Whether or not we're already in a bull market depends on your definition of one. Major indexes have bounced more than 20% off their bear market lows, but they have not yet set new all-time highs. However, the Dow Jones Industrial Average and the S&P 500 are getting close, down 3% and 5%, respectively, from their all-time highs.
A new bull market signals a change in market sentiment, and it favors growth stocks over value stocks. One such growth company that could be a big winner is Kura Sushi (KRUS 4.25%), a growing purveyor of revolving sushi bars. It's a unique concept in the U.S., and one that could deliver tasty returns for investors. Here are three reasons why.
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1. There's considerable room for growth
The restaurant market is huge in the U.S., with close to $1 trillion in annual sales. Even though it's highly competitive, there's a significant opportunity for a well-capitalized new idea like Kura Sushi. Its results show strong demand for the concept, which was brought to U.S. shores by its Japanese parent company, Kura Japan, which is the majority owner.
The U.S.-based Kura Sushi finished its fiscal third quarter with 47 restaurants in the U.S. and a goal of opening at least 300 locations. Kura Sushi's average unit volumes (AUVs) are already among the tops in the restaurant industry at close to $4 million, beating even top performers like Chipotle Mexican Grill.
Restaurant chains tend to improve average unit volumes, or the sales that individual location generates, as they grow, and higher-AUV chains mean those locations can contribute more profit to the bottom line. In its most recent quarter, Kura Sushi's comparable sales rose 10.3%, a sign that organic growth remains strong and AUVs are still moving higher.
2. The company has plenty of profit potential
Sales alone aren't enough for a restaurant. The company also has to generate a profit. But here, the early data is also promising for Kura Sushi.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose from $3.2 million to $5.1 million, or a 10.3% margin. Adjusted operating income also improved from $0.5 million to $1.3 million.
More importantly, restaurant-level operating margins are stellar at 23.5% in the latest quarter, showing that the company should be able to expand its bottom-line margins as it adds new locations and leverages its corporate costs. That's significantly better than Chipotle's restaurant-level operating margin when it had just gone public, and it's better than most other restaurant chains which report that metric.
Here's one example of how restaurant-level operating margin translates into bottom-line profits. In Chipotle's second-quarter earnings report, its restaurant-level operating margin was 27.5%, and its overall operating margin was 17.2%. In other words, the path to double-digit operating margins for Kura Sushi seems clear as it expands.
The company is also building on a 35-year history in Japan with demonstrated restaurant-level results.
3. Sushi is popular but highly fragmented
There are thousands of sushi restaurants in the U.S., a sign of the food's popularity, but no chain is near dominant, and there is no major national sushi chain in the U.S.
According to Technomic, in 2017, the top five Asian concepts had just 7% of market share in the industry, and Asian concepts have outpaced overall growth in the restaurant industry. Kura Sushi also sees growth in the Asian population in the U.S. and believes sushi's position as a healthy food item gives it an advantage as well.
As it attempts to become the first U.S. national Japanese restaurant brand, Kura Sushi benefits from not competing against any other restaurant company already in that position. Additionally, a new bull market would favor cyclical stocks like restaurant chains and would likely translate into more consumer spending on restaurants.
That's all good news for Kura Sushi, and puts it in an excellent position to outperform the market in the coming years.
