With the major restaurant chains doing so much to try to win back value-sensitive consumers, I’ve been doing a lot of thinking about the rise and fall of great restaurant chains, with some vanishing into the annals of history and others coming, seemingly out of nowhere, to become major national players.
Today we’ll be looking at another fledgling restaurant chain, Kura Sushi USA (NASDAQ: KRUS), which has big ambitions for being a large provider of authentic Japanese cuisine. We’ll be looking at the potential for growth of this company, along with the prospect for profitability and of course the ability to return value to shareholders.
Understanding Kura Sushi
Kura Sushi is a smallish chain of modern Japanese restaurants in the United States. The company offers cuisine served on conveyor belts through the revolving sushi service model. They have 64 locations in the US across 17 states. The restaurants they have are heavily concentrated in California and Texas.
That’s not all there is to Kura Sushi, however. The company has big plans, saying in their most recent 10-K that they believe there is a potential for the company to eventually have over 290 restaurants across the United States.
That’s an ambitious goal for the company, and suggests the company envisions is lot of growth coming along the line. They don’t state a specific timetable for reaching their full potential, but they have clearly been growing at a substantial clip in recent years.
The company’s model is to offer high value to consumers at an accessible price point, and to do that the company has the backing of the Japanese chain Kura Sushi, which owns a majority of the shares and commands some 70% of the overall voting rights to the US operation.
Consolidated Balance Sheet
Cash and Equivalents |
$59 million |
Total Current Assets |
$72 million |
Total Assets |
$324 million |
Total Current Liabilities |
$33 million |
Total Liabilities |
$158 million |
Total Shareholder Equity |
$166 million |
(source: most recent 10-Q from SEC)
Kura Sushi has a fairly secure balance sheet and a good amount of cash on hand for a company of this size. That’s not to say they have all the capital they need to grow to the size they intend to ultimately reach, of course, but that where they stand is relatively good.
The company is presently trading at a price/book value of 4.54, which is high for the sector. By comparison, GEN Restaurant Group (NASDAQ: GENK) is trading at a price/book value of 3.29, and similarly envisions itself growing into a national chain.
Such a premium to book could easily be justifiable, however, if the company is growing at a rapid rate and offers enough of a return on investment.
The Risks
As mentioned before, Kura Sushi is heavily concentrated in California and Texas. That’s not necessarily a bad thing, because that’s clearly where the demand is, but it does mean the company risks being more sensitive to regional economic woes than most.
The company is dominated by Kura Sushi’s Japanese company, and is ultimately heavily reliant on them for help in operations and the acquisition of supplies.
There is a lot of competition in the restaurant business, and even if Japanese restaurants are trendy in this day and age, Kura Sushi is by no means the only Japanese restaurant offering in the US, so they have their work cut out for them to be a winning player in this sector.
Locations for the existing Kura Sushi restaurants are predominantly in shopping malls and other retail centers. While the restaurant is the sort of thing some people will go out of their way to visit, the reality is that the company’s future depends at least partially on the success of the locations they are present in. If shopping malls decline further, that could be a problem for them.
Finally, and this is potentially the biggest concern, Kura Sushi needs to be profitable. We’ll be looking at what that means in the next section.
Statement of Operations
2021 |
2022 |
2023 |
2024 (9 months) |
|
Sales |
$64.9 million |
$141.1 million |
$187.4 million |
$171.8 million |
Operating Income |
($10 million) |
($754 thousand) |
$332 thousand |
($5.7 million) |
Net Income |
($10.3 million) |
($764 thousand) |
$1.5 million |
($3.6 million) |
Diluted EPS |
($1.21) |
(8¢) |
14¢ |
(32¢) |
(source: most recent 10-K and 10-Q from SEC)
Kura Sushi has a lot going for it in the realm of growth. The company’s sales are absolutely surging year over year as they open new locations and the existing locations grow to become mature sites. This is a lot to be excited about.
What is missing is profitability, as the company is not growing into a profitable venture right now. Even 2023, in which they managed to turn a profit, saw only a slight profit, which would give us a gaudy P/E ratio of over 481. This most recent quarter saw a narrow miss on earnings, missing the expected 1¢ earning to break-even.
Estimates going forward expect more of the same, with this year coming in at a revenue of $236 million and a loss of 31¢, followed by a 2025 revenue of $288 million and a loss of 28¢. There’s growth, but still no track to profitability.
As far as returning value to investors, things similarly don’t look so good. Kura Sushi doesn’t pay dividends and doesn’t plan to any time soon. The company is also not going to be engaged in share buybacks of any serious sort so long as they are trying to grow at all costs.
Conclusion
Kura Sushi has an enviable amount of growth to offer to potential investors, and if the company makes good on its ambitions to have 290 locations in the US they could really offer a lot to shareholders.
The problem is that right now, they’re just not profitable, and there is no reason to think they will be any time soon. Absent profitability, they will only be able to fund growth by diluting shareholder value and issuing more shares. This could pay off in the long run, but in my view the risk is just too high, and I’m going to view this as a hold.
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