Shares of sushi restaurant chain Kura Sushi (KRUS 4.25%) dropped 13.6% in October, according to data provided by S&P Global Market Intelligence. The company had a quiet month. But Wall Street was reevaluating the opportunity and revising its estimates lower, which hurt investor confidence. And that's why the stock fell for the month.
Why would Wall Street lower expectations?
Kura Sushi is a small restaurant chain of only 47 locations as of its fiscal third quarter of 2023, which ended on May 31. Its revolving sushi conveyor belt provides a differentiated dining experience. And the idea is working. The company's sales during the first three quarters of 2023 were up almost 34% compared to the comparable period of 2022, bolstered by same-store-sales growth.
While things are exciting for Kura Sushi's business, multiple analysts have lowered their price targets for the stock during the last month. Among these analysts is Jeff Bernstein of Barclays. On Oct. 23, Bernstein lowered his price target for Kura Sushi stock from $95 per share to $67 per share, according to The Fly.
Lowering the price target by almost 30% shook investor confidence in Kura Sushi. As the chart below shows, Bernstein's announcement coincides with a large drop in the share price.
Therefore, investors were rethinking this investment during October. And that's why shares of Kura Sushi fell.
Are better days ahead for the stock?
Kura Sushi will report financial results for its fiscal fourth quarter of 2023 on Nov. 8. The company is expecting to generate revenue of $55.5 million, which would be 32% year-over-year growth. Growth will be a mixture of new restaurant openings and growth in sales per locations.
The plan makes particular sense in light of the economics of Kura Sushi's business. In Q3, its restaurant-level operating profit margin was 23.5% -- that's a top-tier number and justifies opening more locations.
Some investors might look at Kura Sushi's price-to-sales (P/S) valuation of 3 as expensive and cause for concern. However, consider that it's cheaper than the valuation of Chipotle Mexican Grill stock, even though Kura Sushi is growing faster.
KRUS PS Ratio data by YCharts
Given the good economics of the business, a valuation that makes sense when compared to peers, and its cheaper price tag after October, I'd say that Kura Sushi stock indeed has better days ahead.
However, given that Kura Sushi is such a small company, financial results could be choppy from one quarter to the next, which is something for investors to understand beforehand.
