2023-03-09 10:04:43 ET
Summary
- Kura Sushi has a growing restaurant base, but there is a disconnect with its current financial performance.
- The company's business model appears to be under pressure, which could potentially damage its brand image.
- Additionally, it trades at a high multiple, making KRUS unattractive investment.
Kura Sushi ( KRUS ) is a Japanese sushi restaurant chain that serves customers through a revolving sushi service model. They have a growing restaurant count across the US of 42 stores, up from 40 in Q4'22. Most of their restaurants are located in California and Texas. KRUS's strong top-line growth, which reflects the growing popularity of sushi in the US, indicates that there is a strong desire for healthy food options. This growth challenges the perception that the sushi market in the US is maturing, and forecasts indicate that it will continue to grow at a moderate pace . In addition, despite the decline in social media interaction associated with sushi consumption trends , the current expansion of KRUS challenges this trend.
In today's inflationary environment, management's outlook on expanding its restaurant base count further is a double-edged strategy, as it could be a source of additional income and also a source of additional operating expenses. As of this writing, KRUS is still operating at a loss and is trading at high multiples, which makes the stock unattractive.
Company Overview
KRUS: Growing Restaurant Base (Source: Company Filings. Prepared by the Author)
As mentioned earlier, one of the value adding catalyst of KRUS is its growing restaurant base, as shown in the image above. In fact, Kura Sushi is not yet done, as they are planning to have 9 to 11 new restaurants by the end of 2023. However, KRUS ended Q1'23 with a sequential drop in its top line revenue from $42 million in Q4'22 to $39.3 million in Q1'23.
Today, KRUS's business model has been affected by what is being called " Sushi terrorism ." This issue has arisen due to viral videos circulating on the internet, which show some customers in conveyor belt sushi restaurants engaging in poor and unhygienic behavior, such as licking teacups and soy sauce bottles, spraying sushi with alcohol sanitizer, and eating other customers' orders. This kind of behavior is likely to discourage other customers from visiting the restaurant, which may result in a potential loss for KRUS. This could also explain the drop in social media interaction about sushi, as mentioned earlier. This could potentially put pressure on the company's future reports.
However, according to the management, everything is under control and they see positive comp restaurant sales growth supported by positive foot traffic, as quoted below.
This 6.9% comp figure breaks down to 4% from traffic and 2.9% from price and mix. We are especially pleased by our traffic growth, which outpaced the casual dining segment by a monthly average of more than 700 basis points and which we believe is an indication of our concept resilience in a potential economic downturn. Source: Q1'23 Earnings Call Transcript
On a year over year basis, KRUS generated strong 31.8% growth from its $29.8 million recorded in Q1'22. Despite all of this, analysts remain optimistic and maintain a growing top line, as shown in the image below.
KRUS: Growing Quarterly Revenue Estimates (Source: SeekingAlpha Premium)
I believe Q2'23 will be an important quarter for the company to demonstrate its ability to continue growing its total revenue in tandem with the expansion of its restaurant base count.
Looking at the image below, we can see that KRUS' aggressive expansion leads to more inefficiency.
KRUS: Operating Inefficiency continues (Source: Data from SeekingAlpha. Prepared by the Author)
According to the management this is due to inflated input costs as quoted below.
Due to ongoing inflation, our cost of goods sold as a percentage of sales was 160 basis points higher compared against the previous year. And it's largely responsible for the year over year decline in restaurant-level. But it is difficult to predict when we can expect a moderation in commodity cost. Source: Q1'23 Earnings Call Transcript
This snowballed into a net loss amounting to -$2.1 million, which is a deeper loss compared to the -$1.3 million recorded in Q1'22. Today's weak financial performance hardly supports its premium valuation, making KRUS an unattractive investment as of this writing.
Weakening Price Action
KRUS: Weekly Chart (Source: Author’s TradingView Account)
The price action on the weekly chart of KRUS seems to be struggling, as shown in the chart above. If it breaks down below its simple moving averages ((SMA)), it will confirm today's weakness. Moreover, the 20-day SMA has crossed below the 50-day SMA, indicating a bearish momentum. However, as of this writing, the MACD remains bullish. If a potential bearish crossover occurs, it will confirm the bearish sentiment in line with today's weakness.
Premium Kura Sushi
KRUS currently has a trailing EV/Sales ratio of 4.80x, which is unattractive compared to its 3-year average of 4.03x. Furthermore, even with an expected 31% growth in FY'23, KRUS is still trading at a forward EV/Sales ratio of 3.90x.
Moreover, the trailing EV/EBITDA ratio of KRUS is 165.51x, higher than last year's ratio of 143.68x, which makes the company's valuation risky and unattractive as of this writing. This is particularly concerning when considering its high forward EV/Sales ratio of 77.88x, which is relatively expensive compared to its sector's median of only 9.94x .
Conclusive Thoughts
KRUS: Expanding Footprint (Source: Investor Presentation)
Kura Sushi still has room to grow, as shown in the image above, and surprisingly, despite its weak performance today, the company maintained no debt to finance this expansion journey. KRUS remains liquid, with its cash and cash equivalent balance amounting to $26.9 million, which can finance its planned restaurant expansion plan. This positions KRUS well, especially considering the return to a normal operating environment. However, uncertainties from today's inflationary environment makes KRUS risky investment as of this writing.
Thank you for reading and good luck!
For further details see:
Kura Sushi: Growing Restaurant Base, But Revenue Lagged