A Hole in the Pocket
(NASDAQ: KRUS) Kura Sushi H1 2023
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More of the same, in a good way
For the past few years, the quarterly takeaway from Kura Sushi has felt same-ish. A great fundamental showing paired with a continuously ludicrous valuation. Sales at the midpoint are $83.3 million (+36%) with narrowing operating losses of $3.2 million (vs $3.1 million) and net losses of $3.1 million (vs $3.15 million). Comparable sales were up 17.4% in Q21. Restaraunt level margins for H1 are 19.3% (up from 18.6%) and should expand sequentially into the latter half of the year, as they typically do. Last year Kura reported record AUVs and restaurant margins2 as the plucky sushi chain counteracted cost inflation with sales leverage and pricing. Food cost inflation is subsiding, and the company are on track to roll out Japanese sourcing3 and the utilisation of broad liners next year. Labour inflation is proving to be persistent4, and the team have no plans to pass additional pricing hikes onto the consumer as things stand.
On a YoY basis, restaurant-level operating costs as a percentage of revenue are down 20bps (to 87%) and should continue to decline as the year advances. As far as surpassing the 21% restaurant margins shown last year is concerned, I believe that represents the high water mark for now; albeit with some leverage potential.
“To be able to hit a 20% restaurant level margin in Q2, we're very happy with. We'll continue to chip away at it. But that number is a pretty good number, and we're not going to sacrifice guest service or food quality in order to drive that margin much higher than that. But there is a little opportunity, I believe, as we continue to leverage, but we're happy with the number where it is”.
Jeff Utz, CFO, Q2 2023 earnings call
As I write this, the market cap exceeds $570 million intraday. Having already built a position in the low $30s, the current valuation doesn’t bother me as much as it might others. Kura Sushi currently represents ~3.8% of my invested capital. It’s been six months5 since Kura’s impressive end to 2022; about time to check in on this fledgling US subsidiary. There is not much that needs to be said, so I will keep it short.