Kura Sushi USA, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Cura Sushi USA, Inc. Fiscal Fourth 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, November 16, 2020. On the call today, we have Hajime Uba, President and Chief Executive Officer, Koji Shinohara, Chief Financial Officer, and Benjamin Porten, Investor Relations Director. And now, I would like to turn the conference over to Mr. Porten.

Thank you, Operator. Good afternoon, everyone, and thank you all for joining. By now, everyone should have access to our fiscal fourth quarter 2020 earnings release. It can be found at www.curricyshi.com. A copy of the earnings release has also been included in an AK 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'd like to turn the call over to Jimmy.

Thank you, Ben, and thank you everyone for joining us today. I hope everyone is staying safe and healthy. Like our last quarter's earnings call, our discussion today will mainly focus on a business update and our pandemic strategies. However, if you do have specific questions about our fourth quarter financial results, we will be happy to answer them during Q&A. As many of you likely remember, as official guidelines in mid-March and many others. As conditions allowed, We began the process of reopening our stores in late May, and by the end of our fiscal quarter, we were able to open 23 out of 25 restaurants. Keep in mind that our restaurants have been hampered by various COVID capacity restrictions, which is reflected in this quarter's sales. You might remember that in California, which contains roughly half of our restaurant base, Governor Newsom issued a restriction on all indoor dining beginning on July 1st, and because this restriction was in effect throughout the fourth quarter, our California stores operated largely on a two-go and outdoor seating service basis until restrictions were relaxed in certain counties in September. Outside of California, most of our restaurants were operating at 50% seating capacity during the fourth quarter, and we have been very excited to see solid demand from our guests for our differentiated dining experience as we reopened our dining rooms. In Texas, we saw significant improvement in September with the return of the full crew experience and the seating capacity increased to 75%. With our Q4 comps in Texas were negative 60%, Our comps for September were negative 38%, and our October comps improved to negative 24%, which we think is indicative of the recovery we can expect in regions with reopened indoor dining rooms and the full-clue experience. We saw another example of this with our recent new restaurant opening in Fort Lee, New Jersey. are subsequent to the end of the quarter, where sales levels have reached 50% to 60% of our pre-pandemic system AUV, in spite of New Jersey's 25% seating capacity limitation. As I noted, a significant part of our consumer appeal is our ability to provide guests with a multi-sensory crew experience in our dining rooms through the use of our revolving conveyor belt our on-demand ordering screen and express belt, our Mr. Fresh Dome, and our Big Club on Rewards machine. You can imagine this experience is almost impossible to replicate in full due to current restrictions. Our most significant headwinds have been in California due to a system-wide ban on conveyor belts, which has resulted in the loss of a signature element of the crew experience. as well as the front of house labor efficiencies that our conveyor belts provide. To mitigate the loss of in-store sales, starting in late July and early August, we implemented several initiatives to supplement our two-year service, including limited outdoor seating in many of our California restaurants and the system-wide rollout of online ordering and delivery options through GrabHouse. As a result of our focus on off-premises dining, including GrabHub implementation, we were able to grow our off-premises mix to 17% for Q4. This compares to our historical off-premises mix of around 1% of sales. Additionally, by the end of the fourth quarter, we had 10 restaurants in California with outdoor dining spaces. While we were able to recoup some of the lost sales, as you can imagine, we are eager to bring back the Furukura experience to our guests in California as soon as we can. As implementation of efforts such as outdoor dining and our GrabHub listing were completed in August, we began to see the full-month benefit of these new initiatives beginning in September. Our September and October results were also buoyed by the relaxation of dining room restrictions in certain California counties. To provide a comparison between our past quarter and our current quarter, we began our FY24 quarter with only three open dining rooms, but today we have 18 restaurants that offer in-store dining. While our Q4 pumps were negative 73%, We've seen consistent comp improvement as we've entered our new fiscal year with September comps of negative 53% and October comps of negative 44%. Notably, we've achieved close to 30% sequential system-wide revenue growth in September in spite of August historically being our strongest month. These strong results continued into October which saw further system-wide revenue growth of 20% over September. We are continuing to see monthly improvements in our off-premises sales business as well. While our Q4 GrabHub sales were only $35,000, we were able to grow our GrabHub sales to $84,000 in September, bringing our total off-premises sales to $350,000 for that month. In October, our off-premises sales continued to grow, with off-premises sales of $405,000, $123,000 of which were from GrabHub. These early results have been very encouraging, and we are exploring working with other channels to expand our digital footprint and mitigate margin pressures from third-party fees. We are currently running an in-store pilot for online ordering through Square and pending results we plan to expand this system-wide. Through Square, we will be able to offer online ordering through our homepage, offer mobile ordering through our waiting app, and eventually provide contactless service and table-side payment for our dining room guests. Our full client experience have been one of the drivers of our industry-leading pre-COVID unit economics, and operating our restaurant without this has been a challenge. However, we feel good about the demand for Kura Sushi when our dining room is available, and we continue to look for ways to deliver a great guest experience in spite of these limitations. In addition, due to the steps we've taken at the onset of COVID, including retention of store managers and critical kitchen staff, we believe we are well positioned to ramp up our operations swiftly and efficiently when indoor dining restrictions are lifted and seating capacity limitations are relaxed. Regardless of our restaurant capacity, our main goal continues to be the health and safety of both our guests and our team members. To further promote a safer environment and give our guests peace of mind, we have taken several steps for each of our restaurants, including personal protective equipment for our team members, enhanced cleaning processes, social distancing, partition between booths, and team members' health checks prior to the start of each shift. As we mentioned on our last call, we continue to implement a customer survey as part of our check-out process, focusing on our COVID-19 safety procedures. To date, their response has been overwhelmingly positive. Let's quickly discuss our development efforts. Subsequent to the end of the fourth quarter, we opened our Fort Lee New Jersey restaurant in September, and our Koreatown Los Angeles and Washington DC Restaurant in November. We currently have four stores under construction, including one that may end up opening in early fiscal year 2022. All in all, we still expect to maintain our stated goal of a 20% unit growth CAGR over a five-year period, which began in fiscal 2019. But as you can imagine, in the current environment, there are a number of factors and many others. In terms of liquidity, I would like to reiterate how fortunate we are to have entered this challenging time with a capital portion that can sustain our company and our growth plans. As of the end of the quarter, we had $9 million in cash on hand and no debt. We have also increased our revolving line of credit to $35 million from Kurasu Japan, along with an extension of the payback period from one year to five years. With the expansion of our revolver, our capital portion provides a solid runway, not just for supporting the company through the pandemic, but for continuing to execute our growth plan. With our planned capital expenditures for the fiscal year 2021, we have just begun drawing down on our revolver. As always, we appreciate the support of Kureja TAN and their confidence in the long-term success of our business. Our fourth quarter weekly expenditures of approximately $850,000 per week was within our expectations. and we expect our weekly catchment rate to be approximately $800,000 for fiscal Q1 2021. Our expected Q1 burn rate is higher than our burn rate expectations for subsequent quarters during this fiscal year as our D&O insurance payment falls on the first quarter. Lastly, due to the ongoing certainty driven by COVID-19, We will not issue financial guidance for fiscal year 2021 at this time. In closing, I would like to thank all of our team members for their tireless efforts in serving our guests during this challenging time. With strong pent-up demand and solid financial footing, we are excited about the long-term growth opportunity of our business and will remain prudent as we navigate through this challenging environment. 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. Operator, please open the line for questions.