Kura Time the Stock Issuance Perfectly
(Quick Note on Kura's 1.1M Stock Offering)
I wouldn’t usually take the time to discuss something as mundane as a stock offering and fashion it into a post on Substack, but I felt that today was a suitable opportunity to do that.
The stock issuance was timed perfectly and, in my opinion, the proceeds are significant enough, relative to the organisation, to warrant a quick post.
• The net proceeds from this offering would amount to ~$47.1M.
• Should the additional 165K shares be issued (at the underwriter’s discretion), then proceeds would amount to ~$54.1M.
• The proceeds are expected to be used to repay the $17M credit revolver and be allocated to working capital and CapEx.
Why Is This Good?
Common stock dilution is not always great. Pre-announcement, Kura had ~7.4M shares of Class A common stock outstanding, so the additional 1.1M to 1.2M in issuance will have a sizeable impact there.
However, even at $45 per share, Kura’s common stock is still relatively expensive. As such, the management team are utilising their expensive stock as currency to add material improvement to the fundamentals of the business. This is prudent.
If you recall from my previous post, Kura had improved its balance sheet considerably from the previous quarter. However, the business still only had ~$8M in cash and equivalents, with just over $20M in current assets.
Adding a further $47M in cash to that balance sheet (or whatever the amount is net of costs), most of which is going to be used to repay their $17M in loans from the parent company, is going to dramatically strengthen the liquidity of Kura.
This comes at a time when Q3 showed that they are now back in their stride, reporting sales of $18.5M despite only having 60% seated capacity. Moreover, gross, operating, and net earnings margins had all converted back to positive, and Q4 looks set to be a record-smashing quarter.
With 8 new leases signed (which acts as the new store runway for FY22) this additional capital from the offering will enable Kura to build out those stores (likely each within 12 months) without the fear of liquidity hampering their process.
Equally important, the company will be able to reduce its outstanding debt balance, after suggesting it may climb to as high as $22 million by the end of the year.
Steven Benrubi stated the following just a few weeks ago during the Q3 earnings call:
“Our performance in the third quarter has only made us more confident, and the investments that we're currently making in preparation for the next fiscal year are a demonstration of this confidence.”
- Steven Benrubi, CFO
This stock offering is clearly a signal of that confidence.
Whilst it may not be great for the stock price in the interim (which was grossly inflated anyway) I would rather the management team be focused on the fundamentals, which they have demonstrated with this announcement.
It would be far more prudent to issue stock at $45 per share, than if it were trading at, say, $30 per share.
However, I must add that even at $45 per share (which is likely where it will trade at market open) the stock is still expensive.
Whilst I am looking to increase my position, slightly, in Kura Sushi US, I have the patience to wait for a better multiple.
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Lead Analyst at Occasio Capital Ltd
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