Chipotle Mexican Grill (CMG 2.41%) has arguably had a greater influence on the restaurant industry than any other business this century. The company essentially invented the fast-casual concept or the idea that food can be served quickly but still be high-quality and made using traditional cooking techniques.
Chipotle's success has spawned a raft of imitators, but no one has managed to match the popularity of the burrito roller. Even Chipotle's multiple attempts to create a sister chain have failed, showing how much of a challenge starting a new restaurant concept can be.
After the stock has jumped more than 4,000% since its 2006 initial public offering (IPO), it's no surprise that investors are still hoping to find the next Chipotle. With the recent IPO of Cava (CAVA 10.50%), some investors believe the Mediterranean fast-casual chain could follow in Chipotle's footsteps, but there's another restaurant stock investors should take a look at. That's Kura Sushi (KRUS 4.25%).
Image source: Getty Images.
What is Kura Sushi?
Kura Sushi, a subsidiary of Kura Japan, calls itself a revolving sushi bar. You order food on a tablet, and it comes down a conveyor belt in its own container. The mostly automated system even has a receptacle where you deposit your plate when you're finished.
Kura opened its first U.S. restaurant in 2009 in Irvine, California, and has 45 locations across 14 states and Washington, D.C., as of the end of the second quarter. The company is growing quickly both on a unit basis and a comparable-sales one. In its most recent quarter, comparable sales jumped 17.4%, and total revenue rose 40.2% to $43.9 million.
Like Chipotle, all of Kura Sushi's locations are company-owned, and its restaurants are generating solid profits. Its restaurant-level operating margin was 20.3% in the second quarter. That's comparable to Chipotle when it was smaller and is better than a number of other larger restaurant chains. Investors should expect that number to improve as the company grows and average unit volumes increase.
In fiscal 2022, its average unit volume, or total sales from its average restaurant, was $3.8 million, which is actually better than Chipotle and nearly every other large fast-food chain.
Though Kura is still small, that number offers a testament to its popularity. Its restaurants average 3,400 square feet with seating for about 120 people.
On the bottom line, the company is still unprofitable as it's investing in growth. In the second quarter, it lost $1 million on a generally accepted accounting principles (GAAP) basis, but that was an improvement from a loss of $1.9 million in the quarter a year ago.
The growth plan
At the time of its IPO in 2019, the company said it saw room in the market for at least 290 restaurants, or nearly seven times more than it has today, but the company can easily upgrade that target based on market conditions. And with an average unit volume (AUV) near $4 million, it seems like customers like the concept. Kura plans to grow its unit count by about 20% each year. This year, it aims to add nine to 11 new restaurants.
A fast-casual sushi concept in the U.S. seems promising for a number of reasons. First, there are no sushi chains of significant size in the country -- even though, by now, sushi is a familiar, well-liked food. It also doesn't need to be cooked, making it an ideal food to be served quickly. Chains like Chipotle have gotten around this problem by using steam tables that keep prepped food hot. However, serving cold food eliminates that problem entirely.
With restaurant margins already above 20% and average unit volumes approaching $4 million, Kura Sushi has a lot of profit potential. The stock is already up nearly 400% since its IPO, and it now trades at a price-to-sales (P/S) ratio of 5.5 based on this year's expected revenue, making it slightly cheaper than Chipotle on a P/S basis.
If Kura can keep up its recent momentum and execute on its plan to reach 300 restaurants, the stock should continue to be a winner for investors.
