Kura Sushi: Rating is still an issue (NASDAQ: KRUS)

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Few industries have taken the hits the restaurant industry has taken since 2020, and they seem to have fallen into a hurricane, with new headwinds thrown at these businesses from every direction. It started with a decrease in traffic and was followed by a rise in the costs of goods and a Mini-migration of workers from industry. Now, restaurants must try to overcome the difficulties of maintaining margins while still providing value to consumers. So far, kura sushi (Nasdaq: Cross) seems to manage this balance well, being more conservative in pricing than its peers and not prioritizing margins. However, with stocks trading at nearly 3 times futures sales, I still don’t see enough margin of safety here.

Kura Sushi Restaurant

Kura Sushi Restaurant (The company’s website)

A little over six months ago, I wrote in Kura Sushi (“Kura”), noting that the stock was priced to perfection at $80.00 per share. That’s because it was trading at 5 times fiscal 2022 revenue estimates, and it seemed to be running out of gas from the stock’s strong 100% rally as well as its rally. Since then, KRUS has seen a decline of over 50%, which is attributed to softness in the general market and the fact that industry-wide headwinds are increasing rather than improving in the least.

The recent negative development has been the rapid rise in gas prices and the sharp increase in mortgage rates that put pressure on consumers’ wallets even more in a period of low personal savings rates. Quora may not have seen the effects of that in our first quarter results, but it looks like we’re seeing a slight dip in casual dining traffic, and I don’t see Quora as immune to this drop in demand. Let’s take a closer look at the recent developments below:

Kura Sushi - Revenue Multiple (December 2021)

Kura Sushi – Revenue Multiple (December 2021) (FASTGraphs.com)

Q2 نتائج results

Quora reports strong financial results for the second quarter of 2022 (calendar year first quarter), record second-quarter sales of $31.3 million, 245% increase year-over-year, and 62% increase year-over-year (Q2 2020). : 19.4 million US dollars). This was driven by the sharp increase in new restaurant openings and the impressive performance of restaurant sales, with a low double-digit growth rate (11.3%) on a two-year basis. While the same-store sales growth rate on a two-year basis is not unusual, most of this has been achieved by taking a fairly aggressive pricing depending on the brand. Kura has remained relatively conservative from a pricing standpoint, ensuring that it continues to deliver a value proposition to its guests.

Kura Sushi - Quarterly Revenue

Kura Sushi – Quarterly Revenue (company filings, author outline)

In fact, Kura appears to be focused on maintaining margins with productivity gains, including executing table-side payments, ordering drinks on a touchpad, and launching bot servers in 20 restaurants or roughly half of its system. In a period of rising wages and increasing recruitment/training costs due to a tight labor market, this is a big deal from a productivity standpoint and can turn the table a bit faster and increase labor savings in the long run. Given Kura’s small size, this focus on innovation through technology is commendable and has helped the company protect its margins.

In fact, despite higher commodity costs and an increase in the minimum wage, labor costs in Quora came in at just 33.1% versus 31.7% in the second quarter of 2020, which is only a slight increase. Meanwhile, food and beverage costs came in at 30%, down from 31.5% in the second quarter of 2020. A relatively small increase in food/beverage/labor costs can be attributed to sales leverage and some menu price increases in the biennium, but Also to Kura’s Miscellaneous Market Basket (about 100 items), which made her more vulnerable to spikes in some commodities. Although employment is up, a full deployment of bot servers by the end of the year should help generate some employment gains in fiscal year 2020.

Industry-wide headwinds

Although Quora appears to be doing an exceptional job of balancing three major headwinds (commodity inflation, staff shortages, and wage inflation) through technology and automation (bot servers, rotating sushi bar), the latest headwinds are beyond the company’s control. These last two developments are higher gas prices, with national gas prices near $4.80 a gallon and above average in two of the major markets in Cora (Texas and California). Meanwhile, mortgage rates rose to multi-year highs, driving up mortgage payments for many consumers. If we combine this with already high food price inflation (groceries), discretionary spending budgets shrink and could shrink further.

Rotating sushi bar from Kura Sushi

Rotating sushi bar from Kura Sushi (company video, Youtube.com)

This isn’t ideal for the restaurant industry, and we’ve already seen a dip in traffic. Black Box Intelligence reported that late June marks the 15th consecutive week that the industry has seen negative traffic, and the industry has only recorded seven weeks of positive traffic growth this year, the most recent in March. The recent trend in traffic indicates that gas prices have hurt restaurant traffic. While Kura Sushi may offer a better value proposition than other casual restaurants and other sushi restaurants due to its ability to keep prices low (technology/automation), it may suffer from the barter effect.

National gas prices

National gas prices (AAA gas prices)

As discussed by Cora in its first-quarter results, no impact was observed, and in fact, customer panel amortization rates increased on a three-year basis, indicating a lack of resistance to high list pricing and a lack of check management. However, this was over two months ago, and I would be shocked if the company saw little change in consumer behavior towards the end of fiscal third quarter (May sales) and fiscal fourth quarter (June through August).

If this is the case, this will affect the leverage of sales, making it a little more difficult to maintain margins. While this isn’t a huge deal from a revenue standpoint, given that Cora is opening new restaurants at a brisk pace (eight plus this year), and long-term margin expectations are strong, the stock price doesn’t seem to fit any slowdown at nearly 4x sales per year. Finance 2022. Besides, even if Kura bucks the traffic trend somehow, the stocks follow their industry groups closely. If casual food stocks see another drop, a massive group of buyers will need to hold KRUS above $50.50 and let it beat the group’s performance. Let’s take a closer look below:

Rating and technical picture

Based on approximately 9.7 million shares and a share price of $50.50, Quora is trading with a market capitalization of approximately $490 million. Historically, the stock traded at 3.7x sales, and is currently trading at about 3.6x fiscal 2022 sales based on the midpoint of the fiscal 2022 sales guidance point ($135 million). I would argue that due to industry-wide headwinds that Kura Sushi can’t control (a potential change in consumer spending habits and the multiple contraction we’ve seen in growth stocks), the stock’s most conservative multiplier is 3.0x sales. If we multiply that number by the estimated fiscal year 2023 revenue of $180 million, that translates to a fair value of $55.70.

Kura Sushi multiple historical revenue

Kura Sushi multiple historical revenue (FASTGraphs.com)

While my 12-month target price is $55.70 to above 10% per share, I would prefer a minimum 35% discount on the fair value of small business names to bake in with an adequate margin of safety. After this discount is applied, a low-risk buy zone will come in at $33.40 or less. So while kura sushi may be one of the best industry-wide growth stories, I still don’t see a sufficient margin of safety here given the continuing industry headwinds, with the most significant (a drop in demand).

Turning to the technical picture, this supports the view that Cora is not sitting in a low-risk buy zone, as the stock is trading in the upper quadrant of its expected trading range based on support/resistance. In fact, at the current share price of $50.50, Quora’s reward/risk ratio of 0.17 to 1.0 comes out as unattractive, with $3.80 likely upside resistance ($54.30) and $21.50 potential downside support ($29.00). Overall, I prefer a minimum 6.0T 1.0 reward/risk ratio to justify entering new trades in small caps, and Quora is nowhere near meeting that criterion currently. Hence, I view any rallies above $55.00 as profit taking opportunities.

Kura Sushi Restaurant

Kura Sushi Restaurant (The company’s website)

Summary

Kura Sushi compiled strong financial results for the second quarter (December-February). However, the real test will be our fiscal third-quarter and fourth-quarter (March-August) results, which should give us a glimpse of whether we’ve seen any dip in demand. I think a decline seems likely across the board for casual dining, given that consumers aren’t nearly as robust as expected, with personal savings rates at multi-year lows. Even worse, this reduction in discretionary budgets comes against price increases for most casual dining groups.

Fortunately, Kura has been more conservative with the pricing, and its value proposition is improving as many casual restaurants prioritize protecting margins. However, whether or not it is in a better position, it is very rare for a stock to buck the performance of its industry group or the weakest part within that industry group. So, just as a rising tide lifts all the boats, a perfect storm (negative) capsizes them or at least impedes the progression of the leaders’ rising stock price (like Korra). Therefore, while I believe that Kura Sushi has a bright future, I see any rallies above $55.00 as profit-taking opportunities.

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