Kura Sushi has gotten torched over the last six months - since November 2024, its stock price has dropped 34% to $60.01 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Kura Sushi, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Kura Sushi Will Underperform?
Even with the cheaper entry price, we're cautious about Kura Sushi. Here are three reasons why KRUS doesn't excite us and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
With $258.4 million in revenue over the past 12 months, Kura Sushi is a small restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale. On the bright side, it can grow faster because it has more white space to build new restaurants.
2. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Kura Sushi’s operating margin decreased by 4.6 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Kura Sushi’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was negative 5%.
3. Cash Burn Ignites Concerns
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the last two years, Kura Sushi’s capital-intensive business model and large investments in new physical locations have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 10.9%, meaning it lit $10.93 of cash on fire for every $100 in revenue.
Final Judgment
We see the value of companies helping consumers, but in the case of Kura Sushi, we’re out. Following the recent decline, the stock trades at 930.7× forward P/E (or $60.01 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Like More Than Kura Sushi
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