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Kura Sushi USA (KRUS) priced its IPO on July 31 , 2019, selling 2.9 million shares at $14.00, garnering more than $40 million in gross proceeds.

The company operates a network of Japanese restaurants in the United States.

KRUS is investing in off-premises capabilities, but will experience continued 50% capacity limitations on its dining operations for the foreseeable future.

Irvine, California-based Kura Sushi provides its customers with Japanese cuisine that uses high-quality ingredients with no artificial seasonings, sweeteners, colors and preservatives and is built on its parent company, whose first restaurant opened in 1984 and, along with the parent firm in Japan, has since grown to over 400 locations.

In the U.S., Kura has 32 open restaurants.

In Kura 's restaurants, seats are located next to two conveyor belts-one that continuously cycles sushi rolls, nigiri, and desserts that customers can pick from at any time, as well as one that delivers food on demand.

Customers order food via a tablet that allows them to access the full menu of the company, including products such as gyoza, tempura, soups, ramen, ojyu boxes and more desserts, while the plates are returned through a special slot in the inside of the table, as shown in the graph below:

kuraphoto

Source: Web magazine Japan

A short 15-second anime video plays on the tablet after five plates are returned, while when 15 are reached-the proprietary tableside Bikkura-Pon rewards machine dispenses a toy to reward the dining achievement of its guests.

To keep the food clean, the company has developed the proprietary Mr. Fresh dome, which lifts up as soon as the customer lifts the plate.

The conveyors help the company reduce the need for restaurant servers while, through the use of automated equipment and systems including sushi robots, RFID readers, robotic arms and food replenishment algorithms, they reduce labor and food costs in the kitchen.

Management believes that one of its strongest competitive strengths is the unique dining experience, and refers to it as the "Kura experience."

The US fast-casual restaurant market is projected to grow rapidly between 2017 and 2021 according to a 2017 market research report by ResearchandMarkets.

The main drivers of market growth are increased urban population, increased employment, more food menu customization and increased disposable income.

Examples of competitors that operate fast casual restaurants in the US include:

  • Chipotle Mexican Grill (CMG)
  • Firehouse Restaurant
  • Five Guys
  • Panda Express

However, with the advent of the Covid-19 pandemic, the hospitality industries, including restaurants, have proven to be hard hit, as shutdowns and operating restrictions have severely impacted their revenue-generating capacity.

KRUS' topline revenue by quarter was trending upward until the Covid-19 pandemic hit in the most recent reporting period:

kurarev

Gross profit by quarter has held up until the last quarter, where it plunged into negative territory:

kuragross

Operating income by quarter hovered around breakeven until the quarter ended May 31st, where it dropped precipitously into negative territory:

kuraop

Earnings per share (Diluted) showed a similar trajectory, as shown in the following chart:

kuraeps

Source for chart data: Seeking Alpha

In the past 12 months, Kura 's stock price has dropped 38.5 percent vs. the U.S. The 18.5 percent drop in the Hospitality Index and the 17.0 percent increase in the US market as a whole, as shown in the chart below:

kurachart

Source: Simply Wall Street

Commentary

Management underlined in its last earnings call for fiscal Q3 2020 that its restaurants 'have been largely shut down.'

Notably, although the firm could have remained open to take-out operations, management decided to forego that option for reasons of security and liquidity.

Kura began reopening restaurants in late May and as of today, all restaurants are open, subject to 50% capacity restrictions, and with the exception of California restaurants, which have been temporarily limited due to a ban on indoor dining.

The company has not been able to use the conveyor belts to deliver food in a number of markets, so it has been necessary to hire additional workers to run the food out of the tables, increasing the operating costs.

Management, however, has had a bigger problem, the sudden processes of reopening and closing in different markets, as areas see larger infections and respond by shutting down public congregation facilities, such as restaurants.

Management also spoke to its new restaurant opening efforts, which continue, in some cases at a slower pace due to construction limitations.

As for its financial results, management said it had entered the crisis with a 'strong capital position,' with $14 million in cash and no debt, along with a $20 million revolver from its Japanese parent with no borrowings as of the fiscal quarter-end.

The ongoing problem for Kura is that even for restaurants that are fully open, the maximum capacity of the dining room is limited to 50 per cent, so sales comps are at best 50 per cent of the previous year.

Management also discussed their off-premise efforts, including building up their online ordering platform, which is now their top priority. The firm' s take-out mix currently only accounts for 6.5 per cent of total sales.

Ultimately, sales will be substantially restricted as long as the capacity limitations of the 50 per cent dining room are in effect.

With a Covid-19 vaccine probably not in full distribution in the U.S. until the end of 2021, my estimate is that Kura will see no meaningful lifting of the 50 per cent capacity restriction until 2022.

While some sales are likely to increase as a result of its investment and efforts off-premises, it is hard to see the company reaching earlier revenues any time soon.

My opinion on the stock is Neutral at its current level, given the dining capacity limitations, which are beyond management’s control.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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