Why Is Everyone Talking About Kura Sushi USA Stock?

Kura Sushi USA's (KRUS -0.57%) stock soared 34% to a seven-month high on July 8 following its third-quarter earnings report. The conveyor-belt sushi chain's revenue surged 105% year over year to $38 million, which beat analysts' estimates by $2.5 million. Its comparable restaurant sales, which exclude its newly opened restaurants, increased 65%.

On the bottom line, Kura Sushi generated $0.5 million in net income, or $0.05 per share, compared to its adjusted net loss of $4.5 million a year earlier. Analysts had expected an adjusted net loss of $0.10 per share. It also posted a positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $3.2 million, compared to an adjusted EBITDA loss of $2.6 million a year ago. Those impressive growth rates have generated a lot of buzz among investors, but does Kura Sushi's stock still have room to run?

Image source: Kura Sushi.

What does Kura Sushi do?

Kura Sushi is one of the largest conveyor-belt sushi restaurants in Japan. Customers can grab plates of sushi as they pass by on a rotating conveyor belt or order freshly made dishes with a tablet computer. These restaurants are generally more affordable than higher-end sushi establishments. 

Kura Sushi USA, which only houses the company's American operations, went public in 2019 at $14 per share. It started trading at $14.89, then soared to an all-time high of $80.84 last December. It currently trades in the low $70s.

Kura's store count has grown from 21 locations across four states (California, Texas, Georgia, and Illinois) at the time of its IPO to 37 locations across 11 states at the end of the third quarter. It's opened five new restaurants so far in fiscal 2022 (which started last September), and it plans to open three additional locations by the end of the year. It believes it can eventually open more than 290 locations across the entire U.S. over the long term, with an average annual restaurant growth rate of over 20%.

Kura doesn't face many direct competitors in the conveyor-belt sushi market in the U.S., and most of its top Japanese rivals -- including Food & Life Companies' Sushiro -- have limited their overseas expansions to Asian countries. However, Kura Sushi still faces intense competition across the fragmented U.S. market for Asian restaurants.

How fast is Kura Sushi growing?

Like most other restaurant chains, Kura Sushi suffered a slowdown in fiscal 2020 as it temporarily closed its stores during the pandemic. However, its growth accelerated significantly in fiscal 2021 and the first nine months of fiscal 2022 as it reopened its stores and opened new locations.

Data source: Kura Sushi USA. YOY = Year-over-year.

Kura's consistent growth in comparable restaurant sales indicates it isn't merely opening new restaurants to prop up its short-term sales. For the full year, Kura expects its total revenue to increase 111% to 119%. Analysts expect its revenue to rise 114% this year and grow 32% in fiscal 2023.

Is inflation an issue for Kura Sushi?

Kura Sushi's restaurant-level operating, reported operating, and adjusted EBITDA margins all crumbled in fiscal 2020 as the pandemic spread. That pressure persisted throughout fiscal 2021 as it continued to open new restaurants but largely recovered in fiscal 2022 as the headwinds faded.

Data source: Kura Sushi USA. YOY = Year over year.

Kura Sushi keeps its restaurant-level operating margins high because its conveyor-belt format eliminates the need for dedicated servers while streamlining the delivery of food to its diners. It slightly increased its prices to offset food inflation, but that price hike hasn't significantly affected its store traffic -- since sushi is generally considered a premium dish.

During Kura's third-quarter conference call, CEO Hajime "Jimmy" Uba said, "in spite of ongoing inflationary pressure, consumer sentiment for Kura Sushi remains extremely strong" and that the restaurant was "seeing continued strength" in larger check sizes among its higher-income customers.

Analysts expect Kura's adjusted EBITDA margin to expand to 4.8% for the full year, then climb to 7.4% in fiscal 2023. They also expect it to turn profitable on a generally accepted accounting principles (GAAP) basis in fiscal 2023.

But is Kura Sushi's stock still worth buying?

Based on those estimates, Kura's stock trades at just four times next year's sales -- which is a reasonable price-to-sales ratio if it can continue to grow its comparable restaurant sales while opening dozens of new locations.

Wingstop (WING 0.36%), which is following a similar playbook in the chicken wings market, is expected to grow its revenue by 24% this year and 18% next year -- but it already trades at seven times the latter estimate. However, Wingstop is also firmly profitable on a GAAP basis -- so Kura might command a higher valuation once it generates consistent profits. Therefore, I believe Kura could still be a great long-term buy at these levels.