Kura Sushi Q2 Earnings: The Inventory Has Momentum (NASDAQ:KRUS)

Funding Thesis

Kura Sushi USA, Inc. (NASDAQ:KRUS) is among the early movers within the U.S. to deploy expertise to optimize working effectivity. The corporate confirmed momentum to develop its retailer counts and comp gross sales. The corporate acquired robust assist from its Japanese guardian and different main Japanese suppliers. The evaluation under reveals that the inventory is undervalued by 40%-52% in our bearish case. We expect the present valuation could be very engaging and charge it as a purchase.

Firm Profile

Kura Sushi USA, Inc. is a technology-enabled Japanese restaurant idea that serves genuine Japanese delicacies by way of an enticing revolving sushi service mannequin.

Kura Sushi is headquartered in Irvine, California, and was established in 2008 as a subsidiary of Kura Sushi, Inc. (“Kura Japan”), a Japan-based revolving sushi chain with over 500 eating places and greater than 35 years of name historical past. Kura Sushi at present operates 45 eating places throughout twelve states and Washington, DC.

Key Takeaways from Q2 2023 Earnings:

• Its whole gross sales elevated 40% to $43.9 million in Q2 2023 from $31.3 million in Q2 2022, attributable to 9 new eating places opened and a rise in menu costs. Comparable restaurant gross sales elevated 17.4% in Q2 2023, accelerating from 6.9% in Q12023.
• Its meals and beverage prices as a proportion of gross sales elevated barely to 30.1% in Q2 2023 in comparison with 30.0% in Q2 2022, attributable to meals price inflation partially offset by will increase in menu costs.
• Its labor and associated prices as a proportion of gross sales decreased to 31.5% in Q2 2023 from 33.1% in Q2 2022, attributable to will increase in menu costs and technological initiatives, partially offset by will increase in wage charges.
• Its occupancy and associated bills as a proportion of gross sales decreased to six.9% in Q2 2023 from 7.3% in Q2 2022, because of the enhance in client visitors and menu costs.
• Its different prices as a proportion of gross sales decreased to 13.3% in Q2 2023 from 13.9% in Q2 2022, attributable to a rise in client visitors.

The corporate elevated the restaurant-level margin to twenty.3% in Q2 2023 from 17.8% in Q2 2022.

For the complete fiscal 12 months of 2023, the Firm reiterates and updates the next annual steerage:

• Its whole gross sales will develop 32% to a spread of $185 million and $188 million in 2023.
• Its common and administrative bills as a proportion of gross sales stay flat in 2023 and between 15.5% and 16.0%.
• The corporate will open a complete of 9 to 11 new eating places in 2023, with a mean CAPEX per unit of roughly $2.5 million.

We’ve got the next feedback:

1. The corporate is predicted to develop 32% in 2023 and its building prices on the per unit foundation are anticipated to extend by 19% in comparison with final 12 months. The inflationary stress is apparent throughout the trade, however the firm is ready to offset this by way of rising visitors and costs.
2. Its whole gross sales and comp gross sales each elevated at important charges and additional accelerated from the Q12023 cadence. Particularly, Q1 is often slower for the corporate in comparison with Q2. The buyer visitors isn’t impacted by the pricing enhance, demonstrating super bargaining energy.
3. We estimated its first-year money return on funding on a per unit foundation was at or above 30%.

Confirmed Know-how to Lead Restaurant Innovation in U.S.

The corporate is among the early movers within the U.S. to deploy table-side cost and robotic servers to enhance working effectivity and scale back the usage of labor.

The usage of expertise is broadly adopted in Japan, because the nation confronted a inhabitants lower disaster years forward of the U.S.

Sturdy Assist from its Japanese Suppliers

The corporate pays a payment to obtain employees assist, sure provides, components and tools to be used in its eating places from Kura Japan.

The corporate bought a majority of its provides from two Japanese distributors: JFC Worldwide Inc. (“JFC”), a subsidiary of Kikkoman Company, and Wismettac Asian Meals, Inc. (“Wismettac”). It bought 52% and 25% of provides from JFC and Wismettac, respectively, in 2022.

Valuation and Catalysts

In line with IBIS, the market dimension of Japanese eating places within the U.S. is $30 billion in 2023. If the corporate is ready to penetrate 5% of the market, its revenues will enhance to $1.5 billion. The corporate is predicted to generate over 20% restaurant-level margin, which is above the sector common. Therefore, it’s nonetheless conservative to estimate the valuation by a number of strategies.

The under reveals our sensitivity check on penetration assumptions at 1%, 2.5%, and 5%. Even essentially the most conservative assumption suggests the inventory is undervalued by 40%-52%. Return potentials for our base case and bull case are over triple digits. We expect the present valuation could be very engaging and charge it as a purchase.

The valuation relies on future market penetration assumptions. Therefore, the catalysts are seemingly the cadence of its new retailer counts, new market entry, and income progress to look at in future earnings.

Dangers

Lawsuit threat

Kura Sushi USA has been sued for discrimination by former staff. The latest class motion was filed by a bunch of servers for unpaid extra time, common wage, uniform, and enterprise journey bills, and lots of different unpaid gadgets in California in 2022. The lawsuit remains to be ongoing and will doubtlessly hurt the corporate’s financials and fame.

Meals security threat

Latest news in Japan reported that Sushi terrorism precipitated public concern over meals hygiene and security on the revolving sushi restaurant chain, Akindo Sushiro. The revolving sushi eating places skilled a dramatic decline in visitors after the information. The excellent news is that the affect was restricted due to the efficient crisis-management technique carried out by Akindo Sushiro. If dealt with improperly, we consider that the corporate would endure if a state of affairs just like this occurred in america.

Minority shareholders threat

Kura Japan owns 4,126,500 shares of its Class A typical inventory and all of its 1,000,050 Class B frequent inventory. Kura Japan’s mixed possession of Class A typical inventory and Class B frequent inventory represents 75% of the mixed voting energy of its fairness pursuits. The corporate pays a payment to Kura Japan for sure staffing, tools, service and and many others. There’s a threat that Kura Japan would possibly act towards its personal curiosity as an alternative of minority shareholders.