The chain opened seven stores, including five new markets, in fiscal 2021. 

Kura Sushi USA debuted on the stock market in August 2019, with plans to reach 300 U.S. locations and a 20 percent-plus annual growth rate.

There was little reason to believe the chain—which uses a revolving conveyor belt to serve customers—wouldn’t accomplish those lofty goals. At the time, Kura posted AUVs of roughly $3.5 million, and same-store sales had increased in 11 of the past 12 quarters. Comps rose 34.8 percent in fiscal 2017, 2.9 percent in fiscal 2018, and 6.2 percent in fiscal 2019. Financial services firm BTIG estimated Kura’s sales per square foot and transactions per square foot to be close to $1,100 and 60x, respectively—almost doubling a typical casual-dining concept.

Much has changed since—more than the industry has ever seen. COVID effectively ushered in a new era of dining, forcing restaurants across all segments to pivot and rush into the future.

However, Kura Sushi never took its eye off the ball. The restaurant has opened seven restaurants in five new markets during its fiscal 2021 calendar (running from September to August). CEO Jimmy Uba said it was “our busiest and possibly our most productive development year ever.”

“A truly impressive feat by our developmental team given the challenging macro environment,” Uba said during Kura’s Q3 earnings call. “We continue to be pleased with the success of fiscal 2021, including our recent openings. We believe there are units from this year’s vintage that have the potential to become some of the top performers in our system.”

READ MORE: Kura Sushi Sticks to Growth as COVID Challenges Loom

The runway for growth came into question when the U.S. was first ravaged by the pandemic. Kura was forced to temporarily close all of its units, causing same-store sales to plummet 85.4 percent from March to May in 2020. The company is also based in California, which proved to be one of the most restrictive states throughout. Around this time last year, California reported north of 325,000 positive cases and 7,000 deaths and was setting daily records.

Again, however, times have changed. The deployment of vaccinations reduced COVID cases, causing jurisdictions to remove restrictions. California fully reopened its economy on June 15 and lifted mask mandates. As a result, all 32 restaurants are now operating at 100 percent capacity. Kura Sushi’s same-store sales declined 19 percent in Q3 (March to May) versus 2019, including a 36 percent dip in California alone, but the chain still achieved restaurant level operating profit for the first time since the pandemic began.

Additionally, off-premises mixed 10 percent, compared to roughly 1 percent pre-pandemic. The rewards program ballooned to 160,000 members, or a 60 percent increase quarter-over-quarter.

All 32 restaurants are operating at 100 percent capacity.

With California opening in June, Kura Sushi’s momentum intensified to start Q4. In the second part of June, Kura Sushi saw comps rise 4 percent, with California-based stores down in the single digits and Texas restaurants rising in the double-digits. In June, off-premises mixed 6 percent, which is within the mid-single to high-single digit expectation Kura has for post-pandemic off-premises sales.

“We are thrilled with the success we’ve experienced so far, and our team is ready to capitalize on our guests’ pent-up demand for the full Kura experience,” Uba said.

In June, the second- and third-strongest performing restaurants were Bellevue, Washington, which opened in June, and Fort Lee, New Jersey, a store that debuted last fall. That trend continued into July. To Uba, the success of the new markets “is a clear demonstration of the broader appeal of Kura Sushi in the U.S., and the confirmation of the enormous opportunity we have ahead of us as we continue to expand our footprint.”

Kura’s largest store is 6,800 square feet, but the Fort Lee unit is about 3,000 square feet, while Bellevue is about 4,000 square feet. This means strong sales were achieved without a larger size or greater occupancy limits. But that doesn’t mean Kura will automatically shift to smaller stores. To Uba, it’s more about choosing the right market and real estate. Bellevue and Fort Lee were the first stores in Washington and the East Coast, respectively. Because of this, the restaurants were able to draw from a larger radius. For example, when Kura opened its first Texas store, customers drove three hours from Oklahoma.

“We do take an unusual approach in our unit growth in that we are not hub-and-spoke model. We take a non-contiguous approach, which is powered by our remote management system,” Uba said. “And I say that this is a huge competitive advantage for us. If we were operating from a more traditional hub-and-spoke model it would have been much later in our corporate life that we would have discovered just how lucrative and attractive the Pacific Northwest and East Coast are as markets for us.”

Uba said Kura’s 2022 development plan will benefit from new real estate opportunities brought forth by the pandemic as well as a more rigorous site selection process using data and analytics. The chain has executed eight leases, including three new markets—Arizona, Massachusetts, and Pennsylvania. Uba called it “the most exciting pipeline we’ve had since entering the space.”

Sushi On A Plate At Kura Sushi Restaurant

In the second part of June, Kura Sushi saw comps rise 4 percent. 

In terms of labor, Kura conducted a “very serious” hiring effort in mid-May in anticipation of California fully reopening in mid-June. To be more competitive, the chain made it so referral bonuses were paid upfront as opposed to dispersed over a couple of months. The initiative was effective, and Kura was able to fill all the necessary positions for California stores to operate normally.

Excluding a $5.8 million employee retention credit and $700,000 in retention and new hire bonuses, labor and related costs would have been 36.6 percent in Q3. Pre-pandemic, Kura’s labor rates ran in the low-30s range, but with so much hiring lately and the influx of new employees, it will take time to reach peak efficiency. But CFO Steven Benrubi said he expects to return to pre-COVID levels.

“Labor may run a little bit more elevated for a period of time, but eventually getting back in that low-30s neighborhood is our target,” Benrubi said. “There is some inflationary pressure in categories, like dish washer wages for instance. But we still believe that over time we can work our way to a pretty similar kind of labor leveraging, both with the sales recovery and continuing improvement on efficiencies in the restaurants.”

For commodities, Benrubi pointed to the fact that Kura has a diverse mix of proteins, with more than 130 items on the menu. The top-five commodities only capture 25 to 26 percent of purchase mix, so there is no heavily concentrated area. However, Kura has seen inflationary pressures in spots, and the CFO is unsure how much of that will be longer-term. If it does turn out to be longer, the company believes “there’s opportunity to adjust pricing in an appropriate way to go along with what we’re delivering in food product.” In Q3, food and beverage costs as a percentage of sales were 31.7 percent compared to 38 percent last year.

“In terms of sensitivity, because we take such minor pricing because of our small plates menu, it’s on the order of $0.05, $0.10, $0.25, there’s been pretty minimal sensitivity or pushback from our guests in the past,” Uba said. “In terms of margin management, that remains a very robust lever, whether we’re talking about labor inflation or commodity inflation, there’s still room to take price.”

In Q3, total sales reached $18.5 million versus $2.8 million in 2020. Operating income was $900,000, compared to an operating loss of $8 million in the year-ago period. Net income was $800,000, or $0.09 per diluted share, compared to net loss of $9.2 million, or negative $1.10 per diluted share, in Q3 2020.

Casual Dining, Chain Restaurants, Feature, Finance, NextGen Casual