KURA SUSHI (KRUS) WRITE-UP

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Conclusion – The company is doing fine, the stock at 86x the consensus EPS estimate for the Y/E 8/20/20 is substantially overvalued. If there were a probability of margin expansion or an acceleration of same store sales, there would be the possibility of a rational expansion of the valuation. The risk, from this elevated valuation is that potential inefficiencies from the expansion plan, as well as the new expenses of supporting a publicly held vehicle, could impact store level and corporate margins negatively. We think it is likely that there will be a more attractive entry point down the road, when the performance as a public company is better documented, and the valuation relative to earnings and EBITDA could be better as well.

The Company  -Kura Sushi USA, Inc. (KRUS), based in Irvine, California, is a majority owned subsidiary of Kura Japan, which now operates over 400 locations. Kura, USA opened its first restaurant in Irvine in 2009, and operated, as of 8/31/19 twenty three locations across five states. Thirteen were in California, seven were in Texas, one each in Georgia, Illinois, and Nevada. Kura’s concept is technology enabled, providing a unique dining experience by way of a revolving sushi service model. Their cuisine encourages a healthy lifestyle by way of providing ingredients free of artificial seasonings, sweeteners, colorings or preservatives. KRUS came public on 7/31/19, selling 3.34M shares at $14.00/share.

 Unit Level Economic Commentary – while the AUV was flat year to year, the 6.2% increase in same store sales, a shown below, was driven by an increase in average check and traffic. The decrease in CGS from 34.0% to 32.8% of sales was due to an increase in menu prices. The slight increase in labor costs to 31.0% of sales was due to additional labor costs related to openings. Occupancy & Other expense increased primarily due to higher rents and pre-opening expense at new locations. Other Store Expense was up due to the opening costs of new restaurants, including credit card fees, kitchen supplies, advertising and promotions, royalty fees (0.5% of sales to Kura Japan) and utilities.

Development Commentary –  in Fiscal ’19 four of the six new units were in California, one in Schaumberg, IL and the other in Las Vegas, NV. Six new locations are planned for the FY  8/31/20. Over the long term, 20% unit growth is planned.

Same Store Sales Commentary – Comparable sales represent restaurants open for at least 18 months prior to the start of the account period, including those temporarily closed for renovations during the year. The sales growth measure excludes the Laguna Hills, CA locations, which closed during fiscal 2018.

Recent Developments  – Per 8/31 report and conference call – Comp sales were up 9.4% in Q4, including 3.0% price,  the eleventh quarter out of the last twelve that comps have been up. In particular, two stores located in shopping centers became fully occupied for the first time, contributing (a “very significant” amount) to the overall comp gain. Two new restaurants opened in the quarter, in Garden Grove, CA and Las Vegas. Adjusted EBITDA, in this first reporting quarter after going public, was $2.2M, up from $2.1M in Q4’18. Restaurant level EBITDA was down 280 basis points to 21.6% as a result of occupancy and other costs. During Q4, in August,  the rewards program was expanded from two restaurants to sixteen locations. The response has been “encouraging”, with a boost in average check size and frequency. A new Touch Panel ordering system is currently being tested. It is noteworthy that the effective tax rate for FY’19 was only 4.5%. Guidance for the Y/E 8/31/20 includes comp growth of 2-4%, restaurant level EBITDA from 20.5-21.5%, openings backloaded with two in Q3 and 2 in Q4, expect a net loss in Q1, near breakeven in Q2 and steady profitability improvement in the second half of ’20. That margin improvement is expected to come from pricing, technology driven efficiencies, better labor control and reduced waste.

Conclusion – Provided at the beginning of this article

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