40 minutes for the excitement of the conveyor belt and they were a little bit disappointed that we weren't able to provide that. So if this were to if this disuse of the primary belt were to continue for a long time, we do think this would make us a little bit less attractive.
But on the exact flip side, we think that the experiential nature really positions us as a destination restaurant.
Great. That's helpful. And then my second question is on development. Understand there's a lot of moving pieces here, but I believe at one point you had said that the construction on a couple of the up and coming units are nearing completion. And so I'm just curious your view on the possibility that Fort Lee or Koreatown would open this fiscal year or if those would be more likely to open kind of next year and beyond?
So in terms of the construction, both Fort Lee and Cree Town in Los Angeles are completely completed. Fort Lee is just has its final inspection to go through. Cree Town is actively going through the inspection process. And so these stores are largely ready to open. Although like as again, as everybody knows, both in Fort Lee or New Jersey generally in California, indoor dining is prohibited.
And so the dating factor for opening those stores remains these externalities. And that being said, we are hopeful that we'll be able to open at least one of these stores this fiscal year. But again, this is going to depend on the indoor dining restrictions being lifted. So we just wanted to give you some context behind the thinking around our store openings during the pandemic. And our calculations have indicated that as long as we're able to open for at a 50% seating capacity limit, we will be able to secure restaurant level operating profit from those stores.
And so as long as we can have so that's one of the major considerations in terms of the opening timing for a given store.
Great. Thank you, Jimmy, Koji and Ben. I appreciate
it. Thank you, James. Thanks, James. Our next question comes from the line of Peter Saleh with BTIG. Please proceed with your question.
Great. Thanks for taking the question. I just want to come back to the cash burn real quick. It looks like you guys burned through about $10,000,000 or so of cash over the course of the quarter. And if I heard you correctly, I think you're burning another, call it, $800,000,000 to $850,000,000 I believe that was a weekly number that you guys provided.
So what is the thought process behind the cash burn if this environment continues longer than another, call it, 3 months? How do you guys plan to address that? We see a slowing of development? Will you put a halt on development to kind of ease the cash burn? Or will you tap revolvers to kind of move forward on development?
So we just want to make it really clear that the weekly cash burn we gave during the prepared remarks are not they're near term. We do not expect that cash burn rate to continue for the next 12 months. So there are a couple of pressures on our cash burn rate. The first one would be that this burn rate reflects our 14 stores in California not being able to indoor dining. And so that is a downward pressure on our revenue.
The other would be that we've resumed construction on 5 new units. And so so we have a lot of capital expenditures because we've already executed these leases. These are in mid construction before. But the capital expenditures will that remains a lever that we can pull at any point. And the CapEx represents about $400,000 of that burn rate.
So that would be a very material lever for us to pull. And then in terms of the dining capacities, we think it's extremely unlikely that indoor dining will be not allowed for 4 months or 4 quarters. We're hopeful that it's going to be shorter than that. So that pressure from the burn rate to be lifted as well when that happens. So again, in terms of managing the burn rate, the CapEx is something that is completely within our control.
And so it is also the most material market. And so we think there is a lot of room in terms of our burn rate going forward if the situation were to get worse or it became clear that it's going to go on much longer than initially expected.
Understood. Okay. And I appreciate that you guys gave the takeout mix, I think, in June with the off premise mix, if you will. But can you quantify that in dollars? I know there's a lot of moving parts here with pre pandemic and post pandemic AUVs.
So can you quantify what the actual maybe dollar weekly sales were per restaurant in any way on off premise?
So we're go ahead, sorry. So in terms of absolute numbers, for July, we've only been operating for Tugo only for a couple of weeks. And so our advertising pushes haven't really begun in earnest and this isn't necessarily reflective of where this can go. And in terms of June, just the nature of our staggered schedule means that every staggered reopening schedule means that every single restaurant is a different number of opening operating days. And so giving you an absolute number for June as well would also not necessarily give you a meaningful look into what we can do in the future.
That being said, in terms of your modeling purposes, we do believe that we'll be able to capture 10% to 20% of our pre pandemic sales through off premises.
Okay, very helpful. Okay, just last question. Are you seeing or getting any sort of rent concessions or any opportunities to lower your rent expense from landlords? Are you seeing any of that yet?
So our development team has been working very hard on this. And having our new CDO, Robert Krueger, join us has been huge immensely helpful. We're very happy that he's on our team. And so we've been in ongoing negotiations since April. We've negotiated for April, May, June and we're currently negotiating for July.
But for both May June, we received modest abatements and then deferrals representing approximately half of the cash rent expense.
So
one thing we'd like to note is that because we use we book our rent on a straight line basis, this is not going to these deferrals are not going to be reflected on a P and L level.
Our next question comes from the line of Jeremy Hamblick with Craig Hallum. Please proceed with your question.
Thanks, guys. Thanks for taking the questions and providing so much color. I wanted to just start with thinking about your average location and the level of sales like on an average weekly sales level that you need to breakeven. I think you said that you'd open if you had 50% seating capacity. But if you were to make that more granular and just look at the average weekly sales volume that you needed to do to breakeven at
a
So our pre pandemic AUVs are $3,500,000 If we're able to secure half of pre pandemic sales levels, that brings us to about a monthly revenue of $150,000 which would allow us to breakeven.
Great. That's helpful. And then thinking about cash burn and moving forward, the 5 restaurants under construction, I just wanted to confirm that excludes Fort Lee and Koreatown.
As we think
That doesn't include Fort Lee. Sorry to interrupt.
Okay. That's helpful. As we think about I know this is such a fluid situation and it's hard to forecast. But thinking ahead to fiscal 2021 and the unit growth rate that you've maintained, is there a threshold on cash that you need to think about, we're going to back off the CapEx for new unit construction because this is just a prolonged recovery that we hit, whether it's something that you're below $8,000,000 let's say on your cash and you still haven't tapped your revolver, is there a total level of liquidity where you say at this point we want to make sure that we have ample liquidity, we don't want to get in a situation where this is carrying on longer and we're not going to develop new units, is there kind of a level or a range that you have in mind to before you make that difficult decision?
So, Jeremy, that's really been top of the mind. I imagine it's top of the mind for pretty much any other player in the restaurant industry and certainly guiding our thinking and our development strategy going forward. One thing that we can say is that we're very confident that we'll be able to meet or beat the 20% unit growth CAGR that we've been discussing in the past. So in terms of we realized that our development strategy is more aggressive in comparison to the rest of the restaurant space right now. But we have 2 main things that are really working in our favor and is driving us forward.
And one is the ongoing financial support from the parent and their very strong financial position. And the other would be that our calculations have indicated that we're able to catch restaurant level operating profit as long as we're at low 50% or more. And so if one of these factors were to no longer be true, then we would certainly reevaluate.
Understood. That's helpful. Last question is, you've been, I think, very generous relative to your public company and restaurant peers in how you've managed your staff, providing full healthcare benefits and really have waited to furlough really any employees for extended periods. Is that another situation that you would reevaluate at some point? How much of your staff is furloughed at this point, but how do you make that decision moving forward as well?
Just to give
you some context on our the reasons why we were more generous than some of our peers, this was a financially strategic move by us where we believe that being able to maintain high retention rates and being able to reopen immediately when it was the right time to do so or reopen at the exact timing where we wanted to be able to reopen and capture those profits without having to worry about under staffing. The profits we'd be able to capture were more meaningful than the near term And just as a reminder, our lack of furloughing anybody until early April was predicated on the assumption that we would be receiving the PPP loan. And then the situation obviously changed and continues to change. So there's been a pretty material difference. So in May, we did another significant furlough kitchen employees.
We brought them back in June, but July the number of shifts that we need has been significantly cut in California. And so not every employee is working right now. But the cash support is largely done.
Great. Thanks for taking the questions guys and providing all the detail. Best wishes for getting back to normal business soon.
Thank you, Henry.
Our final question comes from the line of George Kelly with Roth Capital. Please proceed with your question.
Hi, everybody. Thanks for taking my questions. So just 2 for you. First, I understand there's all sorts of barriers and kind of issues with getting your guests into a seat. But my question you mentioned on the in response to another question that average ticket has grown.
And I was just wondering if you could expand on that. And what's kind of changed versus February with an average customer? How is as an average guest, how do they look? Are they cautious in general? Or just what have you seen?
Sure. So in terms of the average ticket, while we have seen an increase, we haven't been able to draw a direct conclusion behind what's driving it. In terms of what our guest looks like, we've seen a modest shrinking of our average party size. We're no longer seeing large parties of 5 or 6. And so that's been driving that.
It's possible that fewer kids are coming because there are fewer large parties and children bring down average tickets. And so not having as many children could be one of the reasons that I've heard.
Okay. Okay. Got you. And then second question for me is just about your development pipeline. So you mentioned the 20% CAGR, but I was just wondering if you could be more specific for fiscal year 2021.
And can you talk about any of the sites that you're continuing to you mentioned Washington, D. C. And Sherman Oaks, but what else is on the are you continuing to invest in it with plans 2021
open?
So as some context for everything, we'd like to go over how right now, we have 10 leases that are executed. We expect to open one of those 10 stores this fiscal year and then for the remainder to be distributed over fiscal 2021 fiscal 2022. And the pacing and the distribution is going to depend on what our burn rate looks like as a result of how we did as a result of our sales recovery? And then looking directly towards fiscal 2021, beyond the yes, fiscal 2021, beyond the 5 stores that are actively under construction now, we think these three stores would be the likeliest candidates for a fiscal 2021 opening, which would be Aventura Florida Troy, Michigan and then the Stone Town Galleria Mall in San Francisco.
Okay, great. That's helpful. And I guess I do have one follow-up to that. Any significant changes as you think of just an average your average store in the construction, does all this COVID related stuff cause you to rethink any of that what the box looks like?
So every construction we do is a 20 year investment, given the 20 year leases and the pandemic is not going to last 20 years. So we're a little bit reluctant to make construction related changes related to the pandemic. That being said, and this was already part of our planned pipeline, but we are testing new models that are designed more towards off premises, whether that means a dedicated make line in the kitchen or pickup racks in the front of the house. So that would be the main change that we're considering. And on a cost level, there's not going to be a material difference between a to go a traditional store that's geared more towards to go.
This concludes today's question and answer session. And I would like to turn the floor back over to Mr. Jamie Uba for any closing remarks.
Thank you everybody for joining us today. Please take care and stay safe. Thank you very much.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.