KRUS - Kura Sushi's Q1 2024 Earnings: Still Impressive And We Remain Bullish

2024-01-07 21:48:48 ET

Summary

• Kura Sushi announced positive financial results, with a 31% YoY revenue growth and a 130 basis point expansion in restaurant-level margins.
• The company issued strong guidance for fiscal year 2024, projecting a 20% growth in total revenues and the opening of 12-14 new restaurants.
• CEO Jimmy Uba expressed confidence in the brand's ability to expand nationwide and emphasized the scalability of the revolving sushi concept.

Recap

Kura Sushi USA (KRUS) announced its earnings on January 4th and the results were quite positive. The company further improved its restaurant-level profit margins and issued strong guidance for fiscal year 2024, with a projected growth of 20%. This was certainly impressive news and the market responded accordingly, with the stock price jumping 20% after the earnings release. We had issued a buy rating back in November when the stock pulled back from its $110 high. Since our recommendation, the stock has climbed over 70% as we believed the prior sell-off was mainly due to broader concerns about consumer discretionary spending at the time. However, we saw Kura as having long-term potential given its industry-leading restaurant margins and still small store base. Kudos to the investors who joined us on this profitable ride! Going forward, we continue to be bullish on Kura Sushi due to its differentiated business model and growth trajectory. We believe there is still an upside ahead for this stock.

Financials

Kura Sushi put up some really strong numbers this past quarter. Revenues grew 31% year-over-year, which is mighty impressive these days with all the inflationary pressures in the US. Even more remarkable was the 130 basis point expansion in restaurant-level margins. This margin lift was driven by leverage on both food/beverage costs and labor. For 2024, management laid out a prudent outlook in our view. They expect to open another 12-14 new restaurants and grow total revenues by 20%. Now even though that revenue growth rate is a slowdown from the current pace, we still think projecting 20% top-line growth in this environment is darn good. It shows management is being conservative with their guidance, which we appreciate. This kind of steady, high-quality growth trajectory continues to justify our long-term bullish thesis on Kura Sushi. The company's differentiated revolving sushi model is delivering consistent execution and allowing it to gain market share. We remain big fans of this emerging restaurant chain story.

Fiscal Year 2024 Outlook

For the full fiscal year of 2024, the Company reiterates and updates the following annual guidance:

Total sales between $239 million and $244 million;

General and administrative expenses as a percentage of sales to be approximately 14.5%; and

12 to 14 new restaurants, with average net capital expenditures per unit of approximately $2.5 million.

On the recent earnings call, CEO Jimmy Uba had some insightful comments about Kura Sushi's site selection strategy and market expansion plans. When asked by investors, he emphasized that Kura isn't just growing in existing markets but also entering new markets nationwide, like Pittsburgh, Tampa Florida, and Naperville Illinois. This helps alleviate our original concerns that supply chain capabilities might limit growth and further proves the scalability of the concept.

Uba also expressed strong confidence in the brand's ability to expand across the U.S. He noted that both in new markets and new units within existing markets, Kura Sushi is outperforming expectations. This demonstrates the brand appeal and portability of the revolving sushi concept.

Additionally, as of the end of Q1 fiscal 2024, the company held $64.2 million in cash and cash equivalents, with zero debt. This fortified balance sheet puts Kura Sushi in a great position to achieve growth in 2024 regardless of whether the Fed continues to raise rates.

The earnings call commentary reinforces our positive long-term view. Kura Sushi has an attractive and differentiated concept with plenty of runway for expansion nationwide. We reiterate our buy rating.

Valuation

Our original $110 price target was premised on Kura Sushi capturing 1% of the Japanese restaurant market over the next decade.

To hit that mark, we estimated the company would need to grow revenue from around $190 million in 2023 to $300 million in 10 years, maintaining a 5% compound annual growth rate. We also assumed they could achieve a restaurant-level operating margin of 20%. Well, Kura Sushi just blew those assumptions out of the water last quarter. They grew revenue by 30% year-over-year and expanded margins to 24% - way ahead of our modeling.

That tremendous outperformance explains the stock's 17% pop on Friday. Given these results, we now believe it's highly likely the share price will reach our next target of $131, which bakes in a 13.8% CAGR, 2.5% market penetration, and 20% restaurant margins. And we wouldn't be surprised to see Kura hit our subsequent target of $201, which factors in a 23% growth rate and 5% penetration. That would represent a 125% upside from current levels.

Macro Risk

On the bigger economic picture, we assess that the U.S. economy will keep growing, fueled by the rise of AI and a strong service sector.

While broader macro factors always warrant monitoring, they do not change our bullish stance on this company specifically. Kura Sushi possesses multiple company-specific strengths that should enable it to deliver outsized growth for years to come, regardless of minor fluctuations in the economy.

Conclusion

Even with some lingering macroeconomic risks on the horizon in 2024, we remain bullish on Kura Sushi's prospects. A few reasons why:

First, their efficient operating model leveraging technology like robot servers has allowed Kura to keep costs low. This positions them well to withstand inflationary pressures better than their peers.

Second, they've built a reputation for affordable sushi that doesn't sacrifice quality. Customers love this value proposition.

Third, the current store footprint is still small, leaving ample runway for long-term expansion across the U.S.

Now even though the stock has climbed 74% since our buy rating in November, we don't think the big upside is over yet. The fundamentals still point to strong growth ahead.

So while we acknowledge the macro worries, Kura Sushi's specific strengths lead us to reiterate our buy rating. This is a company capable of delivering for growth investors even in a choppy economic environment. The future remains bright.

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