Kura Sushi’s 15.8% return over the past six months has outpaced the S&P 500 by 5.8%, and its stock price has climbed to $54.74 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Kura Sushi, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Kura Sushi Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about Kura Sushi. Here are three reasons there are better opportunities than KRUS and a stock we'd rather own.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is a key performance indicator used to measure organic growth at restaurants open for at least a year.
Kura Sushi’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.
2. Cash Burn Ignites Concerns
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
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 9.7%, meaning it lit $9.66 of cash on fire for every $100 in revenue.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Kura Sushi burned through $28.12 million of cash over the last year, and its $203.2 million of debt exceeds the $48.04 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Kura Sushi’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Kura Sushi until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Kura Sushi isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at a lofty forward P/E (or $54.74 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.
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