Kura Sushi USA stock is not as expensive as you may think

The improved economic outlook and easing inflation are increasing consumer confidence, resulting in increased consumer spending. The restaurant sector is thriving this year, thanks to the strong economy, and high-quality restaurant stocks are soaring. Kura Sushi USA ($KRUS) is one of them.

The niche restaurant brand reported strong earnings results last week, and the stock skyrocketed, reaching triple-digit prices for the first time.

The company once again exceeded expectations for the quarter, delivering strong revenue growth coupled with significantly improved operating efficiencies. Its automation initiatives are paying off, keeping operating expenses down. At the same time, consumer demand is stronger than ever and confirms the company's strong expansion potential. Let's take a deeper look.

A Unique Restaurant Concept That Resonates With Consumers

As we've seen in past newsletters, Kura Sushi USA is a differentiated restaurant brand. Its parent company, Kura Japan, operates more than 450 restaurants in the country and is a pioneer of the revolving sushi concept. In 2008, it tested this tech interactive Japanese restaurant concept in the US by opening its first restaurant in Irvine, CA. This first restaurant was successful and helped prove this unique concept in the country.

Kura Sushi USA currently operates 47 restaurants across the US with a goal of opening more than 300 over the next decade. The company set this goal during its IPO four years ago and hasn't updated it yet. But the competitive environment has changed dramatically since then, primarily due to the pandemic, as many mom-and-pop restaurants have closed. According to a recent study, roughly 80,000 restaurants closed temporarily or permanently during the pandemic. This will benefit restaurant chains like Kura Sushi, which are publicly listed and have plenty of cash to expand aggressively. On the recent earnings call, the CEO said that they'll update their white space estimate next year, and the number will be much higher than 300, thanks to the changes in the competitive environment and the high consumer demand for the differentiated dining experience.

During Q3 FY23 (the most recent quarter), they opened one new unit, and one more after the end of the quarter, while they have seven other units under construction. The growth momentum is clearly robust, which confirms the large and expanding addressable market.

Continued Solid Top & Bottom Lime Performance

KRUS's Q3 revenue jumped 30% y/y to $49.2 million and was driven by three factors: restaurant openings, price increases, and traffic growth. Same-store sales, which is the most important metric in the restaurant industry, came in at 10.3%, which is very high and was driven by a 7.3% price increase and a 3% increase in traffic.

In other words, even though the company continued to raise its prices during the quarter to offset inflationary pressures, the traffic increased, which highlights the very strong and resilient demand. The main reason behind this strong performance is that KRUS primarily targets affluent consumers who can afford to pay higher prices for experiences they enjoy. On top of that, the CEO said during the call that June same-store sales growth accelerated to 14.7%, which is another sign of robust consumer demand.

Besides the strong revenue growth, KRUS is achieving very strong operating leverage thanks to easing inflation and unique automation initiatives. For example, the company saw a 2% quarter-over-quarter decline from Q2 to Q3 in cost of goods sold inflation. This trend will likely continue given the easy inflation comps and the high-interest rates, which will improve KRUS's operating efficiency.

The company also achieved nice operating leverage on the labor front as labor expenses fell to 29.2% of revenue from 31% a year ago. This is a significant achievement considering a 10% labor cost inflation. But the automation initiatives helped the company more than offset the inflationary pressures during the quarter. Namely, the robot servers, table-side payments, and touch panel ordering system that they rolled out last year all contributed to the labor cost leverage in Q3.

Another very promising automation initiative is the automated dishwasher. The company is waiting to get approval for this technology, which will drive tremendous operating leverage. The management team has called the automated dishwasher the single most exciting thing that they have in the pipeline that will drive increased efficiency. This is because dish washers are actually the highest-paid employees in the back-of-the-house operations because they're not eligible for tips. So, this new system can drive greater operating efficiencies than the three initiatives they rolled out last year. The company increased its non-adjusted profit margin to 2.7% in Q3, from 1.2% a year ago and its restaurant-level operating margin increased 1% y/y to 23.5% and the rollout of the automated dishwasher will further boost these metrics.

Overall, Kura Sushi's underlying fundamentals are stronger than ever, and they will likely continue to improve for the foreseeable future due to the growth momentum and the automation initiatives. During the quarter, the company raised $63 million by issuing and selling stock at $54 per share, and given that it's debt-free, it has a very strong balance sheet that can support its rapid expansion.

What About Valuation

KRUS stock has soared 113% this year on continued strong financial performance. While it's a pricey stock, it's not as expensive as many investors think. At current prices of around $100 per share, it trades on par with Chipotle ($CMG), another high-flying restaurant stock. The company raised its full-year revenue guidance to $188 million at the midpoint of the expected range, and analysts expect revenue to grow another 30% to $244 million in the next fiscal year that ends August 31, 2024. Assuming the company continues to over-deliver, and the stock trades at around 6x sales, the stock can rise 29% from current prices to $134 by the end of FY24.

What Else

KRUS stock has soared more than 400% over the past four years, but this is likely just the beginning. The company has proved that its unique restaurant concept resonates with consumers, and the expansion potential is stronger than ever due to the favorable changes in the competitive environment and the resilient consumer demand amid hyperinflation. The stock is not cheap, and we could see a pullback in the near term, but it's not overvalued either.

KURA SUSHI USA RATING

Short Term: Moderate BuyLong Term: Buy

🎯 15-Month Price Target: $76 ➡️ $134

I've no positions in the stocks mentioned.

The boring Disclosures: Newsletters express the opinion of the authors. Nothing in this email is a buy or sell recommendation. I'm not a financial advisor; make your own decisions.