Good day, ladies and gentlemen, thank you for standing by. Welcome to the Kura Sushi USA, Inc., fiscal second 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, April 14th, 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. 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, 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. To those of you who have been impacted directly by COVID-19, I hope for a speedy recovery for you or your loved ones. This call was scheduled for what would normally be a discussion of our fiscal second quarter financial results and ongoing operating initiatives. As you know, these are not normal times, so I'll 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 forecast expectations that we provided on our fiscal first quarter call. Exiting the second quarter, which ended on February 29th, we felt very good about the momentum of our business and ongoing operating initiatives. As news about COVID-19 began to spread, we started to see a slowdown in sales across the system, particularly in our West Coast restaurants. Our initial focus was to manage store labor hours. As an increasing number of state and local governments issued new guidelines for public activities, it quickly became apparent that business as usual was a thing of the past.
As these guidelines featured to mandatory shutdown of non-essential business, we made the difficult decision on March 18th to close all our restaurants system-wide. While many food service restaurants have moved to takeout and delivery services, we believe our technology-enabled concept with a revolving Kura Sushi service model and a distinctive multi-sensory dining experience would 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 has forced some difficult decisions. While we were able to continue to pay hourly employees up until April 4th through the employee emergency relief fund that we established, they are currently furloughed. Our kitchen staff is the exception, as they will remain on payroll. We made this decision because we believe the near-term expense of retention will be less than the cost of retraining staff and loss of sales from delayed reopenings. To support our team during this difficult time, 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. We also plan to offer return bonuses to help ensure the continuity of our restaurant teams.
With regard 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 rent obligations. Given the overall fluidity 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 non-essential operating expenses, including the furlough of a modest group of support staff. With regard to our corporate operations, our thought 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 development 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, New Jersey, Koreatown in Los Angeles, Washington, D.C., and Sherman Oaks, California, which are currently in a holding pattern, 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 recommendations regarding safety and social distancing. Finally, I have two additional items to note. First, we have applied for a Paycheck Protection Program loan under the CARES Act, which, if successful, we would apply largely to payroll costs. Under the terms of the plan, we plan to spend the loan funds on expenditures that would maximize forgiveness. Second, last week, Kura Sushi, Inc., our parent company, agreed to make available to us a $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 plan to do so in the immediate future.
We very much appreciate the support of Kura Sushi, Inc. and their confidence in the long-term success of our business. Overall, we are very fortunate to have entered this unique situation with a strong capital position. As of today, we have approximately $24 million in cash on hand and no debt. With all of our restaurants 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 rent relief. As you are well aware, the duration of our 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 lasts for an extended period of time.
One final reminder, due to the 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 are well equipped to weather this 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 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.
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 uncharted territory. This concludes our prepared remarks. We are now happy to answer any questions you have. As a reminder, during the Q&A questions, I may answer in Japanese before my response is translated into 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. If you would like to ask a question, please press star one on your telephone keypad. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove yourself from the queue. One moment, please, while we poll for your questions. 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.
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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.
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As Jimmy mentioned in his prepared remarks, we do believe there are still several levers that we can pull to materially bring down the burn rate.
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We've applied for the Paycheck Protection Program, and we want to make a best faith effort to use the funds as intended, which is keeping people on payroll. 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're keeping more employees on payroll.
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From a bird's eye view, we've furloughed some of our employees, but the remaining employees are staying on at full pay.
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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 a very difficult decision, but we would make additional furloughs.
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This $1 million per week cash burn rate assumes that we're going to be continuing with construction for new units and renovations during our store closures. 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.
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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. We'd like to address that right now.
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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.
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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. Our plan to continue renovations and new unit development assumes that the scenarios will be either the pandemic ends earlier than expected or the pandemic ends around the time that was originally expected.
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The reason that we're going with the former assumptions is that we want to maintain our restaurant level contributions. If we were to close post pandemic, after we've reopened to do the renovations, that would have a material impact on our restaurant level contribution.
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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've established with our parent. We proceeded assuming that one of the two earlier scenarios will play out. That being said, if it becomes clear that the pandemic is going to continue longer than expected, we would be able to stop construction and stop any capital expenditures. I hope that clarified things.
Our next questions come from the line of Andrew Strelzik of BMO Capital Markets. Please proceed with your questions.
Good afternoon, 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. 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 ?
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As soon as we decided to close our stores on March 18th, we began discussions with our landlords for 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.
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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. We've been very focused on getting the PPP processed. Just to add onto that a little bit, the $1 million cash burn rate assumes full occupancy costs.
Yeah. Great. Okay, that's helpful. Then, I understand the reticence to move towards the more of the takeout model, given the inability to replicate the experience, which is a key piece of the brand. I'm just wondering, you've talked about takeout or maybe delivery as more of a longer term opportunity. Have you reshuffled at all your thinking around prioritizing that? Have you moved it up at all, just given how things have unfolded? Did you consider this an opportunity to accelerate that at all, or you just ruled it out immediately?
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We've always felt that our guests come for the entire dining experience. Our historical focus has been on providing the best possible in-store experience. We haven't considered doing to-go, and we aren't currently considering doing to-go or delivery. That being said, given that there are so many unknowns with this ever-changing situation, we haven't ruled anything out, and we want to maintain maximum flexibility.
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As some additional context, we did keep some of our stores open for to-go sales before we made the decision to close our entire system. As I'm sure you're aware, given that dining space or eating in has been largely banned across the country, off-premises sales are more competitive now than ever. We weren't able to make enough sales to justify keeping those stores open just for to-go. We don't have existing relationships with third-party services, and we don't have the existing infrastructure for to-go. We felt that it was better to invest our time and resources into other efforts.
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What we'd 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 with the new store construction and store renovations, or if it would be in-store technology such as the drink ordering systems and the tableside touch panels. We're implementing CrunchTime, which is our new back-of-the-house platform. We are very aggressively using this time in a way that we think is efficient.
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We felt that the best course of action was to invest in these efforts as opposed to investing in trying to enter the most competitive off-premises market we've ever seen. Our goal right now is to position ourselves to emerge in the best possible position, to make ourselves ready for recovery. We think that this is going to make that easier.
Okay, I appreciate all the color there. 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. I guess when you think about reopening the stores and getting running again, what's the biggest challenge in that process?
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We anticipate that the 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. What we would like to say is that our very top priority, and th is is true when we closed our stores, is the health and wellbeing of our employees and our guests. The very last thing that we w ant to do is to compromise the trust that we've established between our guests and our employees. That's going to be the primary consideration more than anything else.
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Once it's abundantly clear that it is safe for people to reenter open society and the restaurants can safely reopen, we would evaluate whether or not if opening our stores would help us control our losses more effectively than keeping our stores closed. If that were the case, we would reopen.
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It goes without saying that even after we get federal or local lifts on the stay-at-home restrictions, we're still going to implement additional safety and health measures in our restaurants. 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. It's nice to hear from you.
Our next questions come from the line of James Rutherford of Stephens. Please proceed with your questions.
Hey, thank you for taking the questions here. I've got two. 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 stores.
This is a question to our CFO. We have no concern about our main suppliers such as JFC, Mizkan, and Mu tual. The leadership gotten confirmation from them that their financial health is extremely strong and there's no impact on t heir I mean, that these few months won't impact them.
Okay. Thank you for that. 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 kind of authority you're going to watch as you look at this? I ask the question because there's a variety of voices talking about when to reopen the state. I think Texas is trying to be pretty aggressive relative to other states. You've got the federal versus state kind of conflict as well. I'm just kind of curious what signs you will watch when you decide to reopen.
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While 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. We'll be evaluating on a unit-by-unit basis according to the local circumstances in terms of reopening.
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The other thing would be that we don't expect our sales after reopening to immediately be at pre-pandemic levels. We expect a lower rate of sales and a steady ramp afterwards.
Excellent. 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 email addresses. Mig ht 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?
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James, it's funny that you mentioned this because this is a very unique situation. While typically in any other circumstance, we would do an advertising effort that would be similar to a new store opening. Given our responsibility to the communities, it would be irresponsible of us to have the sort of crowds that are typically drawn by our store openi ngs. As you mentioned, our first step would probably be to reach out to our existing guests through our rewards e mail database and sort of monitor the traffic and go from there.
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The other would be, we would need to consider how many employees we retain and the workforce levels when we advertise for our re-openings.
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 your stores have pretty long wait times. I suspect when we get back to somewhat of a normal, you probably won't have a lot of people just standing around in the lobby. What are you guys anticipating as your capacity levels when we get back over the next, call it, month or two? Do you anticipate you'll be at 50% capacity, 60%? I guess I'm trying to understand what you're modeling. Also, is there a level of capacity that you would need to get that cash burn rate as close to zero as possible?
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Given the level of uncertainty surrounding consumer sentiment when the pandemic is completely over, we don't want to give guidance or expectations. We do think that the best course of action is to prepare for everything and to build differ ent strategies for different traffic levels.
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As Jimmy mentioned earlier, after employee and guest safety, 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 opening the stores as opposed to keeping them closed. We'll evaluate given the situation, and we'll constantly reevaluate as this progresses and make the best decision for the long-term health of the company.
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Given that we're 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.
All right. 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 you for joining us today. Please stay safe and we look forward to the 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.