Kura Sushi USA(KRUS) - 2024 Q4 - Annual Report

Part I Business Kura Sushi USA operates 70 technology-enabled Japanese restaurants as a controlled subsidiary, emphasizing an engaging dining experience and growth through new unit development - Kura Sushi USA operates 70 restaurants across twenty states and Washington, D.C., positioned as a technology-enabled Japanese dining concept[11] - The company is a "controlled company," with its parent, Kura Japan, holding 70% of the combined voting power[12] - The core dining model, the "Kura Experience," combines a revolving conveyor belt, an on-demand express belt, and a Bikkura-Pon rewards system to create an engaging, multi-sensory experience[14] - The company's growth strategy focuses on new restaurant development, aiming for a long-term potential of over 290 restaurants in the U.S[17] - The average cash build-out cost for a new restaurant in fiscal year 2024 was approximately $2.4 million, net of landlord allowances[28] Risk Factors The company faces significant risks from inflation, growth strategy execution, geographic concentration, reliance on its parent and key suppliers, and cybersecurity threats - The company is experiencing inflationary pressures on food, labor, construction, and utility costs, which may adversely impact revenues and results of operations[73][79] - Long-term success is highly dependent on the ability to execute the growth strategy, which includes identifying and securing appropriate sites for new restaurants[81] - 47% of restaurants are concentrated in California and Texas, making the company vulnerable to adverse conditions specific to these states[91] - The company relies significantly on its majority stockholder, Kura Japan, for strategic and operational support, and on two major distributors, JFC and Mutual, which accounted for 55% and 34% of food and beverage costs in FY2024, respectively[93][98][43] - As a "controlled company," Kura Japan has significant influence over corporate matters, and its interests may conflict with those of other stockholders[158][159] - The business relies heavily on technology, including conveyor belts and IT systems; any failure or cybersecurity breach could significantly harm operations[105][107] Unresolved Staff Comments The company reports no unresolved staff comments - None[166] Cybersecurity The company's cybersecurity program, based on ISO 27001, is overseen by the Board and managed by IT, with no material threats identified - The cybersecurity program is based on the ISO 27001 international standard and includes risk assessments, employee training, a disaster recovery plan, and an incident response plan[167][168] - The Board of Directors provides oversight for cybersecurity risk, receiving quarterly updates from management[169] - The management team responsible for cybersecurity is led by the Vice President of IT, who has over 20 years of experience in restaurant and technology sectors[169] Properties Kura Sushi operates 64 leased restaurants across 17 states, with an average size of 3,400 square feet and typical 20-year lease terms - As of August 31, 2024, the company operates 64 restaurants in seventeen states and Washington, D.C[170] - All properties, including the corporate office and all restaurants, are leased. Leases are typically non-cancelable with 20-year terms[170][171] - Restaurant formats vary, including in-line and end-cap locations, with an average size of approximately 3,400 square feet[170] Legal Proceedings The company is subject to various legal proceedings, with details incorporated by reference from Note 11 of the Financial Statements - For a description of legal proceedings, the report refers to Note 11 — Commitments and Contingencies in the Notes to Financial Statements[172] Mine Safety Disclosures This item is not applicable to the company - Not applicable[172] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Kura Sushi's Class A common stock trades on Nasdaq under 'KRUS'; the company has not paid dividends and made no share repurchases in FY2024 - The company's common stock trades on the Nasdaq Global Market under the symbol "KRUS"[173] - The company has not declared dividends and does not plan to in the foreseeable future, anticipating that all earnings will be used for business operation and growth[175] - No equity securities were repurchased by the company during fiscal year 2024[179] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2024, sales grew 26.9% to $237.9 million driven by new restaurants, but the company reported an operating loss of $11.5 million and a net loss of $8.8 million due to increased costs Fiscal Year 2024 vs. 2023 Financial Highlights (in thousands) | Metric | Fiscal Year 2024 | Fiscal Year 2023 | Change (%) | | :--- | :--- | :--- | :--- | | Sales | $237,860 | $187,429 | 26.9% | | Operating Income (Loss) | $(11,505) | $332 | (3,565.4)% | | Net Income (Loss) | $(8,804) | $1,502 | (686.2)% | | Adjusted EBITDA | $14,564 | $14,342 | 1.5% | - Sales growth was driven by fourteen new restaurants opened during fiscal year 2024. Comparable restaurant sales increased by only 0.7%[198] - Labor costs increased to 31.9% of sales from 30.2% in FY2023, driven by new restaurant openings and wage rate increases[200] - General and administrative expenses rose by 39.3%, primarily due to $5.5 million in litigation costs and increased compensation[204] - The company recorded a $1.6 million impairment charge on one underperforming restaurant location[205][242] Key Performance Indicators (FY2024 vs. FY2023) | Indicator | Fiscal Year 2024 | Fiscal Year 2023 | | :--- | :--- | :--- | | Average Unit Volumes (AUV) | $4.2 million | $4.3 million | | Comparable Restaurant Sales Growth | 0.7% | 9.5% | | Restaurant-level Operating Profit Margin | 20.1% | 21.9% | | Restaurants Opened | 14 | 10 | Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from commodity and food price fluctuations and inflation, impacting profitability and pricing flexibility - The company's profitability is dependent on its ability to anticipate and react to changes in the costs of food, beverages, and other commodities[244] - Primary inflationary factors affecting operations are food, labor, construction, and energy costs. Increases in minimum wage directly impact labor costs[245] - While the company has partially offset inflation with menu price increases and efficiencies, there is no assurance this strategy will remain successful, especially if competitive or macroeconomic conditions worsen[246] Financial Statements and Supplementary Data This section presents audited financial statements with an unqualified opinion from KPMG, detailing financial position, critical audit matters, and key notes - The independent auditor, KPMG LLP, issued an unqualified opinion on the financial statements and internal controls over financial reporting[250] - The auditor identified the evaluation of incremental borrowing rates for new operating leases as a critical audit matter due to its subjective nature and the company's lack of outstanding debt[259] Balance Sheet Summary (in thousands) | Account | Aug 31, 2024 | Aug 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $61,335 | $89,371 | | Total Assets | $328,522 | $304,659 | | Total Current Liabilities | $34,499 | $29,138 | | Total Liabilities | $165,984 | $140,018 | | Total Stockholders' Equity | $162,538 | $164,641 | - In fiscal year 2024, the company settled legal claims with former and current employees for approximately $5.1 million, related to alleged violations of the Fair Labor Standards Act (FLSA) and state wage laws[349][350] - The company maintains a full valuation allowance of $15.6 million against its net deferred tax assets, as it is not more likely than not that these assets will be realized[357][359] Changes in and Disagreements with Accountant on Accounting and Financial Disclosure The company reports no disagreements with its accountant regarding accounting principles or financial disclosure - None[361] Controls and Procedures Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of August 31, 2024 - Management concluded that disclosure controls and procedures were effective as of the end of the reporting period[363] - Management concluded that internal control over financial reporting was effective as of August 31, 2024, based on the COSO framework[366] - During the quarter, additional controls were implemented in connection with the impairment assessment of a restaurant asset group[367] Other Information No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during Q4 FY2024 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the quarter ended August 31, 2024[368] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[369] Part III Directors, Executive Officers, Executive Compensation, Security Ownership, and Related Transactions Information for Items 10-14, covering directors, executive compensation, and related transactions, is incorporated by reference from the 2025 proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement for the 2025 annual meeting of stockholders[371] Part IV Exhibits and Financial Statement Schedules This section lists financial statements and an index of exhibits, with all financial statement schedules omitted as not applicable or redundant - All financial statement schedules are omitted as they are not required, not applicable, or the information is included elsewhere in the report[373] - The report includes an index listing all exhibits filed as part of the Form 10-K[373] Form 10-K Summary The company reports no Form 10-K summary - None[376]