Kura Sushi (KRUS -1.72%), the fast-growing sushi restaurant chain, is being hailed as a potential contender to follow in the footsteps of industry giant Chipotle Mexican Grill (CMG -0.72%). With Chipotle’s immense success in the fast-casual sector, investors are constantly on the lookout for the next big thing. While some believe Cava (CAVA -3.59%), the Mediterranean fast-casual chain, could be the next Chipotle, Kura Sushi is emerging as a strong competitor.
Kura Sushi, a subsidiary of Kura Japan, describes itself as a revolving sushi bar. Customers use a tablet to place their orders, and the food arrives on a conveyor belt in its own container. With most of the process automated, even returning the empty plate is hassle-free.
Since opening its first U.S. restaurant in Irvine, California, in 2009, Kura Sushi has expanded to 45 locations across 14 states and Washington, D.C. The company’s growth is impressive, both in terms of unit expansion and comparable sales. In the latest quarter, comparable sales jumped 17.4%, while total revenue increased by 40.2% to $43.9 million.
Similar to Chipotle, all of Kura Sushi’s locations are company-owned, and the restaurants are generating notable profits. In the second quarter, the restaurant-level operating margin was an impressive 20.3%. This figure rivals Chipotle’s performance when it was still a smaller operation and surpasses many larger restaurant chains. As Kura Sushi continues to grow and average unit volumes rise, investors can expect this number to improve even further.
In fiscal 2022, Kura Sushi’s average unit volume, which represents the total sales from an average restaurant, reached $3.8 million. This figure actually surpasses Chipotle’s average unit volume and outperforms most other large fast-food chains. This high demand is reflected in the restaurant’s popularity, with an average seating capacity of approximately 120 people in each location.
Although Kura Sushi is currently operating at a loss due to its focus on expansion, its potential for profitability is undeniable. In the second quarter, the company reported a loss of $1 million based on generally accepted accounting principles (GAAP), an improvement from the $1.9 million loss in the same quarter the previous year.
Even at the time of its initial public offering (IPO) in 2019, Kura Sushi identified room in the market for at least 290 restaurants, almost seven times the number currently in operation. Given the exceptional average unit volume of around $4 million, it’s clear that customers are embracing the concept. Kura Sushi plans to increase its unit count by approximately 20% each year and aims to open nine to 11 new restaurants this year.
The prospects for a fast-casual sushi concept in the United States are promising for several reasons. Despite sushi’s widespread popularity as a well-liked food, there are no significant sushi chains in the country. Additionally, sushi doesn’t require any cooking, making it an ideal option for quick service. While chains like Chipotle use steam tables to keep prepped food hot, Kura Sushi’s ability to serve cold food eliminates that need entirely.
With restaurant margins already exceeding 20% and average unit volumes nearing $4 million, Kura Sushi possesses substantial profit potential. The stock has already seen impressive growth, with a nearly 400% increase since its IPO. At present, it trades at a price-to-sales ratio (P/S) of 5.5 based on this year’s expected revenue, making it slightly more affordable than Chipotle when considering the P/S metric.
If Kura Sushi maintains its current momentum and successfully executes its plan to reach 300 restaurants, it is poised to continue thriving as a top-performing investment.
